                        T.C. Memo. 2008-112



                      UNITED STATES TAX COURT



   7050, LTD., JEROME SCHECHTER, TAX MATTERS PARTNER, ET AL.,1
                         Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20687-05, 20698-05, Filed April 23, 2008.
                 20700-05.


     William A. Roberts and Kyle Coleman, for petitioners.

     Nancy B. Herbert, for respondent.


                        MEMORANDUM OPINION


     HOLMES, Judge:   This partial summary-judgment motion raises

two very simple questions.   The first is whether two foreign


     1
       The other cases that we consolidated with this one are The
Bottoms-Up Limited Partnership, Jerome Schechter, Tax Matters
Partner, docket number 20698-05 and First Sunny Day Family
Limited Partnership, Jerome Schechter, Tax Matters Partner,
docket number 20700-05.
                                - 2 -

currency options expired before they were contributed to a

partnership named 7050, Ltd.    The second is whether 7050

“terminated”--a term of art in the context of this case--by the

end of 2001.

     Though these questions are simple, they emerge from a deal

of unusual complexity.   And the Commissioner argues that both of

the issues arise because the people putting the deal together

didn’t get the paperwork right:    They ended up contributing

worthless, already expired options to the partnership; and then

didn’t properly close down the partnership itself.

     We have to decide if there’s any genuine issue of fact about

what really happened.

                              Background

     These consolidated cases are three in a cluster of similar

cases, all arising from investments in alleged Son-of-BOSS tax

shelters and all assigned to this Division of the Court.2    Each

of the three cases involves a partnership, and Jerome Schechter

is the tax matters partner of all three partnerships involved--

7050, The Bottoms-Up Limited Partnership, and First Sunny Day

Family Limited Partnership.    7050’s owners were Schechter--

holding 99 percent as a limited partner--and a limited liability

company named 84 LLC (Schechter was its registered agent) holding



     2
       For a general description of Son-of-BOSS transactions, see
Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007).
                                 - 3 -

1 percent and serving as general partner.    557 LLC is another

limited liability company involved in the deal; it was formed in

May 2001, at the same time as 84 and 7050.

     7050 was at the center of a complicated series of tax-

reduction transactions.    According to the Commissioner, even if

Son-of-BOSS deals were generally upheld, this particular deal had

a couple of unique problems.    The first is that options crucial

to making the deal work were transferred to 7050 only after they

had expired in September 2001.    This would have a significant

impact on the basis calculation for other property that 7050

distributed later that year.    Then, when 7050 distributed its

property to Schechter at the end of 2001, the Commissioner argues

that it didn’t quite distribute all of it, leaving behind a few

thousand Canadian dollars in a bank account until 2003.    This,

the Commissioner claims, means that Schechter didn’t receive a

“distribution in liquidation of his partnership interest” in

2001.    The Commissioner has moved for summary judgment on these

facts.    If he’s right, these cases are over and a substantial

penalty might be tacked onto any 2001 taxes that 7050’s partners

owed.

     On a summary-judgment motion, we view all the facts in the

light most favorable to the nonmoving party.    Many of the key

facts are not disputed, though, and on this motion we assume
                              - 4 -

without deciding that all the transactions involved were not

shams and did not lack economic substance.   The key facts are:3

     •    In July 2001, 557 bought a long foreign-currency
          option from Deutsche Bank and sold it an
          offsetting short option.

     •    On August 21, 2001, 557 bought Can$6,892.16 for
          US$4,500.

     •    On September 4, 2001, both foreign currency
          options expired out-of-the-money.

     •    In mid-September, Schechter sent a fax to a
          Deutsche Bank employee named Jennie Dunaway. He
          dated the cover letter to his fax September 14,
          2001, but the fax has a footer suggesting it was
          sent September 15, 2001. Page 2 of the fax
          contains a statement signed by Schechter and dated
          August 1, 2001, purporting to transfer “both of
          its digital options” from 557 to 7050 “effective
          today.”4

     •    On September 17, 2001, Schechter sent a second fax
          to Deutsche Bank with a revised statement
          purporting to transfer “all of its positions” from
          557 to 7050 “effective today.” This statement is
          also dated August 1, 2001.

