                         T.C. Memo. 2009-104



                       UNITED STATES TAX COURT



                 MICHAEL E. NAPOLIELLO, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13983-06.               Filed May 18, 2009.



     Edward M. Robbins, Jr., for petitioner.

     Halvor N. Adams III, Mark O’Leary, and Harry J. Negro, for

respondent.



                          MEMORANDUM OPINION


     KROUPA, Judge:    This partner-level matter is before the

Court on the parties’ cross-motions for summary judgment under

Rule 121.1    Respondent issued petitioner an affected items

deficiency notice (deficiency notice) after no partner contested


     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the year at issue, unless otherwise
indicated.
                                 -2-

the partnership-level determinations in a notice of final

partnership administrative adjustment (FPAA) issued to AD FX

Trading 2000 Fund, LLC (partnership).2    There are two issues for

decision.   The first issue is whether respondent issued

petitioner a valid deficiency notice under section

6230(a)(2)(A)(i).    We hold that the deficiency notice is valid

and we have jurisdiction because the deficiency is attributable

to an affected item requiring partner-level factual

determinations.   The second issue is whether the deficiency

notice is invalid because the FPAA violated due process by

failing to provide petitioner adequate notice of the $12,072,927

deficiency in his Federal income taxes ($12 million deficiency).

We hold that the deficiency notice is valid because the

determinations in the FPAA adequately put petitioner on notice

that respondent had finally determined adjustments to the

partnership return.

     We shall grant respondent’s motion for summary judgment and

deny petitioner’s cross-motion for summary judgment for the

reasons discussed.

                             Background

I.   Preliminaries

     The facts we recite are included in the parties’ stipulation

of facts and accompanying exhibits, matters admitted in the

     2
      The parties agree that it was conclusively determined at
the partnership level that AD FX Trading 2000 Fund, LLC, is a
sham that is disregarded for Federal tax purposes. We use the
terms “partnership,” “partner,” and related terms for
convenience.
                                  -3-

pleadings or motions, or uncontested facts presented in the

parties’ oral arguments.    We treat the facts as true solely for

purposes of deciding the parties’ motions, not as findings of

fact for this case.    See Fed. R. Civ. P. 52(a); P & X Mkts., Inc.

v. Commissioner, 106 T.C. 441, 442 n.2 (1996), affd. without

published opinion 139 F.3d 907 (9th Cir. 1998).

II.   Petitioner’s Transactions

      This case is one of many before the Court involving so-

called Son-of-BOSS tax shelters packaged by various law and

accounting firms.3    Petitioner participated in the tax shelter to

create a large artificial capital loss in 2000 to offset a $60

million capital gain resulting from the sale of petitioner’s 50-

percent interest in a Hollywood promotions agency with Jason

Moskowitz known as U.S. Marketing & Promotions, Inc.    Petitioner

resided in California at the time he filed the petition.

      Petitioner engaged in several transactions involving the

partnership to create a cumulative basis of approximately $60

million in securities (partnership securities) that were

purchased by the partnership for $387,951.    First, petitioner

contributed $1.5 million in exchange for his interest in a

single-member limited liability company, MN Trading, LLC (MN

Trading).   Then petitioner, through MN Trading, used the $1.5

million to purchase two pairs of offsetting long and short

foreign currency options, the first involving the euro and the

      3
      See generally Kligfeld Holdings v. Commissioner, 128 T.C.
192 (2007), and Notice 2000-44, 2000-2 C.B. 255, for a general
description of similar transactions.
                                -4-

Japanese yen and the second involving the U.S. dollar and the

euro.   The transactions involved purchased options with premiums

of $30 million each (long options) and sold options with premiums

of $29.25 million each (short options).     Petitioner then

contributed his interest in MN Trading in exchange for an 82.52-

percent interest in the partnership.     About a month later

petitioner withdrew from the partnership and received cash and

the partnership securities for his partnership interest.       He sold

the partnership securities shortly thereafter for $358,296 and

reported a $60,942,026 loss ($61 million capital loss) in

connection with the sale on his Form 1040, U.S. Individual Income

Tax Return, for 2000.

     Petitioner calculated this loss by allocating to the

partnership securities his claimed outside basis in the

partnership at the time of his withdrawal (less cash received).

