DocketNumber: Docket No. 12307-04.
Citation Numbers: 114 T.C.M. 326, 2017 Tax Ct. Memo LEXIS 184
Judges: GOEKE
Filed Date: 9/18/2017
Status: Non-Precedential
Modified Date: 11/20/2020
Decision will be entered for respondent on the deficiency and for petitioners on the penalty.
GOEKE,
On the basis of the concession, the issues for decision are: (1) whether petitioners are entitled to deduct a loss for 2000 on the offsetting foreign currency options. We hold that they may not because the underlying option transactions lacked economic substance; and (2) whether petitioners are liable for an accuracy-related penalty under
After Waddell & Reed went public in 1998, Waddell & Reed established a company-sponsored personal financial planning program for its senior executives (WR executive program) that provided financial, estate, and income tax planning and tax return preparation services. Part of Waddell & Reed's reasoning for adopting the WR executive program was concern with its own reputation and client relationships as affected by the ethical conduct of its executives, including tax compliance issues. Waddell & Reed also wanted to ensure that senior executives focused their attention on shareholder matters rather than their own tax and investment affairs. Upon Mr. Tucker's recommendation, Waddell & Reed engaged KPMG to manage the WR executive program. KPMG also served as Waddell & Reed's auditor. Mr. Tucker recommended a friend*188 and former KPMG colleague, Eugene Schorr, to run the WR executive program. Bruce Wertheim, a senior manager at KPMG, assisted Mr. Schorr as a principal adviser.
Mr. Schorr has a bachelor's degree in accounting and a master's degree in taxation and is a C.P.A. and a personal financial specialist. He worked in KPMG's tax compliance group and specialized in individual tax and financial planning, gifts and estates, trust planning, and charitable contributions. Mr. Schorr worked at KPMG (or its predecessors) from 1966 until he retired in 2003, becoming a partner in 1976. During his career Mr. Schorr served as partner in charge of KPMG's New York individual tax practice and as partner in charge of its national personal financial planning practice. During 2000 and 2001 he served as partner in charge of KPMG's national financial planning corporate program. Mr. Schorr taught an undergraduate estate and gift tax course for 10 years and lectured on income tax, trust, and estate planning issues at various conferences and institutes. He wrote tax articles and served on the editorial board of Taxation for Accountants and as a director of the New York State Society of Certified Public Accountants.*189 Throughout this career Mr. Schorr emphasized the importance of client relationships. In his experience, many senior executives lacked time to handle their own financial and estate planning and tax matters. Mr. Schorr had extensive experience in the development and administration of executive financial planning programs such as the WR executive program. Mr. Tucker considered Mr. Schorr trustworthy and knowledgeable and viewed him as the preeminent person at KPMG for coordinating tax return compliance, tax planning, estate planning, and financial planning for executives.
From 1999 through 2001 KPMG provided Waddell & Reed's senior executives, including Mr. Tucker, with individual tax and financial planning services pursuant to the WR executive program. As part of the WR executive program, KPMG asked Waddell & Reed's senior executives to complete a comprehensive information-gathering document relating to the executives' financial and tax situations and financial and nonfinancial goals. KPMG used the information to develop specific recommendations for the executives.
During his employment with Waddell & Reed, Mr. Tucker participated in an executive deferred*190 compensation stock option plan (WR stock options plan). By 2000 Waddell & Reed's stock had significantly appreciated in the short time since it had gone public in 1998. KPMG anticipated that Waddell & Reed's executives, including Mr. Tucker, would exercise their WR stock options during 2000 to take advantage of the increased stock value and would experience significant increases in their 2000 incomes as a result of exercising the WR stock options. KPMG advised Mr. Tucker on timing and restrictions upon the exercise of the WR stock options. On August 1, 2000, Mr. Tucker exercised 1,776,654 WR stock options. On that same date he exercised 119,513 WR stock options via the Keith A. Tucker Children's Trust Agreement, dated February 21, 2000. On their 2000 joint income tax return, petitioners reported $44,187,744 in wages and salaries, which included $41,034,873 in gain from the exercise of WR stock options. Waddell & Reed withheld Federal income tax of approximately $11.4 million from Mr. Tucker's compensation relating to the exercise of the options.
In May 2000 before exercising the WR stock options, Mr. Tucker met with KPMG advisers to discuss his financial*191 and tax planning for 2000 including his exercise of the WR stock options. They discussed the need to withhold income tax upon the exercise of the WR stock options. Mr. Schorr also explained the need for Mr. Tucker to diversify his investments. Mr. Tucker viewed his WR investments as conservative and wanted to diversify into riskier investments. Mr. Schorr advised Mr. Tucker that KPMG offered various investment programs that could mitigate his income tax resulting from exercising the WR stock options. Mr. Tucker viewed his conversations with KPMG as part of the WR executive program. KPMG had trained and directed its partners to refer clients with income over a certain threshold to KPMG's Innovative Strategies Group. Mr. Schorr identified Mr. Tucker as a potential client for the Innovative Strategies Group in the spring of 2000 on the basis of Mr. Tucker's 2000 income from his exercise of the WR stock options. Mr. Schorr conferred with Timothy Speiss, the northeast partner in charge of KPMG's Innovative Strategies Group, and with other KPMG partners with respect to Mr. Tucker. Mr. Schorr asked Mr. Speiss to meet with Mr. Tucker to discuss tax strategies to mitigate his 2000 income tax.*192 Mr. Speiss has a bachelor's degree in business with a major in accountancy and a master of science degree in taxation. He began working at KPMG in 1983 and became a partner in 1999. At trial in this case Mr. Speiss asserted his
By letter dated June 22, 2000, Mr. Wertheim provided Mr. Tucker with an estimate of Mr. Tucker's income from the planned August 2000 exercise of the WR stock options in anticipation of their upcoming meeting. On June 26, 2000, the KPMG advisers, Messrs. Speiss, Wertheim, and Schorr, met with Mr. Tucker, and Mr. Speiss explained that part of his work was to identify investment opportunities that also had tax benefits and to implement the tax benefits for KPMG's clients. KPMG proposed a tax strategy referred to*193 as "short options" and explained that the strategy would mitigate petitioners' 2000 income tax from the WR stock options (short options strategy). Mr. Schorr explained that the Internal Revenue Service (IRS) could impose accuracy-related tax penalties and that taxpayers could protect themselves from penalties by relying on counsel. Mr. Tucker had previously been unfamiliar with IRS penalties.
