BCP Trading and Investments, LLC v. Cmsnr. IRS

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 18, 2020 Decided March 23, 2021

No. 19-1068

BCP TRADING AND INVESTMENTS, LLC, ET AL.,
APPELLANTS

v.

COMMISSIONER OF INTERNAL REVENUE,
APPELLEE

VIRGINIA SIMPSON,
APPELLANT

Consolidated with 19-1072, 19-1098, 19-1099, 19-1122,
19-1123

Appeals from the United States Tax Court

Jeremy C. Marwell argued the cause for appellants
Kalkhoven-Pettit Partnerships. George M. Clarke III argued
the cause for appellants Esrey-LeMay Partnerships. With them
on the briefs were Mireille R. Oldak, Vivek A. Patel, Robert E.
McKenzie, Kathleen M. Lach, Matthew X. Etchemendy,
Michael L. Charlson, and David C. Cole.

Virginia Simpson, pro se, filed the brief for appellant
Virginia Simpson.
 2

Jennifer M. Rubin, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief was Joan
I. Oppenheimer, Attorney.

Before: SRINIVASAN, Chief Judge, HENDERSON and
WALKER, Circuit Judges.

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: In January
2008, the Commissioner of the Internal Revenue Service
(Commissioner) issued tax adjustments to the partnership of
BCP Trading & Investments, LLC (BCP) for tax years 2000
and 2001. Members of BCP—themselves limited
partnerships—challenged the adjustments, arguing they were
untimely and that the Commissioner mistakenly determined
that the investment partnership was a sham. The United States
Tax Court found the adjustments timely because the three-year
statute of limitations for the adjustments was extended by the
partnership and its members and those extensions, contrary to
BCP’s members’ challenges, were consistent with fiduciary
and contract principles. The Tax Court upheld the
Commissioner’s adjustments, declaring the partnership a sham
for tax purposes. Virginia Simpson, a non-participating party,
moved to intervene after the Tax Court issued its memorandum
opinion and findings of fact but before it issued its final
decisions. The Tax Court denied her intervention in a separate
order.

Before us is a consolidated appeal of the Tax Court’s
opinion and final decisions regarding the Commissioner’s
adjustments issued to BCP as well as its order denying
intervention. The Tax Court applied correct legal precedent and
committed no clear error in its findings upholding the
 3
Commissioner’s tax adjustments. Nor did the Tax Court abuse
its discretion in denying Simpson’s intervention. Accordingly,
we affirm.

I. BACKGROUND1

As with many cases arising from the Tax Court, “[t]he
hardest aspect of this case is simply getting a handle on the
facts.” ASA Investerings P’ship v. Comm’r, 201 F.3d 505, 506
(D.C. Cir. 2000). Because a chronological retelling of the story
may confuse more than enlighten, we start with the actors
involved and then address the intricacies of the transaction at
issue.

A. The Actors

The hub around which all of the actors revolve is BCP.
BCP was a partnership and during its brief life had 39
members. At BCP’s helm was its managing member, a limited
liability company, Bolton Capital Planning, LLC (Bolton
Capital). Charles Bolton owned and operated Bolton Capital
and Belle Six worked for Bolton Capital. Six, Bolton’s partner
in crime,2 was a former employee of the global accounting firm
Ernst & Young (E&Y). BCP’s other 38 members (“client
members”) were limited liability companies and limited
partnerships and all were clients of E&Y. Two groups of client
members—all limited partnerships—are relevant to this
appeal: (1) KP1, KP2 and PCMG XII and (2) WTETP and
PCMG VI.

1
We address the relevant facts and law of Simpson’s failed
intervention in Part III, infra at 31. All facts come from the
stipulations and other evidence before the Tax Court.
2
Six and Bolton both pleaded guilty to tax crimes in connection
with their tax shelter activities.
 4
Kevin Kalkhoven and Dan Pettit were limited partners in
the KP1, KP2 and PCMG XII limited partnerships. They were
both executives at JDS Uniphase Corporation and they hired
E&Y in the 1990s to manage their tax matters. Their
relationship with E&Y grew from tax matters to include much
of their personal financial affairs. Jim Cox of E&Y managed
both Kalkhoven’s and Pettit’s business matters.

William Esrey was a limited partner in WTETP and
Ronald LeMay was a limited partner in PCMG VI. Esrey and
LeMay were executives at Sprint Corporation; Sprint required
them to use E&Y to prepare their tax returns and E&Y prepared
their tax returns beginning in the 1980s. Over the years both
Esrey’s and LeMay’s relationship with E&Y evolved from tax
preparation to estate, financial and tax planning—Mike Carr of
E&Y served as Esrey’s and LeMay’s point of contact.

B. The Actors’ Business Relationships

In 1999 Six left E&Y to join The Private Capital
Management Group (TPCMG) to help TPCMG market an
E&Y-promoted financial transaction called a Contingent
Deferred Swap (CDS). CDS transactions defer taxes on
ordinary income by one year and transform the ordinary
income into capital gains, which are taxed at a lower rate than
ordinary income. Through their respective limited
partnerships, Kalkhoven, Pettit, Esrey and LeMay (Taxpayers)
engaged in CDS transactions with TPCMG in 1999. In late
1999 or early 2000, TPCMG transferred the CDS business to
Bolton. Six joined Bolton to continue to market the CDS
transactions and act as liaison between Bolton and E&Y.

To offset the capital gains taxes generated from the CDS
transactions, E&Y created a new transaction—the transaction
at issue in this case—known as the CDS Add-On or CDS Plus
(Add-On). E&Y’s Carr and Bolton Capital’s Six described the
 5
Add-On to Esrey and LeMay and both Esrey and LeMay
decided to participate. E&Y and Bolton Capital’s Six also
presented the Add-On to Kalkhoven and Pettit and both
decided to participate. In May 2000, on E&Y’s advice, Bolton
Capital formed BCP to execute the Add-On. Between 2000 and
2001 BCP client members—including the Taxpayers’ limited
partnerships—engaged in the E&Y-designed Add-On.

Under the United States Tax Code, partnerships do not pay
federal income tax. I.R.C. § 701.3 Instead, partnerships file an
annual information return reporting each partner’s share of
income, gain, loss, deductions and credits. Id. §§ 702, 6031.
The partners report their individual shares of income, gain,
loss, deduction or credit on their individual federal income tax
returns and taxes are assessed against the partners individually.
Id. §§ 701, 702, 704. If the IRS disagrees with a partnership’s
reporting, it issues a Final Partnership Administrative
Adjustment (FPAA) before imposing tax assessments against
the individual partners. Id. §§ 6223(a)(2), (d)(2), 6225(a). The
IRS must assess tax attributable to partnership items 4 within
three years of the date the partnership return is filed or the last
date for filing the return, whichever is later. Id. § 6229(a). If
the three-year period has not yet expired, the IRS may seek to
extend it, using either of two “statute extensions.” Id.

