Full opinion text
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER BABCOCK, District Judge. This action concerns a claim by Plaintiffs Carlos E. Sala and Tina Zanolini Sala (referred to herein as “Sala,” since Tina Zanolini-Sala is a named plaintiff only because the Salas filed a joint tax return) for a refund on Sala’s 2000 federal taxes. Sala timely filed his 2000 federal tax return on or before April 15, 2001. Although Sala had income in 2000 of more than $60 million, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the alleged loss through his involvement in a foreign currency options investment transaction known as Deer-hurst. Sala filed an amended return on November 18, 2003, eliminating the loss claimed on his original 2000 return and paying over $26 million in taxes, plus penalties and interest. Sala later filed another amended return reclaiming the tax loss and seeking a refund of the taxes, interest, and penalties. The Government contends Sala is not entitled to claim the tax loss because Deerhurst was an improper tax shelter. Sala disagrees, and brought suit against the Government to obtain a refund of the taxes, interest, and penalties he paid to the Government. An eight day trial to the Court in this matter was held commencing March 10, 2008, and concluding March 19, 2008. The two claims at issue were Sala’s entitlement to a refund of the taxes, penalties, and interest he paid on his 2000 income and— to the extent any refund was due Sala on putatively “excess” interest — the Government’s entitlement to an accuracy-related penalty owed, but not assessed. After a review of all the evidence presented both at trial and by deposition, I find in favor of Carlos Sala and Tina Zanolini-Sala and against the Government on all claims and counterclaims. I. BACKGROUND FACTS The following facts are not disputed. In 1997, Sala became employed as CFO, Secretary, and Treasurer of Abacus Direct, Inc. Sala’s compensation included cash and stock options. In June 1999, Abacus was acquired by Doubleclick, Inc. In connection with the acquisition, Sala received Doubleclick stock options. Sala sold his Doubleclick options in February or March of 2000. Largely as a result of the sale of these options, Sala realized more than $60 million in income in 2000. Sala invested most of this income into municipal bonds and other fixed income financial products. Approximately $9 million, however, was invested in a foreign currency investment program, which is collectively referred to herein as the “Deer-hurst Program.” As part of the Deerhurst Program, Sala deposited $500,000 on October 23, 2000, into a personal account at Refco Capital Markets (“Refco”) that was managed by Deerhurst Management Company, Inc. (“Deerhurst Management”). Deerhurst Management was principally owned and managed by Andrew Krieger, a renowned foreign currency trader. On November 21, 2000, Sala deposited an additional $8,425,000 into his personal account at Refco. Between November 20 and November 27, 2000, Deerhurst Management acquired 24 foreign currency options on Sala’s behalf. The options consisted of both long and short options in various foreign currencies with a net cost to Sala of approximately $728,297.85. On November 8, 2000, Sala formed Solid Currencies, Inc. (“Solid” or “Solid Currencies”) — a Delaware S Corporation in which he was the sole shareholder. On November 28, 2000, Sala transferred the 24 options, plus approximately $8 million in cash, to Solid and then from Solid to Deer-hurst Investors, GP, (“Deerhurst GP”) in exchange for a partnership interest. Deerhurst GP was liquidated prior to December 31, 2000. Upon liquidation of Deerhurst GP, Solid received a share of the proceeds. Solid transferred its share of the Deerhurst GP proceeds to Deer-hurst Trading LLC. Krieger continued to manage these funds on behalf of Sala in various entities through 2004. On or before April 15, 2001, Sala filed a corporate income tax return for Solid for the 2000 tax year. The return was prepared and signed by David Schwartz, the brother of Michael Schwartz — the person who introduced Sala to the Deerhurst Program. The return reported an ordinary loss from a trade or business of $60,449,984. The approximately $60 million loss claimed was allegedly achieved by a series of predetermined steps, orchestrated under a then-existing tax rule that disregarded short options as liabilities for purposes of establishing partnership basis. Under this rule, established in Helmer v. Commissioner of Internal Revenue, T.C. Memo.1975-160 (1975), liabilities created by short options were considered too contingent to affect a partner’s basis in the partnership. Upon transfer of the 24 foreign currency options from Sala to Solid and then to Deerhurst GP, Solid’s basis in Deerhurst GP was increased by the value of the long options, $60,987,866.79, but was not offset by the $60,259,568.94 cost of the short options. Accordingly, Solid’s claimed basis in Deerhurst GP was approximately $69 million — the value of the cash plus the long options. Upon liquidation of Deerhurst GP, Solid received a portion of Deerhurst GP’s liquidated assets equal to the proportionate size of Solid’s basis. Solid claimed to have received approximately $8 million in cash and two foreign currency contracts. Under the Tax Code, the foreign currency contracts were considered to be “property” at transfer. The value of the foreign exchange contracts distributed to Solid, therefore, was claimed to be approximately $61 million — $69 million (Solid’s original basis in Deerhurst GP) less the $8 million in cash. When Solid sold the foreign currency contracts, its loss was equal to the $61 million dollar value of the contracts, offset by any profit received from their sale. According to Solid’s 2000 tax return, the combined loss on the foreign currency contracts was approximately $60,250,065.94. When combined with Solid’s other expenses and losses, Solid’s 2000 loss was reported as $60,449,984. On or before April 15, 2001, Sala filed a personal federal income tax return for the 2000 year (“2000 return”). The 2000 return reported wages of $51,748,681; taxable interest income of $1,837,561; dividend income of $410,300; taxable refunds, credits, or offsets of state and local income taxes of $7,846; a capital gain of $6,472,000; and other income of ($23). The 2000 return reported on line 17 (rental real estate, royalties, partnerships, S corporations, trusts, etc.) the $60,449,984 loss attributed to a non-passive loss from Solid Currencies. The 2000 return reported adjusted gross income of $26,381. Sala reported owing no federal taxes. In November 2003, Sala filed a form 1040X amending his 2000 return. The amended return reported the same income amounts as the original return, but did not report the $60,449,984 loss previously attributed to Solid Currencies. Sala paid the resulting approximately $26 million in taxes, interest, and penalties. On or about June 18, 2004, the IRS issued a Notice of Deficiency to Sala, asserting he owed additional taxes in the amount of $22,204 due to the disallowance of $56,071 of losses Sala reported as attributable to Solid Currencies. The Notice of Deficiency also asserted an accuracy-related penalty in the amount of $4,400.80 for tax year 2000. In September 2004, Sala filed another form 1040X for the 2000 tax year reclaiming the loss attributable to Solid Currencies