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Long Term Capital Holdings v. United States

330 F. Supp. 2d 122 (2004)

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Long Term Capital Holdings v. United States

United States District Court for the District of Connecticut

330 F. Supp. 2d 122 (2004)

Facts

Long-Term Capital Portfolio, L.P. (LTCP) (plaintiff) sold preferred stock in certain United States corporations for approximately $1 million while claiming a basis of approximately $100 million. The preferred stock had been contributed by Onslow Trading and Commercial LLC (OTC). OTC acquired the preferred stock in exchange for certain lease obligations. OTC first leased assets and then immediately subleased them. The sublessees prepaid their obligations to OTC, which then exchanged its original leases and its subleases for the preferred stock, claiming a basis approximately 100 times the market value of the packaged lease agreements. OTC then contributed the preferred stock to LTCP. After LTCP claimed a loss on the sale of the preferred stock, it secured a formal opinion from private legal counsel claiming that the loss should be allowed. The Internal Revenue Service (IRS) denied almost all of LTCP’s claimed loss and levied underpayment penalties against it. LTCP petitioned for readjustment. In finding, as a factual matter, that the lease transactions had no economic substance or business purpose other than to create tax benefits for LTCP, the court evaluated and rejected evidence presented by LTCP as substantial authority for the validity of its claimed loss.

Rule of Law

Issue

Holding and Reasoning (Arterton, J.)

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