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During 1993 and most of 1994, S pursued a
sophisticated investment strategy. S was liquidated in
1994. FPL, which had increased its outside basis in its
interest in S by the $337 million gain it had reported in
1992, claimed large ordinary losses attributable to its
interest in S for the taxable years 1994 through 1997.
R issued a notice of final partnership
administrative adjustment to S determining that S did not
realize a $344 million short-term capital gain for the
period ended Dec. 31, 1992, on the alternative grounds
that: (1) FPL’s initial investment in S was a sham in
substance; and/or (2) S failed to properly compute its
substituted basis (from its partners) pursuant to sec.
752, I.R.C. FPL filed a timely petition for readjustment
in its capacity as a notice partner of S.
Held: FPL’s investment in S was not a sham in
substance inasmuch as FPL invested in S in order to
achieve legitimate business objectives independent of
purported tax benefits and FPL’s investment produced
objective economic consequences. Held, further, R’s
adjustments are sustained on the ground that S’s short
position in Treasury bills generated a partnership
“liability”, within the meaning of sec. 752, I.R.C.,
which liability S failed to account for in computing its
substituted basis (from its partners) in its assets.
Robert T. Carney and Paul S. Manning, for petitioner.
Sergio Garcia-Pages, John T. Lortie, and Gary F. Walker, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent issued a notice of final
partnership administrative adjustment (FPAA) to Caraville
Corporation, N.V., the tax matters partner (TMP) of Salina
Partnership, LP (hereinafter, Salina or the partnership), setting
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