3
Unless otherwise noted, references to the Internal Revenue
Code are those in effect at the time relevant to these cases.
4
A “partnership item” is “any item required to be taken into
account for the partnership’s taxable year under any provision of [the
Internal Revenue Code’s Income Tax subtitle] to the extent
regulations prescribed by the Secretary provide that, for purposes of
this subtitle, such item is more appropriately determined at the
partnership level than at the partner level.” I.R.C. § 6231(a)(3). “[A]
determination that a partnership lacks economic substance is an
adjustment to a partnership item.” United States v. Woods, 571 U.S.
31, 39 (2013).
 6
§ 6229(b). The IRS may obtain an extension from the partner
whose individual tax return may be affected. Id.
§ 6229(b)(1)(A). Alternatively, the IRS may ask the tax matters
partner (TMP) of the partnership to consent to an extension to
allow the IRS to assess any taxes attributable to partnership
items of all partners. Id. § 6229(b)(1)(B).

The IRS obtained a timely partnership extension for tax
year 2000 from Bolton, BCP’s TMP, on January 6, 2004
(Partnership Extension). Bolton subsequently executed eight
more partnership extensions—the last on April 2, 2007—
extending the liability period for tax years 2000 and 2001
through June 30, 2008. The IRS also obtained timely individual
extensions from Kalkhoven, Pettit, Esrey and LeMay
(Individual Extensions). As relevant here, Pettit and Kalkhoven
signed Individual Extensions for tax year 2000 on November
17 and November 20, 2003, respectively, and both again did so
on September 27, 2004. Esrey and LeMay signed Individual
Extensions for tax year 2000 on December 4, 2003 and January
26, 2004, respectively. The Taxpayers continued to sign
individual extensions, extending their tax liability for tax years
2000 and 2001 through at least December 31, 2008.

While the IRS sought the Partnership and Individual
Extensions, E&Y was actively advising BCP and the
Taxpayers and representing the Taxpayers before the IRS.
E&Y’s Cox advised Kalkhoven and Pettit to consent to the
Individual Extensions and did not discuss any extension
downside with them. Similarly, E&Y’s Carr advised Esrey and
LeMay to authorize individual extensions. E&Y also advised
BCP to sign the Partnership Extension. Six wrote to the
Taxpayers, informing them that Bolton Capital planned to sign
the Partnership Extension “[b]ased on Ernst & Young’s . . .
recommendation . . . unless we hear otherwise from you.” Joint
Appendix (J.A.) 725.
 7
Around the same time E&Y was the subject of several civil
and criminal investigations. As a brief overview, by 2002 E&Y
knew the IRS was auditing CDS transactions. In March 2002,
E&Y became the subject of an IRS “civil promoter” audit to
determine if E&Y had failed to disclose tax shelters.5 That
audit was settled in July 2003. In May 2004, a grand jury
investigation began to examine E&Y’s tax shelters.

On January 31, 2008, the IRS issued FPAAs against BCP
for tax years 2000 and 2001. In the FPAAs, the IRS determined
BCP was a “sham” and should be disregarded for tax purposes.
The Taxpayers, through their partnerships, challenged the
FPAAs in Tax Court. First, the Taxpayers argued the FPAAs
for tax year 2000 were untimely because the Individual
Extensions and Partnership Extension upon which any
subsequent tax year 2000 extensions rested were voidable
under agency and contract law. The Taxpayers also argued that
BCP was a bona fide partnership because it had a valid business
purpose. In August 2013 Tax Court Judge Diane Kroupa
presided over the trial but Judge Kroupa retired after trial and
the case was reassigned to Tax Court Judge Mark Holmes. In
August 2017 the Tax Court issued its findings of fact and
memorandum opinion, concluding the extensions were valid
and that BCP “was created to carry out a tax-avoidance
scheme” and should therefore be “disregard[ed]” for tax
purposes. BCP Trading & Invs., LLC v. Comm’r, 114 T.C.M.
(CCH) 151, 2017 WL 3394123, at *21 (2017). On February 6,
2019, the Tax Court issued its order denying intervention. J.A.

5
I.R.C. §§ 6111 and 6112 require a tax shelter organizer to
register a qualifying tax shelter with the IRS and provide certain
information regarding it. I.R.C. §§ 6707 and 6708 impose penalties
on anyone who fails to register or provide the applicable information
on a qualifying tax shelter.
 8
2482. And on February 7, 2019, it issued two decisions
implementing its August 2017 opinion. J.A. 2488–89.

C. The Challenged Add-On6

The Add-On consisted of several intermediate steps. To
begin, BCP client members purchased 132 option pairs
between July 19 and August 11, 2000. Both options in the pair
were digital options. A digital option is a type of option
contract that pays the option holder a fixed payout if the
underlying asset’s price equals or exceeds a predetermined
price (strike price) by a predetermined expiration date.7 If the
underlying asset’s price does not reach the strike price by the
expiration date, the option expires worthless. Here, the
underlying asset in each digital option pair was a foreign
currency.

As a “European-style” option, the underlying asset’s price
is evaluated to determine whether an option pays out or expires
worthless only on the predetermined expiration date and time.
The asset’s price at expiration is the spot price or spot rate.
Accordingly, on the option’s expiration date and time, the spot
price is compared to the strike price. If the spot price meets or
exceeds the strike price, the option pays out but if the spot price
does not meet or exceed the strike price, the option expires
worthless. All options began “out of the money”—at the time
each option was purchased, the currency price did not already

6
Our description of the Add-On follows the Commissioner’s
brief, see Appellee’s Br. at 4–26, and the Tax Court’s opinion, see
BCP, 2017 WL 3394123, at *3–*6.
7
Here, we describe the 124 option pairs that required positive
price movement relative to the strike price, not the eight option pairs
that required negative price movement.
 9
exceed the strike price but upward price movement was
necessary for them to pay out and not expire worthless.

Each option pair included an option which the client
member bought from Refco Capital Markets (Refco) (referred
to as the “long” option) and an option which the client member
sold to Refco (referred to as the “short” option). The long and
short options in each pair had a one “percentage in point” (pip)
difference in strike price. A pip is the smallest pricing
increment in foreign exchange markets and for many
currencies it is 1/100th of a cent. With a spread only one pip
wide, typically the spot prices fall short of both strike prices
(and both options in the pair expire worthless) or exceed both
strike prices (and both options in the pair pay out). As
envisioned, if the spot price exceeded both strike prices, Refco
owed the predetermined payout on the long option to the client
member and the client member owed the predetermined payout
on the short option to Refco. But the payout to the client
member on the long option always exceeded the payout to
Refco on the short option; Refco then paid the client member
the difference between the two. Accordingly, if both options
expired “in the money” with the spot price above the strike
price, only the client member (not Refco) received the net
payout.

How the Add-On functioned may be best understood by
one transaction. PCMG XII bought and sold into an option pair
with Refco on July 31, 2000. Both the long and short options
in the pair expired on November 30, 2000. The option pair’s
underlying asset was the reference exchange rate of Canadian
Dollars (CAD) per United States Dollar (USD). The long
option’s strike price was an exchange rate of 1.5075 and the
short option’s strike price was an exchange rate of 1.5076. If
the spot price (i.e., the reference exchange rate on November
30, 2000) equaled or exceeded the long option’s strike price of
 10
1.5075, Refco paid PCMG XII $170 million. On the other
hand, if the spot rate equaled or exceeded the short option’s
strike price of 1.5076, PCMG XII paid Refco $169.5 million.
If the spot rate was above both strike prices, PCMG XII
received a net payment of $500,000. If the spot price was below
both strike prices, both options expired worthless.

