In The Crying of Lot 49, Thomas Pynchon pivoted his tale of centuries-spanning financial intrigue implicating one of the earliest European mail carriers, Thurn und Taxis, around a postage stamp bearing a muted horn. Although the internet age has rendered much regular mail obsolete, the core business of Pitney Bowes (“PB”), selling machines that print postage stamps, has remained enviably profitable. In mid-2000, after extensive negotiation and due diligence, PB acquired a 99.9% interest in a limited liability company taxable as a partnership that was expected to generate historic rehabilitation tax credits. From all outward appearances, the partnership appeared to be a fairly conservative investment that also would reduce the federal income tax liability of PB. The investment ultimately enmeshed the State of New Jersey in a controversy with the Internal Revenue Service (the “IRS”), however, that has far greater consequences than Pynchon’s illicit postage stamp conspiracy. On August 27, 2012, the United States Court of Appeals for the Third Circuit reversed the Tax Court and held that PB was not a bona fide partner in Historic Boardwalk Hall, LLC (“HBH”) who could claim historic rehabilitation tax credits.1

Although PB was indemnified by the State of New Jersey against the loss of the tax credits, the decision is important for the rest of us because, even some 66 years after the Supreme Court first provided the standard for when a person should be respected as a partner for federal income tax purposes, the issue of when an ostensible partner will be treated as such continues to be uncertain. The IRS argued that HBH was a sham, and lacked economic substance and that PB did not have a bona fide participation because it had no meaningful stake in the success or failure of HBH. The third argument resonated with the Third Circuit Court of Appeals. Accordingly, that court reversed the Tax Court’s decision and concluded that, even conceding that economic substance was present in the transaction, PB’s lack of any meaningful downside risk in HBH or upside opportunity was meant that PB was not a bona fide partner. This case leaves open the quantitative issue of how significant the economics of a stake in a joint venture must be before an ostensible partner will be treated as a partner for federal income tax purposes.

The decision not only has an impact in the tax credit area, but also in the partnership world more generally. Taxpayers and their tax advisors will want to review existing and new structures to ensure that the investors therein have sufficient upside and risk in the venture to be respected as bona fide partners.

Background

The case itself addressed the availability of federal historic rehabilitation tax credits to PB generated by the restoration of the Historic Boardwalk Hall (“East Hall”) located in Atlantic City, New Jersey.2 The New Jersey Sports and Exposition Authority (“NJSEA”) is a state agency that owned a leasehold interest in East Hall.3 NJSEA was in charge of a renovation of East Hall. The expected renovation cost initially was approximately $78.5 million. The actual amount needed to complete the project was approximately $90 million.

A promoter, Sovereign Capital Resources (“Sovereign”), alerted the NJSEA to the market for historic tax credits among corporate investors. The promoter couched the proposal to the NJSEA as an opportunity to sell the tax credits that the state agency itself could not use because of its taxexempt status. The proposed transaction was structured as a sale of the NJSEA lease (through a sublease) to HBH, then a newly-formed LLC taxable as a partnership. Under the HBH operative agreements, the investor, ultimately PB, would be allocated 99.9% of the HBH profit and loss, but only a small fraction of the cash flow in the form of a 3% preferred return. NJSEA would hold the remaining interests in HBH. The investor was to be insulated from the risks of the East Hall project itself through a series of governmental guarantees.4 In addition, the governmental guarantees extended to a cash guarantee of the availability of the tax credits.

Sovereign prepared a “Confidential Offering Memorandum” outlining the strategy for the transfer of the tax credits to a corporate investor. Unfortunately, the offering materials referred to the transaction as a sale of the tax credits themselves, rather than a sale of an equity interest in the project that would make the investor eligible to claim the benefits of the tax credits. The opinion recites that the anticipated profitability of the East Hall facility was artificially inflated essentially in order to create better tax optics.5 The projections even removed utility expenses in order to present the project as potentially profitable. PB itself recommended that NJSEA fund construction costs through a loan to the partnership rather than in the form of capital contributions so that the managing member could obtain a pre-tax profit and, therefore, the “partnership would be respected for U.S. tax purposes.” The Offering Memorandum recited that a substantial portion of the proceeds raised from the investor would be used to pay a development fee to NJSEA. In other words, the proceeds raised from the sale of the interest in HBH were to be used to make a payment to NJSEA and not to be used in the development of East Hall. The investor was to receive a 3% priority distribution on its investment.

