Opinion ID: 3008141
Heading Depth: 2
Heading Rank: 2

Heading: Birth of WB Partners

Text: Barone wanted to structure the purchase agreement to afford “(1) [p]ersonal protection from creditors; (2) layers of liability protection to operate WCI; (3) the ability to invest both together [with Watkins] and separately, depending on the risks involved in each project; (4) . . . qualified retirement plans; and (5) avoid[ance of] probate.” To accomplish these goals, Barone and Watkins stacked a number of holding companies between them and WCI to form a multi-layered liability shield. Barone and Watkins created WB Acquisition, Inc., and arranged for the company to receive WCI’s shares when the repurchase from REXX closed. They created two S corporations1—DJB Holding Corporation (“DJB”) and GSW Holding Corporation (“GSW”). Barone and Watkins then entered employment agreements with DJB and GSW, respectively, and each corporation adopted an employee stock ownership plan2 (“Plan”). The DJB Plan purchased all shares of DJB, and the GSW Plan purchased all shares of GSW. DJB and GSW then formed a general partnership called WB 1 An “S corporation” is “a corporation that ha[s] elected to be taxed under Subchapter S of the [Internal Revenue] Code.” Gitlitz v. Comm’r, 531 U.S. 206, 209 (2001). Like a general partnership, an S corporation does not pay income tax on its profits, but passes the profits through to its shareholders. Id. 2 An “employee stock ownership plan” is “a type of pension plan that invests primarily in the stock of the company that employs the plan participants.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2463 (2014). The earnings of such a retirement plan are exempt from income tax, and participants in the plan pay tax on their benefits only when the benefits are distributed. 26 U.S.C. §§ 401(a), 402(a), 501(a); McDaniel v. Chevron Corp., 203 F.3d 1099, 1104 (9th Cir. 2000). DJB HOLDING CORP. V. CIR 9 Partners, in which each corporation owned a fifty-percent interest. Finally, WB Partners acquired all shares of WB Acquisition. All the necessary documents were executed in September 2000.3 According to Barone, the Plans were intended to provide qualified retirement plans, personal protection from creditors, and avoidance of probate. The holding corporations, DJB and GSW, permitted Barone and Watkins to pursue separate endeavors, while WB Partners allowed them to work together if they wished. Another consequence of the arrangement was that WB Partners’ income would escape taxation until the Plans distributed benefits: WB Partners, DJB, and GSW are all “pass-through” entities, 26 U.S.C. §§ 701, 1363(a), 1366(a)–(c), and valid employee stock ownership plans are tax exempt, 26 U.S.C. §§ 401(a), 501(a), 4975(e)(7); T.D. 9081, 68 Fed. Reg. 42970, 42970 (July 21, 2003).4 As part of their employment agreements, Barone and Watkins agreed to render “construction management, indemnity, and financing services” exclusively for DJB and GSW, respectively. “Indemnity and financing services” include “providing personal guarantees required in order for clients of [DJB and GSW] to obtain a required performance bond.” In turn, DJB and GSW agreed on September 20, 2000, to provide these services to WB Partners to the extent 3 The Commissioner concedes that “WB Partners, [GSW], and [DJB] exist for Federal income tax purposes.” 4 As a general partnership, WB Partners does not pay income tax on its profits, but passes its earnings on to its partners, DJB and GSW. See 26 U.S.C. § 701. As noted, DJB and GSW are S corporations that pass their income on to their shareholders, the Plans, and the Plans are tax exempt. See supra nn.2, 3. 10 DJB HOLDING CORP. V. CIR “necessary to manage and conduct the business of the Partnership.” The Tax Court found, and Taxpayers do not dispute, that Barone and Watkins performed the same roles for WCI after forming WB Partners as before. Watkins continued to oversee WCI’s work on a “day-to-day basis.” Barone continued to handle “business development” and “the financing.” In short, after the restructuring, WCI became a subsidiary of WB Acquisition, which was owned by WB Partners, which in turn was owned by the holding corporations DJB and GSW. Barone and Watkins became employees of their respective holding corporations rather than WCI, but continued to provide services to WCI according to the terms of their employment agreements. And WB Partners’ structure ensured that Barone and Watkins would pay no tax on any of the partnership’s income until they began to receive benefits from their respective retirement plans.