U.S. v. OHLE, Cite as 105 AFTR 2d 2010-XXXX, 01/12/2010

UNITED STATES of America, Plaintiff, v. John B. OHLE III and William E. Bradley, Defendants.
Case Information:

Code Sec(s):
Court Name: United States District Court, S.D. New York,
Docket No.: No. S2 08 Cr. 1109(LBS),
Date Decided: 01/12/2010.
Disposition:
HEADNOTE

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Reference(s):

OPINION

United States District Court, S.D. New York,

MEMORANDUM & ORDER

Judge: SAND, District Judge.

On August 11, 2009, the Government filed the Second Superseding Indictment (“Indictment”) against Defendant JohnB. Ohle III (“Ohle”) and Defendant William E. Bradley (“Bradley”). The Indictment, which includes eight counts, charges Ohle and Bradley with various tax and fraud offenses. The Indictment alleges that between 2001 and 2004, Ohle and various co-conspirators engaged in a massive scheme to cheat the Government out of over $100 million by causing dozens of United States taxpayers to engage in fraudulent tax shelter transactions and fraudulently report the results of those shelters on their tax returns. Ohle is alleged to have formed two conspiracies, charged in Count One and Count Five. Bradley is only alleged to have been a member of the Count Five conspiracy.

The Count One conspiracy (the “HOMER conspiracy”) charges Ohle and others with conspiring to defraud the United States and to commit various tax crimes and mail and wire fraud. Ohle and his coconspirators are charged with developing and implementing an allegedly fraudulent tax shelter known as “Hedge Option Monetization of Economic Remainder” (“HOMER”). Ohle, a certified public accountant and attorney, is charged with helping to design, market, and implement HOMER while he was working for a national bank (“Bank A”), which maintained its principal offices in Chicago, Illinois. The scheme was allegedly designed to eliminate or reduce the amount of U.S. income taxes paid by wealthy clients of Bank A and law firm Jenkens & Gilchrist, P.C. (“J & G”). The scheme generated extraordinary fee income for Bank A, J & G, Ohle, and his co-conspirators. The Indictment also alleges that Ohle and other members of the Innovative Strategies Group (“ING”) at Bank A received bonuses based in part on the amount of fees each generated through their sale of the HOMER tax shelters. Ohle is charged with substantive tax evasion as to various clients in Count Two (Client D.W.), Count Three (Client C.P.), and Count 4 (Client D.D.).

The Count Five conspiracy, referred to in the Indictment as “The Mail and Wire Fraud and Personal Income Tax Fraud Conspiracy”, charges Ohle, Bradley, and co-conspirators Douglas Steger and Individual C with conspiracy to commit fraud. The conspiracy alleged in Count Five consists of two schemes: the referral fees and Carpe Diem. The Indictment alleges that as part of an effort to market, sell, and implement HOMER tax shelters, Ohle, other members of Bank A's ISG, and attorneys from J & G agreed to pay referral fees to third parties who referred a client who ultimately entered into a HOMER tax shelter. Third-party referral sources sent invoices to J & G, who would then pay referral fees to those third parties based on the amounts stated in the invoices. The Indictment alleges that J & G would issue IRS Forms 1099-MISC, when appropriate, to the third parties to reflect the payment of the referral fees as non-employee compensation to the third parties. As part of the referral scheme, Ohle is alleged, along with Steger and Bradley, to have prepared fraudulent invoices to obtain referral fees from Bank A, which they were not entitled to receive under the fee arrangement. Ohle is alleged to have contacted Bradley to prepare invoices for referral fees in connection with Client Group 1's HOMER tax shelter, despite the fact that Bradley performed no services in connection with that deal. Bradley is also alleged to have prepared fraudulent invoices related to two of Bank A's HOMER clients.

Second, the Carpe Diem scheme alleges that Ohle approached Client E, with whom Ohle had an established business relationship, to invest in Carpe Diem, a Bermuda-based hedge fund for whom Steger was an independent salesman. Client E invested $7 million in Carpe Diem. The Indictment alleges that Ohle also met with Client F and Client G, both of whom were HOMER clients of Bank A. Client F and Client G invested $1 million each in Carpe Diem. Ohle is alleged to have received a 5% commission on each of the Carpe Diem transactions, even though he told Client E that he would not receive any commission on her investments. The Indictment also alleges, related to the Carpe Diem fees, that Ohle unlawfully diverted funds from Client E's trust account to be used for Ohle's personal benefit. When Client E informed Ohle that she and her lawyer wished to discuss the finances of the trust, Ohle, with the assistance of Bradley, replaced a portion of the funds that had been unlawfully diverted from the trust bank account.

In Counts Six and Seven, Ohle is charged with personal tax evasion for the tax years 2001 and 2002, respectively. Count Eight of the Indictment alleges that Ohle obstructed and impeded the due administration of the internal revenue laws. With this background, the Court now addresses Defendant Ohle's and Defendant Bradley's various pretrial motions. For the purposes of these motions, all of the allegations in the Indictment are accepted as true.

I. Discussion

a. Use of the Mail Fraud Statute (Count One)

Ohle argues that Count One of the indictment impermissibly uses the wire fraud statute to reach an alleged criminal tax conspiracy, citing United States v. Henderson, 386 F.Supp. 1048 [34 AFTR 2d 74-6245] (S.D.N.Y.1974). Henderson held that the mail fraud statute (the scope of which is identical to the wire fraud statute, United States v. Schwartz, 924 F.2d 410, 417 (2d Cir.1991)), was not intended to reach cases of alleged tax evasion and was superseded by the comprehensive system of penalties Congress later enacted in the Internal Revenue Code. Henderson, 386 F.Supp. 1048 [34 AFTR 2d 74-6245]. Though it has never explicitly disapproved Henderson, the Court of Appeals for the Second Circuit has recently stated that “Henderson-which other circuits have rejected, ... provides weak authority for the proposition that schemes aimed at defrauding the government of taxes do not fall within the scope of the mail and wire fraud statutes.”Fountain v. United States , 357 F.3d 250, 258 [93 AFTR 2d 2004-615] (2d Cir.2004). 1. We agree with the many courts of appeals 2. and courts within this District 3. that have declined to follow Henderson. Ohle's motion to dismiss the wire fraud allegations is denied. 4.

b. Duplicity (Count Five)

Ohle and Bradley both move to dismiss Count Five as duplicitous. An indictment is duplicitous if it joins two or more distinct crimes in a single count. United States v. Aracri, 968 F.2d 1512, 1518 [70 AFTR 2d 92-6305] (2d Cir.1992). Duplicitous pleading is not presumptively invalid; rather, it is impermissible only if it prejudices the defendant.United States v. Olmeda , 461 F.3d 271, 281 (2d Cir.2006). Duplicity is only properly invoked when a challenged indictment affects one of the doctrine's underlying policy concerns: (1) avoiding the uncertainty of a general guilty verdict, which may conceal a finding of guilty as to one crime and not guilty as to other, (2) avoiding the risk that jurors may not have been unanimous as to any one of the crimes charged, (3) assuring the defendant has adequate notice of charged crimes, (4) providing the basis for appropriate sentencing, and (5) providing the adequate protection against double jeopardy in subsequent prosecution. Olmeda, 461 F.3d at 281 (citing United States v. Margiotta, 646 F.2d 729, 732–33 (2d Cir.1981)).

The Court of Appeals for the Second Circuit has recognized that application of the duplicity doctrine to conspiracy indictments presents “unique issues.” United States v. Murray, 618 F.2d 892, 896 (2d Cir.1980). In this Circuit, “it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for [t]he conspiracy is the crime and that is one, however diverse its objects.”Aracri , 968 F.2d at 1518 (internal citations and quotations omitted). “A single conspiracy may be found where there is mutual dependence among the participants, a common aim or purpose or a permissible inference from the nature and scope of the operation, that each actor was aware of his part in a larger organization where others performed similar roles equally important to the success of the venture.” United States v. Vanwort, 887 F.2d 375, 383 (2d Cir.1989). Each member of the conspiracy is not required to have conspired directly with every other member of the conspiracy; a member need only have “participated in the alleged enterprise with a consciousness of its general nature and extent.”United States v. Rooney , 866 F.2d 28, 32 [63 AFTR 2d 89-534] (2d Cir.1989). If the Indictment on its face sufficiently alleges a single conspiracy, the question of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury.Vanwort , 887 F.2d at 383; see also United States v. Szur, No. S5 97 CR 108(JGK), 1998 WL 132942, at 11 (S.D.N.Y. Mar. 20, 1998). Accordingly, courts in this Circuit have repeatedly denied motions to dismiss a count as duplicitous.See United States v. Nachamie , 101 F.Supp.2d 134, 153 (S.D.N.Y.2000) (collecting cases).

Bradley, pointing to United States v. Muñoz-Franco, 986 F.Supp. 70 (D.P.R.1997), argues that Count Five is duplicitous on its face. We find Judge Rakoff's decision in United States v. Gabriel, 920 F.Supp. 498 (S.D.N.Y.1996), to be more instructive in this case. 5. InGabriel , Judge Rakoff found that, although the count at issue contained boilerplate allegations of a single conspiracy, the subsequent paragraphs in the count were more consistent with two conspiracies than a single conspiracy.Gabriel , 920 F.Supp. at 503. As inMuñoz-Franco, the paragraphs describing the overt acts in the Gabriel Indictment were divided into two distinct sets. Id. at 503; Muñoz-Franco, 986 F.Supp. at 71. Finding that “on any but a superficial reading, [the Government] appears to actually allege two distinct conspiracies[,]” Judge Rakoff stated that if it were within his power he would dismiss the count at issue as duplicative. Gabriel, 920 F.Supp. at 504–05. “But the Court of Appeals has repeatedly cautioned that the determination of whether a conspiracy is single or multiple is an issue of fact “singularly” well suited to determination by a jury.” Id. Therefore, Judge Rakoff held that “[g]iven Count Six's boilerplate allegations of a single conspiracy, the Court cannot conclude on the basis of the pleadings alone that there is no set of facts falling within the scope of Count Six that could warrant a reasonable jury in finding a single conspiracy.”Id.

Similarly, in the case at bar, Count Five contains “boilerplate allegations” of a single conspiracy. The Indictment alleges, “From in or about 2001 until at least in or about February 15, 2004, in the Southern District of New York and elsewhere, JOHNB. OHLE III, and WILLIAM BRADLEY, the defendants, together with Douglas Steger and Individual C, co-conspirators not named as defendants herein, and others known and unknown, unlawfully, willfully, and knowingly did combine, conspire, confederate, and agree together and with others to defraud the United States and an agency thereof, to wit, the IRS of the United States Department of Treasury, and to commit offenses against the United States, to wit, violation of Title 18, United States Code, Section 1341 and 1343, and Title 26, United States Code, Section 7201.” Indictment ¶ 80. Count Five then describes the two schemes involved: the referral fee fraud and Carpe Diem.

The Indictment's subsequent description of the overt acts indicates that Count Five may consist of multiple conspiracies. But, as in Gabriel, Count Five survives the facial test. The Government alleges that Bradley and Ohle, along with co-conspirators, are accused of participating in a conspiracy to “steal money by fraud, [and] pay no taxes.” (Gov't Opp. 47.) The Indictment alleges that both schemes sought to obtain money through fraud, and, thereafter, defrauded the IRS by concealing those ill-gotten gains. Both schemes occurred at the same time-between mid-November 2001 and February 2002. 6. (Gov't Opp. 44.) Ohle is alleged to have participated in all the Count Five schemes. But, contrary to Defendants' argument, Ohle was not the only member of the conspiracy alleged to have participated in multiple frauds. Steger and Bradley are both alleged to have submitted false invoices to J & G as part of the referral fee fraud. Indictment ¶¶ 84, 85. Bradley is alleged to have shared his proceeds with Individual C, who was owed legitimate referral fees. Ohle urged Individual C “to take care of” Bradley; Individual C then gave Bradley a check for $4,000. Indictment ¶ 92. Ohle and Steger are also alleged to have obtained funds from three different clients through investments in the Carpe Diem hedge fund. Indictment ¶¶ 95–102. One of these clients was Client E. Ohle is alleged to have misappropriated almost $350,000 of Client E's funds, which had been run through Carpe Diem. After Client E began to make inquiries regarding his investment, Ohle enlisted Bradley to replace a portion of the funds that had been misappropriated. Indictment ¶ 104.

Bradley's role in aiding Ohle to replace a portion of Client E's funds, which had been unlawfully diverted, alleges a “mutual dependence and assistance” across the schemes.See Vanwort , 887 F.2d at 383. Individual C's payment to Bradley shows that each individual submitting invoices was not acting in a vacuum. Given that the two frauds occurred at the same time and had common participants, and that compensation was paid amongst the co-conspirators (not just between co-conspirators and Ohle) and across the two frauds, we find that the Indictment alleges a single conspiracy on its face. Furthermore, proceeding on the current Count Five would not undermine any of the policies underlying the duplicity doctrine. 7. See Margiotta, 646 F.2d at 732–33. Defendants' motion to dismiss Count Five as duplicative is denied.

c. Severance

Federal Rule of Criminal Procedure 8(a) permits joinder of offenses if the offenses charged are “of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan.” Fed.R.Crim.P. 8(a). Rule 8(b) permits joinder of defendants “if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses. The defendant may be charged in one or more counts together or separately. All defendants need not be charged in each count.” Fed.R.Crim.P. 8(b). Even if joinder is proper under Rule 8, a court may still sever pursuant to Rule 14(a) if it appears joinder would prejudice a defendant or the government. Fed.R.Crim.P. 14(a). “For reasons of economy, convenience and avoidance of delay, there is a preference in the federal system for providing defendants who are indicted together with joint trials.”United States v. Feyrer , 333 F.3d 110, 114 (2d Cir.2003).

i. Count Five

Bradley and Ohle both move to sever Count Five of the Indictment. “Though Rule 8(a) addresses joinder of offenses and Rule 8(b) concerns joinder of defendants, when a defendant in a multi-defendant action challenges joinder, whether of offenses or defendants, the motion is construed as arising under Rule 8(b).” 8. United States v. Stein, 428 F.Supp.2d. 138, 141 (S.D.N.Y.2006); see United States v. Turoff, 853 F.2d 1037, 1043 [62 AFTR 2d 88-5236] (2d Cir.1988). The Court of Appeals for the Second Circuit has explained that a ““series” exists if there is a logical nexus between the transactions.” United States v. Joyner, 201 F.3d 61, 75 (2d Cir.2001). Unlike Rule 8(a), “Rule 8(b) does not permit joinder of defendants solely on the ground that the offenses charged are of “the same or similar character.”” Turoff, 853 F.2d at 1042. Joinder is proper only when the charged offenses are either (1) “unified by some substantial identity of facts or participants,” or (2) “arise out of a common plan or scheme.” United States v. Attanasio, 870 F.2d 809, 815 (2d Cir.1989); see also Feyrer, 333 F.3d at 114; Lech, 161 F.R.D. at 256. We take “a common sense approach when considering the propriety of joinder under Rule 8(b),” Feyrer, 333 F.3d at 114, and ask whether “a reasonable person would easily recognize the common factual elements that permit joinder.”Turoff , 853 F.2d at 1044. Determining whether joinder of two conspiracies is permitted often requires a fact specific analysis. See United States v. Reinhold, 994 F.Supp. 194, 199 (S.D.N.Y.1998) (collecting cases).

