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:: Partnership - Audit Technique Guide - Chapter 9 - Tax Shelters (12-2002)   Chapter 9 - Table of Contents Introduction          Office of Tax Shelter Analysis       Tax Shelter Disclosure        Registration of Tax Shelters       Corporate Taxpayer Disclosure Statements     Penalties          Partnership Anti-Abuse Regulations       Overview         Intent of Subchapter K       Factors Indicating Abuse       Authority to Recast Transactions      Supporting Law        Resources          Economic Substance of Partnerships and Transactions      Judicial Doctrines        Overview         Step Transaction Doctrine       Supporting Law   INTRODUCTION Although tax shelters are often referred to as “corporate tax shelters,” many of these shelters involve the abuse of partnerships.  In recent years, there has been a continuous growth of the use of partnerships in tax shelters. Several steps have been taken to address tax shelters and the abuse of the partnership entity.  Treas. Reg. section 1.701-2, proposed in 1994 and finalized in 1995, provides two anti-abuse tests for partnerships.  In February 2000, Treasury and the Internal Revenue Service issued temporary and proposed regulations under IRC sections 6011, 6111, and 6112 that imposed new disclosure, registration, and list maintenance requirements with respect to certain tax shelters.  These regulations were subsequently modified in August 2000 and August 2001.  Prop. Treas. Reg. section 1.6011-4T requires corporate taxpayers who have participated in a reportable transaction to attach a disclosure statement to certain tax returns.  While this reporting requirement applies to corporate taxpayers, the reportable transactions may involve the use of partnerships.  Prop. Treas. Reg. section 301.6111-2T requires promoters to register certain tax shelters by filing a Form 8264.  Prop. Treas. Reg. section 301.6112-1T requires any person who organizes or sells any interest in a potentially abusive tax shelter to maintain a list identifying each investor. If disclosure, registration, and/or list maintenance is required under these regulations, the transaction is not per se abusive, unless it is a listed transaction.  Notice 2001-51, 2001-34 I.R.B. 190, identifies listed transactions for purposes of Prop. Treas. Reg. section 1.6011-4T and Prop. Treas. Reg. section 301.6111-2T.  Some of these transactions may involve the use of partnerships.  Additionally, the Office of Tax Shelter Analysis was established in 2000 and is responsible for monitoring abusive tax shelters. This chapter will cover: Corporate Tax Shelter Characteristics Office of Tax Shelter Analysis Tax Shelter Disclosure Partnership Anti-Abuse Regulations Sham Partnership/Sham Partners Judicial Doctrines back to the top OFFICE OF TAX SHELTER ANALYSIS The Office of Tax Shelter Analysis maintains a Tax Shelter Hotline, reviews Tax Shelter Registrations, and manages a staff of Technical Advisors who are responsible for various types of abusive transactions. The Tax Shelter Hotline was established to provide initial guidance when an examiner believes that a potential shelter has been uncovered in an audit.  The Hotline is manned by an experienced examiner who can direct you to applicable Notices, court cases, and regulations that might pertain to your situation.  You may also be directed to the responsible Technical Advisor who is assigned the “product.” Tax Shelter Registrations are filed with the Ogden Service Center.  A team coordinated by OTSA makes periodic reviews of filed registrations.  Penalties under IRC section 6111(d) can be imposed on promoters who fail to register in accordance with the regulations. Technical Advisors have been selected to coordinate many of the transactions that are being marketed by shelter promoters.  In some instances, more than one Technical Advisor is assigned to a transaction, such as both a Financial Products Technical Advisor and a Partnership Technical Advisor. How to contact the Office of Tax Shelter Analysis:   Hotline Telephone: (202) 283-8740 Facsimile:  (202) 283-8354 Address:  Internal Revenue Service LM:PFTG:OTSA Office of Tax Shelter Analysis Mint Building M3-320 1111 Constitution Avenue, NW Washington, DC 20224  Email:    irs.tax.shelter.hotline@irs.gov                     back to the top TAX SHELTER DISCLOSURE Registration of Tax Shelters IRC section 6111 requires any tax shelter organizer to register certain tax shelters not later than the day on which the first offering for sale of interests in such tax shelter occurs.  