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How Abusive Was Tribune Media’s Disguised Sale?

Posted on Jan. 29, 2024
Karen C. Burke
Karen C. Burke

Karen C. Burke is a professor of law and the Richard B. Stephens Eminent Scholar at the University of Florida Levin College of Law.

In this article, Burke addresses the proper application of the general antiabuse rule in Tribune Media.

Copyright 2024 Karen C. Burke.
All rights reserved.

In 2009 Tribune Media Co. deliberately structured the disposition of its controlling interest in the Chicago Cubs (the Cubs transaction) to fit within the debt-financed exception to the partnership disguised sale rules.1 The linchpin of the Cubs transaction was Tribune’s guarantee of the partnership’s senior debt.2 Had Tribune disposed of the Cubs assets in an outright sale, it would have recognized significant gain.3 In 2016 the government assessed a deficiency, claiming that Tribune’s guarantee should be disregarded because the likelihood of payment was too remote.4 In 2021 the Tax Court held that Tribune had entered into a bona fide guarantee and “the fact that having to fulfill the guarantee is remote is not sufficient to disregard it.”5

On appeal to the Seventh Circuit, the government has invoked two antiabuse rules — the specific antiabuse rule of reg. section 1.752-2(j) and the general partnership antiabuse rule of reg. section 1.701-2 — as alternative grounds for disregarding the guarantee.6 In assessing a partner’s economic risk of loss, the government argues that the specific antiabuse rule requires a focus on real-world facts and circumstances despite the constructive liquidation test under the section 752 regulations.7 If the government loses under the specific antiabuse rule, it may still win under the general partnership antiabuse rule. Under existing law, the general antiabuse rule can apply independently of the specific antiabuse rule.8 This article addresses the proper application of the general antiabuse rule in Tribune Media.

The Tax Court’s Decision

The section 701 antiabuse rule authorizes the government to recast a partnership transaction if a principal purpose of the transaction is “to reduce substantially the present value of the partners’ aggregate federal tax liability in a manner that is inconsistent with the intent of Subchapter K.”9 The rule also requires that the “partnership must be bona fide and each partnership transaction or series of related transactions (individually or collectively) must be entered into for a substantial business purpose.”10 In Tribune Media, the Tax Court determined that the general antiabuse rule was not violated even though the guarantee “appeared to have minimal impact on the economics of the debt,” while resulting in “significant improvement to the partner’s after-tax consequences from the transaction.”11

In applying the antiabuse rule, the Tax Court looked at whether “the Cubs transaction as a whole” had a substantial business purpose.12 According to the Tax Court, the general antiabuse rule requires only “a genuine business purpose for forming the partnership, not that every component of the partnership’s formation have a separate business purpose.”13 The court viewed the business purpose requirement as “a broad provision applying to the function of the partnership as a whole [which] is not intended to apply to every agreement into which the partnership or its partners enter.”14 The business purpose requirement focuses on whether “the entities engaged in the transaction are genuine and profit-motivated or whether the ultimate intent of the transaction had a nontax purpose.”15 Further, in determining “whether a transaction has a nontax motive,” the court focused on “whether the transaction alters the taxpayer’s economic position.”16 Because the Cubs transaction was “not a sham and resulted in significant economic outcomes,” the partnership had a “bona fide business purpose.”17

Even if the guarantee were viewed as the “transaction” that required a substantial business purpose, the court found no violation of the section 701 antiabuse rule.18 While the guarantee exposed Tribune to de minimis risk,19 the court said that “a guaranty does not require a separate purpose other than pledging ultimate payment for a loan.”20 Since Tribune bore “ultimate responsibility” for the debt, the guarantee was valid even if it provided no “additional extrinsic benefits” that a commercial lender might seek.21 In determining Tribune’s economic responsibility for the partnership debt, the court applied the fictions of the constructive liquidation test.22 Thus, the issue was whether Tribune could be called on to satisfy its guarantee if all of the partnership’s assets were deemed worthless in a worst-case scenario.23

