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August 25, 2011
Illusory Partnership Interests and the Anti-Antiabuse Rule

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By Karen C. Burke and Grayson M.P. McCouch

Karen C. Burke is a Warren Distinguished Professor and Grayson M.P. McCouch is a professor at the University of San Diego School of Law.

In this report, the authors examine the continuing vitality of the Culbertson standard for determining the validity of a partnership for federal income tax purposes. In recent litigation, notably Castle Harbour, taxpayer's counsel have argued that section 704(e)(1) validates partner status based solely on ownership of a capital interest, making Culbertson essentially irrelevant for capital-intensive partnerships. This argument seeks to portray section 704(e)(1) as a repudiation of Culbertson and related doctrines underlying the partnership antiabuse rule. Properly understood, however, section 704(e)(1) was never intended to validate illusory partnership interests or to sanction the use of partnerships for tax avoidance purposes.

Copyright 2011 Karen C. Burke and Grayson M.P. McCouch. All rights reserved.

Table of Contents

I. Introduction

II. Section 704(e)(1) and Culbertson

III. Section 704(e)(1) and Castle Harbour

IV. Culbertson in a Check-the-Box World

    A. Entity Classification

    B. Economic Substance

    C. Partnership Antiabuse Rule

V. Conclusion

I. Introduction

For more than 60 years, the Supreme Court's Culbertson decision1 has provided the general standard for determining whether a partnership is sufficiently real to be respected for federal income tax purposes. In Culbertson, the Court held that the validity of a partnership for tax purposes depends on whether "considering all the facts . . . the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise."2 In a line of recent tax shelter cases, the D.C. Circuit invoked Culbertson to strike down partnerships that were designed to generate artificial tax losses and deflect income to tax-indifferent parties.3 Similarly, in Castle Harbour,4 the Second Circuit found that two Dutch banks failed to qualify as partners under Culbertson because they had no bona fide equity participation in the partnership. On remand, however, the district court found that the banks qualified as partners after all, based on their ownership of capital interests under section 704(e)(1), without regard to Culbertson.5 The district court's decision is currently on appeal to the Second Circuit, which heard oral arguments May 16.

This report examines the implications of the section 704(e)(1) argument advanced by taxpayer's counsel and accepted by the district court, both in the specific context of Castle Harbour and in the broader context of tax shelter litigation. The section 704(e)(1) argument is significant, even apart from the outcome of Castle Harbour, because it forms the centerpiece of a concerted litigation strategy for rolling back Culbertson and challenging related antiabuse rules in other pending tax shelter cases. This report contends that taxpayer's counsel have misinterpreted section 704(e)(1) and that the litigation strategy is misguided in seeking to portray that provision as an "anti-antiabuse" rule sanctioning the use of partnerships for tax avoidance purposes.

II. Section 704(e)(1) and Culbertson

Section 704(e)(1) provides that a "person shall be recognized as a partner for [federal income tax purposes] if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person."6 On its face, this provision could be read as a routine statement of the familiar principle that income derived from capital is taxed to the owner of the underlying capital, but taxpayer's counsel adopt a much more expansive reading with far-reaching implications. A nearly identical predecessor provision was originally enacted in 1951, two years after the Culbertson decision, to clarify the treatment of family partnerships, which were widely used to reallocate taxable income without any substantial change in the structure or operation of the business. Unquestionably, section 704(e)(1) modifies Culbertson by making real ownership of a capital interest (rather than intent to join in the underlying business venture) the touchstone of partner status in a capital-intensive partnership. Because section 704(e)(1) by its terms is not limited to family partnerships, some commentators argue that the provision should be read expansively to repudiate Culbertson altogether or at least to provide a separate, objective test that validates partner status for capital-intensive partnerships without regard to intent.7 In their view, section 704(e)(1) makes intent equally irrelevant in determining partner status and in determining partnership validity. They argue that recognition of partner status logically implies the existence of a partnership, and conclude that if the mechanical test of partner status under section 704(e)(1) is satisfied, then the partnership itself must also be valid as long as it is not a sham.8

That reading of section 704(e)(1) raises several problems. First, it relies on circular reasoning. It is tautologically true, of course, that a "partnership cannot exist without partners, and vice versa,"9 but the statute is not framed as a chicken-and-egg paradox. By its terms, section 704(e)(1) presupposes that a person can be identified as the owner of a capital interest in a partnership; if those requirements are satisfied, the statute declares that the owner of the capital interest will be recognized as a partner. The statute does not explain what is meant by a capital interest or a partnership. In the absence of a contrary indication in the regulations or the legislative history, it might seem natural to look to the general definition of a partnership in section 761, including the Culbertson gloss, to give the term the same meaning in section 704(e)(1) as in the other provisions of subchapter K. Proponents of the section 704(e)(1) argument, however, insist that there is no room for a Culbertson inquiry in determining the existence of a valid partnership under section 704(e)(1). At the same time, they concede that a partnership may be attacked as a sham if it is formed solely for tax avoidance purposes. To pass muster under section 704(e)(1), they argue, a partnership need only engage in some minimal level of business activity or have some colorable purpose other than (or in addition to) income tax avoidance.10 The main attraction of this test seems to be that it replaces Culbertson with a mechanical test based on ownership and thereby lowers the threshold of validity for a capital-intensive partnership under section 704(e)(1).

The statutory reference to a capital interest is equally problematic. The section 704(e) regulations define a capital interest as a right to receive a share of partnership assets on withdrawal or liquidation,11 but this definition serves only to contrast a capital interest with a profits interest; it is of no use, for example, in determining whether a purported capital interest with overwhelmingly debt-like characteristics should be treated as a loan under general substance-over-form principles.12 Nevertheless, proponents of the section 704(e)(1) argument view the statute as removing "any limits . . . on the type of capital that qualifies for partnership treatment"13 and conclude that any interest (other than a profits interest) that is not actually classified as debt should be recognized as a valid capital interest.14

More fundamentally, the section 704(e)(1) argument rests on a radically revisionist view of the intended scope of section 704(e)(1). At the time of enactment and for many years thereafter, section 704(e)(1) was generally understood not as a frontal assault on the Culbertson intent test but rather as a modification of one particular application of that test in the context of family partnerships.15 Specifically, section 704(e)(1) was intended to clarify that a person who receives a gift of a capital interest in a partnership (or who contributes donated capital to a partnership) will be recognized as a partner as long as that person is the real owner of the capital interest (or the contributed capital). In other words, section 704(e)(1) was not intended to alter the basic test of partnership validity, but merely to clarify which of two possible parties -- the transferor or the transferee -- should be recognized as a partner.16 By making that determination based on the real ownership of the donated capital interest (or the contributed capital), section 704(e)(1) sought "to harmonize the rules governing interests in the so-called family partnership with those generally applicable to other forms of property or business" in accordance with the principle that "income from property is attributable to the owner of the property."17

