Судебные дела / Зарубежная практика / KLAMATH STRATEGIC INVESTMENT FUND, LLC, by and through ST. Croix Ventures, LLC, Plaintiff, v. UNITED STATES of America, Defendant., United States District Court, E.D. Texas, Texarkana Division., 440 F.Supp.2d 608, Civil Action Nos. 5:04-CV-278 (TJW), 5:04-CV-279., July 20, 2006
KLAMATH STRATEGIC INVESTMENT FUND, LLC, by and through ST. Croix Ventures, LLC, Plaintiff, v. UNITED STATES of America, Defendant., United States District Court, E.D. Texas, Texarkana Division., 440 F.Supp.2d 608, Civil Action Nos. 5:04-CV-278 (TJW), 5:04-CV-279., July 20, 2006
KLAMATH STRATEGIC INVESTMENT FUND, LLC, by and through ST. Croix Ventures, LLC, Plaintiff, v. UNITED STATES of America, Defendant.
United States District Court, E.D. Texas, Texarkana Division.
440 F.Supp.2d 608
Civil Action Nos. 5:04-CV-278 (TJW), 5:04-CV-279.
July 20, 2006.
Kent L. Jones, N. Jerold Cohen, Shel╜don M. Kay, Thomas A. Cullinan, Kristin Balding Gutting, Sutherland, Asbill & Brennan, Atlanta, GA, for Plaintiff.
Andrew L. Sobotka, U.S. Attorney Of╜fice, Dallas, TX, Jennifer Kirkpatrick Brown, U.S. Dept of Justice, Washington, DC, for Defendant.
MEMORANDUM OPINION AND ORDER
WARD, District Judge.
Before the Court is Plaintiffs' Partial Motion for Summary Judgment (# 71) and the Defendant's Cross Motion for Sum╜mary Judgment (# 79). The Court has carefully considered the parties' written submissions in reaching its decision as set forth herein.
Klamath Strategic Investment Fund, LLC ("Klamath") and Kinabalu Strategic Investment Fund, LLC ("Kinabalu") (col╜lectively "Plaintiffs") move for summary judgment on legal issues presented in this case. These include, inter alia, whether: (1) the premium loans at issue are contin╜gent obligations and "liabilities" under Section 752 of the Internal Revenue Code (the "Code"); and (2) Treasury Regulation ╖ 1.752 (the "Regulation") is invalid. 1 The Court addresses each in turn.
1. ═ The other issues in Plaintiffs' Motion were not raised in the government's cross motion. Moreover, the record indicates that the par╜ties agree that there are fact issues regarding the "economic substance" of the transaction. Accordingly, Plaintiffs' Motion regarding whether the note in question is a Convertible Payment Debt Instrument and whether Trea╜sury Regulation ╖ 1.701-2 is invalid is carried with the case.
This case is a civil action by the Plain╜tiffs against the United States under 26 U.S.C. ╖ 6226 for readjustment of partner╜ship items. Actions under section 6226 are similar to suits for refund where the court makes a de novo determination of the facts and law as they relate to the taxpayers' activities.
This case began because the government issued Notices of Final Partnership Ad╜ministrative Adjustments ("FPAAs") against the Plaintiffs for deficiencies in their tax returns. The Internal Revenue Service (the "Service" or the "IRS") issued the FPAAs to Plaintiffs on July 19, 2004, making adjustments to how Plaintiffs and their partners reported various items for tax purposes on the Forms 1065 U.S. Part╜nership Return of Income for their short taxable year that ended June 12, 2000. The major issue raised in the FPAAs is whether the loan premiums that Plaintiffs received from a bank in connection with the funding of their investments are to be treated as "liabilities" for purposes of cal╜culating the bases in the partnerships un╜der Section 752 of the Code. 2 The FPAAs assert that, under Section 752 and other recently adopted Treasury regulations, the amount of the loan premiums should be treated as liabilities.
2. ═ Unless otherwise stated, all references to "Section" are to sections of the Internal Revenue Code of 1986, as amended.
Plaintiffs' Motion is primarily focused on the applicability and efficacy of Section 752 and a recently adopted regulation. Specif╜ically, Plaintiffs contend that some of the legal theories of liability raised by the government in the FPAAs are invalid as a matter of law.
II. Factual Background
St. Croix Ventures LLC ("St.Croix") and Rogue Ventures LLC ("Rogue") were formed as single-member Delaware limited liability companies on January 20, 2000. On March 29, 2000, St. Croix and Rogue each borrowed $41,700,000 from National Westminster Bank plc ("NatWest") pursu╜ant to the terms of a Credit Agreement dated March 28, 2000 (hereinafter the "loan" or "loans"). Each of the loans had a term of seven years and a fixed interest rate. Only interest was payable until maturity. In practical terms, the loans thus required interest only payments and with a large balloon payment of the principal at the end of the term. The Credit Agree╜ment provided St. Croix and Rogue the opportunity to prepay the loan at any time with five days notice to NatWest.
According to the express terms of the Credit Agreement, St. Croix and Rogue each opted to pay an increased interest rate on their loans in return for NatWest paying St. Croix and Rogue premiums on the date that their loans originated of $25,000,000. Thus, St. Croix and Rogue each received a "loan premium" of $25,000,000 for agreeing to pay a higher than market rate of interest (17.97 percent per annum) on the principal amount of the loans ($41,700,000). It is undisputed that the total amount received by each of St. Croix and Rogue on the date that the Credit Agreements were funded was $66,700,000. The entire $66,700,000 fund╜ed to each of St. Croix and Rogue was transferred to their respective accounts at NatWest, along with an additional cash contribution of $1,500,000 from each, with accrued interest. NatWest paid St. Croix and Rogue interest on the $66,700,000 while such amount was held in their ac╜counts at that bank.
