Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page Page 2 of 28 1 of 91

T.D. 1995-7 (Cite

8588 I.R.B. as: 60 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

1

FIR 23)

D
RULES DEPARTMENT Internal and REGULATIONS OF THE TREASURY Service 1

Revenue Part 8588]

26 CFR [TD RIN

1545-AS70

Subchapter Tuesday, *23 AGENCY: Internal Revenue Service

K Anti-Abuse January 3,

Rule 1995

(IRS),

Treasury.

ACTION: SUMMARY: under recast affects provlde *24 authorlzes

Final This the

regulation. document K of contains the of the to a final Internal the use wlth is of regulatlon Code of in Revenue, of the those providing 1986 certain an antl-abuse The final is rule to to regulatlon necessary rule

subchapter

Internal

Revenue

(Code). The

Commlssloner and

circumstances, and law. 1994, except that

a transactlon partnershlps guldance

involvlng

a partnership. partnerships tax 12, applicable May 1994. or D.

partners

needed This

comply regulation

EFFECTIVE (e)

DATES: and

effective 29, Berman

§

1.701-2 FOR

(f) are

effectlve CONTACT: number).

December Mary A.

FURTHER

INFORMATION a toll-free INFORMATION:

Llndsay

Russell,

(202)

622-3050

(not

SUPPLEMENTARY Introduction

This document sectlon 701 of

adds _1.701-2 the Code.

to

the

Income

Tax

Regulations

(26 CFR

part

i)

under

Background

©

2006

Thomson/West.

No

Clalm

to

Orlg.

U.S.

Govt.

Works.

h_ps://print.westlaw.com/delivep/.html?des_-atp&format:HTMLE&dataid=B0055800000... 5/10/2006

APP-B-000122

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page Page 3 of 28 2 of 91

T.D. 1995-7 (Clte

8588 I.R.B. as: 60 5, _R T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

2

Subchapter conducted Rep. Sess. K be if H.R. the use No. 65 used

K was wlth 1622, (1954). for tax indicated 83d

enacted Cong., It was avoidance that are 2543, relating more

to 2d not

permlt Sess. purposes.

businesses and (1954); however, For rather an 2d tax than Sess. avoidance S. Rep. 89

organized equity H.R. that entity, other (1954). purposes, 938, 59 as Rep. the in

for between No.

3olnt the 1337,

profit 83d of

to

be S. 2d

"slmpliclty,

flexibility, intended,

partners." Cong., K,

provisions

subchapter be the applied Code.

example,

enacting concepts provisions

subchapter should of to 2d an

Congress such Conf. use for

aggregate, approprlate 83d to Cong.,

concepts Rep. the of bona rules fide

applying

No.

Similarly, sought while Cong.,

later "prevent their i00

amending

special for

allocations, No.

Congress 94th

special

allocations buslness

allowing Sess.

purposes."

(1976). On FR May 25581) 12, 1994, rule and that as and tax). the sectlon under a public were made revised the The use bona at IRS and of Treasury the K. was Code. held the on to IRS issued That July the and a notice document responding 25, notlce The be 1994. of of to proposed to notice the After proposed adopt of to the any rulemaking add an the and were (59

under

701

proposed

antl-abuse received, comments the flnal the regulation Code

subchapter hearing an the by to

Comments

considering rulemaklng proposed in this provision rule

received this

response Treasury

statements regulation

hearing, the

Treasury

decislon. and that the may

anti-abuse

applies

operation income, in of of

interpretation relevant glft, is

of and to to

regulations antl-abuse small of the flde rules 3olnt

thereunder rule number

a particular prlmarlly intended

partnership excise affect interfere

transaction

(including

estate, final K.

generation-sklpp±ng, expected that as make not

regulatlon transactions The

a relatively wlth

partnershlp

inapproprlate partnerships. Explanation A. As Overview noted of of

subchapter

regulation conducted

business

arrangements

through

Provlsions Provisions subchapter an K is intended activities tax. to permit in taxpayers a flexible the intent to of conduct 3olnt arrangement K are

above, (including incurring

business without

investment) entlty-level

through Impllcit

economic

subchapter

three requirements. First, the partnership must transaction (or series of related transactions) substantial must be consequences transactions partners' an or In the a provlslon other those final business under between economic of pollcy cases, tax regulation subchapter objectives if the to the purpose. subchapter the agreement as Second, over each the and K to and proper K that causes applicatlon partners the form form respected under substance partner

be bona must be of of each

fade and each partnership entered into for a partnership Third, the transactlon tax and of the to that reflect the extent

principles. must

partner reflect of to

partnership partner's except from taking U.S.

operations income to

partnershlp the

accurately

clearly is

(referred convenience requirement. the account

reflection intended results that and No the of tax

income), promote of devlate

admlnlstratlve that into Works. subchapter

that

provision

K and

ultimate

results © 2006

partnership, to Orig

all

Thomson/West.

Clalm

Govt.

htt_s://print.west_aw.c_m/delivery.htm_?dest=atp&f_rmat_HTMLE&dataid=B__558_____...

5/10/2006

APP-B-000123

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 491 3 of of

28

T.D. 1995-?

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

3

(C_te

as:

60

FR

23)

the the

relevant transaction

facts is

and

clrcumstances, as properly

are

clearly

contemplated the the partners' partners'

by

that

provlslon, In the

treated

reflecting reflects

income. income,

determining principles

whether of

a transaction 446(b) and

clearly 482

sections

apply. be applled subchapter recast wlth to K. partnershlp The final that of with transactions in a regulation clarlfles attempt to K as intent, taking use

The provisions of subchapter K must manner consistent with the intent of the authority of in the Commissioner to

transactions the intent consistent

partnerships approprlate into account

a manner

inconsistent

subchapter thls

to achieve tax all the facts

results that are and circumstances.

In carry

addltlon, as the out

the an

final of

regulation of of the its the and facts any

provides partners of or that and Code (2)

that the

the or

Commissioner or in part as regulations, prescrlbes and the are clearly

can

treat to

a to the of

partnership extent the by B. taklng that that into

aggregate

in whole Code regulations treatment

approprlate except the tax treatment

purpose as an

provision

(i)

a provision entlty, of all

partnership provision. of

ultimate

results,

account

circumstances,

contemplated

Discussion that to

Comments to

Relating the

to

Provisions of the of

in

the

Regulation regulation made to and the the final

Comments responses regulation, i. Scope

relate

application an explanation

proposed the

them, are

including

revlslons

summarized Regulatlon stated too affected of

below.

of

the

Several was that the too the

comments broad intent or and are

that, by was as the

as drafted, the regulation. stated and Several would

the

language guidance Similarly, proposed

in to

the

proposed as comments with concern

regulation to whlch which the use added or of suggested (upon that be explicit

vague

to provide K as

adequate in the

taxpayers

transactlons regulation

some

subchapter

regulation

operates) regulatory if flnalized Other scope of of the

overbroad proposed, suggested regulation,

potentially comments adversely addltlonal would the

conflicted expressed affect provlde examples the be the

statutory regulation,

provlslons. comments comments

legitimate should necessary wlthdrawn,

partnerships. to clarify and the Some guidance. revlsed On must that relate the be the to

that which

requested

that

regulation

reproposed. hand, other that would such it comments was in as well wlth large substance supported established their part over simply form the approach that be some the Some in of the these aspects purpose, comments by proposed of of the Code noted they comments as

other

regulation,

noting regulation doctrines, partnershlp

provisions

interpreted

conslstent

purpose. and

codifying business of these

exlsting

judicial

transactions.

