Earlier this week, the Ninth Circuit issued a terse (under 600 words) unpublished decision reversing the grant of summary judgment in a tax shelter case. Broadwood Inv. Fund LLC v. United States, 2015 U.S. App. LEXIS 13501 (9th Cir. Aug. 3, 2015). The court briefly indicated that the district court had erred because the taxpayers had provided sufficient evidence to raise a genuine issue of material fact on the question of intent, which was relevant to a determination whether the relevant partnership was a sham. Id., slip op. at *2-*3 (reversing Broadwood Inv. Fund LLC v. United States, 2012 U.S. Dist.… Read More
When we think of federal tax law, we tend to think of statutes and regulations, but judicial principles developed through case law play an important role. One of the more important judicial principles in the area of taxation is the rule that the tax consequences of a transaction are based upon its substance, not its form.
The Fifth Circuit applied this principle last week in addressing two partnership transactions undertaken by Dow Chemical Company. Chemtech Royalty Assocs., L.P. v. United States, 2014 U.S. App. LEXIS 17490 (5th Cir. Sept. 10, 2014). In the transactions, Dow and a group of foreign banks set up two partnerships; after the IRS refused to treat the partnerships as legitimate entities, Dow filed a challenge to the final partnership administrative adjustment.… Read More
Although Congress codified the economic substance doctrine, courts continue to deal with an inventory of cases applying the doctrine under existing precedent. On June 24th, the Fifth Circuit decided an interesting one, Nevada Partners Fund, L.L.C. v. United States, 2013 U.S. App. LEXIS 12877 (June 24, 2013).
Nevada Partners involved a tax shelter that was driven by foreign currency transactions. The multi-tiered structure, as described by the Court, worked like this:
- First, the investment manager established a group of LLCs. These included an LLC which would act as a holding company for two others. This first-tier LLC would be formed with a transitory partner and it would own 99% of a second LLC, which in turn would own 99% of a third LLC.
While tax law is driven in large measure by statutes and regulations, case law remains significant, particularly in the context of litigation involving tax shelters.
Historically, courts developed a variety of common law doctrines such as “substance over form,” “step transaction,” or “business purpose” that come into play in the context of transactions that are perceived to be abusive. Among the more prominent of these doctrines is the economic substance doctrine. While Congress took steps to codify the economic substance doctrine in 2010, it did so on a prospective basis, leaving a large number of pending tax cases to be governed by existing common law principles.… Read More