Court Opinion

ID: 657
Source: CourtListenerOpinion
Date Created: 2010-03-26 01:00:05+00
Date Added: 2024-06-11T12:24:56.949338
License: Public Domain

United States Court of Appeals for the Federal Circuit
                                     2008-5045

                      JADE TRADING, LLC, by and through,
                ROBERT W. ERVIN and LAURA KAVANAUGH ERVIN
                 on behalf of ERVIN CAPITAL, LLC, Partners Other
                           Than the Tax Matters Partner,

                                                    Plaintiffs-Appellants,

                                          v.

                                   UNITED STATES,

                                                    Defendant-Appellee.

       David D. Aughtry, Chamberlain, Hrdlicka, White, Williams & Martin, of Atlanta,
Georgia, argued for plaintiffs-appellants. With him on the brief were Nicolas F. Kory;
and Linda S. Paine, of Houston, Texas.

       Joan I. Oppenheimer, Attorney, Appellate Section, Tax Division, United States
Department of Justice, of Washington, DC, argued for defendant-appellee. With her on
the brief were Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and
Richard Farber, Attorney.

Appealed from: United States Court of Federal Claims

Judge Mary Ellen Coster Williams
 United States Court of Appeals for the Federal Circuit
                                       2008-5045

                      JADE TRADING, LLC, by and through,
                ROBERT W. ERVIN and LAURA KAVANAUGH ERVIN
                 on behalf of ERVIN CAPITAL, LLC, Partners Other
                           Than the Tax Matters Partner,

                                                      Plaintiffs-Appellants,

                                           v.

                                   UNITED STATES,

                                                      Defendant-Appellee.

Appeal from the United States Court of Federal Claims in 03-CV-2164, Judge Mary
Ellen Coster Williams.

                              _______________________

                             DECIDED: March 23, 2010
                             _______________________

Before LOURIE, ARCHER, and LINN, Circuit Judges.

ARCHER, Circuit Judge.

      Jade Trading, LLC (“Jade”) appeals the Court of Federal Claims’ denial of its

petition for readjustment of the partnership items of Jade and its affirmance of the

Internal Revenue Service’s (“IRS” or “Service”) application of penalties at the

partnership level without consideration of the partners’ reasonable cause defense. Jade

Trading v. United States, 80 Fed. Cl. 11 (2007). Because the contribution of euro call

options to Jade (hereinafter sometimes called the spread transaction) was a transaction

that lacked economic substance, we affirm the Court of Federal Claims’ denial of Jade’s

petition. Further, we hold that the Court of Federal Claims lacked jurisdiction to review
the application of penalties based on the outside bases of Jade’s partners, and we

therefore vacate that portion of the court’s judgment and remand for further

proceedings. We also vacate as moot the Court of Federal Claims’ determination that

Temp. Treas. Reg. § 301.6221-1T(c), (d) is not invalid.

                                            I

                                            A

      This case is governed by certain provisions of the Tax Equity and Fiscal

Responsibility Act of 1982 (“TEFRA”). See 26 §§ U.S.C. 6221-31 (1998). 1            Prior to

TEFRA’s enactment, tax liability adjustments of individual partners based on the

operations of the partnership were rendered at the partner level. “TEFRA was intended,

in relevant part, to prevent inconsistent and inequitable income tax treatment between

various partners of the same partnership resulting from conflicting determinations of

partnership level items in individual partner proceedings.”     RJT Invs. X v. Comm’r

Internal Revenue, 491 F.3d 732, 737 (8th Cir. 2007). Under TEFRA, all “partnership

items” are determined in a single proceeding. 26 U.S.C. § 6221. 2 The results of this

proceeding then apply to each individual partner’s income tax return.           If a partner

wishes to challenge any adjustment to his income tax return or to assert any partner-

level defenses, he may file a partner level refund suit. 26 U.S.C. § 6230(c).