On the same day Mr. Tucker also met with a representative of Quadra Associates who was a former KPMG colleague of Messrs. Tucker and Schorr to discuss a tax strategy for petitioners' 2000 income tax referred to as the Quadra Forts transaction. Mr. Schorr arranged this meeting. After these meetings Mr. Tucker decided to further pursue and investigate KPMG's short options strategy. Mr. Tucker declined to engage in the Quadra Forts transaction in part because it would require disposition of his WR stock, something he wanted to avoid as Waddell & Reed's CEO. KPMG sent a letter to Mr. Tucker, dated July 25, 2000, that described both tax strategies, which Mr. Tucker received during the first week of August. On August 2, 2000, Mr. Tucker spoke with representatives of KPMG and Helios Financial LLC (Helios)*194 to discuss the mechanics of the short option strategy. After these discussions Mr. Tucker viewed the short options strategy as in a concept stage and he did not yet understand the transaction. KPMG provided an engagement letter to Mr. Tucker, dated August 10, 2000, and signed by Mr. Speiss, for services relating to the short option strategy for a fee of $600,000.
On August 11, 2000, the IRS issued
Mr. Tucker and KPMG began to discuss other tax mitigation strategies for Mr. Tucker's 2000 tax planning. In fall 2000 Mr. Tucker reconsidered the Quadra Forts transaction, upon KPMG's advice, and met with Quadra Associates. KPMG provided tax advice to Mr. Tucker on the Quadra Forts transaction and consulted with Quadra Associates as Mr. Tucker's adviser. Mr. Tucker decided to participate in the Quadra Forts transaction. The Quadra Forts transaction was scheduled to commence on December 18, 2000. Issues arose concerning Quadra Associates' unwillingness to share details about the transaction with KPMG, and the lack of disclosure could have prevented KPMG from being able to sign petitioners' 2000 return as return preparer. On December 12, 2000, Quadra Associates advised KPMG that financing for the Quadra Forts transaction was in jeopardy and the*196 transaction might not close. On December 14, 2000, Mr. Tucker was advised that the Quadra Forts transaction could not be completed because of a lack of financing. During this period, when Mr. Tucker first considered the short options strategy in June 2000 through the failure of the Quadra Forts transaction in mid-December 2000, Mr. Tucker had little direct communication with Mr. Speiss.
After the Quadra Forts transaction fell through, Mr. Speiss discussed with and sought approval from several members in KPMG's tax leadership positions to develop and propose a customized tax solution to mitigate Mr. Tucker's 2000 income tax by the end of the year. Mr. Speiss informed Mr. Schorr that he intended to propose a potential customized tax strategy to Mr. Tucker that involved foreign currency options. Mr. Schorr followed up with at least one member of KPMG's tax leadership to confirm that the tax leadership approved a customized tax solution for Mr. Tucker because of the sensitive nature of yearend tax strategies and because Mr. Schorr understood that KPMG would not pursue certain types of tax strategies for its clients after issuance of
On December 15, 2000, Mr. Speiss spoke with Mr.*197 Tucker and recommended a transaction involving foreign currency options (FX transaction). KPMG customized and recommended the FX transaction to three Waddell & Reed senior executives, including Mr. Tucker. One of the other executives also executed the transaction. Mr. Speiss identified four entities, Helios, Diversified Group, Inc. (DGI), Alpha Consultants, LLC (Alpha), and Lehman Brothers Commercial Corp. (Lehman Brothers), a global financial services firm, that would collectively execute and manage the FX transaction. Mr. Tucker understood that Helios, DGI, and Alpha (promoter group) were investment advisers that would assist in implementing the FX transaction and that DGI had designed the FX transaction. Individuals associated with the promoter group explained the potential profit and loss associated with the FX transaction and informed Mr. Tucker that both the potential profit and loss would be capped. The promoter group told Mr. Tucker that he had a potential return of $800,000 on the FX transaction, after transaction costs and fees, and the probability that he would earn a profit was 40%. Mr. Tucker viewed an $800,000 profit over a short period as a good investment. In fact Mr.*198 Tucker had a net economic loss on the FX transaction of approximately $695,000. Mr. Tucker knew about the tax benefits of the FX transaction; he also knew the IRS might disallow the loss deduction from the transaction.
On December 16, 2000, Mr. Speiss sent a letter to Mr. Tucker concerning the FX transaction and transmitting a profit and loss summary for the FX transaction and a summary of "review points" being considered by KPMG. The letter included an attachment titled "CFC timeline". The CFC timeline contained the following table:
Fri., Dec. 15 | Purchase stock of CFC; enter into shareholder's |
agreement; fund CFC; acquire options. | |
Wed., Dec. 27 | Latest date for sale of gain legs and purchase of |
replacement options | |
Thurs., Dec. 28 | Latest effective date of check-the-box election |
Fri., Dec. 29 | Remaining positions expire or are sold |
Mar. 13, 2001 | Latest date for making retroactive check-the-box |
election | |
Tax return due | |
date | |
Sept. 15, 2001 |
On December 18, 2000, Mr. Tucker spoke with Messrs. Schorr and Speiss by telephone about the FX transaction. Mr. Tucker decided to implement the FX transaction and signed an engagement letter, dated December 27, 2000, for KPMG*199 to provide tax consulting services relating to the FX transaction. Mr. Tucker worked with Mr. Speiss to implement the transaction during the last two weeks of December 2000, including after Mr. Tucker left for a two-week vacation on December 19, 2000. Mr. Schorr did not participate in meetings and discussions between Messrs. Tucker and Speiss relating to the FX transaction. Mr. Tucker understood that Mr. Schorr was not involved in implementing the FX transaction.
Mr. Tucker implemented the FX transaction through three entities: Sligo (2000) Company, Inc. (Sligo), Sligo (2000), LLC (Sligo LLC), and Epsolon, Ltd. (Epsolon). In December 2000 Mr. Tucker incorporated Sligo under Delaware law, with Mr. Tucker owning all outstanding stock. Sligo elected S corporation status for Federal income tax purposes, effective December 18, 2000. In December 2000 Mr. Tucker also organized Sligo LLC under Delaware law pursuant to a limited liability company agreement dated December 19, 2000. From its inception until December 26, 2000, Mr. Tucker was the sole member of Sligo LLC. On December 26, 2000, Mr. Tucker transferred his ownership interest in Sligo LLC to Sligo.
Epsolon was*200 a foreign corporation organized under the laws of the Republic of Ireland on November 6, 2000. When Epsolon was initially organized, Cumberdale Investment, Ltd. (Cumberdale), also a foreign corporation existing under the laws of the Republic of Ireland, owned all 100 shares of Epsolon's issued and outstanding stock. On December 18, 2000, Sligo purchased 99 Epsolon shares from Cumberdale for $10,000. From December 18 through 31, 2000, Sligo owned 99 shares and Cumberdale owned 1 share. Petitioners did not directly or indirectly own any interest in Cumberdale. Epsolon elected partnership classification for Federal income tax purposes effective December 27, 2000. On December 18, 2000, Cumberdale and Sligo entered into a shareholder agreement to make capital contributions to Epsolon: Cumberdale agreed to contribute $15,300 and Sligo agreed to contribute $1,514,700 for a total contribution of $1,530,000. Mr. Tucker opened two accounts at Lehman Brothers, one on behalf of Epsolon (Epsolon account) and the other on behalf of Sligo LLC (Sligo LLC account).*201 of $510,000 and $500,000 on December 20 and 28, 2000, respectively.
