That’s Judge Emin (“Eminent”) Toro’s scorecard at close of play in Continental Grand Limited Partnership, Century Subsidiary Corporation, Tax Matters Partner, 166 T. C. 3, filed 3/2/26.

It’s the usual daisy chain among offshore indifferents and an onshore heavy. US parent of an offshore holding company and the latter’s offshore sub set up a boxchecked onshore LLC, wherein both onshore overparent and offshore sub are partners. Offshore sub elects per Reg Section 301.7701-3(c) to be disregarded from offshore holding company. Then offshore holding company issues promissory note, guaranteed by onshore overparent, for $610 million to offshore sub, which in turn assigns note to onshore LLC. Election was retroactively made effective to a time before offshore sub contributed the note to the onshore LLC, which is OK here. Then offshore holding company pays it off seven (count ’em, seven) years later for $1 billion-with-a-b, including principal and accrued interest. Then offshore sub bails from partnership, taking $1 billion-with-a-b along.

Offshore sub claims substantial basis in note. IRS says zero basis in offshore holding company in its own note, zero basis in note in onshore overparent guarantor, and zero basis in note for partnership. Hence onshore overparent had no tax benefit on dissolution of partnership.

See my blogpost “A Sour Note,” 9/3/14 for how this attempted guarantee basis-builder fails.

Yes, in this case the note was valid, legal and binding when and where issued. And yes, it was worth the face value then and there. 

Per Treas. Reg. 301.7701-3(g)(1)(iii), as no exceptions apply here, when offshore sub elected disregarded, it’s deemed to have transferred all of its assets and liabilities to offshore holding company. Hence when offshore holding company issued the note ostensibly to offshore sub, it issued the note to itself, and then itself contributed to note to the partnership. Arguments that this cuts off offshore law as to separation of parent and sub has nothing to do with how the USA taxes the deal. Sub and offshore holding company may be separate under local law, and taxed offshore however local law provides.

A note is a chose in action, the right to press a legal claim to receive money. It may be property (Judge Toro says he isn’t going metaphysical on whether a note is “property”, Opinion, at p. 10), but in the hands of its maker a note has no basis; it cost nothing. And by electing disregarded status, offshore sub became offshore holding company, hence offshore holding company was holding its own note payable to itself. The issue is not that the note was contributed to the partnership; Section 722 requires examination of the value of the note in offshore holding company’s hands. All the note does is evidence offshore holding company’s obligation to pay itself. 

The negative currency fluctuations that hurt the offshore sub when it took the payout is nothing to the point. Offshore sub elected a year after it got and contributed the note to go disregarded back to pre-note days.  National Alfalfa says you can choose your system, but once chosen, you’re stuck.

Petition assets two cases, but they’re C Corp cases, and here we have Sub K issues. Offshore holding company had zero basis in its own note, and its electing offshore sub is disregarded. Section 723 says contribution by partner to partnership gives partnership partner’s basis in the contribution, and here it’s zero.