Saba Partnership v. Commissioner
| Citation | 85 T.C.M. 817 |
| Decision Date | 11 February 2003 |
| Docket Number | Docket No. 1471-97.,Docket No. 1470-97. |
| Court | U.S. Tax Court |
| Parties | Saba Partnership, Brunswick Corporation, Tax Matters Partner v. Commissioner. Otrabanda Investerings Partnership, Brunswick Corporation, Tax Matters Partner. v. Commissioner.<SMALL><SUP>*</SUP></SMALL> |
Joel V. Williamson, Thomas C. Durham, and Gary S. Colton, Jr., for the petitioner.
Jill A. Frisch and Lewis R. Mandel, for the respondent.
SUPPLEMENTAL MEMORANDUM OPINION
These cases are before the Court on remand from the Court of Appeals for the District of Columbia Circuit. Saba Pship. v. Commissioner [2002-1 USTC ¶ 50,145], 273 F.3d 1135 (D.C. Cir. 2001) (Saba II), vacating and remanding [Dec. 53,604(M)] T.C. Memo. 1999-359. In Saba Pship. v. Commissioner [Dec. 53,604(M)], T.C. Memo. 1999-359 (Saba I), we reviewed notices of final partnership administrative adjustment (FPAAs) issued to Saba Partnership (Saba) and Otrabanda Investerings Partnership (Otrabanda) (sometimes, collectively, the partnerships). In the FPAAs, respondent made adjustments to the partnerships' tax returns for certain taxable years ending in 1990 and 1991 based on alternative determinations that (1) Saba and Otrabanda were sham partnerships that should be disregarded for Federal income tax purposes; and (2) the partnerships' purported contingent installment sale transactions (CINS transactions) under section 453 were shams that should be disregarded for Federal income tax purposes. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner in these cases is Brunswick Corporation, the partnerships' tax matters partner (Brunswick or petitioner).
In Saba I, we described in detail Brunswick's divestiture of certain of its business lines, its discussions with representatives of Merrill Lynch regarding a tax shelter that the latter was marketing to certain U.S. corporations, its decision to join with Algemene Bank Nederlands N.V. (ABN) to form the partnerships known as Saba and Otrabanda, and the partnerships' purported CINS transactions. We held that the disputed CINS transactions were not motivated by legitimate nontax business purposes, nor were they imbued with objective economic substance. Consequently, we held that the CINS transactions were shams that would not be respected for Federal income tax purposes.
In Saba II, the Court of Appeals vacated and remanded these cases
for reconsideration in light of our recent decision in ASA Investerings Partnership v. Commissioner [2000-1 USTC ¶ 50,185], 201 F.3d 505 (D.C. Cir. 2000) [affg. [Dec. 52,845(M)] T.C. Memo. 1998-305], where we invalidated what appears to be a similar—perhaps even identical—tax shelter on the grounds that the entire partnership, not merely the specific transactions at issue, was a sham for federal tax purposes. [Saba II, 273 F.3d at 1136.]
The Court of Appeals also stated that a remand to this Court was appropriate because
in presenting its case in the Tax Court, Brunswick may have acted on the mistaken belief that the Supreme Court's decision in Moline Properties, Inc. v. Commissioner [43-1 USTC ¶ 9464], 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), established a two-part test under which Saba and Otrabanda must be respected simply because they engaged in some business activity, an interpretation that ASA squarely rejected, see ASA [2000-1 USTC ¶ 50,185], 201 F.3d at 512 * * *. [Saba II [2002-1 USTC ¶ 50,145], 273 F.3d at 1141.]
At the time of trial in these cases, the parties entered into a series of stipulations of facts. All stipulated facts and exhibits are incorporated herein by this reference. We also incorporate by reference all our findings of fact in Saba I. (For convenience, all citations of Saba I will include citations of the specific page(s) of the Court's slip opinion.)
After these cases were remanded, the parties filed opening briefs and reply briefs addressing the issues raised by the Court of Appeals.
Pursuant to the Court of Appeals' mandate, we consider whether Saba and Otrabanda are sham partnerships that should be disregarded for Federal income tax purposes. Petitioner bears the burden of proof. Rule 142(a); Brown v. Commissioner [Dec. 42,547], 85 T.C. 968, 998 (1985), affd. sub nom. Sochin v. Commissioner [88-1 USTC ¶ 9248], 843 F.2d 351 (9th Cir. 1988).