The Credit Agreements and two related agreements that were exhibits thereto (the Pledge and Security Agreement and the Security Deed) allowed St. Croix and Rogue (and later Klamath and Kinabalu) to use the $66,700,000 to engage in the following types of investments:
(a) any of the following: (i) time depos╜its of NatWest (or any of its Affili╜ates) with maturities of 90 days or less denominated in dollars or euros and (ii) commercial paper denom╜inated in Dollars, Euros, or Sterling and issued by NatWest, Ulster Bank Limited or Coutts & Co.,
(b) fixed income securities purchased with remaining maturities of 90 days or less issued by any governmental or corporate issuer, the outstanding long or short term unsecured debt of which is rated in one of the two highest rating categories by an in╜ternationally recognized statistical rating organization, if such fixed in╜come securities are (i) denominated in Dollars or (ii) denominated in Eu╜ros (or in the currency of any of the United Kingdom of Great Britain and Northern Ireland, the Federal Republic of Germany, the Republic of France, Japan, Canada, and Italy),
(c) any (i) interest rate swap transac╜tions and (ii) interest rate options that are entered into with NatWest (or any Affiliates) as the counterpar╜ty requiring settlement not later than the Maturity Date, and
(d) foreign currency spot, forward or option transactions entered into with NatWest (or any of its Affiliates) as the counterparty requiring settle╜ment in not more than six months for Dollars and Euros with respect to (i) the currencies listed in clause (b)(ii) above, and (ii) the following additional currencies: Hong Kong dollar, Argentine Peso, Egyptian dollar, Saudi Riyal and Danish Kron╜er.
NatWest agreed to limit its recourse for any default under the Credit Agreement to any cash and investments in St. Croix's and Rogue's accounts at that bank. The loans were thus nonrecourse to St. Croix and Rogue.
To protect NatWest against the possibil╜ity that St. Croix or Rogue might opt to repay the loans early and that NatWest therefore would not obtain the full benefit of the increased interest rate over the full seven-year loan term, the Credit Agree╜ments provided for a Prepayment Amount (as well as a small breakage fee) if the loans were paid off early:
The obligation of the Borrower to pay the principal of and interest on the Stat╜ed Principal Amount, together with, if the Note is prepaid prior to the Maturi╜ty Date, the Prepayment Amount, if any, and the Breakage Fee, if any, shall be evidenced by the Note.
See Credit Agreements at Section 2.02(a).
The Prepayment Amount was to be cal╜culated under a formula that took into account the Stated Principal Amount (i.e., $41,700,000), a discount factor for the ma╜turity date based on a current bank inter╜est rate determined at the time of pre╜payment, and the discounted value of the remaining interest payments that would otherwise have been due under the loan, also using a current bank interest rate determined at the time of prepayment. See Credit Agreements at Section 3.02. The Prepayment Amount on the day that the loan was made approximated the amount of the loan premium (i.e., $25,000,000) and declined over the term of the loan, depending on the date of future payment. Id. If the loan fully matured (i.e., went to 7 years) before payment oc╜curred, no Prepayment Amount would ap╜ply. Id.
On April 6, 2000, St. Croix and Rogue each invested the proceeds of the loans and loan premiums along with an addition╜al $1,500,000 in cash (i.e., for a total of $68,200,000, plus some accumulated inter╜est), in Klamath and Kinabalu, respective╜ly, in exchange for a 90% partnership in╜terest. 3 NatWest agreed to allow Klamath and Kinabalu to assume, respectively, St. Croix's and Rogue's responsibilities under the Credit Agreements pursuant to As╜signment and Assumption Agreements.
3. ═ The other partners in Klamath and Kinabalu were Presidio Growth LLC and Presidio Resources LLC, which contributed $16,665 and $150,000 for the 1% and 9% interests, in Klamath and Kinabalu, respectively.
Ostensibly to mitigate their risk position with respect to interest rate changes dur╜ing the term of the loans, on April 6, 2000, Klamath and Kinabalu each entered into a fixed-for-floating rate interest rate swap with NatWest for a term of approximately seven years. The transaction was made effective as of March 29, 2000. The Swap Agreement included a requirement for a Final Fixed Payment of $25,000,000.
Plaintiffs contend that they were formed to invest in U.S. Dollar and foreign curren╜cy denominated debt securities of corpo╜rate and governmental issuers and enter into forward currency contracts, options on currencies and securities and other invest╜ments. The overall investment strategy was described to St. Croix and Rogue in a Confidential Offering Memorandum as fol╜lows:
Investment Strategy. The Managing Member has structured a three stage, seven year investment program which seeks to exploit trading opportunities in the markets for foreign debt securities and currencies. The core investment strategy underlying all three stages will be to maintain long or short positions in debt securities and currency exchange contracts. Through such investments, each Fund seeks to profit from changes that the Managing Member anticipates will occur in the value of the currencies in which such securities are denom╜inated or quoted or to which the forward currency exchange contracts relate.
As described under "Investment Strate╜gy," the three stages are differentiated by the degree of risk assumed by a Fund. In each successive stage, the Managing Member will allocate a great╜er percentage of the Fund's assets to securities and currency positions which, in the view of the Managing Member, entail a greater opportunity for profit but also correspondingly greater risk. Reflecting the greater degree of risk, the Managing Member may require the Members to make additional capital con╜tributions. However, the aggregate contributions of a Member will not ex╜ceed the amount to which such Member agrees at the time of subscription. The obligation to make additional capital con╜tributions will terminate if the Member notifies the Managing Member of its election to withdraw its entire capital account balance. It is the Managing Member's belief that successful imple╜mentation of its investment strategy can best be achieved through a relatively long-term investment horizon.
The Managing Member is not limited in the investment strategies that it may employ on behalf of the Funds. Among other strategies, a Fund may seek to exploit instability of emerging market currencies which have been tied or "pegged" to the currencies of major de╜veloped countries. The Managing Mem╜ber believes that a currency peg sets an artificial price for the currency that is ultimately unsustainable. Free market forces work to weaken the peg. When the peg finally breaks, devaluation of the currency historically has been swift and dramatic. By monitoring the economic conditions in emerging market countries and the direction of the currency mar╜kets, the Managing Member seeks to identify, and profit from, those currency devaluations which are most likely to occur over the life of the Fund.
With respect to the three stages in the strategy: Stage I was expected to last 60 days, Stage II another 120 days, and Stage III approximately 6.5 years. After Stage I, St. Croix and Rogue might be required to make additional capital contributions up to $6,000,000 to fund the riskier invest╜ment strategies. However, St. Croix had the right to withdraw from the partnership after Stage I, and at 60 day intervals thereafter.
On May 25, 2000, St. Croix and Rogue elected to withdraw from the Klamath and Kinabalu partnerships effective June 5, 2000. In response, Klamath and Kinabalu distributed their respective assets on June 7, 2000, and prepaid the loan amount to NatWest on June 12, 2000. The tax ac╜counting treatments of these transactions gave rise to this case.
