Stobie Creek Investments, LLC v. United States

OPINION AND ORDER

MILLER, Judge.

In May 2000 members of the Welles family sold half of their stock in the family business, Therma-Tru Corporation (“Therma-Tru”) of Toledo, Ohio. That portion of the Therma-Tru stock was held by Stobie Creek Investments, LLC (“Stobie Creek”), a partnership controlled by members of the Welles family. These cases, before the court after trial, are complaints for readjustment of partnership items filed by plaintiffs Stobie Creek, JFW Enterprises, Inc., and JFW Investments, LLC (collectively, “plaintiffs”), 1 pursuant to 26 U.S.C. (“I.R.C.”) § 6226(b) (2000), 2 and RCFC App. F. 3

*640 Plaintiffs contest the Notice of Final Partnership Administrative Adjustment (the “FPAA”) dated March 9, 2005 (the “2005 FPAA”), issued for the tax year ended December 31, 2000 (the “2000 tax year”), and the FPAA dated February 23, 2007 (the “2007 FPAA”), issued for the tax year ended April 30, 2000 (the “2000 stub tax year”). Compl. ¶1, Stobie Creek Invs., LLC v. United States, No. 05-748T (Fed.Cl. July 12, 2005); Compl. ¶1, Stobie Creek Invs., LLC v. United States, No. 07-520T (Fed.Cl. July 11, 2007). The 2005 and 2007 FPAAs disregarded Stobie Creek for tax purposes as a sham; disallowed the stated basis of Therma-Tru stock because it was attributable to transactions entered into for the purposes of tax avoidance; and increased the partnership’s capital gain income with respect to the sale of the Therma-Tru stock. Plaintiffs seek a refund (with interest as provided by law) of $4,149,521.35 for the 2000 tax year and $58,149.14 for the 2000 stub tax year.

*641 BACKGROUND AND FACTS 4

Therma-Tru was a corporation engaged primarily in the business of manufacturing and selling residential entry doors. See Transcript of Proceedings at 411 (Jeffrey Welles), Stobie Creek Invs., LLC v. United States, Nos. 05-748T & 07-520T (Fed.Cl. Apr. 9-23, 2008) (“Tr.”). 5 In 1962 David K. Welles Sr. (“David Welles”), who died in late December 2007, left Owens Corning Fiberglass and purchased a lumber yard that would later become Therma-Tru. Assisting him with that purchase were attorneys from Shumaker, Loop & Kendrick, LLP (“SLK”). See Tr. at 157 (Waterman), 411-12 (Jeffrey Welles). David Welles was the patriarch of an unusually close, functional, inter-dependent, and loyal family consisting of David Welles’s wife Georgia E. Welles, their sons David K. Welles, Jr. (“Deke”), Jeffrey F. Welles, Christopher S. Welles, and Peter C. Welles and their daughter Virginia Welles Jordan. See Tr. at 394-97 (Jeffrey Welles). The Welles family would continue to engage SLK for a variety of legal matters, and the Welleses maintained a close relationship with individual SLK partners. See Tr. at 158-60 (Waterman), 412-16 (Jeffrey Welles).

By 1987 Therma-Tru had grown substantially, becoming one of the leading firms in the insulated door market. That year David Welles was diagnosed with bone cancer and explored the sale of Therma-Tru. David Welles considered selling the family business to a number of bidders, including Masco Corporation (“Masco”), but he abandoned the plan to sell Therma-Tru after the stock market collapse on October 19, 1987 (known as “Black Monday”). See Tr. at 161 (Waterman), 416-19 (Jeffrey Welles). By 1999 Therma-Tru had grown even larger and more successful, attaining the leadership po-David Welles earlier had passed management of the company to his son Deke. See Tr. at 159 (Waterman). Jeffrey Welles served as the primary investment advisor to Therma-Tru and to the Welles family generally, after working for many years in investment banking, first at the Goldman Sachs Group, Inc. (“Goldman Sachs”), and then at Lazard Fréres & Co. (“Lazard”). See Tr. at 400-11 (Jeffrey Welles). sition in its industry.

Jeffrey Welles left Lazard in 1999 and established an office in New York City at 445 Park Avenue to concentrate his full efforts on providing investment and financial advice to the Welles family. See Tr. at 409-10, 443. During summer 1999 Jeffrey Welles had a conversation in Toledo with his parents, David and Georgia Welles, regarding establishing a family office for the Welles family. In order to pursue this objective, Jeffrey Welles contacted David A. Herpe, partner in the private client department of the law firm McDermott, Will & Emery, LLP (“McDer-mott”) in its Chicago office. See Tr. at 437-JO. Mr. Herpe, who had handled tax matters for the family and Therma-Tru, characterized a family office as

an entity that performs certain functions collectively for family members that can range from something fairly simple like recordkeeping, paying bills, cash management on the one end. The other end it could be investment oversight, tax compliance, coordinating estate planning work and actually serving as a fiduciary for trusts and foundations.

Tr. at 81. Mr. Herpe rendered legal advice and services to Jeffrey Welles in connection with forming the family office that would come to be named North Channel, LLC *642 (“North Channel”), as well as forming an investment entity to manage the family’s investments that later took the name Stobie Creek. In September 1999 Jeffrey Welles established North Channel, and North Channel maintained its offices at 445 Park Avenue. See Tr. at 89-91 (Herpe), 438-40 (Jeffrey Welles).

By 1999 David and Georgia Welles had transferred a significant portion of their Therma-Tru holdings to their children. By mid-summer 1999 the Welleses again were interested in selling a substantial portion of Therma-Tru. Masco became aware that Therma-Tru was on the market and made a bid for the company. Masco proposed a stock transaction in which the shareholders of Therma-Tru would receive approximately $825 million in restricted Masco shares. The transaction progressed through summer and early fall 1999. While this transaction would be tax-free (because it was a stock transaction and not a redemption or cash transaction), the restrictions on the Masco shares would inhibit liquidity. See Tr. at 420-23 (Jeffrey Welles). Jeffrey Welles was concerned that this illiquidity would hinder his family’s financial and philanthropic goals and sought “techniques ... to borrow against those shares or to assign the holding period.” Tr. at 423. Jeffrey Welles’s research included contacting Frank H. Edwards, now managing partner of Aqueduct Capital Group, then a broker at Morgan Stanley in the private client services group. Jeffrey Welles and Mr. Edwards discussed Morgan Stanley products that might help the Welleses with illiquidity. See Tr. at 423-25 (Jeffrey Welles), 852-55 (Edwards). The transaction with Masco, however, derailed when the Welleses and Masco could not reach a consensus on company management following the planned acquisition. See Tr. at 426-27 (Jeffrey Welles).

A Therma-Tru board member, Larry So-lari, suggested that the Welleses contact Kenner and Company (“Kenner”), a private equity firm, as a potential buyer. See Tr. at 427. Following a series of negotiations, bids, and renegotiations, the parties struck a tentative deal on December 8, 1999. See Tr. at 427-28. The principal attorney representing the Welleses in this matter, as well as a variety of other matters, was David F. Waterman, partner and chair of SLK’s management committee, who had a long history representing the Welles family and Therma-Tru. The Welles family has been a client of SLK for over forty-five years. SLK has provided the Welleses and Therma-Tru with estate planning, real estate, tax, and litigation services. Mr. Waterman began working on matters for the Welleses in his capacity as an attorney with SLK in the mid-1980s. Until 1992 the “relationship partner” at SLK responsible for the Welleses was Greg Alexander. See Tr. at 159 (Waterman). As Mr. Alexander was planning on retiring, Mr. Waterman stepped into that role. In addition to being the relationship partner for the Welleses and providing them with legal services, Mr. Waterman also joined the board of Therma-Tru as a director. See Tr. at 157-61.

The transaction that SLK helped negotiate between Therma-Tru and Kenner differed from the stock transfer that the Welleses had considered with Masco. The structure of the Kenner sale contemplated that Kenner would infuse cash into Therma-Tru for a 50% equity position at the same time that the current shareholders would redeem 50% of their stock in Therma-Tru for cash. See Tr. at 432-33 (Jeffrey Welles). The December 8, 1999 Kenner proposal and non-binding letter of intent valued 50% of Therma-Tru at nearly $425 million. See PX 61 at 1. Therma-Tru, the stockholders of Therma-Tru (consisting of the Welleses and various non-family Therma-Tru employees), and KT Holdings, LP (an investment vehicle created and controlled by Kenner), finalized a structured sale that was embodied in an Amended and Restated Recapitalization and Stock Purchase Agreement on May 9, 2000. See PX 62 (embodying final agreement; PX 314 is earlier draft version of agreement dated February 8,2000).

This transaction differed from the one that the Welleses considered with Masco in another important respect. Because a redemption, and therefore a payment of cash for stock, was contemplated, the transaction would be a taxable transaction for the Ther-ma-Tru shareholders. See Tr. at 432-34 *643 (Jeffrey Welles). Based on the long relationship of the Welleses and Mr. Waterman, whose firm had a history of rendering tax advice to the family and Therma-Tru, in late October or early November 1999, David, Deke, and Jeffrey Welles approached Mr. Waterman to inquire whether he or another attorney at SLK was “familiar with any strategies that could reduce taxes in connection with the [Kenner] transaction.” Tr. at 181 (Waterman); see also Tr. at 434-35 (Jeffrey Welles). Mr. Waterman testified that he “was not directly involved” in such strategies, but knew that SLK “had assisted ... at least two clients ... in connection with a strategy that had been developed by ... a Dallas-based law firm.” Tr. at 181. That firm was Jenkens & Gilchrist, P.C. (“J & G”).

The Welleses indicated an interest in learning more about this strategy, and Mr. Waterman put them in contact with John V. Ivsan, an associate in SLK’s tax department working out of SLK’s Toledo, Ohio office. Mr. Waterman characterized Mr. Ivsan as “a conduit, if you will, between the client and [J & G].” Tr. at 183. Because Mr. Ivsan was a “conduit” and “the thought and the judgment that was being exercised and the strategy itself was being created by [J & G],” Mr. Waterman was comfortable in referring the Welleses to Mr. Ivsan. Id. On December 9, 1999, Mr. Ivsan e-mailed Donna Guerin, a partner at J & G’s Chicago office and one of the two principal attorneys involved in implementing the J & G strategy. 6 Mr. Ivsan informed Ms. Guerin that he had “a $450 million transaction” (referring to the contemplated sale of 50% of the Welleses’ Therma-Tru stock) and that “the clients have been brought lightly up to speed” (referring to the J & G strategy), but he sought “confidentiality agreements signed by them before going further” and asked Ms. Guerin to prepare appropriate agreements for the three individuals, David, Deke, and Jeffrey Welles. DX 326.

David and Jeffrey Welles signed these confidentiality agreements and returned them via facsimile transmission to SLK on December 28, 1999. See PX 134. During fall 1999 Jeffrey Welles met with Ms. Guerin in Chicago. Mr. Ivsan also e-mailed Ms. Guerin on December 14, 1999, to indicate that he would be meeting with the Welles family to discuss the J & G strategy in connection with the Therma-Tru transaction and to propose to Ms. Guerin that J & G “be compensated an amount equal to 2% of the deal” and that the “overall fee quote, inclusive of advisory fees, [be] 5%.” DX 327 (family name redacted from e-mail, but offered by defendant and admitted as pertaining to the Welles family); see Tr. at 344-47 (Waterman). Jeffrey Welles already was quite interested in pursuing the strategy and sought to convince his family that it was the right move.

The Welleses were sophisticated individuals who had engaged not only in complex business transactions for years, but who also had engaged a number of attorneys to provide tax-planning services and to implement strategies that would minimize their tax burdens. This background is significant because no opprobrium attaches to creative tax planning; because the Welleses had sheltered millions of dollars guided by Mr. Herpe; and because the concept of legitimate tax minimization or avoidance was—and continues to be—an acceptable tool for business and estate financial management. See Gregory v. Helvering, 293 U.S. 465, 469 , 55 S.Ct. 266 , 79 L.Ed. 596 (1935) (“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”).

Mr. Herpe began working with the Welles family in 1993, while at the law firm of Schiff, Hardin & Waite. In October 1993 Mr. Herpe first met with David and Georgia *644 Welles to discuss estate-planning strategies and charitable giving. At that time Mr. Herpe explained to them a mechanism known as a “Grantor-Retained Annuity-Trust,” or “GRAT.” See Tr. at 83-34. Mr. Herpe described the GRAT as “a leveraged gift technique, it’s a trust which is used to transfer assets at a greatly reduced gift tax value, and as a means, therefore, to save transfer taxes.” Tr. at 83. Mr. Herpe described the GRAT structure, as follows:

When you create a GRAT you are exchanging an asset for a fixed annuity, a series of fixed-annuity payments over a term. The GRAT is set up so that the annuity payments are a more or less equal exchange for the asset put in. Based on tables that the government publishes you can value that annuity interest.

The gift that you make when you create the GRAT is the value of the asset you put in minus the value of the annuity stream. So the gift is only a fraction, and it can approach zero of the actual asset you put in. To the extent assets remain in the GRAT when the term ends, those pass on with no further transfer tax.

Q. [by plaintiffs’ counsel] So in essence, you can avoid having to pay a gift tax?

A. Correct.

Tr. at 84-85.

With Mr. Herpe’s assistance, the Welleses would create two such GRATs: the Georgia E. Welles 1994 Qualified Annuity Trust (“GEW 1994 QAT”) and the David K. Welles 1994 Qualified Annuity Trust (“DKW 1994 QAT,” also known as the “Welles Family Trust”). Tr. at 85; see PX 16 (DKW 1994 QAT formation document). These trusts provided for a four-year annuity whereby

each of the trusts were funded with shares of stock in Therma-Tru, nonvoting stock. Therma-Tru paid a dividend on its stock periodically, the dividends were used to fund the annuity payments.

So by the time we actually got to the end of the four years we hadn’t had to distribute anything other than the dividend cash back to David and Georgia. And the result was that all of the stock was still in the trust at the end of the four-year period.

Tr. at 86. At the end of this four-year annuity term, the stock that the trusts held was valued at approximately $56 million. That $56 million worth of stock passed to the beneficiaries of the trusts—the Welles children—free of any gift or estate tax. Mr. Herpe recounted that “[t]he tax rate at that time was 55 percent at the high end, so the tax savings was approximately $30 million.” Tr. at 87. Based on his experience, Mr. Herpe considered this transaction appropriate under the Internal Revenue Code.

On January 23 and 24, 2000, the Welles family met at David and Georgia’s home in Vero Beach, Florida, to discuss a variety of matters pertaining to the pending Therma-Tru deal with Kenner, formation of a family office (North Channel), formation of a family pooled investment vehicle (Stobie Creek), formation of a private family foundation to fulfill the Welleses’ charitable goals, tax issues, and a strategy to deal with the capital gains associated with the contemplated sale of Therma-Tru to Kenner. See PX 111 (Welles Family Meeting Documents compiled by Mr. Herpe); PX' 113 (Welles Family Meeting Agenda drafted by Mr. Herpe); PX 117 (Welles Family Meeting Minutes prepared by Mr. Herpe). During the first session, on January 23, restricted to members of the Welles family, David and Georgia Welles discussed the family philosophy and philanthropic pursuits. See Tr. at 449-51 (Jeffrey Welles). During the morning session on January 24, Jeffrey Welles and Mr. Herpe spoke at length to the family about the concept of a family office and the benefits to the Welles family from forming such an office. They discussed North Channel’s intended business purpose and sketched out the job descriptions of the positions in which North Channel would employ people. See Tr. at 99-103 (Waterman); 451-54 (Jeffrey Welles). Jeffrey Welles already had planned on hiring William F. Chung as Chief Operating Officer of North Channel and discussed Mr. Chung’s background with the family. Mr. Chung had worked with Jeffrey Welles at Lazard for over four and one-half years and directly for Jeffrey Welles for two of those years. See Tr. at 1311-13 (Chung). The family also discussed the idea of forming the pooled *645 investment vehicle that would become Stobie Creek to help the family pursue its investment goals. See Tr. at 455-60 (Jeffrey Welles).

Mr. Herpe was neither involved in nor present during the afternoon session during which Mr. Waterman gave his presentation on tax strategy, nor did Mr. Herpe have any role in the tax planning that culminated in these refund actions. To prepare for his presentation at the Vero Beach meeting, Mr. Waterman reviewed a copy of a J & G tax opinion that was issued to a Tampa-based SLK client, Larry Morgan, in connection with a series of transactions utilizing the short sale of Treasury securities as the investment vehicle, obtained from Thomas A. Cotter, a partner in the tax and estate planning departments at SLK. See Tr. at 189-90 (Waterman); PX 228 (Morgan J & G opinion letter dated April 8,1999). During the afternoon session that date, Mr. Waterman presented the J & G strategy to the family, including an executive summary of the strategy prepared by J & G. See PX 111 at 24; PX 111B (copy of executive summary bearing Jeffrey Welles’s fax line). The executive summary described six steps that were to be engaged in a particular order and read, in full:

1. Taxpayer, through a single member limited liability company treated as a disregarded entity for tax purposes, enters into (writes) a short option position on foreign currency. Such transaction is a nontaxable event until exercise, assignment, lapse or termination notwithstanding the receipt of the cash premium for the option. Additionally, a long option position is purchased, using the short option premium and taxpayer cash equity. A business and/or investment reason for this investment strategy must exist (e.g., a belief or view that the currency price will move in the desired direction). The option spread may be bullish (call spread) or bearish (put spread).

2. Taxpayer forms a partnership (the “Partnership”) with a third party or with his wholly owned S Corporation (“S Corp.”), in which the Taxpayer is a 99% partner.

