TIFD III-E Inc. v. United States, No. 10-70 (2d Cir. 2012)Annotate this Case
The United States appealed from a judgment of the district court invalidating two notices of Final Partnership Administrative Adjustments issued by the IRS. The district court so ruled because it concluded that the taxpayer's characterization of two tax-exempt Dutch banks as its partners in Castle Harbour LLC was proper under Internal Revenue Code 704(e)(1). The district court also concluded that, even if the banks did not qualify as partners under section 704(e)(1), the government was not entitled to impose a penalty pursuant to Internal Revenue Code 6662. The court held that the evidence compelled the conclusion that the banks did not qualify as partners under section 704(e)(1), and that the government was entitled to impose a penalty on the taxpayer for substantial understatement of income. Accordingly, the judgment of the district court was reversed.