     •    Also on September 17, 2001, Jennie Dunaway stated
          in an e-mail, “LOA’s sent via fax. Moving
          positions only, no CASH.”5



     3
       The facts listed in this section are uncontested on this
motion, though we note they have not been found to be true after
a trial.
     4
       The Commissioner notes, and Schechter doesn’t dispute for
purposes of this motion, that 557 was not a partner in 7050, that
it was wholly owned by Schechter, and that it was a disregarded
entity for Federal tax purposes.
     5
       The Commissioner believes “LOA” stands for “letter of
authorization,” and Schechter doesn’t dispute this for purposes
of this motion.
                              - 5 -

     •    The Deutsche Bank account statements for both 557
          and 7050 show that the transfer of these options
          didn’t actually take place until September 17,
          2001 (the transaction “settlement date”), by which
          time they had already expired worthless. Both
          statements, however, include the notation “A/O
          8/01/01 AS CAPITAL CONTRIB.”

     •    On December 24, 2001, Deutsche Bank posted a
          deposit into the 7050 account: “TRANSFER FROM 557
          LLC” of Can$6,892.16.

     •    Schechter sent two faxes dated December 26, 2001,
          purporting to transfer one-half of 7050’s Canadian
          currency to the First Sunny Day Family Limited
          Partnership and the other half to The Bottoms-Up
          Limited Partnership.6 The faxes are both date-
          stamped January 2, 2002.

     •    7050’s 2001 year-end Deutsche Bank statement shows
          a balance of Can$6,892.16.

     •    On December 31, 2001, Deutsche Bank statements
          show that First Sunny Day and The Bottoms-Up
          partnerships engaged in currency transactions
          involving Canadian currency, both of which were
          less than one-half of the combined amount
          purportedly transferred from 7050 on December 26,
          2001.

     •    Also on December 31, 2001, 7050 filed a
          Cancellation of Domestic Certificate of Limited
          Partnership with the Colorado secretary of state’s
          office.

     •    7050’s 2001 tax return reflects a property
          distribution of $1,504,500, which includes the
          claimed basis in the long foreign currency option
          plus the basis in the Canadian currency
          contribution.


     6
       These assignment documents are internally inconsistent--
they list 7050 as the assignor but state that the First Sunny Day
and The Bottoms-Up partnerships are transferring Canadian
currency to 7050. There may be some dispute about the meaning of
these documents because of this mistake, but we construe them in
favor of 7050 on a summary-judgment motion.
                               - 6 -


     •    Quarterly statements for 7050’s account show
          continued ownership of some Canadian currency
          until early 2003.

     Surrounding these bare facts was a plan designed to make the

most of the option contracts that ended up expiring worthless.

The long option had a high purchase price (and thus a high basis)

when 557 bought it.   And under section 723,7 that basis would

travel with the option to 7050 when it was contributed.   But

section 1234(a)(2) says that if an option expires out of the

money, it’s deemed to have been sold on the date it expired.     So

if 557 didn’t transfer the option to 7050 before it expired on

September 4, 2001, there was no option to contribute later on.

Worthless options being worthless, it would be deemed to have

zero value and 7050 would have a zero basis in it.   It’s absurd

for partners to go through the motions to transfer worthless

property under such circumstances--so Schechter wants to show

there’s a genuine dispute as to whether 557 contributed the

options before they expired.

     Then there’s the Canadian currency.   Once 7050 completed the

option transaction, it needed to distribute an asset to which the




     7
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court’s Rules of Practice and
Procedure.
                                  - 7 -

large basis in the long option could be attached.8     That asset

could then be sold at a giant loss by the person receiving it.9

And 7050 aimed at making the Canadian dollars that asset.        This

is where Schechter ran into trouble--orchestrating all of the

necessary transactions within just a few months proved difficult.