If the spot rate landed within the one pip spread—the
“sweet spot”—client members received a “lottery payoff”
because Refco had to pay out on the long option but the client
members did not have to pay out on the short option. In our
example, if the spot rate had landed at 1.5075 or between
1.5075 and 1.5076, Refco would have paid PCMG XII $170
million but PCMG XII would not have paid Refco $169.5
million. The likelihood of the spot rate falling within the one
pip spread was miniscule. Not only was the spread just one pip
wide but the option pairs were custom. A custom option is not
listed or traded on any exchange. Accordingly, there are
multiple different expiration-day spot prices for the same
currency depending on which bank or broker Refco dealt with.
Refco had the discretion to choose between those spot prices
for settling the option pairs, so long as it acted “in good faith
and in a commercially reasonable manner.” J.A. 90. Refco had
both an incentive not to let an option pair hit the sweet spot and
the discretion to keep it from doing so.8

8
Refco’s incentive to enter the option pair contracts came from
the option premiums. The client members paid a purchase premium
to Refco on each long option and Refco paid a sale premium to the
client members on each short option. The purchase premium
exceeded the sale premium and the client members paid Refco the
net difference between the premiums (total premium). In our
example, PCMG XII’s purchase premium to Refco was $51,000,000.
Refco’s sale premium to PCMG XII was $50,750,787. Accordingly,
 11
Between July 31 and August 11, 2000, the client members
contributed the option pairs to BCP—transferring the assets
from the client member’s ownership to BCP’s. In return, each
client member was credited with a BCP capital account equal
to the amount of the total premium paid on its contributed
options. Subsequently, every option pair either expired
worthless or was sold before its expiration date for less than the
total premium paid. Accordingly, BCP’s portfolio appeared to
lose significant value.

E&Y advised the client members to terminate their interest
in BCP in the year they chose to claim losses. All client
members, including the Taxpayers’ respective partnerships,
withdrew from BCP between 2000 and 2001. Upon leaving
BCP, client members, including the Taxpayers, were paid in
Japanese yen in an amount equal to their remaining capital
account less expenses and fees. A client member triggered its
losses by liquidating its position in BCP and selling the yen.

Client members claimed an outside basis9 in their yen of
an amount equal to the assets they contributed to BCP—their
long option premiums—but did not reduce the basis by
contingent liabilities BCP assumed—their short options.
Because the short option liabilities were not fixed at the time
of transfer—they were out of the money and there was not an
obligation to pay on them unless, at expiration, they were in the
money—the partnership treated them as uncertain and ignored
them in computing the partners’ outside bases. Accordingly,

PCMG XII paid Refco the total premium: $249,213. Whether the
options expired worthless or paid out, Refco kept the total premium.
9
“Outside basis” is “[a] partner’s tax basis in a partnership
interest.” Woods, 571 U.S. at 35–36. Outside basis “functions as a
proxy for the value of the assets . . . contributed” to a partnership.
Petaluma FX Partners, LLC v. Comm’r, 792 F.3d 72, 75 (D.C. Cir.
2015).
 12
when the Taxpayers sold their yen, it appeared they had
sustained massive losses. For example, after liquidating its
interest in BCP, PCMG XII received $478,748 worth of yen.
PCMG XII claimed a basis of $709,108,965—PCMG XII’s
long option premiums—in the yen. That is, PCMG XII claimed
the value of the assets it contributed to BCP was $709,108,965,
notwithstanding PCMG XII had paid a total premium of only
$3,354,857 for the option pairs it contributed to BCP. When
PCMG XII sold its yen—representing all that remained of the
assets PCMG XII had contributed to BCP—it appeared that the
value of the assets PCMG XII had contributed to BCP
decreased from over $700 million to $478,748. The Taxpayers
then used the losses generated from the Add-On to
substantially offset their income and reduce their taxes.10

After the 2001 distributions, BCP had no assets or
liabilities, its only remaining member was its managing
member, Bolton Capital, and BCP dissolved in June 2002. The
Commissioner contends the Add-On is a type of tax shelter
known as a Son-of-BOSS shelter, described by the Tax Court
as a series of steps whereby the taxpayers

transfer . . . assets encumbered by significant
liabilities to a partnership, with the goal of
increasing basis in that partnership. The

10
For example, for the tax year 2000, Kalkhoven reported
salary income of $492,523,171 and capital gains of $35,399,233 but
claimed combined losses of $533,578,758 from the three
partnerships, reducing his federal tax liability to $2,746,074. In other
instances, the Taxpayers even received tax refunds in the millions of
dollars. For tax year 2000, the Esreys reported salary income of
$83,724,716 and capital gains of $123,058,888 but, using a total loss
of $462,205,971 from the partnerships, reduced their tax liability to
$14,446 attributable to self-employment taxes, which resulted in a
$5,261,538 refund.
 13
liabilities are usually obligations to buy
securities, and typically are not completely
fixed at the time of transfer. This may let the
partnership treat the liabilities as uncertain,
which may let the partnership ignore them in
computing basis. If so, the result is that the
partners will have a basis in the partnership so
great as to provide for large—but not out-of-
pocket—losses on their individual tax returns.

BCP, 2017 WL 3394123, at *1 n.2. As explained infra, the Tax
Court agreed with the Commissioner’s contention.

II. ANALYSIS

Tax Court decisions are reviewed “in the same manner and
to the same extent as decisions of the district courts in civil
actions tried without a jury.” I.R.C. § 7482(a)(1). Accordingly,
questions of law are reviewed de novo and factual findings for
clear error. Andantech LLC v. Comm’r, 331 F.3d 972, 976
(D.C. Cir. 2003). Mixed questions of law and fact are treated
as questions of fact and reviewed for clear error. Id. Under clear
error review, we assess the Tax Court’s findings under “all the
evidence of record,” Daniels v. Hadley Mem’l Hosp., 566 F.2d
749, 757 (D.C. Cir. 1977), and “may overturn the Tax
Court’s . . . findings only if we come to a ‘definite and firm
conviction that a mistake has been committed,’” Endeavor
Partners Fund, LLC v. Comm’r, 943 F.3d 464, 467 (D.C. Cir.
2019) (quoting United States v. U.S. Gypsum Co., 333 U.S.
364, 395 (1948)). Clear error occurs if a finding is based on a
“serious mistake as to the effect of evidence or is clearly
contrary to the weight of the evidence.” Daniels, 566 F.2d at
757 (footnotes omitted).

