Court Opinion

ID: 4483090
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:53.222311+00
Date Added: 2024-06-11T14:54:02.701271
License: Public Domain

Dawson, C.J., concurring: I agree with the result reached by the majority and with Judge Tannenwald’s conclusions and reasoning with respect to each of the four basic tests of corporate characteristics set forth in the regulations. But I find it necessary to express the reasons for my disagreement with the dissenting views of Judge Quealy and Judge Simpson. At the outset, let me say that, despite the weaknesses in the Kin tner regulations which a difficult situation like this has highlighted, I think these cases must be decided within the framework of the four basic tests which the existing regulations specifically prescribe. Over the years since the original adoption of the Kintner regulations, the four basic tests created therein have become the established rules through which the Commissioner on the one hand and tax planners on the other have been able to operate with some degree of certainty in determining the tax treatment of limited partnerships. Even more important, however, is the fact that in these cases neither of the parties has challenged the validity or applicability of those regulations. Instead, the litigants have agreed that these cases must be decided within the rules of such regulations. The Km tner regulations were adopted by the Treasury in 1960 in response to a need for clarification of the tax treatment of various noncorporate entities which possessed certain corporate characteristics. For a number of years the Treasury had been concerned with the attempts of various noncorporate entities, such as professional partnerships, to qualify as corporations for tax purposes in order to obtain certain tax benefits only available to corporations. In the key case of United States v. Kintner, 216 F. 2d 418 (9th Cir. 1954), the court held against the Government on this issue. In response to the Kin tner decision, the Treasury revised the then-existing regulations governing the tax status of noncorporate entities, and in 1960 promulgated the present regulations containing specific detailed tests of corporate tax status. T.D. 6503, 1960-2 C.B. 409. Thus, these regulations became known as the “Kin tner regulations. In the light of this background, I think the current regulations were drafted with an objective of limiting the ability of a partnership or other entity to qualify as a corporation for tax purposes. In fact, it might even be said that the regulations are weighted against qualification for corporate status. This is borne out by the fact that in order to qualify as a corporation, the entity must possess more corporate than noncorporate characteristics. Sec. 301.7701-2(a)(3), Proced. & Admin. Regs. Thus, if the application of the four key tests of the Kin tner regulations results in an even split, with two tests indicating corporate status and two indicating noncorporate status, the result will be that the entity will nonqualify as a corporation. Moreover, with respect to limited partnerships, the regulations go to some length to establish that the ordinary limited partnership (i.e., one which is “subject to a statute corresponding to the Uniform Limited Partnership Act”) does not meet most of the tests of corporate status. Secs. 301.7701-2(b)(3), 301.7701-2(c)(4), and 301.7701-2(d)(l), Proced. & Admin. Regs. At the time that the Kin tner regulations were first promulgated, and for several years thereafter, it was believed by commentators and practitioners that there was no danger that an entity established as an investment vehicle in the form of a limited partnership would be deemed an association taxable as a corporation.1  I would agree with Judge Quealy’s observation that the existing regulations virtually rule out the possibility that an ULPA partnership will be a taxable association within the meaning of section 7701(a)(3). But he would deal with this situation by holding the Kin tner regulations invalid. To me this approach seems inappropriate. While it is clear that taxpayers and courts should not be bound by regulations which exceed the governing statute,21 believe that, as a matter of equitable policy, the Government as the promulgator of such regulations should be bound by them or should take steps to change them. Moreover, it seems especially inappropriate for a court to ignore the existing regulations in cases in which both sides agree to their applicability and which are litigated thereunder. Judge Simpson would hold for the respondent under the existing regulations. Although he agrees with the majority in the results of the application of three of the basic tests of continuity of life, centralization of management, and transferability of interests, he would tip the scales toward corporate status based upon certain additional factors which he considers material. However, none of these so-called additional factors seems persuasive to me because either the factor referred to is common to both corporate and noncorporate entities or