Court denies claims in tax refund case

NEW YORK (Reuters) - The U.S. Court of Federal Claims issued a ruling in a tax refund case that the transactions under question were a tax avoidance mechanism, and not an investment strategy.

The case, Jade Trading LLC vs. the U.S., involves tax refunds sought by the Ervin brothers of Sturgis in Kentucky, who sold their cable business in 1999, making more than $40 million in profits.

The same year, each of the three brothers bought an option for $15 million and sold an option for about the same value, through a limited liability corporation.

Each limited liability corporation then contributed the option spread to Jade Trading LLC, and on exiting the partnership, claimed a basis of over $15 million in its Jade interest, factoring in the premium for the call option that was bought, and ignoring the sold call option, according to the court document.

The court ruled on December 21 that a claim that each brother had invested and lost $15 million was false, and that they had each invested only about $150,000.

"In sum, this transaction's fictional loss, inability to realize a profit, lack of investment character, meaningless inclusion in a partnership, and disproportionate tax advantage as compared to the amount invested and potential return, compel a conclusion that the spread transaction objectively lacked economic substance," Judge Mary Ellen Coster Williams wrote in the ruling.

The ruling also found that a 40 percent Internal Revenue Service penalty is applicable.

(Reporting by Aarthi Sivaraman; Editing by Ben Tan)