Any person claiming any tax benefit by reason of a tax shelter must include the identification number assigned to such tax shelter on his return. Confidential Corporate Tax Shelters IRC section 6111(d) concerning “certain confidential arrangements treated as tax shelters” was added to the Code in 1997.  Prop. Treas. Reg. section 301.6111-2T implements IRC section 6111(d).  It requires that promoters register any entity, plan, arrangement or transaction by their promoters which meets the following three requirements: a significant purpose of the structure is the avoidance or evasion of Federal income tax for a direct or indirect participant which is a corporation the transaction is offered under conditions of confidentiality the shelter promoters may receive fees in excess of $100,000 in the aggregate All sales of confidential corporate tax shelters taking place after February 28, 2000, must be registered by filing a complete Form 8264, Application for Registration of a Tax Shelter.  The penalty for failing to register is the greater of $10,000 or 50 percent of the promoter’s fees.  If it can be shown that the nondisclosure was intentional, the promoter’s failure to register penalty is 75 percent of the promotion fees. Tax Shelters in General:  For registration purposes, arrangements or transactions which are not confidential must still be registered if they meet the definition of  “tax shelter” as defined by IRC section 6111(c).  For this purpose, a tax shelter is any investment which meets the following two conditions set forth in IRC section 6111(c)(1) and (2): The first requirement concerns the “tax shelter ratio,” a term defined in IRC section 6111(c)(2).  In general, the tax shelter ratio is the ratio of the aggregate amount of deductions potentially allowable to any investor to the amount of money contributed by the investor.  If the ratio is greater than 2 to 1 (the available deductions are twice the amount contributed by the investor) as of the close of any of the first five taxable years, the investment will meet the first requirement.  The close of the first of the five taxable years starts after the date the investment is offered for sale. The second requirement is that the investment is required to be registered under a federal or state law regulating securities, is sold pursuant to an exemption from registration, or is a substantial investment.  If the investment is sold pursuant to an exemption from registration, the state or federal agency must receive a notice of this exemption.  An investment is substantial if the organizer expects to have five or more investors and if the aggregate that may be offered for sale exceeds $250,000. back to the top Corporate Taxpayer Disclosure Statements Corporate taxpayers who participate, directly or indirectly, in “reportable transactions” are required to file a disclosure statement with their corporate tax return.  Indirect participation includes participation though a partnership.  Prop. Treas. Reg. section 1.6011-4T(a). Treas. Reg. section 1.6011-4T defines the term “reportable transaction” as: Listed transactions, and Other reportable transactions In addition to being either a listed transaction or another reportable transaction, a reportable transaction must also meet the projected tax effect test in Treas. Reg. section 1.6011-4T(b)(4). Listed Transactions:  For corporate tax returns filed after February 28, 2000, a listed transaction is one which is the same as or substantially similar to a transaction that the IRS has identified by notice, regulation, or other published guidance to be a tax avoidance transaction.  See Notice 2001-51, 2001-34 I.R.B. A listed transaction will satisfy the projected tax effect test if the corporate taxpayer expects the transaction to reduce corporate tax by more than $1,000,000 in any single year, or $2,000,000 during any combination of taxable years in which the transaction is expected to reduce the federal tax liability. Other Reportable Transactions:  A transaction entered into after February 28, 2000, is considered to be a reportable transaction if it has at least two of the following five characteristics: The taxpayer has participated in the transaction under conditions of confidentiality as defined in Treas. Reg. section 301.6111-2T(c). The taxpayer has obtained or been provided with contractual protection against the loss of the intended tax benefits.  