Significantly, the purported contradiction between Culbertson and section 704(e)(1) was not discovered until fairly recently. The predecessor of section 704(e)(1) was enacted in 1951, and during the ensuing six decades, courts have regularly applied Culbertson, looking at all relevant facts and circumstances to determine whether a partnership has sufficient reality to be respected for tax purposes.18 If Congress intended to overrule Culbertson and redefine the threshold for partnership validity, that purpose was artfully concealed. Instead, it seems far more likely that section 704(e)(1) was intended merely to resolve the narrow question whether the transferor or the transferee of a donated capital interest in a capital-intensive partnership should be treated as the real owner and hence as a partner. This modest reading of section 704(e)(1) is consistent with the provision's language and legislative history. It also explains why courts continue to rely on Culbertson as the general test of partnership validity and why the cases arising under section 704(e)(1) focus narrowly on whether a transferor or a transferee is the real owner of a capital interest in an otherwise valid partnership.19 There appears to be no fundamental inconsistency between Culbertson and section 704(e)(1), and accordingly there is no need to decide which "trumps" the other.20

Perhaps not entirely by coincidence, the argument for a more expansive reading of section 704(e)(1) seems to have surfaced during the tax shelter wars of the 1990s, at least partly as a defensive measure against antiabuse rules aimed at the marketing of sophisticated arrangements to exploit the intricate provisions of subchapter K. No matter how ingeniously constructed the shelters might be from a purely technical standpoint, they remained vulnerable to challenge under Culbertson and related judicial doctrines such as economic substance, business purpose, and substance over form. Accordingly, it should not be surprising that taxpayer's counsel have sought to transform section 704(e)(1) from an obscure provision of minor importance into a freestanding definitional provision with far-reaching implications. Nevertheless, on closer examination, a modest reading of section 704(e)(1) that leaves Culbertson essentially intact seems more consistent with the statute's language, history, and purpose as well as with existing judicial authority.

III. Section 704(e)(1) and Castle Harbour

The section 704(e)(1) argument was squarely raised in Castle Harbour. The partnership financing structure in that case purported to shift more than $300 million of taxable rental income from domestic corporations (subsidiaries of General Electric Capital Corp.) to two untaxed Dutch banks, generating more than $60 million of tax savings.21 Initially, the district court upheld the validity of the partnership, finding that the Culbertson intent test was satisfied because the partnership had economic substance and was not a sham.22 On appeal, the Second Circuit reversed, finding that the banks did not qualify as partners under Culbertson because they had "no meaningful stake" in the partnership venture and their investment therefore did not amount to a "bona fide equity participation."23 On remand, the district court considered the section 704(e)(1) issue for the first time and found that the banks satisfied the plain language of the statute because they owned capital interests in a capital-intensive partnership.24 Accordingly, the district court concluded that the banks qualified as partners under section 704(e)(1), without regard to Culbertson, and the government once again filed an appeal to the Second Circuit.

Despite its resounding victory in the district court, the taxpayer faces a tactical dilemma on appeal. The taxpayer is bound by the Second Circuit's holding that the banks did not qualify as partners under Culbertson because they lacked a bona fide equity participation in the partnership. Thus, in order to prevail, the taxpayer must persuade the Second Circuit that the banks qualify as partners under section 704(e)(1) even though they had no meaningful stake in the success or failure of the partnership venture. In other words, the taxpayer must show that section 704(e)(1) not only identifies a partner based on real ownership of a capital interest but also defines the nature of the required interest under a different, more lenient standard than the one articulated by the Second Circuit in its earlier decision. In effect, the taxpayer must persuade the Second Circuit that its application of Culbertson to require a bona fide equity participation, while not necessarily wrong as a matter of law, is irrelevant for a capital-intensive partnership.

In essence, taxpayer's counsel argue that because the banks were formally entitled under the partnership's operating agreement to receive a distribution of partnership assets on liquidation, their interests met the definition of a capital interest under the section 704(e) regulations.25 An initial problem with this argument is that it reads too much into a provision that was intended merely to distinguish a capital interest from a profits interest. Neither the statute nor the regulations purport to provide a comprehensive definition of a partnership interest. Indeed, that is precisely why the Second Circuit found it necessary to look to Culbertson for guidance in requiring a bona fide equity participation. Of course, had the Second Circuit been willing to reverse the district court's fact findings as erroneous, it could have denied partner status to the banks by recharacterizing their interests as debt under a substance-over-form analysis, but in its earlier opinion the Second Circuit stopped short of doing so and merely described the banks' interests as overwhelmingly debt-like. Taxpayer's counsel argue that the banks' interests should be respected as capital interests in the partnership, despite their debt-like features, because they are formally structured as rights to receive a distribution of partnership assets on liquidation, they have not actually been recharacterized as debt by any court, and they resemble preferred stock, which is routinely recognized as equity in the corporate context.26 This argument assumes a binary system in which all interests can readily be classified as debt or equity, and it ignores both the opportunities for structuring equivocal interests in the partnership context and the difficulty of classifying those interests.27 A taxpayer who acquires an equivocal interest runs a risk that the interest may be reclassified for tax purposes, and the range of alternative classifications is not necessarily limited to a binary choice between debt and equity.28 Thus, the argument advanced by taxpayer's counsel is in tension with the Second Circuit's determination that the banks did not qualify as partners under Culbertson even though their interests were not recharacterized as debt. It also fails to explain why section 704(e)(1)'s reference to a capital interest should be taken to validate illusory interests that are not recognized under Culbertson.

