Marriott Intern. Resorts, L.P. v. U.S.

Decision Date28 October 2009
Docket NumberNo. 2009-5007.,2009-5007.
Citation586 F.3d 962
PartiesMARRIOTT INTERNATIONAL RESORTS, L.P., and Marriott International JBS Corporation, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
CourtU.S. Court of Appeals — Federal Circuit

Appeal from the United States Court of Federal Claims in consolidated case nos. 01-CV-256 and 01-CV-257, Judge Charles F. Lettow.

Robert L. Willmore, Crowell & Moring LLP, of Washington, DC, argued for plaintiffs-appellants. With him on the brief were Harold J. Heltzer and Alex E. Sadler.

Joan I. Oppenheimer, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were John A. DiCicco, Acting Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and Richard Farber, Attorney.

Before MAYER, RADER and MOORE, Circuit Judges.

PER CURIAM.

Marriott International Resorts, L.P. and Marriott International JBS Corporation (collectively, "Marriott") appeal the decision of the United States Court of Federal Claims in Marriott International Resorts, L.P. v. United States, 83 Fed.Cl. 291 (2008). The court determined that in 1994 the obligation to close a short sale qualified as a liability under I.R.C. § 752 and that the IRS properly adjusted the outside basis of the Marriott partners for the 1994 tax year to account for the partnership's assumption of the obligation to close certain short sales. Therefore, the court granted the United States' motion for summary judgment and entered judgment for the United States. Marriott Int'l Resorts, L.P. v. United States, 83 Fed.Cl. 291 (Fed. Cl.2008) (judgment). Marriott, relying primarily on a line of cases from the United States Tax Court beginning with Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975), argues that as of 1994, the obligation to close a short sale did not qualify as a "liability" for purposes of I.R.C. § 752.

We review a trial court's grant of summary judgment de novo, reapplying the same standard used by the trial court. Ethicon Endo-Surgery, Inc. v. U.S. Surgical Corp., 149 F.3d 1309, 1315 (Fed.Cir. 1998). We have applied that standard in our consideration of the record, including the briefs and arguments of counsel, and we conclude that the Court of Federal Claims correctly determined that the obligation to close a short sale qualified as a "liability" under I.R.C. § 752 as of 1994. We therefore affirm, and we adopt the opinion of the Court of Federal Claims for the reasons stated in its opinion, a copy of which is attached as an Appendix.

AFFIRMED

APPENDIX

Marriott Int'l Resorts, L.P. v. United States, 83 Fed.Cl. 291 (2008).

Nos. 01-256T and 01-257T.

UNITED STATES COURT OF FEDERAL CLAIMS.

(Filed: August 28, 2008)

In the United States Court of Federal Claims

Nos. 01-256T & 01-257T (consolidated)

(Filed: August 28, 2008)

MARRIOTT INTERNATIONAL RESORTS, L.P., et al., Plaintiffs v.

UNITED STATES, Defendant.

Cross-motions for summary judgment in a tax case; recognition of basis upon contribution of assets and liabilities to a partnership; 26 U.S.C. §§ 722, 752; contingent liabilities; short sales; Federal Reserve Board's Regulation T

Harold J. Heltzer, Crowell & Moring LLP, Washington, DC, for plaintiff. With him on the briefs were Robert L. Willmore and Alex E. Sadler, Crowell & Moring LLP, Washington, DC.

G. Robson Stewart, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, DC, for defendant. With him on the brief were Nathan J. Hochman, Assistant Attorney General, John A. Dicicco, Deputy Assistant Attorney General, David Gustafson, Chief, and Mary M. Abate, Assistant Chief, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, DC.

OPINION AND ORDER

LETTOW, Judge.

Pending before the court are cross-motions for summary judgment, filed by the parties in this partnership-taxation case.1 At issue is a claimed tax loss of $71,189,461 on the sale of Mortgage Notes, as manifested on a partnership tax return. This loss was the planned result of a series of transactions entered into by Marriott-affiliated entities with the intention of recognizing a tax loss based upon the premise that the obligation to close a short sale2 is not considered a liability for partnership-tax-basis purposes.3 The Internal Revenue Service ("IRS" or "the Service") took issue with this premise and disallowed the claimed loss. Following extensive prior proceedings related to discovery and privilege,4 the motions now at issue were filed and have been fully briefed. A hearing on the cross-motions was held on May 19, 2008, and supplemental briefs were filed on June 6, 2008. The competing motions accordingly are ready for disposition.