3. Taxpayer contributes the option spread position to the Partnership. This contribution should result in Taxpayer’s tax basis in the Partnership interest being equal to the cost of the long option contributed. The short option is, more likely than not, not treated as a liability for tax purposes, thus achieving this result.

4. At an appropriate time, the Partnership closes the option positions based on market timing factors, or the options expire, and the Partnership recognizes economic gain or loss on the transaction.

5. The Taxpayer contributes his stepped-up Partnership interest to S Corp., resulting in the Partnership having only one partner and therefore liquidating, distributing all of its assets to the S Corp. partner. In such case, there is a step-up in the tax basis of the assets held by the Partnership to the stepped-up outside basis of the S Corp. partner. Alternatively, if a third party is the other partner in the Partnership, the Taxpayer may be redeemed from the partnership in exchange for a distribution of an equivalent fair value amount of such assets, which take on the Taxpayer’s high outside basis in the Partnership.

6. The distributee of the Partnership assets (i.e., the S Corp. or the Taxpayer) sells them at their stepped-up basis.

PX 111 at unnumbered page 24; PX 111B.

Per the executive summary, the ultimate goal of stepping-up the basis of the assets is to report that stepped-up basis on the partnership’s tax return, which passes through to each partner’s tax return, thereby reducing the capital gain reported and the attendant capital gains tax. Later drafts of this J & G executive summary made this point explicit. See DX 707 (J & G BEDS Executive Summary containing seven steps; final step reading, in its entirety, “Partnership sells the stepped-up capital assets generating a reduced gain for tax purposes.”). Mr. Waterman reaffirmed at trial that this was the goal of pursuing the strategy: “Q. [by defense counsel] The purpose of the [J & G] strategy is to boost the basis and then reduce the capital gain? A. That’s it’s fundamental purpose[ ], yes.” Tr. at 323.

*646 When Virginia Welles Jordan asked Mr. Waterman at the Vero Beach meeting if he would engage in the J & G strategy were he in the Welleses’ situation, he stated that he would. See Tr. at 463-64 (Jeffrey Welles); see also Tr. at 223 (Mr. Waterman testifying that “the comment that I left them at the Vero Beach meeting was if I were they I would pursue this transaction.”)

After the Vero Beach meeting, the Welles family expressed great interest in following Jeffrey Welles and Mr. Herpe’s suggestions to form a family office, pooled investment vehicle, and charitable foundation. They also expressed interest in pursuing the J & G strategy. The family and their representatives and agents proceeded to work on these pursuits in parallel.

Jeffrey Welles began researching the investment aspects of the option transactions that were part of the J & G strategy. He described his research as “do[ing] some diligence on the options transactions.” Tr. at 467. He began by contacting people he knew in the investment industry to develop ideas on which currencies would be worthwhile investments. He first contacted David Parse of Deutsche Bank Alex Brown, LLC (“DB Alex Brown”), 7 at the suggestion of Ms. Gue-rin of J & G. See Tr. at 467-68. Jeffrey Welles conducted a series of telephone conversations with Mr. Parse in late March 2000 regarding foreign exchange options. Jeffrey Welles’s handwritten notes, taken during the course of one such conversation, indicate that the discussion concerned options involving the euro, the Swiss franc, and a variety of spot prices. See Tr. at 476-77; see also PX 154 at 1-2 (document containing two pages of handwritten notes spanning three conversations, the first with Neil F. Bresolin, and the remaining two with Mr. Parse). Jeffrey Wells also engaged Neil F. Bresolin, Vice President of Investment Management Services at Goldman Sachs Group, Inc. (“Goldman Sachs”), in a conversation about foreign exchange options. See Tr. at 471-75; see also PX 154 at 1. Although Jeffrey Welles discussed foreign exchange options generally with Mr. Bresolin, he did not tell Mr. Breso-lin or anyone else at Goldman Sachs the terms of the options that he was considering. See Tr. at 804 (Jeffrey Welles). Jeffrey Welles also spoke with Mr. Edwards at Morgan Stanley. Tr. at 478-79. Mr. Edwards put Jeffrey Welles in touch with a trader at Morgan Stanley’s foreign exchange desk where Jeffrey Welles discussed foreign exchange options generally, but did not mention the particular terms of the options that he was considering. See Tr. at 855-60, 866-76 (Edwards).

Stobie Creek was formed on March 3, 2000. See PX 57 Tab 9 (Delaware certificate of good standing dated October 24, 2007, indicating formation of Stobie Creek on March 3, 2000). The Welleses planned on forming a single-member LLC for each family member and for the DKW 1994 QAT, each designated by the initials of the respective family member or trust that would be the sole member of that LLC, i.e., JFW Investments, LLC; DKW Senior Investments, LLC; DKW Junior Investments, LLC; etc. (the “single-member LLCs”). The Welleses then planned on having each of those single-member LLCs join Stobie Creek as members. Attorneys at SLK prepared schedules to that effect, comprising a Member Signature Page, Joinder Agreement, and New Investment Request in Stobie Creek, for each of the single-member LLCs on March 3, 2000. See, e.g, PX 57 Tabs 2-8. 8

On March 3, 2000, Mr. Herpe sent Jeffrey Welles a Cash Handling Agency Agreement for Stobie Creek that would “allow Stobie *647 Creek to receive all of the cash proceeds from the Therma-Tru Sale.” DX 548 (letter from Mr. Herpe to Jeffrey Welles); DX 424 (the Cash Handling Agency Agreement). On March 6, 2000, Mr. Herpe forwarded to Jeffrey Welles a draft of the Stobie Creek company agreement for review and further discussion. Mr. Herpe instructed that, once Jeffrey Welles had “completed [his] review of the documents,” he was to give Mr. Herpe a call, and Mr. Herpe would have “drafts of the foundation documents available for [Jeffrey Welles and his parents’] review shortly.” DX 40.

On March 6, 2000, Mr. Waterman sent a letter, copied to each of the Welleses,

confirming] and correcting] certain information that we provided to you [at the Vero Beach Meeting] in connection with a proposed investment in so-called digital foreign currency options, the consolidation of such options together with Therma-Tru stock in an investment partnership, the closing of such option positions, the termination of the investment partnership and subsequent sale of Therma-Tru stock.

PX 152 at 1-2. Mr. Waterman enclosed “a redacted version of a draft opinion issued by J & G in connection with a similar transaction together with supporting legal memoran-da.” PX 152 at 2. That draft opinion was the one issued to Larry Morgan regarding a similarly structured transaction that involved the short sale of certain Treasury securities, rather than foreign currency options, as proposed at the Vero Beach meeting. See PX 228 (J & G tax opinion letter dated Apr. 8, 1999, for Larry Morgan regarding Treasury security investment strategy); PX 151 (one related J & G memorandum). Mr. Waterman’s letter described the opinion that J & G would issue for the Welleses as an opinion that it was “more likely than not” that the recommended transactions would be respected for federal income tax purposes. PX 152 at 2.

Mr. Waterman discussed some government efforts to attack tax shelters generally, but opined that then recently issued regulations “do not appear to apply to you in your particular situation, since the investment strategy under consideration does not reduce corporate tax liability. Rather the proposed strategy will result in a reduction of your individual income tax liability.” PX 152 at 3. Mr. Waterman also clarified his earlier comments at the Vero Beach meeting about the possibility that, in the event the IRS did not recognize the Welleses’ tax treatment of the transaction, the Welleses ultimately could be required to pay penalties in addition to the unpaid tax. Mr. Waterman noted that J & G had offered to SLK “a portion of its fee for [SLK’s] assistance in creating and implementing the investment vehicles and documenting the transfers of assets.” Id. Mr. Waterman indicated that, contrary to what he might have said at the Vero Beach meeting,

I believe we have been clear that were are not recommending that you pursue [J & G’s] proposal. In fact, we have advised you that our knowledge of J & G’s proposal was obtained in confidence under a confidentiality agreement similar to the one you have executed, that we are therefore unable to issue the opinion being offered by J & G and that we have not determined that we would be prepared to issue such an opinion even if permitted under our confidentiality restrictions.

Id. Mr. Waterman also asked the Welleses to

note that the enclosed opinion states, and the opinion to you will state, that it is based on certain representations made by you in connection with the transactions, namely that you will enter into the option agreements with a profit motive, that your contributions of the options and the Ther-ma-Tru stock to the investment partnership will have substantial non-tax business reasons and that each transaction described at the beginning of this correspondence will be undertaken separately without any binding commitment to do so. Of particular importance are the representations that you have substantial non-tax business purposes to convey the options and the Thermar-Tru stock to the partnership, since that is one of the more likely grounds on which the IRS could challenge the arrangement and the resulting tax consequences.

PX 152 at 4 (emphasis added).

Jeffrey Welles testified that he had not received this letter from Mr. Waterman, nor *648 any other Waterman letter of significance. See Tr. at 595-96. The court charges Jeffrey Welles with knowledge of the contents of these attorney communications. It is not likely that Jeffrey Welles was unaware of a key letter that his counsel wrote, especially after he admitted receiving the J & G Morgan tax opinion letter by mail after the Yero Beach meeting and before he engaged in the foreign currency options transactions. See Tr. at 689 (witness caveated that he was not positive about how he received it), 740. Jeffrey Welles’s disinclination to recall receiving key letters from Mr. Waterman—the only communications to the Welleses that memorialized Mr. Waterman’s legal advice on this crucial tax matter—tarnished the plausibility of Jeffrey Welles’s testimony. That said, Mr. Waterman’s effort to distance himself from his promotion of the J & G strategy does not shield Mr. Waterman’s legal advice from the taint of self-interest. SLK was a broker for J & G’s strategy.

JFW Investments, LLC, a Delaware Limited Liability Corporation, was formed on March 17, 2000. See PX 36 Tab 1. Jeffrey Welles’s S-Corporation, JFW Enterprises, Inc., was formed on March 17, 2000, as well. See PX 36 Tab 4.

On March 20, 2000, Mr. Ivsan sent Ms. Guerin an e-mail requesting her to instruct Deutsche Bank AG (“DB” or “Deutsche Bank”) to open accounts for each of the Welleses’ single-member LLCs and S-Corporations. See DX 156. Mr. Ivsan’s e-mail copied David Parse of DB Alex Brown. Mr. Parse would be the individual at DB Alex Brown primarily responsible for managing the creation of each of the option contracts between Deutsche Bank and the Welleses that were integral to the J & G strategy. In an e-mail dated March 22, 2000, Mr. Ivsan sent Ms. Guerin and Mr. Parse a list reflecting the amount of the respective capital gain that each of the Welleses expected to realize through redemption of the Therma-Tru stock. See DX 304.

In an Assignment Separate From Certificate dated March 24, 2000, Jeffrey Welles transferred 50% of his Therma-Tru stock to Stobie Creek. See DX 712. Jeffrey Welles continued his research regarding foreign currencies and markets. See Tr. at 519-22; see, e.g., PX 159 (Deutsche Bank Weekly Reports dated March 27, 2000). On March 27, 2000, Mr. Parse and Rod Maekay, also of DB Alex Brown, sent by fax to Jeffrey Welles “sample” option confirmations, reflecting another entity’s transactions, that were indicative of the type of digital options that Jeffrey Welles was planning on acquiring as part of the J & G strategy. See DX 376. On the same date, March 27, 2000, Jeffrey Welles filed Form 2553 with the IRS, electing to treat JFW Enterprises, Inc. as an S-Corporation. See PX 36 Tab 10.

On March 28, 2000, David and Georgia Welles, as trustees of the Welles Family Trust (the DKW 1994 QAT), signed Guaranty Agreements with DB Alex Brown for the trading accounts that the Welleses opened. See PX 163; PX 164. On March 30, 2000, Jeffrey Welles by fax directed Susan Madden of Northern Trust Corporation (“Northern Trust”), the trust company managing the Welles Family Trust, to wire $2,045,750.00 from the Welles Family Trust to seven separate accounts at DB Alex Brown. See DX 518. This reflects a loan from the Welles Family Trust to the single-member LLCs to pay the premiums for the options that each of the single-member LLCs would acquire. Lawrence W. Goldstein, Chief Financial Officer of North Channel, prepared a record of these loans and their eventual repayment. See PX 141. Jeffrey Welles authorized these wire transfers, along with the transfer of funds from the single-member LLCs to DB Alex Brown. See PX 218; PX518.

On March 31, 2000, each of the single-member LLCs entered into two pairs of option contracts: the first pair, an option collar involving a long option and a short option on the value of the Swiss franc (“CHF”) versus the United States dollar (the “dollar”); the second pair, an option collar involving a long option and a short option on the value of the dollar versus the euro (referred to collectively as the Foreign Exchange Digital Options Transactions, or “FXDOTs”). Both pairs of options would close on April 17, 2000. See DX 212-225 (Deutsche Bank trade confirmations dated and faxed April 3, 2000, indicating trade date of March 31, 2000); see also PX *649 243-256 (same confirmations, except that PX 247 (corresponding to DX 216) and PX 256 (corresponding to DX 225) have handwritten corrections made to initial exchange amount). On April 3, 2000, JFW Investments, LLC, transferred its option contracts to Stobie Creek. See PX 123. The other single-member LLCs followed suit.

Each option was a digital option. A digital option is one in which the payoff is either some fixed amount of some asset or nothing at all. Each pair of option contracts included the purchase of a long option and the sale of a short option on a currency pairing. Together, these contracts constituted an option collar. See PX 293 at 4-6 (expert report of Robert W. Kolb, Ph.D., testifying for plaintiffs).

The single-member LLCs each purchased a long euro digital option with a strike price of $0.9912 per euro; sold a short euro digital option with a strike price of $0.9914 per euro; purchased a long Swiss franc digital option with a strike price of CHF 1.7027 per dollar; and sold a short Swiss franc digital option with a strike price of CHF 1.7029 per dollar. Considering the pair of euro digital options together, if, at option close on April 17, 2000, the euro traded at less than $0.9912 per euro, Jeffrey Welles (as an example) would lose $96,625.00; if the euro traded at more than $0.9914 per euro, Jeffrey Welles would gain $96,625.00; and if the euro traded in between the two strike prices, Jeffrey Welles would gain $19,228,375.00. The range within this two-pip (two-thousands of a unit) spread was referred to as the “sweet spot.” Similarly, considering the pair of Swiss franc digital options, if, at option close on April 17, 2000, the Swiss franc traded at less than CHF 1.7027 per dollar, Jeffrey Welles (as an example) would lose $96,625.00; if the Swiss franc traded at more than CHF 1.7029 per dollar, Jeffrey Welles would gain $96,625.00; and if the Swiss franc traded in between the two strike prices, hitting the sweet spot, Jeffrey Welles would gain $19,228,375.00. See Tr. at 569-74 (Jeffrey Welles); see also DX 293 at 7-11 & exs. 9 & 10 (expert report of Dr. Kolb); DX 307 at 3^4 (expert report of Richard M. Levieh, Ph.D., testifying for plaintiffs).

Looking to the aggregate of the single-member LLCs’ investments, combining the two options resulted in nine possible outcomes: in one outcome hitting both sweet spots would result in an over $407 million return; in two outcomes hitting either sweet spot would result in an over $202-204 million return; in one outcome finishing in the money in both options would result in a $2 million gain, doubling the investment; in two outcomes finishing in the money in one option but out of the money 9 in another would result in no net gain or loss, i.e. zero profit; and in one outcome finishing out of the money in both options would result in a loss of $2 million, the entire investment. See PX 293 at 7-11 & ex. 11; DX 307 at 3^4. Represented in a tabular format, the matrix of outcomes can be displayed, as follows:

Profit or Loss Outcomes for FXDOTs

$1 < CHF 1.7027 -$2,045,750.00 $202,529,250.00 $0

$1 > CHF 1.7027 and $202,529,250.00 $1 < CHF 1.7029 $407,104,250.00 $204,555,000.00

$1 > CHF 1.7029 $0 $204,555,000.00 $2,045,750.00

EUR 1 < $0.9912 EUR 1 > $0.9912 EUR 1 > $ 0.9914 and EUR 1 < $0.9914

*650 See also PX 293 ex. 11 (table in Dr. Kolb’s expert report).

It is important to note that these outcomes decidedly were not each equally likely to occur. The court examines the expert witnesses’ analyses of the probability of a given result in the Discussion section of this opinion.

Over the lifetime of the options, Jeffrey Welles monitored on a regular basis the spot exchange rates of the dollar versus the euro and Swiss franc versus the dollar. See Tr. at 580-81 (Jeffrey Welles). He also directed Mr. Chung to monitor on a regular basis these spot exchange rates and other macroeconomic indicators. See Tr. at 1318-30 (Chung). On April 17, 2000, each of the options expired out of the money, resulting in a loss of the entire investment. See Tr. at 596 (Jeffrey Welles), 1330 (Chung). On May 9, 2000, the Therma-Tru transaction with Kenner closed. See PX 62 (Amended and Restated Recapitalization and Stock Purchase Agreement).

After the close of the Therma-Tru transaction and well after the expiry of the options, a flurry of e-mails and faxes passed among the Welleses and their family office, attorneys at SLK, and attorneys at J & G regarding the dating of certain foundation and assignment documents. On April 4, 2000, Mr. Ivsan of SLK sent Ms. Guerin at J & G an email indicating that he had prepared contribution and joinder agreements for each Welles family member and the Welles Family Trust based on the LLC operating agreement and had prepared joinder forms drafted by McDermott for Stobie Creek. He advised that “[f]orms have been sent out for execution; they are undated. I will provide the original executed copies to you to fill in the dates.” DX 305. Mr. Ivsan stated that Ms. Guerin was to “fill in the dates based on the assignment dates for the digital option contracts.” Id. Mr. Ivsan also prepared undated forms of assignment/joinder transferring the Stobie Creek membership interests from the single-member LLCs to the Welles-es’ single-member S-Corporations and indicated that Ms. Guerin should similarly fill in the dates. See id. On the same date, April 4, 2000, Ms. Guerin faxed “numerous documents” to Jeffrey Welles for his signature, including option contracts, wire transfer authorizations, and assignment agreements. DX 333. On the same date, Mr. Chung, now Chief Operating Officer of North Channel, sent Ms. Guerin a fax with the subject “Signature pages.” DX 711.