The Taxpayers first argue the Tax Court clearly erred in its
ruling that the extensions were valid because the Tax Court
 14
misunderstood the facts and failed to apply them under the
correct legal standards. Next, the Taxpayers challenge the Tax
Court’s sham determination because it allegedly applied an
incorrect legal standard and clearly erred in its fact-finding.
Granted, the Tax Court opinion is at times unclear or its
reasoning is cursory. But such flaws do not per se establish
clear error. See ASA Investerings P’ship v. Comm’r, 201 F.3d
505, 511, 515 (D.C. Cir. 2000) (no clear error by Tax Court
although some “reasoning seem[ed] misdirected” and at times
its “focus . . . was a little puzzling”). Viewing the record as a
whole, we cannot come to a “definite and firm conviction that
a mistake has been committed,” U.S. Gypsum Co., 333 U.S. at
395, nor do we conclude that the Tax Court applied an incorrect
legal standard.11

A. The Statute Extensions

In Tax Court, the Taxpayers argued that the January 2004
Partnership Extension and the 2003/2004 Individual
Extensions were voidable under fiduciary and contract law;
further, the limitations period governing adjustments for the
2000 tax year expired before the adjustments issued because
extensions for that year were obtained outside the three-year

11
We recognize that “the presumption of correctness that
attaches to factual findings is stronger in some cases than in others.”
Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 500
(1984). Even though the presumption may have “lesser force” here
because Judge Holmes was not the trial judge and his “findings
[were] based on documentary evidence,” not live testimony, our
determination remains unaffected. Id. Judge Holmes
“demonstrate[d] that he complied with [Federal Rule of Civil
Procedure] 63’s basic requirement: that a successor judge become
familiar with relevant portions of the record.” Mergentime Corp. v.
Washington Metro. Area Transit Auth., 166 F.3d 1257, 1265 (D.C.
Cir. 1999).
 15
limitations period. An FPAA is timely if either an individual
extension or the Partnership Extension is valid. The Taxpayers’
arguments that the extensions are void start from the same
general proposition: when the IRS sought the Partnership
Extension and Individual Extensions, E&Y had a conflict of
interest due to the civil and criminal investigations it was
facing, E&Y breached its duty to the Taxpayers because E&Y
never disclosed that conflict and the IRS ignored and facilitated
E&Y’s breach—ultimately benefitting from the breach by
securing the extensions. The Tax Court found that the
Taxpayers’ arguments failed irrespective of any E&Y conflict
or breach of duty to the Taxpayers. We agree with the Tax
Court, as we now explain.

1. The Partnership Extension and Bolton’s Fiduciary Role

Principles of agency and fiduciary law apply to extensions.
See Transpac Drilling Venture 1982-12 v. Comm’r, 147 F.3d
221, 225 (2d Cir. 1998). And under fiduciary law, “the
transactions of those who knowingly participate with [a]
fiduciary in . . . a breach are ‘as forbidden’ as transactions ‘on
behalf of the trustee himself.’” Dirks v. SEC, 463 U.S. 646, 659
(1983) (quoting Mosser v. Darrow, 341 U.S. 267, 272 (1951));
see also United States v. Dunn, 268 U.S. 121, 132 (1925) (“he
who fraudulently traffics with a recreant fiduciary shall take
nothing by his fraud”). Here, if the IRS knowingly trafficked
with a breaching fiduciary to obtain the extensions, it cannot
benefit from them.

In concluding that the Partnership Extension is valid under
fiduciary principles, the Tax Court focused on Bolton as the
relevant fiduciary because he, not E&Y, signed the Partnership
Extension as the Taxpayers’ fiduciary. BCP, 2017 WL
3394123, at *14. We find no fault in that focus. See In re
Martinez, 564 F.3d 719, 735 (5th Cir. 2009) (“the IRS’s ability
 16
to deal with a [TMP] and rely on his actions on behalf of the
partnership is critical for the effective operation of the current
tax system”). The transaction at issue was between Bolton—
acting on behalf of the Taxpayers as their fiduciary—and the
IRS.

The Tax Court distinguished the facts sub judice from
those in a leading Second Circuit case. BCP, 2017 WL
3394123, at *14 (citing Transpac, 147 F.3d at 221). The issue
in Transpac was “whether, as a result of being placed under
criminal investigation by the IRS (and hence becoming subject
to pressure by the IRS), the [TMPs] labored under a conflict of
interest and thereby were disqualified from binding the
partnerships.” 147 F.3d at 222. The IRS sought and obtained
partnership extensions from the TMPs—who were at that time
under criminal investigation—after the limited partners refused
to sign individual extensions. Id. at 224. The TMPs cooperated
with the criminal investigation and were granted immunity or
offered suspended sentences by the prosecution. Id. at 223.
Because the IRS knew the TMPs had a “powerful incentive to
ingratiate themselves to the government,” they operated under
disabling conflicts and the IRS could not rely on their consent
to bind the limited partners. Id. at 227.

As the Tax Court recognized, this case is readily
distinguishable from Transpac. Bolton, as the TMP, was not
under criminal investigation at the time he signed the
Partnership Extension. Apparently, Bolton did not begin to
worry about potential criminal liability until two years after he
signed the January 2004 Partnership Extension. Accordingly,
the IRS had no reason to believe it was dealing with a breaching
fiduciary when it obtained Bolton’s consent to the Partnership
Extension. And unlike in Transpac, the Taxpayers did not
rebuff the IRS’s request for individual extensions—in fact, all
of the Taxpayers signed Individual Extensions. The Taxpayers
 17
contend their agreement is tainted because they could not have
made an informed decision as to any extension without
knowing of E&Y’s conflict. But the Taxpayers’ acquiescence
does inform whether the IRS had reason to know Bolton was a
breaching fiduciary when it obtained the Partnership Extension
from him.12

2. The Partnership and Individual Extensions and Contract
Law

Although a statute extension is not a contract, “[c]ontract
principles are significant” in evaluating it because I.R.C.

12
The Taxpayers also argue the transaction between Bolton as
their fiduciary and the IRS is invalid because the IRS dealt with E&Y
in order to secure the Partnership Extension. But this argument
would require E&Y’s authority to secure the Partnership Extension
either through the Taxpayers or Bolton—and for the IRS to know
that. Evidence suggests that Six solicited input from the Taxpayers
on the Partnership Extension, J.A. 153–54, but there is no evidence
the IRS knew that. And the Taxpayers’ focus on Bolton himself fails
as well. Indeed, the Tax Court found the Taxpayers’ argument that
E&Y “embedded” Six in BCP unconvincing because Six left E&Y
for “messy personal reasons.” BCP, 2017 WL 3394123, at *14.
Although the Tax Court’s finding is brief, we do not believe it clearly
erred in finding E&Y did not have the influence to secure the
Partnership Extension through Bolton or that the IRS knew of E&Y’s
influence, if any. The communications between the IRS and E&Y
regarding Bolton’s consent to the Partnership Extension are
equivocal regarding E&Y’s influence over Bolton such that the IRS
knew E&Y was the real party securing the extension. Compare J.A.
815–16 (E&Y told the IRS it “request[ed]” Bolton to sign the
Partnership Extension), with J.A. 560 (IRS agent noted E&Y partner
said he “had the [TMP] designation signed and the statute
extensions”). In our view, E&Y’s bare “request” of Bolton does not
establish that the IRS knew that E&Y in fact had influence over
Bolton.
 18
§ 6501(c)(4) “requires that the parties reach a written
agreement as to the extension” and an agreement “means a
manifestation of mutual assent.” Piarulle v. Comm’r, 80 T.C.
(CCH) 1035, 1042 (1983). Accordingly, the Tax Court applies
“general contract principles in interpreting, applying and
deciding the enforceability of waiver documents.” Chai v.
Comm’r, 102 T.C.M. (CCH) 520, 2011 WL 5600287, at *2
(2011).