The FX transaction consisted of two components. The first component (Epsolon loss component) was structured in accordance with the CFC timeline outlined above. The second component (Sligo LLC basis component) was structured to increase the basis in an S corporation, Sligo, through which the Epsolon loss could pass through to Mr. Tucker.
On December 20, 2000, Epsolon purchased the following four foreign currency options (euro options) from Lehman Brothers tied to the U.S. dollar and the European euro (USD/euro) for a combined premium of $156,041,0
Long euro call I | .9208 USD/euro | $187,637,704 | $56,451,951 |
Long euro call II | .9208 USD/euro | 71,710,943 | 21,568,993 |
Long euro put I | .8914 USD/euro | 187,445,332 | 56,451,284 |
Long euro put II | .8914 USD/euro | 71,637,538 | 21,568,773 |
On December 20, 2000, Epsolon wrote to Lehman Brothers the following euro options for a combined premium of $157,500,000:
Short euro call I | .9207 USD/euro | $189,827,513 | $57,000,000 |
Short euro call II | .9207 USD/euro*202 | 72,434,183 | 21,750,000 |
Short euro put I | .8915 USD/euro | 189,635,141 | 57,000,000 |
Short euro put II | .8915 USD/euro | 72,360,777 | 21,750,000 |
The eight euro options expired on January 8, 2001. The total net premium payable by Lehman Brothers to Epsolon relative to the above eight euro options (December 20, 2000, euro options) was $1,458,999, which was posted as a credit to the Epsolon account at Lehman Brothers. In addition to the net premium, Epsolon was required to post a margin of $1,448,986. The sum of these amounts, together with the accrued interest, was intended as collateral for the amount Epsolon could owe on the December 20, 2000, euro options if the USD/euro exchange rate was below .8914 or above .9208 at expiration.
On the basis of the euro options, Mr. Tucker's advisers determined there were three possible outcomes at expiration:*203 rate was above .8914 and below .9208 USD/euro, the parties would not exercise any of eight options, and Epsolon would realize a gain of $1,458,999 (the net premium credited to its account); or
3. if the USD/euro exchange rate was above .9208 USD/euro, the parties would exercise four of the euro options (long euro call I, long euro call II, short euro call I, and short euro call II), and Epsolon would owe $2,913,049 to Lehman Brothers, which would result in the return of the $1,458,999 credit and an additional loss of $1,454,050.
On December 21, 2000, the euro appreciated against the U.S. dollar. On December 21, 2000, Epsolon disposed of the following four December 20, 2000, euro options for a net gain of $51,260,455:
Long euro call I | $75,714,627 | -- | $19,262,676 |
Long euro call II | 28,131,028 | -- | 6,562,035 |
Short euro put I | -- | $38,155,202 | 18,844,798 |
Short euro put II | -- | 15,159,054 | 6,590,946 |
On the same day, Epsolon purchased from Lehman Brothers the following two foreign currency options tied to the Deutschmark (DEM) and the U.S. dollar (Deutschmark options) for a combined premium of $103,918,493:
Long DEM call I | 2.1241 DEM/USD | $187,751,702 | $75,760,627 |
Long DEM call II | 2.1241 DEM/USD | 71,779,358 | 28,157,866 |
Epsolon sold to Lehman Brothers the following two Deutschmark options for a combined premium of $53,316,100:
Short DEM put I | 2.1939 DEM/USD | $189,640,141 | $38,156,208 |
Short DEM put II | 2.1939 DEM/USD | 72,364,777 | 15,159,892 |
Each of the Deutschmark options expired on January 8, 2001. On the basis of the four Deutschmark options, Epsolon owed a net premium to Lehman Brothers of $50,602,393. Epsolon paid the net premium in part by $50,531,399 in proceeds from the disposition of four December 20, 2000, euro options. Epsolon's acquisition of the Deutschmark options required it to pay an additional $70,994 premium and to post an additional margin of $9,006.
On December 28, 2000, Epsolon disposed of the following four foreign currency options for a net loss of $38,483,893:
Long DEM call I | $124,340,670 | -- | $48,580,043 |
Long euro put I | 4,565,799 | -- | (51,885,485) |
Short euro call I | -- | $125,715,399 | (68,715,399) |
Short DEM put I | -- | 4,619,260 | 33,536,948 |
On January 8, 2001, the four remaining euro and Deutschmark options expired. As of January 8, 2001, Epsolon had not exercised four options, which expired as follows: 1. the long DEM option call II expired, and Lehman Brothers owed $71,779,358 to Epsolon; 2. the short euro call option II expired, and Lehman Brothers owed $72,434,183 to Epsolon; 3. the long euro put option II expired out of the money; and 4. the short DEM put option II expired out of the money.
On December 21, 2000, Sligo LLC purchased from Lehman Brothers a long put option to sell 14,392,491,546 Japanese yen (yen option) at a strike price of 108.96 yen to the U.S. dollar for a $51 million premium. Also on December 21, 2000, Sligo LLC sold a yen put option to Lehman Brothers to sell 14,277,335,279 yen at a strike price of 108.97 yen to the U.S. dollar for a premium of $50,490,000. Both yen options expired on December 21, 2001, a one-year period from execution to maturity. Sligo LLC owed Lehman Brothers a net premium of $510,000 for the two yen options. If the yen/USD exchange rate was above 108.96 at expiration, Sligo LLC would receive a net payment of 115,136,267 yen (worth between $1,081,390*206 and $1,068,710). If the yen/USD exchange rate was below 108.96 at expiration, both yen options would expire worthless, and Sligo LLC would lose the $510,000 premium paid to Lehman Brothers.
On December 26, 2000, Mr. Tucker transferred his 100% ownership interest in Sligo LLC to Sligo. Epsolon took the reporting position that: (1) it was a controlled foreign corporation (CFC) for a period of nine days before it elected partnership classification, i.e., the taxable year ended December 26, 2000, and (2) its partnership election resulted in a deemed liquidation of Epsolon but did not result in any taxable income to Epsolon.