      1
              Hereinafter, Title 26 U.S.C. is referred to as “the Tax Code.”
      2
              Section 6221 of the Tax Code states “[e]xcept as otherwise provided in
this subchapter, the tax treatment of any partnership item (and the applicability of any
penalty, addition to tax, or additional amount which relates to an adjustment to a
partnership item) shall be determined at the partnership level.”

2008-5045                                   2
                                             B

       This case involves a tax shelter designed to produce large, artificial, i.e.,

noneconomic, losses for tax purposes. Jade Trading, 80 Fed. Cl. at 20. In general, the

tax shelter here involved four steps: “1) Investment in Foreign Currency, 2) Contribution

to a Partnership, 3) Partnership Investments, 4) Termination of Partnership Interests.”

Id. at 24-25 (describing tax opinion prepared for potential investors by BDO Seidman, a

national accounting and tax consulting firm).          The investor first simultaneously

purchased a European-style call option and sold a European-style call option. 3 Id. at

25. The investor next contributed the purchased and sold call options to a partnership.

Id. The investor eventually exited the partnership, received an asset with a claimed

high-basis and low-value, and then sold that asset in order to generate a tax loss. Id. A

tax loss was anticipated because, at the time of the facts giving rise to this case, an

investor’s basis in a partnership was ordinarily not decreased by the amount of a

contingent liability contributed to or assessed by a partnership. See Helmer v. Comm’r,

34 T.C.M. (CCH) 727 (1975) (holding that a contingent obligation, such as an option,

was not a liability under § 752 of the Tax Code because a partnership’s obligation under

the option does not become fixed until the option is exercised). 4

                                             C

       The parties do not disagree with the basic facts found by the Court of Federal

Claims. Therefore, we recite only those facts relevant to this decision.

       3
              An option is a contract that gives the buyer the right, but not the obligation,
to buy or sell an asset at a predetermined price (the strike price). A European-style
option is an option that can only be exercised on its expiration date.
       4
              The sold call option contributed to the partnership in this case is similarly a
contingent obligation that does not become fixed until it is exercised.

2008-5045                                    3
      Robert W. Ervin and his two brothers were equal partners in a cable business,

which they sold in 1999. The sale proceeds received in March 1999 resulted in a total

gain to each brother of approximately $13,500,000. Because the buyer was a publicly

traded company, the transaction was disclosed to the Securities Exchange

Commission. Thereafter, the Ervins received numerous offers of investment and tax

advice. After considering a number of these investment and tax proposals, the following

transaction at issue here was entered into by the Ervin brothers.

      In September 1999, the Ervin brothers each formed a single-member LLC. On

September 15, 1999, each Ervin LLC entered into a separate master trading agreement

with AIG, and each paid AIG an $84,100 “account opening fee” pursuant to this

agreement. On September 29, 1999, each Ervin LLC purchased from AIG a call option

on the euro at a strike price of 1.0840 (“purchased call option”) for $15,000,020 and sold

to AIG a call option on the euro at a strike price of 1.0850 (“sold call option”) for

$14,850,018. The options were all European-style options that expired on September

29, 2000, and had a face amount of 290,540,000 euros. Each Ervin LLC paid AIG only

the difference in the premiums of the offsetting options, or $150,002.

      On October 2, 1999, each Ervin LLC entered into a fifteen-month “consulting

agreement” with New Vista, LLC (an affiliate of Sentinel Advisors, LLC), which required

each Ervin LLC to pay New Vista $750,000 for “consulting services.” Payment of this

fee was a prerequisite to the Ervin LLCs being admitted to the Jade partnership. Jade

was formed by Sentinel and Banque Safra, a Luxembourg financial institution, on

September 23, 1999, with Sentinel as the managing partner. On October 6, 1999, each

Ervin LLC entered Jade as a partner. On that same day, each Ervin LLC contributed

2008-5045                                   4
the above described euro call options to Jade, as well as $75,000 cash. In December

1999, each Ervin LLC withdrew from Jade.          Each Ervin LLC’s interest in assets

distributed to it by Jade was valued at $126,122. The distributed assets consisted of

Xerox stock, which was sold in 1999, and euros.

