SIH Partners LLLP, Explorer Partner Corp., Tax Matters Partner

United States Tax Court 167 T.C. No. 8 SIH PARTNERS LLLP, EXPLORER PARTNER CORP., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ————— Docket No. 10099-20. Filed August 6, 2026. ————— The TMP of partnership S timely petitioned this Court challenging R’s adjustments in a Notice of Final Partnership Administrative Adjustment regarding qualified dividend income (QDI), reclassified as ordinary dividend income, and corresponding foreign tax credits (FTC). R principally contends that investment positions held by S are substantially similar or related property as defined by I.R.C. § 246(c)(4) and accompanying Treasury regulations. Held: The Substantial Overlap Test in Treas. Reg. § 1.246-5(c)(1)(iii) has not been met; however, the Anti- Abuse Rule of Treas. Reg. § 1.246-5(c)(1)(vi) is applicable, and therefore S is not entitled to QDI treatment under I.R.C. §§ 1(h)(11)(B)(iii)(I) and 246(c). Held, further, S has not satisfied all statutory requirements to qualify for the FTC. ————— Served 08/06/26  2 Nathan P. Wacker, Rajiv Madan, Nathaniel J. Dorfman, Christopher P. Bowers, Erin E. Girbach, and Nadiya F. Beckwith-Stanley, for petitioner. Brandon S. Cline, Christopher A. Pavilonis, Thomas J. Kerrigan, Naseem Jehan Khan, and Michael E. Washburn, for respondent. WEILER, Judge: On December 5, 2019, the Internal Revenue Service (IRS) issued a Notice of Final Partnership Administrative Adjustment (FPAA) for the tax year ending December 31, 2012 (tax year at issue), to Explorer Partner Corp., the tax matters partner for SIH Partners, LLLP (SIHP). In the FPAA respondent (i) reduced SIHP’s qualified dividend income (QDI) by $170,764,863; (ii) reclassified the reported QDI of $170,764,863 as ordinary dividend income; and (iii) reduced SIHP’s foreign tax credit by $25,614,729 on the basis of section 246(c)(4) 1 and accompanying Treasury regulations. The two issues for decision are whether (1) SIHP’s $170,764,863 of QDI should be reclassified as ordinary dividend income and (2) SIHP’s foreign tax credit should be reduced by $25,614,729. FINDINGS OF FACT Some of the facts are stipulated and are so found. The Stipulation of Facts and the attached Exhibits are incorporated herein by this reference. I. SIHP SIHP, the partnership at issue in the case, is a limited liability partnership organized under the laws of the State of Delaware on April 2, 2007, and classified as a partnership under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 2 Pub. L. No. 97-248, §§ 401–407, 96 1 Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. 2 Before its repeal TEFRA governed the tax treatment and audit proceedings for many partnerships, including SIHP.  3 Stat. 324, 648–71. SIHP had its principal place of business in Delaware when the Petition was timely filed. SIHP wholly owns Susquehanna International Holdings, LLC (SIH), a limited liability company organized under the laws of the State of Delaware. SIH in turn owns CVI Holdings LLC (CVIH), also a limited liability company organized under the laws of the State of Delaware. CVIH wholly owns Capital Ventures International (CVI), an unlimited liability company with share capital organized under the laws of the Cayman Islands. For U.S. federal income tax purposes, SIH, CVIH, and CVI were disregarded entities of SIHP with all items of income, gain, loss, deduction, and credit reported by SIHP. During the tax year at issue SIHP had six partners: petitioner, Colombus International Holdings, Inc., Cortes International Holdings, Inc., Coronado International Holdings, Inc., Lasalle International Holdings, Inc., and Balboa International Holdings, Inc. Petitioner’s shareholders during the tax year at issue were Jeffrey Yass, Arthur Dantchik, Eric Brooks, and Joel Greenberg. II. SIG SIHP, SIH, CVIH, and CVI are affiliated with Susquehanna International Group, LLP (SIG). SIG is a privately held global trading firm, founded in 1987, and it is an active participant in the options and futures market in over 50 stock and options exchanges. SIG’s core business is to act as a liquidity provider in financial markets, such as the NYSE and NASDAQ, as a “market maker” where it provides two- sided markets—a bid price and an offer price—on a continuous basis to ensure a fair, efficient, and liquid market. SIG engages in millions of trades around the world each business day. SIG trades and makes proprietary investments in equities, fixed income, energy, commodity, index, derivative products, private equity, and venture capital, research, customer trading, and institutional sales. SIG has a work force of approximately 3,300 employees who are employed through entities under its management that are registered as broker-dealers with the U.S. Securities and Exchange Commission. Like other market makers, when SIG buys or sells a particular option it typically also acquires an offsetting position to hedge 3 any risk. This 3 Typically, a “hedge” is two investments that offset the specific risks of each other. For example, long and short positions of similar value in S&P 500 index (SPX) and SPY, respectively, would be a typical hedge.  