from the United States Court of Federal Claims in Nos.
1:06-cv-00030-EGB, 1:06-cv-00035-EGB, Senior Judge Eric G.
Douglas Hallward-Driemeier, Ropes & Gray LLP, Washington,
DC, argued for plaintiff-appellant. Also represented by
COURTNEY M. Cox, JUSTIN FLORENCE, Kathleen Saunders Gregor,
Loretta R. Richard, Boston, MA; BRITTANY CVETANOVICH,
M. Weiner, Tax Division, United States Department of Justice,
Washington, DC, argued for defendant-appellee. Also
represented by RICHARD Farber, Gilbert Steven Rothenberg,
Caroline D. Ciraolo, Diana L. Erbsen.
O'MALLEY, Bryson, and WALLACH, Circuit Judges.
WALLACH, Circuit Judge.
Russian Recovery Fund Limited ("RRF"), acting
through its tax matters partners Russian Recovery Advisers,
L.L.C. ("RRA") and Bracebridge Capital, L.L.C.
("Bracebridge"), sued the United States ("the
Government") in the U.S. Court of Federal Claims,
seeking readjustment of partnership items pursuant to the Tax
Equity and Fiscal Responsibility Act ("TEFRA"),
I.R.C. §§6221-6233 (2000). RRF alleges that the
Internal Revenue Service's ("the IRS") October
14, 2005 Notice of Final Partnership Administrative
Adjustment ("2005 FPAA") improperly disallowed
approximately $50 million of losses that RRF had claimed for
fiscal year 2000 and imposed a 40% penalty on any
underpayment. The parties filed cross-motions for summary
judgment on timeliness grounds, and the Court of Federal
Claims held that the limitations period for assessing taxes
against RRF's indirect partners had expired as to some,
but not all, indirect partners. See Russian Recovery Fund
Ltd. v. United States (RRF I), 101 Fed. CI. 498, 510-11
(2011) (granting-in-part and denying-in-part the parties'
motions for summary judgment). Following trial on the claims
not resolved at summary judgment, the Court of Federal Claims
entered judgment for the Government, sustaining the IRS's
disallowance of the losses and imposition of penalties.
See Russian Recovery Fund Ltd. v. United States
(RRFII), 122 Fed. CI. 600, 601-02 (2015).
appeals. We have jurisdiction pursuant to 28 U.S.C. §
1295(a)(3) (2012). We affirm.
Court of Federal Claims's factual findings are extensive
and clearly presented. See RRF II, 122 Fed. CI. at
602-14; RRF I, 101 Fed. CI. at 500-01. Because these
factual findings are largely undisputed, we recite only those
facts necessary to resolve this appeal.
are several players of interest. Nancy Zimmerman co-founded
Bracebridge, a management company. RRF II, 122 Fed.
CI. at 602. Bracebridge created RRF, a hedge fund.
Id. Bracebridge also manages FFIP, L.P.
("FFIP"), another fund. Id. All
three-Bracebridge, RRF, and FFIP-are partnerships. RRF
I, 101 Fed. CI. at 500. Relevant to this appeal, Ms.
Zimmerman is a direct partner of FFIP, and FFIP is a direct
partner of RRF. Id. In this context, Ms. Zimmerman
is an indirect partner of RRF and represents similarly
situated indirect partners of RRF (direct partners of FFIP).
1998, Russian sovereign debt was traded exclusively on the
Moscow Interbank Currency Exchange ("MICEX").
RRF II, 122 Fed. CI. at 603-04. Non-Russian
investors could not invest directly in Russian sovereign debt
on the MICEX; however, they could invest in derivative
instruments known as credit-linked notes ("CLNs")
sold by certain authorized banks. Id. at 603. When
Russia defaulted on its sovereign debt in August 1998, the
Russian ruble collapsed, and CLNs lost nearly all of their
value. Id. These assets also became extremely
illiquid: the Russian Central Bank imposed currency exchange
limitations that prevented the ruble from being freely
traded, and the Russian government only allowed the
authorized banks to access the debt and trade in rubles.