      On its partnership return for 1999, Jade reported on its Schedule K (Partners’

Shares of Income, Credits, Deductions, etc.) a loss of $292,015. Each of the Ervin

brother’s individual income tax return for 1999 claimed approximately $15 million in tax

losses from his execution of the spread transaction and involvement in Jade. These tax

losses resulted from each brother’s increasing the basis of his interest in Jade (“outside

basis”) by the cost of the purchased call option ($15 million) and not decreasing this

basis by the amount of the potential liability that Jade assumed under the sold call

option.

      After auditing the Jade partnership return, the IRS issued a final partnership

administrative adjustment (“FPAA”) to Jade with respect to Jade’s partnership items for

the 1999 tax year.     The FPAA determined that the Jade partnership should be

disregarded and all transactions engaged in by Jade should be treated as being

engaged in directly by the purported partners, including the Ervin LLCs. Thus, the

FPAA disallowed the deductions claimed for losses purportedly incurred from the

contribution of the spread transactions to Jade. The FPAA also disallowed the losses

claimed by Jade and reduced Jade’s claimed distributions of property to zero. The IRS

also imposed accuracy-related penalties under § 6662 of the Tax Code.

      Subsequently, Jade filed a petition for readjustment of the partnership items of

Jade in the Court of Federal Claims.       The court upheld the IRS’s determination,

2008-5045                                   5
concluding that Jade had not met its burden of demonstrating that the contribution of the

spread transactions to Jade objectively had economic substance. Jade Trading, 80

Fed. Cl. at 14. The court also affirmed the penalties determined by the IRS at the

partnership level without considering the reasonable cause defenses that the partners

might have. Id. at 60.

       Jade appealed, and we have jurisdiction under 28 U.S.C. § 1295(a)(3).

                                            II

                                            A

       We review de novo the Court of Federal Claims’ conclusion that the contribution

of the spread transaction to Jade lacked economic substance. Coltec Indus., Inc. v.

United States, 454 F.3d 1340, 1357 (Fed. Cir. 2006). However, we review the court’s

factual findings underlying this conclusion for clear error.    SCS Hosp. Sys., Inc. v.

Montefiore Hosp., 732 F.2d 1572, 1578 (Fed. Cir. 1984). Finally, we review the court’s

jurisdictional determinations de novo. Distributed Solutions, Inc. v. United States, 539

F.3d 1340, 1343 (Fed. Cir. 2008).

                                            B

       The Court of Federal Claims held that the Ervin LLCs’ contributions of the spread

transactions to Jade lacked economic substance. We agree.

       The economic substance doctrine “require[s] disregarding, for tax purposes,

transactions that comply with the literal terms of the tax code but lack economic reality.”

Coltec, 454 F.3d at 1352. In Coltec we discussed the economic substance doctrine in

detail, leaving no question as to its viability. We explained that the doctrine “represents

a judicial effort to enforce the statutory purpose of the tax code.” Id. at 1353. The

2008-5045                                   6
doctrine, “[f]rom its inception, . . . has been used to prevent taxpayers from subverting

the legislative purpose of the tax code by engaging in transactions that are fictitious or

lack economic reality simply to reap a tax benefit.” Id. at 1353-54. In Coltec, after

examining cases from the Supreme Court, various courts of appeals, and our

predecessor court, we concluded that the economic substance doctrine incorporated

five general principles.   Specifically, we opined that 1) the transaction cannot lack

economic reality; 2) the taxpayer bears the burden of proving that the transaction has

economic substance; 3) the economic substance of a transaction must be viewed

objectively rather than subjectively; 4) the transaction to be analyzed is the one that

gave rise to the alleged tax benefit; and 5) arrangements with subsidiaries that do not

affect the economic interests of independent third parties deserve particularly close

scrutiny. Id. at 1355-57. We also explained that “a lack of economic substance is

sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax

avoidance.” Id. at 1355.