and claiming a refund due of $23,727,630. In the Amended Pretrial Order [Docket # 195], the parties stipulated to the following additional relevant facts. In late 1999, Sala was introduced to KPMG partner Trade Henderson through Sala’s friend Tim Gillis — also a KPMG partner. KPMG prepared Sala’s federal and state tax returns for the years 2000, 2001, 2002, and 2003. Prior to 2000, Sala’s tax returns were prepared by PrieewaterhouseCoop-ers. On August 13, 2000, IRS Notice 2000-44 was released electronically; on September 18, 2000, it was published. On or about April 15, 2001, Sala paid R.J. Ruble $75,000 for a tax opinion letter involving the tax benefits of the Deerhurst Program. II. ISSUES PRESENTED AT TRIAL Five distinct issues were presented at trial: (1) whether the transactions creating Sala’s 2000 tax loss constituted sham transactions; (2) whether Sala entered into the transactions creating his 2000 tax loss for profit; (3) whether the transactions creating Sala’s 2000 tax loss, as executed, allowed the tax loss; (4) whether any allowable tax loss was rendered retroactively disallowed by 26 C.F.R. § 1.752-6; and (5) whether the Government is entitled to an offset of any excess interest payments made by Sala with an accuracy-related penalty. The second issue is an issue of fact. See Hildebrand v. Comm’r of Internal Revenue, 28 F.3d 1024, 1026 (10th Cir.1994). The fourth issue is a question of law. The remaining issues are mixed questions of law and fact. Before addressing these issues, however, it is necessary to define the appropriate burden of proof in this case and define the scope of the loss-generating transaction. III. BURDEN OF PROOF The allocation of burdens as to each specific factual issue will be addressed where appropriate throughout this order. I therefore lay out only the general framework here. Under 26 U.S.C. § 7491, when a taxpayer produces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability, the Government has the burden of proof with respect to such factual issue so long as (1) the taxpayer has complied with the requirements of the Tax Code to substantiate any item, and (2) the taxpayer has maintained all records required and has cooperated with reasonable requests for witnesses, documents, meetings, and interviews. It cannot genuinely be disputed that Sala has complied with the requirements of the Tax Code to substantiate each of his factual claims and that Sala has maintained all records required and has cooperated with reasonable requests for witnesses, documents, meetings, and interviews. Sala has provided the Government with thousands of pages of records, including written explanations and other supporting information substantiating his factual claims. Moreover, Sala consented to extending the period in which the IRS could assess an additional tax deficiency for the 2000 tax year. Sala’s cooperation with the IRS was clearly sufficient to meet the requirements under § 7491. Accordingly, the Government has the burden of proof as to each issue of fact so long as Sala supports his factual account with credible evidence. For the purposes of § 7491, “credible evidence ... is the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness).” Griffin v. Comm’r of Internal Revenue, 315 F.3d 1017, 1021 (8th Cir.2003). When considering penalties, however, the burden of production is on the Government to make a prima facie case that penalties should apply. If the Government meets this burden, the burden then shifts to Sala to show his underpayment was not the result of negligence and that he did what a reasonably prudent person would have done under the circumstances. Sparkman v. Comm’r of Internal Revenue, 509 F.3d 1149, 1161 (9th Cir.2007); Van Scoten v. Comm’r of Internal Revenue, 439 F.3d 1243, 1258 (10th Cir.2006). The determination of whether a taxpayer meets his burden of proving due care is a factual one. Mortensen v. Comm’r of Internal Revenue, 440 F.3d 375, 385 (6th Cir.2006). IV. SCOPE OF THE LOSS-GENERATING TRANSACTION Before analyzing whether Sala was entitled to the loss allegedly generated by the Deerhurst Program, it is necessary to define the scope of the “transaction” that caused the loss. I must look beyond the form of the Deerhurst Program to determine whether the portion of the program that created the loss is bona fide. See Rogers v. United States, 281 F.3d 1108, 1114-17 (10th Cir.2002). I examine Sala’s involvement in the Deerhurst Program as a whole, considering each step, to determine if the substance of the transaction is consistent with its form. ACM P’ship v. Comm’r of Internal Revenue, 157 F.3d 231, 246-48 (3d Cir.1998). The “transaction” to be analyzed is the transaction that gave rise to the particular tax benefit, not collateral transactions which do not produce the tax benefits. See James v. Comm’r of Internal Revenue, 899 F.2d 905, 910 (10th Cir.1990). So long as the transaction that creates the tax benefit is bona fide, any tax benefit achieved will be presumed legitimate. See Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1356-57 (Fed.Cir.2006) (discussing cases). The threshold issue, therefore, is whether (a) the “transaction” includes only the portions of the Deerhurst Program occurring in 2000 — that is, Sala’s purchase of the 24 foreign currency option contracts and the subsequent transfers from Sala to Solid Currencies and from Solid Currencies to Deerhurst GP, the subsequent sale of the contracts, and the return to Solid of a reported $8 million in cash and two foreign currency contracts — or (b) whether the “transaction” also includes the reinvestment of the Deerhurst GP liquidation proceeds into Deerhurst LLC and the trading occurring from 2001 onward. For the reasons stated below, I find and conclude that — for purpose of determining whether the loss-generating transaction was bona fide — both the Deerhurst GP portion of the Deerhurst Program and the Deerhurst LLC portion of the Deerhurst Program must be considered together as a single transaction. A. Findings of fact The subjective intent of the parties to a loss-generating transaction is a significant factor when determining whether the transaction was bona fide. See, e.g., Klamath Strategic Inv. Fund, LLC v. United States, 472 F.Supp.2d 885, 896-98 (E.D.Tex.2007). Sala testified at trial that his participation in the Deerhurst Program was undertaken in accordance with a five year plan. Under the plan, potential Deerhurst investors were required to place a minimum of $500,000 into a Refco account, to be traded on each individual’s behalf by Krieger through Deerhurst. Investors were free to withdraw their funds without penalty at any time during this initial test period. If investors desired to continue investing in Deerhurst, they were required to deposit additional funds— which combined were to equal at least 15% of their expected tax loss — into a Deer-hurst GP account. This second round of investment was to remain under Deer-hurst management through 2000. If the Deerhurst GP account was profitable after liquidation in late 2000, investors were required to reinvest their liquidation proceeds in Deerhurst LLC for a minimum of five years, or face a significant early-withdrawal penalty. Sala’s testimony — which was not contradicted by any Government evidence — was both credible and well-supported by documentary evidence and the deposition testimony of Michael