Petitioner included the premiums of the long options in

determining his outside basis in the partnership, but he did not

decrease his basis in the partnership to reflect the

partnership’s assumption of the short options.

III. Partnership-Level Determinations

     Respondent issued petitioner, a notice partner in the

partnership, the FPAA for 2000 as a result of the partners’

participation in the tax shelter.     The FPAA adjusted several

partnership items for 2000 to zero, including amounts reported as

capital contributions, distributions of property other than

money, interest expense, distributions of money, and net loss.
                                 -5-

      In addition, respondent made several determinations in the

“Exhibit A--Explanation of Items” (Exhibit A).4   These

determinations include, among other things, that:   The

partnership was not a partnership in fact; the partnership was a

sham that lacked economic substance and its only purpose was tax

avoidance; all transactions the partnership entered into should

be treated as being entered into directly by the partners; and

any purported losses resulting from the tax shelter were not

allowable as deductions.   No partner timely filed a petition to

contest the determinations in the FPAA.

IV.   Respondent’s Partner-Level Determinations
      Respondent timely issued petitioner the deficiency notice

determining the $12 million deficiency in petitioner’s Federal

income tax for 2000.    This deficiency resulted from adjustments

to income of $59,333,518 in capital gain or loss5 and $519,326 in

itemized deductions.6   Respondent also determined that the

$61,300,322 cost basis petitioner claimed in the partnership

securities was reduced to $358,383,7 the price the partnership

      4
      “Exhibit A--Explanation of Items” is attached as an
appendix.
      5
      Respondent disallowed the $60,942,026 capital loss relating
to the partnership securities and allowed $479,829 of unrelated
net short-term capital losses.
      6
      The itemized deductions adjustment is a computational
statutory adjustment required under sec. 68 resulting from an
increase in petitioner’s adjusted gross income due to
respondent’s capital gains adjustments.
      7
      Respondent originally determined that the partnership’s
cost basis in the securities was $358,383. Respondent now
                                                   (continued...)
                                  -6-

paid for the partnership securities on the date of purchase.

Respondent did not determine penalties or additions to tax

because petitioner had disclosed his participation in the tax

shelter as part of an agreement with respondent under Internal

Revenue Service Announcement 2002-2, 2002-1 C.B. 304.

     Petitioner timely filed a petition for redetermination of

the deficiency with this Court.    The parties presented oral

arguments before this Court with regard to the cross-motions for

summary judgment.   Petitioner argued in his summary judgment

motion that respondent’s determinations in Exhibit A,

particularly that the partnership was a sham and lacked economic

substance, were not partnership items that were conclusively

determined at the partnership level.     Petitioner has conceded,

however, that the FPAA here is materially identical to the FPAA

in Petaluma FX Partners, LLC v. Commissioner, 131 T.C. __, __

(2008) (slip op. at 22), where we held a determination that a

partnership is a sham disregarded for tax purposes is a

partnership item.   Accordingly, petitioner has abandoned this

argument.

                            Discussion
     We have pending cross-motions for summary judgment and must

decide whether to grant either motion.

     Petitioner does not dispute that the tax shelter in which he

participated was a sham, and he raises only procedural arguments


     7
      (...continued)
concedes that the partnership’s actual cost basis was $387,951.
                                  -7-

in defense to collection.   Petitioner’s arguments present two

issues for decision.   The first issue is whether we have

jurisdiction over the deficiency determined in the deficiency

notice because it is attributable to affected items requiring

partner-level determinations.    We conclude that we do have

jurisdiction.    The second issue is whether the FPAA violated the

notice requirement of due process.      We conclude that it did not.

     We begin by discussing the standard for summary judgment.

We then turn to the Court’s jurisdiction to redetermine the $12

million deficiency and petitioner’s tax liability.     Finally, we

address petitioner’s due process argument.

I.   Summary Judgment Standard

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     See, e.g., FPL Group,

Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001).      Either

party may move for summary judgment upon all or any part of the

legal issues in controversy.     Rule 121(a).   We may grant a

summary judgment motion where there is no genuine issue of any

material fact and a decision may be rendered as a matter of law.

Rule 121(a) and (b); Sundstrand Corp. v. Commissioner, 98 T.C.
518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).