       The Ervin LLCs’ transfer of the spread transactions to Jade lacked economic

substance. The Ervin LLCs purchased euro call options from AIG for a premium of

$15,000,020 and sold euro options to AIG for a premium of $14,850,018. However, the

Ervin LLCs paid AIG only the difference – a net premium of $150,002. After contributing

the spread transactions to Jade and subsequently exiting the partnership, the Ervins

claimed a basis of over $15 million in their Jade interests by including only the cost of

the purchased call option.      As a result, the artificially inflated basis generated a

purported $14.9 million tax loss.

2008-5045                                    7
       As the Court of Federal Claims noted, this loss was “purely fictional.”       Jade

Trading, 80 Fed. Cl. at 45. Each Ervin LLC did not invest $15 million in the spread

transaction contributed to Jade and did not lose almost $15 million upon exiting Jade.

Neither option was, in fact, exercised.     Thus, each Ervin LLC had a real loss of

approximately $100,000 upon exiting Jade – the difference between its capital

contribution of $225,000 to the Jade partnership and its redemption proceeds of

$126,122 received from Jade.

       Additionally, the formation of the Jade partnership appears to have had no

economic purpose. The partnership did nothing to enhance the investment potential of

the spread transaction. Id. at 46. However, for tax purposes, it was imperative that the

individual partners contribute the spread transactions to Jade to generate the artificially

inflated bases.

       Also significant is the Court of Federal Claims’ determination that the spread

transaction was virtually guaranteed to be unprofitable. Each Ervin LLC was required to

pay an $84,100 account opening fee to AIG and a $750,000 New Vista consulting fee. 5

Thus, each Ervin LLC spent at least $834,100 for the chance at making a profit of

       5
               In its findings, the Court of Federal Claims also included fees for an
opinion letter prepared by Curtis Mallet. It is unclear whether each Ervin LLC was
“required” to purchase the $100,000 tax opinion letter. However, given that the letter
was requested to cover “certain aspects of United States Federal income tax in
connection with (i) investments in foreign currency that [the Ervins had] made and (ii)
transactions in which [they] engaged with a partnership . . . that trades in foreign
currency,” Jade Trading, 80 Fed. Cl. at 33, it is likely that the Ervins felt compelled to
purchase the letter. The inclusion or absence of this fee does not change our analysis.
        Additionally, the fees listed above do not include Sentinel’s 2% management fee
or its 20% incentive fee, or the 5% penalty for early withdrawal from Jade (which applied
if the Ervin LLCs withdrew from Jade prior to 12 months from entering the partnership,
which they did).

2008-5045                                   8
$140,000. 6 No reasonable investor would engage in such a transaction to earn a profit.

The Court of Federal Claims concluded, and we agree, that

      This transaction’s fictional loss, inability to realize a profit, lack of
      investment character, meaningless inclusion in a partnership, and
      disproportionate tax advantage as compared to the amount invested and
      potential return, compel a conclusion that the spread transaction
      objectively lacked economic substance.

Id. at 14.    As the Court of Federal Claims found, this spread transaction and its

contribution to Jade “was developed as a tax avoidance mechanism and not as an

investment strategy” by the BDO Seidman accounting firm. Id.

      Jade argues that the contribution of the spread transactions to Jade had

economic substance because the purchased call options and the sold call options were

separate assets with separate documentation and were owned by unrelated parties.