This includes the right to a full or partial refund of fees paid to a promoter or fees that are contingent on the taxpayer’s successfully securing the transaction’s projected benefits. The transaction was promoted, solicited, or recommended to the taxpayer by one or more persons who received fees or other consideration in excess of $100,000, and such person’s entitlement to such fees or consideration was contingent on the taxpayer’s participation in the transaction. The transaction produces or is expected to produce a book/tax difference of over $5 million in any taxable year. The transaction involves a tax-indifferent party whose participation is intended to provide the taxpayer with benefits that could not otherwise have been obtained. The projected tax effect test will be satisfied if the taxpayer reasonably expects the transaction to reduce Federal income tax by more than $5 million in any single taxable year or by a total of more than $10 million in any combination of years in which the transaction reduces tax. Even if the transaction has two of the above five characteristics and meets the projected tax effect test, it will not be subject to the disclosure requirements if it meets any one of the following four exceptions: The taxpayer has participated in the transaction in the ordinary course of its business in a form consistent with customary commercial practice, and the taxpayer reasonably determines that it would have participated in the same transaction on substantially the same terms irrespective of the expected Federal income tax benefits.  Treas. Reg. section 1.6011-4T(b)(3)(ii)(A). The taxpayer has participated in the transaction in the ordinary course of its business in a form consistent with customary commercial practice, and the taxpayer reasonably determines that there is a generally accepted understanding that the taxpayer's intended tax treatment of the transaction (taking into account any combination of intended tax consequences) is properly allowable under the Internal Revenue Code for substantially similar transactions.  There is no minimum period of time for which such a generally accepted understanding must exist.  In general, however, a taxpayer cannot reasonably determine whether the intended tax treatment of a transaction has become generally accepted unless information relating to the structure and tax treatment of such transactions has been in the public domain (for example, rulings, published articles, etc.) and widely known for a sufficient period of time (ordinarily a period of years) to provide knowledgeable tax practitioners and the IRS reasonable opportunity to evaluate the intended tax treatment.  The mere fact that the taxpayer may have received an opinion or advice from one or more knowledgeable tax practitioners to the effect that the taxpayer's intended tax treatment of the transaction should or will be sustained, if challenged by the IRS, is not sufficient to satisfy the requirements of this paragraph (b)(3)(ii)(B).  Treas. Reg. section 1.6011-4T(b)(3)(ii)(B). The taxpayer reasonably determines that there is no reasonable basis under Federal tax law for denial of any significant portion of the expected Federal income tax benefits from the transaction.  This paragraph (b)(3)(ii)(C) applies only if the taxpayer reasonably determines that there is no basis that would meet the standard applicable to taxpayers under Treas. Reg. section 1.6662-3(b)(3) under which the IRS could disallow any significant portion of the expected Federal income tax benefits of the transaction.  Thus, the reasonable basis standard is not satisfied by an IRS position that would be merely arguable or that would constitute merely a colorable claim.  However, the taxpayer's determination of whether the IRS would or would not have a reasonable basis for such a position must take into account the entirety of the transaction and any combination of tax consequences that are expected to result from any component steps of the transaction, must not be based on any unreasonable or unrealistic factual assumptions, and must take into account all relevant aspects of Federal tax law, including the statute and legislative history, treaties, administrative guidance, and judicial decisions that establish principles of general application in the tax law (for example, Gregory v. Helvering, 293 U.S. 465 (1935)).  The determination of whether the IRS would or would not have such a reasonable basis is qualitative in nature and does not depend on any percentage or other quantitative assessment of the likelihood that the taxpayer would ultimately prevail if a significant portion of the expected tax benefits were disallowed by the IRS.  Treas. Reg. section 1.6011-4T(b)(3)(ii)(C). The transaction is identified in published guidance as being excepted from disclosure under this section.  Treas. Reg. section 1.6011-4T(b)(3)(ii)(D). Note:  These exceptions do not apply to listed transactions. Penalties Prior to the Taxpayer Relief Act of 1997, the term “tax shelter” under IRC section 6662 for purposes of imposing the accuracy-related penalty meant a partnership or other entity, plan, or arrangement if the principal purpose was the avoidance or evasion of federal income tax.  