Daily Tax Update - August 28, 2012: Third Circuit Reverses Tax Court in Historic Boardwalk, Holding that Taxpayer was Not a Bona Fide Partner

THIRD CIRCUIT REVERSES TAX COURT IN HISTORIC BOARDWALK, HOLDING THAT TAXPAYER WAS NOT A BONA FIDE PARTNER:  The Third Circuit Court of Appeals has reversed the Tax Court and has held that the taxpayer ("PB") was not a bona fide partner in a partnership formed to rehabilitate a historic building.

  • The New Jersey Sports and Exposition Authority and PB formed Historic Boardwalk Hall, LLC ("Boardwalk"), which was treated as a partnership for federal tax purposes, to invest in a historic rehabilitation project.  Boardwalk generated federal historic rehabilitation tax credits under section 47 of the Code, which were allocated to PB.  The Tax Court held that Boardwalk was not a sham and did not lack economic substance.
  • The Third Circuit reversed the Tax Court, holding that PB should not be treated as a bona fide partner in Boardwalk, because PB did not have a meaningful stake in the success or failure of the partnership.  The court found that PB had no meaningful downside risk because it was certain to recoup its contributions to Boardwalk and to receive either the tax credits or their cash equivalent.  The court also found that PB had no meaningful upside potential.
  • The court assumed, without deciding, that the transaction had economic substance.  It expressly did not address the dispute as to whether it could consider the tax credits in evaluating whether the transaction had economic substance.  
  • The court refused to give credence to the Commissioner's "sham partnership theory."  The Commissioner described this theory as a "variant of the economic substance (sham-transaction) doctrine."  This "sham partnership theory" looks at whether the formation of the partnership made sense from an economic standpoint, and if there was otherwise a legitimate business purpose for using the partnership form.  The court seemed to agree with PB, which argued that the "sham partnership theory" "inappropriately blurs the lines between the economic substance doctrine and the substance over form doctrine," which the court pointed out are distinct doctrines.

LEGISLATIVE TEXT AND REPORT AVAILABLE ON EXTENDERS BILL:  The legislative text and the report on the Family and Business Tax Cut Certainty Act of 2012, the tax cut extenders bill, have been released by the Senate Finance Committee. 

The documents can be accessed here:

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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