Sih Partners Lllp, Explorer Partner Corp., Tax Matters Partner

Summary

The Tax Court sustained the Commissioner's FPAA adjustments reclassifying $170,764,863 of reported qualified dividend income (QDI) from Swiss Equities as ordinary dividend income and disallowing a $25,614,729 foreign tax credit (FTC). The court declined the Commissioner's invitation to use substance-over-form to disaggregate SIHP's portfolio swap, holding the Substantial Overlap Test of Treas. Reg. § 1.246-5(c)(1)(iii) was not met when the Transaction was tested as a unitary Portfolio Position including the Firm Hedge. However, the court held the Anti-Abuse Rule of Treas. Reg. § 1.246-5(c)(1)(vi) applied because the short Swiss Equities positions virtually tracked the long holdings and the roughly $25 million in tax savings significantly exceeded expected pretax economic profits of $0 to $2.4 million, making the Swiss Equities substantially similar or related property (SSRP) and reducing the holding period. Because the equities were SSRP, SIHP also failed the statutory requirements for the FTC under I.R.C. § 901(a) and (k)(1).