The Sligo LLC yen options created a basis component of the FX transaction similar to the basis inflation identified in KPMG represented to Mr. Tucker that the FX transaction was not covered by On or around December 26, 2000, Mr. Tucker engaged the law firm Brown & Wood to provide a tax opinion with respect to the FX transaction upon KPMG's recommendation. KPMG had recommended three law firms to Mr. Tucker, and he chose Brown & Wood to provide the opinions because he was familiar with the firm. Mr. Tucker understood that he needed a legal opinion as an "insurance policy" to ensure that the tax treatment of the FX transaction was proper and to protect against risk of IRS penalties. Mr. Tucker did not understand that Brown & Wood was involved with the development of the FX transaction. Mr. Tucker had a conference call with Mr. Speiss and counsel from Brown & Wood on December 15, 2000. In late January 2001 James Haber, president of DGI, advised R.J. Ruble, a tax partner at Brown & Wood, that Mr. Tucker would require two opinions with respect to the FX transaction: one relating to the Sligo LLC basis component (Sligo opinion) and the second relating*209 to a loss generated by the Epsolon loss component (Epsolon opinion). DGI's general counsel had prepared a draft memorandum, dated October 25, 2000, discussing the U.S. tax consequences of a CFC strategy similar to that used in the Epsolon loss component (CFC memorandum). The CFC memorandum included the CFC timeline given to Mr. Tucker before he engaged in the FX transaction. DGI provided the CFC memorandum and also a form legal opinion relating to the Sligo LLC basis component to Mr. Ruble when he was preparing the two Brown & Wood opinions. The two Brown & Wood opinions concluded Mr. Tucker's tax treatment of the FX transaction would more likely than not withstand IRS scrutiny and referenced multiple tax-law doctrines, including the sham transaction doctrine, economic substance, the step transaction doctrine, Mr. Tucker received the Sligo opinion after filing his 2000 income tax return, having filed the return approximately three weeks before the due date in order to obtain his expected refund of the tax withheld with respect to the WR stock options. Mr. Tucker received the Epsolon opinion before he filed his 2000 return. Mr. Tucker*210 questioned KPMG, as his tax return preparer, about the need to wait to file his 2000 return until he received both opinions. KPMG advised him that a delay in filing was not necessary because KPMG confirmed the opinions were forthcoming. Petitioners presented expert testimony that it was within acceptable practice standards at the time of the FX transaction to provide a tax opinion after the filing of a tax return. Both opinions were backdated to December 31, 2000; petitioners' expert noted no advantage to backdating an opinion, and backdating was not part of practice standards. Mr. Tucker did not read the Brown & Wood opinions, believing that he would not understand their technical nature. Mr. Tucker relied on KPMG to review the Brown & Wood opinions, consistent with his normal practice. There is no evidence in the record concerning Brown & Wood's fee for the two opinions or how the fee was paid. Mr. Speiss prepared a 48-page single-spaced memorandum addressed to Mr. Tucker, dated January 8, 2001 (Speiss memorandum), that summarized the FX transaction and analyzed the tax consequences of the FX transaction. The Speiss memorandum states it is not a tax opinion. The*211 memorandum described the application of the relevant Code provisions relied on for petitioners' reporting position and provided an analysis of various statutory provisions and judicial doctrines that the IRS could attempt to use to challenge or recharacterize the FX transaction, including economic substance, sham transaction, sham partnership, and step transaction doctrines, at-risk rules, and partnership antiabuse rules. The Speiss memorandum concluded that Mr. Schorr prepared an internal four-page memorandum to file (Schorr memorandum) dated January 18, 2001, that described advice and recommendations that KPMG provided to Mr. Tucker during 2000. Mr. Schorr did not expect that Mr. Tucker would*212 read the Brown & Wood opinions. Mr. Tucker received the Schorr memorandum before filing his 2000 return. He read the Schorr memorandum because it was a short document and because he had not requested it and was not aware that Mr. Schorr had drafted a memorandum. He described the Schorr memorandum as written in layman's terms for a client to understand. The Schorr memorandum indicated that Mr. Schorr drafted it in response to the IRS' increased scrutiny of tax solutions as announced in The Schorr memorandum summarized discussions with Mr. Tucker about his unwillingness*213 to enter into a transaction that could result in IRS penalties. The memorandum indicated possible IRS penalties of $4 million as a result of the FX transaction and advice given to Mr. Tucker to make a $5 million long-term investment to hedge against penalties. Mr. Tucker invested $3 million in junk-bond, high-yield securities and $1 million in fixed-income instruments and hedging transactions. The Schorr memorandum also summarized KPMG internal discussions on fees charged to Mr. Tucker. KPMG charged Mr. Tucker a $500,000 fee for services relating to the FX transaction, and the Schorr memorandum referred to an initial fee of $250,000. The Schorr memorandum stated that Mr. Speiss insisted on a larger fee because he had developed and implemented the FX transaction from beginning to end. The memorandum also stated that a fee based on hours of service would be between $250,000 and $300,000. Mr. Tucker also paid a $1,020,000 fee to Helios relating to the FX transaction. The relationship between Helios and DGI is unclear from the record. Mr. Schorr knew that the IRS might disallow the claimed tax treatment of the FX transaction but believed that Mr. Tucker would not be subject to IRS penalties.*214 This comports with Mr. Tucker's understanding of the advice he received from KPMG. Although Mr. Schorr wrote in his memorandum that Mr. Speiss developed the FX transaction with Helios and Brown & Wood, Mr. Schorr did not realize that Brown & Wood would have a conflict of interest when providing a tax opinion. Mr. Schorr did not receive copies of the Brown & Wood opinions and did not read the opinions. For 2000, Epsolon, a foreign entity, reported a $38,483,893 net loss from the December 28, 2000, disposition of the four foreign currency options plus an additional loss from transaction costs of $1,100,618 for a total loss of $39,584,511 (option loss). Epsolon allocated $39,188,666 of the option loss to Sligo on the basis of Sligo's 99% ownership. Sligo reported this option loss on its S corporation return for the period December 18 to 31, 2000. On their 2000 joint return, petitioners reported a loss of $39,203,302, consisting, in large part, of the $39,188,666 passthrough loss from Sligo. Petitioners also reported a $13,742,247 loss from Sligo on their 2001 joint return for a total loss of over $52.9 million for the two years 2000 and 2001.Subsequent Adviser Communications*215 and Proceedings In March 2002 Brown & Wood, then part of Sidley, Austin, Brown & Wood LLP (Sidley Austin), sent Mr. Tucker a letter informing him of the IRS' newly announced voluntary disclosure program, for taxpayers who had participated in tax shelters, that allowed taxpayers to avoid accuracy-related penalties. IRS As part of a promoter examination of KPMG, the IRS issued summonses to KPMG for the names of clients to whom KPMG had sold transactions covered by In August 2005 KPMG entered into a deferred prosecution agreement with the Government in which it admitted that it had participated in tax shelter transactions as part of a criminal conspiracy in an attempt to defraud the United States. KPMG agreed to pay the Government $456 million in restitution, penalties, and disgorgement of fees. In May 2007 Sidley Austin entered into a*217 settlement with the IRS in which it agreed to pay a tax shelter promoter penalty of $39.4 million. In April 2009 Mr. Tucker filed an arbitration complaint against KPMG and Sidley Austin before the American Arbitration Association for damages resulting from alleged fraudulent conduct relating to KPMG's advice in connection with the FX transaction. Mr. Tucker alleged that KPMG had made false representations concerning the validity of the FX transaction and the risk of IRS penalties. Mr. Tucker pursued the arbitration complaint to recover for damage to his reputation and career as a result of his involvement in the FX transaction and the resulting IRS case against him and to recover damages in connection with potential IRS penalties for 2000 and 2001. Mr. Tucker learned during the arbitration that his 2000 tax reporting position with respect to the FX transaction involved a basis-inflation component. In November 2010 KPMG entered into a settlement agreement with Mr. Tucker for an amount that would have substantially compensated for Mr. Tucker's lost salary, bonuses, and equity participation due to his forced resignation from Waddell & Reed as alleged in the complaint. Sidley Austin also*218 settled Mr. Tucker's claim for $1,050,000. Respondent submitted two expert reports prepared by David F. DeRosa and Thomas Murphy.