Exhibits admitted at trial include copies of these documents—the schedules consisting of a Member Signature Page, Joinder Agreement, and New Investment Request in Sto-bie Creek—in signed and unsigned forms, undated or dated with a variety of dates. Some bore the date April 7, 2000. See, e.g., DX 79 (assignment of membership interest and joinder agreement for PCW Investments, LLC, to PCW Enterprises, Inc.); DX 91 (assignment of membership interest and joinder agreement for CSW Investments, LLC, to CSW Enterprises, Inc.). The capital-contribution documents for these entities reflected the dates April 4 and 5, 2000, and were included in a letter sent by Susan E. Monro, legal assistant to Messrs. Ivsan and Waterman, to Ms. Guerin at J & G on April 13, 2000. See DX 93 at 1, 8, 12. Some were undated, but included in a letter sent by Ms. Monro to Ms. Guerin on April 10, 2000. See DX 684; DX 400-402 (undated assignment of membership interest and joinder agreement for DKW Junior Investments, LLC, to DKW Junior Enterprises, Inc.; DKW Senior Investments, LLC, to DKW Senior Enterprises, Inc.; and YJ Investments, LLC, to VJ Enterprises, Inc.).

In an e-mail dated April 13, 2000, Mr. Ivsan informed Ms. Guerin that Therma-Tru declared a $90 million distribution “and the treasurer is telling me that I can date the [Therma-Tru] stock certificates for Stobie Creek ... only as of April 14, 2000.” DX 488. Mr. Ivsan asked Ms. Guerin if this posed “a timing issue,” indicating his “impression ... that the April 14 date poses no threat.” Id. By “threat,” the court infers that Mr. Ivsan alluded to a threat to the order in which the transactions took place that was necessary to achieve the beneficial tax treatment that was the underlying purpose of the J & G strategy. A fax transmit *651 tal dated July 17, 2000, by Mr. Ivsan to John Beery of J & G attached copies of the signed Assignments Separate from Certificate of Therma-Tru stock to Stobie Creek, each bearing the date April 14, 2000. See PX 184 at 2-16. Previous versions of these assignments did not reflect this date; rather, they read March 24, 2000. See, e.g., DX 712 (Assignment Separate from Certificate for Jeffrey Welles). The cover letter accompanying Mr. Ivsan’s April 14, 2000 fax transmittal indicated that “[t]he company recorded the stock transfers as taking effect on April 14, 2000, in order to accommodate a AAA distribution on April 11.” PX 184 at 1.

On May 15, 2000, Mr. Ivsan of SLK sent Ms. Guerin at J & G an e-mail stating that the ‘Welles transaction finally closed” and that “it may be wise to document the shift of LLC ownership interests from the individuals to their S corporations as of April 30, 2000, so that we can file a partnership tax return for the short year ending on that date.” DX 319. On May 18 and 19, 2000, Mr. Goldstein faxed David and Georgia Welles a request to sign attached Stobie Creek member signature pages “to establish your interest in Stobie.” DX 295 at 1-2; DX 296 at 1-2. On May 19, 2000, Mr. Goldstein forwarded those signed pages by letter to Mr. Herpe at McDermott. See DX 41. On June 13, 2000, Carrie M. Yackee, Assistant to Mr. Parse at DB Alex Brown, asked Richard S. Pychewicz, Vice President in the operational control unit of Deutsche Bank, to correct the option trade confirmations for two of the options, so that the date under the logo read April 3, 2000, instead of the current date. Ms. Yackee then e-mailed those confirmations to Ms. Guerin at J & G. See DX 481.

The confusion over the dating of these documents persisted for many months—at least. In an e-mail dated December 28, 2000, Mr. Beery of J & G queried Mr. Ivsan of SLK about “the dates of the filing of the Certificate of Formation and the execution of the Operating Agreement for Stobie Creek.” DX 320. On the same date, Mr. Ivsan replied by e-mail that “[m]y notes indicate that [Stobie Creek] was organized on March 3, 2000. The individual members, however, did not join until the dates provided on their subscription agreements, the execution pages of which were all provided to Donna Guerin (I don’t know if they were dated).” Id. (emphasis added).

During summer 2000 the process of preparing the Welleses’ federal income tax returns began. On June 23, 2000, Mr. Ivsan sent “a sample set of tax returns” to Robert J. Floyd, CPA, the tax preparer for the Welles family, North Channel, and Stobie Creek. DX 273. The sample set included “a tax return for an Electing Small Business Trust, an S Corporation return, and a Partnership return____ Included with the Partnership return is an election under Code Section 754 and a basis adjustment under Code Section 743(b).” Id. On July 19, 2000, Mr. Ivsan sent Mr. Floyd his comments and those of J & G attorneys pertaining to the tax returns that Mr. Floyd had prepared. Among other matters, Mr. Ivsan advised that the returns should not be marked “final,” that J & G suggested that the LLCs be treated as the partners of Stobie Creek, and that Jeffrey Welles’s LLC be designated as the Tax Matters Partner. See DX 258.

On August 9, 2000, Mr. Waterman sent each of the Welleses a letter of congratulation on the successful completion of the Ken-ner transaction. He understood from Mr. Ivsan that

[Mr.] Floyd with [SLK’s] assistance and in reliance on the [J & G] opinion, is nearly ready to file the Stobie Creek partnership return reporting the stock redemption at the elevated tax basis, and therefore lower gain, produced by the tax strategy that was developed by [J & G] and implemented with our help earlier this year.

PX 108 at 1-2. He reminded the Welleses that, “[a]s we have discussed, the aggregate fee payable for this opinion and all work in connection with implementing the strategy is 3% of the gain to be sheltered,” whereby the fee would be shared by J & G and SLK in the ratio of two-thirds to one-third. PX 108 at 2. The fee that would be allocated to SLK, one percent “of the gain to be sheltered,” amounted to $2,045,750.00. Id.

Mr. Waterman reaffirmed his and SLK’s earlier expressed willingness to “waive, perhaps not all, but substantially all of this *652 extraordinary fee.” Id. While Mr. Waterman did “not mean to suggest that [SLK was] not financially motivated,” he stated that SLK had “been very fairly compensated for [its] work in connection with this transaction.” Id. Mr. Waterman did offer to donate all, or a portion, of this fee to charity in the event that J & G would insist on recouping any “amount waived by SLK.” Id. Mr. Waterman set forth his understanding that “[J & G] has insisted upon payment of one-half of its fee upon rendering the opinion necessary to file the Stobie Creek return,” the balance of its fee “payable next year when the individual returns are filed.” Id. He reassured the Welleses that SLK would not require any payment until the next year, “consistent with our position that if for any reason [the Welleses] elect not to pursue reporting the transaction on the basis of the [J & G] opinion [SLK] will not charge the extraordinary percentage fee.” Id.

Jeffrey Welles disavowed receiving this letter from Mr. Waterman, along with the first Waterman letter dated March 6, 2000, see PX 152. See Tr. at 602-03 (Jeffrey Welles). As stated previously, the court does not credit this testimony and charges Jeffrey Welles with knowledge of the contents of these communications from his attorney. Mr. Waterman’s offer to forgo a finder’s fee (ultimately SLK took its entire fee, save $150,000.00 that was donated to charity in SLK’s name, see Tr. at 362-63 (Waterman)), similar to his attempt in his March 6, 2000 letter to distance himself from his personal recommendation at the Vero Beach meeting, does not eliminate the conflict-of-interest that inhered in his and SLK’s brokering the J & G strategy.

On August 13, 2000, the IRS released Notice 2000-44, titled “Tax Avoidance Using Artificially High Basis.” I.R.S. Notice 2000-44, 2000- 2 C.B. 255 (“Notice 2000-44” or the “Notice”) (also admitted as DX 715). The Notice addressed “transactions that purport to generate tax losses for taxpayers.” Id. The Notice reiterated the background principle that “a loss is allowable as a deduction for federal income tax purposes only if it is bona fide and reflects actual economic consequences. An artificial loss lacking economic substance is not allowable.” Id. The Notice represented that both the IRS and United States Department of the Treasury (“Treasury”) had “become aware of ... arrangements that have been designed to produce noneconomic tax losses on the disposition of partnership interests. These arrangements purport to give taxpayers artificially high basis in partnership interests and thereby give rise to deductible losses on disposition of those partnership interests.” Id. Notice 2000-44 addressed two variations of loss-generating transactions that the IRS and Treasury both argued lacked economic substance.

The first variation involved “a taxpayer’s borrowing at a premium and a partnership’s subsequent assumption of that indebtedness.” Id. The example given posited a taxpayer who received cash from a lender under a loan agreement that provides for an inflated stated rate of interest and a stated principal amount that is less than the cash the taxpayer actually receives from the lender. The taxpayer contributes the cash to the partnership; the partnership thereafter engages in investment activities; and on a later date, the taxpayer sells the partnership interest. The taxpayer then claims “that only the stated principal amount of the indebtedness ... is considered a liability assumed by the partnership ... that reduces the basis of the taxpayer’s partnership interest under [I.R.C.] § 752.” Id. The taxpayer thereafter “purports to have a basis in the partnership interest equal to the excess of the cash contributed over the stated principal amount of the indebtedness, even though the taxpayer’s net economic outlay to acquire the partnership interest and the value of the partnership interest are nominal or zero.” Id. Once the taxpayer disposes of his partnership interest, “the taxpayer claims a tax loss with respect to that basis amount, even though the taxpayer has incurred no corresponding economic loss.” Id.

The second variation described by Notice 2000-44 involved the purchase and writing of options and the transfer of those option positions to a partnership, redolent of the J & G strategy. This variation involved the taxpayer “elaim[ing] that the basis in the taxpayer’s *653 partnership interest is increased by the cost of the purchased call options but is not reduced under [I.R.C.] § 752 as a result of the partnership’s assumption of the taxpayer’s obligation with respect to the written call options.” Id. Following disposition of the partnership interest, “the taxpayer claims a tax loss.” Id. Notice 2000-44 announced the position that “[t]he purported losses resulting from the transactions described ... do not represent bona fide losses reflecting actual economic consequences as required for purposes of [I.R.C.] § 165,” the portion of the Internal Revenue Code concerning losses. Id. The IRS and Treasury also noted that the “purported losses from these transactions (and from any similar arrangements designed to produce noneconomic tax losses by artificially overstating basis in partnership interests) are not allowable as deductions for federal income tax purposes” and that such “purported tax benefits ... may also be subject to disallowance under other provisions of the Code and regulations.” Id. Notice 2000-44 identified “[tjransactions that are the same as or substantially similar to” those transactions described in the Notice as “‘listed transactions’ for the purposes” of Temp. Treas. Reg. § 1.6011 -4T(b)(2). Id. at 256 . Listing these transactions required taxpayers who employed these tax strategies to register their use of the strategies with the IRS. See id.

Messrs. Cotter and Ivsan of SLK brought Notice 2000-44 to Mr. Waterman’s attention. Mr. Waterman was concerned because Notice 2000-44 described “two or three different types of investment structures, one of which at least looked similar to the transaction that had been engaged in or pursued by the Welles family.” Tr. at 238-39. Mr. Waterman asked Messrs. Ivsan and Cotter to “research this further, talk to the [J & G] people and get back to me as to what effect they collectively thought this might have on our reporting the transaction on the basis of the expected opinion from [J & G].” Tr. at 239. Messrs. Ivsan and Cotter responded to his request in a memorandum dated August 18, 2000. See PX 259.

The August 18, 2000 memorandum was marked “DRAFT NOT FOR CIRCULATION” and reflected the date of September 1, 2000. PX 259 at 1. According to Mr. Cotter, the document was never finalized. See Tr. at 1133. Mr. Waterman recalled that he conversed with Messrs. Cotter and Ivsan about the memorandum some time early in September and that the draft dated September 1, 2000, was “probably the draft [that he] got.” Tr. at 240-41. The memorandum addressed temporary and proposed regulations issued by Treasury on August 11, 2000, concerning confidential corporate tax shelters and requiring both promoters of and participants in such shelters to register with the IRS. The memorandum also analyzed Notice 2000-44 as it related to those regulations and to the transactions that comprised the J & G strategy. See PX 259 at 1.

Mr. Waterman was not impressed with some aspects of the his colleagues’ analysis. In a comment box addressing whether the “Evaluated Transaction” (the J & G strategy) lacked economic substance, the memorandum expressed that “the Evaluated Transaction consisted of an investment strategy intended to generate a pre-tax profit that far exceeds any ‘expected’ tax savings.” PX 259 at 13. Mr. Waterman’s handwritten annotation reads “B.S.” Id. Mr. Waterman testified that he thought that Messrs. Cotter and Ivsan “overstated the case. Again, the large return I knew was a narrow opportunity. And this would suggest that there was no motivation to obtain the tax benefits.” Tr. at 248.

Another paragraph titled “Tax-Structured Transaction” stated that “[o]ne may infer that the Evaluated Transaction qualifies for [an exception from a registration requirement] because (i) the trade constitutes a standard trade for the vehicle used and (ii) the tax consequences of the trade are fairly well established.” PX 259 at 14. Mr. Waterman added another handwritten “B. S.” below that paragraph. Id. Page 20 of the memorandum explored these points in some more detail and Mr. Waterman’s handwritten annotation next to those bullet points read, “[W]e don’t qualify.” PX 259 at 20. Mr. Waterman testified that he “didn’t think it was longstanding and generally accepted that we would obtain this [favorable tax] result. *654 We were, after all, receiving or expecting to receive an opinion to the effect that it was more likely than not that these tax consequences would be realized.” Tr. at 249.

The second major portion of Messrs. Cotter and Ivsan’s August 18, 2000 memorandum related to Notice 2000414 and its potential application to or impact on the J & G strategy. The memorandum advanced the position that Notice 2000-44 addressed transactions that were intended to generate I.R.C. § 165 losses that did not reflect an economic reality. See PX 259 at 26-33. In particular, the memorandum concluded that

the Notice does not appear to describe any transactions that involve a mere adjustment in basis of one or more assets. Rather the Notice seems to direct its attention toward transactions designed to produce a high basis in a partnership interest followed by the disposition of that partnership interest at a tax loss.

PX 259 at 30. Mr. Waterman’s handwritten annotations indicated that he was not convinced. Beside two paragraphs recounting the second variation of transaction described in Notice 2000-44, Mr. Waterman wrote, “[L]ooks like us.” Id. Next to the quoted portion of the memorandum concluding that Notice 2000-44 was addressed only to transactions designed to produce a high basis that later resulted in an I.R.C. § 165 loss, Mr. Waterman wrote, “I wouldn’t count on this.” Id. If a document can bear the indices of credibility, the “B.S. memo” certainly reflects a lawyerly reaction to the SLK tax attorneys’ expression of comfort.

Mr. Waterman also discussed Notice 2000-44 in a telephone conference call with Jeffrey Welles after it had been released and either just before or just after Messrs. Cotter and Ivsan drafted the August 18, 2000 memorandum. See Tr. at 252 (Waterman). Mr. Waterman informed Jeffrey Welles about the issuance of Notice 2000-44, shared his concerns about the Notice, and related Messrs. Cotter and Ivsan’s analysis. Mr. Waterman also advised that he “wanted a conference call with Donna Guerin to be arranged so that we could hear what [J & G] has to say about it.” Id. Some time in late October, Mr. Waterman scheduled that conference call with Ms. Guerin. The participants included Mr. Waterman, Ms. Guerin, David Welles, Deke Welles, Jeffrey Welles, Larry Gold-stein, and John Ivsan.

During the conference call, Mr. Waterman asked Ms. Guerin “what the opinion of [J & G] was or would be regarding the applicability of [Notice 200(M4] to the Welles[es]’ transaction and the effect on their reporting the transaction as the opinion was expected to indicate. And actually, their willingness to continue giving that opinion.” Tr. at 253. According to Mr. Waterman, Ms. Guerin stated “that [J & G’s] opinion committee had reviewed the matter.” Id. Mr. Waterman considered this statement to be “a comforting thought” because, in the context of a large law firm, he was assured that it “[took] a determination of that sort out of the hands of an individual ... it went to the full committee.” Id. Ms. Guerin related to Mr. Waterman that J & G’s opinion committee “had determined that [Notice 2000414] did not affect transactions of the type that the Wellesfes] had engaged in and that they would opine to that effect in their final opinion.” Tr. at 253-54. When Mr. Waterman asked Ms. Guerin “if she was sure about that,” Ms. Guerin replied that “we’re not about to commit malpractice.” Tr. at 254 (Waterman); see also Tr. at 635-38 (Jeffrey Welles). Mr. Goldstein recalled that Mr. Waterman “did virtually all of the talking,” and he did not recall whether Ms. Guerin had said anything during the conference. Tr. at 1229-31. The court finds Mr. Waterman’s testimony to be plausible.

