New Phoenix Sunrise Corp. v. Commissioner, 408 F. App'x 908

New Phoenix originated as an Arizona agricultural company; Capital Poly Bag, its subsidiary, was 100% owned until asset sale in 2001.
Capital engaged in the BLISS transaction with Jenkens & Gilchrist and Deutsche Bank to generate large tax losses while risking small actual losses.
Capital formed Olentangy Partners (Capital 99%, Wray 1%) to hold the BLISS contracts; two Deutsche Bank swap contracts were executed in December 2001 and later assigned to Olentangy.
The BLISS structure produced a theoretical massive economic loss; the only concrete economic result was a small net loss after costs—no profit was realistically possible.
New Phoenix claimed a $10,504,462 loss on its 2001 return, basing the adjusted basis on payment to Deutsche Bank and ignoring offsetting payments.
The IRS issued a notice of deficiency in 2005; New Phoenix petitioned the tax court, which admitted documents tied to Jenkens & Gilchrist’s opinion and ruled against New Phoenix.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Economic substance of BLISS transaction	New Phoenix asserts BLISS had economic substance and profit motive.	Commissioner argues the transaction lacks economic substance and is an economic sham.	BLISS lacked economic substance; tax deficiency sustained.
Reasonable cause and reliance on professional advice	New Phoenix relied reasonably on Jenkens & Gilchrist for tax consequences.	Reliance is unreasonable due to promoter involvement and conflict of interest.	Penalty upheld; reliance on promoters did not constitute reasonable cause.
Disclosure and waiver of attorney-client privilege/work product	Documents were protected; disclosure was improper and not waived.	Subject-matter waiver occurred because New Phoenix relied on privileged opinion for penalties.	Disclosure upheld; waiver applicable; admission harmless as to non-subject matter.

Pasternak v. Comm'r, 990 F.2d 893 (6th Cir. 1993) (threshold economic substance and profit-motive inquiry)
Richardson v. Comm'r, 509 F.3d 736 (6th Cir. 2007) (two-prong economic substance test and business purpose)
Am. Elec. Power Co. v. United States, 326 F.3d 737 (6th Cir. 2003) (economic substance approach to tax shelter arrangements)
Knetsch v. United States, 364 U.S. 361 (Sup. Ct. 1960) (precludes tax-avoidance schemes lacking economic purpose)
Dow Chemical Co. v. United States, 435 F.3d 594 (6th Cir. 2006) (fact-intensive review of economic substance rulings)
Stobie Creek Investments LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (economic-substance analysis for derivatives-like transactions)
Mortensen v. Comm'r, 440 F.3d 375 (6th Cir. 2006) (reasonable-cause defense requires independent, competent advice)
United States v. Boyle, 469 U.S. 241 (Sup. Ct. 1985) (reasonable reliance on professional tax advice)
United States v. Dakota, 197 F.3d 821 (6th Cir. 1999) (waiver of privileges when disclosed to third parties)
In re Grand Jury Proceedings Oct. 12, 1995, 78 F.3d 251 (6th Cir. 1996) (scope of waiver and evidentiary privilege considerations)
In re Lott, 424 F.3d 446 (6th Cir. 2005) (attorney-client privilege cannot be used as shield and sword)