Palm Canyon X Investments LLC, AH Investment Holdings, Inc., Tax Matters Partner v. Commissioner of Internal Revenue Service
The U.S. Tax Court granted summary judgment to Analysis Group client the Internal Revenue Service in a "Son-of-Boss" litigation. At issue was the economic substance of the formation of the Palm Canyon investment partnership and certain market-linked deposit (MLD) foreign currency transactions it engaged in to reduce taxes on earnings. The transactions enabled the taxpayer to offset several million dollars of tax payments.
Managing Principal Gaurav Jetley led an Analysis Group team supporting affiliate Professor Hendrik Bessembinder and industry expert Thomas Murphy in assessing the business purpose of the creation of the Palm Canyon partnership and its purchase of offsetting foreign currency positions.
Professor Bessembinder testified that Palm Canyon’s MLD digital option contracts were inappropriate for mitigating the foreign exchange risks common to doing business in foreign markets. He and Mr. Murphy used multiple analytical methods, including a Monte Carlo simulation, to determine that Palm Canyon’s MLD options were overpriced and not reflective of what the Court termed “reasonable market prices or rational economic behavior.” In addition, Professor Bessembinder and Mr. Murphy testified that for all practical purposes there was no likelihood that the MLD transaction would have been profitable for the taxpayer.
The Court affirmed an administrative ruling that the Palm Canyon partnership was a sham, ruled that its MLD transactions lacked economic substance, and imposed penalties for valuation misstatements and negligence.