Finally,

suggested

that the regulation addltional examples ©

be modifled in various of its appllcatlon. 2006 Thomson/West. No

respects,

including

adding

Claim

to

Orig.

U S.

Govt.

Works.

https://print.west_aw.c_m/de_ivery.htm_?dest_atp&f_rmat_HTMLE&dataid=B__55800000

.. 5/10/2006

APP-B-000124

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 591 4 of of

28

T.D. 1995-7 (Clte

8588 I.R.B. as: 5, T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

4

60 FR

In been

response in K, each clarified

to

these

comments, principal by

the

IRS

and the

Treasury the portion

have scope

revised of the

the

final has the bona of (a) of be a must be

regulatlon Subchapter final fide and

three in

respects. revislng the requires or the (2) over partner (a) of

First, proposed that serles of

regulatlon

substantially paragraph now or

captioned

Intent

regulation. (i) the of must each be and to and related

Paragraph partnership entered (3) the and certain clearly certain tax in over proper and (2) to into tax of transactlons

regulatlon

specifically

must for

partnershlp

transaction the

(individually substantial *25 under between accurately partner's subchapter policy not to favor properly respected subchapter the

collectively, purpose, substance each the and the (proper were may,

transactlon) form form of

business under partner reflect income K that K to

partnership operatlons

transaction

principles, must, income). subDect

consequences transactlons the of do other that accurate of of a flnal and such the de (4). A of instances

partnership agreement

partnershlp economic of to promote certain To flnal reflect or wlth

exceptions, reflect or provlsions results these the

partners' reflectlon adopted under

However,

administrative the consclous other provides respect to (a) all

convenience choice that

ob]ectives

circumstances, such

produce ob]ectives the tax (i) the of

reflect of be to income, treated the are include

income. the as that the results,

administrative

convenience satlsfied

measurement income will partnership regulatlon and the clrcumstances, provislons

regulation

reflection of the

consequences the

transaction extent tax

satlsfles application taklng the

paragraphs of by such that into account

a provision provlslon.

transaction facts of and

ultimate

relevant Examples

clearly section

contemplated 732,

elective

feature

section

754,

value-equals-basis mln!mis rules such number these of examples rules.

rule in §1.704-i(b) as those reflected in the f_nal

(2) (iii) (c), as well as regulatory in _§1.704-3(e) (i) and 1.752-2(e) demonstrate the proper

regulation

appllcation

In

additlon, provides "to of the as of in

the use the scope

revised the the of to Code.

Intent provisions

of of

Subchapter of the subchapter

K set

forth not avoid to

in paragraph intended the to purposes

(a) of

no other

longer taxpayers

that

K are comments

permit

existence this of Some the

partnerships Many comments for

provisions regarding should entity provlslon application taxpayer This exist (e) to of its be or

Internal

Revenue clause. of its

Code." Other the

expressed that of

confusion thls clause as an

suggested treatment of depend that

limited an the of

questlons

appropriate further

a partnership another correct intent of

aggregate the

partners concept

purposes suggested not

applying the on the

comments transaction. intended

aggregate/entity

does

the

structuring was by

clause under

principally law. the The

to

address

aggregate/entity clarifies (a) and this adding as carry an

issues aspect a new entity. as the an of

that the Paragraph aggregate of any

current

final treatment

regulatlon from paragraph of as to

regulation (e) confirms

removing the

clause

paragraph

address partners

inappropriate Commlssioner's in whole or Code or current 2006

a partnership treat to

authority in part

a partnership out

appropriate

purpose

provision of the as well as under ©

the regulatlons thereunder. As stated in some comments, law, the Commissioner's authority to treat a partnership No Claim to Orig. U.S. Govt. Works.

Thomson/West.

h_ps:/_print.west_aw.c_ngde_ive_y.htm_?dest_atp&f_rmat=HTMLE&dataid=B_558_... 5/10/2006

APP-B-000125

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 6 of 28 5 of 91

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

5

(Clte

as:

60

FR

23)

as

an

aggregate the as of tax

of an the as an

its

partners of the in

is not its whole

dependent the under

on

the

taxpayer's may not treat (e) to treatment facts

intent the the and and the for in

in that of

structuring partnership a provlsion a partnership ultlmate circumstances, promulgation exists rules new

transaction. aggregate Code or taking (e) entity, clearly

However,

Commissloner thereunder

partners or

paragraph and that

extent the

regulations account by bellef of the

prescrlbes

the

treatment

in part, all the that that

results, are of of (f) (c)

into is

relevant slgnlficant as

contemplated treatment K to the second

provlslon.

Underlying potential an entlty

paragraph subchapter illustrate

abuse in

in the outslde

inapproprlate

a partnership involving of paragraph

applying Examples

transactions appllcatlon princlpal in

partnerships. (e) . in this

paragraph

Paragraph regulation.

contains

the

revision the

reflected

final that be comments taxpayers tax (c)

The

corresponding structuring on all of

paragraph

proposed

regulation

provldes

the purposes for determlned based requestlng had of liability the

a transaction involvlng a partnership will the facts and circumstances. In response to the factors with the that will thelr of those indicate aggregate subchapter factors. in the of proposed the that K, the

guldance in a manner

concerning to sets to

a principal final in

purpose regulatlon response

reduce forth

substantially several that the the of

federal

inconsistent

intent

paragraph

Finally, not as provide to

comments

examples

regulation as of the

do well

adequate

guidance

regarding

appllcation would help

regulatlon, the scope

suggestlons

that

addltional

examples

clarlfy

regulation, application the weight particular consistent inconsistent 2. A

the flnal regulatlon of the regulatlon to to be with with given the to relevant of situations the involved. intent Intent of

contains numerous examples that illustrate the speclf!cally descrlbed transactlons, including factors The listed K as K. well in as paragraph (c) in the are are examples include transactions transactlons that that

subchapter subchapter

Principal

Purpose that series the if a partnershlp is formed or of related transactions with present of the be value wlth of the the partners' of Some of intent availed of a principal aggregate subchapter comments federal purpose to K, stated in

The proposed regulation provides connection with a transaction or purpose federal the that taxes, the all of tax substantlally l±ablllty can reduclng in a manner disregard transactions the standard Other

inconsistent form have should

Commissioner and

the

transaction. purpose from an

partnership therefore, purpose.

a prlncipal changed supported

reducing

a princlpal

princlpal

comments

"a principal

purpose"

standard, because results are also comments rather, intent should of be stated the

the Commissloner can recast the transaction found to be inconsistent with the intent of that the should K. only taxpayer's only in the be Still other intent whether comments of should the be irrelevant are that

only if the tax subchapter K. Other in all cases; with the intent

inqulry

results

inconsistent the taxpayer's determinations.

subchapter irrelevant

suggested

case

aggregate/entlty

©

2006

Thomson/West.

No

Clalm

to

Orig.

U.S.

Govt.

