Tax News

CCH (cch.taxgroup.com) reports:

  Loan transactions made by two limited liability companies (LLCs) under a Son of BOSS tax-shelter scheme lacked economic substance; therefore, they were disregarded for tax purposes. The loan agreements between a bank and the LLCs failed the economic substance test because there was no reasonable expectation that the loan transactions would produce a profit. The bank's documentation and internal communications showed that the bank did not intend the funding amount to be used as leverage for high-risk foreign currency trading; rather, the funds were to be used for relatively risk-free time deposits and to create massive tax benefits for the law partners.

  Further, the government lacked standing to appeal the district court's ruling that neither Code Sec. 752 nor Reg. §1.752-6 operated to eliminate the claimed tax benefits arising from the partnerships' participation in the loan transactions. The government received the relief it requested; therefore, the government could not appeal the judgment. Furthermore, the district court's decisions regarding economic substance and penalties were independent of the ruling that the loan premiums were not liabilities under Code Sec. 752; thus, the government was also not aggrieved by any adverse collateral estoppel implications.

  The district court had jurisdiction to determine that accuracy-related penalties should not be imposed on the partnerships. The government's challenge to the court's jurisdiction over the issues of the individual partners' reasonable cause and good faith defenses to the imposition of penalties was rejected. The court could consider such defenses at the partnership level because they were asserted by the LLCs' managing partners on behalf of the partnerships.

  However, in determining whether the operating expenses and fees were deductible, the district court erred by failing to consider which partners effectively controlled the management of the partnerships' affairs at the time the transactions occurred. The court incorrectly attributed the managing partners' motive to the partnerships; instead, it was required to determine the partnerships' profit motive, regardless of whether the operating expenses were borne any one partner.

  The district court also incorrectly concluded that interest payments associated with the loans were deductible because they were real economic losses. However, since the loan transactions lacked economic substance, the loans did not constitute indebtedness; therefore, the partnerships could not deduct the interest paid under Code Sec. 163.

  Finally, Code Sec. 6230(d)(5) did not authorize the court to order a refund in a readjustment action brought under Code Sec. 6226. Rather, the partnerships were required to seek a refund through administrative proceedings.

  Affirming in part, vacating and remanding in part, a DC Tex. decision, 2007-1 USTC ¶50,223.

Klamath Strategic Investment Fund, CA-5, 2009-1 USTC ¶50,395

Other References:

 
Code Sec. 163

  CCH Reference - 2009FED ¶9104.264

 
Code Sec. 212

  CCH Reference - 2009FED ¶12,523.243

 
Code Sec. 704

  CCH Reference - 2009FED ¶25,124.23

 
Code Sec. 752

  CCH Reference - 2009FED ¶25,526.17

 
Code Sec. 6221

  CCH Reference - 2009FED ¶37,569.12

 
Code Sec. 6226

  CCH Reference - 2009FED ¶37,709.01

 
Code Sec. 6230

  CCH Reference - 2009FED ¶37,769.15

 
Code Sec. 6662

  CCH Reference - 2009FED ¶39,651G.155

  CCH Reference - 2009FED ¶39,652.72

  CCH Reference - 2009FED ¶39,654.20

 
Code Sec. 6664

  CCH Reference - 2009FED ¶39,661.65

 
Code Sec. 7805

  CCH Reference - 2009FED ¶43,282.169

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 30,168
CCH Reference -
TRC SALES: 3,154
CCH Reference -
TRC PART: 3,158
CCH Reference -
TRC PART: 60,552
CCH Reference - TRC PENALTY: 3,106.05
CCH Reference - TRC PENALTY: 3,106.10
CCH Reference - TRC PENALTY: 3,10.6.15
CCH Reference - TRC PENALTY: 3,116