4 hedging allows SIG to be financially indifferent as to whether the values of the options being traded increase or decrease in price. Because market makers like SIG are hedged in this way, they do not earn a profit through hedge trading. Rather, SIG makes a return from its bid-ask spread, which is the fractional difference (often pennies or less) between their offered bid price and their offered ask price. 4 This small margin, however, correlates to the minimal risk involved, a key factor for SIG’s interest as market makers avoid taking on potential risks with respect to the positions they choose to trade in. SIG maintains longstanding, unhedged short positions 5 in one or more indexes or securities to mitigate risk in the event of an economic downturn (Firm Hedge). The Firm Hedge has existed in some form and amount continuously since 1987 and has lost approximately $1.25 to $2.5 billion. In 2012 the Firm Hedge 6 consisted of three indexes: an index fund and two exchange-traded funds (ETFs) 7 which included the SPX, the IWM, and the FXI. 8 SIG often transferred ownership of the Firm Hedge among its affiliates. Ultimately, the location of the Firm Hedge, i.e., which entity holds the rights at what time, is irrelevant as the overall financial impact remains the same because of the structure of the firm. Moreover, 4 A “bid price” is the highest price that a buyer is willing to pay for an option, while an “ask price” is the lowest price that a seller is willing to accept. 5 Maintaining a short position in stocks is essentially the practice of selling borrowed shares of stocks, called equities, anticipating that the stocks’ prices will decline, and the same numbers of borrowed shares can be repurchased at lower prices. 6 The Firm Hedge is not hedging against any specific investment. Instead, it mitigates firm risk in the event of an economic downturn by betting against the market. 7 The S&P 500 is a stock market index which tracks the performances of 500 of the largest publicly traded U.S. companies. It serves as a key indicator of the U.S. stock market and economy, similar to the Russell 2000 ETF (IWM) and the China Large Cap ETF (FXI). Investors cannot own or trade an index as all it does is take a measure of the market. Instead, companies can buy or create index funds or ETFs. ETFs are a type of investment fund that holds a collection of assets, such as stocks, bonds, or other securities like indexes. ETFs trade like stocks throughout the day on an exchange. This allows investors to buy and sell ETFs at any time during the market’s trading hours. FXI, for example, is an ETF that provides exposure to the FTSE China 50 index and serves as an indicator of China’s equity market. An index fund, by contrast, can be bought and sold only at the end of each trading day. 8 SPX is the ticker shorthand for the S&P 500. It is not in and of itself a tradable fund; however, there are various SPX ETFs and index funds on the market.  5 petitioner and respondent agree it was common for SIG to change the form in which its Firm Hedge positions were held. Firm Hedge positions have been held in portfolio swaps, individual swaps, and in different prime brokerage accounts 9 from different providers over time both before and after the tax year at issue. III. The Transaction at Issue Until 2010 the Firm Hedge was held within a prime brokerage account with Merrill Lynch. Merrill Lynch required a 15% margin—i.e., cash or collateral—for the short position indexes held in the Firm Hedge. In 2010 Morgan Stanley Co. approached SIG with a twofold proposition: first, to move the Firm Hedge from Merrill Lynch to one or more of Morgan Stanley Co.’s foreign-owned entities in exchange for a lower margin rate; second, to enter into a series of agreements that would structure a complex portfolio swap centered upon four specific Swiss equities (Transaction). 