Arguments on Appeal

On appeal, Tribune insists that both the overall Cubs transaction and the guarantee had valid business purposes.24 According to Tribune, the proper “unit of analysis” under the antiabuse rule is the “overall Cubs transaction,” that is, the “series of transactions that includes the guarantee.”25 The overall Cubs transaction was the proper focus because all parts of the transaction were needed to generate the claimed tax benefits, including “forming the partnership, taking out the loans, and distributing the proceeds to Tribune.”26 Tribune argues that focusing on the guarantee in isolation would allow the antiabuse rule to apply whenever a tax-motivated step is carved out of a larger transaction that has a bona fide nontax purpose.27

Not surprisingly, the government rejects that broad framing of the transaction at issue. According to the government, the business purpose requirement applies to each transaction, not to the function of the partnership as a whole.28 Aside from avoiding taxes, “it made no sense for Tribune to relinquish 95 percent of its ownership over the Cubs assets, while guaranteeing” the senior debt that funded the purchase price of those assets.29 Thus, the guarantee — which was indispensable for obtaining the claimed tax benefits — was the transaction that required a substantial business purpose.30 Absent the guarantee, Tribune would have been treated as selling outright its interest in the Cubs, triggering an immediate tax on its built-in gain. The antiabuse rule requires comparison of the claimed tax benefit — avoiding a large amount of taxable gain — with the purported business purpose for the guarantee.31 Focusing on the guarantee as the transaction that generated the claimed tax benefits comports with case law under the economic substance doctrine.32

Framing the Transaction

The outcome will likely depend on whether the relevant transaction is framed narrowly as a series of tax-motivated steps (the debt-financed distribution and Tribune’s guarantee) or more broadly in terms of an overall business objective (the Cubs transaction).33 In Tribune Media, the framing issue should have been relatively straightforward: The guarantee was clearly the transaction that generated the claimed tax benefits and thus required a substantial business purpose. Still, Judge Ronald Buch framed the transaction broadly as the overall Cubs transaction, relying on Judge James Halpern’s interpretation of the substantial business purpose requirement in Countryside.34

The Countryside transaction involved a tiered partnership arrangement that was intended to avoid gain on a sale of low-basis property (real estate held by the partnership) and to duplicate basis in other property (AAA-rated notes distributed to partners whose interests were redeemed).35 In Countryside, the taxpayers won “because the court defined the ‘transaction’ to be tested . . . as the broader one (that is, the sale of the real estate) and it conceived of the investment in the AAA notes as a means of effecting the sale.”36 The court found that the redemption served a “genuine, nontax business purpose” and had economic substance because the redemption was a real transaction.37 In determining that the withdrawing partner had a substantial business purpose for converting his partnership interest into the distributed AAA notes, the court failed to weigh the tax benefits to the withdrawing partner (avoiding section 731 gain on a cash distribution) against the purported business purpose.38

The court looked only at whether distribution of the notes triggered gain to the redeemed partner, while ignoring the earlier formation of a lower-tier partnership whose only apparent purpose was to avoid a step-down in the inside basis of the distributed notes. Given the procedural posture of the case, the court did not consider the broader tax consequences that flowed from the tiered partnership structure and each of its contrived steps.39 The court’s narrow holding was that the fictional distribution of notes had economic substance, even though analysis of the larger transaction might well require a different result.40 The Countryside litigation eventually culminated in a stipulated decision.41 Applying section 743(b) and the general antiabuse rule, the court ordered a $12 million step-down in the basis of the AAA notes (while preserving the $12 million basis step-up in Countryside’s real property), resulting in $12 million of deferred capital gain for the redeemed partners when the AAA notes were ultimately paid.42

In applying the general antiabuse rule, Countryside illustrates the importance of properly framing the relevant transaction. While Countryside is often cited as authority for interpreting the business purpose requirement, the decision ignored the language of the general antiabuse rule, which requires that “each partnership transaction or series of related transactions” must be entered into for a “substantial business purpose.”43 Moreover, the decision conflated the requirement of a “genuine, nontax business purpose” under the economic substance doctrine with the substantial business purpose requirement under the general antiabuse rule.44 Finally, the court failed to weigh the taxpayer’s business purpose for the transaction against the claimed tax benefits.