The most significant issue is whether the $25,000,000 premiums that St. Croix and Rogue received from NatWest constitute "liabilities" under Section 752. Plaintiffs did not treat the premiums as "liabilities" under the theory that there was no fixed requirement to be repaid. Plaintiffs con╜tend that the only thing that St. Croix and Rogue were obligated to repay were the $41,700,000 loans at a higher than market rate of interest. In addition, although St. Croix and Rogue could be obligated to pay the bank a "Prepayment Amount," that obligation would arise only if the Plaintiffs decided to repay the loans before the end of the seven year term of the Credit Agreement. As a result, Plaintiffs argue that the Prepayment Amount was not a "liability" under Section 752 because any such repayment was contingent both in the sense that it might never be paid (i.e., if the loans went to term) and because the amount of any such repayment could not be quantified unless and until the decision was made to prepay the loans.
In response, the government asserts in this case that the $25,000,000 was a "liabili╜ty." Specifically, the government argues that St. Croix and Rogue were obligated to repay the $25,000,000 premiums on the theory that repayment of the $41,700,000 loans at an increased interest rate in ex╜change for a $25,000,000 premium is the economic equivalent of repaying a greater loan of $66,700,000 at a lesser interest rate and with no loan premium.
Plaintiffs assert that the scenario of╜fered by the government is not economi╜cally equivalent and that there were valid business reasons for the structure chosen by St. Croix and Rogue. In any event, even if the two structures are economically equivalent, Plaintiffs contend that taxpay╜ers are entitled to structure their transac╜tions in any lawful manner they choose to produce the least tax. 4
4. ═ See, e.g., Compaq Computer Corp. v. Comm'r, 277 F.3d 778, 786 (5th Cir.2001); Carrington v. Comm'r, 476 F.2d 704, 706 (5th Cir.1973) ("It is, of course, elementary that Carrington had the legal right to decrease the amount of what otherwise would be his taxes, or alto╜gether avoid them, by means which the law permits. Thus the mere fact that the transactions here questioned were concededly de╜signed to limit Carrington's tax liability estab╜lishes nothing with regard to the question of the proper taxation of these transactions.") (internal citations, quotations and alterations omitted); Rhodes v. United States, 464 F.2d 1307, 1312 (5th Cir.1972).
III. Section 752 "Liabilities"
The principal issue in this case is wheth╜er Plaintiffs were correct in taking the position that the loan premium (or the Prepayment Amount) was not a fixed and determined "liability" for purposes of Sec╜tion 752. Plaintiffs contend that they did not treat the premium amount as a liability because they were not necessarily obligat╜ed to repay it. The Government asserts that the loan premium is a liability under Section 752.
Section 752 governs the treatment of liabilities by partners and partnerships. It provides:
(a) Increase in partner's liabilities-Any increase in a partner's share of the liabilities of a partnership, or any increase in a partner's individual lia╜bilities by reason of the assumption by such partner of partnership liabil╜ities, shall be considered as a contri╜bution of money by such partner to the partnership.
(b) Decrease in partner's liabilities-Any decrease in a partner's share of the liabilities of a partnership, or any decrease in a partner's individu╜al liabilities by reason of the as╜sumption by the partnership of such individual liabilities, shall be consid╜ered as a distribution of money to the partner by the partnership.
(c) Liability to which property is sub╜ject-For purposes of this section, a liability to which property is subject shall, to the extent of the fair market value of such property, be consid╜ered as a liability of the owner of the property.
(d) Sale or exchange of an interest-In the case of a sale or exchange of an interest in a partnership, liabilities shall be treated in the same manner as liabilities in connection with the sale or exchange of property not as╜sociated with partnerships.
Under Section 752(b), a partner must decrease his basis in the partnership to the extent that the partnership assumes the partner's individual "liabilities." In turn, under Section 752(a), all partners are then to increase their bases in their partnership interests for their share of the new "part╜nership" liability. To illustrate:
If a partner contributes property in which he has a cost basis of $100 in ex╜change for a 50% interest in the partner╜ship, he has a basis of $100 in his 50% partnership interest. If, however, the con╜tributed property was encumbered by a liability of $80, the partner's basis in the partnership will instead be $60. The basis is calculated as follows: $100 basis for the cost of the contributed property, less $80 for the liability assumed by the partner╜ship, plus $40 for his 50% share of what is now a partnership liability.
In 1975, the Service won a case in the United States Tax Court that defined "lia╜bility" under Section 752. Helmer v. Com╜missioner involved two partners in a part╜nership that sold an option to acquire property owned by the partnership to a development corporation. Helmer v. Comm'r , 34 T.C.M. (CCH) 727 (1975). The development corporation paid up-front consideration for the option and also made annual payments that were to be applied to the purchase price of the property if the option were exercised. The partnership treated these payments as "liabilities" that had the effect of increasing each partner's basis in his partnership interests under Section 752(a) and 722. The theory was that the partnership would have to credit these payments against the purchase price if the development corporation decided to exercise the option. The Service, however, argued that the amount the partnership received for selling the option was not a liability within the meaning of Section 752. The resolution of this issue was important to the partners because the partnership distributed the option proceeds to the Hel╜mers and, under Section 731(a), the part╜ner would have taxable gain to the extent the distributions exceeded their partner╜ship bases. Stated differently, each part╜ner wanted to treat the option payments as "liabilities" to increase his basis. The Court adopted the Service's view that the option proceeds were not a liability for purposes of Section 752 because the obli╜gation of the partnership to credit the payments to the development corporation was contingent upon the option being exer╜cised. The Helmers were therefore not allowed to increase their basis in the part╜nership and, as a result, they owed taxes on the gain from the distribution.
