Free Joint Preliminary Status Report - District Court of Federal Claims - federal

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 1 of 7

IN THE UNITED STATES COURT OF FEDERAL CLAIMS STOBIE CREEK INVESTMENTS, LLC, JFW ENTERPRISES, INC., Tax Matters and Notice Partner, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) )

No. 05-748 T (Judge Block)

JOINT PRELIMINARY STATUS REPORT The parties, pursuant to Appendix A of the Rules of the United States Court of Federal Claims ("RCFC"), submit this Joint Preliminary Status Report. Jurisdiction The parties agree that the court has jurisdiction to determine the matters described in 26 U.S.C. §6226(f). Consolidation At this time the parties are not aware of any other case with which this case should be consolidated. Trial Bifurcation Not applicable. Deferral of Proceedings Plaintiff's statement: Neither Stobie nor its members has any independent knowledge (i) of the facts set forth in defendant's statement; or (ii) that any of the transactions in which Stobie

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 2 of 7

and its members engaged are under any criminal investigation. Defendant's statement is inappropriate because it is speculative and prejudicial. Defendant's statement: The Office of the United States Attorney for the Southern District of New York has advised defendant's counsel that it is conducting a criminal investigation with respect to these transactions. That office has asked that it be kept apprised of any discovery in this action in order to ensure that this action does not adversely affect its pending criminal investigations. In the event that it does, the United States anticipates that it will seek either a protective order, or other such relief, including a stay if necessary, to protect the important interests of law enforcement. Counsel for the United States has notified petitioners that, in addition to Rule 6(e) of the Federal Rules of Criminal Procedure which protects grand jury information, the IRS criminal files are also privileged and not subject to discovery at this time. Remand and Suspension Not applicable. Joinder of Other Parties The parties do not expect any additional parties to join this lawsuit. Motions Under RCFC 12(b), 12(c) or 56 The parties do not expect to file any such motions. Relevant Factual and Legal Issues In its Complaint, Plaintiff asks the Court to redetermine (and, in effect, void) the adjustments to partnership items of Stobie Creek LLC (Stobie) that the IRS made in its Notice of Final Partnership Adjustments (FPAA) dated March 9, 2005. The plaintiff asks the Court to

-2-

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 3 of 7

determine that it correctly computed its tax basis in the Therma-Tru stock that Stobie sold in May 2000, and that Stobie correctly determined the capital gains realized on that sale. Plaintiff's assertions: Plaintiff asserts that during April, 2000, the Plaintiff and its members engaged in certain transactions, including certain foreign currency option transactions, with a valid business purpose. As a result and not as the principal purpose of such transactions, the plaintiff was entitled under Code §§754 and 743 to increase the basis of the Therma-Tru stock which it held to approximately $204,000,000. Upon the subsequent sale of the Therma-Tru stock by Stobie, it realized and correctly reported a capital gains of $5,442,303. The plaintiff and its members assert that the transactions that they engaged in had economic substance, were engaged in for valid business purposes, were not steps in an integrated plan to increase the basis of the Therma-Tru stock, and the tax effects thereof were properly reflected on the tax returns of Stobie and its members consistent with the Code, the Treasury regulations and relevant legal authority. In reporting the transactions on their tax returns for the years in question, Stobie and its members, in good faith, reasonably relied upon opinion of counsel. Defendant's assertions: The United States asserts that the transactions in which the plaintiff and others engaged during April 2000 were designed and executed as part of an integrated series of steps. The United States submits that those transactions were planned for the purpose of artificially inflating the basis of the Therma-Tru stock, in advance of an anticipated sale of that stock. The United States further asserts that not only did the plaintiff lack a valid, non-tax business purpose for engaging in these transactions, the foreign currency transactions in which the plaintiff engaged were structured in such a way as to virtually assure that the plaintiff would not realize a gain or a loss on the foreign currency transactions, in excess of the -3-