According to Mr. Waterman, Ms. Guerin also stated that other taxpayers were continuing to pursue the J & G strategy on the basis of J & G’s advice. Tr. at 254. Mr. Waterman recounted that Ms. Guerin presented three main reasons as to why she and J & G concluded that Notice 2000-44 had no effect on the Welleses’ pursuing the J & G strategy. First “she concurred with [Messrs.] Cotter and Ivsan that the [I.R.C. § ] 165 loss generator was different, fundamentally different from a basis enhancement strategy” and that the J & G opinion ultimately included that reasoning. Tr. at 254-55. Second, Ms. Guerin asserted that, “even *655 if [Notice 2000-44] [was] arguably applicable to the Welleses’ transaction, it did not affect [J & G’s] opinion because it did not affect the legal principles on which [J & G] relied in issuing that opinion, in the past or in the future.” Tr. at 255. Finally, Ms. Guerin “said, at that time, that the Welles[es] had already engaged in their transaction and that was the third reason why the notice would not apply to them.” Id. At the conclusion of the conference call, David Welles expressed that he had heard enough and was satisfied with Ms. Guerin’s opinion. See Tr. at 254.

On August 21, 2000, before this conference call, Mr. Ivsan had provided Jeffrey Welles with a draft of the tax opinion that J & G intended to issue with regard to the Welleses pursuit of the J & G strategy. See PX 149. Mr. Ivsan’s letter reminded Jeffrey Welles that, “as a draft, the opinion may be subject to certain changes after further review.” Id. The core of the opinion letter was an exhaustive analysis of the statutes, regulations, and case law relevant to the J & G strategy. The opinion letter was premised on a series of representations that “[y]ou and/or partners of the Partnership [Stobie Creek] and/or partners of JFW INC have represented” to J & G. PX 149 at 6. Chief among the representations called for in the opinion letter were that Jeffrey Welles had “substantial nontax business reasons” for contributing the options to Stobie Creek and for contributing the partnership interests in Stobie Creek from the single-member LLCs to the single-member S-Corporations. PX 149 at 6-7 (emphasis added). The opinion letter also recited representations that the partners were not obligated to engage in any of the transactions and that they had provided all necessary facts and circumstances to J & G. See id.

Jeffrey Welles indicated that he discussed these representations with Mr. Ivsan shortly after receiving this draft and that he believed the representations to be true and accurate. See Tr. at 620-21. On page K-22 of the draft opinion letter, J & G represented that it had

been informed that an objective investment analysis of the instant option positions at the time of your investment in such option positions, using generally accepted models employing standard option pricing theories and methodologies, indicated a substantial probability that the long option strike price level would be reached and that profitability would be achieved. With a payoff amount as a multiple of the investment amount of 2.0 with respect to the Swiss Francs options, and 2.0 with respect to the Euros options, it is objectively demonstrable that a realistic possibility of economic profit existed.

PX 149 at K-22. Jeffrey Welles testified that he never informed anyone at J & G with respect to an objective investment analysis. See Tr. at 629-30. He believed, as he read that paragraph, “that there had been an objective analysis, it wasn’t by me, so presumably by others, that there was a reasonable profit in the trade.” Id. When Mr. Cotter reviewed the draft with Mr. Ivsan, he asked Mr. Ivsan about the nature of the “objective investment analysis” to which J & G’s draft letter referred. From his conversation with Mr. Ivsan, Mr. Cotter understood that the “objective investment analysis” was an analysis provided to J & G by Mr. Parse or by someone at Deutsche Bank, but he did not inquire further. Mr. Cotter could not recall whether this “objective investment analysis” was provided to J & G or to SLK in the form of a written document. See Tr. at 1172-75 (Cotter).

Mr. Floyd continued his preparation of the tax returns for Stobie Creek, each of the single-member LLCs, and the single-member S-Corporations. His preparation included consulting with Mr. Ivsan of SLK. On December 12, 2000, Mr. Ivsan sent Mr. Floyd a letter including comments on a draft tax return that Mr. Floyd had sent him. See DX 260 at 1. “Following several discussions with representatives of [J & G],” Mr. Ivsan reported his “suggestions concerning a few minor modifications to the information contained in this initial tax return.” Id. Mr. Ivsan’s comments “center[ed] on the treatment of assets held by [Stobie Creek] as of the date of termination.” Id. Mr. Ivsan recounted how the transfer of all of the ownership interests in Stobie Creek on April 30, 2000, resulted in the termination of Stobie *656 Creek for the purposes of I.R.C. § 708(b)(1)(B). Mr. Ivsan indicated that this termination for tax purposes caused the “old” Stobie Creek to be deemed to have contributed all of its assets, i.e., Therma-Tru stock, to a “new” Stobie Creek in exchange for partnership interests in the “new” Stobie Creek that are distributed to members of the “old” Stobie Creek in exchange for their interests in that “old” partnership. See DX 260 at 1.

Mr. Ivsan then suggested, based on the advice of J & G attorneys, a series of specific adjustments to the draft tax return that would indicate that “there are no assets on the books of [Stobie Creek] at the moment of its termination.” DX 260 at 2. Moreover, Mr. Ivsan made suggestions pertaining to specific portions of the tax return, including reporting the outside basis of the partnership interest to reflect “the cost of the long option contract position (unreduced by the proceeds of any short option contract position) and ... the Transferee Partner’s basis in his, her, or its Therma-Tru stock contributed to [Stobie Creek].” Id.

On January 25, 2001, Mr. Ivsan sent Mr. Goldstein “a draft tax opinion governing the transactions conducted by Jeff Welles inside [Stobie Creek]” authored by J & G; the draft itself was undated. PX 240 at 1. Mr. Ivsan noted that “the initial partnership tax return for [Stobie Creek] is due February 15, 2001. Accordingly, you and I should both plan to complete our review as soon as possible.” Id. The enclosed draft J & G opinion contained substantially the same representations that were recited in the August 21, 2000 draft.

On February 9, 2001, Ms. Guerin sent Jeffrey Welles an engagement letter on behalf of J & G. The letter contained the “terms applicable to the engagement of Jenk-ens & Gilchrist to represent you [Stobie Creek and the seven members of Stobie Creek identified on an attached schedule, i.e., the Welles family' members] as your lawyers in connection with certain financial markets and federal income tax issues.” PX 140 at 1. The letter cautioned:

Any expressions on our part concerning the probable outcome of our representation reflect our best professional judgment, but are not guarantees, as they are limited by our knowledge of the facts and are based on the state of the law and our interpretation thereof at the time they are expressed.

PX 140 at 1-2. The engagement letter stated that Ms. Guerin and Paul M. Daugerdas, a partner at J & G and, along with Ms. Guerin, one of the principal J & G attorneys responsible for implementing the J & G strategy, would be “the principal attorneys handling your tax matters.” PX 140 at 2. The letter also represented that the Welleses

specifically agree to pay the sum of $4,091,500.00 as a fixed fee for a tax opinion letter and related consultation concerning the material tax issues surrounding the investment ... in a financial market transaction and the related drafting of documents and implementation of such transaction. You hereby acknowledge that you and/or your advisors have reviewed a draft of our tax opinion letter, and such draft is satisfactory and meets your expectations and needs. Jenkens & Gilchrist agrees to deliver its tax opinion letter in substantially the same form of such draft to each of [the Welles family members] on or before February 15, 2001, and your acceptance thereof will constitute your agreement to make payment therefor as provided.

Id.

A final tax opinion letter dated January 2, 2001 (the “J & G Tax Opinion”), was sent to Jeffrey Welles, see PX 143, although Mr. Welles testified that he received an original of this letter only in February 2001. See Tr. at 626. Evidence admitted at trial also indicates that on February 13, 2001, J & G sent a final copy of its Tax Opinion to Virginia Welles Jordan. See DX 64. The representations section remained substantially similar to that of the draft opinions, reciting:

You and/or partners of [Stobie Creek] and/or officers of JFW INC. have represented the following:

a. You entered into the purchase and sale of the Options for substantial nontax business reasons, including (i) to produce overall economic profits ... and (ii) your belief that the *657 most direct way, with the most leverage, to realize gain from expected changes in currency prices was the purchase and sale of the Options.

b. You contributed the Options to [Sto-bie Creek] for substantial nontax business reasons, including, but not limited to, potential diversification of the risks of certain investments, the desire to co-invest as partners with the other members and for your convenience.

c. Your contribution of your interest in JFWLLC to JFW INC. was made for substantial nontax business reasons, including, but not limited to, the ability to engage in estate planning, shared investment management, ownership with other anticipated shareholders, and asset protection planning.

d. Neither you, JFWLLC, [Stobie Creek], nor JFW INC. were obligated to engage in any transaction to which our opinions herein relate upon the completion of any other of such transactions.

e. To the best of your knowledge, you have provided to us all the facts and circumstances necessary for us to form our opinion.

PX 143 at 7-8. On page K-23 of the J & G Tax Opinion appeared the following:

We have been informed that an objective investment analysis of the instant option positions at the time of your investment in such option positions, using generally accepted models employing standard option pricing theories and methodologies, indicated a substantial probability that the long option strike price level would be reached and that profitability would be achieved. With a payoff amount as a multiple of the investment amount of 2.0 with respect to the Swiss Franc options, and 2.0 with respect to the Euro options, it is objectively demonstrable that a realistic possibility of economic profit existed.

PX 143 at K-23.

On February 15, 2001, Stobie Creek filed its federal income tax return for the tax period commencing on March 3, 2000, the formation date of Stobie Creek, and ending on April 30, 2000, the date upon which the ownership interests were documented as passing from the single-member LLCs to the single-member S-Corporations. Mr. Floyd prepared the return and signed it. See DX 124. On February 2, 2002, Stobie Creek filed its return for the tax period commencing on May 1, 2000, and ending on December 31, 2000. Mr. Floyd prepared the return and signed it. See PX 68.

On March 9, 2005, the IRS issued the 2005 FPAA for the 2000 tax year. The IRS issued the 2007 FPAA for the 2000 stub tax year on February 23,2007.

PROCEDURAL HISTORY

On July 12, 2005, the complaint in No. 05-748T was filed in the United States Court of Federal Claims, and the ease was assigned to Judge Lawrence J. Block. Following a series of status conferences and some preliminary discovery, on February 27, 2007, this case was transferred to the undersigned pursuant to RCFC 40.1(b). Discovery, including depositions and various motions to compel, followed. On July 11, 2007, the complaint was filed in No. 07-520T, the companion case. On August 27, 2007, the court granted plaintiffs’ motion to consolidate that case with No. 05-748T. Discovery proceeded; a pretrial order on November 5, 2007, scheduled trial for January 7, 2008. Following a status conference during which defense counsel informed the court that one of its expert witnesses was scheduled to testify before the United States District Court for the District of Colorado on dates that conflicted with this trial, and plaintiffs’ counsel indicated that one of their experts would be testifying at the same trial, the court on December 10, 2007, rescheduled trial to commence on April 7, 2008.

On January 16, 2008, plaintiffs filed their Motion for an Order Confirming Jurisdiction To Decide the Applicability of Penalties and Any Defenses Thereto. Plaintiffs had planned to raise affirmative defenses to penalties imposed, including reasonable cause *658 and good faith under I.R.C. § 6664(c). 10 Plaintiffs intended to address any and all partner-level defenses in the consolidated proceedings and asked the court to “enter an order ruling that it has jurisdiction to determine penalties and partner-level defenses at this trial.” Pis.’ Br. filed Jan. 16, 2008, at 15. After briefing concluded on February 25, 2008, the court held argument on February 29, 2008. Plaintiffs took the position that this partnership-level proceeding was the proper forum for resolving all partner-level defenses to penalties because, plaintiffs proffered, the member partners would defend against penalties on the basis that they acted in “good faith” and upon “reasonable cause” in relying on the advice and actions of Jeffrey Welles. The affirmative defenses of each of the individual partners likely will succeed or fail based on Jeffrey Welles’s personal defenses as managing partner of North Channel (itself the managing partner of Stobie Creek), so plaintiffs argued that the partnership-level trial should resolve conclusively the reasonable cause defenses of each of the individual partners. The court denied plaintiffs’ motion by supplemental order entered on April 30, 2008, 11 observing that TEFRA establishes a two-tiered process for resolving challenges to FPAAs that explicitly disallows adjudication of partner-level defenses in a partnership-level proceeding. The court acknowledged that jurisdiction was present to determine whether the partnership could avail itself of the reasonable cause and good faith defense. Defendant conceded, and the court agreed, that “in making the determination of reasonable cause and other defenses at the partnership level, courts look to the conduct of the managing partner of the partnership.” Supp. Order entered Apr. 30, 2008, at 3 (internal quotation marks omitted) (citing Def.’s Br. filed Feb. 11, 2008, at 15 n. 1).

On February 19, 2008, plaintiffs filed four motions in limine to exclude evidence or testimony: (1) To Exclude the Expert Report, Rebuttal Report, and Amendment to Expert Report of Dr. David F. DeRosa, defendant’s expert witness; (2) To Exclude Non-party “Pattern” Evidence or, in the Alternative, Motion To Compel, referring to one of defendant’s proposed exhibits; (3) To Exclude Evidence of Settlement and Settlement Negotiations; and (4) To Exclude Testimony Regarding Blanket Assertions of the Fifth Amendment. On March 5, 2008, plaintiffs also filed a Motion To Compel Production of Documentary Support for “Summary Chart” Provided by Defendant, which sought documents that were the source of defendant’s proposed “pattern evidence” exhibit.

Plaintiffs’ first motion sought to exclude Dr. DeRosa’s testimony as deficient under the standards for the admissibility of expert testimony established by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 (1993), and Kumho Tire Co. v. Carmichael, 526 U.S. 137 , 119 S.Ct. 1167 , 143 L.Ed.2d 238 (1999). Plaintiffs charged that Dr. DeRosa’s testimony propounded a theory that is not associated with a methodology recognized within the financial community. By order entered on March 25, 2008, the court denied plaintiffs’ motion, ruling that Dr. DeRosa presented “the academic credentials and background to testify as an expert in the structure of complex financial transactions” and that he would be “applying that expertise in analyzing the investment plan in question.” Order entered Mar. 25, 2008, at 5. The court acknowledged that plaintiffs’ objections properly would be considered in the court’s assessment of the weight to be accorded to Dr. DeRosa’s testimony. See id.

Plaintiffs’ second motion sought to exclude DX 649, a spreadsheet prepared by Barbara *659 S. Aprile, Senior Financial Product Specialist with the IRS, that summarized hundreds of transactions that defendant characterized as tax shelters, analogous to the transactions in which plaintiffs engaged, and that was offered for the purpose of demonstrating that plaintiffs’ transactions were based on a predetermined template and lacked economic substance. Plaintiffs argued that the proposed exhibit was based on incomplete material regarding the motives and conduct of hundreds of people and entities unrelated to plaintiffs and was based on unauthenticated papers that lack adequate foundation as to their creation or relevance to the transactions at issue. The court observed that plaintiffs intended to introduce evidence that the subject transactions were designed or structured for plaintiffs; and, in any case, that they were not based on a template that was marketed to many other individuals and entities; and that this exhibit properly was offered as evidence to rebut these positions. By order entered on March 20, 2008, the court ruled that the summary chart could be offered to support defendant’s case that the transactions lacked economic substance and denied plaintiffs’ motion to exclude DX 649. The same order also denied plaintiffs’ March 5, 2008 motion to compel production of documents, except insofar as plaintiffs were allowed to examine Ms. Aprile regarding the preparation of the summary chart, the nature and character of the data that served as its foundation, and any extrapolations that she had made from source data. The court reminded the parties that plaintiffs’ examination of Ms. Aprile properly would explore the qualification of DX 649 as an admissible summary under Fed.R.Evid. 1006, as well as challenge its weight if admitted into evidence. See Order entered Mar. 20, 2008, at 2-3.

Plaintiffs’ third motion sought to exclude evidence relating to settlement and settlement negotiations that the IRS entered into with parties and non-parties under IRS Announcement 2004-46, including Stephen J. Bores, president of Therma-Tru until 1999 and part shareholder of Therma-Tru, who sold his interests in Therma-Tru stock and engaged SLK and J & G to utilize the J & G strategy, albeit separately from plaintiffs and without plaintiffs’ knowledge. Plaintiffs also sought to exclude any testimony pertaining to the Non-Prosecution Agreement that the IRS entered into with J & G on March 27, 2007. By order entered March 24, 2008, the court granted plaintiffs’ motion with respect to the Non-Prosecution Agreement, excepting the J & G press release attached to the Non-Prosecution Agreement 12 if plaintiffs should rely on evidence of advice from J & G or that of another attorney or law firm approving or evaluating the reasonableness of relying on the J & G Tax Opinion. See Order entered Mar. 24, 2008 at 2.

Plaintiffs’ fourth and final motion in li-mine sought to exclude deposition testimony by Mr. Daugerdas, Ms. Guerin, Mr. Ivsan, Mr. Parse, Perry E. Parker, and Craig Bru-baker 13 that consisted, according to plain *660 tiffs, almost entirely of blanket invocations of the Fifth Amendment privilege against self-incrimination. Plaintiffs argued that non-party witnesses’ assertions of the privilege were not relevant evidence of wrongdoing by plaintiffs and urged that the court decline to draw a negative inference from blanket assertions of the privilege. Plaintiffs also argued that no evidentiary basis could be established for attributing to plaintiffs the non-party witnesses’ assertions of the privilege, that plaintiffs lacked any control over the witnesses, and that the Government knew that the witnesses would invoke the privilege to any and all deposition questions and was posing damaging questions as the predicate for asking the court to draw negative inferences from the witnesses’ invocation of the privilege. Plaintiffs presented a four-factor test formulated by the United States Court of Appeals for the Second Circuit in LiButti v. United States, 107 F.3d 110, 123-24 (2d Cir.1997), that, they argued, the court should employ to determine whether it would be permissible to draw negative inferences from the deponents’ invocation of the privilege.