The Taxpayers argue that the challenged extensions are
invalid under the contract principles of misrepresentation and
undue influence. Generally, misrepresentation is “an assertion
that is not in accord with the facts” or a material non-disclosure.
Restatement (Second) of Contracts §§ 159, 161. And undue
influence is the “unfair persuasion of a party . . . who by virtue
of the relation between [the party and the persuader] is justified
in assuming that [the persuader] will not act in a manner
inconsistent with his welfare.” Id. § 177(1). The extent of
unfair persuasion “depends on a variety of circumstances,”
including the “unavailability of independent advice.” Id.
cmt. b. A contract is voidable if a party’s manifestation of
assent is induced by a non-party’s misrepresentation or undue
influence unless the counterparty “in good faith and without
reason to know” of the non-party’s misrepresentation or undue
influence “gives value or relies materially on the transaction.”
Id. §§ 164, 177(3).

Six informed the Taxpayers that Bolton planned to sign the
Partnership Extension based on E&Y’s advice and that it would
be signed unless Bolton Capital heard from them. And E&Y
advised each Taxpayer to sign his Individual Extension.
Accordingly, if the Taxpayers’ assent to any extension was due
to E&Y’s misrepresentation or undue influence, the extension
could be voidable. Importantly, however, for the Taxpayers to
 19
void the extensions under either contract theory, they must
have justifiably relied on E&Y. Id. §§ 164(2), 177(1).

i. Esrey and LeMay

In its Partnership Extension analysis, the Tax Court stated
that the “problem” with the Taxpayers’ contract argument was
that E&Y was not their “only adviser and they all had ample
reason to question E&Y long before 2004” when the
Partnership Extension was signed. BCP, 2017 WL 3394123, at
*15. In other words, the Taxpayers were less likely to be
unduly influenced because they had other advisors. And, in any
case, they could not justifiably rely on E&Y because, by the
time the Partnership Extension was signed, they should have
questioned E&Y’s good faith—whether or not they knew of
E&Y’s specific conflicts.

To support its ruling that the January 2004 Partnership
Extension was valid as to Esrey and LeMay, the Tax Court
relied on several facts. In 2000, Esrey and LeMay hired the
King & Spalding law firm to evaluate the Add-On. The law
firm ultimately “questioned whether [the Add-On] could get
through an audit.” Id. In 2002, LeMay informed E&Y that he
and Esrey had hired King & Spalding for its independent views
and instructed E&Y to consult with the firm on “all strategic
matters.” J.A. 538–39. In 2003, LeMay learned from a
newspaper reporter that the IRS was investigating E&Y as a
tax shelter promoter. The Tax Court found it “more likely than
not,” given their relationship, that LeMay informed Esrey
about the reporter’s information. BCP, 2017 WL 3394123, at
*15. And in May 2004, Esrey and LeMay hired outside counsel
to represent them in dealing with the IRS.

The Tax Court concluded that Esrey’s and LeMay’s
contract argument as to their Individual Extensions “doesn’t
work for the same reason it didn’t work for the partnership-
 20
level extension.” Id. Accordingly, the Tax Court relied on the
same facts to support its holding that Esrey’s and LeMay’s
Individual Extensions—signed in December 2003 and January
2004, respectively—were valid agreements under contract law.
The Tax Court added that both Esrey and LeMay knew that
E&Y was being investigated because E&Y told them and both
Esrey and LeMay were “sophisticated businessmen.” Id.

We agree with the Tax Court. As early as 2000, King &
Spalding put Esrey and LeMay on notice that something could
be amiss with E&Y’s tax strategies. The Tax Court found that
King & Spalding had “questioned” whether the Add-On would
survive an audit. Id. Esrey testified that King & Spalding told
them both “the IRS had the better part of the argument”
regarding E&Y’s tax strategies’ legitimacy. J.A. 1607–08.
Even before hiring King & Spalding, LeMay was “beginning
to get a little insecure about [his] lack of knowledge” regarding
E&Y’s tax strategies after he read a news article discussing IRS
challenges to Son-of-BOSS tax shelters; he and Esrey then
decided to consult King & Spalding for advice. J.A. 858–59.

Knowledge of the civil promoter audit was another reason
Esrey and LeMay should have questioned E&Y’s actions. In
2003 LeMay was contacted by a national newspaper and asked
whether the promoter audit affected him. LeMay contacted
E&Y and E&Y told him the settlement was unrelated to him.
LeMay also read the press release regarding E&Y’s settlement
of the promoter audit. The Tax Court’s inference that LeMay
likely told Esrey about the call is reasonable, considering Esrey
admitted he and LeMay “talk[ed] . . . frequently and share[d]
each other’s thoughts or opinions” regarding press reports on
E&Y’s tax shelters. J.A. 855–56.

That Esrey and LeMay were sophisticated businessmen is
also relevant in evaluating whether either was justified in
 21
relying on E&Y. See Restatement (Second) Contracts § 177
ill. 1 (“experience[] in business” relevant to whether one is
“justified in assuming” individual he “rel[ied] [on] in business
matters” will not act in manner inconsistent with his welfare).
Sophisticated businessmen who hire a global accounting firm
to prepare their tax returns should not rely unquestioningly on
that firm once they have direct knowledge of IRS scrutiny of
the firm’s tax strategies.13

ii. Kalkhoven and Pettit

As with Esrey and LeMay, the Tax Court concluded that
Kalkhoven and Pettit could not rely on misrepresentation or
undue influence to nullify the Partnership Extension because
E&Y was not their “only adviser and they all had ample reason
to question E&Y long before 2004.” BCP, 2017 WL 3394123,
at *15. In May 2002 E&Y advised Kalkhoven and Pettit that
E&Y was delivering requested documents to the IRS related to
“certain transactions in which [they] were involved” and
invited them to contact E&Y’s outside counsel with any
questions. Id. Eventually, in September 2004, Kalkhoven and
Pettit hired the Fulbright & Jaworski and Vinson & Elkins law
13
We do believe, however, that the Tax Court’s reliance on
Esrey’s and LeMay’s hiring of outside counsel in May 2004 is
misplaced. Counsel hired in May 2004 has no bearing on whether
Esrey and LeMay justifiably relied on, or were unduly influenced by,
E&Y when the relevant extensions had been signed. And we, like the
Taxpayers, are unsure what the Tax Court meant when it noted that
E&Y told Esrey and LeMay that prosecutors were investigating it
because there does not appear to be record evidence to support that
notation—at least no record evidence to support that disclosure
having been made before the relevant extensions were signed.
Regardless, the evidence the Tax Court utilized to support its
timeliness holding predates Esrey’s and LeMay’s execution of their
Individual Extensions and their approval of the Partnership
Extension.
 22
firms to represent them in dealing with the IRS. And while
these firms represented Kalkhoven and Pettit, Bolton continued
to sign Partnership Extensions through April 2007.