The Government's most persuasive argument that the two conspiracies have a common purpose is found in its Surreply: “A significant aspect of implementation [of the HOMER conspiracy] involved Ohle's recruitment and funding of a nominee, or puppet, in the form of Individual A, whose third-party role Ohle needed to fund in order to make the HOMER tax shelter work. Ohle generated that funding through his scheme to obtain HOMER client referral fees, and other client fees, by fraud-the core aspects of Count Five.” (Gov't Surreply 7.) The problem, though, is that these facts are not alleged in the Indictment. The Indictment alleges that “OHLE embezzled funds from a client, “Client E,” and used some of the money to fund Individual A's participation in the HOMER tax shelter. In addition, OHLE obtained by fraud from Bank A referral fees related to the HOMER tax shelter, the majority of which OHLE kept.” Indictment ¶ 74. Based on the Indictment, Count Five is only alleged to have had a minor role in financing the HOMER conspiracy. Additionally, the money allegedly transferred to Individual A was related to Carpe Diem not to the referral fee scheme. Therefore, based on the language of the Indictment, we read Count Five to allege a conspiracy to commit fraud in order to obtain money-some of which was diverted to Individual A in order to fund his role in the HOMER conspiracy.

Courts have upheld joinder in situations where the criminal acts of one offense helped to finance the criminal acts of another offense. See Turoff, 853 F.2d at 1037 [62 AFTR 2d 88-5236];United States v. Catapono , 05 Cr. 229, 2008 WL 3992303 (E.D.N.Y. Aug. 28, 2008). In Turoff, the Court found that a “quid pro quo was exchanged between [the] participants,” and that “these financial benefits were part and parcel of the tax fraud.”Turoff , 853 F.2d at 1044. The court emphasized that “there is a key link between the two offenses-one scheme stemmed from the other-and that link provides a sound basis for joinder under Rule 8(b).” Turoff, 853 F.2d at 1044. Ohle is alleged to have used only a portion of the funds embezzled from Client E to finance Individual A's role in the HOMER conspiracy. The transfer of funds to Individual A's account does not provide a “key link” between the two conspiracies; rather, it appears to be an ancillary aspect of the Count Five conspiracy.

In United States v. Lech, then Judge Sotomayor found that “Turoff stands for the proposition that [defendants] may be tried together because they had specific knowledge of each other's activities, jointly participated in many of the acts alleged in the Indictment, and used that knowledge and participation as a springboard for the [other alleged offenses].” Lech, 161 F.R.D. at 257. The Indictment does not allege that Bradley had any knowledge of the HOMER conspiracy or the transfer of funds to Individual A. 9. Knowledge of the other conspiracy is not required, but it is an indicator of whether or not there is a common scheme or purpose. See United States v. Menashe, 741 F.Supp. 1135, 1139 (S.D.N.Y.1990) (“O'Toole's plan cannot be called “common”, since he is the only one alleged to be aware of it.....”)

Furthermore, the referral fees scheme's object-to fraudulently obtain fees from Bank A, a co-conspirator in the HOMER conspiracy-demonstrates that it did not have a common purpose with the HOMER conspiracy. In United States v. Rojas, S4 01 Cr. 251(AGS), 2001 WL 1568786 (S.D.N.Y. Dec. 7, 2001), the court found that a common scheme could not exist where the goals of the conspiracy were antagonistic. InRojas , the Count One conspiracy, known as the LRO, sought to sell narcotics for financial gain, and the Count Two conspiracy sought to rob the Count One conspiracy of its narcotics and sell the stolen drugs for their own financial gain. The two conspiracies had at least one defendant in common. The court concluded that the conspiracies did not have a common goal and the similarity of facts did not support joinder.Rojas , 2001 WL 1568786, at 5 (“[T]heir goals were antagonistic: for the Count Two Conspiracy to succeed, it would have to harm the LRO by stealing the LRO's drugs.”).

Although the instant case only involves defrauding a single co-conspirator, as opposed to the conspiracy as a whole, the referral fee scheme undermined the HOMER conspiracy by defrauding one of its co-conspirators. In United States v. Kouzmine, 921 F.Supp. 1131 (S.D.N.Y.1996), Judge Kaplan noted that because the two defendants had a falling out prior to the second conspiracy, “there is no colorable argument” that the two conspiracies were part of one single overarching scheme.Id. at 1133. In the instant case, the referral scheme's object of defrauding a HOMER co-conspirator of its financial gain from that conspiracy, demonstrates an animosity between the two schemes, analogous to the falling out inKouzmine.

Nor do we find that the conspiracies are unified by a “substantial identity of facts or participants.”Attanasio , 870 F.2d at 815. “It is well settled ... that two separate transactions do not constitute a series within the meaning of Rule 8(b) merely because they are of a similar character or involve one or more common participants.”Lech , 161 F.R.D. at 256; see also United States v. Van Berry, No. 04 Cr. 269(JBS), 2005 WL 1168398, at 5 (D.N.J. May 18, 2005) (“That the same participants were involved in crimes of a separate nature, however, (or at the very least that the defendants believed the same participants were involved in separate crimes) is not sufficient to connect otherwise distinct crimes.”); United States v. Giraldo, 859 F.Supp. 52, 55 (E.D.N.Y.1994) (“[D]efendants charged with two separate-albeit similar-conspiracies having one common participant are not, without more, properly joined.”).

The Government argues that the two conspiracies share a substantial identity of similar facts because both conspiracies involve the HOMER tax shelter. The Government further argues that if Count Five is severed, it will be forced to prove the HOMER tax shelter twice. We do not agree. Severance of Count Five will not force the Government to prove “essentially the same facts” more than once. See Shellef, 507 F.2d at 99–100. The HOMER tax shelter plays an important role in both conspiracies but in different capacities. The Government will need to provide evidence of HOMER to contextualize Count Five but it will not have to prove HOMER's illegality. In trying the HOMER conspiracy, the Government will likely devote a substantial amount of time to the issue of the legality of the tax shelter, dissecting how HOMER worked and the role Ohle played in developing and operating it. In contrast, the Government could prove its entire burden in Count Five-the fraud perpetrated through the referral fee scheme, the Carpe Diem scheme, and the embezzlement of Client E's funds-without ever proving or alleging the illegality of the HOMER tax shelter.

In the instant case, the similarity between the two conspiracies is marginal. The courts in this Circuit have consistently required a far more substantial connection.See United States v. Butler , No. S1 04 Cr. 340(GEL), 2004 WL 2274751, at 4 (S.D.N.Y. Oct. 7, 2004) (finding the facts involved in the two counts to be “so closely connected that proof of the very same facts is necessary to establish each of the joined offenses”); United States v. Ferrarini, 9 F.Supp.2d 284, 292 (S.D.N.Y.1998) (finding a substantial connection because “evidence of those activities-and their unlawful nature-would be necessary at a separate trial on the false statement charges to prove the falsity of the defendants' statements that they were not engaged in fraudulent activity”). The most significant common factor is the HOMER tax shelter, but the fact that the Count Five conspiracy sought to steal proceeds from the HOMER conspiracy significantly decreases the relevance of this factor.See Rojas , 2001 WL 1568786, at 5 (finding that the antagonistic nature of the two conspiracies negated the significance of the fact that they involved the same narcotics). We find that the two conspiracies do not have a common scheme or plan, nor do they share a substantial identity of facts and participants; Defendants' motion to sever Count Five 10. is granted. 11.

ii. Severance of Counts Six through Eight

Ohle also seeks to sever Counts Six through Eight. Counts Six and Seven charge Ohle with personal tax evasion in 2001 and 2002, respectively. Count Eight charges Ohle with obstructing and impeding the due administration of the Internal Revenue laws pursuant to 26 U.S.C. § 7212(a). As we have already severed Count Five, Ohle is the only defendant remaining in the Indictment. Therefore, Rule 8(a) governs the question of whether Counts Six through Eight are properly joined with Counts One through Four. Rule 8(a), unlike Rule 8(b), permits joinder solely on the ground that the offenses charged are “of the same or similar character.” Fed.R.Crim.P. 8(a); see Turoff, 853 F.2d at 1042.

Ohle's challenge to the joinder of Count Eight is without merit. Ohle is charged with obstructing and impeding the administration of the Internal Revenue laws through the design and implementation of the HOMER tax shelter. Without question Count Eight is “based on the same act or transaction” as Counts One through Four. Fed.R.Crim.P. 8(a). Therefore, Count Eight is properly joined.

With regard to severing Counts Six and Seven, we find this to be a close question. “[T]ax counts can properly be joined with non-tax counts where it is shown that the tax offenses arose directly from the other offenses charged.”Turoff , 853 F.2d at 1043; see also Shellef, 507 F.3d at 87–88. “The most direct link possible between non-tax crimes and tax fraud is that funds derived from non-tax violations either are or produce the unreported income.” Turoff, 853 F.2d at 1043. “However, if the character of the funds derived do not convince us of the benefit of joining these two schemes in one indictment, other overlapping facts or issues may.”Id. at 1043–44.

The Government has alleged a relationship between the unreported income in Counts Six and Seven and the HOMER conspiracy proceeds. However, the Government relies on allegations outside of the Indictment. Although the Court of Appeals for the Second Circuit has not directly confronted the question of whether joinder must be decided on the face of the Indictment, the Court recently “caution[ed] that the plain language of Rule 8(b) does not appear to allow for consideration of pre-trial representations not contained in the indictment, just as the language of the Rule does not allow for the consideration of evidence at trial.” United States v. Rittweger, 524 F.3d 171, 178 n. 3 (2d Cir.1998). Accordingly, we find that the Government's allegations regarding the relationship between the unreported income and the HOMER conspiracy proceeds cannot justify joinder.

Counts Six and Seven are alleged to be objects of the Count Five conspiracy. The unreported income includes money Ohle received from the referral fee fraud and Carpe Diem. (Gov't Mem. 72.) Thus, there is a “direct link” between the unreported income in Counts Six and Seven and the proceeds of the Count Five conspiracy. See Turoff, 853 F.2d at 1043. Given the close nexus between Counts Five, Six, and Seven, we conclude that Counts Six and Seven should also be severed.

Defendants' motion to sever is granted as to Counts Five, Six, and Seven and denied as to Count Eight.

d. Statute of Limitations

i. Count One

The applicable limitations period for a wire fraud conspiracy charge is generally five years. 18 U.S.C. § 3282;see United States v. Scop , 846 F.2d 135, 138 (2d Cir.1988). However, “if the offense affects a financial institution,” then a ten-year statute of limitations applies. 18 U.S.C. § 3293(2); see United States v. Bouyea, 152 F.3d 192, 195 (2d Cir.1998). Ohle does not contest that Bank A is a financial institution within the meaning of the statute. Rather, Ohle argues that § 3293(2) does not apply because Bank A was an active participant in the fraud, not the object of the fraud, and not directly affected by the fraud.

In United States v. Serpico, 320 F.3d 691, (7th Cir.2003), the Seventh Circuit specifically rejected the defendant's argument that a financial institution is not “affected” if it is an active participant in the offense.Serpico , 320 F.3d at 695. The Court concluded that the financial institution's active participation in the scheme did not negate the effect on the institution. Id. (“[W]e find it hard to understand how a bank that was put out of business as a direct result of the scheme was not “affected,” even if it played an active part in the scheme.”). Ohle attempts to distinguish Serpico, by limiting the holding to apply only when the financial institution is both the object of the scheme to defraud and a participant in the scheme. (Ohle Reply Memo. 6–7, n. 1.)

The statute applies a ten year period of limitations if the offense “affects” a financial institution. 18 U.S.C. § 3293(2). This Circuit has found that this language is to be read broadly. See Bouyea, 152 F.3d 192, 195 (2d Cir.1998) (“[T]he statute is clear: it broadly applies to any act of wire fraud “that affects a financial institution.””). In United States v. Bouyea, the Court of Appeals for the Second Circuit found that the statute was applicable to a wholly owned subsidiary where the parent company, but not the subsidiary, was a financial institution. Bouyea, 152 F.3d at 195. The Second Circuit rejected the defendant's argument that “the defrauding of a financial institution's subsidiary-leading to a reduction of the financial institution's assets-is insufficient as a matter of law to meet the “affect[ing] a financial institution” requirement of § 3293(2).”Id. In reaching this conclusion, the Court extensively quoted the Third Circuit's reasoning inUnited States v. Pellulo , 964 F.3d 193 (3d Cir.1992). Id. Notably, Bouyea quotes the Third Circuit's conclusion that “[the defendant's] argument would have more force if the statute provided for an extended limitations period where the financial institution is the object of fraud. Clearly, however, Congress chose to extend the statute of limitations to a broader class of crimes.” Id. (quoting Pellulo, 964 F.2d at 216).

Bouyea “easily reject[s]” the argument that the financial institution must be the object of fraud, requiring, instead, that the effect on the financial institution be “sufficiently direct.” Bouyea, 152 F.3d at 195. The effect on Bank A was direct. Ohle and his co-conspirators are alleged to have used Bank A to perpetrate the HOMER tax shelter “through the Bank's ostensible backing of the transaction, the use of its subsidiary as the “trustee” in each HOMER shelter, and the use of Bank funds.” (Gov't Opp. 16.) As Ohle argues himself, Bank A was an active participant in the fraud. As a result of this participation, Bank A was not only exposed to substantial risk but experienced actual losses.Id. Bank A paid over $24,000,000 in settlements to HOMER clients and over $4,200,000 in attorneys' fees defending the suits. Id. Ohle's argument that this effect is too remote is unpersuasive. In using Bank A as a central player in the HOMER conspiracy, Ohle and his co-conspirator's knew they were exposing it to risk if their fraud was uncovered. “[T]he whole purpose of § 3293(2) is to protect financial institutions, a goal it tries to accomplish in large part by deterring would-be criminals from including financial institutions in their schemes.” Serpico, 329 F.3d at 694–95. Through his alleged use of Bank A in the HOMER conspiracy, Ohle put Bank A at substantial risk. This risk resulted in millions of dollars of losses for the financial institution, and the losses were a direct and foreseeable result of the HOMER conspiracy. We find the ten year statute of limitations applies, 12. and Ohle's motion to dismiss Count One as time-barred is denied. 13.

ii. Counts Two, Four, and Six

Ohle contends that Counts Two, Four and Six are also time-barred. Pursuant to Section 6531(2), a six year statute of limitations period is applicable to tax evasion offenses. 26 U.S.C. § 6531(2). The period begins to run upon the filing of the tax returns that underlie those counts. See United States v. Habig, 390 U.S. 222, 223 [21 AFTR 2d 803] (1968). The initial indictment in this case was returned on November 13, 2008. The returns at issue were filed approximately six years and one month prior to the Indictment: October 17, 2002 (Count Two), October 21, 2002 (Count Four) and October 16, 2002 (Count Six).See Indictment ¶¶ 38, 70, 107. Section 6531 provides for a tolling of the limitations period for the time “during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice.” 26 U.S.C. § 6531. The tolling provision is applicable even if the defendant is outside of the country for business or pleasure trips.United States v. Myerson , 368 F.2d 393, 395 [18 AFTR 2d 5997] (2d Cir.1966); see also United States v. Marchant, 774 F.2d 888, 892 [57 AFTR 2d 86-451] (8th Cir.1985). The Government states that it will prove at trial that Ohle spent at least two months outside of the country, which would result in the counts at issue being timely. Ohle's motion to dismiss Counts Two, Four and Six as time-barred is denied.

iii. Count Eight

Title 26, United States Code, Section 6531 sets forth the periods of limitation for criminal tax prosecutions.See 26 U.S.C. § 6531. The statute provides that, in general, criminal tax proceedings must be initiated within three years of the offense, but it carves out eight exceptions for which the statute of limitations is six years.Id. Section 6531(6) provides a six year statute of limitations “for the offense described in section 7212(a) (relating to intimidation of officers and employees).” 26 U.S.C. § 6531(6). Ohle urges a literal reading of the statute, which would apply the six year statute of limitations to violations of Section 7212(a) related to intimidation of officers and employees but not to omnibus clause violations of 7212(a).