     This case is ripe for summary judgment because all of the

relevant facts are undisputed and a decision may be rendered as a

matter of law.
                                   -8-

II.   General TEFRA Procedures

      We now turn to our jurisdiction in affected items deficiency

notice cases.    This Court is a court of limited jurisdiction, and

we may exercise jurisdiction only to the extent provided by

statute.   See sec. 7442; GAF Corp. & Subs. v. Commissioner, 114

T.C. 519, 521 (2000).    Our jurisdiction to redetermine a

deficiency in tax depends on a valid deficiency notice and a

timely filed petition.      GAF Corp. & Subs. v. Commissioner, supra

at 521.    A taxpayer to whom a deficiency notice has been sent can

generally petition this Court for a redetermination of the

deficiency.    Sec. 6213.   Special rules apply, however, for

certain partnerships and their partners.

      Partnerships do not pay Federal income taxes, but they are

required to file annual information returns reporting the

partners’ distributive shares of income, deductions, and other

tax items.    Secs. 701, 6031.   The individual partners then report

their distributive shares of the tax items on their Federal

income tax returns.    Secs. 701-704.    Congress enacted the unified

audit and litigation procedures of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub L. 97-248, Sec. 401, 96

Stat. 648, to provide consistent treatment of partnership items

among partners in the same partnership and to ease the

substantial administrative burden that resulted from duplicative

audits and litigation.      See Petaluma FX Partners, LLC v.
Commissioner, supra at __ (slip op. at 10).
                                 -9-

     Under the TEFRA rules, partnership items are determined in

partnership-level proceedings, while nonpartnership items are

determined at the individual partner level.   Sec. 6221;

Affiliated Equip. Leasing II v. Commissioner, 97 T.C. 575, 576

(1991).   A partnership item is any item required to be taken into

account for the partnership’s taxable year to the extent

regulations specify it is an item more appropriately determined

at the partnership level than the partner level.   Sec.

6231(a)(3).

     Partnership-level determinations also impact certain items

of individual partners.   These are referred to as affected items,

and their resolution depends on partnership-level determinations.

Sec. 6231(a)(5); Maxwell v. Commissioner, 87 T.C. 783, 792

(1986).   Affected items cannot be tried as part of a partner’s

personal tax case until the partnership-level proceeding has

concluded.    Maxwell v. Commissioner, supra at 792.

III. The Parties’ Arguments

     The parties agree that the deficiency notice is valid and we

have jurisdiction in this partner-level case only if the

deficiency procedures of subchapter B of chapter 63 (deficiency

procedures) apply as provided under section 6230(a)(2)(A).

Respondent argues that we have jurisdiction under section

6230(a)(2)(A)(i) because the deficiency is attributable to an

affected item and requires partner-level factual determinations.

Petitioner makes two counterarguments that the requirements of

section 6230(a)(2)(A)(i) have not been met and therefore
                                 -10-

respondent was required to directly assess the tax rather than

issuing the deficiency notice.    First, petitioner argues that the

deficiencies are attributable to a partnership item, outside

basis, rather than an affected item.    Second, petitioner argues

that even if the deficiency is attributable to an affected item,

respondent should have directly assessed the tax because

respondent was not required to make partner-level factual

determinations.   We disagree with both of petitioner’s arguments

and address them each in turn.

IV.   Deficiency Attributable to an Affected Item

      This Court has repeatedly held that we lack jurisdiction, in

a partner-level proceeding involving nonpartnership items, to

redetermine a deficiency, or any portion thereof, attributable to

the tax treatment of a partnership item.    Bradley v.

Commissioner, 100 T.C. 367, 371 (1993) (this Court may not

redetermine a partner’s distributive share of partnership losses

in a partner-level proceeding).    We now decide whether the $12

million deficiency is attributable to a partnership item.

      Respondent determined in the deficiency notice that

petitioner’s cost bases in the partnership securities were the

actual amounts the partnership paid for the securities and

allocated no additional costs to the securities.    Respondent then

disallowed both the $61 million capital loss petitioner reported

from the sale of the securities and certain itemized deductions

to determine the $12 million deficiency.    Respondent adjusted

petitioner’s bases in the partnership securities as a result of
                                -11-

the determinations in the FPAA that the partnership is

disregarded as a sham and all of the partnership’s transactions

are treated as being engaged in directly by the partners.    These

determinations are partnership items.    See Petaluma FX Partners,

LLC v. Commissioner, 131 T.C. at __ (slip op. at 21-22).     We do

not have jurisdiction to revisit these determinations as they

were conclusively determined when no partner contested the

determinations in the FPAA.    See Genesis Oil & Gas, Ltd. v.

