Fid. Int'l Currency Advisor a Fund Llc v. U.S.

• Decision Date: 18 October 2010
• Docket Number: Civil No. 06–40244–FDS,Civil No. 05–40151–FDS,Civil No. 06–40130–FDS,Civil No. 06–40243–FDS
• Parties: FIDELITY INTERNATIONAL CURRENCY ADVISOR A FUND, LLC, BY the TAX MATTERS PARTNER, Plaintiff,v.UNITED STATES of America, Defendant.Fidelity High Tech Advisor a Fund, LLC, by the Tax Matters Partner, Plaintiff,v.United States of America, Defendant.
• Court: U.S. District Court — District of Massachusetts

747 F.Supp.2d 49

FIDELITY INTERNATIONAL CURRENCY ADVISOR A FUND, LLC, BY the TAX MATTERS PARTNER, Plaintiff,

v.UNITED STATES of America, Defendant.Fidelity High Tech Advisor a Fund, LLC, by the Tax Matters Partner, Plaintiff,

v.United States of America, Defendant.

Civil Nos. 05–40151–FDS, 06–40130–FDS, 06–40243–FDS, 06–40244–FDS.

United States District Court, D. Massachusetts.

Oct. 18, 2010.

David J. Curtin, James D. Bridgeman, Kiara Rankin, Ronald L. Buch, Sheri A. Dillon, William F. Nelson, Bingham McCutchen LLP, Washington, DC, John O. Mirick, David K. McCay, Mirick, O'Connell, Demallie & Lougee, Worcester, MA, for Plaintiffs.Dennis M. Donohue, Barry E. Reiferson, Heather L. Vann, John Lindquist, U.S. Department of Justice, Washington, DC, for Defendants.

AMENDED [CORRECTED] FINDINGS OF FACT AND CONCLUSIONS OF LAW

SAYLOR, District Judge.

This is a dispute concerning two complex tax shelter transactions. The plaintiffs in these consolidated actions are Fidelity International Currency Advisor A Fund, LLC and Fidelity High Tech Advisor A Fund, LLC. The tax matters partner, and the principal taxpayer who invested in and benefitted from the tax shelter transactions at issue, was Richard J. Egan.¹

Richard Egan was one of the founders of EMC Corporation and the former ambassador to Ireland. He entered into the tax shelter transactions to avoid large tax liabilities on the sale of EMC stock and the exercise of non-qualified stock options. Together with his wife, Maureen, Richard Egan claimed a tax loss of $158.6 million in 2001, a further tax loss of $1.7 million in 2002, and capital losses of $167.1 million in 2002 as a result of their participation in the tax shelter transactions.

The IRS disallowed the tax treatment claimed by the Egans and issued Final Partnership Administrative Adjustments adjusting various partnership items and assessing accuracy-based tax penalties. This litigation followed.

The case was tried before the Court over 44 trial days beginning in late 2008. The Court also received more than 3,700 exhibits, and heard extensive testimony from multiple expert witnesses. For the reasons set forth below, the Court concludes that the partnership item adjustments made by the IRS are correct, and accordingly will enter judgment for the United States. The Court also finds that various accuracy-related penalties are applicable.

+-------------------+
                ¦TABLE OF CONTENTS  ¦
                +-------------------+
                

I.  INTRODUCTION                                                        65
                

                    A.    Summary of Facts                                              65
                    B.    Summary of Legal Conclusions                                  67
                

II.  NATURE OF PROCEEDINGS                                              69
                III. FINDINGS OF FACT                                                   70
                

                    A.    Jurisdictional Facts                                          70
                

          1.   Fidelity High Tech                                       70
                          2.   Fidelity International                                   71
                

                    B.    EMC, the Egans, and Related Parties                           72
                

          1.   EMC and Richard Egan                                     72
                          2.   The Egan Family                                          72
                          3.   Carruth Management and Subsidiaries                      73
                          4.   Burke, Warren Law Firm                                   74
                

                    C.    The Tax Promoters and their Associates                        74
                

          1.   The Diversified Group Incorporated                       74
                          2.   Helios Financial LLC                                     74
                          3.   KPMG, LLP                                                74
                          4.   Alpha Consultants, LLC                                   75
                          5.   Samuel Mahoney                                           75
                          6.   Refco Capital Markets Limited                            75
                          7.   Proskauer Rose, LLP                                      75
                          8.   Sidley Austin Brown & Wood, LLP                          75
                          9.   RSM McGladrey, Inc.                                      75
                

                    D.    The Egans' Tax Problems                                       75
                

          1.   Low–Basis EMC Stock                                      75
                          2.   Non–Qualified Stock Options                              76
                

