Fidelity International Currency Advisor a Fund, LLC Ex Rel. Tax Matters Partner v. United States, 661 F.3d 667

Egan founded EMC Corp; he exercised options creating substantial ordinary income and potential tax liability.
To reduce tax, Fidelity formed a partnership with Irish citizen Mahoney and engaged in offsetting currency option transactions.
Options were structured to produce near-certain offsetting gains and losses, yielding large paper losses allocated largely to Egan.
Egan acquired majority Fidelity interests, increasing his outside basis; Fidelity World contributed options to Fidelity to boost basis.
IRS later disallowed Fidelity’s 2001/2002 losses as lacking economic substance and denied Egan’s outside basis, triggering partnership-level adjustments and penalties.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Was there a misstatement of basis in the partnership returns?	Fidelity argues no improper basis statements; net loss aligns with district results.	IRS/district found misstatements at the transaction level, enabling basis manipulation.	Yes, there were basis misstatements.
Is the underpayment 'attributable to' a gross valuation misstatement?	Underpayment would occur anyway; misstatements did not cause the shortfall uniquely.	Misstatements reduced taxes, and underpayment is attributable to those misstatements.	Yes, underpayment attributable to misstatements.
Does the 40% gross valuation misstatement penalty conflict with newer penalties?	New § 6662(b)(6) creates potential conflict for disclosed, substance-lacking transactions.	No conflict; different provisions serve different purposes and timing; penalties apply as written.	No conflict; apply 40% penalty under existing provision.

Todd v. Commissioner, 862 F.2d 540 (5th Cir.1988) (interprets 'attributable to' language in historical context)
Heasley v. Commissioner, 902 F.2d 380 (5th Cir.1990) ( Fifth Circuit on related penalty dynamics)
Gainer v. Commissioner, 893 F.2d 225 (9th Cir.1990) (early conflicting approach to attribution of penalties)
Keller v. Commissioner, 556 F.3d 1056 (9th Cir.2009) (embraces dominant circuit view on attribution and penalties)
Merino v. Comm'r, 196 F.3d 147 (3d Cir.1999) (economic substance and partnership item considerations)
Zfass v. Comm'r, 118 F.3d 184 (4th Cir.1997) (economic substance & valuation considerations in penalties)
Gilman v. Comm'r, 933 F.2d 143 (2d Cir.1991) (discusses misstatement implications in penalties)
Massengill v. Comm'r, 876 F.2d 616 (8th Cir.1989) (penalty considerations in valuation overstatements)