10 Jeff Cohen, SIG’s equity finance group manager, served as the lead for the Transaction. As part of the decision- making process on whether to enter into the Transaction, SIHP directed Mr. Cohen to create a preliminary pretax profit and loss analysis. On April 5, 2010, Mr. Cohen conducted an initial expected pretax profit and loss analysis (Cohen’s 2010 Analysis) of the proposed Transaction. The proposal involved the acquisition of long positions in four specific equities based in Switzerland: (1) Novartis (Ticker Symbol: NOVN VX); (2) Roche (ROG VX); (3) Nestle (NESN VX); and (4) Swisscom (SCMN VX) (collectively, Swiss Equities). The core portfolio within the Transaction would additionally include the Firm Hedge. The analysis of the prospective deal and the inclusion of the Firm Hedge was not unusual. Mr. Cohen was often responsible for finding the most cost-effective placements for Firm Hedge positions and frequently placed the Firm Hedge into portfolio swaps when it would lower overall financing costs. 9 A “prime brokerage” account is a bundled set of brokerage services that operate similarly to the services received by an individual at brokerage firms such as Robinhood or Schwab. 10 A portfolio swap is a type of equity swap. An equity swap is an over-the- counter instrument created by a broker-dealer firm that gives its counterparty client exposure to a long or short position in a security. A single equity swap deals with one cashflow, or “underlier,” from a single stock. In a portfolio swap the exchanged cashflow is a formula based on multiple stock indices. Portfolio swaps offer exposure to multiple securities such as indices, individual equities, or fixed income products.  6 Cohen’s 2010 Analysis anticipated that the trade would be an over-the-counter transaction that would not be listed on any financial exchange. He estimated the cost of dividends payable on the short positions of the Swiss Equities to be up to 78% of the anticipated gross dividends. Cohen’s 2010 Analysis did not account for the necessary trade costs associated with required foreign currency transactions but did account for Swiss withholdings of 15%. Mr. Cohen concluded his analysis by estimating a net profit of $974,347 on the Transaction as follows: Gross Dividend $39,189,275 (100%) Less withholdings (13,716,246) (35%) Net Dividend Due 25,473,029 (65%) Potential Reclaim 7,837,855 Amount (20%) Dividend Payable (30,567,635) on Swap Trade Costs (1,768,902) Net Trade PNL $974,347 A. Brokerage Agreements for the Transaction On April 13, 2010, in order to facilitate the Transaction, SIHP entered into an International Swaps and Derivatives Association (ISDA) master agreement with Morgan Stanley & Co. International plc (Morgan Stanley International) and Morgan Stanley Co. (collectively, Morgan Stanley). 11 11 Morgan Stanley International is a London-based legal entity, regulated by the Financial Conduct Authority in the United Kingdom. Morgan Stanley Co. is the U.S. affiliate of Morgan Stanley International. SIG and Morgan Stanley Co. entered into a bridge agreement under which Morgan Stanley International was able to treat SIG’s assets held in its U.S. prime brokerage account as collateral. SIG, Morgan Stanley International, and Morgan Stanley Co. all signed the ISDA, which determined the specific margin requirements for the Swiss Equities as the Transaction progressed.  7 Before the Transaction the Firm Hedge with Merrill Lynch required margin rate collateral equal to 15% market value of the Firm Hedge. The ISDA with Morgan Stanley offered a significantly lower rate of 6.5% collateral for both the Firm Hedge and the indexes. Each smaller transaction entered into under the ISDA master agreement was documented by a trade confirmation which set the terms and conditions of the specific transactions. The agreements facilitated (1) the purchase of equities; (2) the formation and maintenance of the portfolio; and (3) operational efficiencies across the two components. Taken in sum, these agreements make up the Transaction, which held the Swiss Equities in prime brokerage accounts, and facilitated the Transaction, which exposed SIHP to a portfolio of positions through the Firm Hedge. SIHP purchased the Swiss Equities through Credit Suisse to be delivered to SIHP’s prime brokerage account with Morgan Stanley. SIHP then held the Swiss Equities over their respective ex-dividend dates. At the same time that SIHP 12 acquired the Swiss Equities, SIHP entered into a portfolio swap arrangement with Morgan Stanley. This portfolio swap provided SIHP with identical short positions in each of the four Swiss Equities and other market indices. The ISDA Agreement with Morgan Stanley facilitated the Transaction, which occurred from April 2010 until October 2013. The Transaction was styled as an equity portfolio swap holding short positions 13 in the Swiss Equities and the Firm Hedge, while SIHP and Morgan Stanley held identical long positions in the Swiss Equities within a prime brokerage account. 