If the Second Circuit affirms the district court's section 704(e)(1) holding, it will have to determine the validity of the partnership allocations under section 704(b).29 Having already characterized those allocations as "in the nature of window dressing,"30 the Second Circuit might well find that they lacked substantial economic effect. In any event, unless the taxpayer prevails under both section 704(e)(1) and section 704(b), the Second Circuit will have to consider whether to impose penalties for negligence or understatement of tax. Under section 6662, the penalty issue turns primarily on whether the taxpayer had substantial authority for its reporting position.31 The district court believed that its own decision demonstrated the existence of substantial authority supporting the taxpayer's section 704(e)(1) argument.32 Evidently, however, the district court's own opinion cannot serve as substantial authority for a transaction that occurred more than 10 years earlier, and no previous judicial decision or administrative ruling had accepted or even seriously considered the expansive reading of section 704(e)(1) advanced by taxpayer's counsel in Castle Harbour.33 Despite selected passages from earlier cases suggesting that section 704(e)(1) "replaced" the Culbertson intent test with an ownership test,34 none of the cases cited by the district court involved an arrangement even remotely like the Castle Harbour transaction, and none of them support the notion that section 704(e)(1) sanctioned the use of partnerships for tax avoidance purposes.35 The taxpayer cannot satisfy its burden of proof on the penalty issue simply by challenging the government's position; instead, it must adduce substantial authority supporting its own position.36 Conceivably, the partners may seek to avoid penalties in a subsequent partner-level proceeding by claiming reasonable reliance on the legal opinion provided by taxpayer's counsel, but that opinion cannot serve as a penalty shield unless its contents are disclosed, and in the partnership-level proceeding so far, the taxpayer's counsel have vigorously resisted all requests for disclosure.

IV. Culbertson in a Check-the-Box World

A. Entity Classification

Some commentators argue that Culbertson was further undermined by the promulgation of the check-the-box regulations,37 which allow an eligible business entity to elect to be classified either as a partnership or as a corporation for federal income tax purposes. Since partnership classification is the default setting for unincorporated entities with more than one member, the argument runs, the check-the-box regulations should be interpreted to impose a single, uniform standard for determining both the validity of an entity and the status of its members.38 Proponents conclude that the appropriate standard is found not in Culbertson but rather in Moline Properties Inv. v. Commissioner,39 which arguably sets a lower threshold under a disjunctive test that can be satisfied either by business purpose or by the conduct of business activity.40 If Moline has displaced Culbertson, it follows that a uniform standard should also apply in distinguishing debt from equity in the corporate and partnership contexts to ensure that an entity's members can freely elect partner or shareholder status.41

The significance of Moline should not be overstated. In that case, it was the taxpayer, not the government, who sought to disregard the existence of a wholly owned corporation that the taxpayer had created for his own business purposes. The Supreme Court upheld the existence of the corporation as a separate taxable entity, noting that "the choice of the advantages of incorporation to do business . . . required the acceptance of the tax disadvantages."42 While a taxpayer may be bound by its own choice of form, the government can always look behind the form of a transaction to assess its economic reality. In determining whether an entity should be respected for tax purposes, Moline hardly stands for the proposition that business purpose is irrelevant.43 Indeed, at least one court views Moline as establishing a "unitary test" under which an entity will not be recognized in the absence of a business purpose.44 As a practical matter, therefore, the gap between Moline and Culbertson may be narrower than it is sometimes portrayed. To the extent the standards diverge, it seems premature to suggest that "in a check-the-box world . . . the influence of . . . Culbertson should recede."45

Any transaction involving an entity classified under the check-the-box regulations also will be subject to the partnership antiabuse rule,46 which draws on Culbertson and related common law doctrines. It would be strange indeed if the check-the-box regulations promulgated in 1996 were intended sub silentio to override the Culbertson standard embodied in the antiabuse rule promulgated just two years earlier. While the check-the-box regulations may have repercussions that were not foreseen by their drafters,47 there is no indication that they were intended to change the Culbertson test for partnership validity. Since any divergence between the Moline and Culbertson standards is likely to matter primarily for partnerships formed or availed of for tax avoidance purposes, the check-the-box regulations should be interpreted in a way that avoids unnecessary conflict with the antiabuse rule.48

B. Economic Substance

With the codification of the economic substance doctrine in section 7701(o),49 a business purpose inquiry may become more significant in determining entity validity. Some commentators have argued that a business entity should be respected if it meets the disjunctive version of the Moline test (requiring either business purpose or activity) without being subjected to further scrutiny under the economic substance doctrine.50 Under this view, the economic substance doctrine and related common law doctrines should apply in determining partnership validity and partner status "only when there is no nontax purpose for a partnership's formation."51 Any broader application of the economic substance doctrine, it is argued, would conflict with the minimal requirements for entity recognition under Moline and impermissibly "reinsert considerations of taxpayer purpose into entity validity and member status determinations."52

At the outset, it should be noted that partnership formation is not included in the list of "certain basic business transactions" falling outside the scope of section 7701(o).53 The safe harbor for enumerated business transactions is premised on the assumption that those transactions are sanctioned by "longstanding judicial and administrative practice," even though the choice between alternatives may be based primarily or even exclusively on their comparative tax advantages. Since Culbertson is recognized by long-standing judicial and administrative practice as the general standard for determining entity validity in the partnership context, it seems incongruous to argue that the choice of partnership form is a "basic business transaction" of the same sort as the enumerated transactions exempt from section 7701(o) without being subject to scrutiny under Culbertson.54

The argument that the economic substance doctrine does not apply to partnership formation rests on either an overly broad extrapolation from the list of exempt transactions55 or a misreading of existing case law. For example, while the choice between capitalizing a business enterprise with debt or equity is generally immune from challenge under section 7701(o),56 the overwhelmingly debt-like nature of an interest may nevertheless have a bearing on the economic substance of the parties' arrangement and hence on whether the holder of the interest is recognized as a partner.57 Even before the codification of economic substance in section 7701(o), at least one court recognized that a sham entity as well as a sham transaction may be disregarded if it lacks a nontax business purpose.58 While this approach may be viewed narrowly as a specific application of the Culbertson test, a broader reading suggests that the formation of an entity may be scrutinized under the economic substance doctrine.59 Unsurprisingly, some commentators have expressed concern that such a broad reading undermines the Moline argument by requiring a valid business purpose and comparing that purpose with the claimed tax benefits -- precisely the type of inquiry adopted in the codified version of economic substance.60

As Congress and the courts have recognized, economic substance often overlaps with other common law doctrines, such as substance over form, making it difficult to predict which doctrines will apply in a particular case.61 In challenging a partnership's validity, the government may rely on any one or more of several doctrines, including economic substance, sham transaction, substance over form, and business purpose. While a partnership that fails the sham test should also be disregarded under Culbertson, it does not follow that "a classification that passes the sham test would . . . necessarily survive Culbertson."62 A taxpayer's choice of partnership form is not insulated from scrutiny under Culbertson merely by "the existence of some business purpose or objective reality in addition to its tax-avoidance objective."63 If the ostensible form of the parties' arrangement is disregarded under Culbertson, there should be no need to invoke sham transaction or economic substance to reach the same result. In future tax shelter cases, therefore, taxpayers should carefully consider whether to concede a partnership's invalidity as a sham or under Culbertson, if doing so will ward off automatic penalties for a violation of economic substance under section 7701(o).