Works.

h_ps://print.west_aw.c_m/de_ivery.htm_?dest=atp&f_rmat=HTMLE&dataid=B_558_... 5/10/2006

APP-B-000126

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 791 6 of of

28

T.D. 1995-7 (C_te

8588 I.R.B. as: 60 5, T.D. FR 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

6

The intent above,

IRS

and

Treasury

continue applies

to believe for only of an if both tax

that (i)

an the K.

inqu±ry rule of and in of under taxpayer

into this has

the

taxpayer's As noted

generally the to fide achleve

is approprlate substantlal the intent to is the in

antl-abuse

nature. tax that K. Thus,

regulatlon wlth than

a prlncipal reductlon to use the In those A the wlth of the is more purpose that

purpose is tax a bona resultlng cases, number the

federal

reductlon, Havlng activities

(2) that a manner establish subchapter thls point. be

inconsistent efficlent tax the of

subchapter business means the wlth

a prlnclpal not

partnership any reductlon in

conduct

alternative cannot flnal the

available the transaction

does intent

lnconslstent recast regulation of regulatlon

Commissioner examples of requirement subchapter so that the is appropriate.

regulation. ±nconslstent appllcatlon tax

demonstrate that the tax the restricts

this results

addltlonal intent regulatlon, reductlon

K sufficiently requirement

potentlal of

a prlnclpal

purpose

federal

By (e) In

contrast, as of the flnal of this the on context, the

noted above, the entity/aggregate regulatlon does not require the reduclng and principle carrying out taxes through agree the with the IRS of Treasury

determination under paragraph taxpayer to have a prmncmpal mlsappllcatlon those applied, of the *26 as of comments under that prlnclple. suggested law, to be that current provlslon

purpose that solely applled. 3. Scope

substantially

entlty/aggregate basls

!s properly purpose

particular

of

Commissioner's

Ability

To

Recast

Transactlons be the several unllmlted

The proposed inconslstent requlsite dlsregard ways in interpreted discretionary the whlch

regulation provldes that if wlth the intent of subchapter purpose of the of federal tax form transaction. could as to attemptlng powers, a partlcular

a transactlon is determlned to K and the taxpayer acted wlth reductlon, proposed be provlde the recast. the as To Commissioner descrlbes comments with these which Some to regulation

prlnclpal

can

The to

a transaction this language applles

approprlately without

Commissioner address

recharacterization

guidance

recharacterlzation

transactlon.

concerns, paragraph (b\ of the final regulation has been revised the Commlssloner may recast transactlons only as appropriate to tax treatment of each transaction is consistent with the intent 4. Effective The was date in 12, regulatlon issued. on the bona final Date of the Regulation to be after requested is that issued. clarlfy the effectlve May 12, that, in for 1994, it of all the order transactions date to the the address significant

to clarify that ensure that the of subchapter K.

was Some

proposed on or

relating the

to

a

partnership effect the

occurrlng fide

proposed

regulation only from the

comments

regulation's revlslons and as could asset Works. of be from a May made

partnership

transactions, In llght and narrow

apply its that who Orig.

prospectively scope effective an

regulation regulation the final

final

potential to the be

application, 1994. interpreted

regulation for example,

generally when No

contlnues

However, to apply, ©

to preclude

possiblllty a partner Claim to

regulatlon

recelved U.S.

2006

Thomson/West.

Govt.

h_ps://print.west_aw.c_ngde_ivery.htm_?dest=atp&f_rmat_HTMLE&damid=B_558_... 5/10/2006

APP-B-000127

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 8 of 28 7 of 91

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

7

(Clte

as:

60 FR

23)

partnership date, the the transactions

before final

the

effective has

date been

disposes revised after to the tax paragraph

of

the

asset that taxpayer in on

after it

the Also,

effective only in a (f) are 29, to of light

regulatlon of the to

clarify effective the (e),

applies must case have of

involving purpose for all

a partnership proposed achieve

date. the or

ellmlnation

requirement under as

that

prlncipal effectlve 1994. prior No to

substantial involving to the date to of

reductlon

aggregate/entity

determinations transactions is intended effective Regulation the

paragraphs of partnership

(e) and after

a partnership treatment the regulation. Legal between sham of

December

inference the

transactions

applicable of the

5. Relationship Several established doctrines are are designed governed comments legal to by with

Established

Doctrines the regulation and and over the form Code which

questioned doctrlnes, the step assure thelr their that

relatlonshlp as the and

such the

business

purpose

substance doctrines), under are

(Including

transaction tax and that

transaction transactlons regulations and

consequences statutes

substance purposes. other

interpreted

conslstent

Partnerships, The take for applicatlon in myriad important

llke of light forms A by

business doctrines the

arrangements, to of partnership of complex these to

are

subject

to

those

doctrines. which the tax can rules not

those of that which (i)

transactlons complexity, and, in many tax and

is particularly (ll) in

flexibility often of certain

partnershlp

arrangements, cases, rules

are are

often also in

substantial

partnersh!ps,

appear

purely

mechanical. contemplated claiming tax

literal Congress

application has, are that

partnership those doctrines.

contexts

circumstances,

resulted

in taxpayers

results

contrary

The final regulation confirms cases, be satlsfied in applying transactlons, inappropriate regulation w±ll So the also viewed, law, the are to tax assure that

certain fundamental the provisions of provisions the established are

principles subchapter not used to

that must, in K to partnership achieve reflected those in

all

those While the

results. to apply.

fundamental

principles legal doctrines,

the

consistent

with

doctrines

continue the

uncertalnty that already the the should IRS.

regarding exlsts proper not in

the

application of undue

of

the

regulatlon doctrines. burdens

reflects under As on a

uncertalnty

properly any

evaluatlng existing

transactions legal

current result, either C. Other

including regulation or

application impose

administrative

taxpayers Comments

i.

Suggested some in the

Alternatives comments regulatlons that © was stated to

to

the that

Regulation it the is appropriate of the These No Claim to include stated U.S. a general of that the Works. antl-abuse K, and IRS

While rule others

limit

misuse

provisions

subchapter

claimed

not

necessary.

comments to Orig.

2006

Thomson/West.

Govt.

https://print.west_aw.c_m/de_ivery.htm_?dest_atp&f_rmat=-HTMLE&dataid_B__558_____...