*219 foreign currency option transactions were valued consistent with market prices and whether Mr. Tucker had a reasonable profit potential with respect to the Epsolon options. Mr. Fong concludes that the option transactions were valued properly and that there was a reasonable prospect for profit, net of fees and expenses. Mr. Fong determined that Mr. Tucker had a 40% chance of profit on both the Epsolon options and the Sligo LLC options. Dr. DeRosa agreed with Mr. Fong's probability calculation but also explained that Mr. Tucker would have needed to profit on both sets of options to earn a profit net of fees and that the likelihood of profiting on both sets would be lower. Petitioners argue that they are entitled to deduct the loss on the Epsolon options to the extent of Mr. Tucker's basis in Sligo. Having conceded Sligo's basis arising from the Sligo LLC options, petitioners assert that Mr. Tucker had a $2,024,700 basis in Sligo in 2000 on the basis of alleged cash contributions. Petitioners assert that they are entitled to deduct $2,024,700 of Sligo's loss in 2000 and to carry forward the remainder of the 2000 loss to future years to the extent of Mr. Tucker's basis in Sligo*220 and its successor corporation, Starview Enterprises, Inc. Petitioners argue that specific and detailed provisions of the Code and the regulations dictate the tax treatment of the Epsolon options, which we should respect. In support of their position, petitioners assert that the Epsolon loss component yielded the loss claimed pursuant to the following analysis: (1) Epsolon realized an aggregate gain of $51,260,455 in 2000 when it disposed of four euro options on December 21, 2000. (2) Epsolon did not recognize the $51,260,455 gain for U.S. tax purposes because (i) Epsolon was a foreign corporation not subject to tax under (3) Epsolon and Sligo were not required to recognize gain or loss when Epsolon elected partnership status because Epsolon made an election that allowed it to recognize gain equal to Sligo's basis in its Epsolon stock and Sligo had a zero basis in its Epsolon stock. (4) After Epsolon became a U.S. partnership, it disposed of an additional four foreign currency options for*221 a net loss of $38,483,893 and transaction costs of $1,100,618 in 2000 for a total loss of $39,584,511. (5) Sligo was required to take into account its distributive share of Epsolon's net loss, which passed through to Mr. Tucker, as Sligo's S corporation shareholder, and the loss was deductible under Respondent asserts several arguments against petitioners' entitlement to the ordinary loss deduction. Specifically, respondent argues that we should disallow petitioners' claimed loss deduction because (i) the Epsolon options lacked economic substance, (ii) the Epsolon loss was not bona fide and the Epsolon options were not entered into for profit, (iii) the step transaction doctrine prevents separating the gain from the loss on the Epsolon options, (iv) the loss should be allocated to Epsolon before the partnership election while it was a CFC because the gain and loss legs of the options are a single economic position under We agree with respondent that the Epsolon*222 options lacked economic substance. A taxpayer may not deduct losses resulting from a transaction that lacks economic substance even if that transaction complies with the literal terms of the Code. Petitioners argue that the Code imposes clear, mechanical provisions to determine the taxation of foreign corporations. Petitioners contend that we must give effect to the applicable Code and regulatory provisions as written because Congress "knowingly and explicitly" enacted laws to permit the tax treatment that petitioners claimed. The tax strategy at issue involved two separate components that both used offsetting foreign currency options to create a tax benefit: (1) the Epsolon loss component used offsetting foreign currency options to generate losses and (2) the Sligo LLC basis component used offsetting foreign currency options to create a basis in an S corporation through which the Epsolon losses could flow to petitioners' joint tax return. These two components were structured and executed to work in tandem in order to generate an artificial loss*223 to offset petitioners' nearly $50 million in taxable gains in 2000 and 2001. As petitioners argue that the mechanical provisions of the Code and the regulations dictate the tax treatment of the loss on the Epsolon options, we review the tax treatment below. Mr. Tucker generated the claimed tax loss through Epsolon. At the time Mr. Tucker acquired ownership of Epsolon, it was a foreign corporation for U.S. tax purposes. Mr. Tucker owned 99% of Epsolon through his wholly owned S corporation, Sligo. Epsolon executed the loss component in four steps: (1) Epsolon acquired various offsetting foreign currency digital option spread positions (spread positions); (2) it disposed of the gain legs of the spread positions while Epsolon was a CFC; (3) it made a "check-the-box" election to become a partnership for U.S. tax purposes; and (4) it disposed of the loss legs of the spread positions. Petitioners argue that Epsolon's gain on the options realized while a CFC is foreign source and not recognized for U.S. tax purposes and that Epsolon's losses after it became a partnership are U.S. source and pass through to Sligo as U.S. source loss. As an S corporation, Sligo would*224 pass its losses through to Mr. Tucker, its sole shareholder. Accordingly, Mr. Tucker claimed the Epsolon losses on his joint return. Petitioners argue that Congress chose not to tax foreign source income of a CFC in existence for less than 30 days with no business activities other than buying and selling foreign currency options. Epsolon was a CFC for nine days. According to petitioners' mechanical application of the Code and the regulations, petitioners*225 could be taxed on Epsolon's gain only under Effective December 27, 2000, Epsolon elected partnership status, becoming a partnership for Federal income tax purposes. The partnership election resulted in two events: (i) the electing entity is deemed to distribute its assets and liabilities to its shareholders in a complete liquidation*226 and (ii) the shareholders are then deemed to contribute the same assets and liabilities to a newly formed partnership for Federal income tax purposes. After the deemed liquidation, Sligo was deemed to contribute the eight options back to Epsolon as a newly formed partnership. Through the above application of the mechanical rules of the Code and the regulations, Mr. Tucker did not recognize the gain on the offsetting gain legs of the Epsolon options but recognized the loss on the loss legs to offset his income on his WR stock options. In this way, Epsolon separated the gain and loss legs of the Epsolon options. Petitioners argue that both the loss and the gain were bona fide, and the Code treats them differently. As outlined above, the Epsolon loss passed through to Mr. Tucker's S corporation Sligo and