FLORIDA BAR TAX SECTION MEETING

Transcription

1 FLORIDA BAR TAX SECTION MEETING Recent Developments Concerning Partnership Tax Including Leveraged Partnerships, COD Income and Tax Credits - October 13, 2012 James Barrett, Esq., Baker & McKenzie LLP Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

2 Distribution of In Kind Assets Leveraging Non Sale Distributions Code Sections 707, 731 and 752 T B Bank Distributions not taxable as disguised sales. P Property 2

3 Countryside Limited Partnership v. Commissioner, (U.S. Tax Court, January 2, 2008). Other W C Partners Before October, 2000 Bank $8.5m Contribution 99% CS LLC CLPP Real Estate $8.5m Contribution 99% LLC MP $3.5m loan $12 million cash 3

4 Countryside Limited Partnership W C Other Partners October, 2000 CS 99% LLC CLPP Real Estate 99% MP LLC $12 million 4 privately issued notes from AIG 4

5 Countryside Limited Partnership W C Other Partners 99% December, 2000 CS CLPP Real Estate 99% MP 4 privately issued notes worth $12 million 5

6 Countryside Limited Partnership W C Other Partners 99% January/April 2001 CS CLPP Real Estate Sold 3-P MP 4 privately issued notes worth $12 million Agreement executed in January, Sale closed in April, $8.5m loan repaid. 6

7 Countryside Limited Partnership W C Other Partners 99% April, 2003 CS CLPP 99% $ $3.5 million loan to Bank repaid MP $12M Cash (4 Notes redeemed) 7

8 Countryside Limited Partnership W C Other Partners 99% January, 2004 CS CLPP MP 99% $ Cash $8.5M 8

9 Countryside Limited Partnership Transactions possessed sufficient economic substance - Accomplished a legitimate business purpose - Resulted in a change in the partners relative economic position Privately issued notes were not marketable securities under Code 731(c) 9

10 Cf. CCA (September 7, 2006) House purchased by partnership in a single member LLC LLC with house to be refinanced and distributed to retiring partner If unable to refinance, partnership to sell house and distribute net proceeds (after repayment of loan) to retiring partner Partnership deemed not to be owner of house but to have distributed cash (i.e. funds used to purchase house) to retiring partner 10

11 CCA Reasons - House not beneficially owned by LLC - Partnership anti-abuse rules: Treas. Reg Step Transaction Doctrine 11

12 CCA Planning Thoughts Timing of Property Purchase and Redemption Discussions Indicia of Ownership for Partnership in distributed assets before distribution Investment assets less conservative Meaningful change in economic conditions of the partners 12

13 Note Canal Corporation v. Commissioner, 135 T.C. No. 9 (2010). Recent case applying Code 752 anti-abuse rule to thinly capitalized subsidiary [Treas. Reg (j).] 13

14 CANAL CORP. Chesapeake GP WISCO GP Tissue Business Target Business 14

15 CANAL CORP. Chesapeake GP WISCO 95% 5% GPT LLC Target Business and GP Tissue Business 15

16 1999 CANAL CORP. Chesapeake GP Guaranty WISCO 95% 5% (includes special distribution right) GPT LLC $755M Loan BofA $755M Cash Target Business and GP Tissue Business 16

17 CANAL CORP. Chesapeake GP Guaranty WISCO 95% $755M Cash 5% GPT LLC $755M Loan BofA Target Business and GP Tissue Business 17

18 CANAL CORP. Chesapeake $151M Loan $600M WISCO GP 95% Guaranty 5% GPT LLC $755M Loan BofA Target Business and GP Tissue Business ($1.15 Billiion Value) 18

19 CANAL CORP. One Month Later Chesapeake GP $151M Loan $600M cash WISCO Guaranties 5% GPT LLC $491M GP Sub Target Business and GP Tissue Business BofA 19

20 CANAL CORP. Chesapeake One Year Later (2000) GP Guaranty $151M Loan $600M cash WISCO 5% GPT LLC $755M Loan GP Sub Target Business and GP Tissue Business 20

21 CANAL CORP. Two Years Later (2001) For antitrust reasons, GP purchases WISCO s interest in GPT LLC for $41M. GP then sells entire interest to unrelated third party. Triggered deferred gain of $524M for WISCO. GP paid WISCO $196M for lost tax deferral from termination of partnership. Chesapeake cancelled the $151M loan to WICSO. 21