Effective for items with respect to transactions entered into after August 5, 1997, the definition of a "tax shelter" for purposes of IRC section 6662 was changed to be any partnership or other entity, plan, or arrangement if a significant purpose is the avoidance or evasion of federal income tax.  Thus, for penalty purposes, the definition of “tax shelter” became more encompassing. There are no specific penalties for failing to file a disclosure statement for a reportable transaction.  The failure to file a required disclosure statement, however, may have an impact on the taxpayer's ability to satisfy IRC section 6664 "reasonable cause and in good faith" defense to the IRC section 6662 accuracy-related penalty. If any person who organizes or sells any interest in a potentially abusive tax shelter fails to maintain a list identifying each investor as required under Treas. Reg. section 301.6112-1T, the penalty that may be imposed is $50 per investor with a maximum penalty of $100,000 per calendar year.  If a promoter fails to register a tax shelter as required under Treas. Reg. section 301.6111-2T, a penalty under IRC section 6707 may be imposed. back to the top  PARTNERSHIP ANTI-ABUSE REGULATIONS Overview The partnership anti-abuse regulations give the Service the ability to recast transactions which may comply with the literal language of the Code and regulations, but which produce tax results never contemplated by Subchapter K.  Treas. Reg. section 1.701-2 provides two anti-abuse tests for partnerships.  These regulations were proposed in 1994 and finalized in 1995.  If the results of a transaction are inconsistent with Subchapter K, and a principal purpose of the transaction is the reduction of tax liability, the Commissioner has the authority to undertake a variety of actions to achieve tax results consistent with the intent of Subchapter K. Coordination Based on Announcement 94-87, 1994-27 I.R.B. 124, and the preamble to T.D. 8588, any application of this regulation is required to be coordinated with Compliance and the Office of Chief Counsel to provide fair and consistent treatment of taxpayers when applying the regulation.  If the examiner believes that the anti-abuse regulations are applicable, the examiner should contact either an LMSB Partnership Technical Advisor or SBSE Partnership Issue Specialist as soon as possible.  The Technical Advisor or Issue Specialist will then coordinate the issue with the Office of Chief Counsel.  The examiner should not raise the issue with the taxpayer until clearance has been obtained from the Technical Advisor or Issue Specialist. Effective Dates While paragraphs (a), (b), (c), and (d) are effective for all transactions involving partnerships that occur on or after May 12, 1994 (“partnership anti-abuse”), paragraphs (e) and (f) are effective for all transactions involving a partnership that occur on or after December 29, 1994 (“abuse of entity”). back to the top Intent of Subchapter K Treas. Reg. section 1.7014-2(a) states that the intent of Subchapter K is to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity-level tax.  The “conduct of joint business” does not include business activities engaged in solely for tax avoidance purposes. Implicit in the intent of Subchapter K are the following: The partnership is bona fide Each partnership transaction or series of transactions must be entered into for a substantial business purpose The form of each transaction must be respected under substance over form principles The tax consequences must accurately reflect the partners’ economic agreement and clearly reflect the partners’ income Recognizing that some provisions of Subchapter K produce tax results which do not properly reflect income, (such as the value equals basis rule found in Treas. Reg. section 1.704-1(b)(2)(iii)(c)), the regulations state that the clear reflection of income requirement will be met if the tax results are “clearly contemplated” by the Subchapter K provision.  Treas. Reg. section 1.7014-2(a)(3). back to the top Factors Indicating Abuse Whether or not a particular partnership or partnership transaction was used to substantially reduce taxes in a manner inconsistent with the intent of Subchapter K depends on all the facts and circumstances.  