Tribune argues that the partnership antiabuse rule cannot apply because Tribune merely “used a well-established and thoroughly regulated type of partnership transaction and . . . followed an on-point tax regulation to the letter.”45 In fact, ILM 201324013 appears to target a 2008 leveraged partnership transaction in which Tribune disposed of another of its businesses (Newsday Media Group) to Cablevision Systems Corp.46 The Newsday transaction was similar in structure to the leveraged partnership transaction that the Tax Court struck down in Canal Corp.47 Following the Tax Court’s decision in Canal Corp., Tribune agreed to pay significant tax, penalties, and interest to resolve the dispute arising from its 2008 sale of Newsday.48 While the 2009 Tribune transaction was structured to create the appearance of economic risk of loss, it sought to eliminate rather than merely defer gain.49 The antiabuse rule warns that the claimed tax treatment may be modified “to achieve tax results that are consistent with the intent of subchapter K” even though “the transaction may fall within the literal words of a particular statutory or regulatory provision.”50 Using an illusory guarantee to eliminate gain through a debt-financed distribution is clearly inconsistent with the intent of subchapter K.51

Conclusion

The Tribune Media litigation involves high stakes for the government as well as for taxpayers. While district courts have applied reg. section 1.701-2 “without questioning its validity,”52 leading partnership tax practitioners have described the antiabuse rule as a “stunning departure from existing law.”53 Despite the controversy surrounding its initial promulgation, the general antiabuse rule appears to be consistent with the prevailing trend of judicial decisions.54 The Seventh Circuit need not reach the general antiabuse rule if it determines that the transaction violates the specific antiabuse rule of reg. section 1.752-5(j).55 Absent that determination, the Seventh Circuit will be forced to deal squarely with Tribune’s claim that reg. section 1.701-2 is invalid.56 Given the apparently abusive nature of the Tribune transaction, finding the antiabuse rule invalid under these facts would invite even more aggressive tax planning. Contrary to Tribune’s claim that it engaged in a routine debt-financed distribution that complied with the literal requirements of reg. section 1.707-5(b)(1), this highly engineered transaction sought permanent elimination of gain by exploiting the provisions of subchapter K in a manner unintended by lawmakers.57

Regardless of whether the specific antiabuse rule applies, the general antiabuse rule remains viable as an alternative ground for challenging the transaction. Even under reg. section 1.701-2, however, the government could lose if Tribune’s disguised sale is framed broadly as the overall Cubs transaction rather than the tax-motivated debt-financed guarantee and distribution. Focusing the business purpose requirement on the “function of the partnership as a whole,” as the Tax Court did, would undercut the antiabuse rule and allow validly formed partnerships to engage in tax-avoidance transactions with impunity.58 Despite the restrictive view articulated by the Tax Court in Tribune Media and Countryside, the substantial business purpose requirement appears to impose a more rigorous standard than a merely plausible business purpose.59 Indeed, the noncommittal view of the antiabuse rule espoused in Countryside should perhaps have prompted the Tax Court to scrutinize more closely the carefully contrived appearance of risk created by the guarantee in Tribune Media.60 Moreover, the section 701 regulations require that the business purpose for the transaction be weighed against the claimed tax benefit.61 If the Seventh Circuit compares Tribune’s tax-motivated guarantee with the claimed tax benefit — gain elimination rather than mere deferral — the government should prevail.62

FOOTNOTES

1 See Tribune Media Co. v. Commissioner, T.C. Memo. 2021-122; reg. section 1.707-5(b)(1) (debt-financed distribution exception). When the debt-financed exception applies, the distribution is taxable only to the extent the distributee receives money or other consideration exceeding the distributee’s allocable share of the debt.

2 The guarantee purportedly converted the partnership’s nonrecourse debt to a recourse debt allocatable solely to Tribune. See reg. section 1.707-5(a)(2)(i) (allocation of recourse liabilities).

3 In 2008 Tribune converted from a C to an S corporation owned by a tax-exempt employee stock ownership plan. The Cubs transaction was structured to permanently eliminate built-in gain of the former C corporation. The partnership elected the remedial method, thereby allowing the purchasing partner (the Ricketts family) to amortize the value of the Cubs assets as if the assets were acquired in a fully taxable transaction while the corresponding remedial income was nontaxable to the S corporation. See infra note 49. In 2012 following bankruptcy proceedings, Tribune converted back to a C corporation.