C. Partnership Antiabuse Rule

In 1994 Treasury promulgated a partnership antiabuse rule64 which, building on Culbertson and related common law doctrines, requires that a partnership be bona fide. Some commentators have attacked the rule, arguing that it contradicts a "firmly established" principle "that a partnership can exist for tax purposes and that the rules of Subchapter K apply even if the partnership was formed or availed of for the primary purpose of reducing tax."65 This "firmly established" principle, however, turns out to be based on little more than an expansive reading of section 704(e)(1). Although "Subchapter K was not intended to promote tax avoidance," the argument runs, "its provisions apply to economically real partnerships without regard to tax motivations."66 The argument plucks the ambiguous language of section 704(e)(1) from its historical context and recasts it as a wholesale repudiation of Culbertson, ignoring not only the background and purpose of the family partnership rules but also 60 years of post-1951 case law relying on Culbertson as the leading case in determining partnership validity for tax purposes.

Properly understood, section 704(e)(1) is not fundamentally inconsistent with Culbertson; on the contrary, it assumes the existence of a bona fide partnership (and a bona fide capital interest) and merely looks at real ownership of the capital interest to determine which of two potential parties -- a transferor or a transferee -- will be recognized as a partner. Section 704(e)(1) provides no authority for recognizing a person as a partner if the partnership (or the partnership interest) is not bona fide, nor does it prevent courts from looking behind the form of a partnership to the substance of the parties' underlying economic arrangement.67 Thus, section 704(e)(1) provides no real support for an attack on the validity of the partnership antiabuse rule.68 Although the precise scope of the antiabuse rule has yet to be fully worked out, recent judicial decisions have put to rest any serious doubts about its validity.69

Recently, some commentators have urged Treasury to revoke the antiabuse rule, arguing that the enactment of section 7701(o) has either preempted the rule or made it redundant.70 There is, of course, a substantial overlap between the antiabuse rule and the codified economic substance doctrine -- both provisions require a substantial business purpose and compare that purpose with the claimed tax benefits -- but the provisions are not precisely congruent. Some commentators posit a broad reading of section 7701(o), at least for the purpose of arguing that it preempts the antiabuse rule.71 Section 7701(o), however, does not purport to codify the whole panoply of judicial doctrines related to economic substance, but only a particular strand concerned with transactions that lack a substantial business purpose and produce no meaningful change in a taxpayer's economic position. In addition to requiring that a partnership be bona fide and that each transaction have a substantial business purpose (and that its form be respected under substance-over-form principles), the antiabuse rule imposes a proper-reflection-of-income requirement.72 This last requirement, aimed at transactions that seek to manipulate the mechanical provisions of subchapter K to produce unintended tax consequences, should by itself be sufficient to dispel any notion that section 7701(o) makes the antiabuse rule unnecessary.

In a similar vein, some commentators argue that the partnership antiabuse rule serves no useful purpose because it adds little to existing judicial doctrines concerning abusive transactions.73 Nevertheless, "redundancy of this sort hardly seems like a significant harm in itself."74 Indeed, the rule may serve as a salutary reminder to drafters of partnership opinions who might otherwise be tempted to downplay the applicability of doctrines such as business purpose, economic substance, and substance over form. Conversely, revoking the rule might be construed as a retreat from robust application of those judicial doctrines, or even as an implicit invitation to renewed use of partnerships for tax avoidance purposes. While the interplay of the antiabuse rule with judicial doctrines inevitably raises questions of interpretation and application in particular cases, the argument that the rule has outlived its usefulness seems to be based on little more than wishful thinking. The antiabuse rule provides courts with an alternative, specific ground for deciding cases involving abusive partnership arrangements without resorting to the economic substance doctrine. In light of section 7701(o), taxpayer's counsel arguably should view the antiabuse rule less as a threat than as a potential opportunity to avoid strict liability penalties for transactions that fail to withstand the test of economic reality.

V. Conclusion

The section 704(e)(1) argument propounded by taxpayer's counsel in Castle Harbour rests on a misreading of the statutory language and its legislative history. Taken in isolation, the literal terms of section 704(e)(1) can be interpreted to redefine long-standing concepts of partners, partnerships, and capital interests. However, a more modest interpretation comports far better with the provision's background and purpose and with well-established judicial and administrative authority. An examination of the legislative history reveals that section 704(e)(1) was not intended to overrule Culbertson but merely to clarify partner status in a relatively narrow class of cases involving donated capital interests in capital-intensive partnerships.

More fundamentally, the section 704(e)(1) argument seems to have been developed by taxpayer's counsel as part of a concerted litigation strategy.75 In casting section 704(e)(1) as a sweeping repudiation of Culbertson, taxpayer's counsel seek not only to validate illusory partnership interests like the banks' interests in Castle Harbour but also to establish a statutory basis for challenging the partnership antiabuse rule in subsequent cases involving tax-motivated partnership transactions. Ultimately, however, this attempt to elevate form over substance is doomed to fail. The continuing vitality of Culbertson and related judicial doctrines is demonstrated by judicial decisions upholding the antiabuse rule and by codification of the economic substance doctrine. Cases like Castle Harbour illustrate the importance of looking behind formalistic labels to the substance of a transaction. Compliance with the mechanical rules of subchapter K, no matter how cleverly engineered and vigorously defended, cannot transform an illusory interest into a real one.


1 Commissioner v. Culbertson, 337 U.S. 733 (1949).

2 Id. at 742.

3 See ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000), Doc 2000-3346, 2000 TNT 23-11, cert. denied, 531 U.S. 871 (2000); Boca Investerings Partnership v. United States, 314 F.3d 625 (D.C. Cir. 2003), Doc 2003-1175, 2003 TNT 8-7, cert. denied, 540 U.S. 826 (2003).

4 TIFD III-E Inc. v. United States, 459 F.3d 220 (2d Cir. 2006) [ Castle Harbour II ], Doc 2006-14691, 2006 TNT 150-8, rev'g 342 F. Supp.2d 94 (D. Conn. 2004) [ Castle Harbour I ], Doc 2004-21384, 2004 TNT 214-17. For discussion and analysis of the issues in Castle Harbour, see Karen C. Burke and Grayson M.P. McCouch, "Snookered Again: Castle Harbour Revisited," Tax Notes, Sept. 13, 2010, p. 1143, Doc 2010-17837, or 2010 TNT 177-10; Monte A. Jackel and Robert J. Crnkovich, "Castle Harbour Strikes Again," Tax Notes, Nov. 2, 2009, p. 591, Doc 2009-22694 , or 2009 TNT 209-14 .