Numerous circuits have applied the six year statute of limitations to the omnibus clause of Section 7212(a).See United States v. Kassouf , 144 F.3d 952, 959 [81 AFTR 2d 98-2066] (6th Cir.1998) (“There is nothing to indicate that Congress intended the parenthetical to be limiting rather than merely descriptive of § 7212(a). Similar parentheticals in other statutes have also been found to be descriptive rather than limiting.”); United States v. Wilson, 118 F.3d 228, 236 [80 AFTR 2d 97-5281] (4th Cir.1997) (applying, without discussion, the six year period of limitations to the alleged violation of the omnibus clause of § 7212(a)); United States v. Workinger, 90 F.3d 1409, 1414 [78 AFTR 2d 96-5710] (9th Cir.1996) (“In short, the structure of § 6531 makes it apparent that the parenthetical language in § 6531(6) is descriptive, not limiting.”). In United States v. Kelly, this Circuit found that the district court's application of the six year period of limitations to an omnibus clause violation of Section 7212(a) was not plain error. Kelly, 147 F.3d 172, 177 [82 AFTR 2d 98-5030] (2d Cir.1998). We find no reason to diverge from the persuasive reasoning of the courts that have previously addressed this issue. 14. Accordingly, we find that the six year period of limitations should be applied to the alleged violation of the omnibus clause of Section 7212(a). Ohle's motion to dismiss Count Eight as time-barred is denied.

e. Venue

Defendants Ohle and Bradley allege that venue is not proper in the Southern District of New York and move to dismiss Count Five. Ohle also moves to dismiss the substantive tax offenses-Counts Two, Three, Four, Six and Seven-for lack of venue. The United State Constitution provides that a defendant has the right to trial in “the district wherein the crime shall have been committed.” U.S. Const., Amend. VI.; see also United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1188 (2d Cir.1989). Where “the acts constituting the crime and the nature of the crime charged implicate more than one location, venue is properly laid in any of the districts where an essential conduct element of the crime took place.” United States v. Ramirez, 420 F.3d 134, 139 (2d Cir.2005). The Government bears the burden at trial of proving venue by a preponderance of the evidence. United States v. Potamitis, 739 F.2d 784, 791 (2d Cir.1989). When the defendant is charged with more than one count, venue must be proper to each count. Beech-Nut Nutrition Corp., 871 F.2d at 1188.

The Government need only allege that criminal conduct occurred within the venue, “even if phrased broadly and without a specific address or other information,” in order to satisfy its burden with regard to pleading venue. United States v. Bronson, No. 05 Cr. 714(NGG), 2007 WL 2455138, at 4 (E.D.N.Y. Aug. 23, 2007); see also United States v. Szur, 97 Cr. 108(JGK), 1998 WL 132942, at 9 (S.D.N.Y. Mar. 20, 1998). In each count of the Indictment, the Government alleges that the offenses occurred “in the Southern District of New York and elsewhere.” See Indictment ¶¶ 40, 55, 72, 80, 107, 109. These allegations alone are sufficient to survive a pretrial motion to dismiss. 15. The question of whether there is sufficient evidence to support venue is appropriately left for trial. 16.Chalmers, 474 F.Supp.2d at 575. Defendants' motions to dismiss based on venue are denied without prejudice to renewing those motions at the close of the Government's case. 17.

f. Sufficiency of Pleading (Count Eight)

In Count Eight, Ohle is charged with obstructing and impeding the due administration of the Internal Revenue laws pursuant to 26 U.S.C. § 7212(a). Ohle alleges that Count Eight is insufficiently pled and applying Section 7212(a) in the instant case would render the statute unconstitutionally vague. Count Eight, which tracks the language of the statute and incorporates specific allegations from previous paragraphs in the Indictment, is sufficiently pled and provides Ohle with fair notice of the charges against him. See United States v. Walsh, 914 F.3d 37, 44 (2d Cir.1999) (“[W]e have consistently upheld indictments that do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.”) (internal citations and quotations omitted); United States v. Tramunti, 513 F.2d 1087, 1113 (2d Cir.1975) (“[A]n indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.”).

Ohle argues that under United States v. Kassouf, 144 F.3d 952 [81 AFTR 2d 98-2066] (6th Cir.1998), Section 7212(a) requires proof of a pending IRS action that the defendant corruptly endeavored to obstruct; and, therefore, the Government has failed to allege a violation of Section 7212(a). (Ohle Mem. 25.) At the outset we note that Kassouf was immediately limited in its own circuit. 18. The Court of Appeals for the Second Circuit, along with many other circuits, has repeatedly affirmed convictions for violations of § 7212(a), or otherwise failed to raise objections to § 7212(a) indictments, in which no IRS proceeding or investigation was pending. See United States v. Wilner, No. 07 Cr. 183(GEL), 2007 WL 2963711 [100 AFTR 2d 2007-6349], at 3 (S.D.N.Y. Oct. 11, 2007) (collecting cases). Furthermore,Kassouf is fundamentally at odds with this Circuit's broad interpretation of the omnibus clause. In United States v. Kelly, the Second Circuit held that the language of the omnibus clause is extremely broad and “renders criminal “any other” action which serves to obstruct or impede the due administration of the revenue laws.” Kelly, 147 F.3d at 175.

Count Eight, which incorporates prior paragraphs of the Indictment, alleges numerous specific acts of obstruction, including but not limited to undermining the ability of the IRS to ascertain HOMER clients' true tax liabilities and determine whether penalties should be obtained through the drafting of fraudulent opinion letters. Indictment ¶ 110 (incorporating ¶ 17). These allegations, which allege that Ohle participated in a scheme to conceal his own income and the income of others from the IRS, charge a violation of Section 7212(a) with sufficient specificity. See Wilner, 2007 WL 2963711 [100 AFTR 2d 2007-6349], at 6 (denying the motion to dismiss an indictment, which charged the defendant “with scheming to create a false paper trail of checks and divert income to a corporation in order to avoid taxes properly owing on income he himself earned as an individual (or similarly owed by other taxpayers)”).

Ohle also argues that the statute is unconstitutionally vague as applied. The Second Circuit rejected a similar argument inKelly. In Kelly, the court relied on the “well-reasoned opinion” of Judge Gertner inUnited States v. Brennick, 908 F.Supp. 1004 [79 AFTR 2d 97-1210] (D.Mass.1995), to conclude that the court's broad interpretation of the statute did not run afoul of the constitutional doctrines of overbreadth and vagueness. Id. We similarly find that application of Section 7212(a) in the instant case does not render the statute unconstitutionally vague. Ohle's motion to dismiss Count Eight is denied.

g. Lack of Pre-Indictment Administrative Conferences

Ohle argues that the failure of the IRS and the DOJ to offer Ohle a pre-indictment conference merits dismissal of the Indictment. However, IRS guidelines do not provide for a pre-indictment conference “if the taxpayer is the subject of a grand jury investigation,” as was the case here. IRM 9.5.12.3.1 (July 25, 2007). The United States Attorneys' Manual (“USAM”) provides that, “If time and circumstances permit, the Tax Division generally grants a taxpayer's written request for a conference with the Division in Washington, D.C.” USAM 6-4.214 (Sept.2007). However, the Second Circuit has held that the provisions of the USAM “reflect executive branch policy judgments” and “do not confer substantive rights on any party.” United States v. Piervinanzi, 23 F.3d 670, 682–83 (2d Cir.1994);see also United States v. Kelly, 147 F.3d 172, 176 [82 AFTR 2d 98-5030] (2d Cir.1998) (stating that “[internal department] guidelines provide no substantive rights to criminal defendants” in discussing DOJ Criminal Tax Manual). The Government claims it decided not to offer Ohle a pre-indictment conference in order to prevent Ohle from dissipating assets subject to forfeiture before he was indicted and arrested. This decision does not provide a basis for dismissal of the indictment. See United States v. Goldstein, 342 F.Supp. 661, 666 [30 AFTR 2d 72-5475] (E.D.N.Y.1972) (failure to offer preindictment conference in criminal tax case not grounds for dismissal of indictment because “such a conference is clearly not a matter of right”).

h. Request for Evidentiary Hearings

Ohle seeks a hearing on two issues: (1) whether grand jury subpoenas subsequent to the return of the initial Indictment were issued for the improper purpose of gathering evidence at trial; and (2) whether the Government improperly utilized two civil tax investigations to gather proof for the pending criminal trial.

Turning first to the issue of Grand Jury subpoenas, we find that there is no credible claim of improper use. The law is settled in this Circuit that “[i]t is improper to utilize a Grand Jury for the sole or dominating purpose of preparing an already pending indictment for trial.” In reGrand Jury Subpoena Duces Tecum Dated January 2, 1985 (Simels), 767 F.2d 26, 29 (2d Cir.1985); see also United States v. Dardi, 330 F.2d 316, 336 (2d Cir.1964). But “absent some indicative sequence of events demonstrating an irregularity, a court has to take at face value the Government's word that the dominant purpose of the Grand Jury proceedings is proper.” United States v. Raphael, 786 F.Supp. 355, 358 (S.D.N.Y.1992).

Ohle relies principally on In re Grand Jury Subpoena Duces Tecum Dated January 2, 1985 (Simels), 767 F.2d 26 (2d Cir.1985). In Simels, the Government first issued a trial subpoena for certain evidence. The trial subpoena was challenged, and the Government, instead of responding to that challenge, issued a Grand Jury subpoena for the exact same evidence. Id. at 29–30. In quashing the subpoena, the Second Circuit noted that the timing of the subpoena “casts significant light on its purposes.”Id. at 29. Ohle argues that the timing in the instant case is suspicious because Grand Jury subpoenas were issued after the initial Indictment. But what Ohle fails to acknowledge is that subsequent superseding indictments were filed. Since the filing of the Second Superseding Indictment on August 11, 2009, not a single Grand Jury subpoena has been issued. Ohle has simply failed to point to any aspect of the Government's actions that is questionable, and, thus, we find that there is no reason to hold an evidentiary hearing with regard to the Grand Jury subpoenas.

Next, Ohle argues an evidentiary hearing is necessary to determine whether the evidence obtained through tax audits of Ohle should be suppressed. The Government may use evidence acquired in a civil action in a subsequent criminal proceeding, unless the defendant demonstrates that the use of such evidence would violate his or her constitutional rights or depart from the proper administration of criminal justice. United States v. Kordel, 397 U.S. 1, 11–13 (1970). InKordel, the Supreme Court set forth certain circumstances where a defendant's right to due process may be violated, including when the Government brings a civil action solely for the purpose of obtaining evidence in a criminal prosecution. Id. at 12; see also United States v. Teyibo, 877 F. Supp 846, 856 (S.D.N.Y.1995).

Although Ohle cites a number of legal propositions, he alleges no acts of bad faith on the part of the Government to support the contention that the Government conducted the civil tax proceedings in order to obtain evidence for the pending criminal trial. He argues only that the timing of the two civil audits conducted in the midst of the criminal tax investigation is “suspicious” without alleging relevant dates or information obtained. Notably, Ohle does not contest the Government's statement that he had counsel during both of the audits, and that one of the audits was commenced prior to the criminal investigation (Gov't Opp. 77 n. 45.) Ohle has not raised any issues or pointed to any potential infringement of his rights that would warrant an evidentiary hearing. Ohle's motion for an evidentiary hearing is denied.

II. Conclusion

Defendants' motions to sever Count Five, Count Six, and Count Seven are granted; Defendant Ohle's motion to sever Count Eight is denied. All remaining motions are also denied.

SO ORDERED.

