Kearney Partners Fund, LLC v. United States
Decision Date | 13 October 2015 |
Docket Number | No. 14–14067.,14–14067. |
Parties | KEARNEY PARTNERS FUND, LLC, by and through LINCOLN PARTNERS FUND, LLC, Tax Matters Partner, Kearney Partners Fund, LLC, by and through Delta Currency Management Company, Tax Matters Partner, Nebraska Partners Fund, LLC., Lincoln Partners Fund, LLC, by and through Bricolage Capital Management Company, Tax Matters Partner, Lincoln Partners Fund, LLC, by and through Nebraska Partners Fund, LLC, Tax Matters Partner, Plaintiffs–Appellants. v. UNITED STATES of America, Defendant–Appellee. |
Court | U.S. Court of Appeals — Eleventh Circuit |
Charles E. Hodges, II, Antoinette L. Ellison, Kilpatrick Townsend & Stockton, LLP, Atlanta, GA, Scott Andrew Beatty, Henderson Franklin, Bonita Spgs, FL, Eric Daniel Molina, Pavese Haverfield Dalton Harrison & Jensen, LLP, Carlos A. Kelly, Vicki L. Sproat, Henderson Franklin Starnes & Holt, PA, Fort Myers, FL, Adam Howard Charnes, Kilpatrick Townsend & Stockton LLP, Winston–Salem, NC, for Plaintiffs–Appellants.
Jacob Earl Christensen, Paul A. Allulis, Arthur Thomas Catterall, Gilbert Steven Rothenberg, Katherine Walsh, Michael N. Wilcove, U.S. Department of Justice, Washington, DC, Arthur Lee Bentley, III, U.S. Attorney's Office, Tampa, FL, for Defendant–Appellee.
Appeals from the United States District Court for the Middle District of Florida. D.C. Docket No. 2:10–cv–00153–RBD–CM.
Before TJOFLAT and HULL, Circuit Judges, and BARTLE,* District Judge.
Kearney Partners Fund, LLC, Nebraska Partners Fund, LLC, and Lincoln Partners Fund, LLC brought this action to challenge the Notices of Final Partnership Administrative Adjustment the Internal Revenue Service issued disallowing all items they claimed on their partnership returns on the ground that partnerships constituted an abusive tax shelter designed to generate artificial, noneconomic tax losses desired by the taxpayer. Following a bench trial, the District Court upheld the administrative adjustments to the partnerships' returns and entered judgment for the Government. The partnerships appeal the judgment, questioning whether the District Court had jurisdiction to determine all partnership and nonpartnership items for the tax periods in question, and, if it had jurisdiction, whether it erred in determining that the transactions at issue lacked economic substance and therefore had to be disregarded for tax purposes.
The District Court's Memorandum Opinion and Order, attached hereto as an Appendix, correctly resolved these questions. We therefore affirm the Court's judgment on the basis of the Memorandum Opinion and Order.
APPENDIX
MEMORANDUM OPINION AND ORDER
This cause is before the Court following an eight-day bench trial that concluded on September 25, 2013. (Docs. 246–52, 255.)1 Having considered the pleadings, evidence, argument, and relevant legal authority, and having made determinations on the credibility of the witnesses, the Court hereby renders its decision on the merits of this case, pursuant to Federal Rule of Civil Procedure 52.
BACKGROUND
These consolidated cases arise out of a tax dispute between the Internal Revenue Service (“IRS”) and Plaintiffs, which are a three-tiered set of LLCs treated as partnerships for tax purposes (and which the Court will refer to herein as “partnerships”). (See Doc. 173–6, ¶ 1.) The IRS contends that the creation and operation of the partnerships constituted an illegal tax shelter. (Doc. 173, p. 9.)
Thus, the IRS issued Notices of Final Partnership Administrative Adjustments (“FPAA”), which adjusted the partnerships' tax returns to eliminate the tax consequences of the alleged shelter. (J–1 to J–11.)2 The IRS' contention is that the partnerships' transactions lacked economic substance. (Doc. 173, pp. 10–11.) The IRS also determined that accuracy-related penalties should be imposed due to the alleged misstatements on the tax returns. (Id. at 10.)
Plaintiffs then filed these consolidated suits challenging the FPAAs. (Id. ) Case Nos. 2:10–cv–154, –158, and –159 were brought for tax periods before December 4, 2001; at that time, the partnerships were formally owned by entities affiliated with a company called Bricolage. (See id. at 7–8.) Case Nos. 2:10–cv–153 and –157 were brought for tax periods after that date; at that time, Mr. Pat Sarma formally purchased the core partnership (Nebraska) and indirectly owned the other partnerships (Lincoln and Kearney). (Id. )
At trial, the facts revealed a complex series of transactions and interactions between Mr. Sarma, Bricolage, the partnerships, and other entities advising them. Based on the findings of fact explicitly laid out below and the record as a whole, the Court finds that Mr. Sarma and Bricolage, in conjunction with their advisors, schemed to create and operate the partnerships (even before Mr. Sarma formally purchased them) to serve as an abusive tax shelter; this allowed Mr. Sarma to avoid paying taxes on a large capital gain that he had incurred, in exchange for significant fees to Bricolage and the other advisors.
Though the facts are complicated, the law is less so: transactions are not entitled to tax respect if they lack any economic substance—either objective economic effects or a subjective business purpose. The Court therefore concludes that the IRS was correct to eliminate the tax consequences of the shelter's transactions, which had no economic substance whatsoever. However, the Court finds that the penalties are inapplicable due to an amnesty program propagated by the IRS in which Mr. Sarma participated on behalf of the partnerships.
FINDINGS OF FACT 3
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