5 TIFD III-E Inc. v. United States, 660 F. Supp.2d 367 (D. Conn. 2009) [ Castle Harbour III ], Doc 2009-23570 , 2009 TNT 205-17.

6 Section 704(e)(1).

7 See William S. McKee et al., Federal Taxation of Partnerships and Partners, para. 3.02[3], at 3-23 (4th ed. 2007) ("Congress rejected the intent test established by Tower and Culbertson, as well as any limits (e.g., the original capital requirement) on the type of capital that qualifies for partnership treatment."); Ethan Yale, "Defining 'Partnership' for Federal Tax Purposes," Tax Notes, May 9, 2011, p. 589, Doc 2011-7148, or 2011 TNT 90-15 ("Satisfying Culbertson, although sufficient, should not be necessary, at least for capital-intensive partnerships.").

8 See McKee et al., supra note 7, para. 1.05[4] [a], at 1-41 ("There is no indication that a person, once established as a partner for tax purposes, is not entitled to all of the benefits and subjected to all the burdens of the partnership tax provisions, except as expressly modified by other provisions of section 704(e)."); Yale, supra note 7, at 594 (positing "a biconditional relationship between the partnership validity test (Culbertson) and the partner status test (section 704(e)(1))," and concluding that "status and validity are jointly determined by a disjunctive linking of the two tests, so that if either status or validity is established the other follows, as long as there is some underlying business, financial operation, or venture").

9 McKee et al., supra note 7, para. 3.02[3], at 3-24; see also Yale, supra note 7, at 600 ("The [government's] argument is based on the observation that the existence of partners presupposes the existence of a partnership, so partnership validity must be decided before partner status. . . . [However,] the same logic can support the opposite conclusion just as persuasively: The existence of a partnership presupposes the existence of partners, so partner status must be decided before partnership validity.").

10 See McKee et al., supra note 7, para. 1.05[4] [a], at 1-41 ("If a putative partnership conducts a real enterprise in which putative partners share capital ownership, tax avoidance motives for the formation of the partnership or for a person becoming a partner are irrelevant."); id. at para. 3.03[1] [b], at 3-33 (observing that "business purpose is unnecessary for entity recognition if the entity conducts business activity," but "where no activity is conducted, business purpose is required," and listing "evading a state restriction" and "avoiding federal estate tax" as valid business purposes); Yale, supra note 7, at 597 (interpreting section 704(e)(1) to require that a partnership conduct "some trade, business, financial operation, or venture in which capital is a material income-producing factor"); id. at 600 (acknowledging that partnership is a sham if "it carries on no business, financial operation, or venture, and is formed solely to generate tax benefits for its partners").

11 See reg. section 1.704-1(e)(1)(v).

12 Thus, section 704(e)(1) cannot validate a purported capital interest that fails to satisfy Culbertson because of its lack of economic reality.

13 McKee et al., supra note 7, at para. 3.02[3], at 3-23.

14 Id. at para. 3.05[3], at 3-56 ("The Service's acceptance as equity certain instruments that are effectively debt is not limited to the corporate arena."); Yale, supra note 7, at 597 (interpreting section 704(e)(1) to require that putative partners be "true owners of equity interests in the entity").

15 The background of section 704(e)(1) is discussed in Burke and McCouch, supra note 4, at 1150-1154. Although section 704(e)(1) is not explicitly limited to family partnerships, as a practical matter it applies almost exclusively in situations involving a transfer between family members or related parties; the question of who is the real owner of a capital interest almost never arises in an arm's-length transaction between unrelated parties. Id. at 1151; see also 4 Boris Bittker and Lawrence Lokken, Federal Taxation of Income, Estates and Gifts, para. 86.3.2, at 86-33 (3d ed. 2003) ("The principal function of section 704(e)(1) is to validate partnership interests acquired by gift from a member of the donee's family, but it also applies to gift[s] from nonfamily donors and purchased interests. . . . Purchased interests are explicitly covered . . . because intrafamily purchases are often suspect, especially if the buyer does not pay cash and the debt is paid off with partnership profits or is forgiven at a later time by the ostensible seller."). Similarly, a party who contributes original capital to an existing partnership ordinarily qualifies as a partner under Culbertson and therefore has no need to rely on section 704(e)(1).

16 Of course, if the transferor and the transferee are the only two purported partners, the validity of the partnership may turn on whether the transferee is the real owner of his interest under section 704(e)(1). If the transferee is not recognized as a partner, the partnership may be invalid. The question of ownership under section 704(e)(1), however, is conceptually distinct from the question of intent to carry on a business, financial operation, or venture under section 761. In this sense, section 704(e)(1) merely treats real ownership of the interest as a conclusive indicator of intent on the transferee's part to join in conducting the underlying business venture.

17 H.R. Rep. No. 82-586, 1951-2 C.B. 357, 380; S. Rep. No. 82-781, 1951-2 C.B. 458, 486. Thus, section 704(e)(1) clarifies that "however the owner of a partnership interest may have acquired such interest, the income is taxable to the owner, if he is the real owner. If the ownership is real, it does not matter what motivated the transfer to him or whether the business benefited from the entrance of the new partner." Id. See also Mim. 6767, 1952-1 C.B. 111, 117 (noting that under pre-1951 law, "the test of business purpose may be satisfied by the single fact (if it be a fact) that the alleged partner has invested in the business money or property, useful to the business, of which he or she is the real owner"). This is a far cry from the notion that section 704(e)(1) was intended to redefine a partnership capital interest under a uniform standard by reference to corporate equity. See infra note 41.

18 For recent decisions applying Culbertson in the context of tax-motivated partnership transactions, see, e.g., Virginia Historic Tax Credit Fund 2001 LP v. Commissioner, 639 F.3d 129 (4th Cir. 2011), Doc 2011-6626, 2011 TNT 61-14; United States v. G-I Holdings Inc., No. 2:09-cv-05031 (D.N.J. 2009), Doc 2009-25898, 2009 TNT 225-18; Historic Boardwalk Hall LLC v. Commissioner, 136 T.C. 1 (2011), Doc 2011-80, 2011 TNT 2-15.

19 Under section 704(e)(1), the motive for a gift of a capital interest is generally irrelevant if the transferee is the real owner of the interest. Nevertheless, "the presence or absence of a tax-avoidance motive is one of many factors to be considered in determining the reality of the ownership of a capital interest acquired by gift." Reg. section 1.704-1(e)(2)(x). Thus, even if a transferee's partner status is determined under the substantial ownership test of section 704(e)(1), Culbertson remains relevant in determining whether a valid partnership exists in the first place. The cases decided under section 704(e)(1) focus on whether the transferee is the real owner of a capital interest, not on the nature of the capital interest or the validity of the partnership. See, e.g., Evans v. Commissioner, 447 F.2d 547 (7th Cir. 1971) (partner assigned interest to wholly owned corporation but failed to disclose assignment to other partner; assignee recognized as partner); Pflugradt v. United States, 310 F.2d 412 (7th Cir. 1962) (partner gave interest to minor children; children not recognized as partners where no fiduciary was appointed to manage their interests).