then to Mr. Tucker. To take advantage of the loss, he needed to have a sufficient basis in his Sligo stock. He created a stock basis through a second set of offsetting foreign currency options (Sligo LLC basis component). Petitioners have conceded that Mr. Tucker is not entitled to the basis in his Sligo stock created through the Sligo LLC options. We summarize the Sligo LLC basis component below. Pursuant to S corporation shareholders must make various adjustments to their bases in their S corporation stock. S corporation shareholders increase their bases in S corporation stock by their pro rata shares of income and by capital contributions and decrease their bases by losses and deductions passed through to the shareholders. To take advantage of the Epsolon losses, Mr. Tucker had to sufficiently inflate his basis in his Sligo stock. To this end, he purported to establish the necessary basis through offsetting yen options. Through Sligo LLC he bought and sold put options with premiums of $51 million and $50.49 million, respectively, and then contributed the options to Sligo by transferring his ownership in Sligo LLC to Sligo. Mr. Tucker calculated his Sligo stock basis by increasing his basis for the $51 million premium purportedly paid for the long yen option. However, he did not decrease his stock basis for the offsetting $50.49 million premium purportedly received for the short yen option on the basis that his obligation to fulfill the short yen option was a contingent liability that did not reduce his stock basis under Petitioners argue that the Code and the regulations mandate the above treatment of the gain and loss on the Epsolon options, and accordingly they are entitled to deduct the loss from the Epsolon options to the extent of Mr. Tucker's basis in Sligo. They argue that Congress chose not to tax the gain realized on the Epsolon options while Epsolon was a CFC for less than 30 days and chose to allow the loss realized while Epsolon was a U.S. partnership. They urge the Court to give effect to the statute as written and the regulatory choices made by the Secretary. They argue that Congress purposefully taxed U.S. shareholders of CFCs only when the*233 entities are CFCs for 30 days or more. As stated in the preamble to the proposed regulations, in light of the increased flexibility under an elective regime for the creation of organizations classified as partnerships, Treasury and the IRS will continue to monitor carefully the uses of partnerships in the international context and will take appropriate action when partnerships are used to achieve results that are inconsistent with the policies and rules of particular Code provisions or of U.S. tax treaties. Mr. Tucker used the partnership election to ignore economic reality and to separate Epsolon's gains from its losses--a critical step in his prearranged transaction. This manipulation of the elective regime for creating a partnership is patently inconsistent with legislative intent and is a prime example of the kind of behavior that concerned the regulators when the flexible check-the-box rules were promulgated. The offsetting Epsolon option spreads, the splitting of the gain and loss legs through the check-the-box partnership scheme, and the election under Petitioners cite two 50-year-old cases from the Court of Appeals for the First Circuit in support of their position that we should respect the mechanical application of the Code and the regulations used to achieve the tax-avoidance strategy in the FX transaction, The judicial doctrines empower the federal courts to disregard the claimed tax benefits of a transaction--even a transaction that formally complies with the black-letter provisions of the Code and its implementing regulations--if the taxpayer cannot establish that "what was done, apart from the tax motive, was the thing which the statute intended." Taxpayers generally are free to structure their business transactions as they wish even if motivated in part by a desire to reduce taxes. Accordingly, the burden of proving economic substance rests on the taxpayer. The Courts of Appeals are split as to the application of the economic substance doctrine.See Under the objective economic inquiry of Petitioners argue that the Epsolon options materially changed the taxpayer's economic position. Petitioners further argue that Mr. Tucker had a reasonable possibility of making a profit. He could have earned $487,707 profit net of fees if both the Epsolon and Sligo LLC options had been profitable, which petitioners argue reflects a reasonable possibility*241 of profit sufficient to satisfy the objective economic inquiry as articulated by the Court of Appeals for the Fifth Circuit. Petitioners contend that Mr. Tucker had a 40% probability of earning a $1,458,999 profit on the Epsolon options and a 40% probability of earning a $558,708 profit on the Sligo LLC options for a total profit of $2,017,707 and a net profit of $487,707 after payment of KPMG's and Helios' fees. Petitioners argue this amount represents a large profit because it represents a 14% return over a short period. The parties substantially agree on the amount and probability of Mr. Tucker's profit potential from the Sligo LLC and Epsolon options. At the time of the FX transaction, Mr. Tucker also understood that the Sligo LLC options and Epsolon options each had a 40% chance of profitability. Respondent notes that Mr. Tucker needed to profit on both components to realize a net profit on the total FX transaction to cover the nearly $1.5 million in fees that Mr. Tucker paid to KPMG and Helios. Respondent argues that probability that both events would occur could have been as low as 16%. Mr. Fong acknowledged that the likelihood of profit on both components was between 16% and*242 40%, depending upon the extent to which there was a correlation between the two events. Neither party's expert provided testimony of the appropriate correlation, however. The possibility of making The Epsolon options gave rise to $52.9 million in tax losses over two years, 2000 and 2001, with petitioners claiming a $38 million loss for 2000 and a tax benefit of over $20 million for 2000 and 2001. The $487,707 potential profit is de minimis as compared to the expected $20 million tax benefit. Petitioners' claimed tax loss has no meaningful relevance to the minimal profit potential of $487,707 from the FX transaction. This amount is insignificant when compared to petitioners' $52.9 million in ordinary losses for 2000 and 2001 from the FX transaction and when compared to petitioners' tax savings of $20 million manufactured by the FX transaction for 2000 and 2001. Petitioners' tax savings for 2000 alone were $15.5 million. By any objective measure, the FX*244 transaction defied economic reality. Petitioners suggest that we ascertain profitability by considering only the Epsolon options on the basis of their concession with respect to the Sligo LLC basis component. Petitioners contend that a comparison of the profit potential and the tax benefit of only the Epsolon options shows that the profits and the tax savings are sufficiently aligned to establish that the Epsolon options had economic substance. Petitioners contend that with their concession, they*245 are entitled to a loss deduction of approximately $2 million for 2000, which results in tax savings of roughly $800,000 for 2000. However, petitioners misstate the effect of their concession as they seek to carry over the remainder of the 2000 $38 million loss to future years to the extent that they can establish Mr. Tucker's Sligo stock basis. Petitioners further argue that we should recalculate the profit potential on the Epsolon options by allocating the $1.5 million in fees paid to KPMG and Helios equally between the Epsolon and Sligo LLC components. Under this calculation, petitioners assert that Mr. Tucker would have a profit potential of $688,090 on the Epsolon options, which represents a 30% return over a 19-day period. Petitioners argue that Mr. Tucker's potential profit is "substantial" compared to the $800,000 of tax savings petitioners claim for 2000, ignoring their carryover of the 2000 loss. In assessing the