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 4 of 7

transactional costs. Accordingly, The United States asserts that, under relevant Code provisions, regulations and case law, the transactions that Stobie and others purportedly engaged in during April 2000 did not increase the basis of the Therma-Tru stock for tax purposes, and that Stobie realized capital gains in excess of $200,000,000 when it sold the Therma-Tru stock in May 2000. The United States asserts that the transactions in which Stobie engaged during April 2000 constituted an abusive tax shelter, known as a "Son of Boss" shelter which the IRS described in Notice 2000-44, issued in August 2000. The parties agree that this case presents the following legal and factual issues: · whether the formation of Stobie, and the transactions in which it engaged, had a

business purpose and economic substance, or were instead economic shams that are not respected for tax purposes; · whether the formation of Stobie, and the transactions in which it engaged, were

transactions entered into for a principal purpose of reducing substantially the present value of its members' aggregate income taxes in a manner inconsistent with the intent of those portions of the Code dealing with partnerships, and should, therefore, be disregarded under Treas. Reg. §1.701-2; · plaintiff; · whether, if the formation of Stobie is respected, the contribution to it of the whether the step-transaction doctrine applies to bar the tax benefits claimed by

written call options must be accounted for under Treas. Reg. §1.752-6, applied retroactively, or, alternatively, whether the contribution of the written and purchased call options must be accounted for together, on a net basis; -4-

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 5 of 7

·

whether, if the formation of Stobie is respected, it is entitled, under Code §§ 754

and 743, to increase the basis of the Therma-Tru stock; and · whether, if Stobie is not entitled to increase the basis of the Therma-Tru stock as

claimed on its tax return, under the relevant facts and law, accuracy-related penalties are applicable pursuant to Code §6662. The parties set forth the above description of issues only for the purpose of providing a brief summary for this status report. Neither party intends to concede or waive any factual or legal claim or defense. Settlement The parties do not believe settlement is likely at this stage of the case. They do not contemplate alternative dispute resolution. Trial The parties anticipate proceeding to trial, and do not request expedited trial scheduling. The parties request that trial be held in Chicago, Illinois. The parties propose the following schedule. Where more than one date is listed for a given event, it means the parties were not able to reach agreement on that aspect of the schedule. Document Discovery Begins: Deposition Discovery Begins: Fact Discovery Closes: February 15, 2006 June 1, 2006 August 31, 2006 (proposed by plaintiff) January 16, 2007 (proposed by defendant) September 15, 2006 (proposed by plaintiff) March 15, 2007 (proposed by defendant)

Experts Disclosed:

-5-

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 6 of 7

Rebuttal Experts:

November 15, 2006 (proposed by plaintiff) May 1, 2007 (proposed by defendant) December 15, 2006 (proposed by plaintiff) June 1, 2007 (proposed by defendant) December 15, 2006 (proposed by plaintiff) July 2, 2007 (proposed by defendant) January 15, 2007 (proposed by plaintiff) August 24, 2007 (proposed by defendant)

Expert Discovery Closes:

Discovery Cutoff:

Pretrial Scheduling Conference:

Electronic Case Management None. Other Matters None.

-6-

Case 1:05-cv-00748-CCM

Document 10

Filed 02/02/2006

Page 7 of 7

Respectfully submitted, United States of America Stobie Creek Investments LLC and JFW Enterprises, Inc.

/s/ Stuart D. Gibson Stuart D. Gibson Attorney of Record U.S. Department of Justice Tax Division Office of Civil Litigation Post Office Box 403 Ben Franklin Station Washington D.C. 20044 (202) 307-6586 Eileen J. O'Connor Assistant Attorney General David Gustafson Acting Chief, Court of Federal Claims Section Steven I. Frahm Assistant Chief, Court of Federal Claims Section Cory A. Johnson Trial Attorney, Court of Federal Claims Section

/s/ Robert E. Kolek Robert E. Kolek Attorney of Record Ronald S. Safer Of Counsel Thomas R. Wechter Of Counsel Theresa M.H. Marx Of Counsel. Schiff Hardin LLP 6600 Sears Tower Chicago, Illinois 60606 (312) 258-5500

/s/ Cory A. Johnson Of Counsel

Dated: February 2, 2006

-7-