Regarding Kalkhoven’s and Pettit’s Individual
Extensions—signed in September 200414—the Tax Court
similarly pointed to the fact that the two executives were then
represented by Fulbright & Jaworski and Vinson & Elkins. And
when they signed the extensions, both knew of E&Y’s conflicts
because E&Y had already sent the Add-On clients to Fulbright
& Jaworski because of those conflicts. E&Y also told
Kalkhoven and Pettit in August 2002 that it was subject to a
promoter audit regarding CDS and to contact its law firm of
McKee Nelson with any questions.

The Tax Court’s findings here were not error. Granted, the
fact that Kalkhoven and Pettit were represented by Fulbright &
Jaworski and Vinson & Elkins by September 2004 says nothing
about their reliance on, or the undue influence wielded by,
E&Y with respect to the January 2004 Partnership Extension.
But that Fulbright & Jaworski represented them does inform
whether they justifiably relied on E&Y in executing their
September 2004 Individual Extensions. Kalkhoven and Pettit
signed letters of engagement with Fulbright & Jaworski on the
same day they signed their individual extensions. But E&Y had
recommended that their clients transition to Fulbright &
Jaworski in August 2004 due to the conflict of interest
stemming from the May 2004 grand jury investigation. The
Tax Court inferred that Kalkhoven and Pettit had received the
letter because they hired the firm E&Y suggested in the letter.
Before hiring Fulbright & Jaworski, Pettit had signed an

14
Because the three-year limitations period had not expired
when Kalkhoven and Pettit signed their second Individual Extension
for tax year 2000 in September 2004, the Tax Court used the
September 2004 extensions as the operative ones.
 23
engagement letter with Vinson & Elkins in March 2004, well
before his September 2004 Individual Extension.

Moreover, E&Y’s May 2002 letter also supports the Tax
Court’s determination that Kalkhoven and Pettit should have
questioned E&Y’s good faith. The letter informed them that the
IRS had served E&Y with an administrative summons
“demand[ing] the production of broad categories of documents
and other information with regard to certain transactions in
which [Kalkhoven and Pettit] were involved” and that E&Y
intended to comply. J.A. 544–45. Another letter—in August
2002—noted that the IRS was again examining E&Y
transactions via an administrative summons. Importantly, it
noted that the request related to the CDS transactions. Granted,
CDS was different from the Add-On but they were related
transactions in that Add-On was designed to eliminate capital
gains taxes generated from the CDS transactions.

In November 2003, before the Partnership Extension or
Kalkhoven’s and Pettit’s September 2004 individual
extensions were signed, Kalkhoven and Pettit received consent
and disclosure forms from E&Y. The consent form stated that
E&Y believed it could continue to represent Kalkhoven and
Pettit effectively. But it also stated the IRS had “taken the
position that E&Y acted as a tax shelter promoter of CDS and
[the Add-On] transactions” and noted several potential sources
of conflicts, including that E&Y had settled the promoter audit
and that individual E&Y personnel might be subject to
sanctions and might seek to assert defenses inconsistent with
their clients’ interests. J.A. 885–88. The disclosure letter
encouraged Kalkhoven and Pettit “to retain . . . independent
counsel to work with [E&Y].” J.A. 713; J.A. 719. And it
advised them that it was “rais[ing] . . . certain matters that
could be deemed to constitute conflicts of interest under
applicable ethical rules.” J.A. 714; J.A. 720. Nonetheless
 24
Kalkhoven and Pettit signed conflict waivers in November
2003—before the January 2004 Partnership Extension and
their September 2004 Individual Extensions were executed.

In sum, the Tax Court outlined various events that
occurred before the Taxpayers’ Individual Extensions or the
Partnership Extension were signed, all of which should have
put the Taxpayers on notice that they should not rely on E&Y’s
advice any longer. Accordingly, we see no clear error in the
Tax Court’s findings.

B. The “Sham” Determination

In general, a partnership “may be disregarded where it is a
sham or unreal.” Moline Props., Inc. v. Comm’r, 319 U.S. 436,
439 (1943); see also ASA Investerings, 201 F.3d at 512. And in
a “sham” inquiry, “whether the ‘sham’ be in the entity or the
transaction[,] . . . the absence of a nontax business purpose is
fatal.” ASA Investerings, 201 F.3d at 512; see also Horn v.
Comm’r, 968 F.2d 1229, 1237 (D.C. Cir. 1992) (“extract[ing]”
from economic substance and business purpose tests that
transaction “will not be considered a sham if it is undertaken
for profit or for other legitimate nontax business purposes”).
Under the business purpose doctrine, “the Commissioner may
look beyond the form of an action to discover its substance[;]”
accordingly, although a “taxpayer may structure a transaction
so that it satisfies the formal requirements of the Internal
Revenue Code, the Commissioner may deny legal effect to a
transaction if its sole purpose is to evade taxation.” ASA
Investerings, 201 F.3d at 513 (quoting Zmuda v. Comm’r, 731
F.2d 1417, 1420–21 (9th Cir. 1984)). Further, a partnership is
not recognized as such for tax purposes unless “the parties
 25
intended to join together as partners to conduct business
activity for a purpose other than tax avoidance.” Id.

The Taxpayers15 argue that the Tax Court’s determination
that BCP was a “sham” partnership was flawed because it
applied the incorrect legal standard and misunderstood the facts
as they related to the correct standard. Because the Tax Court
applied the correct legal standard and because, viewing the
record as a whole, we come to no “definite and firm conviction
that a mistake has been committed” in its findings, U.S.
Gypsum Co., 333 U.S. at 395, we affirm its sham
determination.

1. Application of Luna

The Taxpayers first argue that the Tax Court erred in using
the factors set out in Luna v. Commissioner, 42 T.C. 1067
(1964), to evaluate BCP because Luna is “analytically distinct”
from the business purpose doctrine and focuses on the incorrect
inquiry. Luna “distilled the principles” articulated in the United
States Supreme Court’s decisions in Commissioner v. Tower,
327 U.S. 280 (1946), and Commissioner v. Culbertson, 337
U.S. 733 (1949). WB Acquisition, Inc. v. Comm’r, 101 T.C.M.
(CCH) 1157, 2011 WL 477697, at *9 (2011), aff’d, 803 F.3d
1014 (9th Cir. 2015). In both Tower and Culbertson, the
Supreme Court evaluated whether an existing partnership “is
real within the meaning of the federal revenue laws.” Tower,
327 U.S. at 290; see also Culbertson, 337 U.S. at 741. Tower
established that the key analysis is intent: “whether the partners
really and truly intended to join together for the purpose of
carrying on business and sharing in the profits or loses or both.”