1.
See also United States v. DeFiore, 720 F.2d 757 (2d Cir.1983) (distinguishingHenderson in prosecution for wire fraud where state tax laws were violated, and noting that the Court of Appeals for the Ninth Circuit had rejected Henderson),cert. denied, 466 U.S. 906 (1984); United States v. Mangan, 575 F.2d 32, 49 [41 AFTR 2d 78-1174] (2d Cir.) (distinguishingHenderson in prosecution for wire fraud and federal tax evasion), cert. denied, 439 U.S. 931 (1978).
2.
See, e.g., United States v. Dale, 991 F.2d 819, 849 [76 AFTR 2d 95-7649] (D.C.Cir.1993) (rejectingHenderson in prosecution for wire fraud and federal tax evasion); United States v. Computer Sciences Corp., 689 F.2d 1181, 1187 n. 13 (4th Cir.1982) (rejectingHenderson in prosecution for mail and wire fraud and making false claims to the government), cert. denied, 459 U.S. 1105 (1983), overruled in nonrelevant part by Busby v. Crown Supply, Inc., 896 F.2d 833, 841 (4th Cir.1990); United States v. Shermetaro, 625 F.2d 104, 110–11 [46 AFTR 2d 80-5303] (6th Cir.1980) (rejecting Henderson in prosecution for conspiracy to defraud the United States and federal tax evasion);United States v. Weatherspoon , 581 F.2d 595, 599–600 (7th Cir.1978) (distinguishingHenderson in prosecution for mail fraud and making false statements to the government); United States v. Miller, 545 F.2d 1204, 1216 [39 AFTR 2d 77-364] n. 17 (9th Cir.1975) (rejectingHenderson in prosecution for mail fraud and federal tax evasion), cert. denied, 430 U.S. 930 (1977),overruled on other ground by, Boulware v. United States , 552 U.S. 421 [101 AFTR 2d 2008-1065] (2008); see also United States v. LaBar, 506 F.Supp. 1267, 1274 (M.D.Pa.1981) (distinguishing Henderson in prosecution for mail fraud and making false statements to the government),aff'd mem. , 688 F.2d 826 (3d Cir.), cert. denied, 459 U.S. 945 (1982).
3.
See United States v. Regan, 713 F.Supp. 629 (S.D.N.Y.1989) (upholding inclusion of mail fraud allegations charging tax fraud as RICO predicates);United States v. Standard Drywall Corp. , 617 F.Supp. 1283, 1295–96 (S.D.N.Y.1985) (noting that “[a]lthough never rejected by the Second Circuit,Henderson has not carried the day in that court either”); United States v. Abrahams, 493 F.Supp. 296 (S.D.N.Y.1980) (noting Henderson's rejection by other courts and refusing to hold that the Commodity Futures Trading Commission Act had implicitly repealed in part the mail and wire fraud statutes). But see United States v. Gallant, 570 F.Supp. 303, 309 (S.D.N.Y.1983) (followingHenderson in disallowing dual prosecution for mail and wire fraud and copyright violations), abrogated on other grounds by Dowling v. United States, 473 U.S. 207 (1985).
4.
Ohle also argues that, even if the conspiracy to commit wire fraud allegations are upheld, the Government is not authorized to seek criminal forfeiture based on the proceeds of a conspiracy to commit wire fraud. However, this argument is based on a misreading of the complex statutory scheme at issue. 28 U.S.C. § 2461(c) allows the Government to seek criminal forfeiture when a defendant is charged with an offense for which any form of forfeiture is authorized. 18 U.S.C. § 981(a)(1)(c) authorizes civil forfeiture for “any offense constituting “specified unlawful activity” (as defined in 18 U.S.C. § 1957(c)(7) of this title), or a conspiracy to commit such offense.” “Specified unlawful activity” is defined by § 1957(c)(7) to include offenses listed in the federal RICO statute, 18 U.S.C. § 1961(1). Lastly, § 1961(1)(b) includes wire fraud within the definition of “racketeering activity.” Ohle's argument fails to consider the phrase “or a conspiracy to commit such offense” in § 981(a)(1)(c), which has the effect of allowing criminal forfeiture of the proceeds of a conspiracy to commit wire fraud.See United States. v. Evanson , No. 05 Cr. 00805(TC), 2008 WL 3107332, at 1 (D.Utah Aug. 8, 2008) (“[P]ursuant to Section 2461(c), the government may seek the criminal forfeiture of the proceeds of conspiracy to commit mail fraud and wire fraud if the indictment alleges those offenses.”). The Government, therefore, is authorized to seek criminal forfeiture of the proceeds of a conspiracy to commit wire fraud, and Ohle's motion to dismiss the forfeiture allegations is denied.
5.
The Second Circuit has repeatedly emphasized that the determination of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury. See United States v. Johansen, 56 F.3d 347, 350 (2d Cir.1995); United States v. Maldonado-Rivera, 922 F.2d 934, 962 (2d Cir.1990);United States v. Vanwort , 887 F.2d 375, 383 (2d Cir.1989). Not only is Gabriel from this Circuit, but unlike the court inMuñoz-Franco , Judge Rakoff discusses the strong preference for juries to determine the question of whether multiple or single conspiracies exist and how this preference affects the pleading requirements. See Gabriel, 920 F.Supp. at 504–05.
6.
The only act alleged to have occurred prior to November 2001 is the embezzlement of Client E's trust, which the Indictment alleges began as early as 2000 and continued through 2003. Indictment ¶¶ 103–04. The fact that the embezzlement occurred over a significantly broader period of time than the referral fee fraud and the Carpe Diem fraud does not render it a distinct conspiracy. In Gabriel, the two conspiracies did not overlap in time at all, as the second set of criminal acts sought to cover up the first set.Gabriel , 920 F.Supp. at 503–04.
7.
Courts have noted that much of the risk of prejudice created by a potentially duplicative charge can be cured through proper instructions at trial. See Szur, 1998 WL 132942, at 11 (Defendants “may properly request a multiple conspiracies jury instruction depending upon the evidence presented at trial.”); Murray, 618 F.2d at 898 (“As we have stated in a related context, “(i)t is assumed that a general instruction on the requirement of unanimity suffices to instruct the jury that they must be unanimous on whatever specifications they find to be the predicate of the guilty verdict.””).
8.
This Circuit is currently divided on whether Rule 8(a) or Rule 8(b) governs when a defendant in a multi-defendant case seeks to sever a count in which only he or she is charged. See United States v. Shellef, 507 F.2d 82, 97 n. 12 (2d Cir.2007). But what is clear is that when a defendant, such as Bradley, seeks to sever a count in which he and another defendant are charged, we apply Rule 8(b).See United States v. Turoff , 853 F.2d 1037, 1043 [62 AFTR 2d 88-5236] (2d Cir.1988).
9.
In oral argument, the Government stated that “Mr. Bradley's own words in a deposition, which we will seek to have admitted at trial, show that he had knowledge of aspects of the Count One conspiracy, that he knew about the transaction, that he knew about the trust aspect of it, and that he knew that he was required to profess that he had done legal services in connection with that transaction in order to get referral fees.” (Tr. at 51.) Although the Court of Appeals for the Second Circuit has not directly addressed the question of whether joinder must be decided on the face of the Indictment, the Court recently “caution[ed] that the plain language of Rule 8(b) does not appear to allow for consideration of pre-trial representations not contained in the indictment.”United States v. Rittweger , 524 F.3d 171, 178 n. 3 (2d Cir.2008). Regardless, the proffered evidence would not alter our conclusion. At most, this evidence suggests that Bradley might have had some knowledge of the illegality of HOMER. InLech , the court found that the defendant had “very little, if any, knowledge of the other schemes, and did not participate in them.” Id. at 257. Similarly, even if Bradley's deposition testimony would show some knowledge of HOMER, his knowledge of its purpose appears to be marginal, if it existed at all, and there are no allegations that he had any role in that conspiracy.
10.
Ohle moves the Court to order a severance of Defendants pursuant to Rule 14. Ohle argues under Bruton v. United States, 391 U.S. 123 (1968), that he will be prejudiced by the admission of Bradley's proffer agreement. The Government has stated that it would redact the proffer agreement in order to ensure that it would not prejudice Ohle, including redacting any mentions of Ohle's name. Ohle protests that no such proposed redacted version of the agreement has been supplied. Prior to admission, the Court will inspect any proposed proffer agreement. If the proffer agreement cannot be adequately redacted in order to ensure that it does not unfairly prejudice Ohle, than the Court will exclude it. Ohle's motion to sever Defendants is denied.
11.
Ohle and Bradley both argue that the wire fraud allegations in Count Five should be dismissed because they fail to state a legally cognizable claim. These arguments rely heavily on the issue of repugnance, which is moot as the Court has severed Count Five. To the extent that issues remain as to whether Bank A had a property right in the referral fees, we need not reach that issue at this point. To find in Defendants' favor on this issue, the Court would have to determine that the HOMER tax shelter is illegal; and, therefore, any right Bank A had to the referral fees was based on an illegal agreement. This determination is not one the Court can or should make at this juncture. Defendants' motion to dismiss the mail and wire fraud allegations in Count Five is denied.
12.
We need not address the Government's additional arguments that Count One is timely, having concluded that the ten-year statute of limitations applies.
13.
Defendants also challenge Count Five as time-barred. The ten year statute of limitations also applies to Count Five. Bank A was the object of the referral fee scheme. (Gov't Opp. 48.) This scheme is alleged to have defrauded Bank A of over a million dollars. Id. Therefore, the Count Five conspiracy, which in part sought to defraud Bank A of money through the fraudulent referral fee scheme and did, in fact, defraud the bank of over a million dollars, affects a financial institution within the meaning of Section 3293(2). See Bouyea, 152 F.3d at 195;Serpico , 320 F.3d at 695.
14.
Ohle cites only one case where a court has declined to apply 6531(6) to omnibus violations of Section 7212(a). (Ohle Mem. 23–4); see United States v. Connell, No. CR-F 94-5052(REC) (E.D.Cal., Feb. 6, 1995). Ohle does not cite specifically to Connell, an unreported decision from the Eastern District of California, nor the court's reasoning, but rather to the discussion of Connell in United States v. Brennick, 908 F.Supp. 1004 [79 AFTR 2d 97-1210] (D.Mass.1995). Brennick declined to followConnell, saying that the court “appeared to assume” that 6531(6) applied only to intimidation offenses.Brennick , 908 F.Supp. at 1017. Connell predates the Ninth Circuit decision in Workinger, where the Court found that the six year period of limitations did, in fact, apply to omnibus violations of Section 7212(a).Workinger , 90 F.3d at 1414.
15.
See Bronson, 2007 WL 2455138, at 4 (“The Superseding Indictment alleges facts sufficient to support venue because it alleges that the criminal activity occurred “within the Eastern District of New York and elsewhere.””); United States v. Chalmers, 474 F.Supp.2d 555, 574–75 (S.D.N.Y.2007) (rejecting defendant's argument that the “allegation that the charged conduct took place “in the Southern District of New York and elsewhere” is insufficient to support venue because it fails to indicate which specific criminal acts were committed in this District”); Szur, 1998 WL 132942, at 9 (“[O]n its face, the Indictment alleges that the offense occurred “in the Southern District of New York and elsewhere,” which is sufficient to resist a motion to dismiss.”).
16.
Bradley contends that he will suffer substantial hardship and prejudice as a result of a trial in New York because his family, including his daughter who has a congenital brain formation, lives in Louisiana. (Bradley Mem. 17–18.) As Bradley is currently incarcerated in Georgia, these hardships are no longer relevant.
17.
Ohle also asserts that upholding venue would violate Ohle's Sixth Amendment right to be tried in “the district wherein the crime shall have been committed.” (Ohle Mem. 15.) We deny the motion on this basis as well.
18.
In United States v. Bowman, 173 F.3d 595 [83 AFTR 2d 99-2219] (6th Cir.1999), after limiting the applicability ofKassouf to its specific facts, Bowman held that Section 7212(a) was properly applied to the defendant, who provided false information to the IRS in an effort to stimulate an IRS investigation of other tax payers, despite the fact that there was no pending IRS action. Bowman, 173 F.3d at 600.
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IRS SB/SE Reissuance of Procedures for an Offer to Compromise an Accepted Offer, SBSE-05-0110-003, (Jan. 27, 2010)
2010ARD 018-4
Internal Revenue Service: SB/SE memorandum: Interim guidance: Offer to compromise an accepted offer
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON. D.C. 20224
SMALL BUSINESS/SELF.EMPLOYED DIVISION
January 15, 2010
Control Number: SB/SE-05-0110-003
Expiration Date: January 15, 2011
Impacted: IRM 5.8.9
MEMORANDUM FOR DIRECTOR, CAMPUS COMPLIANCE OPERATIONS (BROOKHAVEN) and (MEMPHIS) DIRECTORS, COLLECTION AREA OPERATIONS
FROM: Frederick W. Schindler /s/ Frederick Schindler Director, Collection Policy
SUBJECT: Reissuance of Procedures for an Offer to Compromise an Accepted Offer
The purpose of this memorandum is to reissue interim guidance dated February 2, 2009 with control number SB/SE-05-0209-007 titled, Interim Guidance for an Offer to Compromise an Accepted Offer. This interim guidance memorandum provides procedures for working an offer to compromise an accepted offer. Please ensure this information is distributed to all affected employees.
When the monitoring campuses receive a proposal to change the payment terms of an accepted offer or receive a formal proposal to compromise an accepted offer, the monitoring campus is required to send an Other Investigation (OI) to the office of jurisdiction that initially accepted the offer for consideration (OIC Field function, Centralized OIC (COIC) or Appeals).
Although taxpayers are not required to use a specific offer form, i.e. Form 656, to submit a proposal they are required to submit the proposal in writing. The proposal will be forwarded with the OI to the office that will conduct the investigation. Taxpayers are not required to include a 20 percent payment or periodic payments with the proposal.
Employees will secure and review the taxpayer's updated financial information and supporting documentation and negotiate the terms of the proposal based on the taxpayer's financial situation. The terms available are the same as the terms offered on Form 656 (rev 02/2007 or later), i.e. lump sum cash or periodic payment, regardless of the original offer IRS received date. Employees must adhere to IRM 5.8.9.4.3 when considering a proposal for an offer on an offer and IRM 5.8.9.4.4 when closing the investigation. The investigating office will provide Monitoring Offer in Compromise Unit (MOIC) with the revised terms of the accepted offer. The offer will not be open on the Automated Offer in Compromise System (AOIC), and therefore no documentation will be necessary on AOIC. If the taxpayer's proposal is not acceptable, the investigating office will advise MOIC to proceed with the default of the original offer.
If you have any questions, please feel free to contact me, or a member of your staff may contact Diana Estey. Territory personnel should direct any questions, through their management staff to the appropriate Area contact.
cc: National Taxpayer Advocate
Chief Appeals
www.irs.gov

MAGUIRE PARTNERS - MASTER INVESTMENTS, LLC, MAGUIRE PARTNERS, INC., TAX MATTERS PARTNERS, et al., Plaintiffs v. UNITED STATES OF AMERICA, Defendant.

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA. Case No. CV 06-07371-JFW(RZx) ✓. Related Case Nos.: CV 06-7374-JFW (RZx). CV 06-7376-JFW (RZx). CV 06-7377-JFW (RZx). CV 06-7380-JFW (RZx). Dated: December 11, 2009.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

WALTER, United States District Judge: This action came on for a court trial on August 12, 13, and 14, 2008. Steven R. Mather and Lydia Turanchik of Kajan Mather and Barish appeared for Plaintiffs Maguire Partners - Master Investments LLC, Maguire Partners Inc., Thomas Master Investments LP, Thomas Partners Inc., Tax Matters Partner, Huntington/Fox Investments LP, Edward D. Fox, Jr., Thomas Division Partnership LP, Thomas Investment Partners Ltd., (collectively “Plaintiffs”). Andrew Pribe, Rick Watson, and Jonathan Sloat of the Office of the United States Attorney appeared for Defendant United States of America (“Defendant”). On September 22, 2008, the parties filed their proposed Post-Trial Findings of Fact and Conclusions of Law. On October 6, 2008, the parties each filed their Post-Trial Briefs and their marked copies of the opposing parties' proposed Post-Trial Findings of Fact and Conclusions of Law. After considering the evidence, briefs and argument of counsel, the Court makes the following findings of fact and conclusions of law: 1

Findings of Fact 2

I. Factual and Procedural Background

A. The Principals and Their Entities

1. James Thomas

James Thomas, a real-estate investor and developer, is the trustee of the Lumbee Clan Trust, which is a partner in Thomas Investment Partners Ltd. (“TIP”), which, in turn, is a partner in Thomas Division Partnership LP (“TDP”). In 2001 through 2002, these various partnerships owned an interest in: the Library Tower in Los Angeles; the Gas Company Tower in Los Angeles; the Wells Fargo Center in Los Angeles; the MGM Plaza in Santa Monica; the Solana project in Dallas; and Commerce Square in Philadelphia. These investments were highly leveraged with debt in the range of eighty to ninety percent of the value of the property. Thomas's net worth in 2001 was approximately $200 million, with approximately twenty to thirty percent in cash or marketable securities/cash equivalents and the remainder in real estate holdings, including those identified above.

2. Edward Fox

Edward Fox, a real-estate investor and developer, is the trustee of The Edward D. Fox, Jr. Family Trust dated February 14, 1990 (the “Fox Trust”), which is a partner in Huntington/Fox Investments LP (“HFI”), which, in turn, is a partner in both Maguire Partners - Master Investments LLC (“MP-MI”) and Thomas Master Investments LP (“TMI”). In 2001 through 2002, these various partnerships owned an interest in: the Library Tower in Los Angeles; the Gas Company Tower in Los Angeles; the Wells Fargo Center in Los Angeles; the MGM Plaza in Santa Monica; the Solana project in Dallas; and Commerce Square in Philadelphia. These investments were highly leveraged with the debt in the range of eighty to ninety percent of the value of the property.

In 2001, Fox also was a major investor in the publicly-held Center Trust REIT where he served as chairman of the board and chief executive officer. The Media Center Shopping Mall in Burbank, California was one of the key assets owned by the Center Trust REIT. In 2001, Fox also was a founder and owner of Commonwealth Partners, which was assembling a portfolio of commercial real estate projects in partnership with various California state pension funds. Fox's net worth in 2001 was approximately $50 million.