Schwartz, Martin White — a friend of Sala who also was a significant Deerhurst investor — and Andrew Krieger. I accept Sala’s testimony in this regard as fact. Sala testified that he viewed his investment in the Deerhurst Program to be part of one continuous transaction lasting five years. This testimony was uncontradicted. Accordingly, I conclude Sala subjectively viewed his participation in the Deerhurst Program to be a single transaction. The behavior of the other Deerhurst Program investors also supports the conclusion that the Deerhurst GP program and the Deerhurst LLC program were understood by the investors to comprise one transaction. Martin White testified by deposition that “at a certain point, you needed to be either in or out. And if you were in, you were in for, I think it was four years. And that was it. You were in, you were locked in ... your investment was sort of illiquid at that point.” Although one investor, Joe Umback, withdrew from the initial test phase of the Deerhurst Program — without ever investing in the Deerhurst GP portion of the program — every investor who participated in Deerhurst GP also invested in Deer-hurst LLC despite the fact that the Deer-hurst LLC portion had no tax benefits. This demonstrates that the investors in the Deerhurst understood their obligation— once they had profitably invested in the Deerhurst GP portion of the Deerhurst Program — to invest in the five-year combined program. B. Case law analysis The Government argues that the focus of my inquiry must be upon the Deerhurst GP portion of the Deerhurst Program alone, as the Deerhurst GP portion achieved the 2000 tax loss. I am unconvinced. The cases cited by the Government do not concern the question presented here— whether a loss generated in the first year of an ongoing multi-year investment relationship between two parties must be analyzed on its own. For example, in James the Tenth Circuit addressed whether lease transactions between certain joint ventures — which reported a tax loss — and an entity engaged in the purchase and lease of computer equipment could be found to lack economic substance when the purchases and lease transactions themselves were legitimate. See James, supra, 899 F.2d 905. The court relied on the fact that the legitimate transactions were undertaken by entities independent from those claiming the tax loss. Rejecting the argument that the loss-generating arrangements and the purchase and lease arrangements were one “unitary deal,” the court noted “there were many individual actors and many individual transactions.” Id. at 910. The court held that the purehase- and-lease entity “never actually purchased equipment ‘on behalf of the joint ventures, but instead executed separate purchase agreements with them.” Id. at 909. Thus, the legitimate purchase and lease contracts were independent of the loss-generating arrangements between the purchase- and-lease entity and the joint ventures and the latter were not “legitimized merely because they were on the periphery of some legitimate transactions.” Id. Likewise, in Nicole Rose Corp. v. Comm’r of Internal Revenue, 320 F.3d 282 (2d Cir.2003), the court addressed whether an otherwise sham loss-generating transaction could be found to have economic substance because it offset profits from other associated transactions. The taxpayer claimed a loss of $22 million achieved from the transfer of certain leases of European computer equipment to a European bank. Id. at 283. Contemporaneous with the lease transfers, the taxpayer bought and sold a third corporation, realizing a profit of $11 million. Id. at 284. Rejecting the taxpayer’s argument that the two transactions should be considered together for purposes of determining economic substance, the Second Circuit held that income generated from the purchase and sale of the third corporation was irrelevant to the inquiry whether the lease transfer had economic substance. Id. Nicole Rose did not concern whether the loss-generating portion of an ongoing investment relationship between two parties must be analyzed on its own for economic substance. The remaining cases cited by the Government are similarly distinct from Sala’s. See, e.g., Klamath, supra, 472 F.Supp.2d 885 (holding that although the loss-generating transaction was described as part of a seven-year plan on paper, the “seven-year plan” was actually intended to be— and in fact was — concluded in its entirety by the end of the tax year in which the loss was generated); see also Coltec, supra, 454 F.3d 1340 (holding that although the loss-generating transfer of contingent asbestos litigation liabilities to Garrison — a Coltec subsidiary — in exchange for a $375 million note was done in conjunction with a legitimate business purpose transfer of management of asbestos claims, the transfer of management was “separate and distinct from the fact that Garrison took a managerial role in the asbestos liabilities, as demonstrated by the fact that Garrison managed another entity’s asbestos liabilities ... without actually assuming [its] liabilities” and therefore was not sufficiently linked with the transfer of liabilities for purposes of considering the transfer of management and liability as one transaction). Unlike the phony seven-year plan in Klamath, the evidence here shows that not only the investors, but also the promoters and managers of the Deerhurst Program, intended the program to be long term. Andrew Krieger created a special entity— Beckenham Trading Company (“BTC”)— that executed the trades on behalf of the Deerhurst Program. BTC had its own employees and its own independent infrastructure. The promoters of the Deer-hurst Program, including Michael Schwartz and John Raby, were largely paid for their efforts out of the fees BTC generated from making trades. Likewise, Andrew Krieger received a large portion of his fees from BTC’s profits. In 2000— the year in which Sala realized the tax loss — BTC generated no income. If the Deerhurst Program had been a quick in- and-out program, neither Krieger, Schwartz, nor Raby would have realized a significant return from the Deerhurst Program. As all three parties expressed their expectation of being paid for their work, it follows that all three expected and intended the Deerhurst Program to be ongoing. Accordingly, I find this case unlike those cited by the Government in support of its argument that the Deerhurst GP portion of the Deerhurst Program should be considered separately from the Deerhurst LLC portion of the Deerhurst Program for purposes of determining whether the loss-generating transaction was bona fide. Instead, I find the facts here akin to those in Salina Partnership LP v. Commissioner of Internal Revenue, T.C. Memo. 2000-352 (2000). In Salina Partnership — a case addressing a question nearly identical to that presented in this section — the taxpayer invested in a long-term investment program that consisted of two distinct steps, one occurring at the end of 1992, and the other occurring from 1993 forward. Like this case, the 1992 portion lasted only a few days but yielded significant tax benefits. See id. at *9-11. While conceding the economic substance of the 1993-forward portion of the program, the Government claimed the 1992 portion was structured solely for the purpose of achieving tax benefits and therefore should have been considered a distinct transaction. See