Dynamo Holdings Limited Partnership v. Commissioner of Internal Revenue, 050718 FEDTAX, 2685-11

Docket Nº:2685-11, 8393-12
Opinion Judge:BUCH, JUDGE.
Party Name:DYNAMO HOLDINGS LIMITED PARTNERSHIP, DYNAMO, GP, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent BEEKMAN VISTA, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Martin R. Press, Edward A. Marod, Clinton R. Losego, Lu-Ann M. Dominguez, Alan S. Lederman, and John W. Terwilleger, for petitioners. David B. Flassing, Lisa M. Goldberg, William G. Merkle, Timothy A. Sloane, and G. Roger Markley, for respondent.
Case Date:May 07, 2018
Court:United States Tax Court
 
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T.C. Memo. 2018-61

DYNAMO HOLDINGS LIMITED PARTNERSHIP, DYNAMO, GP, INC., TAX MATTERS PARTNER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

BEEKMAN VISTA, INC., Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 2685-11, 8393-12

United States Tax Court

May 7, 2018

Martin R. Press, Edward A. Marod, Clinton R. Losego, Lu-Ann M. Dominguez, Alan S. Lederman, and John W. Terwilleger, for petitioners.

David B. Flassing, Lisa M. Goldberg, William G. Merkle, Timothy A. Sloane, and G. Roger Markley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BUCH, JUDGE.

The Moog family has been very successful in real estate development. Their real estate business originated in Canada. When it expanded into the United States, they created U.S. subsidiaries under the Canadian structure. Over time some family members and beneficial owners of the Canadian structure moved to the United States.

The Canadian structure proved to be very tax inefficient, particularly when income was distributed (or deemed to be distributed) up the Canadian ownership chain. To cure this inefficiency, the family created a U.S.-based structure and began shifting assets to that new structure. The asset transfers took place during 2005, 2006, and 2007, the years in issue in these cases.1 In particular, U.S. subsidiaries within the Canadian structure made advances to entities within the U.S.-based structure to fund Dynamo's operations. Also, entities within the Canadian structure sold income-producing assets to entities within the U.S.-based structure. Over time, the effect was to shift the U.S.-based income to the U.S.-based structure.

The Commissioner argues that this planning was improper. The Commissioner makes two principal arguments. First, the Commissioner argues that the advances to the U.S.-based structure were not bona fide loans. Instead, the Commissioner argues that we should treat the advances as gifts. The Commissioner argues that this treatment would result in deemed distributions up the Canadian ownership chain followed by deemed gifts to the owners of the U.S.-based structure and deemed contributions to the U.S.-based structure. The Commissioner argues that withholding taxes would apply when the deemed distributions made their way across the border. In addition, the Commissioner argues that some of the assets that were sold to the U.S.-based business were sold below fair market value, giving rise to gifts that are subject to this triangular distribution theory.

We find that the advances were bona fide loans. Some of the assets, however, were transferred at less than fair market value.

FINDINGS OF FACT

I. The Moog Family

The Moog family members are successful real estate developers. Delia Moog is a wealthy Canadian who, during the years in issue, was in her seventies. Mrs. Moog's daughter is Christine Moog, and her nephew is Robert Julien. For over half a century, the family successfully developed real estate in Canada, and for over 20 years, they successfully developed real estate in the United States.

Over the years, Mrs. Moog engaged in estate planning. She began making gifts of large portions of her estate in the 1990s, and she continued to do so after the years in issue. She structured many of the gifts as 60/40 splits, giving 60% to her daughter, Christine, and 40% to her nephew, Mr. Julien.2

II. Beekman

During the years in issue, Beekman Vista, Inc. (Beekman Vista), was a corporation wholly owned by a Canadian entity controlled by Mrs. Moog. Beekman Vista was a holding company that owned several property development companies in the United States. We use "Beekman" to refer to the group of entities consisting of Beekman Vista and its U.S. subsidiaries.