The Court of Federal Claims concluded that “the economic realities of the spread

transaction contributed to Jade made it impossible to delink the option pairs,”

explaining:

              If the Ervin LLCs had wished to hold only the long position – that is,
      the option they purchased from AIG – they would have faced the prospect
      of theoretically unlimited gain. . . . To obtain that position, the Ervin LLCs
      would have been required to pay AIG the full face amount of the premium,
      about $15 million each, to purchase the options. Neither the Ervin LLCs
      nor Jade ever had sufficient funds to make such a payment. Moreover,
      under this scenario, the entire amount would have been at risk; had the
      euro not risen to 1.084, each Ervin LLC would have lost the entire $15
      million premium it paid to AIG.

            Had the Ervin LLCs wished to hold on the short option sold to AIG,
      they would have faced the prospect of theoretically unlimited loss, as AIG
      would have benefitted in any rise of the euro above 1.085, not capped in
      any way. Because such a transaction would be uncovered, AIG would

      6
               This is calculated by subtracting the cost of each spread transaction
($150,002) from its maximum payoff ($290,540) that could occur due to the different
option prices.

2008-5045                                   9
       have had extensive credit concerns. The Ervin LLCs would not have
       received the premiums to which they would be theoretically entitled,
       because AIG would have retained those premium payments as margin,
       because AIG would not have had the spread’s protection from loss. AIG
       would have required that the Ervins post margin in the amount of at least
       $8 million each. In sum, under the agreement with AIG, the Ervins could
       not separate the components of the spread without AIG’s permission
       which would not likely have been forthcoming without the required margin.

Id. at 50-51 (citations to record omitted). As the government’s expert explained, “[t]he

spread strategy component options were priced together, purchased together,

contributed to Jade together, and closed out by Jade together, and at no time during

their lives did either the Ervin LLCs or Jade have the means to separate the component

options.” [JA 5817] The Court of Federal Claims concluded that “the transactions here

cannot be separated because they were totally dependent on one another from an

economic and pragmatic standpoint.” Id. at 51. Jade has not persuaded us that this

conclusion is in error.

       Accordingly, we affirm the Court of Federal Claims’ judgment that the contribution

of the spread transactions to Jade lacked economic substance and should be

disregarded for tax purposes.

                                           C

       Jade asserts that the Court of Federal Claims does not have jurisdiction to review

the penalties imposed by the IRS based on the Ervins’ outside bases in Jade.

       Section 6226 of the Tax Code is TEFRA’s judicial review provision. Specifically,

§ 6226(f) grants the trial court (either the Court of Federal Claims or the United States

Tax Court):

       jurisdiction to determine all partnership items of the partnership for the
       partnership taxable year to which the notice of final partnership
       administrative adjustment relates, the proper allocation of such items

2008-5045                                  10
       among the partners, and the applicability of any penalty, addition to tax, or
       additional amount which relates to an adjustment to a partnership item.

26 U.S.C. § 6226(f) (emphases added). 7

       Jade contends that because the Ervins’ outside bases in Jade, upon which the

assessed penalties are based, are not partnership items, there could be no penalty

applicable to a partnership item to trigger the court’s penalty jurisdiction under § 6226(f).

       The government responds that while a partner’s outside basis is an affected item

and thus not itself a partnership item, most (if not all) of the components of a partner’s

outside basis are themselves partnership items. The government further argues that

since all “legal and factual determinations that underlie the determination of the amount,

timing, and characterization” of partnership items are themselves partnership items, the

lack of economic substance of the spread transactions contributed to Jade is a

partnership item.

       In a factually analogous case, the D.C. Circuit considered whether § 6226(f)

conferred jurisdiction on the trial court, in that case the Tax Court, to determine that the

partners had no outside bases in a partnership that was disregarded for tax purposes.

Petaluma FX Partners , LLC. v. Comm’r of Internal Revenue Serv., 591 F.3d 649 (D.C.