id. at *11. The Government argued the taxpayer never had any intent to achieve profits from the 1992 portion of the program, but always intended the invested funds to be immediately reinvested in the 1993 forward program. See id. Disagreeing with the Government’s position, the Tax Court “decline[d] to analyze the economic substance of the disputed transaction by focusing solely on events occurring during the period December 28 through 31, 1992. Segregating PPL’s investment in Salina into two parts, as respondent suggests, would violate the principle that the economic substance of a transaction turns on a review of the entire transaction.” Id. at *13. The court was persuaded by the fact that the taxpayer— like Sala here, see Part VII, infra — conducted significant due diligence on the 1993 forward program before investing in the 1992 program and that a condition of investment in the 1992 program — like the investment in Deerhurst GP here — was the requirement that the liquidated 1992 funds be reinvested in the 1993 program. See Salina P’ship, T.C. Memo. 2000-352 at *13. Accordingly, I find and conclude that— for purposes of determining whether the loss-generating portion of Sala’s participation in Deerhurst was part of a bona fide transaction — the Deerhurst Program must be considered in its entirety from 2000 onward. V. STEP TRANSACTION ANALYSIS The Government argues that — for purposes of determining whether Sala suffered a deductible loss in 2000 — the Deerhurst GP transactions should be collapsed into one transaction under the “step transaction doctrine.” Under the Government’s view, the steps Sala took in 2000 should be conceptually merged together so that Sala’s purchase of the initial 24 options would — for purposes of calculating tax consequences — be converted to the $9 million dollar proceeds without the intervening loss-generating steps involving Solid Currencies. The issues involved in the application of the step transaction doctrine, especially with regard to taxpayer’s intent, “are undeniably questions of fact.” See True v. United States, 190 F.3d 1165, 1176 n. 10 (10th Cir.1999). “Deciding ‘whether to accord the separate steps of a complex transaction independent significance, or to treat them as related steps in a unified transaction, is a recurring problem in the field of tax law.’ In search of an answer to this problem, courts utilize a variety of approaches, including a particular incarnation of the basic substance over form principle known as the step transaction doctrine. Simply stated, the step transaction doctrine provides that ‘interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction.’ ” See True, supra, 190 F.3d at 1174 (quoting Comm’r of Internal Revenue v. Clark, 489 U.S. 726, 738, 109 S.Ct. 1455, 103 L.Ed.2d 753 (1989); King Enters., Inc. v. United States, 189 Ct.Cl. 466, 418 F.2d 511, 516 (1969)). “Courts have developed three tests for determining when the step transaction doctrine should operate to collapse the individual steps of a complex transaction into a single integrated transaction for tax purposes: (1) end result, (2) interdependence, and (3) binding commitment. More than one test might be appropriate under any given set of circumstances; however, the circumstances need only satisfy one of the tests in order for the step transaction doctrine to operate.” True, supra, 190 F.3d at 1174 (citing Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1522 (10th Cir.1991)). While the Government tries to separate the Deerhurst GP transactions from the Deerhurst LLC transactions for purposes of the step transaction analysis, such a separation would run afoul of the rationale behind the step transaction doctrine in the first place: combining related steps into a single integrated transaction for tax purposes. Thus, as held above, the “complex transaction” examined in this section must necessarily include the entire Deerhurst Program from 2000 and beyond. The end result test “amalgamates into a single transaction separate events which appear to be component parts of something undertaken to reach a particular result.” Kornfeld v. Comm’r of Internal Revenue, 137 F.3d 1231, 1235 (10th Cir.1998). Under this test, if the particular steps in a transaction are “merely the means to reach a particular result,” I do not separate those steps, “but instead treat them as a single transaction.” See True, supra, 190 F.3d at 1175. The taxpayer’s subjective intent when entering into each step is especially important under this test. See id. Whether the taxpayer intended to avoid taxes, however, is not the relevant inquiry. See id. Instead, my focus is on whether — at the time each individual step was taken — each individual step had a purpose other than the achievement of the end result. See id. at 1175-77. Courts invoking the “end result” test generally find it applicable when the complex steps actually employed had little or no benefit over a more direct course of action. See id. at 1177; Crenshaw v. United States, 450 F.2d 472, 475 (5th Cir.1971). If I apply the end result test, Sala’s participation in the Deerhurst Program will be collapsed such that his initial investment in Deerhurst GP in 2000 will be considered for tax purposes as a direct investment in Deerhurst LLC in 2001. Looking at the fact of this case, it is clear that the “end result” test should not apply. The intended end result of Sala’s participation in the Deerhurst Program — aside from the tax benefits which are irrelevant to the “end result” inquiry— was to achieve significant returns from his Deerhurst LLC investments. The evidence presented at trial overwhelmingly shows that Sala was an extremely cautious investor who invested a great deal of time and energy carefully researching and choosing his investments. Sala’s participation in the Deerhurst GP test period falls well within the realm of behavior one would expect from such an investor. Had the Deerhurst Program lost money during the Deerhurst GP test period comparable to the money lost in the Deerhurst LLC period — a phenomena not uncommon among hedge funds, according to Sala’s credible testimony — Sala would have invested his money elsewhere. Accordingly, Sala’s investment in Deerhurst GP was not a circuitous sojourn on the path to his investment in Deerhurst LLC, but was instead a checkpoint that protected him— albeit only to a small degree — from plunging headfirst into an uncertain five-year strategy. In that sense, the Deerhurst GP steps were not “taken for the purpose of reaching the ultimate result” of investing in Deerhurst LLC, but were steps taken for the purpose of protecting Sala from having to “reach the ultimate result”— investing in Deerhurst LLC — at all. See Associated Wholesale Grocers, supra, 927 F.2d at 1523 (citations omitted). The “interdependence test” requires an inquiry into “whether under a reasonably objective view the steps were so interdependent that the legal relations created by one of the transactions seem fruitless without completion of the series.” Kornfeld, supra, 137 F.3d at 1235. “Disregarding the tax effects of individual steps under this test is, therefore, ‘especially proper where ... it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts.’ ” Associated Wholesale Grocers, supra, 927 F.2d at 1523 (quoting Kuper v. Comm’r of Internal Revenue, 533 F.2d 152, 156 (5th Cir.1976) (ellipsis in original)). If each individual step would not have been taken had the others not followed, therefore, the interdependence test requires those steps to be considered as one. True, supra, 190 F.3d at 1179. Under the interdependence test, I “examine [the] tandem of transactional totalities to determine whether each step has a reasoned economic justification standing alone.” Sec. Indus. Ins. Co. v. United States, 702 F.2d 1234, 1247 (5th Cir.1983); see also True, supra, 190 F.3d at 1178. The fact that there was a business purpose for each individual step is one indication that its formation was not interdependent with the subsequent steps. See Associated Wholesale Grocers, supra, 927 F.2d at 1527 n. 15. As held in Part VI, infra, each individual step in the Deerhurst Program had a valid non-tax business purpose. More important, the evidence presented at trial showed Sala invested in the Deerhurst Program for profit, see Part VII, infra, and each step of the transaction helped assure that goal. Sala could have achieved the tax loss without the use of Solid Currencies. Sala also could have achieved the tax loss without reinvesting in Deerhurst LLC. Each step Sala took leading to his eventual investment in Deerhurst LLC amounted to “the type of business activity one would expect to see in a bona fide, arm’s length business deal between unrelated parties” and each makes objective sense standing alone without contemplation of the subsequent steps in the transaction. See True, supra, 190 F.3d at 1179. Most telling, the initial phases of the Deerhurst Program were structured such that Sala — as one investor did — could exit the program early before committing his full $9 million. Thus, as a matter of fact, each step did not lead “inexorably to the next.” See id. Accordingly, it can hardly be said that each step of Sala’s investment in the Deerhurst Program would be “fruitless” without the others and the interdependence test does not require the multiple steps in Sala’s Deerhurst investment to be considered as one. The “binding commitment” test collapses a series of steps into a single transaction where there was a binding commitment at the time the first step was entered into to also undertake a later step or series of steps. See generally Comm’r of Internal Revenue v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968). The “binding commitment” test is seldom applied outside of the context of Gordon— wherein a corporate distribution was broken into a span of several years — and has generally been rejected in other contexts. See Associated Wholesale Grocers, supra, 927 F.2d at 1522 n. 6. As this case does not concern the statutory language considered in Gordon concerning divisive reorganizations, I need not apply the test here. See Security Indus., supra, 702 F.2d at 1245; King Enters., supra, 418 F.2d at 517-18. Accordingly, I find and conclude the step transaction doctrine does not apply here to merge Sala’s purchase of the initial 24 options into his eventual investment in Deerhurst LLC without the intervening loss-generating steps involving Solid Currencies. VI. WHETHER THE DEERHURST PROGRAM WAS A SHAM TRANSACTION While 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, Boulware v. United States, — U.S. -, 128 S.Ct. 1168, 1175 n. 7, 170 L.Ed.2d 34 (2008), “sham transactions” are not recognized for tax purposes. Keeler v. Comm’r of Internal Revenue, 243 F.3d 1212, 1215 (10th Cir.2001). “Sham transactions” generally fall into one of two categories. James, supra, 899 F.2d at 908 n. 4. A “sham in fact” is a transaction that occurs on paper, but which never took place in reality. Id. The Government does not contend that the loss-generating investments at issue in this case were “shams in fact.” A “sham in substance” occurs when there is nothing of substance to be realized from a transaction apart from income tax savings. James, supra, 899 F.2d at 908. A transaction will be accorded tax recognition only if it has economic substance which is compelled or encouraged by business realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached. Frank Lyon Co. v. United States, 435 U.S. 561, 583-85, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978). The analysis, therefore, requires both an objective inquiry into whether the transaction had economic substance — that is, a reasonable possibility of profits beyond the tax benefits — and a subjective inquiry into whether the taxpayer had a business purpose for engaging in the transaction other than tax avoidance. See Jackson v. Comm’r of Internal Revenue, 966 F.2d 598, 601 (10th Cir.1992) (citing Casebeer v. Comm’r of Internal Revenue, 909 F.2d 1360, 1363 (9th Cir.1990)); Bohrer v. Comm’r of Internal Revenue, 945 F.2d 344, 348 n. 5 (10th Cir.1991). It is not necessary for the Government to prove both inquiries. James, supra, 899 F.2d at 908-09. A finding that either a loss-generating transaction lacked objective economic substance or was not motivated by a non-tax business purpose is sufficient to find a transaction to be a sham. See Keeler, supra, 243 F.3d at 1220. A review of the relevant case law makes clear that the line between the economic substance and business purpose inquiries is not a bright one, and that both inquiries have subjective and objective elements. See Nickeson v. Comm’r of Internal Revenue, 962 F.2d 973, 976 (10th Cir.1992). Accordingly, I consider the economic substance of the Deerhurst Program and Sala’s business purpose motivation together to determine whether the transaction had any practical economic effects other than the creation of income tax losses. See Jackson, supra, 966 F.2d at 601. I view the transaction as a whole, and each step — from commencement to consummation — is relevant. See ACM P’ship, supra, 157 F.3d at 247. A. Whether the Deerhurst Program had economic substance Whether a claimed loss is deductible turns on “the objective realities of a transaction rather than the particular form the parties employed.” Boulware, supra, 128 S.Ct. at 1175. It cannot seriously be doubted that the Deerhurst Program had the objective potential to be hugely profitable. Looking at the 24 basis-generating options — trades that Government expert Dr. DeRosa repeatedly referred to as “un-Kriegerlike” for their low potential to earn profits — the experts agreed that the contracts had the potential to earn profits of approximately $550,000— excluding a directional British pound-Japanese yen play — on an investment of approximate $728,000. Accounting for the directional play, the profit potential was much higher. As Sala’s expert Dr. Kolb and Dr. DeRosa both concluded, including the pound-yen play in the profitability calculation — due to its highly speculative nature — was inappropriate and I do not include it in my analysis here. I note, however, that the pound-yen directional play — the type of “occasional core position” Sala, Krieger, and White testified was typical of Krieger’s trading technique — in fact returned over 500% of its cost in less than one month. Dr. Kolb testified — and I agree- — -that the appropriate measure of comparison for determining profit from an investment is the cost of the investment, not the value of the undergirding account. Comparing the $550,000 profit, then, to the $728,000 cost, the 24 trades had a profit potential of approximately 75% in one year. Subtracting Krieger’s 30% “incentive fee,” 4% “management fee”- — -assuming