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Respondent contends that the performance bond agreement, in
effect, was a third party beneficiary contract under which
National received no consideration. Respondent, in making that
contention, overlooks the fact that the separate contractual
obligations between F&D and National had mutual exchanges of
consideration. A third party beneficiary contract is one that
directly benefits a third party and that provides the third party
with a right to sue the original contracting parties for breach.
Black’s Law Dictionary 349 (8th ed. 2004). The only potential
third party beneficiary in this case would be the District, which
might have had a right to sue F&D if F&D had failed to fulfill
its obligations under the performance bond. Therefore, F&D
agreed to complete National’s performance for the project in
exchange for National’s agreement to reimburse F&D for all costs
incurred.
Respondent also contends that National’s $2,500,000
obligation arose because of its breach of the indemnity
agreement. Respondent therefore asserts that economic
performance occurs when payment is made, as described in section
1.461-4(g)(2), Income Tax Regs. However, National only failed to
meet its contractual obligation with the District. By December
31, 1999, National and F&D were continuing to negotiate the
timing and total amount of payments under the indemnity
agreement. No breach of contract had been alleged or occurred.
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