Under the final arrangement, PB made “capital contributions” in excess of $16.4 million over four installments in exchange for a 99.9% membership interest in HBH.6 The capital contributions by PB were timed to match the generation of the tax credits. Although PB had the right to 99.9% of the cash flow from 2000 to 2042, the court found it was not reasonable to expect that HBH would generate any cash flow. In addition, PB had the right to 99.9% of any net proceeds from a sale of East Hall. Again, the court found it implausible that there would be any net cash from such a sale, even if HBH had disposed of its interest in East Hall.

If PB objected to any proposed action by NJSEA with respect to East Hall, NJSEA could purchase PB’s interest in East Hall, and PB could not object to such sale. Ironically, this purchase option was denominated the “Consent Option.” The purchase price under the Consent Option was the present value of any unrealized tax benefits from the tax credits through the end of a tax credit recapture period. NJSEA was required to obtain a guaranteed investment contract (a “GIC”) to secure its obligation to pay this amount, from the time of the initial closing of the transaction. In addition to the Consent Option, NJSEA held a call option enabling it to purchase PB’s interest beginning after the end of the tax credit recapture period. If NJSEA did not exercise the call option, PB could exercise a put option requiring NJSEA to purchase its interest. The purchase price under both options was the greater of the fair market value of the interest in HBH held by PB or the accrued and unpaid 3% return.

In each year of operation, HBH experienced substantial losses. Although HBH’s accountants considered writing down the value of East Hall, they demurred in doing so because “there is no ceiling on the amount of funds to be provided by NJSEA to HBH.” HBH did incur $38,862,877 in qualified rehabilitation expenditures (“QREs”) in 2000, $68,865,639 of QREs in 2001 and $1,271,482 of QREs in 2002. HBH allocated 99.9% of these expenditures to PB and PB claimed tax credits in respect of such amounts. As noted above, the IRS challenged the ability of PB to claim the tax credits.

The Tax Court Decision

The NJSEA filed a timely petition to the United States Tax Court and won. The Tax Court first rejected the IRS’s argument that that HBH was a sham under the economic substance doctrine as PB had a 3% preferred return and the allocation of the tax credits. The Tax Court further disagreed with the assertion that HBH was formed solely to generate the tax credits for PB.

The Tax Court further concluded that PB did share the risks of being a partner by explaining that PB faced the risk that rehabilitation would not be completed as well as liability arising from environmental hazards. After citing to the-totality-of-the-circumstances test laid out by the Supreme Court in the seminal case of Commissioner v. Culbertson,7 the court determined that PB and NJSEA, in good faith and acting with a business purpose, intended to join together in the conduct of a business enterprise. Furthermore, because PB would be provided a net economic benefit through its 3% preferred return and rehabilitation tax credits, it was clear that PB was a partner in HBH.

The Tax Court also rejected a third alternative ground brought by the IRS. The IRS had argued that the NJSEA had not transferred the benefits and burdens of its interest in the East Hall to HBH. The court supported its conclusion based on the following factors: (1) the parties treated the transaction as a sale; (2) possession of the East Hall vested in HBH; (3) HBH reported the East Hall’s profits and losses and stood to lose the income if the East Hall stopped operating as an event space; and (4) bank accounts were opened in HBH’s name as operator of East Hall.

An Overview of Certain Relevant Case Law Preceding HBH

Before we discuss the 85-page decision of the Third Circuit Court of Appeals that reversed the Tax Court’s decision, it is worth examining the some decisional law applicable to when ostensible partners were denied or granted partner status for federal income tax purposes. Taxpayers have been faced with the thorny issue as to when a person will be respected as partner at least since the Supreme Court’s 1949 decision in Culbertson, supra.

In Culbertson, a father joined together with his four sons to raise cattle. The father put up all of the capital and the sons executed notes to the father for their shares in the joint venture. Two of the sons worked directly in the business and the other two sons were expected to do so at a later time. The notes signed by the “Culbertson boys” were repaid through distributions of operating cash flow from the cattle operations. The IRS argued that no partnership existed, and all of the income from the joint venture should be taxed to the father, because all of the capital for the venture originated with the father and the sons did not provide “vital services.” The Supreme Court held that the origin of the capital for the business was irrelevant8 and that a partnership could exist even if a partner did not provide ‘‘vital services.” The test to be applied was whether ‘‘the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.”9

