Case Addresses Readjustment of Partnership Under Economic Substance Doctrine

In Jade Trading, LLC v. US, No. 08-5045, the Federal Circuit faced a challenge to the Court of Federal Claims' denial of petitioners' motion for readjustment of the partnership items of the company. 

As stated in the decision: "The economic substance doctrine requires disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality.  The doctrine, from its inception,...has been used to prevent taxpayers from subverting the legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to reap a tax benefit."

Thus, under the five general principles incorporated in the economic substance doctrine, the court held that the contribution of the spread transaction to the company lacked economic substance and should be disregarded for tax purposes.  However, because the Tax Court did not have jurisdiction to review the application of penalties based on outside bases of the company's partners, the judgment that the petitioners' partner-leven defenses cannot be brought at the partnership level is vacated as moot. 

Related Resource:

• Full text of Jade Trading, LLC