5/10/2006

APP-B-000128

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

PagePage 991 8 of of

28

T.D. 1995-7 (C_te

8588 I.R.B. as: 5, T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

8

60 FR

Treasury

already and

have that

sufficient existlng

means author!ty

to

challenge should be

abusive used

partnership specific the and

transactlons transactlons established increasing In the

to address

as they are dlscovered. legal doctrines, amending partnershlp the on IRS audlts. and These

These comments suggested using the sectlon 704(b) regulations, comments are discussed to as address has below.

past,

Treasury

have rule,

attempted However, experxence behavlor by

partnership in those comments that puttlng violate the and flnal magn±tude proper additional for use of of the a the

transactions supportlng case-by-case encourages premlum pr!nclples regulation these application complexity case-by-case the provisions the on

a case-by-case has first been to and

basls.

recognized

a regulatory approach non-economic, being of ls of in the this

anti-abuse

demonstrated approach would that number believe will the pressure

±nadequate. engage The in IRS

A case-by-case a transaction and way IRS the by Treasury to reduce and that belleve the

arguably

tax-motivated

inapproprlately

regulatlon.

a reasonable transactzons. the the of principles Code and or

effectlve the in embodied

abusive

Moreover, the K. regulatlons of the

Treasury

that

regulation reducing to

forestall Inapproprxate

regulations,

leglslatlve

regulatory

revisions

prevent

subchapter 704(b) be used intent being with

Although subchapter inconsistent subchapter a manner the sectxon

sectxon may the are wlth

are K,

one to

example reach are to K.

of many

the

provisions that are provislons

of of in to

K that K that 704(b)

inapproprlately subchapter xntent by of

results

there

other

inappropriately itself,

applied subchapter is to not reduce

partnershlp Therefore,

transactlons an amendment

inconsistent

regulatlons, are of already focus under

sufficlent. the xnapproprlate and As Program (together partnership complements audit use of Thls not of the been IRS be this

Slgnlflcant subchapter regulatlon viewed overall Natlonal Thus, the enforcement 2. Applicatlon Many will comments not be as

efforts K through is part an

underway resource on the of

increased that to team

allocation audits of

to partnershlp transactions, partnerships. and to

aud±ts. should part has with the

partnershlp Industry thls that

alternatxve a new will the that

increased

focus, Office) IRS of

Speclalxzatlon audits regulation enhanced

established

coordlnate appllcatlon belleve

partnership the

regulatlon through

transactlons. increased

and

Treasury

partnership by Revenue

transactxons Agents concern I.R.B. Issue and result that

activity.

expressed *27 94-87,

the by

regulation, Revenue an issue

if that

flnallzed As of The stated be the IRS may

as xn

proposed, by must the be

applied

approprlately on examlnatlon,

Agents.

Announcement regulation coordinated Specxalization believe the the that final

1994-27 the

124,

when any on wlth and

affected

is consldered wlth this of © both Program

appllcatlon the the Offlce. many

regulation and of

Specialist the in IRS together fair

Partnership

Industry Treasury made in in taxpayers changes

team will

National

coordlnation, the flnal

clarifying treatment transactlons. U.S. Govt.

regulatxon,

consistent

application

regulation No

to partnership Claim to Orlg.

2006

Thomson/West.

Works.

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5/10/2006

APP-B-000129

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 10 of Page 9 of 91

28

T.D. 1995-7 (C_te

8588 I.R.B. as: 60 5, FR T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

9

3.

Special

Analyses

and

the

Secretary's

Authority that defined Act the in notlce EO of proposed as well Act 6) do the rulemaking as not the apply. as (5 U.S.C. regulation

Some was

comments

questloned that section

the

determlnatlon action of the Flexibility the as

not

a signlflcant 5) and the also

regulatory 553(b) Regulatory questloned

12866, Procedure chapter to issue

determination chapter Some comments

Admlnlstratlve (5 U.S.C. authorlty

Secretary's

proposed. statutory proposed issue the the

The IRS and Treasury believe that the regulation complles wlth all and regulatory requlrements relating to the issuance of the notlce of rulemaking, flnal and that it The is 701 clearly through wlthln 761. the Secretary's that authority the authority to for regulation. includes Rule final regulation clarifles

regulation Mlnimis

sections

4. De

In Some

the

preamble comments the

accompanylng on the on or that the the

the a de basls amount tax

proposed minimis of of the the

regulation, of a safe would of in rule number be

the harbor

IRS or

and de

Treasury rule. suggested the the of of and value

soliclted dellneating partnershlp partners' The will the

approprlateness

mlnlmis value

comments

responded rule assets,

approprlate, the present the of

partners, the from value assures not made business proper in

reductlon resultlng the present are

aggregate in

federal the where

llabllity that must be

transaction. the that the partners' the flnal of regulation In addition, regulatlon involving income

requirement federal be and not IRS

regulatlon the

aggregate

tax

reduction belleve

substantial

applled Treasury For forth by for these !n

amounts that for the bona

involved fide for of of harbor

significant.

clarlf!catlons joint the from

provlde standard safeguards explicltly mlnlmls believe Speclal It not Act has

sufficient set

safeguards example, in paragraph business the K.

arrangements reflection are clearly

partnerships. contemplated

the

exceptlon (a) (3)

transactions subchapter Finally, the

that

a partlcular

provislon appllcation In llght safe

K provldes final and the statutory

appropriate regulation regulatory IRS and de Treasury

arrangements. of

recognlzes rules no additional

specific these rules

subchapter

safeguards, are needed.

speciflc

Analyses been determlned action It as has that defined also 6) do Act thls in EO been not Treasury 12866. decision Therefore, that this section 5) and regulation, is not a significant assessment the Flex_bility a of the its is of

regulatory required. Admlnlstrative

a regulatory 553(b) the and, Regulatory

determined apply to

Procedure chapter

(5 U.S.C.

chapter

(5 U.S.C.

therefore,

Regulatory Flexlblllty the Internal Revenue Chlef impact Counsel on small for

Analysls Code, the of

is not required. notlce of proposed the Small were of Business submltted document.

Pursuant to sectlon 7805(f) rulemaking was submltted to Administration and are for comment in the on

Advocacy

business. Information

Comments section

addressed

Supplementary

th!s

© 2006

Thomson/West.

No

Claim

to

Orig.

U.S.

Govt.

Works.

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5/10/2006

APP-B-000130

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 11 of Page 10 of 91 28

T.D. 1995-7 (C_te

8588 I.R.B. as: 60 5, T.D. FR 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

I0

List

of

Sub3ects taxes, to

in

26

CFR

Part

1 requirements.

Income Amendments

Reporting the

and

recordkeeping

Regulatlons

Accordingly, PART 1--INCOME

26

CFR

part

1 is

amended

as

follows:

TAXES

Paragraph numerical

i. The authorlty order to read as

cltatlon follows:

for

part

1 is

amended

by

addlng

an

entry

in

Authority: Section Par. 2.

26 1.701-2 Sectlon to

U.S

C.

7805 issued is

* * * under added 26 U.S.C. under the 701 through 761 * * * of Tax

also

1.701-2 as

headlng

"Determlnatlon

Llab111ty" §1.701-2

read

follows:

Antl-abuse

rule.

(a)

Intent

of

subchapter buslness

K.

Subchapter incurrlng

K is an

intended actlvltles

to permit through tax.

taxpayers a flexible in

to the

conduct economlc intent

joint of

(including wlthout K are must the be

investment) following fide

arrangement subchapter partnershlp

entity-level requirements--

Implicit

(i) The

bona

and

each

partnershlp the

transaction transaction)

or must

series be

of related transactions (individually or collectively, entered into for a substantlal business purpose. (2) The over form form of each partnership transactlon must be

respected

under

substance

principles. as otherwlse K to and and provlded each the partner in of this paragraph (a) (3), operatlons income of the the and tax of the consequences transactlons partners' proper and that the those results requirement that the

(3) Except under between econom!c reflectlon regulations other do of not this pollcy provlslons the

subchapter agreement of

partnershlp must the

partner

partnershlp reflect certaln the could,

accurately partner's

reflect subchapter appllcatlon produce of to the respect to the

clearly However, were with income. is

(collectively, K and conven!ence of tax income extent tax clearly

income). ob3ectlves,

provlslons that proper this and

thereunder to

adopted

to promote recognltlon in some the (2) facts for No of

admlnlstratlve

a transaction reflect (a) (3) such that © 2006 paragraphs

circumstances, reflection wlth and section

properly paragraph of by

Thus, as the and to

treated

satlsfled transaction example, to

a transactlon results, 8 of thls

that taklng

satisfles into

(a) (i) the

application contemplated

a provision all provislon.

ultlmate are

account

relevant See,

circumstances, paragraph Orig. U.S.

