Opinion ID: 3008141
Heading Depth: 2
Heading Rank: 3

Heading: The NTC Joint Venture

Text: In 1999 or 2000, the Corky McMillin Companies (“McMillin”), the Harper-Nielsen-Dillingham Joint Venture (“Harper”), and WCI joined forces to bid on a large redevelopment project at the San Diego Naval Training Center (“NTC”). The work would include removing various hazardous materials from nearly two hundred buildings. The City of San Diego awarded the contract to McMillin, who hired Harper as construction manager. WCI entered a subcontractor arrangement with Harper on December 1, 2000, for a lump-sum amount of $17,001,073. McMillin and Harper also required WCI to sign an indemnity agreement DJB HOLDING CORP. V. CIR 11 and post a full performance bond, as neither entity was willing to do so itself. Barone worried that assuming personal liability on a $17 million bond could bankrupt him and WCI. In order to isolate the proceeds of the NTC project from WCI’s other work, Barone conceived the NTC Joint Venture.
WCI and WB Partners executed the NTC Joint Venture Agreement on September 20, 2000, a week after WB Partners was formed and just over a month before WCI won the subcontract from Harper. Under the agreement, WCI would perform the actual remediation work and WB Partners would supply indemnity and financial guaranty services. The agreement further provided that WB Partners would receive seventy percent of the profits, and WCI would receive thirty percent. The tax consequences of this arrangement bear mentioning. Because the joint venture agreement entitled WCI only to thirty percent of the profits, WCI would have to pay income tax only on that portion.5 The remaining seventy percent of the profits would pass to WB Partners, whose income, as mentioned above, was not subject to taxation unless and until the Plans distributed benefits. In short, if the NTC Joint Venture were valid for tax purposes, only thirty percent of its income would be subject to tax now. 5 A joint venture is considered a “partnership” for tax purposes. 26 U.S.C. § 761(a). Accordingly, the NTC Joint Venture would pay no tax on its income, but pass that income on to its members, WCI and WB Partners. See 26 U.S.C. § 701. 12 DJB HOLDING CORP. V. CIR The agreement also provided that the joint venture would reimburse WCI for costs incurred in the remediation work, plus five percent. The agreement obligated the joint venture to keep books and records and to file income tax returns. It contemplated that Harper would award the subcontract to WCI, not to the joint venture, and make payments directly to WCI.
On September 20, 2000, the same day the NTC Joint Venture was created, WCI, WB Partners, Barone’s and Watkins’s holding corporations, and the NTC Joint Venture executed a general indemnity agreement with the American International Group of Companies (“AIG”). The same entities entered a second indemnity agreement with Greenwich Insurance Company on January 2, 2002. Pursuant to the agreements, the NTC Joint Venture and all the entities that constituted it agreed to indemnify AIG and Greenwich against any costs incurred in executing a bond. The Insurance Company of the State of Pennsylvania issued a performance bond on October 18, 2000, and replaced it soon after with a superseding bond. The bond named WCI as principal, the insurance company as surety, and both McMillin and Harper as obligees. The face amount was $17,001,073, the value of WCI’s lump-sum subcontract with Harper. The NTC Joint Venture obtained an employer identification number and its own bank account. The joint venture also tracked its own financing and prepared its own progress reports. As the joint venture agreement contemplated, WCI received payment from Harper directly. DJB HOLDING CORP. V. CIR 13 Notwithstanding the terms of the agreement, the joint venture’s accountant opted not to file a tax return for the venture. Instead, the accountant believed that separately reporting WCI’s and WB Partners’ income from the NTC project was sufficient. As of September 30, 2002, WCI had billed Harper for $14,100,332, and incurred costs (plus five percent) of $5,822,738. This yielded a profit of $8,277,599, of which WB Partners was entitled to a seventy-percent share, or $5,794,319. In reality, a WCI invoice reflects that WCI paid WB Partners only $4,172,000, and kept for itself the remaining $1,622,319. As a result, WB Partners received only 50.4% of the profits, not 70%. Barone testified that the extra $1.6 million was a “bonus” to WCI in recognition of “a job well done.”