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petitioner argues that ASA was a partnership under the
second alternative. Petitioner’s Reply Br. at 12. We
agree if engaging in business activity were sufficient
to validate a partnership ASA would qualify. It was
infused with a substantial amount in capital ($1.1
billion), and invested it in PPNs, LIBOR notes, and
other short-term notes over a period of two years. In
fact, however, courts have understood the “business
activity” reference in Moline to exclude activity whose
sole purpose is tax avoidance. This reading treats
“sham entity” cases the same way the law treats “sham
transaction” cases, in which the existence of formal
business activity is a given but the inquiry turns on
the existence of a nontax business motive. See Knetsch
v. United States, 364 U.S. 361, 364-66, 81 S.Ct. 132, 5
L.Ed.2d 128 (1960). Thus, what the petitioner alleges
to be a two-pronged inquiry is in fact a unitary test–-
whether the “sham” be in the entity or the
transaction–-under which the absence of a nontax
business purpose is fatal. [Fn. ref. omitted.]
Thus, if Saba and Otrabanda are to be recognized as valid
entities for Federal tax purposes, petitioner must show that the
partnerships engaged in business activity for a purpose other
than tax avoidance. Boca Investerings Pship. v. United States,
314 F.3d 625 (D.C. Cir. 2003); Del Commercial Properties, Inc. v.
Commissioner, 251 F.3d 210, 214 (D.C. Cir. 2001).
Petitioner argues that Saba and Otrabanda must be respected
for Federal income tax purposes because they engaged in the
“minimal” amount of business activity required to satisfy the
standards for recognition under Moline Properties v.
Commissioner, supra. Petitioner cites the partnerships’
investments in commercial paper (and the profits derived
therefrom) as proof that the partnerships were operated for a
nontax business purpose. In connection with this point,
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