In Uncategorized on 02/13/2018 at 14:58

Or, Win Your Case But Instruct Your Adversary

It used to be a truism so often repeated: “No one ever wins a DADs.” That’s the distressed asset – distressed debt dodge, where a portfolio of waste paper is married to a boatload of cash (the tax on which is sought to be dodged) by means of a tiered-LLC spiderweb. When the web is split, the loss is recognized but the gain isn’t, until the FPAA descends, and the sham meets its righteous doom.

The downside is that, by winning, you give your adversary a blueprint for a different result on a new day. Especially when your adversary is a top-class dodgeflogger like Chenery Associates.

So today it’s a different story.

Judge James S. (“Big Jim”) Halpern isn’t convinced IRS has established that Peking Investment Fund LLC, Peking Investment Holdings LLC, Tax Matters Partner, Docket No. 12772-09, filed 2/13/18 is a sham like Mr. Rogers’ celebrated Superior-Jetstream deals I’ve blogged so often. At least, IRS hasn’t convinced Judge Big Jim enough to grant summary J.

“Because the validity of each of respondent’s two arguments in support of justifying the FPAA’s disallowance of the loss in issue turns on disputed questions of material fact, we will deny respondent’s motion.” Order, at p. 2.

First, IRS hasn’t established that the Chenery-promoted partnership wasn’t truly a partnership. There was some collection activity, enough to get above the “feeble” range. The operating partner did bring in some yuan.

“Even if the generation of tax losses is the primary purpose for a partnership’s formation, the partnership may also have as a secondary purpose the conduct of a business enterprise. To prevail in disregarding a DAD partnership as a sham…, the Commissioner must establish that carrying out a business of collecting [non-performing loans] was so minimal a factor in the decision to form the partnership that it can be dismissed. In prior cases in which this Court and others have disregarded DAD partnerships as shams, the evidence showed that the partners ultimately had no real interest in collecting the NPLs.” Order, at p. 6.

Besides, in this deal the “investor” could swap out of one portfolio of bum paper for another if unhappy with the result. IRS hasn’t proved that if they did swap, they’d be protected against loss. All IRS has is Chenery correspondence from other deals promising no economic loss. Noscitur a sociis doesn’t get it.

That a pivot-man partner only had a 1% in the LLC doesn’t mean it was insubstantial. There is no such rule. And there was an independent valuation of the worth of the loan portfolio (hurried because it was year-end), so there was concern about making money.

Of course, on the trial the Peking ducks will have the burden of proof. But on summary J, they get the benefit of every inference (and Judge Big Jim can infer with the best of them).

There’s the interesting question of a Section 482 mix-and-match between two offshore tax-indifferents. Two District Courts have split on this; one of them was affirmed on other grounds by 5 Cir, but Judge Big Jim doesn’t have to go there, because IRS hasn’t shown the two were under common control.

You really have to read the whole order. It’s a blueprint for sliding your DAD dodge in under the tag.

It does prove that you can get tired of winning (in a non-political sense, of course); so tired, in fact, that you think you can cut corners in your summary J motion and get a win anyway.

A Taishoff “good job” to J. E. Williams, Esq., for petitioner.


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