15
In Tax Court only Kalkhoven and Pettit argued BCP was a
legitimate partnership engaged in legitimate business. Esrey and
LeMay conceded that the Add-On transactions were “bogus,” J.A.
1619, and “outright frauds,” J.A. 1762.
 26
327 U.S. at 287. Culbertson explained that the intent inquiry is
fact-intensive and describes factors to evaluate an intent to
form a partnership. 337 U.S. at 742.

In Luna, the Tax Court considered whether the parties in a
business relationship had informally entered into a partnership
under the Tax Code, allowing them to claim that a payment to
one party was intended to buy a partnership interest. See 42
T.C. at 1076–77. To determine whether the parties formed an
informal partnership for tax purposes, the Luna Court asked
“whether the parties intended to, and did in fact, join together
for the present conduct of an undertaking or enterprise.” Id. at
1077 (citing Culbertson, 337 U.S. at 733). Luna listed non-
exclusive factors to determine whether the intent necessary to
establish a partnership existed. Id. at 1077–78.16

The Taxpayers are correct that Luna’s intent inquiry is
“analytically distinct” from the business-purpose doctrine but
the two analyses are not mutually exclusive. See, e.g.,
Chemtech Royalty Assocs., LP v. United States, 766 F.3d 453,
460–61 (5th Cir. 2014) (Tower/Culberson inquiry appropriate
16
The Luna factors include: “The agreement of the parties and
their conduct in executing its terms; the contributions, if any, which
each party has made to the venture; the parties’ control over income
and capital and the right of each to make withdrawals; whether each
party was a principal and coproprietor, sharing a mutual proprietary
interest in the net profits and having an obligation to share losses, or
whether one party was the agent or employee of the other, receiving
for his services contingent compensation in the form of a percentage
of income; whether business was conducted in the joint names of the
parties; whether the parties filed Federal partnership returns or
otherwise represented to respondent or to persons with whom they
dealt that they were joint venturers; whether separate books of
account were maintained for the venture; and whether the parties
exercised mutual control over and assumed mutual responsibilities
for the enterprise.”
 27
because “[t]he fact that a partnership’s underlying business
activities had economic substance does not, standing alone,
immunize the partnership from judicial scrutiny [under
Culbertson]” (internal quotations omitted)); Historic
Boardwalk Hall, LLC v. Comm’r, 694 F.3d 425, 461 (3d Cir.
2012) (same); TIFD III-E, Inc. v. United States, 459 F.3d 220,
230–32 (2d Cir. 2006) (district court erred in considering only
partnership’s “economic substance” and ignoring Culbertson’s
“all-facts-and-circumstances test”). At least inferentially, we
have recognized the Luna factors by describing the “basic
inquiry” as “whether, all facts considered, the parties intended
to join together as partners to conduct business activity for a
purpose other than tax avoidance.” ASA Investerings, 201 F.3d
at 513; see also Andantech LLC v. Comm’r, 331 F.3d 972, 978
(D.C. Cir. 2003) (citing Culbertson, 337 U.S. at 742–43).
Accordingly, the Luna factors are appropriately applied to the
intent inquiry. See TIFD III-E, 459 F.3d at 230–32 (Luna noted
as one of multiple cases “identifying factors a court might
consider” to evaluate whether partners joined partnership with
requisite intent).

The Taxpayers argue that, if Luna is applicable, BCP
satisfies its factors. But the Tax Court disagreed and did not
clearly err in this “fact-intensive inquiry.” Saba P’ship v.
Comm’r, 273 F.3d 1135, 1140 (D.C. Cir. 2001). We agree with
the Tax Court that “the agreement of the parties and their
conduct in executing its terms” and “whether business was
conducted in the joint names of the parties” weigh against
finding BCP a partnership for tax purposes. BCP, 2017 WL
3394123, at *17 (quoting Luna, 42 T.C. at 1077). BCP’s
“business” was limited to one type of transaction: the Add-On.
After accepting the options, BCP’s only activities were settling
paired options and paying distributions, plus paying minimal
advisor fees. And the fees paid to E&Y and Bolton to
 28
participate in the Add-On were based on the tax loss generated
by the Add-On.

“[W]hether the parties exercised mutual control over and
assumed mutual responsibilities for the enterprise” also weighs
against finding BCP to be a bona fide partnership. Id. (quoting
Luna, 42 T.C. at 1078). Bolton Capital had an unusual amount
of control over BCP. The operating agreement gave Bolton
Capital “all powers and rights necessary, proper, convenient or
advisable to effectuate and carry out the purposes, business and
objectives of the Company.” J.A. 269. The client members
were not permitted “to take part in the management or control
of the business or affairs of the Company, including, without
limitation, voting to remove the Managing Member” or “have
any voice in the management or operation of any Company
property.” J.A. 274. Further, Bolton Capital was either the
“Managing Member, General Partner, . . . Tax Matters
Partner . . . [or had] Power of Attorney” for every client
member and Bolton signed the BCP operating agreement on
behalf of every client member. J.A. 82. The Taxpayers note that
limited partnerships controlled by one general partner are
commonplace. But Luna’s multi-factor test emphasizes that the
determination is fact intensive—the Tax Court validly found
that Bolton’s level of control was particularly unusual here.

Accordingly, the Tax Court correctly applied the Luna
factors to determine “whether the parties intended to, and did
in fact, join together for the present conduct of an undertaking
or enterprise” and correctly concluded that BCP failed the Luna
analysis. BCP, 2017 WL 3394123, at *17.

2. The Business Purpose/Economic Substance Doctrines

Generally, an entity is considered a “sham” and
disregarded for tax purposes if it is not “undertaken for profit
or for other legitimate nontax business purposes.” Horn, 968
 29
F.2d at 1238 (applying economic substance and business
purpose factors). Both the business purpose and economic
substance doctrines “look beyond the form of an action to
discover its substance.” ASA Investerings, 201 F.3d at 513
(internal quotations omitted). Taxpayers are entitled to
structure their business transactions “in such a way as to
minimize tax” but the business purpose doctrine is not met if
“such structuring is deemed to have gotten out of hand, to have
been carried to such extreme lengths that the business purpose
is no more than a facade.” Id. The Taxpayers contend that
BCP’s formation was intended to achieve, and in fact did
achieve, diversification—an “indisputably legitimate business
purpose.” Appellants’ Br. at 67.

The Tax Court’s determination that diversification was
merely a “facade” is well supported by the record. BCP, 2017
WL 3394123, at *19. Granted, the record contains conflicting
evidence. Some testimony suggests diversification was a goal
of BCP—for example, Bolton stated he believed pooling of the
partners’ assets in BCP would provide diversification and E&Y
told Kalkhoven the pooling of foreign currency investments in
BCP would achieve diversification. But other testimony
suggests any non-tax motive was fabricated. Six stated that she
was not aware of any non-tax reason for contributing the option
pairs to BCP and Bolton “helped fabricate a non-tax motivation
used to falsely explain why clients participated in the CDS
Add-On shelter.” J.A. 596. The Tax Court’s rejection of
Kalkhoven’s and Pettit’s testimony on diversification as “not
credible and inconsistent with the objective facts” is also well
supported by the record. BCP, 2017 WL 3394123, *19 n.22.
Both Kalkhoven and Pettit admitted they did not know what
the Add-On was and did not even know their investments were
part of the Add-On—they simply testified that, as part of a
 30
broad investment plan, they invested with Bolton Capital to
diversify.