FACTS5

The parties provided the court with charts that set out the competing federal income tax consequences of Marriott's transactions. See Joint Status Report (Oct. 16, 2006), Ex. A ("Joint Submission"). Subsequently, the government provided a summary setting out specific dates and dollar amounts for aspects of the transactions. See Exhibit submitted in conjunction with the hearing held on May 19, 2008 ("Gov't's Summary"). These submissions, together with the parties' proposed findings of uncontroverted facts and responses, supply a baseline of agreed facts underpinning the cross-motions for summary judgment.

A. The Transactions

Plaintiff, Marriott International Resorts ("Marriott Resorts") is a Delaware limited partnership with its principal place of business located in Montgomery County, Maryland. Compl. ¶¶ 1, 4.6 For a tax period ending October 28, 1994, Marriott International JBS Corporation ("JBS") and Marriott Ownership Resorts, Inc. ("MORI") were Marriott Resorts' general partner and limited partner, respectively. Compl. ¶¶ 1, 15. For a tax period ending December 30, 1994, JBS and Marriott International Capital Corporation ("MICC") were Marriott Resorts' general partner and limited partner, respectively. Defendant's Proposed Findings of Uncontroverted Facts ("DPFUF") ¶ 3. JBS, MORI, and MICC were, at all times relevant to this case, controlled subsidiaries of Marriott International, Inc ("Marriott International")7 and Marriott Resorts was wholly owned initially by MORI and JBS and subsequently by MICC and JBS. Plaintiffs' Response to Defendant's Proposed Findings of Uncontroverted Facts ("PRDPFUF") at 6, 9-10.

During the periods at issue, MORI engaged in the business of selling timeshare interests in resort properties. Compl. ¶ 9. As part of this business, MORI offered buyers the opportunity to finance their purchases by having the buyer execute a promissory note, secured by a mortgage on the timeshare unit ("Mortgage Notes"). Compl. ¶ 9. The Mortgage Notes issued by MORI to the purchasers of its time-share units bore interest at a fixed interest rate. See Heltzer Decl., Ex. 1 (Pls.' Resp. to Def.'s First Set of Interrogs. (Oct. 8, 2002) ("Pls.' Interrog. Resp.")) at 3; Ex. 2 (Mem. to Growth Committee regarding "Hedging MORI Note Exposure" (Apr. 22, 1994)) at MAR-008867. On November 22, 1993, MORI and another Marriott entity MTMG Corporation, entered into an agreement with Teachers Insurance and Annuity Association of America ("TIAA"), an unrelated third party, in which the Marriott entities agreed to sell and TIAA agreed to buy up to $175,000,000 of Mortgage Notes. Def.'s Mot. for Summary Judgment ("Def.'s Mot."), Attached Decl. of G. Robson Stewart (Feb. 1, 2008) ("First Stewart Decl."), Ex. 1 (MTMG Corp. Purchase Agreement, (Nov. 22, 1993)) at 1-2.8

On January 3, 1994, Philip Hamon of the investment banking firm CS First Boston, sent by facsimile to Lester Pulse, Senior Vice President of Marriott International, a document which described a series of transactions that might enable Marriott to recognize a loss for Federal income tax purposes based upon the premise that a short-sale obligation would not be considered a liability for partnership tax-basis purposes. First Stewart Decl., Ex. 3 (Facsimile from Hamon to Pulse (Jan. 3, 1994)). The transactions described in the CS First Boston tax document consisted of the following steps:

• Marriott International sells short two-year Treasury notes and invests the proceeds in five-year Treasury notes.

• Marriott International, as a limited partner, and a third party, as the general partner, form a partnership.

• Marriott International contributes the five-year Treasury notes, subject to the short-sale obligations, to the partnership and the general partner contributes some cash.

• The partnership obtains additional assets and subsequently sells the five-year Treasury notes and closes the short sale obligation on the two-year Treasury notes. Marriott International transfers its partnership interest to another Marriott subsidiary.

• No gain or loss is recognized on the transfer, but the partnership-interest transfer results in a technical termination of the partnership which causes a deemed distribution of the assets to each partner and a re-contribution of the assets to a new partnership.

• The tax basis of the assets takes on the "outside" tax basis of Marriott International's interest, i.e., the value of the five-year Treasury notes Marriott International contributed to the first partnership, which value is not reduced by the short-sale obligation.9

• The remaining additional assets later are depreciated or are sold, and Marriott International recognizes the resulting tax losses.

First Stewart Decl., Ex. 3 (Facsimile from Hamon to Pulse); see also First Stewart Decl., Ex. 4 (Letter from Hamon to Michael Dearing (June 24, 1994) ("Intent Letter")), Ex. 5 (Letter from Hamon to Dearing (June 24, 1994) ("Agreement Letter")).

Thereafter, on or about April 25, 1994, MORI established a short position in five-year Treasury securities with a face amount of $65,000,000 ("First Short Sale"). Compl. ¶ 13. The First Short Sale was executed through...

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