ASA lnvesterings Partnerships v. Commissioner10 addressed whether a partnership existed in the context of an abusive tax shelter strategy commonly known as “CINS” -- the contingent installment note strategy. ASA also involved a tax-exempt entity, but the context was distinguishable. In ASA, supra, a U.S. corporation (AlliedSignal) that had recognized a substantial capital gain entered into a partnership with a non-U.S. branch of a Dutch bank (ABN).11 All decisions related to ASA itself were made by AlliedSignal. AlliedSignal contributed $100 million to ASA and ABN contributed $1 billion to ASA. The partnership purchased $850 million of high-grade privately placed LIBOR notes issued by Japanese banks (the ‘‘Notes”). Less than two weeks later, ASA sold the Notes to other banks 80% for cash and 20% for other LIBOR-based promissory notes. ASA applied the installment rules for contingent obligations to the sale and concluded that it recognized over $539 million in gain, substantially all of which was allocated to the Dutch banks. This gain was not matched by an economic profit, but instead resulted from the application of the installment sales rules. Under applicable U.S. rules, the Dutch banks did not incur a U.S. tax liability on this gain. A few months later, AlliedSignal purchased a substantial portion of the ASA interest held by the Dutch banks. Following the redemption, the notes from the purchasing banks were distributed to ABN and AlliedSignal. AlliedSignal determined that the artificial gain recognized by the Dutch banks resulted in a basis shift of the unrecovered basis in the Notes to the bank notes. AlliedSignal reported substantial capital losses when it then sold the bank notes which it attempted to credit against its capital gain. ASA was later liquidated.

The interest rate and other risks inherent in the transactions described in the preceding paragraph were hedged by both of the Dutch banks and AlliedSignal through a complex series of interest rate swaps. The income earned by the Dutch banks was carefully calibrated to a preagreed upon formula and when the income of ASA itself did not generate such income, AlliedSignal made up such shortfall through an additional $4.4 million payment when it acquired the majority of the Dutch bank’s interest in ASA. All costs of the operation of ASA were borne by AlliedSignal and the opinion recites that the $24.7 million in fees were indicative of compensation for the tax strategy and not reasonable in light of the commercial services rendered. When ASA was liquidated, AlliedSignal asked the Dutch bank to rebate $315,000 of the total amount that it received because if the Dutch bank had actually received a $5 million for its participation in the transaction and the agreed-upon return on its cash, AlliedSignal had overpaid the bank. ABN paid this rebate to AlliedSignal.

The Tax Court found that AlliedSignal “chose to ignore transaction costs, profit potential and other fundamental business considerations.” The return to ABN was “independent of the performance of ASA’s investments and the success of the venture.” In addition, ABN did not have the ability to profit beyond the specified return. The Tax Court found that the income allocations to ABN ‘‘were merely an artifice to pay ABN’s specified return.” Although the bank notes that ASA received for the Notes did fall in value and ABN did bear a portion of this loan, as part of the overall transaction, ABN had hedged this risk with the transaction promoter. Thus, on a net basis, ABN did not experience a loss. The court further notes that ABN acted as a “compliant and accommodating party and, therefore, did not provide any services to the partnership.” On these facts, the court concluded that ABN should be treated as a creditor to AlliedSignal and not a partner in ASA. The Tax Court did not address the economic substance issue.

The CINS strategy was also considered in ACM Partnership v. Commissioner.12 In ACM, Colgate-Palmolive took the place of AlliedSignal, but the Dutch bank was the same, as was the promoter, the now-merged firm of Merrill Lynch. The transactions differed from those considered in ASA, supra, in that the partnership acquired debt of Colgate-Palmolive in furtherance of what Colgate-Palmolive believed would be an attractive opportunity to refinance itself at a lower cost of funds. A particularly telling fact emerged during trial. Accountant’s notes suggested that Colgate-Palmolive had requested that the costs of selling the LIBOR notes to which the artificial basis had adhered to not be shown in the income statement of ACM because doing so could alert the IRS as to “why the partnership was constructed in the first place and thus the planned tax losses might be denied by the IRS.” Important for our discussion, however, is the tact taken by the court in disallowing the artificial loss. Instead of finding that no partnership existed between Colgate-Palmolive and ABN, the court concluded that the CINS transaction did not possess any business purpose or economic substance. The court did not address the issue as to whether the partnership itself would be respected for federal income tax purposes. It decided instead that the transactions undertaken by the partnership would not be given any federal income tax effect.13