the factor referred to is closely related to one of the four major characteristics expressly dealt with in the regulations. Accordingly, each additional factor has no independent standing as a significant characteristic. For example, Judge Simpson refers to the rights of the limited partners to vote on the sale of all or substantially all of the assets of the partnership and to remove and replace the general partner as corporate characteristics. Certainly the right to vote on the sale of all of the assets is no more a corporate than a partnership characteristic. It is plain that in the case of a true general partnership all of the partners would have a voice in such a matter. The right to remove and replace the general partner seems to me clearly to be subsumed within the characteristic of centralized management, and Judge Simpson’s viewing it as a separate corporate characteristic appears to be an unwarranted straining to tip the otherwise evenly balanced scales. I am also concerned with the implications of resolving close cases such as these by reliance upon additional factors beyond the four specifically enumerated tests. Although the regulations do provide for consideration of such additional factors, reliance upon such factors introduces an element of subjectivity which is inconsistent with the objective standards represented by the four basic tests. Judge Simpson has focused upon several apparent corporate similarities which, taken in the aggregate, seem to give him an overall feeling that the nature of the beast is corporate. The problem with this approach is that it seriously undermines the usefulness of the objective tests which were the primary objective of the Kintner regulations and which now represent the estab- - lished rules for both the taxpayers and the Commissioner. Furthermore, there are limitless numbers of corporate or non-corporate characteristics of various degrees of significance to which one might point in making a case in either direction. Once we permit ourselves to operate outside the framework of the four basic objective tests, subjective determinations in either direction will inevitably be supported by a selection of several among the universe of factors supporting that view. Another practical problem in the reliance upon additional factors is that to the extent that the presence of any such factor is significant, the absence of that factor should be deemed significant in the opposite direction.3 For example, if as Judge Simpson believes, the sale of limited partnership interests as a “security” through brokers utilizing a prospectus is indicative of a corporate entity, would taxpayers in other cases then be able to argue that the absence of such marketing methods is indicative of a true partnership? Once we begin to deal with the materiality of negatives, the Kintner regulations will be reduced from the objective rules intended, to a meaningless soup sandwich. Finally, I also disagree with Judge Simpson’s analysis of the limited liability test. He is correct in observing that the interpretation which the majority (and the Court of Claims in Zuckman) places upon section 301.7701-2(d)(2), Proced. & Admin. Regs., renders that section virtually meaningless. That, however, is a fault of sloppy draftsmanship, resulting, I suspect, from the bias which the Kintner regulations reflect against classification of limited partnerships as corporations. Judge Simpson attempts to infuse rationality into this section of the regulations through an interpretation of the “dummy” clause which to me appears based upon bootstrap reasoning. He correctly points out that the term “dummy” was derived from the Glensder Textile case, and he quotes from the Glensder opinion to show that the Court there wás using the term “dummy” not as meaning a straw person, but in the context of the relationship between the board of directors and the shareholders of a corporation, i.e., a representative who is answerable to the shareholders. Hence, the question of whether the general partner is a “dummy” is dependent upon whether his role is akin to that which obtains in a corporate situation. Yet the determination of whether a corporate situation obtains is itself the ultimate question under the Kmtnerregulations.4  Featherston, Irwin, Goffe, and Wiles, JJ, agree with this concurring opinion.   See, e.g., Roberts & Alpert, “New Regulations Provide Workable Rules for Real Estate Limited Partnerships,” 14 J.Tax. 230 (1961); Rustigan, “Effect of Regulation Definition on Real Estate Syndicates,” Proc. N.Y.U. 19th Ann. Inst, on Fed. Taxation 1065, 1077 (1961).    See, e.g., United States v. Empey, 406 F. 2d 157 (10 Cir. 1969), in which a portion of the Kin tner regulations requiring partnership taxation of a professional service corporation was held invalid as inconsistent with statutory and case law.    See Roberts & Alpert, supra at 235 n. 1.    Thus, Judge Simpson is rendering the limited liability test meaningless by in effect requiring reference to the centralization of management criteria to apply the limited liability test.