Commissioner, 93 T.C. 562, 565-566 (1989); see also Sente Inv.

Club Pship. v. Commissioner, 95 T.C. 243 (1990); Palmer v.

Commissioner, T.C. Memo. 1992-352, affd. without published

opinion 4 F.3d 1000 (11th Cir. 1993).

     Petitioner ignores the determinations in the deficiency

notice and argues that the deficiency is attributable to

petitioner’s outside basis in the partnership, which he argues is

a partnership item.    We recently held that we may determine a

partner’s outside basis at the partnership level in limited

circumstances where the partnership is disregarded as a sham in a

partnership-level proceeding.    Petaluma FX Partners, LLC v.
Commissioner, supra.    Petitioner asserts that, if his outside

basis in the partnership is zero, then his bases in the

partnership securities are zero,8 and we lack jurisdiction to

redetermine the deficiency because it is attributable to a

     8
      Generally, the basis of property (other than money)
distributed by a partnership to a partner in liquidation of the
partner’s interest shall be an amount equal to the adjusted basis
of such partner’s interest in the partnership reduced by any
money distributed in the same transaction. Sec. 732(b).
                                -12-

partnership item, outside basis.   See Bradley v.Commissioner,

supra at 371.

     Petitioner’s argument is misplaced.   Affected items are

defined to include any item to the extent that it is affected by

a partnership item.   Sec. 6231(a)(5).   We hold that petitioner’s

bases in the partnership securities are affected items because

they result from the conclusive partnership-level determinations

disregarding the partnership as a sham and treating all of the

partnership’s transactions as being engaged in directly by the

partners.

V.   Affected Items That Require Partner-Level Determinations

     Petitioner argues, in the alternative, that we still lack

jurisdiction even if the deficiency is attributable to an

affected item because no partner-level determinations were

necessary to determine the $12 million deficiency under section

6230(a)(2)(A)(i).   Respondent counters that the deficiency notice

was necessary because determination of the deficiency requires

partner-level determinations.   We agree with respondent.

     There are two types of affected items.   Petitioner asserts

that his bases in the partnership securities are of the first

type, which requires a strictly computational adjustment to

record the change in a partner’s tax liability resulting from the

proper treatment of partnership items.   Sec. 6231(a)(6); see

Brookes v. Commissioner, 108 T.C. 1, 5 (1997).    Computational

affected items include those items on a partner’s return that

vary if there is a change in the individual partner’s adjusted
                                 -13-

gross income, for example, the threshold dollar limit for the

medical expense deduction under section 213.     Sec.

301.6231(a)(6)-1T(a)(1), Temporary Proced. & Admin. Regs, 64 Fed.

Reg. 3840 (Jan. 26, 1999).    Once the partnership-level

proceedings are completed, the Commissioner is permitted to

assess a computational adjustment against a partner without

issuing a deficiency notice.     See sec. 6230(a)(1); Brookes v.

Commissioner, supra at 5.

      Petitioner’s $12 million deficiency is not attributable to

this purely computational type of affected item.    Instead, it

falls within the second type of affected item, one that is

dependent upon factual determinations that are made at the

individual partner level.    See Brookes v. Commissioner, supra at
5.   Respondent was required to make partner-level factual

determinations regarding petitioner’s losses from the sale of the

distributed partnership securities.     For example, respondent

needed to determine, among other things, the number and identity

of securities petitioner received from the partnership, the price
at which petitioner sold the respective securities, and any other

associated allowable costs of the sale.     See Domulewicz v.