The regulations provide a nonexclusive list of factors that may indicate a disregard for the intent of Subchapter K (Treas. Reg. section 1.701-2(c)): The present value of the partners’ aggregate federal tax liability is substantially less than it would have been if the partners had owned the partnership’s assets and conducted the partnerships activities directly. The present value of the partners’ aggregate federal tax liability is substantially less than it would have been if purportedly separate transactions were integrated into a single transaction. One or more partners who are necessary to achieve the claimed tax results have either a nominal interest in the partnership, are substantially protected from any risk of loss, or have little or no participation in partnership profits other than a preferred return which is essentially a payment for the use of capital. Substantially all of the partners are related to one another, directly or indirectly. Partnership items are allocated according to the literal language of the partnership allocation regulations (Treas. Reg. sections 1.704-1 and 1.704-2) but with results that are not in harmony with the underlying purpose of IRC section 704(b), which is that tax allocations should reflect the allocation of economic income or loss.  Partnerships which specially allocate income to tax-neutral partners should be scrutinized.  Tax-indifferent partners may include: A foreign person An exempt organization An insolvent taxpayer A taxpayer with unused net operating losses, capital losses, or foreign tax credits The contributor or a related party substantially retains (directly or indirectly) benefits and burdens of ownership of property contributed to a partnership. The benefits and burdens of ownership of partnership property are substantially shifted (directly or indirectly) to the distributee partner before or after the property is actually distributed. There are 11 examples included in the regulations.  Three of them (Examples 7, 8, and 11) illustrate situations in which the use of the partnership was considered inconsistent with the intent of Subchapter K.  Example 7 illustrates a lease stripping transaction.  Example 8 illustrates the use of a partnership to duplicate a tax loss through the absence of an IRC section 754 election.   Example 11 illustrates the use of a partnership to artificially shift basis from an asset the partner plans to hold, to another asset the partner plans to sell at a loss after receiving the assets in liquidation of his partnership interest. back to the top Authority to Recast Transactions If a partnership transaction substantially reduces the present value of the partners’ aggregate federal tax liability in a manner that does not conform with the intent of Subchapter K, the Commissioner has the authority to recast the transaction for federal tax purposes. To accomplish this, the Commissioner has the authority to: Disregard the partnership in whole or in part Disregard one or more of the partners Change the method of accounting to clearly reflect the partnership’s or the partner’s income Reallocate items of income, gain, loss, deduction, or credit Otherwise adjust or modify the claimed tax treatment Documents to Request Partnership agreement Agreements between partnership and any partners Any original documents, correspondence, or minutes of meetings which will shed light on the business purpose of the partnership or the business purpose of any of the partnership’s transactions Interview Questions Interview questions and requests for documents should be crafted to answer the following types of questions: Why was the partnership formed?  What is its business purpose? If the partnership was ostensibly formed as a joint enterprise for profit, how is the profit to be derived?  Does it make good business sense that the parties would have joined together with a profit motive? What did each partner contribute?  What did each partner take away? Are the partners subject to entrepreneurial risk?  Do any agreements remove one or more partners’ economic risk of loss?  Is any partner accorded a preferred or guaranteed return on its contribution that indicates that it has been removed from the risks of the venture? Are the benefits and burdens of ownership of partnership property shared among the partners?  