Cir. 2010). In Petaluma, the purported partnership, Petaluma, was formed with the

purpose of engaging in foreign currency option trading. Id. at 650. The partners each

contributed pairs of offsetting long and short foreign currency options to become

       7
               Under TEFRA, a “partnership item” is “any item required to be taken into
account for the partnership’s taxable year under any provision of subtitle A . . . provided
that . . . such item is more appropriately determined at the partnership level than at the
partner level.” 26 U.S.C. § 6231(a)(3). TEFRA further defines two other terms, namely,
a “nonpartnership item” and an “affected item.” A “nonpartnership item” is one that is
not a “partnership item.” 26 U.S.C. § 6231(a)(4). And an “affected item” is one that is
affected by a “partnership item.” 26 U.S.C. § 6231(a)5.

2008-5045                                    11
partners in Petaluma. Id. The partners increased their adjusted bases in Petaluma to

reflect the long options they contributed, but they did not reduce those bases to reflect

Petaluma’s assumption of their short options. Id. The partners subsequently withdrew

from Petaluma, which fully liquidated their interest in the partnership by distributing cash

and shares of Scient stock. Id. Prior to the end of the year, the partners sold their

stock, taking their adjusted bases in the distributed stock equivalent to their adjusted

bases in Petaluma immediately prior to the distribution. Id. Given the inflated adjusted

bases in the stock, these sales created substantial short-term capital losses that the

partners claimed on their federal tax returns. Id.

       The parties’ arguments on appeal in Petaluma were strikingly similar to those in

this case. As in the present case, Petaluma argued that outside basis is an affected

item, not a partnership item and, therefore, the Tax Court had no right to determine that

its partners’ outside bases were zero.       Id. at 654.   Also similar to this case, the

government conceded that outside basis is not a partnership item but then argued that

outside basis is an affected item whose elements are largely or entirely partnership

items. Id.

       The D.C. Circuit agreed with Petaluma, stating that “the partners’ outside bases

are affected items, not partnership items. Unlike partnership items, affected items are

determined not at the partnership level, but at the individual partner level.” Id. The

court observed that not only are partnership items and affected items treated at different

levels, the assessment procedures are different. Id. at 655. In the case of a partnership

item, the IRS may directly assess the tax against the individual partner by making a

computational adjustment—applying the new tax treatment of all partnership items to

2008-5045                                   12
the partner’s return—and the partner must bring a refund claim to challenge the

computation.    26 U.S.C. § 6230(c)(1).    However, if the partner’s liability relates to

affected items, the IRS must send a notice of deficiency to that partner, thereby initiating

a deficiency proceeding against him individually.        26 U.S.C. § 6230(a)(2)(A)(i); see

Desmet v. Comm’r of Internal Rev., 581 F.3d 297, 302 (6th Cir. 2009) (explaining that

the IRS has different procedures for making adjustments to a partner’s tax liability

depending on whether the item is a partnership item or an affected item).

       The court concluded that under § 6226(f) the Tax Court did not have jurisdiction

to review the determination that the individual partners had no outside basis in

Petaluma. The court rejected the government’s contention that, although an affected

item, outside basis could be determined in the partnership-level proceeding. “The fact

that a determination seems obvious or easy does not expand the court’s jurisdiction

beyond what the statute provides. In other words, it does not matter how low the fruit

hangs when one is forbidden to pick it.” Id. at 655.

       We find the D.C. Circuit’s reasoning persuasive and see no reason to depart

from it in this case. While the parties here are different, each of the Ervins’ outside

basis in Jade is an affected item and thus not determined at the partnership level. See

Schell v. United States, 598 F.3d 1378, 1381-82 (Fed. Cir. 2009) (“An example of an

‘affected item’ is a partner's tax basis in his partnership interest, which is affected by

partnership items such as partnership income or loss.”). We also agree with the D.C.

Circuit’s observation:

       [N]othing about the concept of outside basis indicates that it is more
       appropriately determined at the partnership level. If disregarding a
       partnership leads ineluctably to the conclusion that its partners have no
       outside basis, that should be just as obvious in partner-level proceedings

2008-5045                                   13
        as it is in partnership-level proceedings. Moreover, with the invalidity of
        the partnership conclusively established as a partnership-level
        determination, there is little danger that outside basis will receive
        inconsistent treatment at the individual partner level.