22 CANAL CORP. Gain Accelerated to 1999 Disguised sale of partnership interest Code 707(a)2)(B). WISCO not allocated $755M liability under Code 752. WISCO s value only 21% of liability. WISCO s indemnity only claimable after proceeding against GPT LLC s assets. Potential fraudulent conveyance claim against Chesapeake not relevant. 22

23 CANAL CORP. COMMENTS Basic plan to borrow and distribute to WISCO viable. 100% net worth in indemnitor (i.e. WISCO and Chesapeake). Form of obligations necessary (i.e. fraudulent conveyance claim). Funding by qualified debt under Treas. Reg should be considered: incurred by partnership more than 2 years before redemption of partner. property encumbering contributed property. liability of partnership incurred to purchase capital assets. ordinary course trade or business liability. 23

24 Income From Discharge of Indebtedness Insolvency Exclusion (a)(12) - Gross Income includes income from discharge of indebtedness (a)(1)(B) - Exclusion of discharged indebtedness from gross income if taxpayer insolvent (d)(3) - Insolvent means excess of liabilities over FMV of assets; "determined on the basis of the taxpayer's assets and liabilities." (d)(1) - "indebtedness of the taxpayer" means indebtedness (i) for which taxpayeris liable, or (ii) subject to which the taxpayer holds property (d)(6) - in partnership context, look at partner level. 6. Rev. Rul discharged excess nonrecourse debt treated as a liability. From presentation by Abrahm Smith 24

25 Rev. Rul Income from Discharge of Debt Insolvency Exclusion X Holdco PRS Real Estate Year 1 FMV: > $1,000,000 Note: $1,000,000 (nonrecourse) Insolvent: $87,500 Exclude: $87,500 of COD income Assumption: no other assets or liabilities Year 2 FMV: $800,000 Note: $825,000 ($175,000 COD income) *For purposes of measuring the insolvency of the partners, PRS s discharged excess nonrecourse debt is treated as a liability of its partners based upon the COD income allocation. Thus X and Holdco treat their share of cancelled PRS excess nonrecourse debt as their own liabilities in determining whether, and to what extent, each is insolvent within the meaning of 108(d)(3). From presentation by Abrahm Smith 25

26 Non-recourse liability: CONTRIBUTION ISSUES Excess Liability Allocations 3 part test (Treas. Reg (a)) Minimum gain chargeback. Code 704(c) gain. Excess nonrecourse liabilities - Profits flexibility. 26

27 Historic Boardwall Hall, LLC 110 AFTR 2d (August 27, 2012) (Third Cir.) Ability to claim historic rehabilitation tax credits ( HRTC s ) Code 47. Renovation of East Hall in: Atlantic City investment by Pitney Bowes ( PB ). Application of economic substance for policy driven tax credits: Legislative history to 2010 Codification of Economic substance includes the following: If the realization of the tax benefits of a transaction is consistent with the Congressional purpose or plan that the tax benefits were designed by Congress to effectuate, it is not intended that such tax benefits be disallowed Thus, for example, it is not intended that a tax credit (e.g. Section 47[, which provides for HRTCs,] ) be disallowed in a transaction pursuant to which, in form and substance, a taxpayer makes the type of investment or undertakes the type of activity that the credit was intended to encourage. 27

28 Historic Boardwalk Puts and Options to purchase PB interest after 12 months. Guaranteed by New Jersey Sports and Exposition Authority (a NJ state agency) ( NJSEA ). HRTC Tax Benefits from HRTC guaranteed by NJSEA. 28

29 Historic Boardwalk Substance PB purchasing HRTC s from Historic Boardwalk LLC. See Va. Historic Tax Credit Fund 2001 LP, 639 F. 3d 129 (4 th 2011). No true entrepreneurial risk facing investor. Tax benefit of tax credits guaranteed. Finally funded construction before PB investment. Lack of meaningful upside potential. Application of substance over form. 29

30 Historic Boardwalk Tax Court Decision Reversed. Pitney Bowes not deemed a bona fide equity partner. Partnership: 2 partners, in good faith, and acting for a business purpose, intending to join together in the present conduct of the enterprise. Reasonable expectation of repayment without regard to success of entity. ability by partnership to restrict upside. See Castle Harbor, 459 F. 2d 220 (2 nd Cir. 2006). 30