Commissioner, 129 T.C. 11, 20 (2007); sec. 301.6231(a)(6)-

1T(a)(2), Temporary Proced. & Admin. Regs, 64 Fed. Reg. 3840

(Jan. 26, 1999).   Because the normal deficiency procedures apply

to affected items that require partner-level determinations, we

hold that the deficiency notice is valid and we have jurisdiction

to redetermine the deficiency.    See sec. 6230(a)(2)(A)(i).
                                -14-

VI.   The Deficiency

      We have determined that we have jurisdiction to redetermine

the $12 million deficiency, and we do so now.    Respondent

disallowed the reported $61 million capital loss in determining

the deficiency.    In addition, respondent argues that he properly

disallowed $1.6 million in alleged transaction costs related to

the partnership.   We focus now on disallowing any capital loss.

      The parties agree that it was conclusively determined at the

partnership level that the partnership is a sham without economic

substance and is disregarded for tax purposes.    Petitioner

concedes that there can be no outside basis in a disregarded

partnership.   Petaluma FX Partners, LLC v. Commissioner, 131 T.C.
at __ (slip op. at 26).   Accordingly, petitioner had no outside

basis in the partnership to attach to the assets he received from

the partnership in purported liquidation of his interest under

section 732(b), and petitioner’s bases in the partnership

securities cannot be inflated by his purported outside basis in

the partnership.
      Petitioner is considered, instead, to have purchased the

partnership securities directly as determined in the FPAA.     See

sec. 1.701-2(b)(1), Income Tax Regs.   Accordingly, petitioner’s

cumulative basis in the partnership securities is $387,951, the

partnership’s cost basis on the date the partnership purchased

the securities, under sections 1011 and 1012.    Petitioner sold

the partnership securities for $358,296.   Subtracting the

$358,296 sale price from the $387,951 cost creates a $29,655
                                 -15-

loss.     Respondent disallowed this loss because he determined that

petitioner had no profit motive under section 165(c)(2) for

entering into the stock transaction and that the stock

transaction lacked economic substance.    See Illes v.

Commissioner, 982 F.2d 163, 165-166 (6th Cir. 1992), affg. T.C.

Memo. 1991-449; Forseth v. Commissioner, 845 F.2d 746 (7th Cir.

1988), affg. 85 T.C. 127 (1985); Enrici v. Commissioner, 813 F.2d

293 (9th Cir. 1987), affg. Forseth v. Commissioner, 85 T.C. 127

(1985).    Petitioner does not contest respondent’s determinations.

Instead, petitioner raises only procedural arguments in which he

admits that he did not recognize a loss on the sale of the

partnership securities.9    We conclude that petitioner has

conceded this issue.    Accordingly, we uphold respondent’s

determination disallowing the loss.

     We now turn to the $1.6 million transaction costs that

petitioner alleges are deductible under section 162 or 212.

Ordinary and necessary expenses paid or incurred in carrying on

any trade or business are generally deductible.    Sec. 162.

Similarly, the ordinary and necessary expenses paid for the

production, management, or maintenance of property held for the

production of income may also be deductible.    Sec. 212.

Petitioner is required to have profit as a primary objective

instead of tax savings to take deductions under these sections,

however.    See Agro Science Co. v. Commissioner, 934 F.2d 573, 576


     9
      Petitioner argues he had no bases in the partnership
securities and therefore could not recognize a loss on their
sale.
                                -16-

(5th Cir. 1991), affg. T.C. Memo. 1989-687; Fischer v. United

States, 490 F.2d 218, 222 (7th Cir. 1973); Hirsch v.

Commissioner, 315 F.2d 731, 736 (9th Cir. 1963), affg. T.C. Memo.

1961-256; Looney v. Commissioner, T.C. Memo. 1985-326, affd.

without published opinion 810 F.2d 205 (9th Cir. 1987).     We

conclude that petitioner did not have a profit motive but entered

into the partnership solely to create a large artificial capital

loss to lower his tax liability.

     Further, petitioner may not deduct costs incurred to

implement a transaction that lacks economic substance.    New
Phoenix Sunrise Corp. v. Commissioner, 132 T.C. __, __ (2009)

(slip op. at 38-40).    We conclude that petitioner’s participation

in the partnership cannot form the basis of any deductions

because the partnership is disregarded as a sham without economic

substance.   See Ferguson v. Commissioner, 29 F.3d 98, 102 (2d

Cir. 1994), affg. Peat Oil & Gas Associates v. Commissioner, 100

T.C. 271 (1993).   Accordingly, we hold that respondent properly

disallowed these deductions.
VII. Notice Requirements of Due Process

     We now address petitioner’s final argument.   Petitioner

argues that the deficiency notice is invalid because the FPAA did

not provide petitioner with fair notice and violated his right to

due process of law.10   Petitioner admits he received the FPAA but

argues that it did not provide him adequate notice that his



     10
      “No person shall * * * be deprived of life, liberty, or
property, without due process of law”. U.S. Const. amend. V.
                                 -17-

failure to file a petition would conclusively preclude him from

contesting an approximately $12 million deficiency.    We disagree

that there is a due process violation.