In its order entered on March 21, 2008, granting plaintiffs’ motion in part, the court ruled that three of the four LiButti factors favored exclusion. See Order entered Mar. 21, 2008, at 4-5. The court cautioned plaintiffs that “[t]he extent to which plaintiffs’ motion in limine should be granted, however, is not without qualification.” Id. at 5. The court recognized that plaintiffs could not use the motion “as both a sword and a shield.” Id. If plaintiffs elicited testimony from Jeffrey Welles or any other witness concerning the conversations between Mr. Welles and any of these deponents, “it would be unfair to disallow defendant from introducing the deposition testimony of that witness.” Id. If plaintiffs were to “adduce testimony as to the substance of conversations that Mr. Welles had with any of these third parties ____ defendant may introduce the deposition testimony of that third party.” Id. This ruling did not apply “to the introduction of opinion letters and related documents constituting information or advice.” Id.

On March 28, 2008, plaintiffs moved for partial reconsideration of the court’s March 21, 2008 order granting their motion to exclude the deposition testimony. Plaintiffs questioned the qualifying language whereby defendant would be permitted to introduce the deposition testimony if plaintiffs adduced testimony as to the substance of conversations that Mr. Welles had with the deponents. See Pis.’ Br. filed Mar. 28, 2008, at 3-5. Defendant countered that it would be inequitable to allow plaintiffs to testify with impunity about the communications with the deponents when defendant was not able to introduce the deposition testimony to rebut any such testimony. By order entered on April 3, 2008, following the pretrial conference of the same date, the court denied plaintiffs’ motion for reconsideration based on the reasons stated in defendant’s April 2, 2008 response. 14

On February 19, 2008, defendant filed one motion in limine to exclude the reports and testimony of Ira Shepard and Stuart Smith, two of plaintiffs’ designated expert witnesses. Defendant objected to the expert reports of Prof. Shepard, a tax law professor, and Mr. Smith, a tax attorney, on the grounds that the expert opinions constituted legal testimony not within the scope of Fed.R.Evid. 702 and testimony that improperly usurped the role of the court. By order entered on April 1, 2008, the court granted defendant’s motion, inter alia, because the United States Court of Appeals for the Federal Circuit considered testimony on questions of law inadmissible as expert testimony. See Order entered Apr. 1, 2008, at 4 (citing Mola Dev. Corp. v. United States, 516 F.3d 1370 , 1379 n. 6 (Fed.Cir.2008), and Rumsfeld v. United *661 Techs. Corp., 315 F.3d 1361, 1369 (Fed.Cir.2003)). The court also observed that each of the regional circuits expressed a similar view of such testimony. See id. at 5 & n. *.

On March 11, 2008, the court rescheduled the commencement of trial to April 9, 2008. Trial commenced in Chicago, Illinois, on April 9, 2008, and concluded on April 23, 2008. At the outset of proceedings on April 23, 2008, the last day of trial, plaintiffs’ counsel provided the court and defense counsel with the trial court’s opinion in Sala v. United States, 552 F.Supp.2d 1167 (D.Colo.2008). Counsel did not argue the ease during closing.

In its pretrial brief, defendant had listed the following as an issue of law that the court should resolve: “Whether Treas. Reg. § 1.752-6 is valid as applied retroactively, and disallows all but $2 million of the $204 million increase in the outside basis of Stobie Creek[’s] partners that plaintiffs claim resulted from the contribution of the options.” Def.’s Br. filed Mar. 12, 2008, at 29. Given the holding of the Federal Circuit in Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed.Cir.2006), cert. denied, — U.S. -, 127 S.Ct. 1261 , 167 L.Ed.2d 76 (2007), defendant may have been correct that “the regulation is simply a backdrop to the result that otherwise obtains under the existing law of economic substance and substanee-overform.” Def.’s Br. filed Mar. 12,2008, at 36 n. 25. Significantly, the Federal Circuit in Coltec did not rule on the validity of the regulation or its retroactive effect. Coupled with the 2006 summary judgment opinion in Klamath Strategic Investment Fund, LLC v. United States, 440 F.Supp.2d 608, 623-25 (E.D.Tex.2006) (granting partial summary judgment on invalidity of retroactive application of regulation); see also Klamath Strategic Inv. Fund, LLC v. United States, 472 F.Supp.2d 885, 895 (E.D.Tex.2007), appeals docketed, Nos. 07-40861 & 07-40915 (5th Cir. Sept. 6 and 14, 2007), Sala lends support to plaintiffs’ argument that Treasury Regulation § 1.752-6 cannot be applied retroactively-

By order entered on April 30, 2008, the court stated that its opinion would rule on the applicability of Treasury Regulation § 1.752-6 (and the applicability of I.R.C. § 358(h)(3)); the parties were directed to file supplemental post-trial briefs addressing the regulation and the opinions in Klamath, Sala, and Cemco Investors, LLC v. United States, 515 F.3d 749 (7th Cir.2008), as they relate to retroactive application. Limited post-trial briefing was completed on May 30, 2008.

DISCUSSION

Plaintiffs’ complaints seek readjustment of partnership items for the 2000 tax year and the 2000 stub tax year. Plaintiffs seek a refund in taxes deposited (with interest as provided by law) of $4,149,521.35 for the 2000 tax year and $58,149.14 for the 2000 stub tax year.

I. Jurisdiction

The United States Court of Federal Claims is empowered “to hear and to render judgment upon any petition under [I.R.C. §§ ] 6226 or 6228(a).” 28 U.S.C. § 1508 (2000). Under I.R.C. § 6226, part of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), see I.R.C. §§ 6221-6234 (2000), 15 the Court of Federal Claims has

jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjust *662 ment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item.

I.R.C. § 6226(f).

Partnerships themselves do not pay federal income taxes. I.R.C. § 701. Instead, TEFRA requires a partnership to file an annual information return (Form 1065) that reports its partners’ distributive shares of income, gains, deductions, and credits. Partners are responsible individually for reporting their pro rata share of tax on their own income tax returns. See Weiner v. United States, 389 F.3d 152, 154 (5th Cir.2004).

The IRS may seek to challenge the reporting of any partnership item on a partnership tax return by issuing an FPAA. I.R.C. § 6223(a)(2). Once the FPAA has been issued, the Tax Matters Partner (“TMP”) may file within ninety days a petition for a readjustment of the partnership items for the taxable year at issue with the United States Tax Court, the United States Court of Federal Claims, or the United States district court in which the partnership’s principal place of business is located. I.R.C. § 6226(a). If the TMP does not file a petition for readjustment within ninety days, other “notice” partners have sixty days within which to file a petition for a readjustment of the partnership items for the taxable year. I.R.C. § 6226(b)(1). As long as they have an interest in the outcome of the action, all partners are treated as parties to the petition, whether it is filed by the TMP or by a notice partner. I.R.C. § 6226(c), (d).

A “partnership item” is “any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A to the extent ... such item is more appropriately determined at the partnership level than at the partner level.” I.R.C. § 6231(a)(3). Treasury Regulation § 301.6231(a)(3)-l(a) sets forth the following items, among others, as “partnership items”:

(1) The partnership aggregate and each partner’s share of each of the following:

(i) Items of income, gain, loss, deduction, or credit of the partnership;

(v) Partnership liabilities (including determinations with respect to the amount of the liabilities, whether the liabilities are nonrecourse, and changes from the preceding taxable year);

(3) Optional adjustments to the basis of partnership property pursuant to an election under section 754 (including necessary preliminary determinations, such as the determination of a transferee partner’s basis in a partnership interest); and

(4) Items relating to the following transactions, to the extent that a determination of such items can be made from determinations that the partnership is required to make with respect to an amount, the character of an amount, or the percentage interest of a partner in the partnership, for purposes of the partnership books and records or for purposes of furnishing information to a partner:

(i) Contributions to the partnership;

(ii) Distributions from the partnership —

The concept of “partnership items” also embraces “the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.” Treas. Reg. § 301.6231 (a)(3)-l(b).

The adjustments made in the 2005 FPAA and 2007 FPAA concern, among other items, the contribution of Therma-Tru stock to Stobie Creek, the contribution of digital foreign currency options to Stobie Creek, Stobie Creek’s basis in the Therma-Tru stock, qualification of the sold digital foreign currency short options as “liabilities,” characterization of the digital foreign currency options purchased and sold as separate transactions, the basis of the partnership interests transferred to the Welleses’ single-member LLCs, and the election to increase the cost basis of the partnership assets pursuant to I.R.C. § 754. These matters relate to partnership items that properly are addressed in a partnership-level proceeding over which the Court of Federal Claims has jurisdiction. Accord Jade Trading, LLC v. United States, 80 Fed.Cl. 11, 43 (2007), appeal docketed, No. 08- *663 5045 (Fed.Cir. Feb. 26, 2008); Nussdorf v. Comm’r, 129 T.C. 30, 44 , 2007 WL 2330800 (2007). 16

II. Standard of review

Plaintiffs seek a refund of taxes assessed and paid for the 2000 tax year and the 2000 stub tax year. “In a refund suit the question of overpayment involves two elements: (1) has there been an overpayment and (2) if so, how much.” Fisher v. United States, 80 F.3d 1576, 1580 (Fed.Cir.1996). The court tries factual issues de novo in tax refund suits; no weight is given to the factual findings made by the IRS during administrative proceedings. See George E. Warren Corp. v. United States, 135 Ct.Cl. 305 , 141 F.Supp. 935, 940 (Ct.Cl.1956) (“The tax laws contemplate a trial de novo____”); see also Litman v. United States, 78 Fed.Cl. 90, 107 (2007). Generally, in a tax refund suit, “the taxpayer bears the burden of establishing the right to a refund.” Abrahamsen v. United States, 228 F.3d 1360, 1364 (Fed.Cir.2000); see also Helvering v. Taylor, 293 U.S. 507, 514 , 55 S.Ct. 287 , 79 L.Ed. 623 (1935); Litman, 78 Fed.Cl. at 107 (“ ‘[I]n a refund suit the assessment made by the Service is presumed to be correct and this places an obligation on the taxpayer to come forward with evidence to rebut the presumption.’ ” (quoting Cook v. United States, 46 Fed.Cl. 110, 113 (2000))). However, under I.R.C. § 7491, “[i]f, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue,” provided that the taxpayer establishes the enumerated prerequisites. I.R.C. § 7491(a)(l)-(2); see also Long Term Capital Holdings v. United States, 330 F.Supp.2d 122, 166 (D.Conn.2004) (noting burden of proof on taxpayer to establish that requirements of I.R.C. § 7491 have been met). 17

Although plaintiffs assert in their complaints that “Defendant bears the burden of proof with respect to any issue set forth in the FPAA pursuant to Code Section 7491,” Compl. H 7(c)(ii), Stobie Creek Invs., No. 05-748T; Compl. 117(c)(ii), Stobie Creek Invs., No. 07-520T, they stop short of establishing the prerequisites for invoking I.R.C. § 7491. Plaintiffs’ pretrial brief setting forth their contentions of fact and law makes no mention of I.R.C. § 7491, and plaintiffs did not adduce evidence in recognition of the burden-shifting effect of I.R.C. § 7491. Plaintiffs’ counsel only mentioned I.R.C. § 7491 during closing arguments, 18 at which time defense counsel questioned whether plaintiffs could qualify under the statute, as well as surmised that the result would be the same based on the weight of the evidence. 19 Given the *664 dearth of argument on the subject and the failure of plaintiffs to demonstrate that they have satisfied the prerequisites for shifting the burden under I.R.C § 7491(a)(2), the court rules that the burden of proof remains with plaintiffs to establish their entitlement to a refund of taxes. 20

III. Compliance with the Internal Revenue Code

Defendant has asserted that plaintiffs’ transactions and reporting do not comply with the Code’s basis rules for partnerships in the first instance and that Treasury Regulation § 1.752-6 (2005), retroactively applied to transactions occurring after October 19, 1999, precludes the claimed basis increase on the Therma-Tru stock. These arguments are addressed in turn.

1. The Code and the Helmer doctrine

The United States Court of Appeals for the Federal Circuit charted in Coltec Industries Inc. v. United States, 454 F.3d 1340, 1347 (Fed.Cir.2006), cert. denied, — U.S. -, 127 S.Ct. 1261 , 167 L.Ed.2d 76 (2007), that the first issue to address is whether the partnership’s transactions and reporting were in literal compliance with the Internal Revenue Code. A review of the transactions to be scrutinized provides the context for this analysis.

As discussed more fully in the recitation of facts, beginning in March 2000, the Welles family members and their investment entities set into motion a series of transactions undertaken pursuant to the J & G strategy that purported to reduce the gain recognized on the sale of Therma-Tru stock—a sale that yielded over $211 million to Stobie Creek—to just over $5.4 million. First, the Welleses entered the FXDOTs. Geared to a date of March 31, 2000, the single-member LLCs simultaneously purchased foreign currency digital long options and sold foreign currency digital short options involving the dollar/euro and the Swiss frane/dollar. Although the total stated premiums to be paid by the single-member LLCs for the purchase of the long options was $204,575,000.00, the long option premiums were netted against the short option premiums to be paid by Deutsche Bank, resulting in a net premium actually paid by each single-member LLC totaling $2,045,750.00—1% of the stated premiums for the long options.

Pegged to a date of April 3, 2000, the single-member LLCs contributed both the long and short digital options to Stobie Creek, in exchange for interests in the partnership. Pegged to a date of April 14, 2000, each family member and the DKW 1994 QAT transferred 50% of his/her/its shares in Ther-ma-Tru to Stobie Creek. On April 17, 2000, the long and short digital options expired worthless, without being exercised. Pegged to a date of April 30, 2000, the family members then contributed their separate LLC interests (which now held only their membership interests in Stobie Creek) to corresponding single-member S-Corporations, causing an over 50% transfer of ownership in Stobie Creek and ending the partnership’s first tax year on that date. See I.R.C. § 708(b)(1)(B). 21 Pursuant to I.R.C. §§ 743 and 754, 22 the partnership purported to ad *665 just the basis in the property that it held (the Therma-Tru stock) by the $204,575,000.00 in stated premiums for the long options (not offset by the premiums to be paid by Deutsche Bank for the short options). On May 9, 2000, the sale of Therma-Tru to Kenner was finalized, and Stobie Creek received $211,151,677.00 in exchange for its shares in Therma-Tru. The proceeds were offset by a claimed cost basis of $205,709,374.00, resulting in a reported gain on Stobie Creek’s return for the tax year ended December 31, 2000, of $5,442,303.00.

Plaintiffs take the position that the basis in the Therma-Tru stock held by Stobie Creek was increased by the stated premium for the purchased long options, but was not decreased by the value of the sold short options assumed by Stobie Creek. Generally, when a partner contributes property to a partnership in exchange for a partnership interest, no gain or loss is recognized on the transaction. See I.R.C. § 721(a) (“No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.”). I.R.C. § 722 stipulates that a partner’s basis in a partnership interest (termed “outside basis”), acquired by contributing property and/or any money to the partnership, “shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution.” Similarly, I.R.C. § 752(b) provides that the assumption by a partnership of a partner’s liability decreases the partner’s outside basis in the partnership interest.

Plaintiffs argue that they were not required to reduce the basis in the partnership interests by the value of the sold short options assumed by Stobie Creek “because the short option positions were contingent liabilities.” Pis.’ Br. filed Feb. 7, 2008, at 13. Plaintiffs draw support for this position from Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975). In Helmer the Tax Court adopted the position advanced by the IRS in ruling that option payments did not constitute liabilities for purposes of I.R.C. § 752 when the partnership’s obligation under the option agreements would not become fixed until the options were exercised. Plaintiffs also cite similar decisions of the Tax Court, as well as IRS Revenue Rulings, to demonstrate that contingent obligations do not constitute “liabilities” for purposes of I.R.C. § 752. See Pis.’ Br. filed Feb. 7, 2008, at 16. Because the sold short options were digital options exercised only on their expiration date, whether the options would be exercised could not be known prior to that time. Consequently, based on Helmer and its progeny, plaintiffs maintain that they were not required under I.R.C. § 752 to include the short option premiums in the calculation of basis.

Defendant charges that plaintiffs’ failure to reduce the basis by the sold short option values contravenes the provisions of the Internal Revenue Code. According to defendant, the FXDOTs must be treated as a single transaction—the long and short options cannot be considered separate components, such that plaintiffs may disregard the “contingent” short options in determining basis. Plaintiffs respond that I.R.C. § 988(a)(1)(A) expressly provides that “any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).” Treasury Regulation § 1.988-l(e) prescribes accordingly: “[T]he amount of exchange gain or loss from *666 a section 988 transaction shall be separately computed for each section 988 transaction, and such amount shall not be integrated with gain or loss recognized on another transaction (whether or not such transaction is economically related to the section 988 transaction).” Based on these provisions, plaintiffs contend that a transaction falling within I.R.C. § 988 “necessarily requires the separate computation of basis.” Pis.’ Br. filed Feb. 7, 2008, at 15. Defendant rejoins by interposing Treasury Regulation § 1.988-2(f), which provides that “[i]f the substance of a transaction described in § 1.988—1(a)(1) differs from its form, the timing, source, and character of gains or losses with respect to such transaction may be recharacterized by the Commissioner in accordance with its substance.” Defendant bolsters its statutory argument with I.R.C. § 988(d)(1), establishing that “hedging transactions” shall be treated as a single transaction.