B. The Transactions At Issue

1. The Lumbee Clan Trust Transaction

On December 20, 2001, the Lumbee Clan Trust and AIG entered into a transaction in which the Lumbee Clan Trust paid $1.5 million to AIG. The source of the funds used to pay AIG was a distribution from TIP. Thomas contends that the purpose of the transaction was to serve as a hedge against potential loss in the value of his real-estate interests arising from the risk of terrorism after September 11, 2001. Thomas also contends that the Lumbee Clan Trust paid $1.5 million for an opportunity to receive a net maximum of $38.4 million. The potential payout from the transaction was tied to the value of a portfolio of twenty REIT stocks (the “REIT basket”).

a. The Structure of the Transaction

In general, the transaction between the Lumbee Clan Trust and AIG consisted of a short option, a long option, and a promissory note. On December 20, 2001, the Lumbee Clan Trust and AIG in order to implement the transaction did the following: (1) the Lumbee Clan Trust sold a short option to AIG for $100 million; (2) the Lumbee Clan Trust purchased a long option from AIG for $61,683,169; (3) the Lumbee Clan Trust purchased a promissory note from AIG for $39,816,831; and (4) the Lumbee Clan Trust pledged the proceeds from the long option and the promissory note to secure the short option. The Lumbee Clan Trust's transaction costs amounted to $1.5 million. The long and short options were Asian-style European options. 3 The promissory note eliminated AIG's obligation to transfer funds to the Lumbee Clan Trust in the amount representing the difference between the price of the short option and the price of the long option. The strike price of the short option was fifty percent of the value of the REIT basket, or $100,021,176. The strike price of the long option was seventy percent of the value of the REIT basket, or $140,029,647.

b. The Terms of the Transaction

The terms of the transaction provided that any payoff depended on the average value of the REIT basket between December 20, 2001, and March 19, 2002, as compared to the value as of December 19, 2001. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, did not fall by greater than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Lumbee Clan Trust would receive no payout. If the average value of the REIT basket between December 20, 2001, and March 19,2002, fell more than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Lumbee Clan Trust would receive a cash payment that would increase dollar-for-dollar with the reduction in the average value of the REIT basket below seventy percent of the value of the REIT basket on December 19, 2001, until a maximum payout of $40,008,471 was reached. This maximum payout would be reached if the average value of the REIT portfolio fell by fifty percent or more from its value of December 19, 2001. However, the Lumbee Clan Trust would never be obligated to pay out-of-pocket anything other than the $1.5 million transaction costs paid to AIG on December 20, 2001, for the transaction.

c. The Contributions to the Partnerships

On December 27, 2001, the Lumbee Clan Trust contributed the transaction to TIP. Specifically, the Lumbee Clan Trust contributed the long option and the promissory note, and TIP assumed the short option. On December 27, 2001, TIP contributed the transaction to TDP. Specifically, TIP contributed the long option and the promissory note, and TDP assumed the short option. These contributions of the assets and assumptions of the short option were with the approval of AIG. After the contributions to the partnerships, AIG's position in the short option remained secured by the pledge of the long option and the promissory note.

d. The Performance of the REIT Basket and the Transaction

The value of the REIT basket did not decline by an average of thirty percent for the period between December 20, 2001, and March 19, 2002, as compared to its value on December 19, 2001. Therefore, the transaction did not yield a net payment to TDP.

e. The Tax Reporting by the Partnerships and the IRS Adjustments Related to the Transaction

(i.) Thomas Investment Partners

TIP reported on its 2001 Form 1065 that $101,500,000 had been contributed in capital during the year and that this amount constituted an asset of TIP. TIP also reported on its 2001 Form 1065 that the Lumbee Clan Trust had increased its capital in TIP by $101,500,000. TIP also issued a K-1 (partner's share of income, credits, deductions, etc.) to the Lumbee Clan Trust for 2001 that reflected an increase in the Lumbee Clan Trust's capital account of $101,500,000 due to the contribution of the transaction. TIP reported on its 2002 Form 1065 that it had interest income of $191,640 and it claimed deductions of $1,691,640. TIP did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued a notice of Final Partnership Adjustment (“FPAA”) which adjusted downward the capital contributed to and assets of TIP by $101,500,000 and sought to adjust the outside basis of LCT by $101,500,000. For 2002, the FPAA adjusted downward income by $191,640 and disallowed the deduction of $1,691,640.

(ii.) Thomas Division Partnership

TDP reported on its 2001 Form 1065 that $101,500,000 had been contributed in capital during the year and that this amount constituted an asset of TDP. TDP also reported on its 2001 Form 1065 that TIP had increased its capital in TDP by $101,500,000. TDP also issued a K-1 to TIP for 2001 that reflected an increase in TIP's capital account of $101,500,000 due to the contribution of the transaction. TDP reported on its 2002 Form 1065 that it had interest income of $191,640, and it claimed deductions of $1,691,640. TDP did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of TDP by $101,500,000, and sought to adjust the outside basis of TIP by $101,500,000. For 2002, the FPAA adjusted downward income by $191,640, and disallowed the deduction of $1,691,640.

2. The Fox Trust Transaction

On December 20, 2001, the Fox Trust and AIG entered into a transaction in which the Fox Trust paid $675,000 to AIG. Fox contends that the purpose of the transaction was to serve as a hedge against potential loss in the value of his real-estate interests arising from the risk of terrorism after September 11, 2001. Fox also contends that the Fox Trust paid $675,000 for an opportunity to receive up to a net maximum of $17,242,574. The potential payout from the transaction was tied to the value of a portfolio of twenty REIT stocks (the “REIT basket”). This was the identical basket that the Lumbee Clan Trust transaction used.

a. The Structure of the Transaction

In general, the transaction between the Fox Trust and AIG consisted of a short option, a long option, and a promissory note. On December 20, 2001, the Fox Trust and AIG in order to implement the transaction did the following: (1) the Fox Trust sold a short option to AIG for $45 million; (2) the Fox Trust purchased a long option from AIG for $27,757,426; (3) the Fox Trust purchased a promissory note from AIG for $17,917,574; and (4) the Fox Trust pledged the proceeds from the long option and the promissory note to secure the short option. The Fox Trust's transaction costs amounted to $675,000. The options were Asian-style European options. The promissory note eliminated AIG's obligation to transfer funds to the Fox trust in an amount representing the difference between the price of the short option and the price of the long option. The strike price of the short option was fifty percent of the value of the REIT basket, or $45,009,529. The strike price of the long option was seventy percent of the value of the REIT basket, or $63,013,341.

b. The Terms of the Transaction

The terms of the transaction provided that any payoff depended on the average value of the REIT basket between December 20, 2001, and March 19, 2002, as compared to the value as of December 19, 2001. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, did not fall by greater than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Fox Trust would receive no payout. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, fell by more than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Fox Trust would receive a cash payment that would increase dollar-for-dollar with the reduction in the average value of the REIT basket below seventy percent of the value of the REIT basket on December 19, 2001, until a maximum payout of $18,003,812 was reached. This maximum payout would be reached if the average value of the REIT portfolio fell by fifty percent or more from its value on December 19, 2001. However, the Fox Trust would never be obligated to pay out-of-pocket anything other than the $675,000 transaction costs paid to AIG on December 20, 2001.

c. The Contributions to the Partnerships

On December 27, 2001, the Fox Trust contributed the transaction to HFI. Specifically, the Fox Trust contributed the long option and the promissory note, and HFI assumed the short option. On December 27, 2001, HFI contributed $34,749,083 of the transaction to MP-MI. Specifically, HFI contributed seventy-six percent of the long option and the promissory note, and MP-MI assumed seventy-six percent of the short option. HFI had no prior investment in MP-MI. On December 27, 2001, HFI contributed $7,682,535 of the transaction to TMI. Specifically, HFI contributed seventeen percent of the long option and the promissory note, and TMI assumed seventeen percent of the short option. HFI had no prior investment in TMI. On December 27, 2001, HFI contributed the remaining seven percent of the transaction to Manhattan Properties, LP 4 , which assumed the remaining seven percent of the short option. These contributions of the assets and assumptions of the short option were with the approval of AIG. After the contributions to the partnerships, AIG's position in the short option remained secured by the pledge of the long option and the note.

d. The Performance of the REIT Basket and the Transaction

The value of the REIT basket did not decline by an average of thirty percent for the period between December 20, 2001, and March 19, 2002, as compared to its value on December 19, 2001. Therefore, the transaction did not yield a net payment to Fox.

e. The Tax Reporting by the Partnerships and the IRS Adjustments Related to the Transaction

(i.) Huntington/Fox Investments

HFI reported its investment in MP-MI on its 2001 Form 1065 in the amount of $513,515. HFI reported its investment in TMI on its 2001 Form 1065 in the amount of $113,519. HFI reported on its 2002 Form 1065 deductions of $707,183 and income of $80,114 pertaining to the transaction. HFI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of HFI by $42,431,618, and sought to adjust outside basis of the Fox Trust by $42,431,618. For 2002, the FPAA adjusted income downward by $80,114, and disallowed the deduction of $707,183.

(ii.) Maguire Partners-Master Investments

MP-MI reported on its 2001 Form 1065 that it had made a capital contribution of $34,749,083 during the year and that this amount constituted an asset of the partnership. MP-MI also reported on its 2001 Form 1065 that HFI had increased its capital in MP-MI by $34,749,083. MP-MI also issued a K-1 to HFI for 2001 that reflected an increase in the HFI's capital account of $34,749,083 due to the contribution of the transaction. MP-MI reported on its 2002 Form 1065 that it had interest income of $65,609 and it claimed deductions of $579,143 pertaining to the transaction. It also reported other investments of $34,235,549. MP-MI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of MP-MI by $34,749,083, and sought to adjust the outside basis of HFI by $34,749,083. For 2002, the FPAA adjusted downward income by $65,609, and disallowed the deduction of $579,143. The IRS also adjusted the other investments downward by $34,235,549.

(iii.) Thomas Master Investments

TMI reported on its 2001 Form 1065 that it had made a capital contribution of $7,682,535 during the year and that this amount constituted an asset of TMI. TMI also reported on its 2001 From 1065 that HFI had increased its capital in TMI by $7,682,535. TMI also issued a K-1 to HFI for 2001 that reflected an increase in HFI's capital account of $7,682,535 due to the contribution of the transaction. TMI reported on its 2002 Form 1065 that it had interest income of $14,505, and it claimed deductions of $128,040 pertaining to the transaction. It also reported other investments of $7,569,000. TMI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of TMI by $7,682,535, and sought to adjust the outside basis of HFI by $7,682,535. For 2002, the FPAA adjusted downward income by $14,505, and disallowed the deduction of $128,040. The IRS also adjusted the other investments downward by $7,569,000.

C. Background Regarding the Transactions at Issue

1. The Arthur Andersen Call-Option Spread

The transactions that were entered into by the Lumbee Clan Trust and AIG and the Fox Trust and AIG were designed by Arthur Andersen and referred to internally by various names, such as the “call-option spread”, the “synthetic put” and “asset-hedging.” The call-option spread consisted of two call options - one long and one short - and a promissory note. 5 By using the call-option spread, a taxpayer would be able to create a basis in an amount substantially greater than the amount of money actually paid for the call-option spread by taking the position that the transaction created a “contingent” liability for purposes of I.R.C. § 752 . In order to create basis and obtain the tax benefit, the taxpayer was required to contribute the call-option to a partnership.

The call-option spread was viewed by Arthur Andersen tax partners as one of many-tax-avoidance techniques marketed by Arthur Andersen. In fact, from 1999 to 2001, Arthur Andersen arranged approximately ten call-option spread transactions, and in all but one of these transactions AIG was the counterparty. The call-option spread was considered a “proven solution” by Arthur Andersen, which included techniques offered by Arthur Andersen to minimize taxes. It is estimated that the call-option spread transactions generated about $14.7 million in fees for Arthur Andersen in fiscal years 2000 and 2001.

2. Thomas and Fox Learn About the Call-Option Spread

In 2001, Martin Griffiths, a tax partner in the Los Angeles office of Arthur Andersen, was the engagement partner and the main point of contact for Thomas and Fox. In fact, Thomas, Fox, and another real estate investor, Robert Maguire, represented approximately one hundred percent of Griffiths's business. Because Griffiths was familiar with the investment portfolios and tax needs of Thomas and Fox, he considered it his duty to investigate and determine if any of the “interesting planning ideas” presented to him by Arthur Andersen had any applicability to Thomas or Fox. He testified that it was his job to bring Arthur Andersen's “industry expertise” to bear on Thomas and Fox's interests.

Sometime before September 11, 2001, Griffiths became aware of the call-option spread, and decided to investigate it for Thomas, Fox, and Maguire. Before September 11, 2001, Griffiths contacted his fellow tax partner Mandel to learn more about the call-option spread. After discussing the call-option spread with Mandel, Griffiths and Mandel met with Thomas and, separately, with Fox on September 27, 2001. During these meetings, Mandel explained to Thomas, a former trial attorney with the I.R.S., and Fox the increased basis that could result from the call-option spread, which Mandel described as a hedge, if the options and note were contributed to a partnership. In the weeks after the September 27, 2001 meetings, Griffiths continued to discuss the call-option spread with Thomas and Fox, including detailed discussions regarding the structure of the transaction.

In December 2001, Paul Rutter, outside transactional counsel to Thomas and Fox, met with Mandel to discuss the transaction. He also reviewed the transactional documents prepared by Sullivan & Cromwell, counsel to AIG. Rutter was not an expert on options or hedging, and did not provide business advice to Thomas or Fox regarding the transaction. Instead, Rutter's representation was limited to reviewing the documents prepared by AIG's counsel, which included the contribution agreements by which the transaction would be contributed to the partnerships. Rutter testified that it was his understanding “that they [AIG] were doing this transaction with other people and had a pre-existing set of documents they used[.]”

Rutter also testified that the decision to contribute the transactions to Thomas and Fox's respective partnerships had already been made by the time he became involved in the transaction. In fact, Thomas and Fox admitted that it was always their intention to contribute the transactions to their respective partnerships. The partnership contributions were always viewed by Thomas, Fox, Griffiths, and Rutter as integral to the entire transaction.

On December 20, 2001, Thomas and Fox entered into the call-option spread transactions, described above, with AIG.

II. Discussion

A. The Lumbee Clan Trust Transaction And The Fox Trust Transaction Lack Economic Substance.

A taxpayer is not permitted to reap tax benefits from a transaction that lacks economic substance. 6 Coltec Industries, Inc. v. United States , 454 F.3d 1340, 1352-55 (Fed. Cir. 2006) (discussing Supreme Court precedent invoking economic substance since 1935). As the Federal Circuit explained in Coltec , the economic substance doctrine requires “disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality,” and, thus, “prevent[s] 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 1352-54.

1. Legal Standard for Economic Substance Analysis

To determine whether a transaction is merely an economic sham, the court must determine whether the transaction had any practical economic effect other than the creation of tax benefits. Casebeer v. Commissioner , 909 F.2d 1360, 1363 (9th Cir. 1990); Sochin v. Commissioner , 843 F.2d 351, 354 (9th Cir. 1988). Therefore, the court must exam the objective economic substance of the transaction and the subjective business motivation of the taxpayer. Sochin , 843 F.2d at 354; Casebeer , 909 F.2d at 1363. However, the objective and subjective inquiries are not “discrete prongs of a rigid twostep analysis,” but “are simply more precise factors to consider in the application of [the Ninth Circuit's] traditional sham analysis; that is, whether the transaction had any practical economic effects other than the creation of income tax losses.” Id.

a. The Objective Economic Substance Inquiry

Under the objective economic substance inquiry, the Court must determine “whether the transaction ha[s] economic substance beyond the creation of tax benefits.” Casebeer , 909 F.2d at 1365 ( citing Bail Bonds by Marvin Nelson, Inc. v. Commissioner , 820 F.2d 1543, 1549 (9th Cir. 1987). To do so, the court must analyze whether the “substance of the transaction reflects its form” and whether, objectively, “the transaction was likely to produce economic benefits aside from a tax deduction.” Id.

A transaction lacks objective economic substance where it does not appreciably affect a taxpayer's beneficial interest except to reduce his taxes. Knetsch v. United States , 364 U.S. 361, 366 (1960); ACM Partnership v. Commissioner , 157 F.3d 231 248 (3d Cir. 1998). For example, de minimis economic effect - such as the accumulation of small amounts of cash value in an annuity contract or the assumption of marginal risks in a partnership arrangement - are insufficient to create economic substance. Knetsch , 364 U.S. 361, 365-66 (finding transaction involving leveraged annuities to be economic sham because possible $1,000 cash value of annuities at maturity was “relative pittance” compared to purported value of annuities); ASA Investerings Partnership v. Commissioner , 201 F.3d 505, 514 (D.C. Cir. 2000); ACM , 157 F.3d at 251-52.

b. The Subjective Business Purpose Inquiry

The Court analyzes a taxpayer's subjective business purpose by determining “whether the taxpayers have shown that they had a business purpose for engaging in the transaction other than tax avoidance.” Casebeer , 909 F.2d 1363-64. This analysis “often involves an examination of the subjective factors that motivated a taxpayer to make the transaction at issue,” such as the experience of the taxpayer, the extent of the taxpayer's investigation into a transaction, the extent of any advisor's investigation into the deal, and the taxpayer's trial testimony regarding their motivation for entering into the transaction.” Bail Bonds , 820 F.2d at 1549; see, also, Casebeer , 909 F.2d at 1364.

