Russian Recovery Fund Limited v. United States, No. 16-1718 (Fed. Cir. 2017)Annotate this Case
Non-Russian investors could not invest directly in Russian sovereign debt but could invest in derivative credit-linked notes (CLNs), sold by banks. When Russia defaulted on its sovereign debt in 1998, CLNs lost nearly all of their value. The Russian Central Bank imposed currency exchange limitations that prevented the ruble from being freely traded. Tiger's hedge funds had purchased CLNs for more than $230 million. After the collapse, Tiger needed cash to pay off investors but was unable to sell its CLNs. Zimmerman believed that she could make money by obtaining devalued Russian debt in anticipation of a recovery of the ruble. Bracebridge, in which Zimmerman was a partner, established RRF, a hedge fund. FFIP, another fund managed by Bracebridge contributed RRF's first assets. Tiger transferred CLNs to RRF in exchange for an RRF ownership interest. Tiger sold its RRF partnership shares to FFIP for a discount, although the value of the shares had increased. RRF filed its 2000 tax return, allocating a loss to FFIP. FFIP’s 2001 losses flowed through to Zimmerman. In 2005, the IRS audited the parties, disallowed the loss RRF claimed for the sale of the Tiger CLNs, and imposed a 40% penalty. RRF and Bracebridge sought readjustment of partnership items under the Tax Equity and Fiscal Responsibility Act, I.R.C. 6221–6233. The Claims Court held that the limitations period for assessing taxes against RRF’s indirect partners had expired as to some, but not all, indirect partners and upheld the disallowance of the losses and imposition of penalties. The Federal Circuit affirmed, holding that the losses claimed on Zimmerman’s 2001 tax return are “attributable to” the loss claimed in RRF’s 2000 tax return, the limitations period for which was suspended by the 2005 Final Partnership Administrative Adjustment. Tiger’s contributions to RRF were not valid partnership contributions.