                               Discussion

     Summary judgment is appropriate when there is no genuine

issue of material fact and a decision may be rendered as a matter

of law.    Rule 121(b).   The moving party bears the burden of

proving that there is no genuine issue of material fact, and we

make any and all factual inferences in the light most favorable

to the nonmoving party.      Fla. Country Clubs, Inc. v.

Commissioner, 122 T.C. 73, 75-6 (2004), affd. 404 F.3d 1291 (11th

Cir. 2005).    But when the moving party adequately supports his

motion for summary judgment with admissible evidence, the

nonmoving party can’t just deny it, but must recite specific

facts showing that there really is a genuine factual issue for

trial.    Rule 121(d).    We address each of the Commissioner’s bases

for summary judgment in turn.10

     8
       For a primer on partnership basis rules and a description
of a similar transaction, see Kligfeld, 128 T.C. at 196-97.
     9
       Similarly, Kligfeld Holdings’ transaction was designed to
avoid tax by inflating basis to offset capital gains. Kligfeld,
128 T.C. at 194-95, 198.
     10
       The Commissioner also moves for summary judgment on a
penalty issue--the gross misvaluation of assigning $1.5 million
                                                   (continued...)
                                 - 8 -

I.   The Option Assignment

     The parties agree that the options expired on September 4,

2001.     The Commissioner contends that 557 didn’t assign its

interest in the options to 7050 until after that date.     The

evidence--consisting of the bank statements, Schechter’s two

faxes, and Dunaway’s e-mail–-indicates that Deutsche Bank didn’t

actually transfer the long option into 7050’s account until

September 17, 2001.

     To contest the option’s worthlessness when contributed, 7050

relies first on an affidavit from Joe Garza, the lawyer who put

the deal together.     Garza states (and we must believe him in

deciding this motion) that he consulted with a Deutsche Bank

employee (a Mr. Brubaker) regarding the assignment of the options

from 557 to 7050, and that they agreed to assign the options “on

or about August 1, 2001.”     We also assume that Garza is truthful

in stating that he “confirmed with Mr. Brubaker that everything

necessary for the assignment of the option positions from 557,

LLC to 7050, Ltd. had taken place.”      The record also contains the

written assignments from 557 to 7050 (signed by Schechter on

behalf of both entities) dated August 1, 2001, and by their terms

“effective today.”




     10
      (...continued)
or so in basis to a few thousand dollars’ worth of Canadian
currency.
                                - 9 -

     The Commissioner points out that Schechter’s option

assignments contain fax stamps and cover letters dated in mid-

September.   He notes that the option contract says that any

assignment required prior written approval from Deutsche Bank to

be valid.    Quoting from Section 11.1 of the Master Agreement,

Garza’s own legal opinion states:    “Transactions may be assigned

to a new counterparty solely upon credit and legal approval of

the new counterparty by [Deutsche Bank], such approval to occur

in writing prior to any such assignment.”11   And, consistent with

this contract, the options were still in 557’s brokerage account

when they expired, and Deutsche Bank statements show no transfer

actually happened until mid-September 2001--albeit with a

notation that the transfer was supposed to be effective as of

August 1, 2001.   But on a summary-judgment motion we have to draw

inferences in favor of the nonmoving party--and so we must infer

from Garza’s affidavit that the parties had orally agreed to

modify the requirement that the assignment be in writing and

approved by Deutsche Bank before it became effective.   Since this

assumed factual scenario is different from the one that the

Commissioner proposes, we must deny him summary judgment

on this point.    Whether or not 7050 sustains its burden of proof




     11
       This Master Agreement is not part of the record on this
motion, but neither party disputes the accuracy of the quote.
                                - 10 -



at trial, in defending against a summary-judgment motion that’s

enough.

II.   Liquidation of Schechter’s Interest in 7050

      The Commissioner next contends that the delay in

distributing the last of 7050’s assets means that any

distribution of its assets in 2001 was not a distribution “in

liquidation of a partner’s interest”--a technical term under

section 761 of considerable importance in tracing basis in this

case.

