recognized as a partner under the Code "if he owns a capital
interest in a partnership in which capital is a material
income-producing factor, whether or not such interest was
derived by purchase or gift from any other person."
26 U.S.C. § 704(e)(1). Based on the testimony and documentary evidence
presented at trial, the Court concludes that Syringa and
Addiscombe owned capital interests in Boca and were partners
under Section 704(e)(1) of the Internal Revenue Code. The
evidence further demonstrates that Boca was formed as an
investment partnership. FOF 53, 79, 80, 125. Pursuant to the
Partnership Agreement, the parties contributed $1.5 billion to
Boca, with Syringa and Addiscombe contributing a total of $1.35
billion. FOF 150, 151. In the context of an investment
partnership, capital was a material income-producing factor. FOF
123, 124, 150, 151. The exposure to credit risk, default risk,
and credit spread risk was real and of significant concern to
the foreign partners. FOF 226, 288, 312-316.
The purchases by the AHP partners of partnership interests
from Syringa on July 20, 1990 and from Addiscombe on September
17, 1991, are additional evidence that Boca was a bona fide
partnership and that Addiscombe and Syringa were legitimate
partners. In both instances, the purchase price reflected (i)
the selling partner's share of Boca's operating income and
expenses up to that time, including interest from the PPNs, (ii)
the selling partner's share of the decrease in value of the
LIBOR Notes, and (iii) a premium above book value. FOF 226, 288,
310. The evidence before the Court establishes that the premiums
were not based on a prior agreement, a previously agreed upon
formula or a previously agreed upon amount. The premiums were
negotiated at the time and served legitimate business purposes.
FOF 227, 287, 290.
In the case of Syringa, Mr. Kofol testified without
contradiction that there was no expectation prior to the meeting
on July 20, 1990, that a premium would be paid and that there
had been no discussions of a premium. Payment of the premium
facilitated the purchase of Syringa's interest in Boca, helping
AHP achieve the goal of investing the proceeds from Boyle-Midway
in a relatively conservative portfolio with the additional
upside (and risk) of an investment in volatile LIBOR Notes. AHP
also understood that if certain transactions occurred, AHP had
the potential for a tax benefit. FOF 227, 229. In the case of
Addiscombe, the evidence before the Court is that the AHP
partners paid a negotiated premium of $2.2 million because AHP
wanted to use the funds in the Partnership to make a strategic
acquisition of Genetics Institute and did not want Addiscombe to
have an interest in Genetics Institute. FOF 290. AHP therefore
determined that the payment of the premium was beneficial to
AHP. FOF 283-287, 290.
On the basis of the evidence presented at trial and the facts
found by the Court, the Court finds that Syringa and Addiscombe
had a partner's interest in Boca's assets and concludes that
they should be treated as partners for tax purposes. The parties
intended to organize Boca as a partnership to share the income,
expenses, gains, and losses from Boca's investments and did so.
See FOF 299.
2. Conclusions of Law Regarding the Boca Partnership
The foregoing discussion establishes that the "four basic
attributes" of a partnership identified in S & M Plumbing Co.
v. Commissioner are present here. The record in this case
establishes that (i) all four partners intended to, and did,
organize Boca as an investment partnership, FOF 299; (ii) all
four contributed substantial capital to the partnership, FOF
150151; (iii) all four participated on the Partnership Committee
and jointly controlled Boca, since the agreement of owners of 95
percent of the Partnership was required in order to take action,
FOF 121-122; and (iv) all four jointly shared in the income,
gain, losses, and expenses from Boca's investments pursuant to
the Partnership Agreement. FOF 207, 213, 215, 221, 243, 244,
259, 295, 299; see also Luna v. Commissioner, 42 T.C. at
1077-78. In addition, there was a legitimate business purpose
for the creation of the partnership and the purchase of the
PPNs, see infra Section II.D.1a; FOF 15-21, 75, 78-81, 90, 93,
123-125, 158-163, 167; for the sale of the PPNs and purchase of
the LIBOR Notes, see infra Section II.D.1b and c; FOF 173-174,
182-187, 198; and for the subsequent purchases of the interests
of Syringa and Addiscombe. See infra Section II.D.1c and d;
FOF 224, 226, 227, 229, 283-290, 310.