Petaluma, 591 F.3d at 655.

        Because outside basis is not a “partnership item,” we conclude that the Court of

Federal Claims lacked jurisdiction to determine that the Ervins had no outside basis in

Jade.

        As explained above, under § 6226(f), the trial court has jurisdiction over “the

applicability of any penalty . . . which relates to an adjustment to a partnership item.”

The penalty in this case was imposed on the underpayment of income tax due to the

gross valuation misstatement of the partners’ outside basis in the partnership. Outside

basis is an affected item, not a partnership item; thus, the penalty here relates to an

adjustment of an affected item, not a partnership item. Accordingly, the trial court did

not have jurisdiction over the applicability of this particular penalty.

        Because it is possible that at least some portion of the penalties could have been

computed without relying on the partners’ outside bases, we conclude that the penalty

issue should be vacated and remanded.               See id. at 655-56 (remanding for a

determination as to whether some of the penalties could have been assessed without

partner-level computations).      Remand proceedings should determine whether any

penalties could have been assessed without relying on the Ervins’ outside bases.

                                                   D

        Finally, Jade argues that the Court of Federal Claims should have considered the

Ervin’s reasonable cause defenses, asserting that Temp. Treas. Reg. § 301.6221-1T(c),

(d) is invalid. Because we vacate that portion of the Court of Federal Claims’ judgment

2008-5045                                     14
affirming the penalties assessed against the Ervins, the validity challenge to the

temporary regulation is moot at this time, and we decline to reach it. See United States

v. Alaska S.S. Co., 253 U.S. 113, 116 (1920) (“[I]t is a settled principle in this court that

it will determine only actual matters in controversy essential to the decision of the

particular case before it.”); see also United States v. UPS Customhouse Brokerage, Inc.

575 F.3d 1376, 1383 (Fed. Cir. 2009) (vacating as moot the issue of whether Customs

could impose penalties aggregating more than $30,000 under 19 C.F.R. § 111.91 when

the case was being remanded for Customs to conduct a proper analysis of whether

there was in fact a violation of 19 U.S.C. § 1641); Elkem Metals Co. v. United States,

468 F.3d 795, 803 (Fed. Cir. 2006) (concluding that because an amount was properly

excluded from constructed value, the issue of whether the party correctly reported that

amount was moot and need not be decided). While the Court of Federal Claims could

conclude on remand that some of the penalties could have been assessed without

relying on the Ervins’ outside basis and thus putting this issue back into play, the

opposite is also true.    Although these issues are important to the parties and may

become relevant later in this case, deciding them now would be premature.

         Accordingly, we vacate that portion of the Court of Federal Claims’ judgment

concluding that the Ervins’ partner-level defenses cannot be brought at the partnership

level.

                                             III

         Because the Court of Federal Claims correctly concluded that the contribution of

the spread transactions to Jade lacked economic substance, we affirm the court’s denial

of Jade’s petition for readjustment of partnership items. However, because the Court of

2008-5045                                    15
Federal Claims lacked jurisdiction to review the penalties imposed on the underpayment

of income tax due to the gross valuation misstatement of the Ervins’ outside bases in

Jade, we vacate that portion of the court’s judgment affirming the penalties assessed

against the Ervins.   Additionally, we remand this issue for the court to determine

whether any part of the penalties could have been assessed without relying on the

Ervins’ outside bases and thus falling within the court’s jurisdiction. Finally, we vacate

as moot that portion of the Court of Federal Claims’ judgment upholding the validity of

Temp. Treas. Reg. § 301.6221-1T(c), (d).

          AFFIRMED-IN-PART, REVERSED-IN-PART, VACATED-IN-PART.

                                         COSTS

      Each party shall bear its own costs.

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