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Wednesday, February 12, 2003


Saba Partnership, Brunswick Corporation, Tax Matters Partner, was sent back to Tax Court from its appeal to the Court of Appeals for the DC Circuit. Previously, Tax Court had ruled that Saba and sister partnership Otrabanda were not engaged in business activity in furtherance of a nontax business purpose. DC Circuit instructed them to reconsider, in light of a subsequent decision, both that question and whether Saba and Otrabanda were entirely sham partnerships. The partnerships were formed, by the way, by Merrill Lynch, a company that seems to �earn� half its profits though tax avoidance schemes with no underlying business rational. (See the Merrill Lynch case blogged below.)

Tax Court found the partnerships to be shams. Factually, the case turned on whether Brunswick was paying a fee to participate. Saba noted that there is no evidence calculating �fees� between Brunswick and the partnerships. Tax Court countered by quoting a memo from Brunswick�s Director of Taxes stating, �there cannot have been any agreements, negotiations, or understandings of any kind among the Partners�. As in the Merrill Lynch case last month, the corp is arguing that a rule designed to elevate substance over form does not apply because there is no formal documentation of it. Once again, Tax Court did not buy it. Oh, yeah, and there was also the matter of over two and three-quarters of a million dollars in the form of direct transfers and �discounts� from Brunswick to the partnerships by Merrill Lynch that Merrill Lynch called �fees�. Saba claimed these were inadvertent, although Brunswick does not appear to have asked Merrill Lynch or the partnerships for any of the money back.

Hey, Brunswick, while you�re giving away free money, why not slip me half a million? With the right real estate investments, I think that�s all I would need to set myself up as a full-time pro bono tax advocate for the poor for next ten to twenty years.

Tax Court also once again found that the partnerships were not engaged in business activity in furtherance of a nontax business purpose. The tiny profits from a couple of months of investing in commercial paper did not seem to justify the couple million dollars in �non-fees� paid for the privilege, or the $170 million in capital losses expected from the outset.

Hey, Brunswick, if you don�t mind expecting to lose hundreds of millions of dollars, why not... Oh, never mind. It�s not like I am someone who needs the money. Like, say, Merrill Lynch.

The only part of this decision that made me a tiny bit sympathetic with Brunswick was Tax Court�s use of the memo from their Director of Taxes. I don�t know virtually anything about the procedural side of tax controversies, and I have to assume that the lack of apparent protest from Brunswick means that it was obtained legally. But why is this not work product? How can you give honest advice, especially where intent is an issue, if you know that the IRS or Tax Court can discover your communications and use them against your client?

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