4 At trial, the government claimed that many “buffers” made it unlikely that Tribune’s guarantee would be called on, and that the Ricketts family was the “real guarantor” given their incentive to protect their investment. Tribune Media, T.C. Memo. 2021-122 at 99. If the guarantee were ignored, Tribune would be allocated only 5 percent of the partnership’s nonrecourse liability based on its percentage interest in the partnership. See reg. section 1.707-5(a)(2)(i)(ii) (allocation of nonrecourse liabilities).

5 Tribune Media, T.C. Memo. 2021-122, at 3. In addition to the senior debt of $425 million, Tribune also guaranteed subordinated debt of $248,750,000 which the court disregarded as not bona fide debt. See id. The portion of the distribution attributable to the subordinated debt thus triggered gain. On appeal, Tribune contests the non-debt finding concerning the subordinated debt. Petitioners’ Opening and Response Brief at 74 et seq., Tribune Media, Nos. 23-1135, 23-1136, 23-1242, and 23-1243 (Aug. 8, 2023) (hereinafter Tribune Brief).

6 See IRS Combined Answering and Reply Brief at 3, Tribune Media, Nos. 23-1135, 23-1136, 23-1242, and 23-1243 (Nov. 6, 2023) (arguing that the “court misinterpreted and misapplied the plain text of two independent anti-abuse regulations”) (hereinafter Government Brief).

7 See id. According to Tribune, the specific antiabuse rule is not a “freestanding rule” that permits the government to override the constructive liquidation test. Tribune Brief, supra note 5, at 39; cf. Kristen A. Parillo, “IRS Isn’t Rewriting Debt Allocation Rules in Tribune, Says DOJ,” Tax Notes Federal, Nov. 13, 2023, p. 1305.

8 See Government Brief, supra note 6, at 27-28; see also James B. Sowell, “The Partnership Anti-Abuse Rules: Where Have We Been and Where Are We Going?” 89 Taxes 69, 79-80 (Mar. 2011). Cf. Tribune Brief, supra note 5, at 63 (arguing that the specific antiabuse rule “defines exactly what is considered abusive” and that a transaction falling outside the scope of the specific rule is necessarily “not abusive”). The government has previously invoked the general antiabuse rule in addition to a specific antiabuse rule. See Countryside Limited Partnership v. Commissioner, T.C. Memo. 2008-3.

11 See William McKee et al., Federal Income Taxation of Partnerships and Partners, para. 1.05[4][a] (2023).

12 See Tribune Media, T.C. Memo. 2021-122 at 110. The court focused on the partnership’s business purpose for owning and operating the Cubs.

13 Id. at 108.

14 Id. at 109; see id. (“That level of minutiae was not contemplated by the general anti-abuse rule.”).

15 Id. at 109-110. As support for this interpretation of the substantial business purpose requirement, the court cited two decisions by Judge James Halpern. See id. at 110 n.176 (citing Countryside, T.C. Memo. 2008-3; and DTDV LLC v. Commissioner, T.C. Memo. 2018-32).

16 Tribune Media, T.C. Memo. 2021-122, at 110.

17 Id.

18 Id. at 110-111.

19 Government Brief, supra note 6, at 8 (noting that “Tribune [bore] an undisputed risk on the Senior Debt from zero to a maximum of 0.43 percent”).

20 Tribune Media, T.C. Memo. 2021-122, at 111.

21 Id.; see id. (“Conditioning the validity of a guaranty on its provision of additional extrinsic benefits overlooks its essential function.”).

22 Id. at 94 et seq. The court referred to language in the 1984 conference report indicating that the revised liability shares under section 752 should “take into account, where possible, the manner in which the partners share the economic risk of loss with respect to the borrowed amounts.” Tribune Media, T.C. Memo. 2021-122, at 53 n.53 (citing H.R. Conf. Rep. No. 98-861, at 868 (1984)).