If not, which partner has control and responsibility for the partnership’s property? Are the partners related? Are any of the partners tax neutral? Supporting Law Treas. Reg. section 1.7014-2. back to the top Resources Chapter 16, The Logic of Subchapter K, Laura E. Cunningham and Noel B. Cunningham (West Group, 2,000) IRS Improves Partnership Anti-Abuse Reg., but Major Problems Remain, Richard M. Lipton, Journal of Taxation, March 1995 Partnership Anti-Abuse Rule: Dirty Minds Meet Mrs. Gregory, Lee A. Sheppard, Tax Notes 295, 296 July 18, 1994 The Partnership Anti-Abuse Reg: A Reasonable Step in the Right Direction, Daniel Halperin, 64 Tax Notes 823 August 8, 1994 The Appropriateness of Anti-Abuse Rules in the U.S. Tax System, Frank V. Battle Jr., The Tax Lawyer, Spring 1995 Sanctifying the Smell Test: Some Thoughts on the Final Partnership Anti-Abuse Regulations, J.D. Dell, Journal of Real Estate Taxation, Summer 1995 The following documents discuss the potential application of the anti-abuse rule: FSA  200134002 FSA200118005 FSA 200015005 Notice 2000-44 FSA 2000026009 FSA 199936011 1999 FSA LEXIS 386 1998 FSA LEXIS 315 1998 FSA LEXIS 356 1998 FSA LEXIS 337 1998 FSA LEXIS 276 1997 FSA LEXIS 208 1996 FSA LEXIS 177 1995 FSA LEXIS 192 back to the top ECONOMIC SUBSTANCE OF PARTNERSHIPS AND TRANSACTIONS A Partnership is defined as a business entity that is not a corporation (as defined under Treas. Reg. section 301.7701-2(b)) or a trust (as defined under Treas. Reg. section 301.7701-4) and that has at least two members.  Treas. Reg. section 301.7701-(c)(1).  The entity’s status under state law does not determine its characterization for federal tax purposes Courts have enumerated several factors indicative of a partnership, including: The agreement of the parties Conduct of parties in executing agreement Testimony of disinterested persons Relationship of the parties Capital contributions Control of income Other factors indicating intent Other factors indicating intent are the contributions, if any, the parties have made to the enterprise, the right of each party to make withdrawals, the sharing of profits and losses, whether one party was the agent or employee of another, and whether the parties exercised mutual control and shouldered mutual responsibility for the success of the enterprise.  For example, see Commissioner v. Culbertson, 337 U.S. 733, 742 (1949). back to the top JUDICIAL DOCTRINES Overview To be respected, a partnership and its transactions must have economic substance separate and distinct from the economic benefit achieved solely by tax reduction.  If a taxpayer seeks to claim tax benefits, which were not intended by Congress, by means of transactions or entities that serve no economic purpose other than tax savings, the doctrine of economic substance is applicable.  Whether a transaction has economic substance is a factual determination.  Frank Lyon Co. v. United States, 435 U.S. 561 (1978), sets forth several factors indicating that a transaction has no economic substance.  In sum, the application of the economic substance doctrine requires that one look beyond the form of the transaction to its substance. When a transaction lacks economic substance, the form of the transaction is disregarded in determining the proper tax treatment of the parties to the transaction.  A transaction that is entered into primarily to reduce taxes and that has no economic or commercial objective to support it is without effect for federal income tax purposes.  Frank Lyon Co v. United States, 435 U.S. 561 (1978); Rice's Toyota World Inc. v. Commissioner, 752 F.2d 89, 92 (4th Cir. 1985) aff'g in part 81 T.C. 184 (1983). Courts have also applied the economic substance doctrine to disregard  partnerships.  In ASA Investerings Partnership v. Commissioner, 201 F. 3d 505, (D.C. Cir. 2000), cert. denied, 531 U.S. 871 (2000), the D.C. Circuit, affirming the Tax Court, held that a domestic corporation did not enter into a valid partnership with several foreign corporations, through which the domestic corporation had sought to shelter capital gains.  But see, Salina Partnership v. Commissioner, T.C. Memo. 2000-352 (court refused to classify transitory partnership as a sham but upheld the Commissioner's determination on alternate grounds). The economic substance doctrine is not intended to inhibit bona-fide business transactions.  Factual development and industry knowledge is key in properly applying this doctrine.   The doctrine could be thought of in these three ways: Sham in Fact ─ This involves a taxpayer claiming losses or deductions for a transaction or transactions that took place only on paper.  In other words, the purported events never actually took place.  In this case, the transaction would be disregarded for tax purposes. Sham in Substance ─ This is a transaction which actually took place, but which lacks the economic reality or substance that the form represents.  In analyzing suspected substantive shams, several courts have focused on two related factors, business purpose and economic substance. Step Transaction Doctrine ─ This doctrine is based on the substance over form doctrine.  This section will discuss these judicial doctrines. Courts have expressed and interpreted the economic substance doctrine through numerous cases.  