20 McKee et al., supra note 7, at para. 3.04[3] [b], at 3-46 ("section 704(e)(1) trumps the [ Culbertson ] intent test"); Yale, supra note 7, at 592 (finding it "necessary" to determine "whether Culbertson trumps section 704(e)(1) or vice versa").

21 See Burke and McCouch, supra note 4, at 1143-1150.

22 See Castle Harbour I, 342 F. Supp.2d at 112-113 (equating economic substance, business purpose, and sham doctrines, and finding that the Culbertson test was satisfied because "the transaction that created Castle Harbour was not a sham").

23 Castle Harbour II, 459 F.3d at 231 (finding indicia of equity participation "illusory or insignificant" in overall context of the banks' investment); see also id. at 227 (finding the banks "did not meaningfully share in the business risks of the partnership venture" and their interests were "overwhelmingly in the nature of secured debt").

24 Castle Harbour III, 660 F. Supp.2d at 383-395.

25 See reg. section 1.704-1(e)(1)(v).

26 See Castle Harbour III, 660 F. Supp.2d at 384-385 (analyzing partnership interests by analogy to preferred stock). In Castle Harbour, the banks' interests were formally classified as equity because they represented a right to receive distributions of partnership assets on liquidation under the operating agreement. Looking behind the "appearances and labels created by the partnership agreement" to the "underlying economic realities," however, the Second Circuit found that the banks' interest was "in the nature of a secured loan, with an insignificant equity kicker." Castle Harbour II, 459 F.3d at 241. As a practical matter, the allocations of profit and loss were trumped by other features (including a section 707(a) guaranteed payment backed by a performance guarantee from GE) which left the banks with negligible upside or downside risk and ensured that they would receive full payment of their capital with a fixed rate of return. See Burke and McCouch, supra note 4, at 1145-1148.

27 On the problem of debt-equity classification in the partnership context, see generally Paul Carman and Kelley Bender, "Debt, Equity or Other: Applying a Binary Analysis in a Multidimensional World," 107 J. Tax'n 17 (2007); J. William Dantzler Jr., "Debt vs. Equity in the Partnership Context," Tax Notes, Jan. 30, 2006, p. 497, Doc 2006-706, or 2006 TNT 20-37; Richard M. Lipton and Steven R. Dixon, "When Is a Partner Not a Partner? When Does a Partnership Exist?" 100 J. Tax'n 73 (2004); Robert H. Scarborough, "Partnerships as an Alternative to Secured Loans," 58 Tax Law. 509 (2005).

28 See Carman and Bender, supra note 27, at 27 ("Once the alternative to debt is not equity, the question of the appropriate characterization is no longer binary and the entire panoply of financial instruments is opened up to provide possible alternatives."); Scarborough, supra note 27, at 537-539 (discussing alternative classifications). In the corporate context, the government is unlikely to recharacterize a purported equity interest as debt because the tax consequences of debt are generally more advantageous for the taxpayer. See McKee et al., supra note 7, at para. 3.05[3], at 3-56 ("This may explain why the Service has been so ready to accept as equity corporate stock that closely resembles debt.").

29 The district court initially held that the allocations were valid under section 704(b), but the Second Circuit's disposition of the case on appeal made it unnecessary to review the section 704(b) holding. See Castle Harbour II, 459 F.3d at 224 n.1. The disposition also made it unnecessary for the Second Circuit to consider "whether the district court correctly determined that the characterization of the banks' interest as equity was not a sham." Id. at 231 n.11.

30 Id. at 236. For a discussion of the section 704(b) issue, see Karen C. Burke, "Castle Harbour: Economic Substance and the Overall-Tax-Effect Test," Tax Notes, May 30, 2005, p. 1163, Doc 2005-10220, or 2005 TNT 104-39.

31 Even if substantial authority existed, the court would have to address the subsidiary issues of whether the partnership was a tax shelter (i.e., whether it had federal income tax avoidance as its principal purpose) and, if so, whether the taxpayer reasonably believed that its reporting position was more likely than not proper. See section 6662(d)(2)(B) and (d)(2)(C).

32 See Castle Harbour III, 660 F. Supp.2d at 397 ("To a large extent, my holding in Castle Harbour I in favor of the taxpayer demonstrates the substantial authority for the partnership's tax treatment of the Dutch Banks, as does my discussion above of the Dutch Banks' interest in Castle Harbour under section 704(e)(1)."). Technically, the district court's discussion of penalties was unnecessary in view of its holding on the section 704(e)(1) issue.

33 Section 704(e)(1) was mentioned in passing in a district court decision upholding a partnership; on appeal, the partnership was held invalid for lack of a nontax business purpose. See Boca Investerings, 167 F. Supp.2d 298, 372 (D.D.C. 2001), Doc 2001-25944, 2001 TNT 197-12, rev'd, 314 F.3d 625.

34 Castle Harbour III, 660 F. Supp.2d at 393-395.

35 To the extent those cases are "materially distinguishable," they should be given little weight in the penalty determination. Long Term Capital Holdings v. United States, 330 F. Supp.2d 122, 203 (D. Conn. 2004), Doc 2004-17390, 2004 TNT 169-15, aff'd, 150 Fed. Appx. 40 (2d Cir. 2005) (quoting reg. section 1.6662-4(d)(3)(ii)).

36 The district court seems to have lost sight of this point. See Castle Harbour III, 660 F. Supp.2d at 398 ("The government has cited no decision from any court holding that an entity that purchased an interest in a purported partnership for substantial consideration did not qualify as a partner under section 704(e)(1)."); cf. id. at 398 (characterizing Second Circuit's holding concerning the nature of the banks' interests as "a novel proposition of law" not previously established). Outside the tax shelter context, the government is unlikely to challenge the partner status of a purchaser of a partnership interest. Thus, the absence of relevant authority is hardly surprising.

37 Reg. sections 301.7701-1 to 301.7701-3 (amendments effective Jan. 1, 1997). Taxpayer's counsel did not raise this argument in Castle Harbour because the transaction in that case occurred before the effective date of the check-the-box regulations.