Although a finance/economics professor gave expert
testimony that pooling of the option pairs achieved
diversification, the Tax Court must “look beyond the form of
[the] action to discover its substance.” ASA Investerings, 201
F.3d at 513 (internal quotations omitted). Accordingly, it
evaluated the substance of BCP and Add-On to determine the
business purpose’s validity. It evaluated how the option pairs
functioned and found the option pairs would never hit the sweet
spot. The Tax Court found Add-On was focused on tax savings:
it was promoted specifically to offset capital gains from CDS
and transaction fees were based on the tax loss generated.
Without the sweet spot, the maximum payout from
participating in the Add-On was less than the transaction costs
to acquire the options and participate.17 We agree with the Tax
Court’s ultimate conclusion that BCP had no valid business
purpose.

Tax minimization as a primary consideration is not
unlawful. ASA Investerings, 201 F.3d at 513. Nevertheless, the
business purpose doctrine can be violated if the structuring for
tax benefits has “gotten out of hand” and the business purpose
is “no more than a facade.” Id.; see also id. at 514 (“a
transaction will be disregarded if it did ‘not appreciably affect
[taxpayer’s] beneficial interest except to reduce his tax.’”
(brackets in original) (quoting Knetsch v. United States, 364

17
The Taxpayers’ argument that the Tax Court erred by
considering the lack of profit motive misses the point—a transaction
is valid under the business purpose doctrine if it is “undertaken for
profit or for other legitimate nontax business purposes.” Horn, 968
F.2d at 1238. The Tax Court concluded that neither existed and,
accordingly, found BCP to be a sham. We cannot fault the Tax Court
for covering its bases.
 31
U.S. 361, 366 (1960)). In other words, the business purpose
doctrine is “simply [a] more precise factor[] to consider in the
application of this court’s traditional sham analysis; that is,
whether the transaction had any practical economic effects
other than the creation of income tax losses.” Horn, 968 F.2d
at 1237 (internal quotations omitted). We do not disagree with
the Tax Court’s conclusion that BCP and the Add-On had no
practical economic effect other than the creation of tax losses.
Client members invested only $16.5 million in the option pairs
and claimed $3.1 billion in tax losses. Those losses were
artificial—which the Tax Court recognized. BCP, 2017 WL
3394123, at *16. And any diversification benefit was only in
the options’ payoff distribution. But no option pair in fact paid
out—they all either expired worthless or were sold before their
exercise date. No “diversification benefit” in the payoff was
had—plainly by design.18

III. SIMPSON’S INTERVENTION

Simpson’s motion for intervention came about through a
gap in Tax Court rules. After the Tax Court released its 2017
memorandum opinion, it ordered the parties to agree on the
language of its final decisions. When the parties subsequently
conferred, a non-participating party (Simpson) was discovered.
If a tax case settles, Tax Court Rule 248 requires the
Commissioner to move for entry of decision and the court to
wait 60 days to see if a non-participating party objects to the
settlement before issuing its decision. See Tax Ct. R. 248(b)(4).

18
To the extent the Tax Court’s statements regarding the effect
of disregarding BCP could be read to determine the Taxpayers’
outside bases in BCP, the Tax Court lacked jurisdiction to do so—
which it acknowledged. BCP, 2017 WL 3394123, at *12; see
Petaluma FX Partners, LLC v. Comm’r, 792 F.3d 72, 77 (D.C. Cir.
2015). In addition, those findings were not included in the Tax
Court’s final decisions.
 32
There is no analogous rule, however, if the parties litigate and
subsequently agree on the language of the decision. Here,
Simpson’s late husband was a partner in Moore Trading
Partners (MTP) and MTP was a partner in BCP; his estate “was
an indirect partner and thus a party, [who] had not participated
in the litigation.” J.A. 2448. In any event, on October 26, 2017,
the Tax Court gave 60 days’ notice of the proposed decisions
to non-participating parties. On August 6, 2018, Simpson,
individually and as the surviving spouse of Singleton “Garry”
Simpson, moved to intervene to assert an untimeliness defense.
Simpson “adopt[ed] and incorporate[d]” the Taxpayers’ legal
arguments regarding their statute of limitations defenses and
attached documents to establish that she and her husband had
not agreed to an individual extension until after the limitations
period had expired. J.A. 2454. On February 6, 2019, the Tax
Court denied Simpson’s motion to intervene.

The Tax Court has not issued rules for third-party
intervention. McHenry v. Comm’r, 677 F.3d 214, 216 (4th Cir.
2012). Under Tax Court Rule 1(b), the Tax Court is authorized
to prescribe such procedure, “giving particular weight to the
Federal Rules of Civil Procedure to the extent that they are
suitably adaptable to govern the matter at hand.” Tax Ct. R.
1(b). We agree with the Fourth Circuit that, because Tax Court
Rule 1(b) gives the Tax Court “broad discretion in deciding
whether and to what extent to follow Federal Rule of Civil
Procedure [(FRCP)] 24 governing intervention” and because
“Rule 24 itself confers broad discretion on a trial court, we give
great deference to a Tax Court’s decision to deny intervention,
reviewing only for a clear abuse of discretion.” McHenry, 667
F.3d at 216. Here, the Tax Court did not clearly abuse its
discretion in denying Simpson’s motion to intervene.

Simpson did not specify whether she was seeking
mandatory intervention under FRCP 24(a) or permissive
 33
intervention under FRCP 24(b) and so the Tax Court addressed
both. First, the Tax Court noted intervention of right is not
appropriate if the existing parties adequately represent the
intervenor’s interests, see Fed. R. Civ. P. 24(a), and permissive
intervention is not appropriate if it would unduly delay the
adjudication of the existing parties’ rights, see Fed. R. Civ. P.
24(b). It observed that, if either her individual extensions or the
Partnership Extension was valid, any adjustments were timely.
The Tax Court had earlier found the Partnership Extension
valid and Simpson offered no additional argument on the
Partnership Extension—incorporating by reference the
Taxpayers’ failed argument. Accordingly, the Tax Court
determined Simpson was adequately represented on the issue
because she asserted no other basis for the Partnership
Extension’s invalidity—failing intervention of right. It also
concluded that Simpson failed permissive intervention because
such intervention would “merely duplicate” the Taxpayers’
Partnership Extension argument “which would serve only to
further delay [the litigation’s] conclusion.” J.A. 2487. We
therefore conclude that the Tax Court did not abuse its
discretion in denying Simpson’s motion to intervene.

For the foregoing reasons, the Tax Court’s memorandum
opinion issued August 7, 2017, its order issued February 6,
2019 and its two decisions issued February 7, 2019 are
affirmed.

So ordered.