12 As noted CVIH is a wholly owned subsidiary of SIHP and is a disregarded entity for U.S. federal income tax purposes. Thus, SIHP is treated as directly engaging in the Transaction at issue. 13 Holding a short position in stocks is essentially the practice of selling borrowed shares of stocks, called equities, anticipating that the stocks’ price will decline, and the same number of shares can be repurchased at a lower price. Thus a “short” position in stock is only profitable when the value of that stock falls while a “long” position is profitable when the value rises. As respondent’s expert Dr. DeRosa said at trial: “[L]ong means you own it. Short means that you sold it and you don’t own it, you just borrowed the shares.” An entity that holds a short position in an equity does not receive a dividend when the equity pays a dividend. Instead, when the dividend is paid, an entity holding a short position on the dividend-paying equity is required to make a payment to the counterparty known as a “substitute dividend.”  8 B. Dividends Received from the Swiss Equities SIHP expected to receive dividends from the Swiss Equities in the long position. SIHP also expected to pay a portion of those dividends (approximately 78%) to Morgan Stanley through the Transaction. The expected revenue equals the difference between the dividends received by SIHP for the Swiss Equities and the amount of the substitute dividends that SIHP expected to pay to Morgan Stanley as part of the Transaction. In January of 2012 Mr. Cohen conducted another expected pretax profit and loss analysis (Cohen’s 2012 Analysis) of the proposed Transaction. Cohen’s 2012 Analysis, like Cohen’s 2010 Analysis, could be considered incomplete, as Mr. Cohen did not account for the costs associated with the foreign currency transactions necessary to facilitate the trade. Cohen’s 2012 Analysis projected profits and losses for only two of the four Swiss Equities, the quantity and pricing of which do not reflect the actual agreements later entered into with Morgan Stanley. Moreover, Cohen’s 2012 Analysis included Swiss taxes in the profit calculation. Despite these issues Cohen’s 2010 Analysis and Cohen’s 2012 Analysis (collectively, Cohen’s Analyses) were relied upon by SIHP and later served as the basis for each expert report. For the tax year at issue SIHP reported $170,764,863 in QDI from the Swiss Equities, which breaks down as follows: Description Dividend Record Dividend Payment Dividend Date Date Amount Nestle SA 4/25/2012 4/26/2012 $64,871,330 (NESN VX) Novartis AG 2/29/2012 3/1/2012 45,005,029 (NOVN VX) Roche Holding AG 3/12/2012 3/13/2012 55,968,147 (ROG VX) Swisscom 4/12/2012 4/13/2012 4,920,358 (SCMN VX) Total: $170,764,863  9 SIHP transferred $130,175,828 in substitute dividends to Morgan Stanley for 2012. 14 This amount was calculated by multiplying the dividends that SIHP received on each of the Swiss Equities by the weighted average dividend ratio for each of the four Swiss Equities as negotiated with Morgan Stanley. In sum, SIHP was entitled to $40,589,035 in net dividends from its long position in the Swiss Equities. C. Taxes Withheld by Swiss Federal Tax Authority During the tax year at issue foreign taxes of $59,767,702 were withheld by the Swiss Federal Tax Authority (SFTA) 15 on dividends received from the Swiss Equities. The $59,767,702 of tax withheld breaks down as follows: Description Dividend Record Dividend Foreign Tax Date Payment Date Withheld Nestle SA 4/25/2012 4/26/2012 $22,704,965 (NESN VX) Novartis AG 2/29/2012 3/1/2012 15,751,760 (NOVN VX) Roche Holding AG 3/12/2012 3/13/2012 19,588,851 (ROG VX) Swisscom 4/12/2012 4/13/2012 1,722,125 (SCMN VX) Total: $59,767,702 Under the U.S.-Swiss Income Tax Treaty (Swiss Treaty) nonresidents of Switzerland can file a “reclaim” or refund request to the SFTA to obtain a return of prior Swiss tax withholdings, effectively reducing the withholding from 35% to 15% of the gross dividends received (or a reduction of 20%), if the dividend is from a Switzerland domiciled entity. See Convention for the Avoidance of Double Taxation 14 Under the ISDA and Transaction SIHP was entitled to retain only 22% of the gross dividend, and Morgan Stanley was due 78%; hence the substitute dividend payment back to Morgan Stanley by SIHP of $130 million in 2012. 