      A fundamental requirement of due process is notice

reasonably calculated, under all the circumstances, to inform

interested parties of the pendency of the action and afford them

an opportunity to present their objections.     Mullane v. Cent.

Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).     Due process

is flexible, however, and calls for such procedural protections

as the particular situation demands.     Morrissey v. Brewer, 408
U.S. 471, 481 (1972).

     TEFRA’s notice provisions generally safeguard due process

rights by providing partners with notice of the partnership

adjustment and an opportunity to participate in the partnership-

level proceeding.   See Walthall v. United States, 131 F.3d 1289,

1294-1295 (9th Cir. 1997); Brookes v. Commissioner, 108 T.C. at

5.   An FPAA need not be in any particular form, and any

statements or computations in or attached to the FPAA may be
considered in determining its validity.    See generally Clovis I

v. Commissioner, 88 T.C. 980, 982 (1987).    An FPAA must, however,

provide minimal notice to the taxpayer that the Internal Revenue

Service (IRS) has finally determined adjustments to the

partnership return.     Triangle Investors Ltd. Pship. v.

Commissioner, 95 T.C. 610, 613 (1990); Clovis I v. Commissioner,

supra at 982.   An FPAA is not required to notify partners of
                               -18-

their individual tax deficiencies at the partner level as

petitioner contends.

     Respondent notified petitioner in the FPAA’s Exhibit A that

the partnership is disregarded for tax purposes, that all

transactions engaged in by the partnership are treated as engaged

in directly by its partners, and that the partners would not be

allowed to inflate their bases in the partnership to eliminate

gain.   Petitioner received the FPAA and had the opportunity to

file a petition at the partnership level contesting respondent’s

determinations in the FPAA.   Petitioner chose not to do so.

     Petitioner waited until the partner-level proceeding,

instead, to argue that the FPAA did not provide him adequate

notice.   He makes this argument despite the multiple

determinations in the FPAA that disallow all tax benefits of the

tax shelter.   Petitioner’s participation in a complicated basis-

inflating tax shelter belies his naivete.   Petitioner purchased a

packaged tax shelter involving several sophisticated transactions

to avoid paying taxes on a $60 million gain.   He received the

advice of multiple professionals, including counsel, regarding

this purchase.   He later disclosed his participation in this tax

shelter to avoid paying additions to tax or penalties.

     We conclude that the FPAA provided fair and reasonable

notice to petitioner that the IRS had finally determined

adjustments to the partnership return and did not violate

petitioner’s right to due process of law.
                                 -19-

VIII. Conclusion

     We conclude that respondent is entitled to judgment as a

matter of law.   Accordingly, we shall grant respondent’s motion

for summary judgment and deny petitioner’s motion for summary

judgment.

     In reaching our holdings, we have considered all arguments

made, and to the extent not mentioned, we consider them

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                        An appropriate order and order
                                 and decision will be entered.
                              -20-

                            APPENDIX

                EXHIBIT A - Explanation of Items

1.   It is determined that neither AD FX Trading 2000 Fund, LLC
     nor its purported partners have established the existence of
     AD FX Trading 2000 Fund, LLC as partnership as a matter of
     fact.