Not long thereafter, the Service again asserted in a Court that contingent obli╜gations were not liabilities within the meaning of Section 752. See Long v. Comm'r, 71 T.C. 1, 1978 WL 3318 (1978), motion for reconsideration, 71 T.C. 724, 1979 WL 3765 (1979), aff'd and remanded, 660 F.2d 416 (10th Cir.1981). In Long, the court held that contingent or contested obligations were not liabilities for purposes of increasing partnership basis until the obligations became fixed or liquidated. The taxpayer in Long was the beneficiary of the estate of his deceased father. The decedent was a partner in a partnership that constructed buildings and, upon his death, the estate took his place as a part╜ner in the partnership. Two lawsuits, which sought millions of dollars in dam╜ages for reconstruction-related claims, were pending against the partnership when the father died. Shortly thereafter, the partnership was liquidated and the taxpayer, as beneficiary of the estate, sought to claim a loss on the liquidation. The estate treated the construction related claims against the partnership as "liabili╜ties" for purposes of Section 752, which would have increased its basis in the part╜nership and allowed it to deduct the losses. But the Service refused to allow the tax╜payer to include the estate's share of such "liabilities" in its outside basis because the claims against the estate were contingent. The court agreed:
Although they may be considered "liabilities" in the generic sense of the term, contingent or contested liabilities such as the Kansas City Life-TWA and USF & G claims are not "liabilities" for partnership basis purposes at least until they become fixed or liquidated. This Court has held on a number of occasions that contingent and indefinite liabilities assumed by the purchaser of an asset are not part of the cost basis of the asset. We think that partnership liabili╜ties should be treated in the same man╜ner. We see no logical reason for distin╜guishing the above cases solely because the asset involved is an interest in a partnership, and neither party suggests such a distinction. Those liabilities should be taken into account only when they are fixed or paid.
71 T.C. at 7-8 (citations omitted). Thus, Long held there were two reasons that the claims were not liabilities under Section 752: the obligations were contingent and they were indefinite in amount.
In La Rue v. Comm'r, 90 T.C. 465, 1988 WL 23562 (1988), the Service again ar╜gued, and the Court agreed, that obli╜gations that are fixed in the sense that it is known that some amount will be paid, but that remain contingent in amount, do not constitute "liabilities" for purposes of Sec╜tion 752. The La Rue Court held that even though a contractual obligation is fixed, that obligation does not represent a liability under Section 752 until the cost of that obligation becomes fixed in amount. Id. at 479, 1988 WL 23562; see also Long, 71 T.C. at 8.
The Fifth Circuit has also addressed this issue. In Gibson Prods. Co. v. United States, a taxpayer invested in an oil drill╜ing partnership. 637 F.2d 1041 (5th Cir. 1981). The partnership then entered into a series of leases and turnkey drilling con╜tracts with a third-party, for which the partnership paid $440,000 in cash and gave a $660,000 promissory note. The Fifth Circuit determined that the liability of the partnership was contingent on oil and gas production from the leases and contracts. At issue was whether the partner could treat its proportionate share of the $660,000 note as a "liability" under Section 752. The Fifth Circuit ruled in favor of the Service and found that the contingent nature of the obligation precluded treat╜ment as a liability for tax purposes. 5 The cases therefore adopt the Service's consis╜tent view that contingent or nonexecutory obligations are not liabilities under Section 752. 6
5. ═ Further, the Service has applied the reason╜ing of the aforementioned cases in its revenue rulings. See, e.g., Rev. Rul. 79-294, 1979-2 C.B. 305 (in computing costs basis, obli╜gations reflected in executory contracts prior to performance of the contract is not included in the basis); see also 73-301, 1973-2 C.B. 215 (holding that interim payments in con╜nection with a long-term contract were not liabilities under Section 752); 57-29, 1957-1 C.B. 519 (in computing costs basis, the Ser╜vice does not recognize obligations reflected in executory contracts prior to performance); I.R.S. G.C.M. 37971 (June 1, 1979) (same); I.R.S. G.C.M. 37860 (Feb. 16, 1979) (same).
6. ═ The case law was particularly important for this term as the government admits that until June 24, 2003, there had been no definition of "liability" outside of case law. See Assump╜tion of Partner Liabilities, 68 Fed.Reg. 37434 (June 24, 2003) ("There is no statutory or regulatory definition of liabilities for purposes of Section 752.").
IV. Analysis Regarding Section 752
A. Neither the Loan Premium nor the Prepayment Amounts are Liabilities Under Section 752
Plaintiffs contend that neither the loan premium nor the Prepayment Amount are liabilities under Section 752. They contend that they relied on the Service's interpretation of Section 752 in Helmer, Long, La Rue and Gibson (hereinafter the "752 Cases"). First, Plaintiffs contend that the loan premium is not a liability because there was no obligation to repay the premium. Instead, the Plaintiffs were obligated to repay a loan of $41,700,000 at a higher than market interest rate. Sec╜ond, Plaintiffs argue that the Prepayment Amount is contingent because it will never be paid if the loan goes to term. Finally, the Plaintiffs argue that the Prepayment Amount is based on an interest rate that cannot be known until the decision to pre╜pay the loan is made.
Plaintiffs are correct. Under the lan╜guage of the Credit Agreement, there were no circumstances under which the Plaintiffs were obligated to repay the loan premium. Rather, the only potential obli╜gation was to pay the Prepayment Amount-not the loan premium-if the taxpayers decided to prepay the loan. The Prepayment Amount, however, was contin╜gent because Plaintiffs were required to make the payment only if Plaintiffs decid╜ed to prepay the loan. Further, the amount of any such payment was not fixed and determined but instead changed daily over the seven-year term of the loan as a function of a myriad of variables. As a contingent obligation, neither the potential Prepayment Amount nor the loan premium would constitute a liability under the 752 Cases.
The government asserts that the 752 Cases are not on point. Specifically, the government contends that these cases are factually distinguishable because all of those cases rely on situations wherein a taxpayer wanted to increase basis in the amount of a potential partnership liability that might never actually be incurred. In those cases, the government sought to pre╜vent taxpayers from increasing their basis under Section 752(a) in the amount of a partnership liability that might never be paid. If the partners in those cases were allowed such an increase under Section 752(a), that increase would represent an economic windfall, unless and until the lia╜bility was actually incurred. The govern╜ment contends that this case involves a taxpayer that contributes an existing liabil╜ity to a partnership, but wishes to avoid having to decrease his basis under Section 752(b) by the full amount of liability as╜sumed. The Court is not persuaded.
The government's proposed distinctions are not borne out by the cases. In La Rue, for example, the Tax Court specifical╜ly found that the taxpayer was obligated to make payment. See La Rue v. Comm'r, 90 T.C. 465, 479, 1988 WL 23562 (1988). Moreover, the taxpayer had established reserves to pay this obligation, and such reserves are the functional equivalent of the collateral account here. Nevertheless, the Tax Court found the existing obligation was not a liability under Section 752 be╜cause it was still "contingent in amount." Id . at 479, 1988 WL 23562.