Virginia Historic Tax Credit Fund 2001 v. Commissioner,14 involved a partnership that generated historic tax credits that reduced a taxpayer’s Virginia state liability. The partnership avoided operating risks by only investing in completed projects. Specifically, the Fund purchased the tax credits for 55¢ per one dollar of tax credit (which was permissible under Virginia law) or by making small capital contributions to the projects that generated the credits (also permissible under Virginia law). The partnership then sold interests in itself that priced the tax credits at 74¢ to 80¢ per dollar of credit invested. The promoters pocketed the difference between the price at which the credits were purchased and sold. Each investor also received .01% interest in the partnership, regardless of the amount invested. The partnership itself did not generate any partnership income or loss. Investors received the tax credits on the day that they subscribed for their partnership interests. The partners were redeemed from the partnership for a nominal consideration within 6 months of their contributions.

The Partnership reported the amount that the investors paid for their interests in the partnership as capital contributions and the amount paid by the partnership for the Virginia tax credits as deductible expenses. The IRS asserted that the investors were not partners and the promoters should have reported the difference between the purchase price for the credits and the amount paid for the credits as income.

The Fourth Circuit Court of Appeals framed the issue as to whether there was a disguised sale through a partnership. It found that the ostensible partners faced no entrepreneurial risk, had no expectation that they could experience income or loss from the holding of the partnership interests and had a transitory holding period. It concluded that the Virginia tax credits constituted property and such property was distributed to them (through the partners’ ability to claim the credits) directly in exchange for the amounts that were designated as contributions. Accordingly, the court remanded the case to the District Court for further proceedings that would treat the formation of the partnership as a mechanism for the sale of the tax credits to the investors.

In TIFD III-E. Inc. v. U.S.15 (a/k/a “Castle Harbour”), two Dutch banks formed a partnership known as “Castle Harbour, LLC” with TIFD III-E, Inc. (“TIFD”), a subsidiary of General Electric Corporation (“GE”). GE contributed certain “burned out” leases and cash to Castle Harbour. The leases were referred to as burned out because all of the federal income tax depreciation on the aircraft to which the leases related had already been claimed by GE. Thus, GE enjoyed the benefit of sheltering the full amounts of the early lease payments with such deductions, but was faced with the prospect of paying tax on the full amount of the remaining lease payments at the time that it contributed the leases to Castle Harbour. For book purposes, however, the aircraft were placed on the books of Castle Harbour at their fair market value. As a result, the aircraft had substantial depreciable book basis. The Dutch Banks contributed cash to Castle Harbour.

The Castle Harbour agreement allocated 98% of the “operating income” of Castle Harbour to the Dutch banks. The operating income included the income from the leases, which was small for book purposes due to the book depreciation expense, but significant for federal tax purposes due to the lack of any basis in the aircraft. The allocation of this income to the Dutch banks was not subject to federal income in the hands of the Dutch banks.16 GE had the right to cause Castle Harbour to contribute the aircraft and associated leases to a C corporation. In court’s opinion, this gave GE the ability to transform operating income in non-operating income. Income other than operating income was allocated first to the Dutch banks up to $2.85 million, then 99% to GE and 1% to the Dutch banks. The 98% of the operating income was anticipated to be sufficient to provide the Dutch banks with a 9% return on their capital and if it was greater than this amount, in the view of the court, GE’s ability to contribute the aircraft to a C corporation gave it the ability to reclassify income as other than operating income. Accordingly, GE’s control ensured that the Dutch banks would not receive more than the 9% return (plus $2.85 million and 1% of such other income).

The Castle Harbour agreement promised the Dutch banks distributions at the 9% rate, even if Castle Harbour did not generate sufficient cash flow to make the distribution.17 The contribution of cash by the Dutch banks was protected from the operations of Castle Harbour through several mechanisms. First, their contribution was invested in high-grade commercial paper. Second, Castle Harbour was required to maintain casualty-loss insurance in excess of twice the amount contributed by the Dutch banks. Third, GE itself provided a performance guarantee, which would guarantee a return of the investment by the Dutch banks in most circumstances. Both the District Court and the Appeals Court found that the totality of these arrangements “collectively ensured that there was no realistic chance that the Dutch banks would receive less than the reimbursement of their initial investment.”

Either party could terminate the interest of the Dutch banks. If the Dutch banks did so, their return fell to 8.5%. If GE exercised the termination right, the Dutch banks received the 9% return plus an extra $150,000.