2.   Even if AD FX Trading 2000 Fund, LLC existed as a
     partnership, the purported partnership was formed and
     availed of solely for purposes of tax avoidance by
     artificially overstating basis in the partnership interests
     of its purported partners. The formation of AD FX Trading
     2000 Fund, LLC, the acquisition of any interest in the
     purported partnership by the purported partner, the purchase
     of offsetting options, the transfer of offsetting options to
     a partnership in return for a partnership interest, the
     purchase of assets by the partnership, and the distribution
     of those assets to the purported partners in complete
     liquidation of the partnership interests, and the subsequent
     sale of those assets to generate a loss, all within a period
     of less than 3 months, had no business purpose other than
     tax avoidance, lacked economic substance, and, in fact and
     substance, constitutes an economic sham for federal income
     tax purposes. Accordingly, the partnership and the
     transactions described above shall be disregarded in full
     and (1) any purported losses resulting from these
     transactions are not allowable as deductions; (2) increases
     in basis of assets are not allowed to eliminate gain; or (3)
     increases to the adjusted basis of partnership interests to
     circumvent the loss limitation of §704(d) are not allowed
     for federal income tax purposes.

3.   It is determined that AD FX Trading 2000 Fund, LLC was a
     sham, lacked economic substance and, under § 1.701-2 of the
     Income Tax Regulations, was formed and availed of in
     connection with a transaction or transactions in taxable
     year 2000, a principal purpose of which was to reduce
     substantially the present value of its partners’ aggregate
     federal tax liability in a manner that is inconsistent with
     the intent of Subchapter K of the Internal Revenue Code. It
     is consequently determined that:

          a.   the AD FX Trading 2000 Fund, LLC is disregarded
               and that all transactions engaged in by the
               purported partnership are treated as engaged in
               directly by its purported partners. This includes
               the determination that the assets purportedly
               acquired by AD FX Trading 2000 Fund, LLC,
               including but not limited to foreign currency
                              -21-

               options, were acquired directly by the purported
               partners.

          b.   the foreign currency option(s), purportedly
               contributed to or assumed by AD FX Trading 2000
               Fund, LLC, are treated as never having been
               contributed to or assumed by said partnership and
               any gains or losses purportedly realized by AD FX
               Trading 2000 Fund, LLC on the option(s) are
               treated as having been realized by its partners.

          c.   the purported partners of AD FX Trading 2000 Fund,
               LLC should be treated as not being partners in AD
               FX Trading 2000 Fund, LLC.

          d.   contributions to AD FX Trading 2000 Fund, LLC will
               be adjusted to reflect clearly the partnership’s
               or purported partners’ income.

4.   It is determined that the obligations under the short
     positions (written call options) transferred to AD FX
     Trading 2000 Fund, LLC constitute liabilities for purposes
     of Treasury Regulation §1.752-6T, the assumption of which by
     AD FX Trading 2000 Fund, LLC shall reduce the purported
     partner’s basis in AD FX Trading 2000 Fund, LLC in the
     amount of $58,500,000, for Michael E. Napoliello, Jr. but
     not below the fair market value of the purported partnership
     interest.

5.   It is determined that neither AD FX Trading 2000 Fund, LLC
     nor its purported partners entered into the option(s)
     positions or purchase the foreign currency or stock with a
     profit motive for purposes of § 165(c)(2).

6.   It is determined that, even if the foreign currency
     option(s) are treated as having been contributed to AD FX
     Trading 2000 Fund, LLC, the amount treated as contributed by
     the partners under section 722 of the Internal Revenue Code
     is reduced by the amounts received by the contributing
     partners from the contemporaneous sales of the call
     option(s) to the same counter-party. Thus, the basis of the
     contributed option(s) is reduced, both in the hands of the
     contributing partners and AD FX Trading 2000 Fund, LLC.
     Consequently, any corresponding claimed increases in the
     outside basis in AD FX Trading 2000 Fund, LLC resulting from
     the contributions of the foreign currency option(s) are
     disallowed.

7.   It is determined that the adjusted bases of the long call
     positions (purchased call options), and other contributions
     purportedly contributed by the partners to AD FX Trading
     2000 Fund, LLC has not been established under I.R.C. § 723.
                              -22-

     It is consequently determined that the partners of AD FX
     Trading 2000 Fund, LLC have not established adjusted bases
     in their respective partnership interests in an amount
     greater than zero (-0-).

8.   It is further determined that, in the case of a sale,
     exchange, or liquidation of AD FX Trading 2000 Fund, LLC
     partners’ partnership interests, neither the purported
     partnership nor its purported partners have established that
     the bases of the partners’ partnership interests were
     greater than zero for purposes of determining gain or loss
     to such partners from the sale, exchange, or liquidation of
     such partnership interest.