(d) Example Govt. Works.

Thomson/West.

Claim

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5/10/2006

APP-B-000131

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 12 of Page 11 of 9128

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

ii

(C_te

as:

60

FR

23)

section paragraph 754 of under to thls

(relating (d) adjust section section basls 732).

to

the ii in

value-equals-basis of to also, this the section basis in property), example,

rule (relating and property

in

§1.704-i(b) to the

(2) (iii) (c)), under sectlon 12 and 13

Example

election by and

partnershlp for

paragraph distributed (i)

(d) Examples 1.752-2(e)

(relatlng See de of

a partnershlp (4)

_§1.704-3(e)

(providing

certain

minimis

exceptions). K rules. be applied forth in The in provislons that (a) of formed is to tax the K, fall in of subchapter sectlon of K and with (intent in the the of the that the that is

(b) Application regulations intent with of subchapter present

subchapter must K as set

thereunder subchapter K).

a manner is which federal K,

is consistent this or availed in can tax the and literal can achieve

paragraph of

Accordingly, a prlnclpal the the federal with though the partners' intent tax of

if a partnership purpose aggregate of subchapter as and of subchapter the may purposes,

connectlon

a transaction value with for and *28

reduce llablllty

substantlally a manner recast results

inconslstent transaction are Thus, based are (i) be cons±stent even on statutory particular

Commlssioner to achieve light the to of facts

appropriate pertinent within the K-that

intent

appllcable circumstances. words tax of a that determine, results

regulatory the or the

provisions transaction and of regulatory facts intent

statutory the particular with

provision, circumstances, subchapter be should by

Commissioner

consistent The

purported assets and

partnershlp and

should

disregarded be one of or more the

in of

whole its

or

in part, or in

and part,

the to

partnershlp's owned

actlvities respectively, purported

considered,

in whole purported should

conducted, of the

partners; not be

(2) One treated (3) The ad3usted

or more as

partners

partnership

a partner; of accounting clearly items the of used by the partnershlp or the or a partner should be

methods to

reflect

partnersh!p's income, gain,

partner's deduction,

income; or credlt should be

(4) The partnership's reallocated; or (5) The (c) or of claimed and of tax

loss,

treatment

should analysis; purpose tax

otherwise factors. to based reduce on liability

be

adjusted

or modified. was present formed value with the

Facts

circumstances with a principal K Is aggregate

Whether in of

a partnership the and

availed the of

substantially a manner the facts

partners'

federal determined

inconsistent

intent

subchapter

all

clrcumstances,

including a comparison clalmed tax benefits may in the be such only indicative, a manner. factors Moreover, or

of the resulting do not

purported from the necessarily are given on

business purpose for a transactlon and the transactlon. The factors set forth below establish, the factor facts to and Orig. that only, a partnership and therefore under specified was may thls in The Works. this presence used be not

but These taken the

factors into weight depends

illustrative in maklng to any the

account

determinatlon (whether

section. paragraph

otherwise) © 2006

all No

clrcumstances. U.S. Govt.

Thomson/West.

Claim

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APP-B-000132

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 13 of Page 12 of 9128

T.D. 1995-7 (Cite

8588 I.R.B. as: 60 5, FR T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

12

or

absence

of

any

factor was value than

described (or of was the not)

in

this in

paragraph such

does

not

create

a presumption include: is and

that (i)

a partnershlp The present the

used

a manner. federal

Factors tax

partners' partners

aggregate owned dlrectly; aggregate case if end the

llablllty assets

substantially conducted (2) that steps was whole claimed results or The are in

less

had

the

partnership's

partnership's value than to that would to of

activltles the partners' be the For who the a partmcular was

present designed a slngle and in tax whose part)

federal are

tax

llabillty and intended disposed to provide

is treated that tax of the (in it as

substantlally

less

would

purportedly result this was to analysls

separate integrated may or the

transactions

achleve

transactlon. a partner in be the interest

example,

indicate

contemplated

necessary

achieve in order

partnershlp only partners;

llquldated

a partner remaining

temporarily

benefits

(3) One or either have from have other any

more partners who a nomlnal interest of loss from or the loss

are necessary to achleve in the partnership, are partnershlp's guaranty in that the is profits !n the activities or the of from nature

the clalmed substantially (through other

tax results protected

risk or

distrlbution or use of activities the

preferences, llttle than

indemnity a preferred

agreements,

arrangements), for

no participatlon return

partnershlp's a payment

capital; (4) Substantlally partnershlp) are all related items but those be and may are with of the partners or (measured indlrectly) in compllance that are In this or galn is by to number one or interests in the

(directly allocated results

another; the llteral with the language purpose scrutiny to one taxation taxpayer, losses, of of wlll or (for or a capital be §$

(5) Partnership 1.704-1 sectlon pald to partners example, taxpayer losses, (6) the The and 704(b) that wlth or

with

1.704-2

inconslstent regard, from an as net

regulatlons. income or an tax exempt

partlcular allocated federal operating

partnerships a forelgn unused foreign

in which legally federal tax and person,

speclally

more

effectively attrlbutes

exempt such

organizatlon,

insolvent

credits); burdens (or a of ownership part party); ownership or of or of partnershlp to the to property dlstrlbutee the dlstrlbutee are in partner property nominally or contributed indirectly) by to the

beneflts

partnership

are partner

in

substantlal related of

retained

(directly

contributing (7) The substantlal before (or or a related

beneflts part after

and the

burdens

shifted

(dlrectly

indirectly) distrlbuted

partner

property

is actually

party). The of followlng this elther examples section. permlssible illustrate The or No examples the set prlnciples forth types U.S. below of of do paragraphs not delineate

(d) Examples. (a), the (b), and boundaries

(c) of

impermlssible Claim to Orig.

transactlons. Works.

© 2006

Thomson/West.

Govt.