One factor that can be considered in analyzing a taxpayer's subjective business purpose is whether the taxpayer was acting like a prudent economic actor or contrary to rational business interests in the transaction. See, e.g., Gilman v. Comm'r , 933 F.2d 143, 146-47 (2d Cir.1991) (requiring taxpayer to demonstrate that prudent investor could have concluded that “realistic potential for economic profit” existed) (internal quotation marks omitted); Rice's Toyota World, Inc. v. Comm'r , 752 F.2d 89, 91 (4th Cir.1985) (equating lack of economic substance with finding that “no reasonable possibility of a profit exists”); Long Term Capital , 330 F.Supp.2d at 172 (finding that transaction lacked economic substance because, “at the time the transaction was entered into, a prudent investor would have concluded that there was no chance to earn a non-tax based profit return in excess of the costs of the transaction”); Estate of Strober v. Comm'r , 63 T.C.M. (CCH) 3158, 3160 (1992) (“We conclude that … a prudent investor, relying upon independently obtained appraisals and research, would not have concluded that [the] transaction offered a reasonable opportunity for economic gain exclusive of tax benefits.”). Thus, as the Federal Circuit found in Coltec, there must be an objective inquiry into economic reality that would ask “‘whether a reasonable possibility of profit from the transaction existed,’” Coltec , 454 F.3d at 1356 (quoting Black & Decker , 436 F.3d at 441), and “whether the transaction has ‘realistic financial benefit.’” Id . at 1356 n. 16 (quoting Rothschild , 407 F.2d at 411); see, also, Jade Trading, 80 Fed. Cl. At 47-48 (“The inquiry is not whether the [taxpayers] believed the Jade transaction was a real investment capable of making a profit, but whether the Jade transaction in fact objectively was a real investment capable of making a profit and altering their financial positions.”). In addition, where a taxpayer is sophisticated in economics and/or taxation, entering a bad deal may shed light on the taxpayer's true tax-avoidance motivation. Id. (“the absence of reasonableness sheds light on Long Term's subjective motivation, particularly given the high level of sophistication possessed by Long Term's principals in matters economic.”). Similarly, a conspicuous lack of concern over the particulars of the transaction by the taxpayer may be evidence that the transaction is a sham. See, Mahoney v. Commissioner , 808 F.2d 1219, 1220 (6th Cir. 1987).

2. The Transactions At Issue Lack Economic Substance

The presence or lack of economic substance for federal tax purposes is determined by a fact-specific inquiry on a case-by-case basis. Frank Lyon , 435 U.S. at 584. In this case, the Court finds that the evidence demonstrates that the transactions at issue do not have economic substance because Thomas and Fox received no economic benefit, other than the increase in basis, from the transactions. In addition, the Court finds that the evidence demonstrates that Thomas and Fox were motivated by this increased basis and not by any purported “hedging” benefit.

Plaintiffs argue that factual differences between this case and the recent economic substance cases of Stobie Creek and Jade Trading mean that the transactions at issue in this case do, in fact, have economic substance. However, an examination of how the economic substance analysis was applied in Stobie Creek and Jade Trading demonstrate that the transaction at issue in this case, like the transactions in those cases, do not have economic substance.

a. Under the Economic Substance Analysis as Applied in Stobie Creek , The Transactions At Issue in This Case Lack Economic Substance

Stobie Creek involved the contribution of offsetting long and short foreign-currency options to single-member LLCs. The plaintiffs in Stobie Creek alleged that the principal involved was a “reasonable investor” who “made a reasonable assessment regarding profitability.” Id . at 693. In evaluating this claim, the court stated that it could not “ignore the functional and historical reality that the [offsetting option pairs] were part of the prepackaged J&G strategy marketed to shelter taxable gains.” Id. In addition, the Court in Stobie Creek relied heavily on the expert testimony offered by the Government in concluding that “plaintiffs' attempts to establish a legitimate profit motive wither against the devastating, much more credible expert testimony that established the objective economic reality that the [offsetting option pairs] were severely over-priced, had a negative expected-rate-of-return, and consequently had a scant profit potential.” Stobie Creek , 823 Fed. Cl. At 696. The Government's expert concluded that the transaction “was priced at levels that far exceeded [the components'] theoretical value[,]” where those values were computed using an adaptation of the Black-Scholes model. Id. At 685.

The court dismissed the plaintiffs' expert's criticism of the Government's expert's reliance on the Black-Scholes model. While the court recognized the validity of the criticism that “the model involves assumptions of perfect and static markets[,]” it found that the plaintiffs' expert “could not offer a more appropriate substitute.” Id. at 689-90. The court concluded that the expert testimony “suggests that no reasonable and prudent investor would have expected a possibility of a profit on these transactions.” Id. at 693.

In evaluating the subjective business purpose prong of the economic substance analysis, the court rejected the testimony of the principal that he “believed a 30% chance of doubling his investment existed” because the court found that “the [offsetting option pairs] had no objectively reasonable possibility of returning a profit and therefore lacked an objective business purpose.” Id. at 698. The court found that the transactions were “integral to a ‘preconceived’ tax shelter scheme that was not structured to create a viable profit-producing investment, but, rather, to inflate the basis in an unrelated asset that would yield large capital gains upon sale.” Id. Moreover, the court found that while there was “limited evidence” of an investment motive, the evidence was “not sufficient to overcome the evidence that the [offsetting option pairs] were economic nullities beyond producing the claimed tax benefits.” Id.

Similarly, in this case, Defendant's expert, Professor Grendier, used recognized option-pricing-modeling techniques to conclude that the value of the Thomas transaction was $574, and the value of the Fox transaction was $259. 7 Therefore, based on a thirty-five percent volatility, Thomas and Fox paid approximately 2,700 and 2,600 times the value of the transactions they purchased.

Although Plaintiffs' experts, Professors Manaster and Edelstein, criticized Professor Grendier's Black-Scholes method, Professor Manaster testified that, in the absence of comparative prices, he would have performed the same analysis while Professor Edelstein offered no acceptable alternative to Professor Grenadier's analysis.

Moreover, like the transaction in Stobie Creek , the call option spread was a prepackaged deal offered by Arthur Andersen that focused on the creation of basis. Arthur Andersen did not offer any advice on whether the transaction was a hedge, and Mandel, who offered the call option spread to Thomas and Fox, had no expertise on hedging or options.

Finally, there is no credible evidence that the transactions performed as hedges. First, there is no credible evidence that a close correlation exists between the value of the broad-based REIT basket and the value of any of Thomas's and Fox's real estate investments. Second, even if the transactions served as hedges, the price paid by Thomas and Fox vastly exceeded any benefit they could have received. In addition, despite claiming to follow the REIT market closely, Fox did not know the difference between the average drop required to produce a return of one dollar on his transaction, and the historical drop that occurred in 1974. Therefore, as in Stobie Creek , the Court does not find that the self-serving testimony of the principals, Thomas and Fox, sufficient to overcome the substantial and objective evidence that the transactions at issue are economic nullities entered into for the purpose of fabricating tax basis in amounts that are vastly disproportionate to the actual cost.

b. Under the Economic Substance Analysis as Applied in Jade Trading , The Transactions At Issue in This Case Lack Economic Substance

Jade Trading , another recent case involving economic substance analysis, involved the contribution of a long option and a short option to a partnership. Jade Trading , 80 Fed. Cl. at 11-13. The three taxpayers each paid $150,002, and each obtained an increased basis of $15 million. Id. The court disallowed the claimed tax benefits and determined that the transaction was an economic sham. Id. at 14. The court reached its conclusion based on five reasons. First, the claimed losses “were purely fictional” because the taxpayers “did not invest $15 million in the spread and did not lose $15 million when exiting Jade without exercising either option.” Second, the plaintiffs contentions that the transaction had a profit potential was contradicted by the large limitation on the maximum net profit that could be earned and the “large and unusual” fees that the plaintiffs paid. Third, the transaction was “devised and marketed by a tax accounting group …as a tax product, not by an investment advisor as a vehicle to earn a profit,” and, thus, the court found it “was developed as a tax avoidance mechanism and not an investment strategy.” Fourth, the initiation of the transaction outside the partnership followed by the contribution to the partnership “had no effect whatsoever on the investment's value, quality, or profitability, except to add cost and burden,” but “packaging the investment in the partnership vehicle was an absolute necessity for securing the tax benefits.” Fifth, there was a “highly disproportionate tax advantage to the underlying monetary outlay - the tax loss per [taxpayer], $14.9 million, was roughly 65 times greater than each LLC's $225,002 financial commitment to Jade, almost 100 times each LLC's $150,002 investment in the spread transaction which generated the loss, and approximately 100 times the $140,000 potential net profit each LLC could have earned.”

Similarly, the Court finds that consideration of these same five reasons in this case leads to the same result - that the transactions at issue in this case lack economic substance. First, the claimed basis is fictional, because Thomas and Fox paid only $1.5 million and $675,000, respectively for the integrated transactions they purchased, but gained an increased basis of $101,500,000 and $45,675,000, respectively. The increase in basis is approximately sixty-seven times what they paid for the transactions. Second, as Professor Grenadier explained, there is virtually no likelihood of a thirty percent average drop over ninety days - the drop required to yield a one dollar return - much less the average fifty percent drop required to yield the maximum payout possible. 8 Third, the design of the call option spread demonstrates that it was designed for the creation of tax benefits. Mandel, who was intimately familiar with the call option spread transaction format and was integral in selling these transactions to Thomas and Fox, was a tax expert specializing in “leading edge tax solutions,” not an options or risk-management expert. Moreover, there is no evidence that the call option spread was designed as a hedge generally, or that it operated as a hedge with respect to the transactions at issue in this case. Fourth, there is no evidence that the contribution to the partnerships, which was part of the design of the prepackaged transactions, had any effect “on the investment's value, quality, or profitability.” However, the contribution was required for the creation of an increased basis. In addition, in the weeks after Mandel first discussed the call option spread with Thomas and Fox, Griffiths provided tax advice to them about the increased basis they would achieve if they purchased the transactions. Fifth, the tax benefit is highly disproportional - sixty-seven times - to the actual economic outlay. As a result the Court finds that the transactions at issue lack economic substance.

c. The Transactions At Issue In This Case Are Economic Shams.

In this case, it is clear that Plaintiffs are not taxpayers “who structured their transactions and ordered their affairs in a way so as to reduce their liability for taxes or to achieve the greatest tax benefits; rather, the tax benefits shaped the structure of the investment in order to achieve the goal of tax avoidance.” Stobie Creek , 82 Fed. Cl. at 698; see, also, Coltec , 454 F.3d at 1357 (“there is a material difference between structuring a real transaction in a particular way to provide a tax benefit (which is legitimate), and creating a transaction, without a business purpose, in order to create a tax benefit (which is illegitimate).”). Because of the mismatch between the purported purpose of “hedging” and the inability of the Asian-style options to satisfy that purpose, the dramatic overpayment by Thomas and Fox for the de minimis value they received in return, and the virtual impossibility of receiving even one dollar in return versus the certain increase in basis by $101,500,000 Thomas and 445,675,000 by Fox, the Court finds that the only appreciable benefit gained by the transactions at issue was an increased basis. This conclusion is supported by the fact that Thomas and Fox were sophisticated economic actors. In fact, Thomas was a former trial attorney with the IRS. Thomas and Fox, along with Griffiths, their tax advisor, obviously recognized the value that would result from the increased basis, such as shielding distributions of cash and property from their partnerships by characterizing that property as a return on capital, or reducing the obligation to restore a negative capital account on termination of their partnerships.

The Court finds that the weight of evidence, including the persuasive expert testimony by Professor Grenadier, established that the transactions at issue did not appreciably improve the economic position of Thomas and Fox beyond the creation of an increased basis. Any subjective belief by Thomas and Fox that the transaction constituted a hedge was not objectively supported by the evidence, and any subjective belief that there was an economic benefit is not objectively reasonable. No prudent business person, such as Thomas or Fox, would pay between 2,600 and 2,700 times the value of the transactions in this case for this type of a hedge. Because the transactions do not provide any appreciable economic benefit to Thomas or Fox, the Court finds that the transactions at issue are economic shams, and any evidence of a non-tax avoidance subjective motivation is not sufficient to give the transactions economic substance. Therefore, the transactions must be disregarded under the prevailing economic substance doctrine, and are without effect for purposes of federal taxation.

B. Application of the Step Transaction Doctrine Yields a Cost-Basis of $1.5 Million for Thomas and $675,000 for Fox.

As an alternative to the economic substance doctrine, Defendant also seeks to invalidate the tax effects claimed by Plaintiffs under the step transaction doctrine. “The Supreme Court has expressly sanctioned the step transaction doctrine, noting that ‘interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction.’” The Falconwood Corp. v. United States , 422 F.3d 1339, 1349 (2005) (quoting Comm'r v. Clark , 489 U.S. 726, 738 (1989)). “[T]he objective of the doctrine is to ‘give tax effect to the substance, as opposed to the form of a transaction, by ignoring for tax purposes, steps of an integrated transaction that separately are without substance.’” Id . (quoting Dietzsch v. United States , 204 Ct.Cl. 535, 498 F.2d 1344, 1346 (1974)).

Courts principally rely on two tests to determine whether to apply the step-transaction doctrine: the interdependence test and the end result test. See, Kornfield v. Commissioner , 137 F.3d 1231, 1235 (10th Cir. 1998); Brown v. United States , 782 F.2d 559, 563-64 (6th Cir. 1986); Security Indus. Ins. Co. v. United States , 702 F.2d 1234, 1244 (5th Cir. 1983); McDonald's Rests. v. Commissioner , 688 F.2d 520, 524-25 (7th Cir. 1982). While the two tests have different formulations, both tests have as their central purpose the implementation of “the central purpose of the step transaction doctrine; that is, to assure that tax consequences turn on the substance of a transaction rather than on its form.” King , 418 F.2d at 517.

1. The End-Result Test

The end-result test applies when “a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.” Greene v. United States , 13 F.3d 577, 583 (2d Cir. 1994)( citing Penrod v. Commissioner , 88 T.C. 1415, 1429 (T.C. 1987). “[p]urportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” Brown , 782 F.2d at 564 ( quoting King , 418 F.2d at 516). While the taxpayer's intent is relevant under the end-result test, it is not the intent to avoid taxes; instead, it is whether the taxpayer intended to achieve a particular end-result, legitimate or not, through a series of interrelated steps. True , 190 F.3d at 1175. Thus, if a taxpayer structures a single transaction in a certain way that involves multiple steps, “he cannot request independent tax recognition of the individual steps unless he shows that at the time he engaged in the individual step, its result was the intended end result in and of itself.” Id. at 1175 fn. 9.

In this case, both Thomas and Fox contend that the reason they engaged in the transactions at issue was to “hedge” against a catastrophic collapse in the real-estate market. Thus, as they described it, Thomas and Fox essentially placed a “bet” that they now contend amounted to a hedge. Therefore, the long option, the short option, and the promissory note are simply the “interrelated steps” through which Thomas and Fox accomplish this “bet” or “hedge.” Under the end results test, these interrelated steps of the transaction should be collapsed into a unified whole and the tax consequences determined accordingly.

In addition, any attempt by Plaintiffs to argue that they had a valid business purposes, such as the plaintiff in the Falconwood case, in engaging in the transactions at issue does not “immunize” these transactions from the step transaction doctrine. See, Stobie Creek , 82 Fed. Cl. at 701. While the court in Falconwood held that the step transaction doctrine did not apply to the series of transactions at issue, it did so because the taxpayer had an independent business purpose for the initial step, and then was bound by regulation to follow the remaining steps that the Government had sought to collapse. Falconwood , 422 F.2d at 1351-52 (“Upon completing a downstream merger for independent business reasons, Falconwood therefore had little choice in the face of quasi-legislative mandates but to file a final consolidated tax return for the group that covered Falconwood's operations for its entire taxable year.”). However, as in Stobie Creek, Plaintiffs “cannot align themselves with the factual circumstances presented in Falconwood ” because they “were not bound by any legislative or regulatory mandate to proceed along the tortuous steps that resulted in the claimed basis enhancement.” Stobie Creek , 82 Fed. Cl. at 702.

