TIFD III-E, Inc. v. United States
United States Court of Appeals for the Second Circuit
666 F.3d 836 (2012)
Two subsidiaries of General Electric Capital Corp. (the subsidiaries) (defendants) formed a partnership called Castle Harbor with two Dutch banks. Through Castle Harbor, the subsidiaries contributed a fleet of rental airplanes and the Dutch banks contributed cash. Because the Dutch banks were not subject to United States tax law, 98 percent of Castle Harbor’s income was allocated to the Dutch banks, and the subsidiaries took depreciation deductions for the value of the airplanes. To reallocate the income to the subsidiaries, the United States government (plaintiff) argued that the Dutch banks were lenders, not partners, in Castle Harbor, and that therefore the income was not allocable to the banks. The government argued that the subsidiaries owed income tax on the income that had been improperly allocated to the Dutch banks. In initial litigation, the United States Court of Appeals for the Second Circuit held that the Dutch banks’ interest in Castle Harbor was essentially a secured lender’s interest. On remand, the district court held that the Dutch banks nevertheless qualified as partners in Castle Harbor under § 704(e)(1) of the Internal Revenue Code because the banks had a capital interest in Castle Harbor through their interest in Castle Harbor’s debt. The government appealed.
Rule of Law
Holding and Reasoning (Leval, J.)
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