      Under section 732(a), the basis of an asset that a

partnership distributes to a partner is that asset’s adjusted

basis to the partnership immediately before distribution.    The

Commissioner says that the distribution to Schechter at the end

of 2001 was just such a plain-vanilla section 732(a)

distribution.   If he’s right, Schechter would have only the

piddling basis attributable to the portion of Canadian dollars

actually distributed in 2001.    7050 had bought the Canadian

currency for $4,500 and had distributed only about one-third by

the end of 2001.   So its basis in Schechter’s hands would be only

about $1,500.

      But section 732(b) creates an exception to this rule--if the

partnership distributes an asset to liquidate the partner’s

interest in the partnership, the asset’s basis is the partner’s
                              - 11 -

basis in the partnership, reduced by any cash that the

partnership distributes to him in the transaction.    Because

Schechter claims that he contributed the long option to 7050

before it expired (and for purposes of this motion we must assume

that’s the way it happened), his basis in 7050 might include the

$1,500,000 pre-expiration value of the long option.     If the

distribution did liquidate his partnership interest, his entire

$1,504,500 basis in the partnership in 2001 (less any money he

received) might flow out to him.   So, the difference for

Schechter between a section 732(a) distribution and a section

732(b) distribution might be about $1,500,000 of basis.

     To win this battle, Schechter needs to point out some

genuine dispute of fact on the key question of whether the

distribution of the Canadian currency was “in liquidation of” his

interest in 7050.   Section 761(d) states that the “term

‘liquidation of a partner’s interest’ means the termination of a

partner’s entire interest in a partnership by means of a

distribution, or a series of distributions, to the partner by the

partnership.” (Emphasis added.)

     Schechter relies entirely on the termination of 7050 itself

as the event that terminated his “entire interest.”12    If he can


     12
       There are also ways other than termination of a
partnership that might allow a partner to completely sever ties
so as to get a “distribution in liquidation of his partnership
interest”--sale, exchange, withdrawal, or abandonment being the
                                                   (continued...)
                                - 12 -

show (or, more precisely, raise a genuine issue about whether)

7050 terminated at the end of 2001, then he could argue that any

distribution then occurring resulted in a liquidation of his

interest and qualified for section 732(b) basis treatment.

     This takes us to section 708.       Section 708(b)(1)(A) tells us

that a partnership terminates only if “no part of any business,

financial operation, or venture of the partnership continues to

be carried on by any of its partners in a partnership.”      The

regulations state that the date on which a partnership terminates

is the “date on which the winding up of the partnership affairs

is completed.”     Sec. 1.708-1(b)(3)(i), Income Tax Regs.

     Schechter argues that 7050 met this definition by the end of

2001.     He notes that Garza filed a certificate of cancellation

with the Colorado secretary of state’s office by the end of the

year (7050 was organized under Colorado law), and that 7050

labeled its 2001 tax return a “final return.”      He argues that

these facts show that he intended to terminate 7050 in 2001.        The

Commissioner does not dispute Schechter’s intention, but instead

argues that, whatever Schechter intended, 7050 actually limped on

into 2003.     He asserts that as a matter of law there could be no

liquidating distribution until the last of 7050’s Canadian


     12
      (...continued)
most prominent. O’Brien v. Commissioner, 77 T.C. 113, 116 (1981)
(abandonment); Tapper v. Commissioner, T.C. Memo. 1986-597
(sale); see sec. 1.732-1(b), Example, Income Tax Regs.,
(retirement).
                              - 13 -

dollars were distributed from the Deutsche Bank account--which he

contends didn’t happen until 2003.     Schechter counterargues that

after December 31, 2001, “no further activity occurred.”    We

assume that--apart from the undisputed fact that 7050 continued

holding the Canadian currency in its bank account--this is true.