2. The Interdependence Test

“The interdependence formulation of the step transaction doctrine requires an inquiry into whether the individual transactions in the series would be “fruitless” without completion of the series.” Id. at 699 ( quoting Falconwood , 422 F.3d at 1349). Under this test, courts analyze whether or not one part of the overall transaction would have occurred without another part. Kornfield , 137 F.3d at 1235; Security Indus. Ins. , 702 F.2d at 1247. If not, the transaction is then integrated and the step transaction applies. Id. Thus, under this test, courts “disregard the tax effects of individual transactional steps if “it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts.” True , 190 F.3d at 1175 ( citing Kuper v. Commissioner , 533 F.2d 152, 156 (5th Cir. 1976)).

In this case, the components of the transactions at issue were interdependent because each component was required to accomplish the desired economic result, which was, as Plaintiffs describe it a “bet” or “hedge” against a collapse in the real estate market. This is best demonstrated by the fact that the documents executed as part of the transactions created interlocking contractual obligations. For example, the Certificate re: Consent and Authorization discusses a “Master Transaction.” The Master Transaction “would be effectuated through the execution and delivery by the Trust of the following agreements: (a) Master Agreement to be entered into by … the Trust and [AIG] …; (b) Note …, to be entered into by and between the Trust and [AIG]…; (c) Pledge Agreement by and between Trust and [AIG]; (d) Option and Equity Derivative Account Agreement by and between Trust and [AIG], and (e) Confirmation Letter Agreements re: share option transaction I and re: share option transaction II to Trust from [AIG].” Moreover, the Master Agreement specifies that all transactions and confirmations constitute a single agreement.

The creation of these interlocking obligations with respect to the long option, the short option, and the note accomplished the goal of creating the “bet” sought by Thomas and Fox. Neither the long or short option independently could have created the required “bet.” For example, Thomas and Fox would have only benefitted from an independent purchase of the long option if prices of the stocks in the REIT basket increased, which is the opposite of what they were trying to accomplish in “hedging” against a drastic downturn in the real estate market. In addition, an independent purchase of the short option would have exposed Thomas and Fox to unlimited losses if the price of the stocks in the REIT basket increased. Thus, the purchase of the long option, the short option, and the AIG note were required to accomplish the desired “hedge.” Therefore, the transactions making up the steps of the “hedge” strategy pursued by the Plaintiffs “are interdependent and have no independent functional justification outside of the series.” Stobie Creek, 82 Fed. Cl. at 700. “Under the interdependence test, the individual steps must be disregarded and collapsed into a single transaction.” Id.

The Court finds that, under either the interdependence test or the end result test, the step transaction doctrine applies to Plaintiffs' transactions. Id. Accordingly, the tax consequences should be determined on the substance of the transactions at issue, and not on the form used by Plaintiffs. Id.

C. Application of the Substance Over Form Doctrine Yields a Cost-Basis of $1.5 Million for Thomas and $675,000 for Fox.

In 1945, the Supreme Court stated: “The incident of taxation depends on substance rather than form of the transaction.” Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945); see, also, True v. United States , 190 F.3d at 1174 (10th Cir. 1999); Allen v. Commissioner , 925 F.2d 348, 352 (9th Cir. 1991). In applying this principle, a court “must look beyond the taxpayers' characterization of isolated, individual transaction steps, and also review the substance of each series of transactions in its entirety.” True , 190 F.3d at 1174. Thus, taxpayers may not characterize a transaction solely based on the labels they have used, because such an approach “would completely thwart the Congressional policy to tax transactional realities rather than verbal labels.” Crenshaw v. United States , 450 F.2d 472, 477-78 (5 th Cir. 1971). Therefore, it is the “true nature” of the transaction, not its “mere formalisms” that control. Court Holding , 324 U.S. at 334; see, also, Allen , 925 F.3d at 352; True , 190 F.3d at 1174.

The countervailing consideration to application of the substance over form doctrine is the principle that taxpayers may generally structure their transactions as they wish. Brown v. United States , 329 F.3d 664, 671 (9 th Cir. 2003). Thus, courts do not invalidate claimed tax benefits if the form of the transaction yields tax benefits which are consistent with Congressional intent as to the particular Internal Revenue Code provisions at issue. Id. at 672. Therefore, courts must make a fact-specific inquiry to determine if the facts fall within the intended scope of the applicable statute. Stewart v. Commissioner , 714 F.2d 977, 988 (9 th Cir. 1983).

In this case, Thomas and Fox entered into the transactions at issue, which they described as “bets” or “hedges” against a collapse in the real estate market. Thomas contends that he “paid approximately $1,500,000 to take a chance that he could receive up to $38,400,000.” According to Thomas, “[t]he $1.5 million is, in effect, the TDP transaction cost, the cost of inducing Banque AIG to make a bet on real estate values. Similarly, Fox contends he “paid approximately $675,000 to take a chance that he could receive up to $17,242,574.” According to Fox, “[t]he $675,000 is, in effect, the Fox transaction cost, the cost of inducing Banque AIG to make a bet on real estate values.”

Once these initial payments of $1.5 million and $675,000 were made, Thomas and Fox had no downside exposure from their “bets,” and only an extremely remote possibility of receiving a return. These contractually interlocking transactions were carefully structured so that the amount payable under the short option would never exceed the amounts to be received from the long option and the AIG note. The assets - the long option and the note - were pledged to AIG to secure the liability created by the short option.

For purposes of the application of the form over substance doctrine, the substance of the transaction is clearly a net payment of $1.5 million by Thomas and $675,000 by Fox for a possible payout with no downside exposure. Therefore, Thomas's true economic cost is $1.5 million, not $101.5 million. Similarly, Fox's true economic cost is $675,000, not $45,675,000.

Because the basis of property is its cost per I.R.C. § 1012 , and because Thomas's economic cost for the entire transaction was $1.5 million, his basis was $1.5 million. Thomas's partnerships succeeded to that basis. Similarly, because Fox's economic cost for the entire transaction was $675,000, his basis was $675,000. HFI succeeded to that basis, while MP-MI and TMI succeeded to their proportional share of that basis. The partnerships' characterization of the contribution at more than sixty times what Thomas and Fox actually paid for their unified position is plainly inconsistent with the fundamental principle that basis equals cost as expressed by Congress in I.R.C. § 1012 . Accordingly, under the substance over form doctrine, the tax consequences should be determined on the substance of the transactions at issue, and not on the form used by Plaintiffs.

D. Even if the Transactions At Issue Have Economic Substance and the Step-Transaction and Form Over Substance Doctrines Do Not Apply, the Obligation Created by the Short Option is a Liability for Purposes of I.R.C. § 752.

When a partner contributes property to a partnership, the partnership succeeds to the contributing partner's basis in the property under I.R.C. § 723 . In addition, the contributing partner increases his basis in the partnership by his cost basis in the property under I.R.C. § 722 .

On the other hand, when a partnership assumes a liability of a partner, the partner's basis in his partnership interest is: (1) decreased by the amount of the liability; and (2) increased by the partner's share of the partnership liability resulting from the assumption of the liability. I.R.C. §§ 722 , 733(1), and 752(a) and (b). Once the liability is satisfied, the partner's basis in his partnership interest is decreased by the amount of the liability. I.R.C. §§ 733(1) and 752(b).

In this case, Plaintiffs argue that the short option was not a liability for purposes of Section 752 . Therefore, for example, Thomas argues that the $101.5 million increase in basis that he received when he contributed the long option and the AIG note should not be reduced to account for the offsetting $100 million short option. However, as explained above, when the liability is satisfied, Thomas's basis should be reduced by $100 million pursuant to Section 752 . Therefore, the increase in Thomas's basis would be merely $1.5 million, or the equivalent of Thomas's net payment for the transaction. Thus, the characterization of the partnership's short option as a liability for purposes of Section 752 is consistent with the cost basis - and the economic reality - of Thomas's contribution. See , I.R.C. § 1012 .

The above interpretation of Section 752 is consistent with Revenue Ruling 88-77 , where the I.R.S. determined that when an obligation creates or increases the basis of the obligor's assets, the obligation is a “liability” for the purposes of Section 752 . In Revenue Ruling 88-77 , the I.R.S. defined liability for purposes of Section 752 to “include an obligation only if and to the extent that incurring the liability creates or increases the basis to the partnership of any of the partnership's assets (including cash attributable to borrowings).”

In this case, the short option, the long option, and the AIG note were contractually interlocked, and the acquisition of the obligation (the short option) clearly created basis (via the long option and the note) and should be recognized as a liability for purposes of Section 752 . In fact, the long option and the AIG note were purchased with the proceeds of the sale of the short option.

The above interpretation of Revenue Ruling 88-77 is consistent with the Fifth Circuit's interpretation in Korman & Associates, Inc., v. United States , 527 F.3d 443 (5th Cir. 2008), and the Court of Federal Claim's recent interpretation in Marriott International Resorts, L.P., v. United States , 83 Fed. Cl. 291 (2008). 9 At the time of the transactions at issue in this case and prior to the Fifth Circuit's decision in Korman , the Helmer line of cases found that certain liabilities assumed by partnerships should not be recognized for basis purposes because they were too indefinable or “contingent.” See, Helmer v. Commissioner , T.C. Memo. 1975-160 (1975); see, also, Long v. Commissioner , 71 T.C. 1 (1978), and La Rue v. Commissioner , 90 T.C. 465 (1988).

For example, in Helmer , a corporation held a purchase option on real estate owned by a partnership, and made periodic payments to maintain the option. T.C. Memo. 1975-160 (1975). Because the partnership was obligated to apply the option payments to the purchase price if the corporation exercised its option, the partners argued that its receipt of these payments created a partnership liability that increased their basis in the partnership. Id. However, the Tax Court found that the payments “created no liability on the part of the partnership to repay the funds paid nor to perform any services in the future.” 10 Id.

However, in Korman , the Fifth Circuit addressed the question whether the assumption of a liability from a short sale of Treasury notes is a liability under Section 752 , and determined that it was a Section 752 liability because the assumption was accompanied by the contribution of the proceeds from the short sale. In Korman, the taxpayer borrowed $100 million in Treasury bills and sold them for $102.5 million. The taxpayer then contributed the $102.5 million to a partnership, and the partnership assumed the liability for covering the short sale. The taxpayer then conveyed the partnership interest to another partnership, which sold the interest for $1.8 million. The taxpayer claimed a loss of $100 million, and ignored the liability created by the obligation to cover the short sale because it was “contingent.” 11

The Fifth Circuit noted that the taxpayer acknowledged “only suffer[ing] a $200,000 economic loss” but “claim[ing] a $102.6 [m]illion tax loss on its return.” Id. at 456. The Fifth Circuit found the taxpayer was making a “premeditated attempt to transform this wash transaction (for economic purposes) into a windfall (for tax purposes)” that was “reminiscent of an alchemist's attempt to transmute lead into gold.” Id.

In this case, as in Kornman , Plaintiffs are seeking to “treat[] [their] contingent assets and … contingent liabilities asymmetrically.” Id. at 460 (internal citation omitted). Moreover, the proceeds from the initial short sale and the subsequent covering transaction in this case are “inextricably intertwined.” Id . at 460-61. Therefore, to apply the Helmer line of cases to this case would, as the Korman court found, “fl[y] in the face of reality” and result in an “unwarranted aberration.” Id. at 461.

E. Even if the Short Option is Not an I.R.C. § 752 Liability, the Obligation Created by the Short Option Must Still be Taken into Account under Treasury Regulation § 1.752-6.

Section 1.752-6 of the Treasury Regulations applies to a partnership's assumption of liability occurring after October 18, 1999, and before June 24, 2003, if I.R.C. § 752(a) and (b) do not apply to that liability. 12 26 C.F.R. 1.752-6. On June 24, 2003, the Treasury Department proposed regulations, including temporary Treasury Regulation § 1.752-6 , that would define “liability” in the partnership context under I.R.C. § 752 , and which relied on the interpretation of “liability” found in I.R.C. § 358(h)(3) 13 and Revenue Ruling 88-77 . See, Assumption of Partner Liabilities , 68 Fed.Reg. 37,434 (June 24, 2003) (Prop. Treas. Reg. §§ 1.752-0 to -7). These temporary regulations became final on May 26, 2005, and the Treasury Department specified that Treasury Regulation § 1.752-6 would apply retroactively. See, 70 Fed.Reg. 30,334, 30,335 (May 26, 2005). Treasury Regulation § 1.752-6 was adopted by Congressional directive pursuant to Section 309 of the Community Renewal Tax Relief Act of 2000 (“2000 Act”), which added Section 358(h) to the I.R.C., and which defines “liability” as including contingent obligations for purposes of certain corporate stock exchanges. Section 309(c)(1) of the 2000 Act required the Secretary of the Treasury to adopt comparable rules for transactions involving partnerships, and expressly authorized retroactivity of those rules by stating that the Treasury Regulations adopted under Section 309(c) “shall apply to assumption of liabilities after October 18, 1999, or such later date as may be prescribed in such rules.”

If Treasury Regulation § 1.752-6 is applied retroactively in this case, the short options at issue would constitute liabilities for purposes of I.R.C. § 752 , and, thus, would require a reduction in the partnership basis claimed by Plaintiffs.

Plaintiffs argue that, as the court in Stobie Creek recently found, the requirement under Section 1.752-6 that a partner's basis in a partnership interest must be reduced by the value of the contingent liabilities assumed by the partnership is “contrary to the then existing policy to exclude contingent liabilities from the computation of partnership basis.” Stobie Creek Investments, LLC v. United States , 82 Fed. Cl. 636, 668 (2008) (citing Helmer , 34 T.C.M. (CCH) 727 (1975)). Both Plaintiffs and the court in Stobie Creek base the conclusion that Section 1.752-6 represented a change from previous policy on the Treasury Department's statement that “[t]he definition of a liability contained in these proposed regulations [including Section 1.752-6 ] does not follow Helmer. ” Stobie Creek, 82 Fed. Cl. At 668 (citing 68 Fed.Reg. at 37,436).

However, other courts have found that Treasury Regulation § 1.752-6 does apply retroactively. For example, in Cemco the United States Court of Appeals for the Seventh Circuit observed that Treasury Regulation § 1.752-6 was “explicit” in stating that it applied retroactively to assumptions of liabilities occurring before its enactment. Cemco Investors, LLC v. U.S. , 515 F.3d 749, 752 (7th Cir. 2008). The Cemco court relied on I.R.C. § 7805(b)(6) which specifically allows retroactivity. 14 Cemco , 515 F.3d at 752. The Cemco court found that the effect of Treasury Regulation § 1.752-6 was to “instantiate the pre-existing norm that transactions with no economic substance don't reduce people's taxes.” Cemco , 515 F.3d at 752.

This Court agrees with the Cemco court that Treasury Regulation § 1.752-6 should be applied retroactively. The Court finds that the rationale of the First Circuit in Stobie Creek and Plaintiffs with respect to Treasury Regulation § 1.752-6 “misrepresents the state of prior law” by interpreting the statement that “[t]he definition of a liability contained in these proposed regulations does not follow Helmer v. Commissioner ” as an indication that Helmer represented the prevailing prior law. Burke, Karen C. and McCough, Gayson, M.P., Cobra Strikes Back: Anatomy of a Tax Shelter (June 19, 2008), at 33 and 39 n. 121. In addition, the Treasury Department also stated that “following the principles set forth in § 1.752-1T(g) and Rev. Rul. 88-77 , the proposed regulations provide that an obligation is a liability if and to the extent that incurring the obligation: (A) Creates or increases the basis of any of the obligor's assets (including cash).” 68 Fed. Reg. 37434, 37437 (2003).