The government asserts that the materi╜al question is whether the Plaintiffs had to repay the full $66,700,000. Specifically, the government views the obligations from an aggregate perspective and asserts that the Plaintiffs always had to repay at least the same minimum amount of money they received from the bank-$66,700,000. The government contends that this accurately reflects the amount of Plaintiffs' liability regardless of whether it is viewed as a $66,700,00 loan; a $41,700,000 loan with a $25,000,000 Premium; or a $41,700,000 loan and a Prepayment Amount.
The government is wrong. The Credit Agreement and supporting documents re╜flect that the only obligations undertaken by St. Croix and Rogue were to repay the $41,700,000 loans over a seven-year term at the increased interest rate or, if they decided to prepay the loans, to pay a Pre╜payment Amount. Plaintiffs dispute the government's contention that a $41,700,000 loan carrying a 17.97% interest rate with a $25,000,000 premium is the equivalent of a $66,700,000 loan carrying a 7% interest rate. In any event, because Plaintiffs had the "option" to prepay the loan, they could escape paying the 17.97% interest for sev╜en years.
Plaintiffs also dispute that the hypothet╜ical "unamortized premium" amount as cal╜culated by the government's experts would be the same as the Prepayment Amount, if any, because under the government's theory, the hypothetical "unamortized premi╜um" amount would be calculated from the outset using a fixed rate of interest, while the Prepayment Amount is calculated us╜ing interest rates in effect when the deci╜sion to prepay the loan is made, which could make the Prepayment Amount sig╜nificantly more or less than the hypotheti╜cal "unamortized premium." While the government is correct that, over the short term, the Prepayment Amount is nearly $25,000,000, that is not determinative. 7 As the Prepayment Amount varies with inter╜est, the amount cannot be determined until prepayment is made. There can be no question that, if the Plaintiffs had waited two years to prepay the loan, the amount would be far different than the loan premi╜um amortized over seven years.
7. ═ That fact would be more relevant to wheth╜er the transaction was a sham or lacked economic substance-issues the government properly asserts are for trial.
The government's attempt to lump all the money together in one pot ignores the plain terms of the Credit Agreement and the Court rejects that argument. Further, as will be seen infra, the promulgation of Notice 2000-44 and the Regulation provide further evidence that the government was well aware that the loan premium and Prepayment Amounts would not be liabili╜ties under Section 752 and the 752 Cases.
B. The Government's Argument Re╜garding Inside/Outside Basis is In╜applicable.
The government also contends that the loan premium or Prepayment Amounts must be liabilities under Section 752 in order to prevent a disparity between what is known as inside and outside basis. Gen╜erally, under Section 722, when a partner contributes property to a partnership in return for a partnership interest, the con╜tributing partner assumes a tax basis in his partnership interest equal to his tax basis in the property he contributed, plus the amount of any cash he contributed to the partnership. The partner's tax basis in his partnership interest is commonly referred to as "outside basis." This is in contrast to the partnership's basis in the assets it received from the partner, which is referred to as "inside basis."
The government contends that the Sec╜tion 752 allocation of partnership liabilities among partners serves to equalize the partnership's basis in its assets (inside ba╜sis) with the partner's basis in their part╜nership interests (outside basis). The Tax Court also recognizes this general rule. See Salina Partnership L.P. v. Commis╜sioner , T.C. Memo.2000-352, 80 T.C.M. (CCH) at 698.
In this case, Plaintiffs' position necessi╜tates that the premiums that are not liabil╜ities under Section 752 would create a disparity between the partners' combined outside basis and the partnership's inside basis of $25,000,000. The government con╜tends that this disparity results in a $25,000,000 windfall in artificial tax basis from loan proceeds that were never taxed as income upon their receipt.
The government's argument regarding the mismatch between inside and outside basis is unavailing. The positions the gov╜ernment took in the 752 Cases resulted in the same disparity between inside and out╜side basis that it protests will occur here under Plaintiffs' position. See, e.g., Hel╜mer v. Comm'r, 34 T.C.M. (CCH) 727 (1975). The only difference between the 752 Cases regarding liability and this case is that the taxpayer is receiving the benefit rather than the IRS.
It is clear from the record that the government has often and consistently re╜lied on the principle that a "liability" under Section 752 does not include an obligation that is contingent. The government has applied this principle when it works to its benefit (to increase taxes owed). This Court will consistently apply these same principles even if they sometimes work to the benefit of taxpayers (to decrease taxes owed). This Court's analysis of "liability" under Section 752 will not vary in meaning simply based on whose ox is being gored.
V. Issuance of Treasury Regulation ╖ 1.752
A. The Law Changes for "Liabilities" Under Section 752
On June 24, 2003, the Treasury Depart╜ment revised the regulations that govern the definition of a "liability" for purposes of Section 752. The new regulations under Section 752 expanded the definition of lia╜bility to include "any fixed or contingent obligation to make payment without re╜gard to whether the obligation is otherwise taken into account for purposes of the Internal Revenue Code." Treas. Reg. ╖ 1.752-1(a)(4)(ii); see also Treas. Reg. ╖ 1.752-6(a); Treas. Reg. ╖ 1.752-7(b)(3).
The Treasury Department decided to make this new regulation retroactive. See Treas. Reg. ╖ 1.752-6 (the "Regulation"). The Regulation purports to apply to all assumptions of "liabilities" (as newly de╜fined) by partnerships occurring after Oc╜tober 18, 1999, and before June 24, 2003 (i.e., the Regulation applies only to as╜sumptions of "liabilities" by partnerships that took place before the Regulation was promulgated). 8
8. ═ The Treasury issued a different regulation for "liabilities" after the effective date of the Regulation.
The Regulation requires a partner to reduce his basis in his partnership interest by the amount of any contingent obligation assumed by the partnership between Octo╜ber 18, 1999, and June 24, 2003, but would not allow the partner to increase his basis for the share of the new partnership liabili╜ty. This would, of course, require a major adjustment to the tax positions taken by the Plaintiffs in this case. 9
9. ═ Under the normal rules of Section 752, a partner's basis in his partnership interest is reduced under Section 752(b) to the extent that the partnership assumes his personal "li╜ability." Section 752(a), however, also allows the partners to increase their bases in the partnership interests by their shares of the liability that the partnership has assumed. The Regulation has no parallel provision. When a partnership assumes a liability sub╜ject to the Regulation, the partners are there╜fore not allowed to increase their basis by their proportionate share of such liability. This is a major difference between the opera╜tion of the Regulation and the prior applica╜tion of Section 752.