economic substance of a transaction, we consider the transaction that gave rise to the tax benefit and not collateral transactions that do not produce tax benefits. Petitioners' argument that we should ignore the Sligo LLC basis component fails for two reasons. First, the theory that we should wholly disregard one abusive component merely because it was conceded to be abusive does*248 not imbue the other equally abusive component with economic substance. To do so would contravene the core purpose of the economic substance doctrine to give effect to economic realities. Second, if we were to disregard the basis-inflation component, we would also disregard the 40% probability of earning a $558,708 profit associated with it, thus effectively wiping out any profit potential unless we agree with petitioners' reallocation of fees on a 50-50 basis. Such a reallocation of fees is not warranted as the fees related to the entire FX transaction. Mr. Tucker would have had to profit on both the Epsolon and Sligo LLC option spreads to cover the $1.5 million in fees paid to KPMG and Helios for the FX transaction. Both the Sligo LLC and Epsolon loss components were essential to achieve the mitigation of Mr. Tucker's 2000 income tax from the WR stock options. Mr. Tucker would not have executed the Epsolon options separate from the Sligo LLC options. Tax losses that fail to correspond to any actual economic losses "do not constitute the type of 'bona fide' losses that are deductible" for Federal tax purposes. The economics of the FX transaction do not support petitioners' claim to the losses reported on their 2000 tax return. There were four possible outcomes for the two sets of option transactions: (1) Epsolon option transactions finished in-the-money; Sligo LLC option transactions finished in-the-money; (2) Epsolon option transactions finished in-the-money; Sligo LLC option transactions finished out-of-the-money; (3) Epsolon option transactions finished out-of-the-money; Sligo LLC option transactions finished out-of-the-money; or (4) Epsolon option transactions finished out-of-the-money; Sligo LLC option transactions finished in-the-money. The parties rely on the economic analyses of their respective experts in support of their positions concerning the options' economic effect. Both experts agree that Mr. Tucker could profit*251 only under the fourth outcome, and only to the extent of $487,707 after accounting for fees. The other three outcomes would result in an economic loss. Both experts also used the Black Scholes Merton option pricing formula, but respondent's expert, using Mr. Fong's price determinations for the individual legs of the spread positions, concluded that the options were mispriced against Mr. Tucker. Mr. Fong did not price the spreads as a whole, however. Petitioners dispute that the options were mispriced. Mr. Fong determined, and Dr. DeRosa agreed, that there was an approximately 40% likelihood that the Epsolon option transactions would finish out-of-the-money and an approximately 40% chance that the Sligo LLC option transactions would finish in-the-money, both events were necessary for Mr. Tucker to make the$487,707 profit, and the likelihood that both events would occur would fall between 16% and 40%. Petitioners argue that we should not consider the 60% likelihood that Mr. Tucker would lose money because Mr. Tucker did not consider the FX transaction from a loss perspective. Rather he considered only that he had a 40% chance of making a profit and could earn that profit over a short*252 period. To this end, Mr. Tucker acknowledged he knew the options were riskier than his typical investments. Dr. DeRosa also analyzed the expected rate of return of the FX transaction and the probability-weighted sum of the four possible outcomes, and he calculated that Mr. Tucker had a negative expected rate of return on both the Epsolon and Sligo LLC option transactions, before and after accounting for fees. Dr. DeRosa determined that Mr. Tucker's expected rates of return for the Epsolon and Sligo LLC options were - 54.90% and - 52.39%, respectively, after accounting for fees. Dr. DeRosa explained that the expected rate of return analysis is a fundamental tool in assessing the economics of the options because it accounts for investment costs, possible payoffs, and probabilities of those payoffs. Dr. DeRosa explained that an expected rate of return is indicative of whether an option is priced correctly and the large negative expected rates of return present in this case indicate that the options were "egregiously" mispriced against Mr. Tucker. Petitioners argue that the expected rate of return analysis is not relevant to the objective test of the economic substance doctrine because*253 such an analysis fails to address whether the options had profit potential. At times, courts have found that negative expected rates of return indicate a lack of reasonable possibility of profit while at other times courts have given little weight to such analyses. We have found that the FX transaction lacked profit potential on the basis of a comparison of the minimal profit potential with the $52 million in tax savings over two years. Accordingly, we do not need to rely on Dr. DeRosa's expected rate of return analysis. For the most part, both expert reports are in agreement and use the same mathematical model and inputs. The reports, however, diverge in two key respects. First, as explained above, Dr. DeRosa relies on an expected rate of return analysis, and Mr. Fong determined profit probability. Second, the experts disagree on how to interpret each options' value. The experts agree that the stated premium of each individual option was generally within 1% of its theoretical*254 value. That is, each option, valued independently, was traded at or near market price at the time the trades occurred. Dr. DeRosa's rebuttal report, however, explains that the appropriate value to examine is the net premium paid or received, relative to the theoretical value of the position, to determine whether the FX transaction was fairly priced. While not determinative, a mispriced asset can contribute to the overall picture of a transaction lacking in economic substance. The second and third Respondent asserts that Mr. Tucker engaged in the FX transaction for the sole purpose of avoiding income tax that he owed upon the exercise of his WR stock options.*257 Petitioners counter that Mr. Tucker's admitted desire for tax savings does not negate his other motivations for entering into the FX transaction --profit and diversification. Petitioners claim Mr. Tucker's primary motivation was profit. In an effort to show his profit motives petitioners characterize Mr. Tucker's investment in the FX transaction as relatively small and describe the 40% chance of profit as very substantial and the $487,707 profit potential amount as very large over a short period. On brief, petitioners analogize Mr. Tucker's tax strategy to a double bacon cheeseburger--equating the $20 million expected tax benefits to the two hamburger patties and the $487,707 profit potential to the bacon--and urge us to believe that he "bought it for the bacon." The record, however, indicates otherwise. Mr. Tucker did not implement the options for a genuine business purpose. Rather he entered into the Epsolon options for the sole purpose of reducing his income tax. Mr. Tucker's efforts to participate in other tax strategies before ultimately engaging in the FX transaction, including the short options strategy before KPMG terminated the strategy upon the issuance of Mr. Tucker's testimony attempts to put a positive spin on the economic realities of the transaction, testifying that he knew that the FX transaction was riskier than his typical investments and that he sought to diversify into riskier investments. In actuality, Mr. Tucker should have expected the investment to be a failure, as he*260 knew that the Epsolon and Sligo LLC option transactions each had a 60% chance of losing money. Mr. Tucker claims a diversification motive and made other investments of less than $5 million at the time of the FX transaction per KPMG's advice in an attempt to show his nontax