Defendant’s attempt to characterize the FXDOTs as a single unified transaction under the literal application of the Internal Revenue Code is unavailing. Defendant’s expert, Dr. David F. DeRosa, testified that the long and short option components constituted a single transaction that could not be separated in reality and therefore should not be separated for purposes of calculating basis. 23 Plaintiffs’ expert, Dr. Robert W. Kolb, on the other hand, disagreed with Dr. DeRosa, opining that the “four options [the two pairs of FXDOTs that each Welles entity transacted] are separate and distinct instruments, that they can be traded separately, that they are identifiable as typical options. And I think pretty much without controversy, one should be able to recognize them as four distinct, separate options.” Tr. at 931; see PX 293 at 7 (“These two options [speaking of a single pair] are separate and distinct financial instruments. They are priced separately; they can be traded separately.”). 24

Regardless of the conflicting expert opinions on this issue, the court finds the analysis provided in Helmer and its progeny to be the most significant factor controlling the legal status of the options as either a single transaction or separate transactions. Defendant does not avoid this legal analysis, citing Helmer in its pretrial brief only in a footnote to its argument on penalties. See Def.’s Br. filed Mar. 12, 2008, at 38 n. 28. Nor does Dr. DeRosa’s dissection of the factual circumstances of the transactions undercut the long-accepted legal analysis reflected in Helmer . When the FXDOTs were undertaken, plaintiffs’ non-inelusion of the sold short options in the calculation of basis was supported in the case law regarding “contingent” liabilities. See, e.g., La Rue v. Comm’r, 90 T.C. 465, 479-80 , 1988 WL 23562 (1988) (holding obligations not fixed in amount owing cannot be included in partners’ bases); Long v. Comm’r, 71 T.C. 1, 7-8 , 1978 WL 3318 (1978) (holding contingent or contested liabilities like lawsuit claims not “liabilities” that would reduce basis in partnership interest within meaning of I.R.C. § 752); Helmer, 34 T.C.M. (CCH) at 727 .

*667 Defendant’s invocation of I.R.C. § 988(d)(1) is similarly unpersuasive, as defendant did not establish that the Welleses’ FXDOTs qualify as “988 hedging transactions.” Defendant adduces no evidence to establish that the FXDOTs at issue were “identified by the Secretary or taxpayer as being a 988 hedging transaction,” I.R.C. § 988(d)(2)(B), or to qualify the FXDOTs as entered into by the taxpayer primarily to “(i) to manage risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or (ii) to manage risk of currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer.” I.R.C. § 988(d)(2)(A). In fact, it is defendant’s contention that plaintiffs’ FXDOTs were entered into with a primary motivation of tax avoidance, not risk management. See Def.’s Br. filed Mar. 12, 2008, at 31 (“The Welleses’ implementation of the [J & G strategy] consisted of an artificial and prepackaged set of transactions designed for the specific purpose of generating a tax benefit.”). 25

The legal doctrines delineated in Helmer and its progeny plainly apply to the Welleses’ FXDOTs. Thus, for defendant to prevail on the ground that plaintiffs’ tax reporting position was not in literal compliance with the Code, defendant must rest on its remaining argument that recently enacted Treasury Regulation § 1.752-6 applies retroactively to plaintiffs’ transactions in 2000, an argument analyzed in the next section. Defendant, however, correctly points out that literal compliance alone with the Code is not sufficient to validate the tax reporting position taken by plaintiffs. As the Federal Circuit recently confirmed in Coltec, defendant’s appeal to doctrines such as “substanee-over-form,” “step transaction,” and “economic substance” must be considered before a tax reporting position can stand. See 454 F.3d at 1351 . These doctrines will be addressed in parts IV and V.

2. Retroactive application of Treasury Regulation § 1.752-6

On June 24, 2003, Treasury proposed regulations relating to the definition of liabilities under I.R.C. § 752, i.e., in the partnership context. See Assumption of Partner Liabilities, 68 Fed.Reg. 37,434 (June 24, 2003) (Prop. Treas. Reg. §§ 1.752-0 to -7). Included in the proposed regulations was temporary Treasury Regulation § 1.752-6, titled “Partnership assumption of partner’s section 358(h)(3) liability after October 18, 1999, and before June 24, 2003.” Treas. Reg. § 1.752-6 ; see 68 Fed.Reg. at 37,441. On May 26, 2005, these temporary regulations became final and Treasury specified that Treasury Regulation § 1.752-6 would apply retroactively. See 70 Fed.Reg. 30,334, 30,335 (May 26, 2005). Treasury Regulation § 1.752-6 created a framework for defining liabilities within the context of I.R.C. § 752 that applied from October 18, 1999, to June 24, 2003. See Treas. Reg. § 1.752-6 (d). Treasury Regulation § 1.752-7 set forth the framework that would apply after June 24, 2003, although taxpayers could elect to apply it to transactions occurring between October 18, 1999, and June 24, 2003. Treas. Reg. § 1.752-7 (k).

By reference to I.R.C. § 358(h)(3), which, in the context of setting forth rules for determining basis on corporate transactions, defines liabilities as including “any fixed or contingent obligation to make payment,” Treasury Regulation § 1.752-6 requires a partner to reduce his basis in a partnership *668 interest by the value of contingent liabilities assumed by the partnership—contrary to the then existing policy to exclude contingent liabilities from the computation of partnership basis. See Helmer, 34 T.C.M. (CCH) at 727 . Treasury recognized that a definition of liability that would include contingent obligations would effect a change in the law. See 68 Fed.Reg. at 37,436 (stating in context of proposed Treasury Regulation § 1.752-1(a)(1) that “[t]he definition of a liability contained in these proposed regulations does not follow Helmer”).

On the last day of trial, plaintiffs advised the court of the District of Colorado’s decision in Sala , issued on the date prior, concerning the retroactive application of Treasury Regulation § 1.752-6. See Sala, 552 F.Supp.2d at 1185 . This court ordered the parties to file supplemental post-trial briefs addressing Treasury Regulation § 1.752-6 and the opinions in Cemco Investors, LLC v. United States, 515 F.3d 749 (7th Cir.2008); Sala; Klamath Strategic Investment Fund, LLC v. United States, 440 F.Supp.2d 608 (E.D.Tex.2006) (denying summary judgment on issue of retroactive application of Treas. Reg. § 1.752-6 ); and Klamath Strategic Investment Fund, LLC v. United States, 472 F.Supp.2d 885, 895 (E.D.Tex.2007), appeals docketed, Nos. 07-40861 & 07-40915 (5th Cir. Sept. 6 and 14, 2007), as they relate to the retroactive application of the Treasury Regulation.

In Cemco the United States Court of Appeals for the Seventh Circuit observed that Treasury Regulation § 1.752-6 was “explicit” in stating that it applied retroactively to assumptions of liabilities occurring before its enactment. Cemco, 515 F.3d at 752 . While the Cemco court reviewed the trial court’s findings regarding economic substance, it did not offer a thorough analysis of the validity of retroactively applying Treasury Regulation § 1.752-6. The court merely observed that the effect of the regulation was to “instantiate the pre-existing norm that transactions with no economic substance don’t reduce people’s taxes.” Cemco, 515 F.3d at 752 (contractions in original). 26 If the regulation’s retroactive application is valid, the short foreign currency digital options that the single-member LLCs contributed to Sto-bie Creek—each a “contingent” obligation— constituted liabilities for the purposes of I.R.C. § 752 requiring a corresponding reduction in the basis claimed. Given those circumstances, plaintiffs’ refund action could not succeed under the literal application of the Code and Treasury regulations. Because the retroactive application of Treasury Regulation § 1.752-6 to plaintiffs’ transactions occurring in early 2000 has been placed before the court as an issue for trial, see Def.’s Br. filed Mar. 12, 2008, at 35-36, an analysis of the controlling provisions and regulations follows.

In reviewing the applicability of a Treasury regulation, courts must first determine whether the regulation is legislative in character or interpretive. See Schuler Indus., Inc. v. United States, 109 F.3d 753, 754-55 (Fed.Cir.1997). Legislative regulations are promulgated pursuant to Congress’s direct grant of authority. The United States Supreme Court has directed courts to apply a deferential standard of review to such legislative regulations, according them “controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.” Chevron U.S.A., Inc. v. Nat’l Res. Def. Council, Inc., 467 U.S. 837, 844 , 104 S.Ct. 2778 , 81 L.Ed.2d 694 (1984). By contrast, an interpretive regulation is promulgated by the Treasury pursuant to I.R.C. § 7805(a), by which “the Secretary shall prescribe all needful rules and regulations for the enforcement of’ the Code. Such interpretive regulations are afforded less deference, but nevertheless are valid and applicable if they are reasonable interpretations of a statute and if they “ ‘harmonize[ ] with the plain language of the statute, its origin, and its purpose.’ ” Rowan Cos. v. United States, 452 U.S. 247, 252 , 101 *669 S.Ct. 2288 , 68 L.Ed.2d 814 (1981) (quoting Nat'l Muffler Dealers Ass’n v. United States, 440 U.S. 472, 477 , 99 S.Ct. 1304 , 59 L.Ed.2d 519 (1979)).

In general, Congress has prohibited Treasury from issuing regulations that apply retroactively. See I.R.C. § 7805(b)(1). Regulations are retroactive when they apply to taxable periods ending before the earliest of

(A) [t]he date on which such regulation is filed with the Federal Register[;]

(B) [i]n the case of any final regulation, the date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register[; or]

(C) [t]he date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.

I.R.C. § 7805(b)(l)(A)-(C). I.R.C. § 7805 enumerates exceptions, two of which are relevant: (1) “The Secretary may provide that any regulation may take effect or apply retroactively to prevent abuse,” I.R.C. § 7805(b)(3); and (2) “The limitation [against retroactive application] may be superseded by a legislative grant from Congress authorizing the Secretary to prescribe the effective date with respect to any regulation,” I.R.C. § 7805(b)(6).

Defendant contends that Congress, by section 309 of the Community Renewal Tax Relief Act of 2000, Pub.L. No. 106-554, § 309 , 114 Stat. 2763A-587, -638 (“Section 309”), expressly authorized Treasury to promulgate Treasury Regulation § 1.752-6 and enforce it retroactively. See Def.’s Br. filed May 15, 2008, at 3-8. In the alternative, defendant argues that the regulation is proper under I.R.C. § 7805(b)(3) to prevent abuse, even in the absence of specific congressional delegation of authority and authorization of retroactive application. See id. at 16-18.

Section 309, titled “Prevention of Duplication of Loss Through Assumption of Liabilities Giving Rise to a Deduction,” adopted a basis-reduction rule, codified in I.R.C. § 358(h), that applies to a transferee corporation’s assumption of “any fixed or contingent obligation to make payment, without regard to whether the obligation is otherwise taken into account for purposes of this title.” I.R.C. § 358(h)(3). Congress directed that “amendments made by this section shall apply to assumptions of liability after October 18, 1999.” § 309(d)(1), 114 Stat. 2763A-638. Section 309 concerns transactions undertaken by corporations and the tax treatment of corporate entities. Although the text of Section 309 includes no reference to I.R.C. § 752, the Code provision addressing assumptions of liability by a partnership, subsection (c) of Section 309, titled “Application of Comparable Rules to Partnerships and S Corporations,” directs that Treasury “shall prescribe such rules which provide appropriate adjustments under subchapter K of chapter 1 of the Internal Revenue Code of 1986 [i.e. the portion of the Internal Revenue Code pertaining to partnerships] to prevent the acceleration or duplication of losses through the assumption of (or transfer of assets subject to) liabilities described in section 358(h)(3) of such Code____” § 309(c)(1), 114 Stat. 2763A-638 (emphasis added). 27 Subsection (d)(2) of Section 309 allows for the retroactive application of Treasury’s prescribed rules, stating “The rules prescribed under subsection (c) shall apply to assumptions of liability after October 18, 1999, or such later date as may be prescribed in such rules.” § 309(d)(2), 114 Stat. 2763A-638.

Section 309, codified as I.R.C. § 358(h), sets forth the rule governing the assumption of liabilities by a corporation not already covered by I.R.C. § 358(d). I.R.C. § 358(d)(1) provides that a shareholder must reduce his basis in corporate stock when the corporation assumes a shareholder’s liability because that assumption of liability consti *670 tutes “money received by the taxpayer on the exchange.” Before the enactment of I.R.C. § 358(h), Congress took the position that certain contingent liabilities assumed by a corporation were not considered by the IRS to constitute liabilities within the meaning of I.R.C. § 358(d)(1). See Staff of J. Comm, on Taxation, 107th Cong., General Explanation of Tax Legislation Enacted in the 106th Congress 154 (J. Comm. Print 2001) (citing Rev. Rul. 95-74, 1995- 2 C.B. 36 (holding parent corporation’s basis in stock of subsidiary would not be reduced by subsidiary’s assumption of contingent environmental remediation liabilities)). The Joint Committee on Taxation’s General Explanation of the change made by adding I.R.C. § 358(h) described the type of transaction that Congress was seeking to address:

The Congress was concerned about a type of transaction in which taxpayers seek to accelerate, and potentially duplicate, deductions involving certain liabili-ties____ [A]ssume a transferor corporation transfers assets with a fair market value basis in exchange for preferred stock of the transferee corporation, plus the transferee’s assumption of a contingent liability that is deductible in the future. The transferor claims a basis in the stock received equal to the basis of the assets. However, the value of the stock is reduced by the amount of the liability, creating a potential loss. The transferor may then attempt to accelerate the deduction that would be attributable to the liability by selling or exchanging the stock. Furthermore, the transferee might take the position that it is entitled to deduct the payments on the liability, effectively duplicating the deduction attributable to the liability.

Staff of J. Comm, on Taxation, 107th Cong., General Explanation of Tax Legislation Enacted in the 106th Congress 154 (J. Comm. Print 2001) (emphases added).

When Congress directed Treasury to prescribe “Comparable Rules [for] Partnerships,” it intended that Treasury promulgate rules that would address transactions involving the possible acceleration and/or duplication of losses—the type of transactions to which Congress directed its concern. Congress was explicit in this regard. Treasury Regulation § 1.752-6 cannot assume the status of a comparable rule or regulation when it does not speak to transactions involving the possible acceleration and/or duplication of losses. Defendant admits that the regulation is not “restricted in its application to any particular species of abusive transactions (e.g. an acceleration or duplication of losses).” Def.’s Br. filed May 15, 2008, at 7. Yet, defendant argues, in the following paragraph, that “Treas. Reg. § 1.752-6 carries out the mandate of Congress by precluding the artificial inflation of a partner’s partnership interest (outside basis) through the contribution of contingent liabilities, just as § 358 precludes an artificial inflation of the basis in stock through the contribution of contingent liabilities to a corporation.” Id. at 7-8. Defendant certainly characterizes plaintiffs’ transactions as causing “artificial” inflation of their outside basis, and defendant advances as its litigation position that the IRS does not recognize inflation of the outside basis in this manner. The mandate of Congress to the Treasury in Section 309(e)(1), however, was not to combat inflation of basis—artificial or otherwise—rather, to preclude the acceleration and/or duplication of losses.

The transfers of the contingent liabilities in the eases at bar resulted in increasing each partner’s outside basis, but did not cause any acceleration or duplication of losses. Moreover, I.R.C. § 358(h)(3) only defines liabilities that are assumed in exchanges or series of exchanges between a corporation and its shareholders. Treasury Regulation § 1.752-6 addresses any transaction whereby a partner contributes property to a partnership in exchange for a partnership interest and the partnership assumes a contingent liability of the partner, regardless of whether it accelerates or duplicates losses. The lack of correspondence in the reach of the Treasury Regulation relative to the statutory mandate is apparent.

Although Congress enacted Section 309 to provide a basis rule for contingent liabilities in the corporate context, it did not make a comparable change to the Code in the partnership basis rules of I.R.C. § 752. Trea *671 sury Regulation § 1.752-6 constitutes an attempt to do so by regulation, and Treasury has acknowledged as much. Congress grants agencies the authority to promulgate regulations that have the force of law, but agencies do not have the authority to promulgate such regulations absent a congressional mandate. See Rite Aid Corp. v. United States, 255 F.3d 1357,1359-60 (Fed.Cir.2001) (statutory authorization to correct instances of tax avoidance created by filing consolidated returns does not give Treasury broad authority to change application of other Code provisions); Union Carbide Corp. v. United States, 222 Ct.Cl. 75 , 612 F.2d 558, 563 (1979) (regulations “must be within the scope of the authority vested in the Treasury by the enabling act”). Because Treasury Regulation § 1.752-6 exceeds the scope of Congress’s specific authorization of retroactivity in Section 309, its retroactive application cannot stand, see I.R.C. § 7805(b)(6), and the regulation properly cannot be considered a legislative regulation due the considerable deference afforded by Chevron.

Defendant alternatively argues that the retroactive application of Treasury Regulation § 1.752-6 is appropriate pursuant to I.R.C. § 7805(b)(3) in order “to prevent abuse.” “Abuse” is not defined in I.R.C. § 7805. However, it would be an incongruous result to defer to Treasury’s determination that a particular regulation must apply retroactively in order to prevent abuse, when Congress saw fit to decree the end of one named abuse on a retroactive basis (acceleration and duplication of losses), but not all potential abuses related to transfers of partnership assets. Because Treasury Regulation § 1.752-6 exceeds the congressional mandate to address transactions that accelerate and duplicate losses, this broad “abuse prevention” authority cannot serve as an alternate ground for validating retroactive application.

