I’ve seen this many times over the last fifty-four (count ’em, fifty-four) years: a developer (usually taxed as a partnership, even if LLC) finds the property, and seeks financing. The lender wants return of capital, return on capital, and something extra, namely, viz., and to wit, a piece of the action, whether during operation or sale or both.

We call this piece of the action an equity kicker, and it’s either embedded in the mortgage, or, more likely, in a side agreement. Of course, we put in a load of jive about not creating a partnership, co-venture, or anything but a debtor-creditor relationship. Yeah, most affirmato, roger that.

Anyhow, that’s the deal with Progressive Life Insurance Company (PLI) that Alexander C. Deitch, et al., Docket  No. 21282-17, filed 8/25/21*, made. But the als were individual members with Alex of an LLC known as WTS. Wherefore, when WTS paid PLI $1 million and called it interest, IRS handed out SNODs to Alex and the als.

Judge David Gustafson man-‘splains: “This payment constituted 50% of the net proceeds of the sale of a commercial property as calculated pursuant to an ‘Additional Interest Agreement’ into which WTS and PLI had entered when PLI agreed to lend to WTS approximately $4.4 million for the purchase of the commercial property.” Order, at p. 1.

Now Alex and one of the als were the sole members of WTS, and, as they were both individuals, WTS was a small partnership for TEFRA purposes, therefore no need for FPAA, therefore straight to the individuals (the other al is the wife of the other member).

And there were facially-valid SNODs to Alex and the als, and timely petitions from both.

Except.

IRS argues in its pretrial brief that PLI and WTS were co-venturers, not borrower-lender, so whatever WTS paid PLI out of operations once the property was up and running were Section 707(c) guaranteed payments, and what PLI got on the sale was a distributive share of the sales proceeds.

So what?

So TEFRA. I’m sure my ultra-hip readers reacted as did Judge Gustafson (although Judge Gustafson gives us elegant language, somber reasoning, and copious citations). “Hey, if WTS and PLI are co-venturers, then they’re partners for tax purposes. While PLI is a C Corp and could qualify for the TEFRA small-partnership duck, WTS is a pass-through and not a disregarded (having two members), so WTS and PLI cannot duck TEFRA. And splitting operating profits and sales proceeds are clearly partnership items. So IRS must use TEFRA, but here no FPAA., so no Tax Court jurisdiction.”

Take a look at Jimastowlo Oil, LLC, more particularly bounded and described in my blogpost “Honor Your Partner,” 8/26/13.

So let IRS’ counsel report (a) whether TEFRA ousts Judge Gustafson of jurisdiction to decide IRS’ claim that the equity kicker payments are the result of a co-venture between WTS and PLI, and (b) if so, what else is there to decide?

And let Alex and the als reply.

Now I’ve said often enough that Judge David Gustafson is an obliging jurist. He’ll bring over his laptop and do your papers for you, bring Krispy Kremes and Mayorga with half-and-half to calendar call, and feed the parking meter while you wait. See my blogpost “Obliging? This Beats All,” 3/6/19. Then I said he won’t do your research for you. But here he’s written the memo for Alex’s trusty attorneys, the Lords Chamberlain.

*Alex Deitch 21282-17 8 25 21