profit motives. However, the record shows that the purpose of those investments was to protect against IRS penalties and not to diversify. Mr. Tucker's additional investments do not imbue the FX transaction with tax-independent considerations. Moreover, the Epsolon entity served no business purpose other than tax avoidance. At the time he acquired Epsolon, Mr. Tucker did not intend to conduct any legitimate business or investment activities through Epsolon. Epsolon was a shelf corporation established by tax shelter promoters. Mr. Tucker's decision to enter into the FX transaction was solely tax motivated and did not have a genuine business purpose. Regardless of his purported desire for profit and diversification, Mr. Tucker executed a transaction that was structured for tax savings and not to make a profit. We note that even had petitioners established a nontax or genuine business purpose for the Epsolon options,*261 such motivation would not have been sufficient to satisfy the conjunctive factor test for economic substance as set forth by the Court of Appeals for the Fifth Circuit. The Epsolon options lacked any practical objective economic effect. The 40% gross valuation misstatement penalty would apply in this case on the basis of petitioners' claimed inflated basis in the Sligo stock. Petitioners argue that they are not liable for the accuracy-related penalty because they acted with reasonable cause and in good faith in reporting their 2000 tax liability. We determine whether a taxpayer acted with reasonable cause and in good faith on a case-by-case basis, taking into account all pertinent facts and circumstances. A taxpayer need not challenge an independent and qualified adviser, seek a second opinion, or monitor advice on the provisions of the Code. The reasonableness of any reliance depends on the quality and objectivity of the advice. We find that Mr. Tucker is not liable for the At the time of the FX transaction KPMG was one of the largest accounting firms in the United States. Mr. Tucker viewed Mr. Schorr as a preeminent person for coordinating tax return compliance and tax and financial planning. Mr. Tucker believes KPMG misled him. He was forced to resign as CEO of Waddell & Reed and is no longer employable in the financial*269 services industry. In the end, Mr. Tucker lost his position at Waddell & Reed because of his participation in the FX transaction and received a large settlement from KPMG for his lost future compensation. We note that in our order dated August 24, 2015, we found that Mr. Tucker's representations in his arbitration proceeding against KPMG support his assertion that he relied on the advice he received from KPMG in good faith. Because of Mr. Tucker's long relationship with Mr. Schorr, he was less likely to question KPMG's advice. While Mr. Tucker was motivated to reduce his 2000 income tax liability, he consistently represented to KPMG that he did not want to put his own reputation or career on the line as a result of a tax scheme. When KPMG recommended the FX transaction, Mr. Tucker believed in good faith that it was not abusive. Accordingly, we find that the Mr. Schorr was a competent tax professional and had access to all necessary and accurate information about the FX transaction through his employment with KPMG. Mr. Schorr did not have a financial interest in the FX transaction as a tax shelter promoter would. While KPMG increased its fee above its initial*270 fee, Mr. Schorr did not financially benefit from the increase. Mr. Tucker knew that Mr. Speiss at KPMG created the FX transaction as a customized tax solution to mitigate his 2000 income tax. Yet he did not understand that Mr. Speiss' involvement created an inherent conflict of interest with his longstanding relationship with Mr. Schorr and KPMG as his return preparer. Mr. Schorr also credibly testified that he did not believe Mr. Speiss' involvement created a conflict of interest. Further KPMG indicated to Mr. Tucker that Brown & Wood could provide independent legal advice with respect to the FX transaction. Mr. Tucker did not view KPMG as the promoter of a tax shelter for a number of reasons including his longstanding relationship with KPMG, KPMG's role in the WR executive program, and his statements to KPMG that he did not want to engage in a tax strategy that could jeopardize Waddell & Reed's or his own reputation within the financial services industry. He considered his main contact at KPMG, Mr. Schorr, to be a friend who would look out for his best interests. Mr. Tucker believed that KPMG would protect his interests as it had done when it terminated the short options strategy.*271 KPMG withdrew the short options strategy as abusive, and Mr. Tucker believed that KPMG would not recommend another potentially abusive transaction. Mr. Tucker credibly testified that KPMG's withdrawal of the short options strategy strengthened his trust in KPMG and his decades-old relationship with Mr. Schorr. We place little weight on Mr. Tucker's failure to review certain documents relating to the FX transaction. As a senior executive, Mr. Tucker depended heavily on his personal assistant. We do not view Mr. Tucker's following his normal practices when dealing with his taxes as a failure of good faith or reasonable diligence. As a senior executive, Mr. Tucker had a management style of delegating to people whom he trusted. Having his administrative assistant open and read emails relating to the FX transaction was consistent with Mr. Tucker's normal business practice. Likewise we do not find the fact that Mr. Tucker did not read We do not base our finding of Mr. Tucker's reasonable cause and good faith on the Brown & Wood opinions. Mr. Tucker did not receive at least one of the Brown & Wood opinions before petitioners filed their 2000 joint return, did not read either opinion, and had limited direct communication with Brown & Wood attorneys. There is no evidence that Mr. Tucker directly paid any fees to Brown & Wood for the opinions. Moreover, the promoter group provided drafts of the opinions to Brown & Wood. The reasonable cause defense depends on the particular facts and circumstances of each case. In this case, we find that petitioners have established that they met the requirements of the reasonable cause defense and find that they are not liable for the In reaching our holdings herein, we have considered all arguments made, and to the extent not mentioned, we conclude they are moot, irrelevant, or without merit. To reflect the foregoing,
1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code (Code) in effect for the year in issue.↩
2. The parties filed stipulations of facts with accompanying exhibits which are incorporated by this reference.↩
3. Mr. Tucker signed new account forms with Lehman Brothers that referenced
4. On brief respondent alleged three possible outcomes with slightly different amounts of potential loss or gain and used exchange rates of .8915 USD/euro and .9207 USD/euro. The difference is immaterial for our decision.↩
5. Respondent asserts that petitioners have not substantiated the capital contribution.↩
6. Epsolon was not subject to
7. Voir dire of Mr. Murphy at trial revealed that he had not updated his curriculum vitae with respect to certain aspects of his employment history and trials in which he had testified in the prior four years in violation of
8.
9.
10. In
11. Some Courts of Appeals require that a valid transaction have either economic substance or a nontax business purpose.
12. Dr. DeRosa believes that Mr. Fong's calculation contains a simple mathematical error and the correct value should be $2,388,167. If that error were corrected, the difference between the market-valued net premium and the net premium payable would increase to 39%.↩
13. Lehman Brothers' new account forms, which Mr. Tucker did not read, also mentioned
14. Respondent argues that Mr. Tucker's statements in the arbitration proceeding against KPMG are admissions that prevent him from establishing reasonable cause here. We disagree, as we held in our order dated August 24, 2015, denying respondent's motion for summary judgment.↩
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