There is no doubt that the government knew it was changing the law regarding "liabilities" under Section 752 with this new regulation. The Regulation itself in╜dicates that it changes settled law regard╜ing "liabilities" for Section 752:
"The definition of a liability contained in these proposed regulations does not follow Helmer v. Commissioner, TC Memo 1975-160. (The Tax Court, in Helmer held that a partnership's issuance of an option to acquire property did not create a partnership liability for purposes of Section 752.)."
See Notice of Proposed Rulemaking, 68 Fed.Reg. 37434 (June 24, 2003).
Further, if there was not a change in the law, as the government posits, there would have been no need to promulgate the Reg╜ulation. Indeed, from this Court's view, the promulgation-and the statements made in conjunction with the promul╜gation-is compelling evidence that the IRS knew it was seeking to change settled law to bar, retroactively, the transactions engaged in by the Plaintiffs.
In any event, assuming the Regulation is valid and enforceable as written, summary judgment would be appropriate in favor of the government. Application of the Regu╜lation in this case is straightforward. Un╜der the Regulation, the "premium" portion of the loan must be treated as a liability for purposes of the contributing partners' bases, and as a liability for purposes of the bases of the partnerships. However, be╜fore granting summary judgment in favor of the government, this Court must first determine whether the Regulation is valid and enforceable.
B. The Law Regarding Retroactivity of the Regulation
The Code generally prohibits retroactive regulations. However, Section 7805 of the Code allows the Service to promulgate regulations with retroactive effect under limited circumstances:
(b) Retroactivity of regulations.-
(1) In general.-Except as otherwise provided in this subsection, no tempo╜rary, proposed, or final regulation relat╜ing to the internal revenue laws shall apply to any taxable period ending be╜fore the earliest of the following dates:
(A) The date on which such regula╜tions is filed with the Federal Regis╜ter.
* ═══ * ═══ * ═══ * ═══ * ═══ * ═══ * ═══ *
(3) Prevention of abuse.-The Secretary may provide that any regulation may take effect or apply retroactively to pre╜vent abuse.
* ═══ * ═══ * ═══ * ═══ * ═══ * ═══ * ═══ *
(6) Congressional Authorization.-The limitation of paragraph (1) may be su╜perseded by a legislative grant from Congress authorizing the Secretary to prescribe the effective date with respect to any regulation.
The government contends that the ret╜roactivity of the Regulation is permitted under both Section 7805(b)(3) & (6). The Court will address each in turn.
VI. Analysis of the Regulation
A. Standard of Review for Treasury Regulations
The standard of review applica╜ble to Treasury Regulations depends on whether the regulation at issue is a "legis╜lative regulation" or an "interpretative regulation." 10 A legislative regulation is a regulation issued under a specific grant of Congressional authority to prescribe a method of executing a statutory provision. Snap-Drape, Inc. v. Commissioner, 98 F.3d 194, 198 (5th Cir.1996). In contrast, an interpretive regulation is promulgated pursuant to the Treasury's general author╜ity under I.R.C. ╖ 7805 to prescribe regu╜lations. Id. "A court must accord a higher degree of deference to a legislative regula╜tion than to an interpretive one." Id .
10. ═ A retroactive legislative regulation would correspond to Section 7805(b)(6). If the retroactive regulation is interpretive, it would correspond to Section 7805(b)(3).
The deference accorded to a leg╜islative regulation is so high that such regulations have controlling weight unless they are arbitrary, capricious, or manifest contrary to the underlying statute. Chev╜ron, U.S.A., Inc. v. Natural Resources De╜fense Council, Inc., 467 U.S. 837, 843-44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984); Fransen v. United States, 191 F.3d 599, 600 (5th Cir.1999). This standard of defer╜ence is sometimes referred to as the "Chevron deference." See, e.g., Belt v. EmCare, Inc., 444 F.3d 403, 416 n. 35 (5th Cir.2006). Thus, when reviewing a legisla╜tive regulation entitled to Chevron defer╜ence "a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the ad╜ministrator of an agency." Chevron at 843-44, 104 S.Ct. 2778. Once again, how╜ever, the Chevron deference is only avail╜able to the Regulation if it is a legislative regulation.
B. The Regulation is an Interpretive Regulation-Not a Legislative Reg╜ulation
To assess whether the Regulation is owed Chevron deference, the Court must determine whether the Regulation was issued pursuant to a grant of Congres╜sional authority. The government con╜tends that the Regulation was promulgat╜ed pursuant to ╖ 309 of the Community Renewal Tax Relief Act. See Assumption of Partner Liabilities, T.D. 9207, 70 Fed. Reg. 30334, 30335. There are three parts to Section 309 which are relevant here. First, that section added Section 358(h) to the Code to combat tax results of a corpo╜rate transaction described in Notice 2001-17, which involved the acceleration and duplication of a loss relating to certain liabilities by transferring assets and those liabilities to a corporate subsidiary. Sec╜ond, Section 309(c) then directed the Trea╜sury Department to promulgate "compara╜ble rules" for partnerships:
(c) Application of Comparable Rules to Partnerships and S Corporations.-The secretary of the Treasury or his delegate-
(1) shall prescribe rules which provide appropriate adjustments under subchap╜ter K of chapter 1 of the Internal Reve╜nue Code of 1986 to prevent the acceler╜ation or duplication of losses through the assumption of (or transfer or assets sub╜ject to) liabilities described in section 358(h)(3) of such Code (as added by subsection (a)) in transactions involving partnerships . . .
Finally, Section 309(d) dictated that the rules prescribed under Section 309(c) "shall apply to assumptions of liability af╜ter October 18, 1999, or such later date as may be prescribed in such rules."
In Section 309(c), Congress gave the Treasury Department authority to promul╜gate rules "comparable" to those contained in new Section 358(h) to provide "appropri╜ate adjustments . . . to prevent the accel╜eration or duplication of losses through the assumption of (or transfer of assets sub╜ject to) liabilities described in section 358(h)(3) . . . in transactions involving partnerships". The government contends that this language authorized it to promul╜gate the Regulation in this case. The government is wrong.
In the first place, the Act and its legisla╜tive history do not mention Section 752. Moreover, the legislation that became Act Section 309 was proposed on October 19, 1999, well before the Service issued Notice 2000-44 on August 11, 2000. See Joint Committee on Taxation, Description of Modified Chairman's Mark Relating to Ex╜piring Tax Provisions (JCX-73-99), Octo╜ber 19, 1999 (describing provision to "Pre╜vent Duplication or Acceleration of Loss Through Assumption of Certain Liabili╜ties"). Nothing in the Act or its legislative history suggests that Congress was even aware of the partnership transactions de╜scribed in Notice 2000-44 when the legisla╜tion that became Section 309 was pro╜posed.