38 See McKee et al., supra note 7, para. 3.09[7] [b], at 3-116 ("The check-a-box Regulations establish a regime under which the base requirements for corporate or partnership status are identical. . . . Therefore, any person who would be treated as a shareholder if the entity elects to be treated as a corporation should also be considered a "member" -- and thus, potentially, a partner -- under the check-a-box Regulations regardless of the entity's actual classification. However, this logic -- compelling as it seems -- is hard to square with substantial case law, including post-check-a-box case law."); Jackel and Crnkovich, supra note 4, at 597 ("The check-the-box regulations confirm that the same principles apply to the classification of preferred equity, whether issued by a corporation or a partnership."); see also Yale, supra note 7, at 600-602. The check-the-box regulations do not require a business purpose as a prerequisite for an election. See Dover Corp. v. Commissioner, 122 T.C. 324, 351 n.19 (2004), Doc 2004-9660, 2004 TNT 88-15 (taxpayer elected to treat a foreign subsidiary as a disregarded entity).

39 319 U.S. 436 (1943). Traditionally, Moline has been applied in the corporate context, where separate entity status is likely to have unfavorable tax consequences for the taxpayer.

40 See McKee et al., supra note 7, para. 3.03[1], at 3-30; Yale, supra note 7, at 602-604.

41 See McKee et al., supra note 7, para. 3.05[3], at 3-54 (arguing that "the shareholder-partner parity created by the check-a-box Regulations appears to solidify" the concept that "corporate debt-equity principles ha[ve] direct applicability to the question of whether a relationship [is] a lender-borrower relationship or a true partnership"); see also Brief for Plaintiff-Appellee at 37-38, TIFD III-E Inc. v. United States (2d Cir. Sept. 14, 2010) (No. 10-70) ("The [check-the-box] rules equate corporate equity with partnership equity; they are unworkable unless the criteria for partnership and corporate equity are identical.").

42 319 U.S. at 439. Noting that it may be necessary to disregard a corporation to prevent "frauds on the tax statute," the Court went on to observe that "in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal." Id.

43 See National Investors Corp. v. Hoey, 144 F.2d 466 (2d Cir. 1944). As one contemporary observer clearly understood, the government may "ignore corporate entities . . . in certain classes of cases which it is difficult to define," and in such cases "questions of bona fides, tax avoidance and business purpose will play a major part." George E. Cleary, "The Corporate Entity in Tax Cases," 1 Tax L. Rev. 3, 21-22 (1945); see also id. at 23 ("The Commissioner may, if he chooses, disregard the corporate entity where the taxpayer under similar circumstances could not compel the Commissioner to do so.").

44 ASA Investerings, 201 F.3d at 512; see also id. at 513 (noting that taxpayer's potential profit was "at all times dwarfed by its interest in the tax benefit").

45 McKee et al., supra note 7, para. 3.03[2], at 3-34. Regardless of the minimum threshold requirement for recognition as a business entity under the check-the-box regulations, Culbertson and other judicial doctrines continue to play a vital role in curbing opportunities for abuse inherent in a system of elective classification. Cf. id. para. 3.03, at 3-29 ("It seems clear that the substantive requirements for partnership and corporate entity recognition must merge because every multi-member 'business entity' must be classified as either a corporation or a partnership. . . . What is not as clear, however, is whether the traditional, and arguably more exacting, substantive requirements for partnership recognition will yield completely to lower threshold requirements that traditionally regulate entity recognition for corporations or whether the test for multi-member 'business entity' recognition will draw in part from the partnership cases.").

46 Reg. section 1.704-2 (generally effective for transactions occurring on or after May 12, 1994).

47 In the international arena, the check-the-box regulations have played havoc with rules intended to curb tax haven sheltering. See Lawrence Lokken, "Whatever Happened to Subpart F? U.S. CFC Legislation After the Check-the-Box Regulations," 7 Fla. Tax Rev. 185 (2005).

48 Treasury continues to recognize the coexistence of the Moline and Culbertson standards. Under the proposed series entity regulations, Moline applies for purposes of recognizing the status of a corporation separate from its owners, while Culbertson applies in determining the validity of a partnership and the identity of its members. See REG-119921-09, Doc 2010-19982, 2010 TNT 177-12.

49 Section 7701(o).

50 See Jackel, "Subchapter K and the Codified Economic Substance Doctrine," Tax Notes, July 19, 2010, p. 321, Doc 2010-13951, or 2010 TNT 138-4 (arguing that the Moline test for entity validity "should be treated as separate and distinct from the economic substance doctrine and, as a result, the economic substance doctrine should not be treated as relevant to this type of transaction").

51 Yale, supra note 7, at 605. In such a case, an economic substance inquiry would be redundant because the partnership presumably would be struck down as a sham or as failing to satisfy the minimal requirements for entity validity under the check-the-box regulations. See id. at 604 ("a partnership formed to conduct an activity motivated solely by tax avoidance does not pass the minimum requirements for entity validity").

52 Id. at 606 (arguing that "many believe [such purposive inquiries] were stricken from those validity and status determinations by section 704(e) and the check-the-box regulations," and concluding that "the economic substance doctrine should not apply to questions of entity validity or member status").

53 See Joint Committee on Taxation, "Technical Explanation of the Revenue Provisions of the 'Reconciliation Act of 2010,' as Amended, in Combination With the 'Patient Protection and Affordable Care Act,'" JCX-18-10 (Mar. 21, 2010), at 152, Doc 2010-6147, 2010 TNT 55-23 (codification "not intended to alter the tax treatment of certain basic business transactions that, under longstanding judicial and administrative practice are respected, merely because the choice between meaningful alternatives is largely or entirely based on comparative tax advantages"). The list includes the choice to enter a transaction or series of transactions constituting a corporate organization or reorganization, but conspicuously omits any reference to partnership formation. See id. at 152-153.

54 Yale, supra note 7, at 605 ("The choice to use the partnership form is just such a basic business transaction and should be immune from attack under the economic substance doctrine.").

55 Martin J. McMahon Jr., "Living With the Codified Economic Substance Doctrine," Tax Notes, Aug. 16, 2010, p. 731, Doc 2010-14844, 2010 TNT 158-2 ("Care should be exercised to avoid extrapolating this list of transactions to include any and all transactions in which the listed issues arise.").

56 JCX-18-10, supra note 53, at 152.

57 This is essentially how the Second Circuit applied Culbertson in Castle Harbour. Similarly, even if a purported partnership conducts some business activities, those activities will not necessarily prevent the purported partnership itself from being disregarded as a sham. See Southgate Master Fund LLC v. United States, 651 F. Supp.2d 596 (N.D. Tex. 2009), Doc 2009-18785, 2009 TNT 160-6 (disregarding the existence of a partnership formed to shift built-in loss from a foreign party to a domestic party, and also finding that a basis-build transaction lacked economic substance).