The doctrine differs slightly depending on the applicable Circuit.  The cases listed at the end of this section should be considered. back to the top Step Transaction Doctrine The step transaction doctrine is an expression of the substance-over-form doctrine.  The step transaction doctrine collapses a series of transactions into a single transaction to determine the correct federal income tax consequences.  Under the step transaction doctrine, "a series of transactions designed and executed as parts of a unitary plan to achieve an intended result *** will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation."  FNMA v. Commissioner, 896 F.2d 580, 586 (D.C. Cir. 1990), cert. denied, 499 U.S. 974 (1991); see also Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) ("[a] given result at the end of a straight path is not made a different result because reached by following a devious path"). In applying the step transaction doctrine, courts have applied three different tests: The end result test The mutual interdependence test The binding commitment test Under the "end result" test, the transaction will be collapsed if it appears that a series of formally separate steps are really prearranged parts of a single transaction intended from the outset to reach the ultimate result.  See for example King Enterprises, Inc. v. United States, 418 F.2d 511, 516 (Ct. Cl. 1969).  Under the "interdependence" test, the focus is on whether "the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series."  See for example Redding v. Commissioner, 630 F.2d 1169, 1177 (7th Cir. 1980), cert denied, 450 U.S. 913 (1981).  Under the "binding commitment" test, a series of transactions are collapsed if, at the time the first step is entered into, there was a binding commitment to under-take the later step.  See for example Commissioner v. Gordon, 391 U.S. 83, 96 (1968).” Documents To Request and Interview Questions must be specifically tailored to develop the true nature of the transactions under examination.  In dealing with a possible sham transaction, the examiner should remember that the documents could be misleading and may not represent what actually took place. Documents to Request Partnership agreement Agreements between partnership and any partners Any original documents, correspondence, or minutes of meetings which will shed light on the business of the partnership Interview Questions Interview questions and requests for documents should be crafted to answer the following questions: Who is responsible for carrying out the operational and management responsibilities of the partnership? How are the administrative duties of the partnership handled, for example the bookkeeping and the payment of bills? What are the partners’ capital contributions? What business risks do the partners assume? Do partners bear any meaningful risk of financial loss? Do all partners bear the burdens of ownership of the partnership property, or does one partner exercise control and responsibility over the property? Will partners reap significant tax benefits if the partnership is respected for federal income tax purposes? back to the top Supporting Law Treas. .Reg. section 1.701-2 Commissioner v. Culbertson, 337 U.S. 733 (1949) ASA Investerings Partnership v. Commissioner, 201 F. 3d 505 (2,000) Merryman v. Commissioner, 873 F.2d 879 (5th Cir. 1989) Duhon v. Commissioner, T.C. Memo 1991-369 Cirelli et al., v. Commissioner, 82 T.C. 335 (1984) Karr v. Commissioner, 924 F.2d 1018 (1991) Commissioner v. Tower, 327 U.S. 280 (1946) Sham In Fact Saviano v. United States Court of Appeals 765 F.2d 643 (1985) Business Purpose Salina Partnership LP, FPL Group, Inc. v. Commissioner, T.C. Memo 2000-352 United Parcel Service of America, Inc. v. Commissioner, TC Memo 1999-268 Rice’s Toyota World, Inc., 81 T.C. 184 (1983) Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978) Economic Substance Economic Substance and Interest Deductions: A lack of economic substance may bar interest deductions under IRC section 163. Winn-Dixie Stores Inc. v. Commissioner, 113 T.C. 254 (1999), Goldstein v. Commissioner, 364 F.2d 734 (1966) Sheldon v. Commissioner, 94 T.C. 738 (1990) Knetsch v. United States, 364 U.S. 361 (1960) Corbin West Limited Partnership v. Commissioner, T.C. Memo 1999-7 No. 2203-97 Economic Substance and Capital Losses ACM Partnership v. Commissioner, 157 F.3d 231,247 (3d Cir. 1998) Saba Partnership, et al. v. Commissioner, T.C. Memo 1999-359 ASA Investerings Partnership v. Commissioner, 340 U.S. App. D.C. 55, 201 F.3d 505 (2000) Step Transactions Crenshaw v. United States, 450 F.2d 472 (1971)

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