In addition, the Treasury Department in fact promulgated a rule in accordance with Section 309 when it issued Treas. Reg. ╖ 1.358-7. This regulation, titled "Transfers by partners and partnerships to corporations," addresses contributions of assets and liabilities by partnerships to corporations in which they are sharehold╜ers. This regulation is plainly the type contemplated by the Act. The Court inter╜prets this grant of authority by Congress to promulgate rules applicable to partner╜ships that were shareholders in corpora╜tions that engaged in transactions subject to Section 358(h). Thus, the Regulation exceeds the grant of Congressional au╜thority. 11
11. ═ While certainly not dispositive, the Court notes that when the Regulation was issued, many commentators also recognized that the Regulation exceeded the scope of Congres╜sional authority. See, e.g., Letter from the American Institute of Certified Public Ac╜countants to Commissioner Mark Everson, re╜printed in AICPA Comments on Proposed and Temporary Regulations on Assumption of Part╜ner Liabilities Under I.R.C. Section 752 , 83 D TR G-7 (April 30, 2004) ("[T]he AICPA is concerned that these regulations appear to exceed the underlying statutory authority."); Letter from the New York State Society of Certified Public Accountants to Mr. Horace Howells at IRS, reprinted in CPAs Comment on Proposed Definition of Partnership Liabili╜ties , 2003 Tax Notes Today 195-16 (Sept. 15, 2003) (noting that the Regulation cannot be reconciled with existing precedent and ex╜pressing concern about the ability of taxpay╜ers to rely on settled law); Letter from Fred Goldberg, Jr. (former IRS Chief Counsel, Commissioner of IRS and Assistant Secretary of the Treasury for Tax Policy) to IRS, reprint╜ed in Goldberg Suggests Son of Boss Regs Will Diminish Settlement Prospects , 2003 Tax Notes Today 219-47 (Nov. 13, 2003) ("[W]e believe that the IRS has significant litigation risks respecting the validity of the Temporary Regulation.").
Even though the Regulation exceeds Congress's ╖ 309 grant of authority, this would not, ipso facto , invalidate the Regu╜lation. Instead, to the extent that Con╜gress' grant of authority was exceeded, the Regulation should be reviewed as an "in╜terpretive regulation" rather than a "legis╜lative regulation." See Snap-Drape, Inc. v. Comm'r , 98 F.3d 194, 199 (5th Cir.1996) ("[A] regulation issued pursuant to a spe╜cific directive may nevertheless be interpretive to the extent it exceeds Congress' specific grant of authority.").
C. The Regulation is Ineffective for Conduct Occurring Before August 11, 2000.
The Service's decision to make a regulation retroactive is reviewed for abuse of discretion. See Snap-Drape Inc. v. Commissioner, 98 F.3d 194, 202 (5th Cir.1996). As the Fifth Circuit noted, "the Internal Revenue Service does not have carte blanche" authority to issue retroac╜tive regulations. See id.
The following factors are relevant considerations when reviewing the efficacy of a retroactive regulation:
(1) whether or to what extent the tax╜payer justifiably relied on settled prior law or policy and whether or to what extent the putatively retroactive regula╜tion alters that law;
(2) the extent, if any, to which the prior law or policy has been implicitly ap╜proved by Congress, as by legislative re╜enactment of the pertinent Code provi╜sions;
(3) whether retroactivity would advance or frustrate the interest in equality of treatment among similarly situated tax╜payers; and
(4) whether according retroactive effect would produce an inordinately harsh re╜sult.
Id. ( citing Anderson, Clayton & Co. v. United States, 562 F.2d 972, 981 (5th Cir. 1977)). This list of relevant factors is not exhaustive and is to serve as flexible guid╜ance when evaluating a retroactive regula╜tion. I d.
1. Factor 1: Whether or to what extent the taxpayer justifiably relied on settled prior law or policy and whether or to what extent the puta╜tively retroactive regulation alters that law.
This case is similar to Snap-Drape in that Plaintiffs can demonstrate that the case law was settled as to the definition of "liability" under Section 752. See id. at 203. Twenty-five plus years of consistent positions by the Service provided a clear definition of "liability" under Section 752. Plaintiffs in this case could justifiably rely on this settled law-even if it might work to lower their respective tax obligations. See, e.g., Compaq Computer Corp. v. Com╜missioner , 277 F.3d 778, 786 (5th Cir. 2001); Carrington v. Comm'r, 476 F.2d 704, 706 (5th Cir.1973); see also Rhodes v. United States, 464 F.2d 1307, 1312 (5th Cir.1972). The Regulation is a clear de╜parture from this accepted definition. Ac╜cordingly, this factor would weigh in favor of invalidating the retroactive effect of the Regulation, at least to the extent the retro╜active application caused the Regulation to apply to conduct occurring prior to issu╜ance of Notice 2000-44.
2. Factor 2: The extent, if any, to which the prior law or policy has been implicitly approved by Con╜gress, as by legislative re-enactment of the pertinent Code provisions.
Since Helmer, Congress has either amended, or authorized the Treasury De╜partment to promulgate regulations inter╜preting, various provisions of subchapter K of the Code. There is no evidence that Congress intended the definition of liabili╜ty under Section 752 to be modified. A failure by Congress to amend Section 752 is implicit approval of the definition devel╜oped under Helmer and its progeny. Dep't of Hous. and Urban. Dev. v. Rucker, 535 U.S. 125, 133 n. 4, 122 S.Ct. 1230, 152 L.Ed.2d 258 (2002). This factor would also support eliminating the retroactivity of the Regulation.
3. Factor 3: Whether retroactivity would advance or frustrate the interest in equality of treatment among similarly situated taxpayers.
There is nothing to suggest unequal treatment for similarly situated taxpayers. Accordingly, this factor would not support invalidating the Regulation.
