A Partnership, A Sham, Or A Loan?

This case was an adapted version of a tax case heard in U.S. Federal District Court and the US Court of Appeals. The case involved a partnership set-up by a large US corporation with its own subsidiaries as managing partners and foreign partners as outside investors. The formation of the partnership resulted from a stated objective of finding an alternative to debt financing, but provided far more significant tax savings benefits. The case was intended for use in an undergraduate taxation class focusing on business entities or an undergraduate accounting capstone or special topics course. The case and its attendant exercises were designed as applied vehicles for exploring the dimensions of the debt vs. equity classification and the nature of economic substance doctrine. The case and exercises require little knowledge of partnership taxation, but some research of the economic substance doctrine, the concept of what constitutes a partnership, and the arguments for debt vs. equity classification are required. The case may be used as a writing assignment or for class discussion. Estimated time for completion of the assignments, including research, is about four hours. Estimated time for class discussion of answers is less than one hour.