Beekman Vista was organized as a Delaware corporation in 1984 to enter the U.S. real estate market. Beekman Vista was a wholly owned subsidiary of a Canadian corporation, Canada Square Management, Ltd. (Canada Square). Canada Square was a wholly owned subsidiary of Kolter Property Co. Kolter Property Co.'s preferred shares were held by 1231024 Ontario, Inc., and Kolter Property Co.'s common shares and ownership control were held by 2020072 Ontario, Ltd. 1231024 Ontario, Inc.'s common stock was held in a 60/40 split, with Delia Moog Family Trust holding 60% and Robert Julien Family Trust holding 40%; Mrs. Moog owned all of its preferred shares. 2020072 Ontario, Ltd. was wholly owned by 2020064 Ontario, Ltd. 2020064 Ontario, Ltd.'s nonvoting common stock was held in a 60/40 split with Delia Moog Family Trust #2 holding 60% and Robert Julien Family Trust #2 holding 40%; Mrs. Moog held all of its voting control. Mrs. Moog's ownership of the voting stock of 2020064 Ontario, Ltd. gave her indirect control over Beekman.

Mrs. Moog, Mr. Julien, and Christine were among the beneficiaries of the trusts. Christine was one of the beneficiaries of the Delia Moog Family Trust, and Robert Julien was one of the beneficiaries of the Robert Julien Family Trust. The beneficiaries of the Delia Moog Family Trust #2 and the Robert Julien Family Trust #2 were Mrs. Moog, Christine and her descendant, and Mr. Julien and his immediate family. Mr. Julien and Mrs. Moog were among the trustees of the Robert Julien Family Trust #2 and the Delia Moog Family Trust #2.

Beekman's principal business activity was real estate management and development. Beekman Vista's subsidiaries owned and operated office buildings in Dallas, Texas, and developed residential real estate in south Florida. Beekman also held a hedge fund portfolio, the Dynamo Fund, that produced investment income. The hedge fund had lockup periods, which limit an investor's ability to redeem the investment. All but one lockup period expired on January 1, 2006.

Beekman's management team has a long track record of profitable real estate projects. The management team operated under the Kolter brand name common to Beekman and its parent companies. Mr. Julien and Mrs. Moog were among the officers and directors of Beekman Vista. Although Mrs. Moog was an officer and director, Mr. Julien and his team primarily handled the development projects.

The Beekman management team members worked together for decades. Mr. Julien had worked in real estate with Kolter since the 1980s, and each of the other members of the team had significant real estate experience before joining Kolter. The management team had a well-defined project selection process; it would not bid on projects until completing due diligence and running financial models that demonstrated that the project would be a worthwhile investment.

By the early 2000s Beekman's business had changed substantially. Beekman sold its Texas and Florida rental properties, and the management team decided to focus its efforts on Florida real estate development.

In 2004 Mr. Julien moved to Florida, and the remaining management team members followed. Beekman also moved its principal office and management team from Canada to Florida.

Following his move, Mr. Julien discussed with legal consultants how to set up a long-term business structure in the United States. Mr. Julien believed that lending institutions were uncomfortable doing business with foreign companies such as Beekman and that a U.S.-owned structure would provide the lending institutions additional confidence in their projects or business. The management team was also concerned with talent retention and believed that a U.S. company would better attract and retain younger people. The management team was also aware of the withholding tax on cross-border distributions from Beekman Vista to Canada Square. Mrs. Moog decided to form a U.S. partnership.

Beekman continued to operate profitably from 2005 to 2007. Beekman Vista's estimated earnings and profits for tax years 2005, 2006, and 2007 were $34, 504, 980, $141, 115, 279, and $138, 406, 011, respectively.3

III. Dynamo

Dynamo Holdings Limited Partnership was formed in early 2005 as a Delaware limited partnership. We use "Dynamo Holdings" to refer to Dynamo Holdings Limited Partnership, and "Dynamo" to refer to the group of entities consisting of Dynamo Holdings and the entities owned by it. Dynamo Holdings was owned by two trusts that were limited partners and a corporation that was a general partner. The 2005 Christine Moog Family Delaware Dynasty Trust held a 59.9995% limited partnership interest, the 2005 Robert Julien Family Delaware Dynasty Trust held a 39.9995% limited partnership interest, and Dynamo GP held a .001% general partnership interest. The beneficiaries of the U.S. trusts and the Canadian trusts were not identical. Dynamo GP was owned 60% by 2020072 Ontario, Ltd., one of the Canadian corporations indirectly controlled by Mrs. Moog, and 40% by Robert Julien. 2020072 Ontario, Ltd. was...

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