Defendant also suggests that Notice 2000-44 served to put plaintiffs (and other similarly situated taxpayers) “on notice that the transactions it described would be scrutinized and penalized.” Def.’s Br. filed May 15, 2008, at 10. Defendant argues:

Because Notice 2000-44 was issued in August 2000, and notified taxpayers that the contribution of paired long and short options to partnerships in order to artificially increase outside basis were abusive, and would not be allowed, the Secretary’s exclusion of these transactions from the exceptions in Treas. Reg. § 1.752-6 (b) could not have been a surprise.

Id. at 13. This argument misunderstands the import of IRS notices. As a general proposition, IRS notices are press releases stating the IRS’s position on a particular issue and informing the public of its intentions; such notices do not constitute legal authority. See Samonds v. Comm’r, 66 T.C.M. (CCH) 235 (1993) (holding that IRS notice “is an administrative pronouncement which like a revenue ruling or revenue procedure does not constitute authority for deciding a case in this Court”). IRS notices are not promulgated pursuant to a notice-and-comment period, the process which gives regulations their legal authority and entitles them to Chevron deference. Whether plaintiffs had “notice” that their transactions would be subject to scrutiny has no bearing on whether a Treasury regulation, seeking retroactively to effect a change in the law, can serve to disallow plaintiffs’ reporting position.

This determination that Treasury Regulation § 1.752-6 cannot apply retroactively to plaintiffs’ transactions does not equate to a ruling that plaintiffs have discharged their burden to establish their entitlement to a refund. The IRS disregarded for tax purposes the transactions that plaintiffs entered into pursuant to the J & G strategy because, the IRS further asserted, they lacked economic substance. The court discusses the economic substance doctrine and its application to plaintiffs’ transactions in the following section.

IV. Economic substance doctrine

Having determined that plaintiffs’ calculation of basis complies with the literal requirements of the Internal Revenue Code, the next issue is whether the transactions and reporting engaged in by plaintiffs satisfy the doctrines developed to implement the *672 statutory purpose of the Code. Defendant has enlisted multiple, and complementary, doctrines in arguing that plaintiffs’ transactions should be disregarded: “[T]he BEDS shelter [the J & G strategy] and the options it relies upon[] lack economic substance[;]” “Under the step transaction doctrine Stobie Creek cannot claim the inflated stock basis[;]” “Under the substance-over-form doctrine ... each FXDOT must be treated as a single transaction.” Def.’s Br. filed Mar. 12, 2008, at 30, 32, 34. 28 Whether defendant intended to present different theories or sought to invoke different “tests” for the court to apply, the Federal Circuit set the binding standard in Coltec: “[T]he economic substance doctrine has required disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality.” 454 F.3d at 1352 . The economic substance doctrine “prevent[s] taxpayers from subverting the legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to reap a tax benefit.” Id. at 1353-54 . If plaintiffs’ transactions do not pass muster under the economic substance doctrine, the court must disregard the transactions for tax purposes, and the assessments made in the 2005 and 2007 FPAAs will flow to the individual partners.

1. Coltec analysis

The Federal Circuit in Coltec enumerated five principles that must be considered in analyzing a transaction or series of transactions under the economic substance doctrine: (1) a taxpayer may not reap tax benefits from a transaction that lacks economic reality; (2) a taxpayer bears the burden of proving that a transaction is imbued with economic substance; (3) the economic substance of a transaction must be viewed from an objective standpoint; (4) the transaction which gave rise to the alleged tax benefit is the one to be examined; and (5) arrangements or transactions that do not affect the economic interests of independent third parties deserve close scrutiny. See id. at 1355-57 ; Jade, 80 Fed.Cl. at 45 . Accordingly, plaintiffs bear the burden of showing, from an objective perspective, that the series of transactions that increased the basis of the Therma-Tru stock by $204,575,000.00 had economic reality.

In evaluating a transaction’s economic reality, the Supreme Court and the Federal Circuit, along with other courts of appeals, look for a business purpose, beyond reducing taxes, to support a transaction; a transaction without a business purpose lacks economic reality and must be disregarded. See Coltec 454 F.3d at 1355 (citing Higgins v. Smith, 308 U.S. 473, 476 , 60 S.Ct. 355 , 84 L.Ed. 406 (1940); Gregory v. Helvering, 293 U.S. 465, 469 , 55 S.Ct. 266 , 79 L.Ed. 596 (1935); Dow Chem. Co. v. United States, 435 F.3d 594, 599 (6th Cir.2006); Boca Investerings P’ship v. United States, 314 F.3d 625, 631 (D.C.Cir.2003); In re CM Holdings, Inc., 301 F.3d 96 , 102 (3d Cir.2002); United Parcel Serv. of Am., Inc. v. Comm’r, 254 F.3d 1014, 1018 (11th Cir.2001); Terry Haggerty Tire Co. v. United States, 899 F.2d 1199 , 1201 n. 2 (Fed.Cir.1990); Holiday Vill. Shopping Ctr. v. United States, 773 F.2d 276, 280 (Fed.Cir.1985); Basic, Inc. v. United States, 212 Ct.Cl. 399 , 549 F.2d 740, 745-46 (1977); Rothschild v. United States, 186 Ct.Cl. 709 , 407 F.2d 404, 417 (1969); Ballagh v. United States, 166 Ct.Cl. 191 , 331 F.2d 874, 875-76 (1964)).

Courts have found a legitimate business purpose beyond tax avoidance where the taxpayer demonstrates that a reasonable possibility of profit exists separate and apart from the tax benefits created by the transac *673 tions. See, e.g., Coltec, 454 F.3d at 1356 (citing Black & Decker Corp. v. United States, 436 F.3d 431, 441-42 (4th Cir.2006) (noting that economic substance inquiry requires “objective determination of whether a reasonable possibility of profit from the transaction existed” (internal quotation marks and emphasis omitted))); Gilman v. Comm’r, 933 F.2d 143, 146-47 (2d Cir.1991) (requiring taxpayer to demonstrate that prudent investor could have concluded that “realistic potential for economic profit” existed (internal quotation marks omitted)); Rice’s Toyota World, Inc. v. Comm’r, 752 F.2d 89, 91 (4th Cir.1985) (equating lack of economic substance with finding that “no reasonable possibility of a profit exists”); Long Term Capital, 330 F.Supp.2d at 172 (finding that transaction lacked economic substance because, “at the time the transaction was entered into, a prudent investor would have concluded that there was no chance to earn a non-tax based profit return in excess of the costs of the transaction”); Estate of Strober v. Comm’r, 63 T.C.M. (CCH) 3158, 3160 (1992) (“We conclude that ... a prudent investor, relying upon independently obtained appraisals and research, would not have concluded that [the] transaction offered a reasonable opportunity for economic gain exclusive of tax benefits.”).

Plaintiffs posit that the FXDOTs were entered into with profit motive as the valid business purpose. The FXDOTs were motivated by plaintiffs’ “desire and understanding that large speculative profits could be made by investing in foreign currencies.” Pis.’ Br. filed Feb. 7, 2008, at 24. Jeffrey Welles testified that he engaged in the FXDOTs as an investment to make a profit and that he conducted “due diligence” before investing in the FXDOTs. Jeffrey Welles spoke numerous times with Mr. Parse at DB Alex Brown regarding different currencies for investment. See Tr. at 467-70, 479-82 (Jeffrey Welles). Jeffrey Welles also contacted Mr. Bresolin at Goldman Sachs, New York, to discuss various currency crosses and volatility levels. See Tr. at 471-72. He also spoke with Mr. Edwards at Morgan Stanley regarding foreign currencies. See Tr. at 478. Jeffrey Welles also had access to his personal Bloomberg Service, and he reviewed research reports from Deutsche Bank and Goldman Sachs regarding foreign currencies. See Tr. at 482-83, 519, 522-26, 527, 531-37 (Jeffrey Welles); PX 159; PX160.

Mr. Bresolin emphasized the word “vaguely” in qualifying his recollection of conversations with Jeffrey Welles, Tr. at 1354, 1367, further stating that he had no memory of whether or not he may have put Jeffrey Welles in contact with the foreign currency desk. His testimony did not corroborate Jeffrey Welles’s. Mr. Edwards, definitely a friend of Jeffrey Welles, testified persuasively that he spoke approximately “five or six” times, Tr. at 852, with Jeffrey Welles concerning the available investment strategies, including foreign exchange options, and that he put a specialist from the foreign currency desk on a conference call with Jeffrey Welles. Mr. Edward’s advice was “very minimal.” Tr. at 856.

Mr. Parse is among the disgraced brokers at DB Alex Brown whose role was displayed in documentary evidence introduced by the Government. Although the court declined to admit his deposition transcript, self-limited to invocations of the Fifth Amendment, other documents showed Mr. Parse of DB Alex Brown to be enmeshed in similar options pairings for the purpose of implementing the J & G strategy with a large number of J & G clients. See, e.g., DX 521 (DB Alex Brown’s internal memorandum stating that Mr. Parse would be managing half the total of one hundred transactions); DX 171 (DB Alex Brown’s internal memorandum copied to Mr. Parse noting one hundred transactions to be implemented with J & G and mentioning payment of settlement proceeds in FXDOT trades as extremely critical step for tax transactions to accomplish purpose); DX 185 (Mr. Parse’s outline of the digital options process consistent with the J & G strategy).

Jeffrey Welles originally was directed to Mr. Parse by Ms. Guerin. Mr. Parse was J & G’s point-man at DB Alex Brown. Plaintiffs suggested that, because Jeffrey Welles had worked previously with Mr. Parse at Goldman Sachs, Jeffrey Welles reasonably would have relied on his advice. Mr. Parse, and DB Alex Brown generally, are so thoroughly *674 discredited in defendant’s exhibits that the court declines to find that Mr. Parse provided investment analysis to Jeffrey Welles that was not geared solely toward implementing the J & G strategy. See, e.g., DX 168 at 2 (DB Alex Brown’s closeout indicating that Mr. Parse earned over $3 million in commissions on FXDOTs for the first eleven months of 2000).

The court finds that Jeffrey Welles’s investigation was consistent with his tolerance of high risk, i.e., because it was superficial, he only confirmed the structure of the transaction and the possibility of a return, not the magnitude of the risk relative to its cost and potential return. Based on his investigation, Jeffrey Welles, however, reached a number of conclusions about the FXDOTs. Jeffrey Welles concluded that FXDOTs involving the euro, the Swiss franc, and the dollar had an opportunity to produce a reasonable profit. See Tr. at 580. He believed that the European Central Bank would issue favorable reports that would cause the euro to rise against the dollar and volatility in the currency market to increase. See Tr. at 525-37. He formed the belief that an “uncoupling” would occur in the historical relationship between movement of the euro and Swiss franc. Tr. at 525, 537. Based on his conversations with Mr. Parse at DB Alex Brown, Jeffrey Welles believed that the FXDOTs that he was considering had a 30% chance of doubling his money. See Tr. at 508-09. Jeffrey Welles and his family also were drawn to the transaction by the small chance that a large profit could be made if the “sweet spot” hit on the options. See Tr. at 466-67. Having formed these impressions, Jeffrey Welles directed the Welleses’ single-member LLCs into the FXDOTs involving the euro, the Swiss franc, and the dollar. After executing the trades, he continued to monitor through his Bloomberg service the currency market during the period that the FXDOTs were active. See Tr. at 580. Mr. Chung monitored the FXDOTs, as instructed by Jeffrey Welles. See Tr. at 580-81 (Jeffrey Welles), 1318-30 (Chung). Ultimately, the options expired out of the money, resulting in loss of the full premiums paid. Jeffrey Welles was disappointed with the result. See Tr. at 1330 (Chung).

2. Expert analyses of profit potential

As the Federal Circuit directed in Coltec, the trial court must analyze, from an objective viewpoint, whether the FXDOTs had economic reality and were motivated by a business purpose. To this end, plaintiffs offered the testimony and reports of three experts, Dr. Robert W. Kolb, Prof. Richard M. Levich, and Prof. Jeffrey A. Frankel, to support their argument that the FXDOTs were entered with the valid business purpose of making a profit. Defendant responded with the testimony and report of one expert, Dr. David F. DeRosa, to undermine plaintiffs’ claim that the FXDOTs had valid tax-independent business purpose and to demonstrate that no reasonable possibility of profit existed. The testimony and reports of each expert relevant to the issue of profit potential are discussed below.

1) Dr. Robert W. Kolb

Plaintiffs’ first expert witness was Robert W. Kolb, PhD., Professor of Finance and Frank W. Considine Chair of Applied Ethics at Loyola University Chicago. Dr. Kolb holds Ph.D.s in Philosophy and in Finance from the University of North Carolina at Chapel Hill. Dr. Kolb was qualified to give his opinions regarding foreign currency, foreign exchange options, economic analysis of foreign currency option financial derivatives, and currency markets generally. Tr. at 900-01. 29 Plaintiffs engaged Dr. Kolb “to analyze *675 the option trading [of the Welles family members]” and to “examine the potential profitability of the option positions for each [of the Welles family members], as well as the overall profit potential for the aggregate [of all of the family members’ trades.]” PX 293 at 2.

Dr. Kolb has been teaching at Loyola University Chicago since 2007. From 2003 to 2006, he was associated with the University of Colorado at Boulder as its Assistant Dean for Business and Society, as the Director of its Center for Business and Society, and as a Professor of Finance. Dr. Kolb worked as an independent author and consultant from 1995-2003. See PX 293 app. at 1 (curriculum vitae of Dr. Kolb).

Dr. Kolb has authored over fifty academically refereed (peer-reviewed) articles pertaining to finance, over half of which concentrated on derivatives. See PX 293 app. at 2-5; Tr. at 889. He has also authored or coauthored over twenty books, including a financial textbook titled Futures, Options, and Swaps, with James A. Overdahl, Chief Economist for the Securities and Exchange Commission. Futures, Options, and Swaps is currently in its fifth edition. See Tr. at 889; Robert W. Kolb & James A. Overdahl, Futures, Options, and Swaps (5th ed.2003). Dr. Kolb recently was appointed Series Editor of Blackwell’s Companions to Finance Series, “which will entail commissioning nearly 65 volumes to cover every area of finance.” PX 293 at 1.

Dr. Kolb has testified in two other cases involving the tax consequences of transactions similar to those involved in the cases at bar: Jade, 80 Fed.Cl. at 32 -33 and Sala , 552 F.Supp.2d. at 1185.

Dr. Kolb undertook to determine what the profit potential was of the FXDOTs that were an essential component of the J & G strategy and whether the long and short options constituted separate transactions. See Tr. at 901-02; PX 293 at 7-11. Dr. Kolb’s essential conclusions were that

1. each option is a separate instrument readily distinguishable from the others and perfectly capable of being traded as such;

2. the investment of each of [the Welles family entities] was a speculative investment; 3. the option trading by each of the [Welles family] entities had significant profit potential; and 4. the history of price movements in the euro and the Swiss franc (when viewed from the perspective of late March 2000) had sufficient volatility such that it was reasonable for the investors to anticipate a profitable investment outcome, especially given their view of the market.

PX 293 at 3.

Dr. Kolb’s report was submitted originally on September 11, 2007. The report as admitted into evidence includes revisions dated October 6, 2007. See PX 293 at unnumbered pages 1-2. Dr. Kolb submitted the revisions because he “read three numbers incorrectly, from the copies of the [Deutsche Bank] trade confirmations. These were the sales prices of the [Swiss franc] options for three of the investors. As a result, in each instance I recorded the sales proceeds as being $20,000 higher than they actually were.” PX 293 at unnumbered page 1; see also Tr. at 886. Testimony adduced at trial and the court’s discussion of that testimony and Dr. Kolb’s report reflect these revisions.

i) FXDOT potential investment outcomes

Dr. Kolb’s analysis focused on the transactions of JFW Investments, LLC, “as representative of each of the other six [investment entities] held by [Welles family members],” turning then to an aggregate analysis of all seven positions. PX 293 at 4. Dr. Kolb described generally four kinds of derivatives commonly traded in financial markets: forwards, futures, swaps, and options. See Tr. at 903-05. The witness discussed options in more detail, focusing particularly on digital options, the type of option that the Welles entities traded as part of the J & G strategy. See Tr. at 905-12; PX 293 at 4-11.

*676 A digital option is one in which the payoff is either some fixed amount of some asset or nothing at all. JFW Investments, LLC, purchased two pairs of option contracts: one pair of options for the dollar versus the euro, and one pair for the Swiss franc versus the dollar. Each pair included the purchase of a long option and the sale of a short option on the currency pairing. The strike prices of each long and short option were separated by two thousandths of a unit (“two pips”). The difference in strike prices is referred to as a “spread.” Together, these contracts constituted an option collar. See Tr. at 906-12; PX 293 at 4-6.

Dr. Kolb analyzed the possible investment outcomes at the expiration of the pair of options that JFW Investments, LLC, purchased involving the dollar versus the euro. He identified three distinct possibilities:

So if the Euro at expiration is less than .9912, then the net outcome for JFW is a loss of $96,625. At the other extreme for the values of the Euro that matter, if the Euro is .9914 or higher, JFW will have a total profit of $96,625____ [A] loss in one ease and a modest profit or—well, it’s modest perhaps in dollars but large in percentage terms.

But there’s also a third possibility. And that is that the value of the Euro at expiration .9912 or higher but also that it’s less than, not equal to, .9914. And I think the expert for the Government, Dr. DeRosa, and I both independently characterize this situation as hitting the sweet spot. And in that event, JFW will have a total profit of $19,228,375.

So there are three possibilities: JFW loses 96,000, JFW makes 96,000, or possibly JFW could make 19.2 million.

Tr. at 911-12. Dr. Kolb denominated the analysis of possible outcomes for the options involving the Swiss franc and the dollar pairing as substantially identical, substituting the appropriate strike prices and premiums. See Tr. at 912.