     The question for us to answer is whether an inactive

currency account was a continuation of 7050’s business activity--

or a part of its winding up--under the Code.    We look to federal,

not state, law:

          While the dissolution of a partnership is
          governed by State law, the termination of a
          partnership for Federal tax purposes is
          controlled by Federal law. A termination of
          a partnership for Federal tax purposes may be
          different from its termination, dissolution,
          or winding-up under State law, and a partner-
          ship may continue to exist for Federal tax
          purposes even though State law provides that
          the partnership has terminated, dissolved, or
          wound-up. * * *

Harbor Cove Marina Partners Partnership v. Commissioner, 123 T.C.

64, 80 (2004).

     We have previously interpreted section 708(b)(1)(A) to

require complete cessation of all partnership activity, including

the distribution to the partners of all the partnership’s assets.

Id. at 81.   In Harbor Cove, we emphasized that “simply because a

managing partner acts unilaterally to dissolve a partnership, to

zero out the partnership assets and liabilities, and to report to

the Commissioner that the partnership has terminated does not
                               - 14 -

mean that the partnership has terminated for Federal tax

purposes.”   Id. at 85.   In Foxman v. Commissioner, 41 T.C. 535,

556-557 (1964), affd. 352 F.2d 466 (3d Cir. 1965), we held that a

partnership continued to exist where all that remained after an

asset sale was two promissory notes collecting interest.    See

also Ginsberg v. United States, 184 Ct. Cl. 444, 396 F.2d 983,

988 (1968) (abandonment of partnership’s primary purpose not

termination); Hoagland v. Commissioner, T.C. Memo. 1971-310 (no

termination where partnership held onto underdeveloped land);

Sargent v. Commissioner, T.C. Memo. 1970-214 (no termination

where partnership’s checking account continued to be used).

     Holding Canadian currency in a bank account is quite similar

to the kinds of minimal activity that we’ve already found were

enough to keep a partnership unterminated.   And so--because there

is no genuine issue of fact that 7050 continued to hold that

account in its name until 2003--we hold that Schechter’s

partnership interest was not liquidated through 7050’s

termination in 2001.   Instead, Schechter received a distribution

of Canadian currency in 2003 when he closed 7050’s account for

good.   His interest in the partnership was therefore not

liquidated for purposes of section 761(d) until the later date,

and he is unable to take advantage of the section 732(b) basis

rule.   We will grant the Commissioner’s motion for summary

judgment on this issue.
                             - 15 -

     That leaves for decision only that part of the

Commissioner’s motion dealing with penalty issues.    He urges us

to grant summary judgment on two factual disputes--that the

amount claimed as partner contributions to 7050, and the amount

claimed by 7050 as partnership distributions in 2001, were both

overstated by more than 400 percent.   (Section 6662(e) and (h)

makes that exaggerated valuation the trigger for a 40-percent

penalty on any resulting underpayment of tax.)

     The difficulty is that the section 6662 penalty is generally

subject to a reasonable-cause-and-good-faith defense.    But there

is a regulation cited by neither party, section 301.6221-1(c) and

(d), Proced. & Admin. Regs., which appears to make the issue of

reasonable cause an exclusively partner-level defense.   The

validity of this regulation is being challenged in at least two

other cases currently pending before the Court,13 so we will deny

this part of his motion without prejudice to its renewal.   If the

Commissioner chooses to renew his summary-judgment motion on the




     13
       New Millennium Trading, LLC v. Commissioner, docket
number 3439-06, motion for partial summary judgment, filed Feb.
6, 2008, and Tigers Eye Trading, LLC v. Commissioner, docket
number 014510-05, motion by Logan Trust for partial summary
judgment to determine the invalidity of Temp. Reg. Sec. 301.6221-
1T(c) and (d), filed Feb. 25, 2008. (The temporary regulation
challenged in those motions is not different from the permanent
regulation that applies in this case.)
                             - 16 -

penalty issue, he should address the effect and validity of the

regulation; as, of course, should 7050 in its answer.

     Since this is a split decision,


                                   An order granting in part and

                              denying in part respondent’s motion

                              for partial summary judgment will

                              be issued.