15 Switzerland imposes a 35% withholding tax on gross dividends paid by the Swiss Equities.  10 with Respect to Taxes on Income, Switz-U.S., art. 10, Oct. 2, 1996, T.I.A.S. No. 97-1219; I.R.S. Notice 2011-64, 2011-37 I.R.B. 231. On or around March 2, 2012, and again on December 10, 2012, SIHP submitted Forms 82 E, Claim for Refund, to the SFTA, claiming a refund of 20% of the gross dividends SIHP (through CVIH) received from the Swiss Equities during tax years 2010 and 2011. To date, the SFTA has not accepted CVIH’s claim for refund for tax years 2010, 2011, and 2012. SIHP reported $25,614,729 in foreign tax credit on its tax return for the tax year at issue related to the withheld Swiss taxes. This amount reported by SIHP equals 15% of $170,764,863—the gross dividend amount SIHP reported as received from the Swiss Equities during the tax year at issue. Notably, this amount was reported before SIHP received confirmation of the 2012 reclaim, a type of refund request with SFTA, pursuant to the Swiss Treaty. IV. SIHP’s FPAA SIHP timely filed its Form 1065, U.S. Return of Partnership Income, for the tax year at issue with the IRS’s Ogden, Utah, service center. Several years later, on December 5, 2019, respondent issued his FPAA to the tax matters partner of SIHP for the tax year at issue. Petitioner disputes all adjustments made in the FPAA, and on July 10, 2020, Explorer Partner Corp. in its capacity as a notice partner of SIHP filed its Petition with this Court, pursuant to section 6226(d)(1). V. Testimony Presented at Trial A. Petitioner’s Expert Luc Faucheux Luc Faucheux is a lecturer at the University of Miami Herbert School of Business and has served as an employee and manager of various international trading firms since 2000. Dr. Faucheux has provided expert witness testimony in five previous cases and is recognized by this Court as an expert in equity swaps and equity portfolio swaps. Petitioner called Dr. Faucheux to rebut the expert reports of respondent’s experts, David F. DeRosa and Israel Nelken. In his rebuttal Dr. Faucheux asserts that respondent’s experts incorrectly state that a swap that provides exposure to multiple securities or indexes is essentially a collection of individual swaps on those same  11 components. His report detailed key characteristics of the Transaction as well as the significant financial consequences SIHP would have faced had it chosen to structure the transaction as a collection of single-equity swaps instead. B. Petitioner’s Expert Michael Cragg Michael Cragg is a senior partner at Keystone Strategy and a former economics professor at Columbia University and the University of California, Los Angeles. He has served on the faculty of the World Bank Training Programs, held an NIH Fellowship at RAND, and was a senior research economist at the Milken Institute in Santa Monica, California. Dr. Cragg previously testified on behalf of the Government and taxpayers on intercompany financings, joint ventures, and partnerships and acted as the lead expert in high profile matters. This Court recognized Dr. Cragg as an expert in financial economics for this proceeding. Dr. Cragg’s report focused on expected pretax economic profit. Dr. Cragg’s analysis of expected pretax profits for 2012 was based on the actual results from CVIH’s bank statements and broker statements, and it included an expected total gross dividend of $170,215,970 from the Swiss Equities in 2012. Dr. Cragg asserts that he used this data, rather than Cohen’s 2010 Analysis data, because it was derived from the actual amounts and terms in each executed trade as agreed upon in advance by SIHP and Morgan Stanley. Dr. Cragg also calculated that the total substitute dividend payments SIHP expected to owe in 2012 was $130,175,828. Thus, Dr. Cragg in his report stated that SIHP expected to earn approximately $32 million on a pretax basis in net dividends from the Swiss Equities. In rebuttal Dr. Cragg argues that respondent’s experts, Dr. Nelken and Dr. DeRosa, based their conclusions on two specific errors, leading to absurd results. The first error Dr. Cragg alleges is that both experts included tax in their “pre-tax” calculations. This error, Dr. Cragg argues, was compounded by including the costs of each transaction without including the corresponding benefit in the pretax profit and including costs that were not contingent upon the transactions. The second error Dr. Cragg alleges is regarding Dr. Nelken’s and Dr. DeRosa’s use of Cohen’s 2010 Analysis rather than the data produced by the arrangements themselves. Dr. Cragg argues that such use was inappropriate as it did not reflect the ultimate Transaction and thus would not meet the requirements of Treasury Regulation § 1.246- 5(c)(1)(vi) (Anti-Abuse Rule).  