Since there was a legitimate partnership and legitimate
business purposes for its creation, organization and
investments, and since there were legitimate business reasons
for the AHP partners to buy out the interests of Syringa and
Addiscombe at the prices they did, it is irrelevant if AHP was
motivated in part to organize Boca as a partnership by a desire
to reduce taxes. See Gregory v. Helvering, 293 U.S. 465,
468-69, 55 S.Ct. 266, 79 L.Ed. 596 (1935). AHP personnel
testified that they were well aware of the potential tax
benefits and had them firmly in mind, but, as the Supreme Court
said in Gregory, "[t]he legal right of a taxpayer to decrease
the amount of what otherwise would be his taxes, or altogether
to avoid them, by means which the law permits, cannot be
doubted." Id. at 469, 55 S.Ct. 266. AHP's motive to obtain a
tax benefit is not inconsistent with its intent to make a
profit. So long as it was not motivated solely by the former, it
should be recognized as a partnership for tax purposes.
In Chisholm v. Commissioner, 79 F.2d 14 (2d Cir.), cert.
denied, 296 U.S. 641, 56 S.Ct. 174, 80 L.Ed. 456 (1935), Judge
Learned Hand expressly rejected the argument that a partnership
"formed confessedly to escape taxation" was for that reason "not
`bona fide.'" Id. at 15. Relying on Gregory, Judge Hand
It is important to observe just what the Supreme
Court held in that case. It was solicitous to
reaffirm the doctrine that a man's motive to avoid
taxation will not establish his liability if the
transaction does not do so without it.
The question always is whether the transaction under
scrutiny is in fact what it appears to be in form;
. . . True, it is always the intent that controls;
and we need not for this occasion press the
difference between intent and purpose. We may assume
that purpose may be the touchstone, but the purpose
which counts is one which defeats or contradicts the
apparent transaction, not the purpose to escape
taxation which the apparent, but not the whole,
transaction would realize.
79 F.2d at 15.
Since Chisholm, courts have consistently applied Gregory
as Judge Hand did. See, e.g., United Parcel Service of America
v. Commissioner, 254 F.3d 1014, 1019 (11th Cir. 2001) ("A
`business purpose' does not mean a reason for a transaction that
is free of tax considerations. Rather, a transaction has a
`business purpose' . . . as long as it figures in a bona fide,
profit-seeking business."); IES Industries v. United States,
253 F.3d 350, 355 (8th Cir. 2001) ("A taxpayer's subjective
intent to avoid taxes . . . will not by itself determine whether
there was a business purpose to a
transaction."); Northern Indiana Pub. Serv. Co. v.
Commissioner, 115 F.3d 506, 512 (7th Cir. 1997) (Gregory and
its progeny "do not allow the Commissioner to disregard economic
transactions . . . which result in actual, non-tax-related
changes in economic position" regardless of "tax-avoidance
motive"); see also Estate of Strangi v. Commissioner, 115 T.C. 478,
2000 WL 1755274 (2000); Knight v. Commissioner, 115 T.C. 506,
2000 WL 1755284 (2000); Pasternak v. Commissioner,
990 F.2d 893, 900 (6th Cir. 1993); Vanderschraaf v. Commissioner,
74 T.C.M. (CCH) 7 (1997), affd, 2000 WL 237963, 211 F.3d 1276
(9th Cir. 2000). In each case, the issue is whether there was a
legitimate business purpose for what the parties did, not
whether they may also have had a tax motive for doing it.
The evidence before the Court demonstrates that (i) the
parties intended to form Boca as a partnership, FOF 299; (ii)
the parties jointly contributed the capital to Boca that was
used to purchase Boca's investments, FOF 150-151; (iii) the
parties shared the benefits and burdens of owning the PPNs,
including the accrual of interest income, FOF 299, 358; Tucker
Tr. (9/20/00 p.m.). 6:18-8:1; (iv) the parties shared the income
from the reinvestment of the cash proceeds from the sales of the
PPNs, FOF 226, 232, 235, 236, 240, 241; (v) the parties shared
the benefits and burdens of owning the LIBOR Notes, including
the diminution in the value of the LIBOR Notes while they were
owned by Boca, FOF 214, 215, 226, 232, 244; (vi) the parties
shared Boca's operating costs, FOF 127, 204, 207, 221, 226, 235,
299; and (vii) the parties would have shared the costs of
selling the PPNs and acquiring the LIBOR Notes if the LIBOR
Notes had been sold or matured while held by Boca. FOF 217.