                          The Delegation of Authority for Tax Affairs to Michael Egan
                    E.    and Carruth                                                   76
                    F.    Early Discussions Concerning Tax Shelters                     77
                    G.    The “Short Option Strategy”                                   79
                    H.    The May 2000 Meetings                                         80
                

          1.   The May 15, 2000 Meetings in New York                    80
                          2.   The May 19, 2000 Meeting in Chicago                      83
                          3.   Denby's Comparison of the Tax Strategies—May 2000        84
                          4.   The May 25, 2000 Meeting in Massachusetts                85
                

    I.    Further Developments in July 2000                             86
                

          1.   The July 10–13, 2000 Meetings in Chicago                 86
                          2.   The July 18, 2000 Meeting with Helios in Chicago         88
                          3.   Carruth's Due Diligence Concerning the Promoters         89
                

                    J.    Formation of Fidelity Entities in July 2000                   90
                

          1.   Fidelity High Tech Transaction Entities                  90
                          2.   Fidelity International Transaction Entities              90
                

                    K.    Carruth Prepares to Implement the Strategies                  91
                

          1.   Denby's Fax of July 20, 2000                             91
                          2.   Further Discussions in July 2000                         91
                          3.   The August 2, 2000 Meeting in Boston                     92
                

                    L.    IRS Notice 2000–44 and Its Aftermath                          92
                

          1.   The Issuance of IRS Notice 2000–44                       92
                          2.   The Reaction to IRS Notice 2000–44                       93
                          3.   The August 23, 2000 Conference Call                      95
                          4.   The Initial Draft Legal Opinions for Fidelity High Tech  96
                

                    M.    Carruth Resumes Implementation of the Capital Gains Strategy  97
                

          1.   The September 5, 2000 Memorandum                         97
                               The Parties Begin Implementation of the High Tech
                          2.   Transaction                                              98
                          3.   The Withdrawal of HSBC as the Counterparty               98
                          4.   The Selection of Refco as the Substitute Counterparty    99
                          5.   The First Registration of EMC Shares                     99
                          6.   Carruth Puts the Fidelity High Tech Transaction on Hold  100
                          7.   The Year–End Transfer of Maureen Egan's Fidelity High    100
                               Tech Interest
                

    N.    Resumption of the High Tech Transaction in January 2001       101
                

          1.   The January 23, 2001 Tax Analysis by Shea                101
                          2.   The January 24, 2001 Memorandum from Shea                101
                          3.   The Initial Draft Legal Opinion Letter from Proskauer    102
                          4.   The January 29, 2001 Memorandum by Shea                  102
                               The Decision to Allocate 99% of the High Tech
                          5.   Transaction to Maureen Egan                              103
                          6.   Planning for Tax Reporting of the High Tech Transaction  103
                          7.   The Second Registration of EMC Shares                    104
                

                    O.    Implementation of the Fidelity High Tech Transaction          104
                

          1.   Index A and Option A Enter into Option Trades            104
                          2.   The Possibility of a One–Option Payout                   105
                          3.   The Capitalization of Fidelity High Tech                 106
                          4.   The Purported Increase in Basis                          106
                          5.   The Receipt of McData Stock Dividend                     107
                          6.   The Cover/Termination of NASDAQ 100 Options              107
                

                    P.    “Stuffing” of Additional Low–Basis Stock into Fidelity High   109
                          Tech
                

          1.   “Stuffing” Activities in May and June 2001               110
                          2.   Additional “Stuffing” in Late 2001                       111
                

                    Q.    The Change of Structure of the Fidelity High Tech Transaction 112
                

          1.   The Original Final Step of the Transaction               112
                          2.   The October 31, 2001 Tilevitz “Stock Dribble” Memorandum 113
                          3.   The Initial Proposal to Use a Subchapter S Corporation   113
                          4.   The Change to a Partnership                              114
                               The Transfer of Maureen Egan's Interest to an LLP and
                          5.   Section 754 Elections                                    114
                          6.   Discussions at Year–End 2001 Concerning Sale of Stock    116
                          7.   The Sale of Stock Held by Fidelity High Tech in 2002     116
                

    R.    The Egans Continue to Explore an Ordinary Loss Strategy       117
                

          1.   Exercise of Options                                      117
                          2.   The Search for Ordinary Income Strategies                118
                

                    S.    The Design and Development of the FDIS Strategy               120
                

          1.   DGI's “2001 Partnership Strategy Memorandum”             120
                               Further Development of the “Financial Derivatives
                          2.   Investment Strategy”                                     120
                          3.   The Foreign Partners—Mahoney and Hawkes                  121
                          4.   The Model Opinion for FDIS Strategy                      122
                          5.   The 2001 FDIS Transactions                               122
                

                    T.    KPMG and Helios Pitch the FDIS Strategy to the Egans          123
                

          1.   The September 2001 KPMG PowerPoint

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