12 C. Petitioner’s Expert James Kermisch James Kermisch is the founder and chief executive officer of JAK Advisory with more than 34 years of experience in alternative asset management and investment banking in the United Kingdom and the United States, specifically with Morgan Stanley. In his report Mr. Kermisch explained how various investment options that achieve equivalent financial exposure are not, in substance, interchangeable. The report placed significance on the investor’s choice of instrument, which includes factors such as liquidity requirements, trading flexibility, risk tolerance, relative cost, tax efficiency, investment horizon, and regulatory considerations. Mr. Kermisch’s report emphasized the specific benefits of a portfolio equity swap transaction. D. Petitioner’s Expert Thomas J. Brennan Thomas J. Brennan is a professor of law at Harvard Law School and a former strategist in the Capital Markets Strategies Group at Goldman, Sachs & Co. This Court recognized him as an expert in mathematics, financial analysis and economics. Dr. Brennan’s report focused on the first test of the relevant Anti-Abuse Rule, namely Treasury Regulation § 1.246-5(c)(1)(vi)(A) (Virtual Tracking Test). Dr. Brennan was asked by petitioner to independently evaluate whether the value of the equity portfolio swap was reasonably expected to “virtually track” changes in the value of SIHP’s stock holdings or any portions of SIHP’s stock holdings. In Dr. Brennan’s opinion there are three key attributes that inform the application of the Virtual Tracking Test. First, the Virtual Tracking Test is distinct from actual tracking. Second, the Virtual Tracking Test involves a comparison of changes in the value of a taxpayer’s stock holdings with changes in the value of the entirety of the stocks reflected in a position. Third, the Virtual Tracking Test requires the change in the value of the position to be reasonably expected to be nearly the same as the change in the value of the taxpayer’s stock holdings. In Dr. Brennan’s opinion, this expected difference in change in values should be no greater than 5% to be considered “virtual tracking.” On the basis of this analysis he concludes that the value of the entirety of the stock reflected in SIHP’s Transaction was not reasonably expected to “virtually track” changes in value of the Swiss Equities. Therefore, Dr. Brennan opines that the Anti-Abuse Rule cannot be applied to reduce SIHP’s holding period in the Swiss Equities.  13 E. Respondent’s Expert David DeRosa David DeRosa holds an undergraduate degree in economics and a Ph.D. in economics and finance from the University of Chicago. Dr. DeRosa is currently on the boards of directors of hedge fund groups that trade equity swaps. His duties include oversight of the businesses, by, for instance, hiring auditors, hiring service providers, signing financial statements, signing agreements such as ISDA agreements and support documents, generally being aware of what trading is occurring, understanding strategies, and signing confirmations. Dr. DeRosa has been recognized by other federal courts as an expert in derivatives, which include equity swaps, derivatives risk management, options and foreign exchange trading, economics and finance, statistics, economics and finance with real world applications, economic analysis, and the hedge fund industry. This Court recognized Dr. DeRosa as an expert in economics, finance, derivatives, and equity swaps for this proceeding. Dr. DeRosa’s analysis for respondent relied upon Cohen’s Analyses and focused on the control exercised by CVIH to open and close transactions on individual securities at will. Dr. DeRosa argued that SIHP’s control over the Transaction demonstrated that it held multiple positions, referencing a single stock or index, rather than a single position. He based this opinion on the fact that SIHP selected which Swiss equities to include in the Transaction and made decisions regarding the addition and subtraction of stock components and when and how to execute the trades. F. Respondent’s Expert Israel Nelken Israel Nelken has a bachelor of science in mathematics and computer science