4. Factor 4: Whether according retro╜active effect would produce an inor╜dinately harsh result.
In many respects Factor 4 relates back to Factor 1. In this case, retroactive appli╜cation will result in the assessment of mil╜lions of dollars in fees against Plaintiffs who ostensibly relied on the Section 752 cases. It is significant that Plaintiffs might have been in a position to structure their conduct differently had they been provided notice of the Service's intentions. Moreover, retroactivity also allows the is╜suance of punitive penalties for conduct that was, on its face, in accordance with the tax laws. See, e.g., Compaq Computer Corp. , 277 F.3d at 786; Carrington, 476 F.2d at 706; Rhodes, 464 F.2d at 1312. This final factor also supports limiting the retroactivity of the Regulation.
While the Court in Snap-Drape ulti╜mately upheld the retroactivity of the reg╜ulation at issue in that case, this case is markedly different. In that case, the ret╜roactivity was tied to the publishing of the proposed regulation itself. See Snap-Drape, 98 F.3d at 202-03. Thus, the regu╜lation was retroactive only to the extent that it was effective back to its originally published date. 12
12. ═ This would also lend support to the retro╜activity being modest and would also high╜light how the taxpayer was on notice of the correct tax treatment. In this case, rules re╜garding the tax treatment itself were not pro╜mulgated until 2003.
In this case, the Regulation was publish╜ed for the first time in June of 2003. There was no indication of the manner the Service intended to change the well-settled definition of "liability" until that time. Moreover, and even more importantly, there was no evidence that the Service even intended to alter the definition of "liabilities" under Section 752 before issu╜ance of Notice 2000-44 .
Consequently, the efficacy of the Regu╜lation is inextricably intertwined with Not ice 2000-44 . On September 5, 2000, the IRS formally released Notice 2000-44 , which describes the same tax issues re╜garding loan premiums that were used by the Plaintiffs in this case. In Notice 2000-44, the IRS made very clear that it would challenge this type of tax treatment. See Tax Avoidance Using Artificially High Basis, 2000 WL 1138430 (Aug. 13, 2000).
Nearly three years later the Treasury Department promulgated the Regulation. The government admits that the Service's intent to apply this regulation to liability assumptions occurring as part of Notice 2000-44 transactions is made explicit in the preamble to the published Regulation, which states:
Prior to the enactment of Code section 358(h) and section 309(c) and (d)(2) of the Act, the lack of specific rules ad╜dressing the treatment of liabilities upon the transfer of property to a corporation or a partnership led to interpretations of then existing law that failed to reflect the true economics of certain transac╜tions. In some cases, taxpayers contin╜ued to assert these interpretations even after the enactment of these statutory provisions. For example, in a transac╜tion addressed in Notice 2000-44 (2000-2 C.B.255), a taxpayer purchases and writes economically offsetting options and then purports to create substantial positive basis by transferring those op╜tion positions to a partnership. On the disposition of the partnership interest, the liquidation of the partner's interest in the partnership, or the taxpayer's sale or depreciation of distributed partner╜ship assets, the taxpayer claims a tax loss, even though the taxpayer has in╜curred no corresponding economic loss.
Thus, it could not be clearer that the government provided notice as early as August of 2000 that it disagreed with the method of tax treatment used by the Plain╜tiffs in this case.
Thus, taxpayers who engaged in conduct similar to the Plaintiffs after August of 2000 were on notice of the Service's issue with these transactions. See Notice 2000-44. The question of whether those taxpay╜ers could have justifiably relied on the definition of "liability" in the 752 Cases in the context of these transactions is not before the Court. 13
13. ═ The Court does not take the occasion to analyze the efficacy of the Regulation after issuance of Notice 2000-44 as that issue is not before the Court. In no way does this Court intend to suggest that the Regulation is, or is not, invalid after Notice 2000-44. However, the Court believes that taxpayers who en╜gaged in the allegedly prohibited conduct pri╜or to issuance of Notice 2000-44 are in a different position than those that engaged in the conduct after issuance.
As stated above, the Plaintiffs in this case did not have the benefit of that no╜tice. 14 All of the conduct complained of in this litigation occurred before Notice 2000-4 4 was published or issued. Taxpayers, including the Plaintiffs, were entitled to rely on the well-established position of the Service for the past 25 years in the 752 Cases. See Snap-Drape, 98 F.3d at 202; Anderson, Clayton & Co., 562 F.2d at 981. The decision to retroactively apply a regu╜latory change that is in conflict with this long line of cases without any prior notice is therefore an abuse of discretion. See id.
14. ═ The government asserts that the Plaintiffs were aware of Notice 2000-44 before they filed their taxes. However, the relevant in╜quiry is whether the taxpayers had "notice" before engaging in the prohibited conduct. In this case, the taxpayers did not have such notice.
Finally, the Court cannot help but note that the Regulation applies only to con╜duct that occurred before June 24, 2003, and after October 18, 1999. See Treas. Reg. ╖ 1.752-6(d). The Service then is╜sued a different regulation to govern liabilities for conduct that occurred after June 24, 2003. A narrow time frame, coupled with conduct that the Service spe╜cifically calls out in the preamble of the Regulation, is a strong indication that the promulgation of the Regulation was to buttress the government litigation position in this and similar cases. See, e.g., Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 213, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) ("Deference to what appears to be noth╜ing more than an agency's convenient liti╜gating position would be entirely inappro╜priate."); see also Chock Full O'Nuts Corp. v. United States, 453 F.2d 300, 303 (2d Cir.1971) ("[T]he Commissioner may not take advantage of his power to pro╜mulgate retroactive regulations during the course of a litigation for the purpose of providing himself with a defense based on the presumption of validity accorded to such regulation."). This issue is support╜ive of Plaintiffs' position that the Regula╜tion is owed no deference and that its ret╜roactivity is ineffective.
Until June of 2003, the Service had as╜serted through litigation that contingent obligations were not liabilities under Sec╜tion 752. The courts agreed with the gov╜ernment for more then two decades. As there was no statutory or regulatory defi╜nition of "liability" under Section 752, the body of law represented by that line of cases provided the only definition available to taxpayers. Accordingly, taxpayers-in╜cluding the Plaintiffs in this case-could justifiably rely on the 752 Cases when making tax decisions.
In June of 2003, the government issued a retroactive regulation that changed the definition of liabilities to specifically in╜clude contingent obligations as well. The issuance of this regulation was due in large part to the government's attempt to curb alleged taxpayer abuse through the use of transactions similar to the ones utilized by Plaintiffs. However, taxpayers-like the Plaintiffs in this case-that engaged in the conduct before issuance of any notice could justifiably rely on Helmer and its progeny. Thus, the retroactivity of the Regulation is ineffective as to these Plaintiffs.