The IRS argued that the Dutch banks should not be respected as partners in Castle Harbour because “they had no meaningful stake in the success or failure of the partnership.” The Second Circuit agreed, finding under the totality of the Castle Harbour arrangements, that the Dutch banks were to receive a return of their investment and a 9% return thereon. The Second Circuit Court of Appeals relied heavily upon the Culbertson opinion in deciding whether the Dutch banks should be treated as partners in Castle Harbour or lenders to GE. The Second Circuit also applied the normal factors considered by courts in determining whether an advance is debt or equity to the investment made by the Dutch banks. The court found that the Dutch banks’ possession of 98% of the income of Castle Harbour was illusory (“window dressing” in the court’s words) because of the ability of GE to determine what constituted operating income or by paying the $150,000 purchase premium. The court found the $2.85 million and 1% participation in other income of Castle Harbour to be “relatively insignificant.”

The appeals court found that the guarantee arrangements insulated the investment made by the Dutch banks from any significant risks in the business of Castle Harbour. Accordingly, the court found that the contribution of the Dutch banks was not risk capital. These factors, coupled with the presence of other factors supporting the treatment of the investment made by the Dutch banks as debt,18 led the court to hold that the Dutch banks should not be treated as partners of Castle Harbour for federal income tax purposes.

In G-I Holdings. Inc.,19 GAF Chemicals Corporation (“GAF”) transferred a business unit to Rhone-Poulenc Surfactants & Specialties, L.P. (“RPLP”) in exchange for a limited partnership (“LP”) interest in RPLP. The partnership valued the business at $480 million. A U.S. subsidiary of Rhone-Poulenc, a publicly-traded French company, contributed $480 million in cash to RPLP for the RPLP general partnership interest. GAF immediately pledged the LP interest for a $450 million non-recourse loan from a bank. RPLP was required to make monthly distributions on the LP interest, regardless of RPLP’s profitability or cash flows. The LP distributions were guaranteed by Rhone-Poulenc. The LP distributions were used to pay interest on the bank loan. GAF also pledged its rights under a put option, which would have allowed GAF to put its RPLP limited partnership interest to Rhone Poulanc, for the capital account balance of the interest, in the event that distributions on the LP interest were not made.

The facts of the case raised the issue as to whether GAF made a contribution to the capital of RPLP or whether RPLP was an arrangement to disguise a sale of the business to Rhone Poulanc. The parties agreed that GAF should be treated as a partner to the extent the value of its contribution ($480 million) exceeded the amount advanced by the bank ($450 million). The court agreed with the IRS that the contribution and distributions should be collapsed, but the interest received by GAC should be bifurcated into a debt piece ($450 million) and an equity piece ($30 million). The court then held “only $30M of the $480M was a bona fide contribution in exchange for a partnership interest.”

The court found that GAC was not a partner for four reasons. First, GAF’s risk of loss was diminished by the existence of the put option. Second, the court found that GAF paid $11 million to structure the transaction and that it had only an $8 million profit potential. This fact suggested that GAF was not profit-motivated. GAF had previously negotiated an asset sale agreement with Rhone Poulanc that would have resulted in a $120 million tax liability if the transaction had taken that format. The disguised sale rules supported treatment of the transaction as a sale. The government, however, lost on the issue as to whether the transaction was timely audited. Accordingly, its tax assessment against GAF was time-barred.

The Appellate Court Decision in Historic Boardwalk

On its appeal, the IRS argued that the Tax Court erred by allowing PB, through its membership interest in HBH, to receive the tax credits generated by the East Hall renovation. The IRS characterized the transaction as an impermissible indirect sale of the credits to a taxable entity by means of a purported partnership between the seller of the credits (NJSEA) and the buyer (PB). While the Commissioner utilized an arsenal of arguments in its appeal submission, the Third Circuit focused primarily on its contention that PB was not a bona fide partner in HBH. Utilizing the cases discussed above, and based on the following analysis, the appellate court agreed with the IRS that PB did not have sufficient risk at stake and did not share in a substantive manner in the upside of HBH’s business to be treated as a partner for federal income tax purposes.