Petitioner first contends that Saba and Otrabanda qualify as partnerships for Federal income tax purposes consistent with the statutory definitions of partnerships (and partners) set forth in sections 704(e), 761, and 7701(a)(2), and in accordance with Supreme Court decisions in cases such as Commissioner v. Tower [46-1 USTC ¶ 9189], 327 U.S. 280 (1946), and Commissioner v. Culbertson [49-1 USTC ¶ 9323], 337 U.S. 733 (1949). Petitioner avers that "a person should be treated as a partner when he or she owns capital in a partnership in which capital is a material income-producing factor, without regard to whether the partnership was formed to avoid tax."
We need not dwell on this argument because the Court of Appeals did not direct us to evaluate the technical compliance of the partnerships. Instead, the Court of Appeals directed us to consider whether the partnerships should be recognized at all for Federal income tax purposes consistent with the standards the Court articulated in ASA Investerings Pship. v. Commissioner [2000-1 USTC ¶ 50,185], 201 F.3d 505 (D.C. Cir. 2000), affg. [Dec. 52,845(M)] T.C. Memo. 1998-305. We were also directed to consider whether Saba and Otrabanda are distinguishable from the partnership that the Court of Appeals determined to be a sham in ASA Investerings Pship.
Petitioner asserts that the Saba and Otrabanda partnerships were significantly different from the ASA Investerings Partnership, and that Saba and Otrabanda should be recognized as valid partnerships and not shams for Federal income tax purposes. Before addressing petitioner's specific arguments, we briefly review the factual background in ASA Investerings Pship. v. Commissioner, supra.
In ASA Investerings Pship., the Commissioner issued an FPAA to a Merrill Lynch-designed partnership whose principal partners were AlliedSignal, Inc., and ABN. The Court of Appeals held that the disputed partnership would not be recognized for Federal income tax purposes on the ground it was not organized to conduct business activity for a purpose other than tax avoidance. In so holding, the Court of Appeals sustained this Court's findings that ABN did not share in the partnership's profits and losses. Id. at 514. The Court of Appeals agreed that the purported partners did not share profits because "direct payments made to ABN were to compensate it merely for its funding costs", and "ABN could make no profit from the transaction: any potential profit from the LIBOR notes would be offset by losses from the concomitant swap transactions." Id. The Court of Appeals also concluded that "any risks inherent in ABN's investment were de minimis" because "The PPNs were essentially risk free", "any loss on the PPNs would be embedded in the value of the LIBOR notes", and ABN "succeeded in hedging all but a de minimis amount of the risk associated with the LIBOR notes." Id. at 514-515.
We note that after the instant cases were remanded to the Court, the Court of Appeals issued its opinion in Boca Investerings Pship. v. United States [2003-1 USTC ¶ 50,181], 314 F.3d 625, — (D.C. Cir. 2003), revg. [2001-2 USTC ¶ 50,690] 167 F. Supp. 2d 298 (D.D.C. 2001), citing ASA Investerings Pship. v. Commissioner, supra, in support of its holding that another Merrill Lynch-designed partnership would not be recognized as a valid entity for Federal tax purposes because it was not organized for a nontax business purpose.
Petitioner contends that Saba and Otrabanda are distinguishable from ASA Investerings Partnership in that (1) Brunswick did not promise a guaranteed or specified return to ABN, and (2) the partners agreed to share partnership expenses and losses. Petitioner made these same claims in arguing its case before the Court of Appeals. Saba II, 273 F.3d at 1140-1141. The Court of Appeals expressed skepticism that petitioner could demonstrate "significant differences" between the actions of Brunswick in these cases and those of AlliedSignal in ASA Investerings Pship. Id. As the discussion which follows reveals, petitioner has failed to demonstrate that there are any significant differences in the two cases.
Petitioner maintains that there was no agreement among the partners that ABN would be paid a specified return on the funds it contributed to the partnerships. Petitioner further contends that there is no evidence in the record that ABN was in fact paid a specified return on its funds, stating:
The payment of a `specified return' would have required detailed calculations of interest rates, time periods, and principal amounts. There is nothing in the Saba record to suggest that any such calculations were ever made. The record in Saba contains thousands of pages of documents, but there is not one scrap of paper which calculates the payments which would be necessary to provide a specified return. The witnesses testified no such calculations were ever made.
It is disingenuous for petitioner to suggest that a determination that Brunswick paid fees to ABN would have required a detailed calculation of interest rates, time periods, and principal amounts. Respondent asserts, and we agree, that Brunswick, ABN, and Merrill Lynch (acting as a middleman) understood that Brunswick would pay ABN fees to participate in the partnerships. Respondent points to internal documents maintained by Brunswick and ABN that refer to...
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