the account was traded at a 4-to-l notional value — and “mark-up fees” of 1.5 pips ($150) per million dollars in equity controlled, the profit potential of the 24 basis trades was approximately 45% per year as follows: $728,000 plus $550,000 yields approximately $1,278,000. $1,278,000 reduced by a 30% “incentive fee” on the $550,000 in profit yields $1,113,000. $1,113,000 reduced by a 4% “management fee” yields $1,068,480 — a profit of over 46%. The inclusion a “markup fee” of 1.5 pips per million dollars roundturn has only a minor impact. Although no “mark-up fee” was actually charged on the 24 basis trades, a review of the Refco statements reveals that the $728,000 controlled $60 million in cash, leading to a “mark-up fee” — if it had been charged — of $9,000. This corresponds to a “mark-up fee” of approximately 1.2% of the $728,000. Subtracting the “mark-up fee” from the $1,068,480 yields $1,059,-480 — a profit, net of fees, of over 45%. Had Krieger invested all of Sala’s $9 million in similar “low profit potential” trades and reinvested the after-fee proceeds in similar trades, Sala’s $9 million had the potential to exceed — albeit by a slender margin — the $60,449,984 claimed loss within the five years and two months dedicated to the combined Deerhurst Program. Although the possibility of achieving such maximum profits was small— based on Dr. DeRosa’s estimate that the trades had, at most, a 50 percent likelihood of reaching maximum profitability in one year — the potential is still significant. If — as Dr. DeRosa repeatedly argued he should have — Krieger invested in higher profit potential trades, the likelihood of exceeding the $60 million tax loss could only increase. Although Dr. DeRosa testified- “it would be impossible to ever obtain” even a ten percent return using the investment strategy employed by Krieger in 2000, the actual results show DeRosa’s testimony to be inaccurate in this regard. In fact, the results are even more impressive when calculated using the actual profits achieved from the basis trades. In 24 days, Sala’s $728,000 investment yielded a profit of between $90,000 and $110,000 — depending on which expert’s opinion is believed — corresponding to a monthly return well over ten percent by either accounting. Annualized over the course of a 365-day year, this rate of return amounts to between approximately 550 and 780 percent. In light of the potential and actual profits arising from the Deerhurst Program, I find and conclude the program offered a reasonable opportunity for profits exclusive of the tax benefits and therefore possessed economic substance. B. Whether Sala had a business purpose for structuring his investment in the Deerhurst Program other than tax avoidance A taxpayer has a legal right to conduct his business so as to decrease — or altogether avoid — the amount of what otherwise would be his taxes. Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596 (1935). Accordingly, a tax-avoidance motive is not inherently fatal to a transaction. See True, supra, 190 F.3d at 1173 n. 6. If a taxpayer chooses to conduct his business in a form that results in tax avoidance, however, he must choose a business structure that comprises a viable business entity that has a substantial business purpose or actually engages in substantive business activity. See N. Ind. Pub. Serv. Co. v. Comm’r of Internal Revenue, 115 F.3d 506, 511 (7th Cir.1997). The business purpose prong of the sham transaction inquiry is similar to the “primarily for profit” standard of 26 U.S.C. § 165, discussed at Part VII, infra. See Friedman v. Comm’r of Internal Revenue, 869 F.2d 785, 792 (4th Cir.1989). Thus, the business purpose inquiry concerns the subjective motivations of the taxpayer when entering into the transaction. See id. Unlike the 26 U.S.C. § 165 inquiry, however, the business purpose inquiry is met by the taxpayer if he can show any business purpose for structuring his transactions other than tax avoidance. See Frank Lyon Co., supra, 435 U.S. at 584, 98 S.Ct. 1291; Friedman, 869 F.2d at 792; see also Keeler, supra, 243 F.3d at 1217. Whether the taxpayer had a business purpose other than tax avoidance can be determined by evidence demonstrating the taxpayer’s subjective motivations or by an objective examination of the transaction. See Friedman, 869 F.2d at 792; see also Keeler, 243 F.3d at 1217. As the business purpose inquiry is a factual question, the initial burden of production is on Sala to produce evidence sufficient to allow for judgment in his favor if not contradicted. See 26 U.S.C. § 7491. Sala met his burden of production at trial. While admitting the Deerhurst Program was structured in a way that provided significant tax benefits, Sala testified credibly at trial that each step of the program was structured to provide non-tax business benefits as well. Sala’s testimony was supported by Michael Schwartz, Andrew Krieger, Martin White, Dr. Kolb, and documentary evidence. Accordingly, the burden is on the Government to show by a preponderance of the evidence that there was no business purpose to Sala’s actions other than tax avoidance. The Government does not meet its burden. 1. Solid Currencies had a legitimate business purpose Sala testified he believed contributing the loss-generating options contracts to an S corporation protected him from personal liability. Although Sala’s attorney, Mr. Nemirow, expressed concerns that Solid Currencies was undercapital-ized, he was satisfied by the opinion letter of Rosenman & Colin LLP concerning the liability issue — a letter Mr. Nemirow testified provided a “strong” and “unqualified” opinion regarding Sala’s liability exposure under New York law. The Government argues that the use of an S Corporation was intended to distinguish Sala’s transaction from those listed in I.R.S. Notice 2000-44. The evidence presented at trial, however, showed that the use of an S Corporation was envisioned by the Deerhurst Program’s promoters before Notice 2000-44 was issued. Moreover, Sala could have achieved the same tax benefits without the use of an S corporation by contributing the 24 options contracts directly to Deerhurst GP. This lends additional credibility to Sala’s testimony regarding the business purpose of Solid Currencies. Accordingly, I find and conclude Sala’s contribution of the loss-generating options contracts to Solid Currencies had a legitimate business purpose other than the creation of tax losses. 2. Deerhurst GP had a legitimate business purpose A partnership will not be recognized for tax purposes if the partnership “is fictitious or if it has no business purpose or economic effect other than the creation of tax deductions.” DeMartino v. Comm’r of Internal Revenue, 862 F.2d 400, 406 (2d Cir.1988). In such cases, the basic inquiry is whether, all facts considered, the parties intended to join together as partners to conduct business activity for a purpose other than tax avoidance. Comm’r of Internal Revenue v. Culbertson, 337 U.S. 733, 741, 69 S.Ct. 1210, 93 L.Ed. 1659 (1949); ASA Investerings P’ship v. Comm’r of Internal Revenue, 201 F.3d 505, 513 (D.C.Cir.2000). The parties’ “intention in this respect is a question of fact, to be determined from testimony disclosed by their ‘agreement, considered as a whole, and by their conduct in execution of its provisions.’ ” Culbertson, 337 U.S. at 742, 69 S.Ct. 1210 (citing Drennen v. London Assurance Co., 113 U.S. 51, 56, 5 S.Ct. 341, 28 L.Ed. 919 (1885)). Although there is no doubt the partners, including Sala, entered Deerhurst GP with an eye on tax benefits, there is likewise no doubt that they also entered Deerhurst GP with a good faith intent to join together for the purpose of investing in currency options and sharing in the profits, losses, and expenses. Further, there is no doubt that Deerhurst GP actually engaged in substantial business activity. Deerhurst GP bought and sold hundreds of options contracts — controlling billions of dollars in currency according to Dr. DeRosa — in its one month existence, and achieved substantial profits. These profits — as well as their related expenses — were divided among the partners based upon their partnership share. As Sala and Krieger testified, contributing Solid Currencies’ options to Deerhurst GP allowed for economies of scale, reduced transaction costs that could be spread among the various partners, reduced likelihood of human error, and better allocation of risk and exposure. Krieger testified that having a pool of funds in Deerhurst GP was preferable to numerous individual accounts in the test period because banks were generally not interested in trades amounting to less than $5 million. Although Sala’s account — as well as Martin White’s — was valued over $5 million, no other investor had an account approaching a similar value. Krieger and Sala both testified that larger trades were more attractive to banks and therefore afforded better liquidity and lower costs. Sala and Krieger testified as well that the larger pool of funds in Deerhurst GP — as compared to the individual accounts — allowed for trading at a higher leveraged basis. As leverage increased, so did the potential for profit — or loss. This testimony was supported by the testimony of Sala’s expert, Dr. Kolb, and I find it reasonable and credible. Sala and Martin White both testified that the Deerhurst GP test period allowed investors to get comfortable with Krieger’s operation and, as Sala put it, “make sure he didn’t run off with my money.” During the Deerhurst GP test period, Sala became acquainted with Krieger’s back office operations and reporting, as well as Krieger’s trading style and type of investments. Sala developed a working relationship with Krieger that culminated in Deerhurst adopting Sala’s preferred reporting methods as its own — at least for the reports provided to Sala and Martin White. Sala, Krieger, and Michael Schwartz testified that liquidating Deerhurst GP at the end of 2000 allowed for easier accounting and redistribution of the partnership assets. This testimony was confirmed by Dr. Kolb and I find it to be reasonable and credible. Sala and Krieger also testified that liquidation helped protect the parties against year-end volatility in the market. The Government relied on the testimony of its expert Dr. DeRosa to show a lack of legitimate business purpose. Dr. DeRosa testified that Krieger’s investment strategy was largely volatility-based, and therefore more profitable under volatile market conditions. While Dr. DeRosa’s testimony was credible, it does not overwhelm the other valid business purposes for liquidating at the end of 2000, particularly in light of the fact that — as Dr. DeRosa noted in his expert report — the portfolio was profitable at the end of 2000, and actual profits could only be realized by selling the underlying contracts. In light of Krieger’s understandable desire to start slowly in order to acclimate his clients to the novel world of foreign currency options trading, “cashing in” while the options were significantly profitable clearly served a reasonable and legitimate business end. Accordingly, I find the liquidation of the Deerhurst GP at the end of 2000 had a legitimate business purpose other than the creation of tax losses. Viewing the Deerhurst GP transactions in their individual steps and in their entirety, therefore, I find and conclude Deer-hurst GP was a bona fide partnership. Each transaction entered into by Sala with regard to the partnership — including Solid Currencies’ contribution of the loss-generating options contracts to Deerhurst GP— and by the partnership with regard to Sala — including liquidating the options contracts at year’s end — had a substantial business purpose other than the creation of tax losses. 3. The Deerhurst Program test period had a legitimate business purpose The Government argues that the fact that Sala was committed to the Deerhurst Program if the Deerhurst GP made even a penny of profit conclusively shows Sala was only interested in a tax loss. I am unconvinced. As Krieger testified, the Deerhurst Program required a long term commitment in order to execute the foreign currency options trades profitably. Krieger had experienced difficulties with a prior client — Ross Capital — that chose to withdraw and then reinvest in the Deerhurst Program several times in 1998 and 1999. Accommodating short-term investors was excessively burdensome due to the large amount of currency controlled by the options. Krieger’s testimony regarding his strong preference for long term investors was therefore credible. Whether or not a test period even occurred, it would not be unreasonable for Krieger to require a long term investment. The test period helped ensure any investors would remain invested. Also, as Krieger testified, allowing investors to start of with a smaller amount helped promote the program to those investors who would be uncomfortable jumping into the unfamiliar area of foreign currency options trading with a large up-front investment. The Government also argues the test period could not have served as a model whereby Sala could become acquainted with Krieger’s trading style because only $728,000 was actually invested, and the profit on the test account was — although the exact dollar amount is not clear — only about one percent of the $9 million. The Government’s argument ignores the historic realities of the Deerhurst Program. As Sala, Krieger, White, and both experts testified, and as the documentary evidence clearly established, Krieger’s trading style consisted mostly of lower risk, lower return investments coupled with occasional core positions betting on the direction of a particular currency’s valuation. This is exactly what the 24 basis trades consisted of: five volatility-based sets of four options that had fixed risk/reward potential and two pairs of options with a directional basis. Moreover, the one percent return was comparable to the great plurality of monthly returns in the history of Deer-hurst before 2000. Approximately fifty of the 107 months in which Deerhurst had been operational from 1991 to 2000 showed gains or losses of less than two percent. Thirty-six months — approximately one third of all months reported- — -showed gains or losses of less than one percent. Thus, contrary to the Government’s position, Krieger traded in 2000 just as he had traded prior to 2000. No matter how “unKriegerlike” Dr. DeRosa believed the trades to be, the historical record of Krieger’s actual trading patterns closely mimics that of the test period. Accordingly, I find and conclude the use of a test period had a legitimate business purpose other than the creation of tax losses. A The use of four-option sets had a legitimate business purpose The Government presented