The Third Circuit found that Castle Harbour, supra, and Virginia Historic, supra, provided the correct framework for determining whether PB should be considered as carrying on significant entrepreneurial activities in HBH. The Third Circuit found that PB did not have a meaningful risk with respect to its partnership interest as it was certain to recoup its contribution in HBH and receive the tax credits, which was PB’s primary interest for having participated in HBH. In discussing the lack of entrepreneurial risk, the Third Circuit noted that, notwithstanding that HBH was not compelled to repay PB’s for its capital contribution, PB had sufficient assurances that it would receive back at least the amount pertaining to the capital contribution in the form of tax credits. In addition, the Tax Benefits Guaranty, simultaneously executed with the HBH operating agreements, eliminated any risk that would preclude PB from receiving the tax credits should the IRS be successful in challenging the transaction. PB was even covered for any interest and penalties that could be assessed by the IRS. A potential risk that PB might not receive the tax credits arising from a failure to complete the project was eliminated as the project had been fully funded before PB agreed to make any capital contribution to HBH.

The Third Circuit disagreed with the Tax Court’s determination that PB faced the risk that the rehabilitation would not be completed. In the Third Circuit’s view, however, because NJSEA had significant funds, there really was no significant risk that the project would not be completed. In support of its proposition, the Third Circuit cited ASA lnvesterings, supra.

PB effectively eliminated its investment risk, audit risk and project risk. The Third Circuit viewed PB’s participation in HBH not as a party interested in the rehabilitation of East Hall but rather as an acquirer of the tax credits. In the Third Circuit’s view, the conclusion that PB was not a partners was not undermined by PB’s 3% preferred return on its contribution to HBH. Recall that if PB exercised its Put Option or NJSEA exercised its Call Option, the purchase price to be paid by NJSEA was effectively measured by PB’s accrued and unpaid preferred return. The Third Circuit stated that a cap placed by a limited partner with respect to a loss of its investment would not, by itself, jeopardize the investor’s status as a partner for tax purposes. However, a lack of meaningful risk weighs heavily in the determination of whether an investor is a bona fide partner in a partnership and the Third Circuit, citing ASA lnvesterings, supra, concluded that “PB did not bear a meaningful risk in joining HBH as it would have had it acquired a bona-fide partnership interest.”

In addition, the Third Circuit, citing Culbertson, supra, concluded that “PB’s avoidance of all meaningful downside risk in HBH was accompanied by a dearth of any meaningful upside potential:

Whether [a putative partner] is free to, and does, enjoy the fruits of the partnership is strongly, indicative of the reality of his participation in the enterprise. PB, in substance, was not free to enjoy the fruits of HBH. Like the foreign banks’ illusory 98% interest in Castle Harbour, PB’s 99.9% interest in HBH’s residual cash flow gave a false impression that it had a chance to share in potential profits of HBH..... if either NJSEA exercised its Call Option or PB exercised its Put Option, in reality, PB could never expect to share in any upside.

Lessons from the Holding

With the Third Circuit’s reversal of the Tax Court’s decision in HBH, we are, once again, faced with the question of how much risk is sufficient to consider an investor as a bona fide partner in a partnership. The Third Circuit did not base its argument in HBH being a sham or on lack of economic substance; it turned its decision on a lack of business risk and upside in PB’s participation in HBH. It would have been helpful if the Third Circuit had provided some objective guidance as to the threshold of risk that would be considered acceptable for determining that an investor was a bona fide partner in a partnership. We are just left with broad statements that a cap on the investor’s risk does not necessarily disqualify the investor from being treated as a bona fide partner but no bright lines are provided in the Third Circuit’s decision.

What is clear for practitioners, however, is the importance of looking outside of the documents themselves. Historic Boardwalk Hall, LLC, supra, follows on the lessons taught by Culbertson, supra, the CINS line of cases and Castle Harbour and GI Holdings, supra. In order for a person to be respected as a partner, it must have a real and substantial ability to participate in the income and gains from partnership operations based upon the actual operation of the partnership. The fact that the partnership agreements provide this opportunity will not be sufficient if the underlying business of the partnership renders the partnership agreement sharing irrelevant.

Conspiracy Theories?

Maybe we’ve been reading too much Pynchon (probably true in any case), but the political backdrop is intriguing, even if you are not seeing a conspiracy behind every postage stamp. The choice of the government to litigate Historic Boardwalk really is interesting. Given that PB was fully indemnified, the revenue issue in the case was whether the Federal government was willing to supply some $18 million to the State of New Jersey to support the rehabilitation of East Hall. In other words, if the taxpayer won, NJSEA kept the $18 million in cash that it received from PB. If the IRS won, PB would experience an increase in its tax liability, but such increased costs would be paid for by the State of New Jersey. The sums involved seem paltry in the scheme of federal spending. In addition, prosecution of the case diverted Department of Justice and IRS resources from seeking money from the private sector. Like Oedipa Maas, we are waiting to see who bids on Lot 49.