Another mix-and-match tax dodge of that accomplished immunologist Mr. Jim Haber gets unhorsed in AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than the Tax Matters Partner, 2015 T. C. Memo. 223, filed 10/19/15, Judge Halpern, who’s been there from the beginning, putting the hems on Jim’s inventiveness. I’ve blogged this case and its siblings, most of whom are quoted in Judge Halpern’s opinion, so I won’t reiterate them here.

Jim, of course, doesn’t testify, as his Fifth Amendment right had been earlier secured.

It’s the classic European digital option game, an offsetting gain being unrecognized while the guaranteed loss creates a bailout for corporations with big BICG. Jim Haber was flogging those deals even after IRS fired a warning shot in Notice 2000-44, 2000-2 C.B. 255, back in August, 2000. And misrepresenting facts to coax opinion letters out of various law firms upholding these shenanigans.

Even better was the way that Jim Haber guaranteed the options would never hit the “sweet spot,” whereat the heavy money would pour into the participants’ laps.

Lehman Bros., late but unlamented, was in on it. For a fee, Lehman acted as counterparty, calculation party, and execution party, resembling Poohbah of Mikado fame. And no, the execution party is not the firing squad, it’s the party who carried out the trades at the magic day when the options had to be exercised.

Lehman as calculation party could choose the strike price, and had a 3-pip leeway in making the election (which only had to be commercially reasonable, and everybody agrees 3-pips is reasonable). But the deal was structured so there was only a 1-pip leeway. And Lehman had no fiduciary duty to the “partners” in the deal. So Lehman could always be 1-pip high or 1-pip low.

This structure guaranteed this charade could never make money; in short, the perfect Bialystok (cf. Mel Brooks’ masterpiece The Producers).

Judge Halpern employs “somber reasoning and copious citation of precedent” to dash Mr. Haber’s brainchild to the ground.

IRS’s counsel fails to introduce evidence about $772 of interest deduction, so that gets allowed.

And as this is a FPAA, the impact on the “partners” themselves must abide further proceedings.

Of course, the 40% substantial undervaluation is in play, as is the 20% negligence chop.