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.. 5/10/2006

APP-B-000133

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 14 of Page 13 of 91 28

T.D. 1995-7 (C_te

8588 I.R.B. as: 5, T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

13

60 FR

Further, forth outcome partles Example consistent PRS is to partnership in

the an of to

addition example

of (or

any the

facts deletion

or

circumstances of in any the facts to one or example.

that

are

not

speclflcally may alter

set the

circumstances) Unless

the the

transaction transactions of

described are not

otherwise

indicated,

related of K. A, the under

another. tax; B form general has and to a use of partnershlp partnership has a 1% PRS A and tax. interest. liability

i. Choice with the conduct

entity; of the fide B, as

avoldance subchapter indlvidual as

entity-level (i) A and corporate

intent

limited 99%

a bona

business. a partnershlp form from to the

partner, 301.7701-3. limited an

interest. classified the K is

limited

partner,

properly

§§301.7701-2 to provlde operations to

B chose without (ll) tax.

limited subjectlng Subchapter through See

partnership income

a means

B with

buslness

entity-level business an money

intended this PRS

permit

taxpayers Although of (c) (6)

conduct

joint

act±vlty

a flexlble (a) of of the to

economic and

arrangement burdens

without B has ownershlp of

incurring retained, of the

entity-level or the decision of the

paragraph all and with B contributed

sectlon. (see

indlrectly,

substantlally property to organlze conslstent paragraphs Commissloner transaction.

benefits

paragraph

this

section),

conduct buslness thls intent. In (2), and cannot (3)

through PRS under these clrcumstances is addition, on these facts, the requirements of this sectlon have (b) of been this satisfied. sectlon to The recast paragraph

(a) (i),

therefore

invoke

Example use of partnership elected alien. and means (li) tax. the

2.

Choice PRS be to

of

entity;

avoidance with the fide as

of

subchapter of A is

S shareholder K. S. a corporatlon B is §§301.7701-2

requirements; B form has that and in A, as a A

partnership to PRS

conslstent conduct as an

intent business. under

subchapter subchapter under from B as being for A

(i) A and

a bona

treated Because

S corporation 1361(b) rather of

a nonresident

is properly partnership the

classified form,

a partnership prohibits than admit B

301.7701-3. B chose to

sectlon benefits intended

a shareholder in A, its and

a shareholder

retain

subchapter to permit

S treatment taxpayers The this to

shareholders. business

Subchapter through paragraph through See

K is

conduct to

joint

actlvity buslness satisfied. should

a flexible (a) of PRS of

economic this

arrangement wlth

without decision

incurring organlze section

an and on

entlty-level conduct these been as facts,

sect±on. (a) (i),

is consistent paragraphs it may be because

intent. and (3) of form of

In addition, this the

requirements not be

(2), that not

have

Although respected

argued it does

the

partnership

transaction

reflect

its

substance

(inasmuch

appllcatlon treated as the pro on the facts rata B's form

of the substance a shareholder of indicate otherwise. A's this income of share and of

over form A, thereby The (see

doctrine arguably invalldating A's of et A are seq.), 1361 income cast The the Claim

could result in B being subchapter S election), sub3ect and B 871 its to is tax on their to tax Thus, as invoke a subject and 875). substance cannot

shareholders section is

shares in which

dlstrlbutive partnershlp (b) of

partnership

(see

sections reflects

arrangement

accurately Commissloner transaction. to Orig.

separate paragraph

S corporation. to recast No

therefore

this

section

© 2006

Thomson/West.

U.S.

Govt.

Works.

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5/10/2006

APP-B-000134

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 15 of Page 14 of 91 28

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

14

(Clte

as:

60 FR

23)

Example limltatlon; X,

3.

Choice *29 use

of of

entity; and

avoldance Y, a

of

more

restrictive the intent

foreign of form

tax

credit K. PRS (i)

partnershlp

consistent foreign

wlth

subchapter

a domestic

corporation, forelgn interest and

corporation,

partnership

under the laws of Y each owns a 50% under chose under if to PRS §_301.7701-2

Country A to conduct a bona fide ]oint buslness. X and in PRS. PRS is properly classified as a partnership PRS pays income taxes to Country A. X and Y

301.7701-3.

partnership form to enable X to qualify section 901, wlth look-through treatment were a foreign foreign from section be corporation tax PRS. 904(d) to credits The for under U.S. tax section

for a direct forelgn tax credit under §1.904-5(h) (i) . Conversely, purposes, 902 wlth the credit however, X would respect would llmltatlon dlvldends to be not and entitled apply, for only and dlvldend associated dividends

indlrect to

dlstrlbutlons pursuant taxes from (il) PRS, would

look-through

rules, tax

(i) (E) and a separate section 902

§ 1.904-4(g), foreign corporation. taxpayers

subject

a noncontrolled K Is

Subchapter

intended

to

permit

to

conduct

3olnt

business an entity-level and conduct rules share on for of these have this

actlvlty through a flexible tax. See paragraph (a) of business foreign forelgn facts, been section Example and ABC, and through tax the to 4. DEF credit paid taxes PRS by The the of in purposes, PRS, of

economic arrangement without incurrlng thls section. The decision to organize to take advantage maximizing with (a) (I), of X's this (2), cannot the use and look-through of its In thereby is paragraphs

order

proper thls

conslstent

intent. invoke

addltlon, section

requlrements recast Choice use of form

(3) of

satisfied.

Commissioner transaction. entity;

therefore

paragraph

(b) of

avoidance conslstent

of PRS

galn with to

recognition the as intent of a bona is

under flde

sections K. estate §§ real under

351(e) (i) X,

357(c);

partnership llmlted PRS treated stock public

subchapter

partnership is properly X, as to the the a real

conduct

management 301.7701-2 that 856. elects

business. and to be its the

classified estate and PRS.

a partnership a newly trust as

301.7701-3.

general

partner, investment contributes ABC and

formed defined

corporation in all section of the are that and partners of in of partners than of an have gain PRS, of

X offers from

public to

substantlally the llmlted

proceeds

offering

DEF,

partners,

existing partnerships with substantial contribute all of their real property exceed terminate ABC to and require their DEF respective section have redemptlon or as interests time. 351(e) X, ABC, each the for aggregate 708(b) the of in right, their PRS and in 357(c) the bases under (I) (A).

real estate holdings. assets to PRS, subject in In the two real years property some after of addition, partnership equal of matter, to ABC PRS section form and would to the to DEF 351(e) time

ABC and DEF to liabilities contributed, the the former formation in market These their rather recognition as were PRS

beginning limited option) the chose allow Because of at DEF .

interests the fair redemption. exercise to not avoid be if PRS

exchange their are ABC under rights and not

cash

X stock a legal

(at X's

value exchange

respective compelled, at any DEF invest company

or practical X to meaning

a partnership

dlrectly and within

sections

treated

investment (so long as contribution

incorporated to the

it did not elect under section of the real property to PRS. © 2006 Thomson/West. No

856), section 721(a) See section 721(b) . to Orig. U.S. Govt.

applies

Claim

Works.

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5/10/2006

APP-B-000135

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 16 of Page 15 of 912 8

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

15

(Cite

as:

60

FR

23)

(ii) tax.

Subchapter through paragraph through from the and rules See

K is

intended this the

to

permit

taxpayers The the tax

to

conduct to real

3oint

business an and entlty-level conduct have to X (by of these have the sections facts, been not than of of PRS present less (c) (2) of of as some PRS

activity buslness resulted applylng 351(e) the be

a flexible (a) of PRS, of is of thereby

economic avolding

arrangement

without declslon consequences in (3) form lieu of of

Incurrlng organize that estate the of

section. existing 721, 731, wlth (a) (i), argued

would assets rules on

contributing

partnerships' and (2), that its tax 752 and the this intent.

sections consistent be

357(c)), Although because partners' case the and if

In addition, thls the is and X, example, see sectlon

requlrements respected of be the the

paragraphs it may it does the not

satlsfled. value would of the for prior and for the thls

transaction as as right substantially

should

reflect federal were DEF and after require

substance llabillty to

(inasmuch treated the

aggregate by ABC

transaction indicate

integrated For years to that the the rlght make likely point, decision be some

a contribution

encumbered ABC or at its

assets facts DEF (at

directly

paragraph their value

section), former cash to other those

otherwlse. two equal

partners X's would not

to exchange falr market to be other to that the trust of (b) of

interests their exercised investments capital of the as

X stock that time actual

option)

interest

considered real ralse some of estate

exerclse. decisions, Thus, right to and receive prlnclples cannot do

Moreover, includlng although so either real (see invoke will, cash estate

X may

business purposes. wlth and the thereby

addltlonal or all thelr the

it may at or

partners rights, substance a separate

exercise form is this this

exchange transaction under The recast the to

X stock, (a) (2)

partnershlp over form therefore

investment paragraph

respected section). section

paragraph

Commissloner transactlon.