Recognizing that “[t]here is no statutory or regulatory definition of liabilities for purposes of section 752 ” (68 Fed. Reg. 37434, 37435 (2003)), the Treasury Department relied upon Revenue Ruling 88-77 and Salina Partnership v. Commissioner , T.C. Memo 2000-352 (T.C. 2000), and concluded that “[c]ase law and revenue rulings, however have established that, as under section 357(c)(3) , the terms liabilities for this purpose does not include liabilities the payment of which would give rise to a deduction, unless the incurrence of the liability resulted in the creation of, or increase in, the basis of property.” 68 Fed. Reg. 37334, 37435 (2003). Thus, the Treasury Department found that “[t]he question of what constitutes a liability for purposes of section 752 was addressed in Revenue Ruling 88-77 ,” and that the definition of liability in Revenue Ruling 88-77 was consistent with the Internal Revenue's position in Revenue Ruling 95-26 . Id. at 37436. Therefore, the Treasury Department simply applied the pre-existing rule contained in Revenue Ruling 88-77 to address the possibility of abuse caused by contingent liabilities not being recognized under I.R.C. § 752 . 15

Moreover, Notice 2000-44 placed Plaintiffs on notice that the transactions it described would be scrutinized and penalized. Because Notice 2000-44 was issued in August 2000, and notified taxpayers that the contribution of paired long and short options to partnerships in order to artificially increase outside basis were abusive, and would not be allowed, the Secretary's exclusion of these transactions from the exceptions in Treas. Reg. § 1.752-6(b) should not have been a surprise to sophisticated taxpayers such as Thomas and Fox, and their advisor, Arthur Andersen tax partner Griffiths. Moreover, while Plaintiffs argue that Notice 2000-44 did not give them notice because the transactions at issue are not identical to those described in Notice 2000-44 , Plaintiffs conveniently ignore the “substantially similar” language contained in the Notice. Accordingly, the Court finds that even if the short options at issue in this case are not liabilities under I.R.C. § 752 , the obligations created by the short options still must be taken into account under Treasury Regulation § 1.752-6 .

F. The Accuracy-Related Penalties on the Ground of Negligence or Disregarding the Rules or Regulations is Appropriate Under I.R.C. § 6662.

Section 6662 of the Internal Revenue Code governs accuracy-related penalties. The purpose of penalties is “to deter taxpayers from playing the ‘audit lottery,’ that is, taking undisclosed questionable reporting positions and gambling that they [will] not be audited. Caulfield v. Commissioner , 33 F.3d 991, 994 (8th Cir. 1994). As Plaintiffs have argued, Thomas and Fox have not yet used any of the tax benefits associated with the transactions at issue in this case. Because this case is a partnership-level proceeding, the Court must determine “the applicability of any penalty … which relates to an adjustment to a partnership item.” I.R.C. § 6221 . However, the actual computation of the penalty in not done at the partnership level.

One of the accuracy-related penalties provided for in Section 6662 of the Internal Revenue Code is for negligence or disregard of rules or regulations. I.R.C. § 6662(a) and (b)(1). The Code defines negligence as “any failure to make a reasonable attempt to comply with the provisions” of the Code. I.R.C. § 6662(c) . This is an objective standard requiring that the taxpayer exercise “due care.” Hansen v. Commissioner , 471 F.3d 1021, 1028 (9th Cir. 2006) ( citing Collins v. Commissioner , 857 F.2d 1383, 1386 (9th Cir. 1988)). Due care exists where the taxpayer “acted as a reasonable and prudent person would act under similar circumstances.” Id. Under the Treasury Regulations, negligence is “strongly indicated” where “a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit, or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances.” Treas. Reg. § 1.6662-3(b)(1)(ii) (2002); see also Hansen , 471 F.3d at 1029. In the Ninth Circuit, negligence is determined by an analysis of “both the underlying investment and the taxpayer's position taken on the tax return.” Hansen , 471 F.3d at 1029; see also Neonatology Associates, P.A. v. Commissioner , 299 F.3d 221, 234 (3d Cir. 2002) (finding that a taxpayer “proceeds at his own peril” when “presented with what would appear to be a fabulous opportunity to avoid tax obligations.”); Pasternak v. Commissioner , 990 F.2d 893, 902 (6th Cir. 1993) (upholding negligence penalty where the “Tax Court found that petitioners were aware that they were buying a program primarily of ‘window dressings’ for tax benefits and either negligently or intentionally disregarded the law.”).

In this case, the Court finds that the facts support the imposition of an accuracy-based penalty on the grounds of negligence or disregard of the rules and regulations. Specifically, the transactions were entered into over one year after the IRS issued IRS Notice 2000-44 entitled “Tax avoidance using artificially high basis,” which alerted taxpayers and their representatives that purported losses arising from certain transactions designed to create artificially high bases in partnership interests would be disallowed. In addition, the partnerships failed to demonstrate any attempt to determine whether the transactions would potentially be covered by Revenue Ruling 88-77 . Moreover, the partnerships failed to demonstrate that they attempted to determine whether the transactions had any economic substance. Furthermore, the partnerships failed to demonstrate that they sought and received disinterested and objective tax advice because the tax advice that they did receive came from Arthur Anderson, which also arranged the transactions. Based on these facts, the Court concludes that any objective view of the transactions results in the conclusion that they had no non-tax economic benefit.

In addition, the partnership returns reported the valuation of the transaction at sixty-seven times their proper value under either I.R.C. § 752 or the substance over form or step-transaction analysis. In that regard, the Thomas partnerships reported an increase in its capital account of $101,500,000, which is sixty-seven times the actual economic outlay of $1.5 million that Thomas paid for the transaction. Any reasonable and prudent taxpayer would consider the transaction “too good to be true.” Treas. Reg. 1.6662-3(b)(1)(ii) (2002). Therefore, the Court finds that the partnerships were negligent and disregarded the rules and regulations for purposes of I.R.C. § 6662 . Id.

The reasonable cause and good faith defense is a fact and circumstance test that focuses on the taxpayer's affirmative actions to determine its correct tax liability: “[g]enerally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability.” Treas. Reg. § 1.6662-4(b) . The taxpayer's “experience, knowledge, and education” may be taken into account. Id. Reliance on a tax advisor “does not necessarily demonstrate reasonable cause and good faith.” Id.

In this case, the partnerships did not have reasonable cause to disregard the liabilities created by the short options in valuing the Arthur Andersen call option spreads contributed to the partnerships. The transactions were entered into over one year after the IRS issued IRS Notice 2000-44 entitled “Tax avoidance using artificially high basis.” This notice alerted taxpayers and their representatives that purported losses arising from certain transactions designed to create artificially high basis in partnership interests would be disallowed. In addition, the partnerships have failed to provide evidence that they diligently attempted to properly assess their proper tax reporting. The partnerships also have failed to demonstrate any attempt to determine whether the transactions would potentially be covered by Revenue Ruling 88-77 . Furthermore, the partnerships have failed to demonstrate that they attempted to determine whether the transactions had any economic substance. Finally, the partnerships have failed to demonstrate that they sought and received disinterested and objective tax advice because the tax advice that they did receive came from Arthur Andersen, which also arranged the transactions resulting in the increased basis that is at issue in this case. Therefore, the partnerships have failed to demonstrate that they acted in good faith as required by the reasonable cause exception of I.R.C. § 6664(c)(1) .

Conclusions of Law

1. The Court has original jurisdiction over the federal claims asserted in this action pursuant to Section 6226 of the Internal Revenue Code. The Court's jurisdiction extends to all items of the partnership for the period at issue. I.R.C. § 6226(f) . Contributions to partnerships and distributions from partnerships are partnership items. Treas. Reg. § 301.6231(a)(3)-1(a)(4)(I) and (ii). The characterization of offsetting options when contributed to partnerships is a partnership item. See, Jade Trading, LLC v. United States , 80 Fed. Cl. 11, 41-43 (Fed. Cl. 2007); Nussdorf v. Comm'r , 129 T.C. 30, 43-44 and n. 16 (2007). 16

2. Venue is proper in the United States District Court for the Central District of California under 28 U.S.C. § 1391(b) because the alleged acts complained of occurred and are occurring in this district.

3. In applying the economic substance analysis to the transactions at issue in this case, the Court concludes that the transactions at issue are economic shams for tax purposes.

4. Application of the step-transaction doctrine, through either the end result test or interdependence test, yields a cost basis of $1.5 million for Thomas and $675,000 for Fox.

5. Application of the substance over form doctrine yields a cost basis of $1.5 million for Thomas and $675,000 for Fox.

6. The obligations created by the short options in the transactions at issue are liabilities for purposes of I.R.C. § 752 .

7. The obligations created by the short options in the transactions at issue are liabilities for purposes of Treasury Regulation § 1.752-6 .

8. I.R.C. § 6221 requires that “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.” I.R.C. § 6226(e) authorizes this Court to conduct partnership-level proceedings and determine “the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item,” I.R.C. § 6226(f) . In this case, the Court concludes that the partnerships were negligent for purposes of IRC § 6662 , and, therefore, accuracy-related penalties are applicable in this case.


Footnotes

1
The Court deferred ruling on the admissibility of deposition testimony of Messrs. Mandel, Varellas and Nelson offered by the government as well as certain trial exhibits objected to by the parties in the Final Pre-Trial Exhibit Stipulation filed August 5, 2008, pending further post-trial submissions by the parties. On October 6, 2008, the parties filed Notices of Designated Deposition Testimony of Kenneth Mandel, Lawrence Varellas, and Kurt Nelson, Plaintiffs' Objections and Defendant's Response to Objections.

The Court has reviewed the objections to the proffered deposition testimony and the objections to certain trial exhibits in the Final Pre-Trial Stipulation filed August 5, 2008, and rules as follows: The Court overrules the objections to Exhibits 45, 52, 53, 54, 74, 81, 82, 85, 86, 88, 89, 90, 94, 95, 97, 100, 101, 102, 103, 105, 130, 131, 140, 141, 142, 143, 144, 145, 146, 151, 260 (a) - (v) and those exhibits will be received into evidence as of the last day of trial, which was August 14, 2008. As to the objections to the deposition testimony of Mr. Mandel, all of the Plaintiffs' objections are overruled except for the following objections which are sustained: (1) p. 35, lines 2 - 4. As to the objections to the deposition testimony of Mr. Varellas, all of Plaintiffs' objections are overruled except the following which are sustained: (1) p. 47, lines 1- 10 and 15 - 25; (2) p. 48, lines 1 - 25; (3) p. 54, lines 1 - 25; (4) p. 55, lines 1 - 8; and (5) p. 87, lines 15 - 25. As to the objections to the deposition testimony of Mr. Nelson, all of Plaintiffs' objections are overruled. Plaintiffs' objections to Defendant's attempt to introduce documents through deposition excerpts which were not marked by Defendant as trial exhibits are sustained. Those documents are inadmissible and will not be received into evidence and have not been considered by the Court.

2
The Court has elected to issue its findings in narrative form. Any finding of fact that constitutes a conclusion of law is also hereby adopted as a conclusion of law, and any conclusion of law that constitutes a finding of fact is also hereby adopted as a finding of fact.

3
An Asian-style option is an option whose payoff depends on the average value of the underlying security or commodity over a specified period of time. In this case, the Asian-style feature meant that the payout was dependent on the average value of the REIT basket from December 20, 2001, to March 19, 2002, as compared to the value of the REIT basket on December 19, 2001. A European option is one that can only be exercised on a particular date. In this case, the date was March 19, 2002.

4
The Manhattan Properties, L.P., transaction is not a part of this litigation.

5
Ken Mandel was a tax partner at Arthur Andersen who worked on "leading edge tax solutions for both high-net-worth clients and large public corporations." Defendant contends that Mandel developed the call-option spread, which is an allegation that Plaintiffs deny. In any case, it is clear from the evidence in this case that Mandel is familiar with the Arthur Andersen technique referred to as the call-option spread. In fact, Mandel described the call-option spread as suitable "for a handful of very large dollar, trust-client transactions, where we excluded the participation from outside attorneys and other non Firm professionals."

6
Defendant argues that Plaintiffs are not entitled to the increased basis created by the transactions at issue under the economic substance doctrine, the substance-overform doctrine, or the step-transaction doctrine. As the Stobie Creek court noted, "[t]hese doctrines vary in origin and somewhat in application, yet apply to the same analysis." (citing King Enters., Inc. v. United States , 418 F.2d 511, 516 n. 6 (1969) ( "[C]ourts have enunciated a variety of doctrines, such as step transaction, business purpose, and substance over form. Although the various doctrines overlap and it is not always clear in a particular case which one is most appropriate, their common premise is that the substantive realities of a transaction determine its tax consequences." ); and H.J. Heinz Co. & Subsidiaries v. United States , 76 Fed.Cl. 570, 583-85 (2007) (discussing multiple formulations employed by courts to consider whether transaction has economic substance or whether it is a "sham" )).

7
Professor Grenadier used a thirty-five percent implied volatility, which is validated by the implied volatility of the Bank of America and JP Morgan quotes Plaintiffs received for similar transactions.

8
In post-trial filings in January 2009, Plaintiffs ask the Court to take judicial notice of the fact that had options with identical terms been purchased on October 1, 2008, there would have been a payoff. In fact, Plaintiffs allege that the actual drop in the REIT basket for the ninety-day period from October 1, 2008 to December 29, 2008, using Asian-style options was 43.47 percent. Defendant does not dispute that this information is accurate, but asserts that it is irrelevant because Defendant did not argue that a payoff from the transactions as issue was "impossible" , but merely "extremely low" and, thus, any economic substance from the transactions at issue was de minimis . The Court agrees with Defendant that the fact that Plaintiffs are able to demonstrate one instance of an Asian-style European option drop in the nearly fifty-year history of REITs occurring seven years after the transactions in question does not change the Court's conclusion that a payoff from the transactions at issue was, at best, highly unlikely. In addition, the Court's conclusion that the transaction at issue lack economic substance is based on, as explained above, a variety of other factors.

9
The recent Court of Federal Claims case of Marriott International Resorts , relied on Revenue Ruling 88-77 to determine that the obligation created by a short sale was a liability for purposes of I.R.C. § 752 . Marriott International Resorts, L.P. v. United States , 83 Fed. Cl. 291 (2008) (finding that, in light of the promulgation of Revenue Ruling 88-77 , symmetrical treatment that "would call for recognition of the corresponding obligation to replace the borrowed securities" was required under Section 752 ).

10
That the option holder in Helmer was able to exercise his option or not is a key distinction between Helmer , and its progeny, and this case where the funds received from the sale of the short option are used to purchase the long option and the AIG note, and the proceeds of which are pledged to secure the liability created by the short option. Helmer and its progeny also are distinguishable from this case because they did not involve the assumption of a payment obligation by a partnership from a partner.

11
However, as the Fifth Circuit found, "[t]he Internal Revenue Code deals with dollars, and the basis adjustment provisions of section 752 presume that the value of the liability is ascertainable." Korman, 527 F.3d at 452.

12
Section 1.752-7 applies to assumptions of liability occurring after June 24, 2003, and taxpayers could elect to apply it to assumptions of liability occurring between October 18, 1999, and June 24, 2003. Treas. Reg. § 1.752-7(k) .

13
Section 358(h)(3) , which defines "liability" in the context of determining basis on corporate transactions as including "any fixed or contingent obligation to make payment."

14
Retroactivity is also permitted to prevent abuse pursuant to I.R.C. § 7805(b)(3) .

15
Treasury Regulation § 1.752-6 also incorporates the definition of liability contained in I.R.C. § 358(h)(3) , which defines "liability" to include contingent liabilities.

16
The parties do not dispute the facts requisite to federal jurisdiction.