Dr. Kolb also prepared a matrix cataloging the possible investment outcomes when considering both pairs of options:

And so the cells of this graph show the profit or loss for JFW in each of those nine possible situations. And so in the upper left corner is the worst outcome, and that is that JFW would lose its total net investment of $193,250. On the other hand, they could break even as is shown in the northeast and southwest cells, the zeros. They could—JFW could double its money. That’s shown in the southeast corner of the graph. So those are some of the possibilities, ranging from losing 193 to zero to making 193.

However, there are other possibilities. And that is that either the Euro options or the Swiss franc options hit the sweet spot or that both of them hit the sweet spot, in which case the profits are quite a bit larger. And so for instance, if just one of the two hits a sweet spot, that’s shown in the four cells at the north center, south center, west center, and east center. And you can see that they’re all in the range of 19 million. There’s a slight difference, but basically $19 million. And those are the outcomes if either one of the pairs hits the sweet spot.

The very central cell of the matrix shows the profit for JFW if both of the options hit their respective sweet spots, in which case JFW would make 38 million.

Tr. at 913-14; see PX 293 at ex. 8 (matrix of all possible investment outcomes for Jeffrey Welles).

ii) Outcome probabilities

Dr. Kolb took pains to note, both in his testimony and in his expert report, that the probability of any one of the particular outcomes occurring was not equal. See Tr. at 914-15 (“[Ijt’s certainly my opinion that some of them are much more likely to be hit than others. And in particular, hitting the sweet spots, in my judgment, is quite a bit less likely than any of the other outcomes.”); PX 293 at 11 (“Of course, not all of the outcomes in [this matrix] are equally probable.”). Dr. Kolb did not include a computation of the probability that any particular outcome would occur. When asked by plaintiffs whether he computed probabilities “in the sense of running [the FXDOTs] through the Black-Scholes model,” he replied, “I did not mention that in my report. At one stage, I *677 made a variety of such computations, but I did not report those in my report.” Tr. at 940. When asked why he did not include this information, he replied:

Well, essentially I didn’t think it was very relevant. And let me explain. The Black-Seholes probabilities fall out just from the mathematics of the model. And again, the model is constructed under that set of pretty strong assumptions of perfect markets and the assumption that the underlying security follows a particular stochastic process.

Furthermore, it doesn’t pertain to what any particular individual is thinking. Rather, it’s in some way an aggregation of all the market participants. So if we perhaps had an idea what Mr. Welles’ opinions were about what the probabilities were, that might be of interest, but I did not see that was relevant to compute the Black-Scholes probability. So I did it as, I suppose, part of my due diligence.

I guess economists like to fool around with things like the Black-Scholes model, so I did it, but I didn’t put it in my report.

Tr. at 94(M1. 30

iii) Dr. Kolb’s conclusions on profitability

When asked whether he had “an opinion with respect to the profit potential of’ the FXDOTs, Dr. Kolb testified that

these options have very substantial profit potential. And we’ve covered that to some extent already. For instance, "with respect to the pair of options traded by JFW, we saw that the range of possible profit and loss outcomes ranged from losing the entire net investment of 96,000 to making a profit of 96,000 or if the sweet spot were hit of making $19 million.

And so in aggregate across all of the 28 options in this ease, there was enormous profit potential.

Tr. at 939; see PX 293 at 11 (“With a modest movement in either exchange rate, JFW would make a profit. With the right move in either or both exchange rates, JFW had an outside possibility of a truly enormous payoff relative to its investment. This highlights the speculative nature of the investment.”). Dr. Kolb based this assessment on his “training in economics in general and options in particular, my familiarity with the markets, the transaction documents in this case, and an understanding of the economic conditions that prevailed in early 2000.” Tr. at 944.

According to Dr. Kolb, historical data have no use in pricing options, because, while “sometimes people use historical data to try and estimate what that future volatility is going to be,” options pricing is “forward looking” and “in terms of pricing the options, it’s all focused really toward the future.” Tr. at 943. Dr. Kolb, however, did include in his report what he called “Historical Investment Outcomes and Alternative Results.” PX 293 at 14-18. He was interested in determining whether the FXDOTs were “doomed from the start.” Tr. at 944; see PX 293 at 15. In order to do so, he engaged in what he called a “post mortem inquiry,” PX 293 at 15, that looked at the investment outcomes of the FXDOTs if the Welleses had purchased options for a different seventeen-day period. Based on this inquiry, he testified that

if the Welles family entities had waited a week or so to institute their Swiss strategy, they would have had profits instead of losses. More specifically, had [Jeffrey Welles] traded the same Swiss francs from any of the five days from April 9th to April 13th, 2000, the investment would have been profitable with corresponding expiration dates of April 26th to April 30th, i.e., the same 17-day period.

Tr. at 945; see PX 293 at 16-18 31

Dr. Kolb’s expert opinion trembles on a slender reed of his own caveats and the testing that he decided to omit from his report. The court would have given it limit *678 ed weight, even if defendant had waived cross-examination. But that was not to come to pass, for defendant proceeded to dissect in a particularly skilled cross-examination what little Dr. Kolb had brought to bear. Defendant began with two hypotheticals intended to highlight the low probabilities of positive investment outcomes for the FXDOTs. The first scenario involved two flips of a coin:

Q. [by defense counsel] I have a fairly simple proposition, and I’d like your view. Suppose I were to tell you that if you gave me 50 cents, you could flip a coin twice and if it came up heads twice, I’d give you $1. Is that something a reasonable person would take?

A. With no other facts?

Q. Yes, a regular two-sided American coin, like a quarter.

A. I would not be interested in that proposition.

Q. And that’s because the odds on your flipping two heads in a row are 1 in 4, right?

A. Exactly, because in this case we know exactly what the odds are going forward, assuming that it’s a fair coin.

Q. Okay. If I were to—and by the way, the view on whether that is a reasonable proposition to accept wouldn’t depend on whether the person had an advanced degree in statistics or a third grade education, would it? The same answer, right?

A. Depends—different people with different educations might make different decisions about it____ I’m not sure what you’re asking beyond that.

Q. Accepting the proposition is not a rational decision regardless of your education level?

A. I suppose that depends what you mean by “rational.”

Q. No reasonable person would take that bet. How is that?

A. Let me say that no reasonable person fully understanding the probabilities would take that bet, if that’s what you’re driving at.

Q. If an eight-year-old thought he or she was particularly lucky that day, that still wouldn’t be a good bet for that person, right?

A. No, but it wouldn’t necessarily be irrational for an eight-year-old to make that mistake.

Q. I think your use of the word “mistake” says it all.

Tr. at 949-50. The second hypothetical scenario involved a roulette wheel with thirty-six numbers, half red, half black, and no zeros. When asked, “If you decided to take half of your money and put it on red and half of your money and put it on black, you would have no reasonable expectation of making a profit from those two bets, would you?” Dr. Kolb replied that he would not have a reasonable expectation of making a profit. Tr. at 950-51.

These hypothetical scenarios underscored the importance of probabilities to an analysis of profit potential. Specifically, the probability of the FXDOTs resulting in a profitable investment outcome was very low because a favorable investment outcome would have required the value of the Swiss franc and the euro to move in opposite directions with respect to the dollar, even though the values of those two currencies historically had been highly correlated with one another. See Tr. at 952-54.

Defendant also introduced work papers produced from spreadsheets that Dr. Kolb created for his expert report. See DX 542. Those work papers included a series of columns tracking whether, over all 349 possible seventeen-day periods over the course of one year, the euro had moved sufficiently with respect to the dollar to result in a profitable investment outcome for the euro FXDOTs. The spreadsheet also included a series of columns examining the same with respect to the Swiss franc versus the dollar. See DX 542 at 1-8. While the euro moved enough with respect to the dollar to result in a profitable investment outcome in thirty-five of the periods, and the Swiss franc moved with respect to the dollar to result in a profitable investment outcome in twenty-three, zero periods recorded simultaneous movement of both the euro and the Swiss franc for both pairs of the FXDOTs to result *679 in a profitable investment outcome. See Tr. at 977-84; DX 542 at 1-8.

2) Prof. Richard M. Levich

Richard M. Levich, Ph.D., Professor of Finance and International Business at the Stern School of Business at New York University, was plaintiffs’ second expert. Prof. Levich holds an M.B.A. and a Ph.D. from the University of Chicago. Prof. Levich was qualified to give his opinions regarding international financial markets, currency trading, models of exchange rate determinations, exchange rate forecasting, and pricing of currency derivatives. See Tr. at 1001. Prof. Levich characterized the purpose of his expert report as “summarizing] various calculations and economic analysis I made regarding [the FXDOTs].” PX 307 at 2.

Prof. Levich has been teaching at New York University in since 1975, before he obtained his Ph.D. See Tr. at 988. He currently serves as Deputy Chairman of the Department of Finance at New York University’s Stern School of Business. See PX 307 app. at 1 (curriculum vitae of Prof. Levich). At the time he testified, Prof. Levich was on a sabbatical leave of absence from New York University to work on a research paper concerning performance of professional currency hedge fund managers; a research paper regarding forward-grade bias, the predictive ability of the forward exchange rate; and revisions to produce the third edition of his textbook in International Financial Markets. See Tr. at 990.

Prof. Levich has consulted for financial institutions, including Morgan Guaranty Trust Company in New York, as it formerly was known, dealing with off-shore capital markets and issues surrounding euro bond markets and regulation of domestic markets, and the Bank of New York in London, dealing with the design of currency trading models and evaluation of whether those models could be designed to result in profits or hedging possibilities for their clients. Prof. Levich served for several years as a trustee for a mutual fund that was sponsored by a French institution known as CDC. See Tr. at 993.

Prof. Levich has authored over forty monographs or articles that have appeared in academically refereed journals and reviewed as part of collected monographs. See Tr. at 994-95; PX 307 app. at 4-10. One of his textbooks is titled International Financial Markets: Prices and Policies (2d ed.2001). He is the founding co-editor of an academic journal, the “Journal of International Financial Management and Accounting.”

i) Macroeconomic and monetary poli-cymaking climate in early 2000

Prof. Levich observes in his report that through the 1980s and 1990s “Germany was viewed as the dominant economy in the region. Germany developed a reputation for policy credibility and keeping its currency, the deutsche mark (DM), as a stable monetary unit.” PX 307 at 4. For that reason Prof. Levich opined, “Swiss monetary policy tended to mimic German policy, resulting in a stable Swiss-German cross exchange rate that traded in a narrow band and with low volatility as compared to other currency pairs involving the U.S. dollar.” Id. The launch of the European Monetary Union and the introduction of the euro in 1999, however, replaced a number of currencies, including the deutsche mark. The introduction of the euro also transferred monetary policy from Germany to the European Central Bank. Prof. Levich opined that this shift to a new central bank, along with other macroeconomic factors, increased the potential volatility of the euro/dollar and Swiss franc/dollar exchange rates, increasing the probability of a profitable investment outcome for the FXDOTs. See PX 307 at 4-7.

ii) Outcome probabilities

Prof. Levich’s assessment of the profitability of the FXDOTs was much more modest than that of Jeffrey Welles. The Welleses’ trading strategy would have been profitable only if both pairs of FXDOTs were profitable. Prof. Levich determined that both pairs of FXDOTs would have been profitable if the dollar/euro exchange rate appreciated by 3.54% or more and if the Swiss franc/dollar exchange rate appreciated by 2.39% or more over the eleven trading days from *680 March 31 to April 17, 2000 (the seventeen-day period of the options). See Tr. at 1005-07; PX 307 at 8. If both exchange rates appreciated by at least those amounts over this period, the FXDOTs would have produced a two-to-one return. See PX 307 at 8. Prof. Levich characterized such an appreciation as “not a particularly large movement.” Tr. at 1007. He also identified the narrow price interval for each of the exchange rates that would cause the FXDOTs to hit the “sweet spot” (0.9912-0.9914 for the dollar/euro and 1.7027-1.7029 for the Swiss franc/dollar). See PX 307 at 9.

Prof. Levich then estimated the probability of making a profit on each of the FXDOTs by employing a Black-Scholes continuous time lognormal option pricing model. See PX 307 at 7. Prof. Levich ran the model with differing inputs for the spot exchange rates for each currency pair on March 31, 2000, and differing volatilities for the currency pairs, including market quotations on implied vola-tilities and a range of other volatilities (12.5%, 15%, 17.5%, and 20%). See id.; Tr. at 1015-20. Based on this model and these inputs, Prof. Levich estimated that the probability of the dollar/euro FXDOT hitting the two-to-one payout ranged from 9-21%; he estimated that the probability of the Swiss franc/dollar FXDOT hitting the two-to-one payout ranged from 15-27%. See PX 307 at 8-9. 32 Prof. Levich also estimated the probability that either pair of FXDOTs would hit the “sweet spot,” which he characterized as a “relatively rare occurrence.” Tr. at 1003. He estimated the probability of the pair of dollar/euro options hitting the sweet spot as between 0.13-0.15%, and the probability of the Swiss franc/dollar pair hitting the sweet spot as between 0.09-0.11%. See Tr. at 1003-04; PX 307 at 9. 33

3) Prof. Jeffrey A Frankel

Jeffrey A. Frankel, Ph.D., the James W. Harpel Professor of Capital Formation and Growth at the Kennedy School of Government at Harvard University, was plaintiffs’ third expert. Prof. Frankel holds a Ph.D. in Economics from the Massachusetts Institute of Technology. The witness was qualified to give his opinions regarding economics, foreign exchange rates, international financial markets, and international macroeconomics. See Tr. at 1419. Prof. Frankel’s report was styled as an “analysis of the economic factors present in the spring of 2000 that could have been expected to have an effect on the exchange rates of the euro and Swiss franc, respectively, against the U.S. Dollar, which were relevant to the values of the options contracts undertaken by Stobie Creek Investments.” PX 279 at 1.

Prof. Frankel described his report as answering two questions:

First, going back to March 31 st, 2000, and based on information available as of that date, were there good reasons to go long in the Euro, to be bullish about the Euro, take a long position in the Euro. And, second, again, based on information available as of March 31 st, 2000, were there reasons to expect a decoupling or reduction in the correlation between the Swiss franc and the Euro and on that basis take a short position in the Swiss franc.

Tr. at 1420.

Prof. Frankel has been teaching at Harvard’s Kennedy School of Government since *681 1999. He currently teaches courses in Advanced Macroeconomics for Open Economies and Economics of International Financial Policy. Prof. Frankel was Professor of Economics at the University of California at Berkeley from 1979 to 1999. See PX 279 at 18-19 (curriculum vitae of Prof. Frankel).

During the course of his academic career, Prof. Frankel has taken leaves of absence to serve as an economic advisor. He served from 1983 to 1984, as a Senior Staff Economist on the Council of Economic Advisers, Executive Office of the President, where many of his responsibilities included dealing with foreign currency issues. See Tr. at 1410-11; PX 279 at 19. Prof. Frankel again took leave in 1996 when he was nominated by former President Clinton to serve as one of the three members of the Council of Economic Advisors from April 1997 to March 1999. See Tr. at 1411-12; PX 279 at 19.

Prof. Frankel has authored or co-authored over twenty books or other monographs pertaining to international economics generally and international financial markets in particular. One textbook is in its tenth edition. Richard E. Caves, Jeffrey A. Frankel & Ronald W. Jones, World Trade and Payments: An Introduction (10th ed.2007). He has published over three hundred articles, the majority of which deal with international financial markets and foreign exchange rates. See Tr. at 1414-15; PX 279 at 25-56. Prof. Frankel testified as an expert, like Dr. Kolb, in Jade, 80 Fed.Cl. at 11 .

After first indicating that macroeconomic and monetary policy factors suggested that he could see especially large movements in the value of the euro with respect to the dollar, see Tr. at 1422-24; PX 279 at 6-7, Prof. Frankel opined that, from the perspective of an investor making decisions on or around March 31, 2000, numerous indications were present that the euro would appreciate against the dollar. Prof. Frankel derived his opinion from an analysis of four major sources of data: formal econometric models; macroeconomic factors discussed contemporaneously by prominent economists and commentators; comments and analysis produced by important market participants, primarily large investment banks; and the foreign exchange forward exchange market. See Tr. at 1424-25; PX 279 at 7-12. Prof. Frankel also observed that the exchange rates of the Swiss franc and the euro with respect to the dollar were closely correlated from the inception of the euro in 1999 through late-March/early-April 2000. From the same perspective of an investor making decisions on or around March 31, 2000, he saw substantial indications that a decoupling or reduction in the correlation of those exchange rates could occur. See Tr. at 1436-38; PX 279 at 12-15. However, his opinion concerning the movement of the euro against the dollar ultimately was not persuasive once defendant’s cross-examination elicited testimony that the percentage chances of movement up or down were 50/50. See Tr. at 1457.

At trial plaintiffs asked Prof. Frankel, “[A]round the time of March of 2000, [were] there reasons to expect a depreciation in the Swiss franc?” Tr. at 1438. Defendant objected to an opinion from Prof. Frankel “about depreciation of the Swiss franc as against the dollar.” Defendant explained:

Three times in his deposition the witness declined to express a view on this and declined to express a view on this in his report----I have no objection to the witness testifying as to an expectation of a depreciation between the Euro and the Swiss franc, but as between the Swiss franc and dollar, this has not been explored and it’s not in his report and the ■witness specifically declined to express an opinion.

Tr. at 1438-39. Plaintiffs narrowed the question by asking Prof. Frankel to comment on the likelihood that the Swiss franc would depreciate with respect to the euro. Prof. Frankel indicated that it was likely, based on an analysis of the same four data sources that he used in his analysis of the likelihood that the

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