Example dlscount; and and W, interests partnershlp partnershlp discounts,

5.

Family of and

partnership partnershlp wife, form managed, a general At to with

to

conduct

jolnt with the

buslness intent PRS real by and of

activities; of subchapter that contributing

valuatlon K. their PRS of will her as a own limited (i) H

use husband in

consistent llmlted

partnership

actively H holds interest. interest

lncome-produclng partnership date, H and W's W makes two the

property

operate.

interest, a gift children, of of to PRS value

W holds a portlon

a limited

a later of the

each

S and the W's gifts

D. Appropriate to joint the children.

consistent were

taxpayers'

treatment

arrangement

partnership, (if) tax. related and and as intent. (3) the

applled K is

in determlnlng to permit

Subchapter through paragraph parties See

intended of thls

taxpayers Although this these

conduct as owned is absent the gifts to

business an entity-level by organize with this (2), to

activity

a flexible (a) (see paragraph through on the see

economic (c) (4) PRS been under facts,

arrangement of the

without section),

incurring the of decision

sectlon.

entirely consistent other by facts W), the

conduct of

business this

circumstances Therefore, before thls 2704 and to for gift Orig.

In add±tlon, section of But to creation

these have

requirements

paragraphs

(a) (i), the rules See also

satisfied. immediately (b) of through estate Claim for No

(such

partnership paragraph 2701 sections

Commissioner transaction. appllcable

cannot family

invoke

section tax

recast

speclal

valuation

arrangements Thomson/West.

purposes. Govt.

© 2006

U.S.

Works.

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5/10/2006

APP-B-000136

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 17 of Page 16 of 9128

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

16

(Cite

as:

60

FR

23)

sectlons (lli) family that thls for aggregate

2036 The

through

2039. rules provlded certain PRS be under special These treated PRS as as chapter rules an an D. actlvltles; of PRS H holds At interest the and a a to the 14 of the Code, glfts not its as in of an (e) of partners

special section fide its the of

valuation 2701, partnership partnership partners for the Commlssioner

particular a bona

prescribe like that

in valuing rules entlty under clearly and of

controlled of

interests.

speclal Accordingly,

contemplate

purpose. treat W to from

paragraph

sectlon, purposes

cannot gifts

aggregate

valuing

S and

Example valuatlon subchapter contr±bute general later each value (ll) H and they of of PRS W's owned

6. Famlly dlscount; K. to (i) it

partnership not engaged use of partnership not H and W, husband and and W holds of D. their respectlve of interests

in bona flde 3olnt business consistent with the intent form in her their limited were limited partnership home. vacation partnership partnership with in consistent applied

wlfe,

partnership date, of W's is W makes W's the gifts not H and

interest, a gift two to bona children,

a limited Discounts,

interest.

a portion S and as

taxpayers'

treatment

arrangement the fide of federal facts, H's the and intent

a partnership,

determlnlng

children. and tax PRS W's of under see as there is no substantial by would formed federal K. uslng be and tax (see buslness a partnership substantially paragraph avalled llabllity of with in (c) (i) purpose less of for than thls that possibly as the is the had

purported

activities aggregate the On to these with the over the

PRS.

In addition, llability has been assets directly

(if respected),

partnershlp's

section). purpose inconslstent challenging substance can recast

a principal to

reduce

aggregate subchapter

a manner such the thls

Therefore 3udlclal this

(in addition prlnclples, section), (b) of

transaction form doctrlne, transactlon

applicable paragraph

(h) of under

Commissioner sectlon.

approprlate

paragraph

Example 7. Special conslstent with the equal PRS amounts $i00 to for pays

allocations; dividends received deductlons; intent of subchapter K. (1) Corporations a bona of fide common partnership stock of formed Z, an to make unrelated

use X and joint

of partnership Y contribute investments. which

PRS,

a share

corporation,

has hlstorlcally dividend income Rate the income (LIBOR) remalnder and on of loss

pald an annual dlvldend of $6. PRS on the Z stock to X to the extent of the the are record allocated date, *30 applied income to to X's Y.

specially allocates the the London Inter-Bank Offered of $50, of and allocates the

contributlon All other Y. items The

dividend

partnership under

equally substantlal to avoiding from on the the

between

X and

allocations

partnership 1.704-i(b) for the allocate return deduction

agreement have (2) . In addition of LIBOR, section the the dlvldend on income while 243

economic effect an entlty-level to invest to Y to in stock provide claim

wlthin tax, the X with the to

the meaning a principal stock

of § purpose and to

formatlon based

partnership permitting

was

Z common

a floatlng-rate dlvldends of them. received

X and

under

dividends

allocated

each

(ll)

Subchapter ©

K is 2006

intended

to

permit No

taxpayers Claim to

to Orig.

conduct U.S.

3olnt

buslness

Thomson/West.

Govt.

Works.

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5/10/2006

APP-B-000137

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 18 of Page 17 of 9128

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

17

(C_te

as:

60

FR

23)

actlvlty tax. the See business satisfied. partnership respective the regulations section).

through paragraph through

a flexlble (a) of PRS is

economlc this

arrangement The thls (2), the whlch wlth

without deczslon to

incurrlng organlze section realized from

an and on

entlty-level conduct these been the that by facts,

section. (a) (i),

consistent and

Intent. and (3) of

In addition, thls income separate of facts the of

requirements to be

of paragraphs 704(b) allocated of the both (2)

have the

Section ownershlp and Section the of (b) 8. of the

_1.704-i(b) to to

(2) permit partners the

validly capltal the of is those not be

partners' provlded and this partners'

allocations (see paragraph

relate, statute this

allocations

satisfy 704(e)

literal

requlrements to the

purpose

provlslons appllcable requlred The the

(c) (5) of example to cannot the

(otherwlse, ownership paragraph Example use of

allocatlons this sectlon

would capital). to

to be

proportlonate therefore

contrlbuted

Commlssioner

invoke

recast

transactlon. financlng; of with to own net and low-lncome K. operating operate housing (1) A loss a building 42. The nonrecourse allocations that effect is of that pro3ect of and credit; B,

