Opinion
11676-20
03-16-2022
Mill Road 36 Henry, LLC, MR36 Manager, LLC, Tax Matters Partner Petitioner v. Commissioner of Internal Revenue Respondent
ORDER
David Gustafson Judge
Trial in this case will begin March 21, 2022. On March 14, 2022, petitioner filed a "Motion in Limine To Exclude Any Evidence Offered by Respondent Re: the Donation's Economic Substance" (Doc. 67). We will deny the motion.
The motion complains that respondent "references 'economic reality' in his Pretrial Memorandum ["PTM"] at page 14 without providing any legal basis for his bare allegation." It is apparently true that neither the Final Partnership Administrative Adjustments" ("FPAA" attached to petition, Doc. 1) nor the answer (Doc. 4) explicitly mentions "economic reality" or "economic substance".
But we do not read the FPAA so narrowly. In its discussion of penalty issues, the FPAA asserts that the easement donation was "a tax avoidance transaction" and that "[t]here has not been a showing ... that the partnership or any of its partners acted in good faith". These assertions in the FPAA seem to relate to "economic reality" and, in particular, seem relevant to the term in the partnership agreement (as described in respondent's PTM, which we assume correct, for purposes of petitioner's motion) that "at 4 years, the Buyers' ownership interest automatically reduced from 99.99% to 30% (with petitioner's going from 0.01% to 70%); and effective January 1, 2021, petitioner had a call option to buy the buyers' membership interest for an amount that Carbonara, alone, determined." (Doc. 46 at 13.) These terms prompt "economic reality" questions about how (for Federal tax purposes) there can have been a bona fide partnership and bona fide partners.
A partnership exists when two or more "parties in good faith and acting with a business purpose intend to join together in the present conduct of the enterprise." Commissioner v. Culbertson, 337 U.S. 733, 742 (1949); Commissioner v. Tower, 327 U.S. 280, 287 (1946) (holding that the proper test is whether the partners "intended to join together for the purpose of carrying on business and sharing in the profits or losses or both"). As the Court explained in Culbertson, "The question is ... whether, considering all the facts--the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent--the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." 337 U.S. at 742. See also Luna v. Commissioner, 42 T.C. 1067, 1077-78 (1964) (identifying eight factors to be considered in assessing the business purpose intent of the parties to a purported partnership).
These issues are intricately connected to the transactions that are the essence of this case. It appears that the parties have listed, in their PTMs, witnesses who would be well suited to address the facts pertinent to these issues. We do not see likely prejudice arising from the consideration of "economic reality". It is therefore
ORDERED that the motion (Doc. 67) is denied.