events had serious consequences for Tiger Management, LLC
("Tiger"), one of the world's largest managers
of hedge funds. Id. at 604. Two of Tiger's
funds, foreign partnerships that do not pay U.S. taxes, had
purchased CLNs through Deutsche Bank for more than $230
million. Id. After the collapse, those CLNs were
worth less than 10% of their original value. Id. And
Tiger overall was in bad straits: in 1998, Tiger managed $22
billion; but by 2000, that amount had dropped to $6 billion
as a result of heavy losses in Russian debt, Asian debt, and
an investment in U.S. Airways. Id. at 613. During
that period, Tiger needed cash to redeem the shares of
investors who wanted out, but the capital controls on Russian
debt hampered Tiger's ability to sell its devalued CLNs.
Id.; see id. at 604 & n.9.
Zimmerman "believed that she could make money for
herself and investors by obtaining devalued Russian debt at
pennies on the dollar in anticipation of a recovery of the
ruble and hence something approaching face value of debt
instruments." Id. at 603. As a result,
Bracebridge established RRF and sought holders of Russian
securities to contribute CLNs or cash in exchange for shares
of RRF. Id. at 603-04; see J.A. 1758.
Bracebridge also established RRA, a separate management
company to advise RRF and collect management fees.
RRFII, 122 Fed. CI. at 602.
earnest marketing efforts by Bracebridge during the first
several months, RRF largely failed to obtain investors and
still had no assets in March 1999. Id. at 605. An
internal Bracebridge email on March 9, 1999 discussed a
potential contribution of CLNs from an entity through
Deutsche Bank. Id. Given concern that RRF needed
partners to attract the potential investor, the email
proposed having Bracebridge-controlled entities become RRF
partners. Id. A telephone list circulated the next
day contained the contact information of players from
Bracebridge, Deutsche Bank, and Tiger. Id.
April 1999, FFIP "contribute[d] the first assets to
RRF." Id.; see id. at 602. Then, on April 30,
1999, Brace-bridge's James DiBiase emailed Ms. Zimmerman
about the "need" to represent that a
"high" percentage "of RRF (i.e., FFIP) is
owned by individuals" to attract Deutsche Bank's
investors. Id. at 606 (internal quotation marks and
citation omitted). In a second email on May 14, 1999, he
advised Ms. Zimmerman that RRF should not allow corporations
to join because "it could possibly impair one of our
most valuable assets, " i.e., "the built-in losses
in Russian depreciated assets that might end up in RRF."
Id. (internal quotation marks and citation omitted).
As explained in a later email by Mr. DiBiase, the presence of
corporations could preclude later resale "since people
interested in buying tax losses don't want to transact
with corporations." Id. (internal quotation
marks and citation omitted).
series of transactions followed, each of which was
orchestrated by Deutsche Bank. Id. at 604, 620.
First, in late May 1999, RRF's first two substantial
outside investors-both funds operated by Tiger-transferred
CLNs to RRF in exchange for an ownership interest in RRF.
Id. at 607. Prior to investing, however, Tiger
requested certain changes to the "standard RRF offering
memorandum" and refused to execute the standard
subscription agreement representing that "the Shares
subscribed for hereby are being acquired by the undersigned
for investment purposes only, for the account of the
undersigned[, ] and not with a view to any sale or
distribution thereof." Id. (paraphrasing J.A.
8178); see J.A. 5898-99. In response, RRF reduced
the three-year lock-up period to "allow Tiger to
redeem its shares on or after July 1, 1999, in exchange for
cash or assets 'in kind, '" and excluded the
representation that Tiger was purchasing the shares "for
investment purposes only" from the subscription
agreement. RRF II, 122 Fed. CI. at 607; see
J.A. 8853, 8900, 8945-48. Second, on June 3, 1999 (i.e.,
approximately two weeks after the first transaction between
RRF and Tiger), "Tiger sold all of its RRF partnership
shares to FFIP" for approximately $14.1 million, a
discount of $800, 000. RRF II, 122 Fed. CI. at 609;
see J.A. 9069. Notably, during the two weeks between
Tiger's acquisition of its ownership interest in RRF and
its sale of that interest to FFIP, the value of the shares
had in fact increased. RRF II, 122 Fed. CI. at 609.