expert testimony that Sala could have purchased essentially identical-risk options sets using “digital options” — options that are set at a specific price and either expire worthless or pay out a fixed amount. Dr. DeRosa’s report notes that each of the four-option sets could be replaced with a cluster of 33 digital options — a total of 165 options achieving the same outcome as the 20 actually used — for a similar price. Using digital options, Sala would have had the same profit/loss potential, but controlled significantly less currency than the $60 million controlled by the 24 basis trades. Thus, using digital options, Sala would not have been able to achieve the $60 million tax loss. While this may be true, the law does not require Sala to have structured his affairs so as to maximize his tax burden. See Helvering, supra, 293 U.S. at 469, 55 S.Ct. 266. The Government presented no evidence that the option strategy actually employed by Krieger lacked a business purpose or was in any way unusual or suspect. Sala’s expert, on the other hand, testified that digital options had significant disadvantages in that they were considered “exotic” options that were traded less frequently and therefore had less liquidity and higher transaction costs. I find this testimony to be credible. Accordingly, whether Sala could have achieved the same investment goal using digital options does not impact whether the purchase of the 24 basis options had a valid business purpose. 5. The Deerhurst Program, when viewed in its entirety, had a legitimate business purpose Having determined that each step of Deerhurst Program in 2000 was structured in a way that had a valid business purpose above and beyond the creation of tax losses, I next look at whether- — -when viewed collectively — the Deerhurst Program had a valid business purpose. See True, supra, 190 F.3d at 1174. I apply the substance over form principle to prevent the true nature of the Deerhurst Program from being disguised by mere formalities. See id. In light of the Deerhurst Program’s potential for significant profits and Sala’s good faith and reasonable belief in and expectation of the program’s profitability above and beyond the tax benefits, see Part VII, infra, I find and conclude the Deerhurst Program “considered as a whole” had a business purpose other than the creation of tax losses. See id. at 1177. Accordingly, I hold Sala’s investment in the Deerhurst Program was not a sham transaction. VII. WHETHER SALA ENTERED INTO THE DEERHURST PROGRAM FOR PROFIT Although the Deerhurst Program was not a sham transaction, Sala’s losses are deductible from his ordinary income only if Sala satisfies the express statutory requirement of 26 U.S.C. § 165(c)(2) that the ordinary income deduction arises from a transaction entered into “for profit.” See Yosha v. Comm’r of Internal Revenue, 861 F.2d 494, 499 (7th Cir.1988); Miller v. Comm’r of Internal Revenue, 836 F.2d 1274, 1279 (10th Cir.1988). The test of whether a taxpayer entered into a loss-generating transaction for profit requires a factual determination of the taxpayer’s intentions when entering into the loss-creating venture. See Miller, 836 F.2d at 1279. If the taxpayer has a good faith belief that the venture will create a benefit in excess of the anticipated tax loss, the Government “allows the loss, because had the transaction been profitable as intended by the taxpayer, the government would have benefitted through increased taxable income.” Id. at 1278-79. Even though the actual prospects of a profitable operation are minuscule, that is not conclusive in determining the taxpayer’s purpose. King v. United States, 545 F.2d 700, 708 (10th Cir.1976). Likewise, even if the venture is unprofitable in fact, the loss may still be deducted so long as it was reasonably expected to be profitable by the taxpayer. See Miller, supra, 836 F.2d at 1279. “What need be shown is that the taxpayer entered into the venture in good faith, for the purpose of making a profit.” King, 545 F.2d at 708. Under 26 U.S.C. § 7491, the initial burden of production is on Sala to produce evidence sufficient to allow for judgment in his favor if not contradicted. Sala met his burden of production at trial. Sala testified that he considered other investment programs, including BLIPS and OPIS, but determined these programs— unlike the Deerhurst Program — had little potential for long term profit. Sala testified he chose not to invest in these programs — but instead to invest in Deerhurst — based on his good faith belief — in light of the well-documented trading history of Krieger and Deerhurst — that the Deerhurst Program would be significantly profitable over its anticipated lifespan. Martin Wdiite testified similarly. I find this testimony to be credible. Both Sala and Wdiite also testified that profitability above and beyond the tax losses was more important than the tax losses themselves because the tax losses were speculative and somewhat dependent on the whims of the I.R.S. With this caveat in mind, Sala sought out an investment program that had what he calculated to be more than a 50% chance of being profitable over and above the tax losses. I find this testimony to be likewise credible. If no contrary evidence were submitted, Sala’s credible testimony and supporting exhibits would— without regard to the judicial presumption of IRS correctness — be sufficient grounds to make a finding of fact that Sala entered into the Deerhurst Program with the ultimate objective of producing profits in excess of the tax losses. Griffin, supra, 315 F.3d at 1021. Accordingly, the burden of proof is on the Government under 26 U.S.C. § 7491 to show Sala did not enter into the Deerhurst Program with a primary profit objective. The Government fails to meet this burden. In support of his assertion that he had a good faith belief the Deerhurst Program would be profitable, Sala testified extensively about his investigation of Andrew Krieger and the prior Deerhurst trading results. Sala’s investigation revealed Krieger had a consistent record of profitability extending back to 1991, when the Deerhurst Program began. Krieger also had a reputation of being an aggressive foreign currency trader who was well known in financial circles for realizing a $228 million foreign currency exchange profit at Banker’s Trust in 1987 at the age of 31. Krieger then went on to work for George Soros, another well-known foreign currency investor, where he achieved additional and significant profits. Sala contacted prior investors with whom Andrew Krieger had been associated' — including Lehman Brothers and the Ross Perot Family Fund. These prior investors gave Krieger “glowing recommendations” and confirmed Krieger’s reputation as a skilled and reputable investment manager with a history of making consistent and significant profits for his investors. Before investing in the Deerhurst Program, Sala also reviewed Deerhurst’s prior trading results from 1991 through 2000. Over this time period, Sala determined Deerhurst had an average annual return of between 16 and 18 percent net of fees on an unleveraged basis. An independent accounting firm, Julius D. Farber and Company, confirmed Deerhurst had an average annual return of 20.7 percent, net of fees, from 1995 through 1999. Sala applied these calculations and determined that Deerhurst had a significant potential for profit that reached