Based on the foregoing, the Court reaches the following
conclusions of law:
1. AHP, AHP 10, Syringa, and Addiscombe intended to, and did,
organize Boca as a partnership to share the income, gains,
expenses, and losses from Boca's investments. The parties
intended that AHP, AHP 10, Addiscombe, and Syringa be partners
in Boca. All relevant indicia of a true partnership exist here.
2. Boca was a partnership for federal income tax purposes, and
its partners were AHP, AHP 10, Addiscombe, and Syringa.
3. Boca was a partnership as defined in Sections 761(a) and
7701(a)(2) of the Internal Revenue Code.
4. All four partners, including AHP, AHP 10, Syringa, and
Addiscombe, owned capital interests in Boca for purposes of
Section 704(e)(1) of the Internal Revenue Code.
5. All four partners — AHP, AHP 10, Syringa, and Addiscombe —
were partners for purposes of Section 704(e)(1) of the Internal
6. The correct taxable year of the Partnership is the fiscal
year ending May 31st.
7. For federal income tax purposes, Boca properly allocated
its income, gains, deductions, and losses among its four
partners in accordance with the Partnership Agreement.
8. The Commissioner erred when he determined that Boca
Investerings should not be recognized as a partnership for
federal income tax purposes on the theory that the parties did
not intend to form a partnership and did not form a partnership
for purposes of federal income tax (FPAA determination 1).
D. The Boca Transactions
The sham transaction doctrine generally prevents taxpayers
from claiming the tax benefits of transactions which,
although they may fit within the language of the Internal
Revenue Code, "are not the type of transaction Congress intended
to favor." Horn v. Commissioner, 968 F.2d 1229, 1236 (D.C.Cir.
1992). "Usually, transactions that are invalidated by the
doctrine are those motivated by nothing more than the taxpayer's
desire to secure the attached tax benefit." Id. As the D.C.
Circuit has put it:
[T]he sham transaction doctrine is simply an aid to
identifying tax-motivated transactions that Congress
did not intend to include within the scope of a given
benefit-granting statute. . . . [A] transaction will
not be considered a sham if it is undertaken for
profit or for other legitimate nontax business
Id. at 1238. So long as the transaction does not offend
Congress' intent with respect to the Internal Revenue Code
provision at issue, "[t]he legal right of a taxpayer to decrease
the amount of what otherwise would be his taxes, or altogether
to avoid them, by means which the law permits, cannot be
doubted." Gregory v. Helvering, 293 U.S. at 469, 55 S.Ct. 266.
In this case, the Commissioner determined that the
transactions financing the purchase and sale of the PPNs and the
LIBOR Notes should not be recognized for income tax purposes
because the transactions lack economic substance, were
prearranged and predetermined, and had no legitimate business
purpose. JEX 326, at GOV025538-GOV025539. In short, the
Commissioner determined that because the transactions related to
the PPNs and the LIBOR Notes lacked "economic substance" —
because they were "sham transactions" — the effect of those
transactions on plaintiffs would not be recognized for federal
income tax purposes.
The controlling authority with respect to economic substance
in this Circuit is Horn v. Commissioner, 968 F.2d 1229
(D.C.Cir. 1992). In Horn, the D.C. Circuit set forth the
following test for determining whether a transaction should be
considered a sham for tax purposes:
To treat a transaction as a sham, the court must find
 that the taxpayer was motivated by no business
purpose other than obtaining tax benefits in entering
the transaction, and  that the transaction has no
economic substance because no reasonable possibility
of profit exists.
Horn v. Commissioner, 968 F.2d at 1237 (quoting Friedman v.