58 ASA Investerings, 201 F.3d at 512 (applying "a unitary test -- whether the 'sham' be in the entity or the transaction -- under which the absence of a nontax business purpose is fatal"); see also id. at 512 n.4 (noting that partnership formation could be treated as a transaction).

59 See McMahon, supra note 55, at 739 (warning that "it might be dangerous" to read ASA Investerings and similar decisions as narrow applications of Culbertson rather than as economic substance cases).

60 For example, one commentator has expressed concern that "taken to its logical extreme, the test propounded by the D.C. Circuit [in ASA Investerings ] would seem to mean that Moline Properties has been displaced by the economic substance doctrine, because that test focuses on the business purpose for the use of the entity and on comparing that purpose with the tax avoidance features of the chosen entity form." Jackel, supra note 50, at 327. Because section 7701(o) was enacted after the decision in ASA Investerings, it remains to be seen whether courts will adopt a broad reading of ASA Investerings as part of the codified doctrine. See Notice 2010-62, 2010-2 C.B. 411, Doc 2010-20020, 2010 TNT 177-14 (providing interim guidance on the scope of section 7701(o)).

61 Indeed, the congressional staff explanation expressly notes the similarity between the Second Circuit's substance-over-form analysis in Castle Harbour and an economic substance inquiry. See JCX-18-10, supra note 53, at 142 n.300 (noting that certain substance-over-form cases involving tax-indifferent parties "have also involved examination of whether the change in economic position that occurred, if any, was consistent with the form asserted, and whether the claimed business purpose supported the particular tax benefits that were claimed").

62 Castle Harbour II, 459 F.3d at 232 n.13; cf. Castle Harbour III, 660 F. Supp.2d at 386 (criticizing the Second Circuit's formulation and finding it "difficult to imagine" a situation in which a "partnership, although not a sham, might nevertheless fail the Culbertson analysis").

63 Castle Harbour II, 459 F.3d at 232; accord, Altria Group Inc. v. United States, 694 F. Supp.2d 259, 277 (S.D.N.Y. 2010), Doc 2010-5869, 2010 TNT 53-13 (citing Castle Harbour for the proposition that in the face of several potentially applicable doctrines, "the Government enjoys the benefit of the resulting legal uncertainty, and is not limited to the test most favorable to the taxpayer's position").

64 Reg. section 1.701-2. The partnership antiabuse rule also imposes requirements of business purpose, substance over form, and proper reflection of income.

65 McKee et al., supra note 7, para. 1.05[4] [a], at 1-40 (emphasis in original); see also id. para. 1.05[4] [a], at 1-43 (describing the antiabuse rule as "an attempt to simultaneously reopen and preempt a debate that the Service lost in the courts and in Congress more than forty years ago"). The same commentators also argue that the partnership antiabuse rule exceeds the scope of Treasury's regulatory authority and is therefore invalid. See id. para. 1.05[5], at 1-62 to 1-76. It may be difficult to demonstrate invalidity under the prevailing standard of review for administrative regulations. See Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704, 713 (2011), Doc 2011-609, 2011 TNT 8-10 (Treasury regulations entitled to the same degree of deference under Chevron as regulations of other agencies).

66 McKee et al., supra note 7, para. 1.05[4] [a], at 1-42.

67 For a contrary view, see McKee et al., supra note 7, para. 1.05[4] [a], at 1-41 ("Congress thus believed that if a putative partnership conducts a real enterprise in which putative partners share capital ownership, tax avoidance motives for the formation of the partnership or for a person becoming a partner are irrelevant.").

68 See New York State Bar Association Tax Section, "Report on the Proposed Partnership Anti-Abuse Rule" (July 1, 1994), Doc 94-6234, 94 TNT 130-34 ("We do not believe that the [partnership antiabuse rule] is inconsistent with the Culbertson case or with the so-called 'family partnership' rules of Section 704(e)(1). Those authorities . . . do not support treating a person as a partner if the partnership interest is not bona fide, or permitting tax results that are inconsistent with the economic arrangement of the parties or the substance of the transaction.").

69 See, e.g., Fidelity International Currency Advisor A Fund LLC v. United States, 747 F. Supp.2d 49 (D. Mass. 2010), Doc 2010-10960, 2010 TNT 96-16; Nevada Partners Fund LLC v. United States, 714 F. Supp.2d 598 (S.D. Miss. 2010), Doc 2010-9781, 2010 TNT 85-9; Countryside Limited Partnership v. Commissioner, T.C. Memo. 2008-3, Doc 2008-61, 2008 TNT 2-15.

70 See Jackel, supra note 50, at 321-322; see also Howard E. Abrams, "Did Health Care Reform Repeal the Partnership Anti-Abuse Rule?" 51 Tax Mgmt. Memo. 299 (2010).

71 Id. at 299 (arguing that "the broader the codification, the less room there is for alternative rules," and suggesting that the antiabuse rule "should be treated as overruled if it falls within the scope of" codified economic substance). In application, however, it seems likely that taxpayer's counsel will read the provision narrowly in order to avoid strict liability penalties. See id. at 304 ("if section 7701(o) is read narrowly, so a fortiori are the associated penalties"); James B. Sowell, "The Partnership Anti-Abuse Rules: Where Have We Been and Where Are We Going?" 89 Taxes 69, 101 (2011) (discussing uncertainty about whether the antiabuse rule is a "similar law" for purpose of penalty under section 7701(o)).

72 Practitioner objections to the antiabuse rule have been largely directed at the proper-reflection-of-income requirement. Cf. Sowell, supra note 71, at 107 n.62 (noting that while the requirement may not be well understood, it does not follow that the government took "an unprecedented step" by incorporating it in the antiabuse rule).

73 See Jackel, supra note 50, at 322 (arguing that the antiabuse rule is redundant and should be repealed in light of codification of economic substance); Sowell, supra note 71, at 100 (noting that the antiabuse rule, if "effectively reduced to a 'proper reflection of income' test" for a subset of tax avoidance transactions, could be repealed "with little compromise to the IRS's arsenal of tax weapons").

74 See Joseph Bankman, "The Proposed Partnership Antiabuse Rule: Appropriate Response to Serious Problem," Tax Notes, July 11, 1994, p. 270.

75 See Brief for Appellant at 49, Southgate Master Fund LLC v. United States (5th Cir. Mar. 31, 2010) (No. 09-11166); see also Petitioners' Trial Memorandum, Long Term Capital Holdings v. United States (D. Conn. May 29, 2003), Doc 2003-16628, 2003 TNT 136-7.


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