from Tel Aviv University, and a master’s and a Ph.D. in computer science from Rutgers University. From 1996 to the present Dr. Nelken has owned a firm called Super CC or Super Computer Consulting that manufactures software to value financial instruments including exotic options, derivatives, and convertible bonds. Dr. Nelken was on the new product development committee at the Chicago Board Options Exchange and is currently a director on the Chicago Futures Exchange and an advisory board member for KnectIQ, a Minneapolis- based cybersecurity firm. This Court recognized Dr. Nelken as an expert in the application of mathematical principles to the analysis of financial instruments for this proceeding.  14 Dr. Nelken reviewed Cohen’s Analyses and concluded that they were flawed for a variety of reasons. Specifically, he opines that Cohen’s 2010 Analysis understated slippage costs, short hedge costs, and dividend rates for dividends owed on borrowed shares, and it failed to consider the risk in not receiving the 20% Swiss reclaim or the costs associated with a delay in repayment. Despite these flaws, Dr. Nelken also relied upon Cohen’s Analyses and used them as the basis for his report. Dr. Nelken argued that SIHP neglected to use data from real trades conducted in 2010 and 2011 when it conducted its final pretax analysis in 2012. His rebuttal report concluded that SIHP anticipated tax savings, including QDI and foreign tax credits (FTC), of at least $25 million. Ultimately, Dr. Nelken concluded that the actual profit on the Swiss Equities for years 2010 and 2012 reflected losses of more than $42 million and nearly $120 million, respectively. In his rebuttal Dr. Nelken contends that the referenced $10.7 million in tax saving was specific to tax year 2010, and that he would expect 2012 to have proportionally larger tax savings of at least $25 million. Dr. Nelken does not, however, provide an estimated amount or computation to reflect this figure. OPINION The ultimate issues before the Court are whether SIHP is entitled to QDI treatment for the gross dividends received from the Swiss Equities, along with FTC for taxes paid to Switzerland on those same dividends, for the tax year at issue. I. Burden of Proof Generally, the Commissioner’s determinations in an FPAA are presumed correct, and the party challenging the FPAA bears the burden of proving those determinations are erroneous. See Rule 142(a)(1); Crescent Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013); Republic Plaza Props. P’ship v. Commissioner, 107 T.C. 94, 104 (1996). However, the record before us permits the resolution of all issues in dispute on a preponderance of the evidence. See Facebook, Inc. & Subs. v. Commissioner, 164 T.C. 194, 244 (2025); Kimberlin v. Commissioner, 128 T.C. 163, 171 n.4 (2007).  15 II. Summary of the Parties’ Arguments Respondent argues that the dividends received from the Transaction are ineligible for QDI treatment, contending that all risk of loss was systematically diminished by holding a position with respect to substantially similar or related property (SSRP), as defined by the rules provided in section 246(c)(4) and accompanying Treasury regulations. Moreover, on the basis of the corresponding reduction in the holding period that would ensue from the application of section 246(c)(4), respondent argues that SIHP is likewise not entitled to FTC. SIHP’s systematic removal of risk (i.e., hedging), respondent argues, flies in the face of congressional intent. Congress enacted section 246(c) to prevent avoidance schemes in which shareholders held both long and short positions in the same stock over the recorded dividend date, an action which when legal is generally referred to as “dividend arbitrage.” 16 When enacting section 246(c), Congress sought to prevent taxpayers from obtaining favorable tax treatment in these types of transactions by ensuring that taxpayers held the long stock position for a minimum holding period at the risk of the market—thus preventing risk-free tax arbitrage—and denying tax-favored treatment for dividends—i.e., QDI—where taxpayers held both long and short positions in a dividend-paying stock. See S. Rep. No. 85-1983, at 28–29, 139–40 (1958), reprinted in 1958 U.S.C.C.A.N. 4791, 4817–18, 4929–30. Respondent first raises the substance-over-form doctrine, namely that the substance of the Transaction fails to match its form and should be recharacterized accordingly. Under respondent’s argument, the Transaction should be recharacterized from a single, unitary position reflecting a portfolio of stocks to a collection of separate individual short positions, each referencing a single stock or index. The result of such disaggregation is that Treasury Regulation § 1.246-5(c)(1)(v) would apply to the Transaction rather than Treasury Regulation § 1.246- 5(c)(1)(ii) through (iv). If tested as a collection of separate positions, rather than as a single position, the Transaction decidedly concerns SSRP and the holding period of each stock, consequently, would be reduced. Respondent also contends the Transaction violates the “Substantial Overlap Test” set forth in Treasury Regulation § 1.246-5. 