Special

allocations; consistent and X, general

nonrecourse wlth the intent PRS a corporation

partnershlp form

subchapter

hlgh-bracket carryforwards,

taxpayers,

partnership

qualifies for the low-income housing credit provided by section is flnanced wlth both cash contrlbutlons from the partners and indebtedness. income and attrlbutable consistent to with The the partnershlp including bulldlng to that agreement the A and have provides of in for all special deductions, allocation B equally substantial

depreclation

deductions reasonably some other credits

a manner economic

allocations

significant partnershlp are allocated to A and deductions. the 1.704-2(e) nonrecourse 1.752-3, interests. and B to to all other PRS's of

item attrlbutable to the building. B in accordance wlth the allocatlon comply allocatlons validly the basis created share under the of by wlth of the the of the all applicable to

The section 42 of depreclatlon regulations, economic effect) The the deductions).

allocations _1.704for is

including and rules enables (sub3ect agalnst their of A §

requirements

l(b) (2) (ii)

(pertalnlng nonrecourse to the partners'

(requirements indebtedness thereby The deduct increasing basis thelr income

allocated

partners

under

respective the their

partnership

increase

nonrecourse from Internal against

indebtedness partnership Code) tax Revenue

dlstributlve llmltatlons and to apply

losses

applicable

nonpartnership

credlts

llability. the building there is no allocation because of are net of the

(ll) At a tlme when the not treated as nonrecourse increase in partnership deductions safe bear extent that A

depreciation deductions mlnlmum to A and gain

deductions attributable to under §1.704-2(c) (because durlng the year), the special effect

depreclatlon

B has

substantial

economlc

value-equals-basls that A and B would building in value (to the notwithstandlng (and, the special deductions under

harbor contained in the economic burden of and the partnership's it is anticlpate B believe they

§ 1.704-i(b) (2) (iii) (c) and of any decline in the value investment unlikely years, treated that slgniflcant in the building), the tlmlng building benefits

the fact of the decllne

wlll

accordingly,

through

allocation). attributable the 2006

Moreover, in later to the building are special allocatlon No of Claim

when the depreclatlon as nonrecourse deductions deductions Govt. to A and B is

§1.704-2(c), ©

depreciation to Orig. U.S.

Thomson/West.

Works.

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APP-B-000138

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 19 of Page 18 of 91 28

T.D. 1995-7

8588 I.R.B. 5, T.D. 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

18

(Cite

as:

60

FR

23)

considered 1.704-2(e). (it1) activlty tax. See business

to

be

conslstent

with

the

partners'

interests

in

the

partnership

under

§

Subchapter through paragraph through

K is

intended this

to

permit

taxpayers The this

to

conduct to

]oint an

business entlty-level conduct these facts, and on

a flexlble (a) of PRS is

economic

arrangement with

without decision

incurrlng organlze

section.

consistent

intent.

In addition,

the requirements of paragraphs (a) (i), (2), and (3) of this sectlon have been satlsfied. Sectlon 704(b), §1.704-i(b) (2), and §1.704-2(e) allow partnershlp items the (see the of income, separate of galn, from relate, the (c) (5) to A of and loss, the deductlon, partners' that and and the cred±t to be allocated of the both of those of wlth of are in validly capital the to the partners respective and ownershlp the of of and of purpose to whlch literal

allocations paragraph allocatlons

provided this harbor B, and even proper account

allocatlons the the

satlsfy

requlrements

statute safe into

regulations and the all if the tax the the

provisions the respect those clearly be (a) (3) facts. these be directly losses and to

sectlon).

Moreover, provislons results facts

application §1.704-2(e) appllcatlon not

value-equals-basls provisions, contemplated. consldered of this Thus, (due even to X's to section, though less taklng

circumstances, would as tax of standard satlsfled liabillty

Accordlngly, satlsfy that the the

allocations income be treated federal owned share the

otherw!se under may

reflection w111 partners allocable aggregate

paragraph

requirement partners' had use the its to

substantially

than

partnership's the

assets is not therefore

inablllty

partnershlp's

credlts) (see paragraph (c) (i) of this seetlon), the transactlon inconslstent wlth the intent of subchapter K. The Commissioner invoke paragraph (b) of this section to recast the transactlon. partner; Pursuant thereby by

cannot

Example 9. Partner not consistent wlth purpose taxation $990, for of and of which and $i0, and the of in is Z the a substantial

with nomlnal interest; temporary the intent of subchapter K. (i) to generate amount (a promoter) for and capltal leases life. to to X PRS X, in of artificial income, form X losses (a foreign

use of partnershlp to a plan a principal shelter Y 9.9%, offshore rights the to makes Under immediately from federal (a domestlc $9,000, and 0.1%, most equlpment receive a §

and PRS PRS PRS to Z. of

corporation), contrlbutlng (90.0%, for sells PRS its and a term its

corporation), respectively) $i0,000 its under of projected

partnershlp of PRS.

respectively, valldly useful lease $8,100 $9,000

proportionate proflts equipment party to the Y, for and

interests offshore $9,000, $9

purchases

the

representlng resultlng

Shortly $891

thereafter,

income $9,000

to a third

allocates thereafter

income

dlstrlbution 1.704-i(b) before of the capital

complete

liquidatlon partners'

interest.

(2) (iv) (f),

restates

capital

accounts

maklng the llquldating distribution offshore equipment worth $i,000 and accounts immediately before the initial capltal the sale of the capltal X, Y, and property © 2006 account Z of by contrlbutions lease), PRS purposes $9,000, borrowing

to X to reflect $9,000 In cash. reflect of $i0,000 plus allocates a $9,000 resulting $i0, purchase Orig. in

its assets conslstlng Thus, because the assets of $19,000 of income among the the $9,000 book loss restated on

dlstribution

(that is, the reallzed from partners accounts purchases (for for real

only), and $8,000 Claim the No

capltal Thereafter, a recourse PRS

$990,

respectlvely. prlce U.S.

Thomson/West.

to

Govt.

Works.

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5/10/2006

APP-B-000139

Case 1:06-cv-00407-ECH

Document 122-7

Filed 08/21/2008

Page 20 of Page 19 of 91 28

T.D. 1995-7 (Clte

8588 I.R.B. as" 5, T.D. 23) 8588, 1995 WL 966 (IRS TD), 60 FR 23, 60 FR 23-01

Page

19

60 FR

basis, from ad]usted

which $1,881

increases and $19, in the to

Y's the tax are any

and

Z's and

bases $99, of to

in 99%

their and $90

respective 1%, to to

partnership Y's for Z's and PRS

interests Z's and in thexr

$9,801 offshore loss

respectxvely sub3ect Y and to $891

(reflecting respectively). the Z. and for would (see lease, and Y's $9, the

interests sells the $9,000

partnershlp $8,910

subsequently allocates partnershzp (ii) On

equipment, reduced business tax tax

$i,000 bases

interests these were (a) (i) (c) of of thxs over reflect facts, in

therefore purported to for the

respectively. transactlon if the this (see (5) of wlth purpose (3), and (c) of is

purpose that purposes

insignificant transaction sectlon) paragraph paragraph to the reduce Intent of .

comparlson respected the sectlon the K. and of thls

benefits lacks that tax

result paragraph

federal In

Accordlngly, this

transaction indicate partners' On these (see of Y of the

a substantlal factors was xs not used in not PRS PRS is

business (i), wlth (2),

section).

addltlon, llabillty

a prlncipal inconsistent (see fide

purpose

substantlally subchapter section), form the formed

a manner bona thls of

facts,