Fidelity Int'l Currency Advisor A Fund, LLC v. United States, No. 10-2425 (1st Cir. 2011)
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Taxpayer, the founder of EMC, a manufacturer of computer storage devices received non-qualified options to acquire EMC stock. When he exercised those options in 2001, they generated $162 million of ordinary income; it was estimated this could create a tax liability of over $63 million. Prior to exercising the options, taxpayer met with tax and accounting professionals and implemented a plan to form a partnership (Fidelity) with a foreign national; that partnership would engage in transactions that would generate losses largely offsetting gains without net risk. Gain would be principally allocated to the foreign national. Following a series of such transactions, the IRS disallowed taxpayer's losses on Fidelity option transactions for 2001 and 2002 and determined that the partnership was a sham that lacked economic substance. The district court sustained the adjustments and imposed a 40 percent penalty. The First Circuit affirmed
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