16 Dividend arbitrage is an investment strategy that centers around simultaneously buying long and short positions in common stock shortly before and after payment of a dividend. This allows the investor to collect the dividend payment while hedging against potential losses in the stock’s value.  16 Next, if the Transaction does not involve SSRP under the “Substantial Overlap Test,” respondent then contends it would violate the general “Anti-Abuse Rule” likewise found in Treasury Regulation § 1.246-5. Petitioner argues that the dividends from the Swiss Equities qualify for QDI treatment because the Transaction, as a whole, complies with the tests found in Treasury Regulation § 1.246-5(c)(1)(iii) and (iv). Petitioner contends that respondent should not be permitted to raise the “substance over form doctrine” and change the Transaction by looking only to the Swiss Equities. Petitioner contends that when the entire portfolio of investments with Morgan Stanley is considered, including the Swiss Equities, the Firm Hedge, and other indexes, it maintained the necessary market risk as mandated by section 246(c) and thus satisfied the 60-day holding requirements necessary to claim QDI tax treatment. See I.R.C. § 1(h)(11)(B)(iii). Finally, petitioner contends that SIHP is entitled to a foreign tax credit of $25,614,729 under section 901(k). III. Legal Background QDI preferential tax treatment generally includes any dividend from a domestic corporation or a qualified foreign corporation. See I.R.C. § 1(h)(1), (11). A qualified foreign corporation is any foreign corporation (i) incorporated in a possession of the United States, (ii) eligible for benefits under a comprehensive income tax treaty with the United States which is satisfactory to the IRS and includes an exchange of information program, or (iii) the stock of which is readily tradable on an established securities market in the United States. I.R.C. § 1(h)(11)(C)(i) and (ii). The parties agree that each of the Swiss Equities was issued by a company residing in Switzerland, and each of those Swiss companies was a “qualified foreign corporation” within the meaning of section 1(h)(11)(C)(i)(II) and Notice 2006-101, 2006-2 C.B. 930. The dispute, rather, lies over calculation of the holding period regarding SIHP’s positions in the Swiss Equities. In order to obtain QDI treatment a taxpayer must hold the equity for a requisite holding period. See I.R.C. § 1(h)(11)(B)(iii). The holding period for QDI treatment adopts by reference the exclusionary holding period provisions provided in section 246(c). See I.R.C. § 1(h)(11)(B)(iii)(I). Sections 1(h)(11)(B)(iii)(I) and 246(c) specify the number of days needed to hold stock to satisfy holding requirements but also contain  17 important restrictions and exceptions. As relevant here, section 246(c)(4)(C) provides that the calculated holding period for QDI treatment is tolled for any period in which, under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding one or more other positions with respect to SSRP. Treasury Regulation § 1.246-5 provides rules for applying section 246(c)(4)(C). Respondent relies on subparagraph (C) of section 246(c)(4) and the relevant regulations thereunder. Petitioner contends the Secretary issued Treasury Regulation § 1.246-5 to provide “bright-line rules” for determining when such diminished risk exists and that, throughout the Swiss Equities trades, SIHP has consistently complied with these rules as prescribed. Respondent, on the other hand, contends SIHP has violated Treasury Regulation § 1.246-5(b) as, if both the Swiss Equities and the Transaction are considered, SIHP has diminished its risk of loss and its position consists of SSRP. IV. Analysis A. Background on Treasury Regulation § 1.246-5 Treasury Regulation § 1.246-5(a) provides that the holding period of stock for purposes of the dividends received deduction is reduced for any period in which a taxpayer