Free Response to Motion - District Court of Federal Claims - federal

Case 1:05-cv-00748-CCM
Ha~ 04 00 03:31p

Document 22-2

Filed 12/29/2006
917 322-2381

Page 1 of 1
p. 1

Jef'f're~ We 11 es

J enkens & Gilchrist
A PROFESIOlL CORPRATION

- STRICTLY CONFIDENTIAL SUBJECT TO AITORNEY-CLIENT PRIVILEGE AND NONDISCLOSURE AGREEMENT
BASIS ENHANCING DERlY A TIYES STRUCTURE

EXECUTIVE SUMMARY
I. Ta.'(payer, thrugh a single member limited liability company treated as a disregarded
entity for ta puroses, enters into (writes) a short option position on foreign currency.

Such transaction is a nontaxable event until exercise, assignent, lapse or termnation

notwithstanding the receipt of the cas premium for the option. Additionally, a long
option posiLion is purchased, using the short option premium and taxpayer cah equity_ A
business and/or invesbnent reasn for this investment strtegy must exist (e.g., a belief or

view that the currency price wil move in the desired direction). The option spread may be bullsh (call spread) or besh (put spread).
2. Taxpayer folms a partnership (the "Parership") with a third pary or with his wholly

owned S Corporation (..S Corp."), in which the Taxpayer is a 99% parer.
3. Taxpayer contrbutes ihe option spread position to the Parership. This contribution

should result in Taxpayer's tax basis in its Parerip inteest being equal to the cost of

ihe long option contributed. The short option is, more likely than not, not treated as a liability for tax puroses. thus achieving this result.
4. At an appropriate time, the Parership clos the option positions based on market

timing factors, or the options expire, and the Partership recognizes economic gain or
Joss on the transaction.

5. The Taxpayer contrbutes his steppe-up Parership interest to S Corp., resulting in the
Parnership having only one parer an therefore liquidating, distrbuting all of its assets
to the S Corp. parer. In such case, ther is a stepup in the ta basis of the assets held

by the Partership to the stepped-up outside basis ofthe S Corp. parer. Alternatively, if
a third pary is the other parer in the Parership, the Taxpayer may be redeemed from

the partnership in exchange for a distrbution of an equivalent fair value amount of such
asseis, which take on the Taxpayer's high outside basis in the Partership.

6. The distrbutee of the Parership assets (i.e., the S Cotp. or the Taxpayer) sells them at
their stepped-up basis.

..
ii

Exhibit 1

KC 3962