And a fax from Deutsche Bank to Mr. DiBiase during this
period makes clear that "it was RRF, not Tiger, that
would have had an interest in an entity like FFIP purchasing
[Tiger's] shares" and acquiring the built-in losses.
Id. at 608. Third, on June 22, 1999, RRF sold 77.18%
of the Tiger CLNs to General Cigar Corporation ("General
Cigar") for cash and shares. Id. at 609;
see J.A. 4992-95. Finally, in 2000, RRF sold the
remaining 22.82% of the Tiger CLNs on the open market.
RRF II, 122 Fed. CI. at 609-10.
these transactions, Mr. DiBiase began working with Ernst
& Young to "provide the documents and facts that
would collectively lay the foundation upon which the
accountants would prepare RRF's [tax] returns."
Id. at 622. On August 14, 2001, RRF filed its 2000
tax return, allocating a loss to FFIP, which included a loss
of $49, 786, 826 from the sale of the 22.82% of the Tiger
CLNs. Id. at 609-10; RRF I, 101 Fed. CI. at
500; see J.A. 1621-23, 9496. FFIP then reported losses
for the 2000 and 2001 tax years, much of which were
attributable to the loss claimed by RRF in 2000. RRF
I, 101 Fed. CI. at 500. FFIP's 2001 losses flowed
through FFIP to Ms. Zimmerman, who filed her 2001 individual
tax return on October 15, 2002. Id. On her 2001
individual tax return, Ms. Zimmerman reported a
"substantial amount" of RRF's loss.
Id. "In other words, the bulk of the losses RRF
allocated to FFIP in 2000 were not passed through in 2000,
but were retained by FFIP until 2001, at which point the
losses impacted Ms. Zimmerman's 2001 return."
2005, the IRS performed an audit of FFIP's 2001
partnership return, which ultimately resulted in the issuance
of a "no adjustments letter" to FFIP. Id.
at 501; see J.A. 201. However, in October 2005, the
IRS issued the 2005 FPAA to RRF for its 2000 tax year, which
disallowed the loss RRF claimed for the sale of the Tiger
CLNs and imposed a 40% penalty. RRF I, 101 Fed. CI.
at 501; RRF II, 122 Fed. CI. at 621.
argues that the Court of Federal Claims erred by (1) denying
its cross-motion for summary judgment in RRF I
because "the proposed assessments were time-barred,
" Appellant's Br. 22 (capitalization omitted);
(2)"holding that Tiger's contributions to RRF were
not valid partnership contributions, " id. at
33 (capitalization modified); and (3) "upholding a
massive penalty based on its new partnership requirements,
" id. at 55 (capitalization omitted). After
articulating the relevant standard of review, we address
these arguments in turn.
Standard of Review
present appeal involves factual findings and legal
conclusions reached on summary judgment and following trial.
"We review the Court of Federal Claims'[s] grant of
summary judgment under a de novo standard of review, with
justifiable factual inferences being drawn in favor of the
party opposing summary judgment." Winstar Corp. v.
United States, 64 F.3d 1531, 1539 (Fed. Cir. 1995) (en
banc) (citation omitted), aff'd, 518 U.S. 839
(1996). In appeals following a trial, we review the Court of
Federal Claims's legal conclusions de novo and its
factual findings for clear error. See John R. Sand &
Gravel Co. v. United States, 457 F.3d 1345, 1353 (Fed.
present appeal also raises issues of statutory and regulatory
construction, the characterization of transactions for tax
purposes, and the reasonable cause exception to tax
penalties. "We . . . review questions of statutory and
regulatory construction without deference." SRA
Int'l, Inc. v. United States,766 F.3d 1409, 1412
(Fed. Cir. 2014). "We review the characterization of
transactions for tax purposes de novo, based on underlying
findings of fact, which we review for clear error."
Wells Fargo & Co. v. United States, 641 F.3d
1319, 1325 (Fed. Cir. 2011) (citation omitted). Finally, as
to the reasonable cause exception to tax penalties,
"[w]hether the elements that constitute reasonable cause
are present in a given situation is a question of
fact, but what ...