23 See reg. section 1.752-2(a) and (b)(1).

24 See Tribune Brief, supra note 5, at 22.

25 Id. at 64-65. According to Tribune, the transaction may be either “one transaction” or a “series of related transactions.” In the case of a series of transactions, the court does not consider each individual transaction because the regulations “collectively” define the transaction requiring a substantial business purpose to be “the series of related transactions.” Id. at 65.

26 Id. at 66.

27 According to Tribune, the antiabuse rule does not prevent a “partner from also having a tax-related motive, or require that the business purpose be more important than the tax-related motive.” Id. at 70 (citing UPS v. Commissioner, 254 F.3d 1014, 1019 (11th Cir. 2001)). Cf. David P. Hariton, “The Frame Game: How Defining the ‘Transaction’ Decides the Case,” 63 Tax Law. 1, 1 (2009) (noting that “any tax-motivated financial structure can be made to look like a tax shelter by defining the transaction as consisting solely of the relevant tax-motivated structuring steps (rather than of the broader business objective or operations to which those steps are applied)”).

28 See Government Brief, supra note 6, at 28.

29 Id. at 34. In fact, the partners’ arrangement and over-collateralization of the senior debt meant that Tribune bore no more than a de minimis risk under its guarantee. See id.

30 See id. at 30-31. According to the government, Tribune had no business purpose for the guarantee, “which existed only to support outsized tax benefits.” Id. at 35.

31 See reg. section 1.701-2(c) (requiring a “comparison of the purported business purpose for a transaction and the claimed tax benefits resulting from the transaction”).

32 See Government Brief, supra note 6, at 32; Coltec Industries Inc. v. United States, 454 F.3d 1340, 1356 (Fed. Cir. 2006) (noting that “the transaction to be analyzed is the one that gave rise to the alleged tax benefit”); Liberty Global Inc. v. United States, No. 1:20-cv-03501 (D. Colo. 2023) (agreeing with Coltec and considering “the appropriate level of granularity to be used in selecting the transaction or set of transactions to be analyzed”); see also GSS Holdings (Liberty) Inc. v. United States, 81 F.4th 1378, 1381-1383 (Fed. Cir. 2023) (explaining that the Coltec approach does not apply to the step transaction doctrine). Given the close relationship between the economic substance doctrine and the general antiabuse rule, the Coltec approach should apply here.

33 See Hariton, supra note 27, at 1 (“As a result, the battle in the courts is primarily about ‘framing’ the transaction.”).

34 See Tribune Media, T.C. Memo. 2021-122, at 110 n.176 (citing the conclusion in Countryside, T.C. Memo. 2008-3, that the “ultimate transaction . . . accomplished a legitimate economic or business purpose”). Judge Buch also cited another decision by Judge Halpern which sheds no light on the substantial business purpose requirement but questions the reach of the section 701 antiabuse rule. See id.; DTDV LLC, T.C. Memo. 2018-32 (“An interpretation of the [reg. section 701-2] regulation that would allow a recast not supported by any of the [other judicial doctrines] would be questionable.”).

35 The taxpayers asked the court to ignore the steps that actually occurred and recast the transaction “as if” the redeemed partners had received a simple distribution of nonmarketable notes. For a description of the Countryside transaction, see Karen C. Burke, “Reframing Economic Substance,” 31 Va. Tax Rev. 271, 284-288 (2011); id. at 284 (“Indeed, Countryside suggests a routine planning strategy for partners in real estate partnerships who wish to indefinitely defer and convert gain on depreciated real estate through a pre-sale redemption.”).

36 Hariton, supra note 27, at 7-8. Alternatively, Judge Halpern may have reached a taxpayer-friendly decision simply by focusing on the wrong transaction. See infra notes 39-42 and accompanying text.

37 The transaction accomplished a conversion of the taxpayers’ partnership interests into AAA notes, “two economically distinct forms of investment.” Countryside, T.C. Memo. 2008-3. Because the court found that the AAA notes were not marketable securities under section 731(c), the distribution was tax free. Cf. reg. section 1.731-2(h) (specific antiabuse rule applicable to marketable securities).

38 Reg. section 1.701-2(c); see McKee et al., supra note 11, at para. 1.05[4][b][vi] (“The only court to have considered the application of the substantial-business-purpose component of the abuse-of-subchapter-K rule ignored the impact of the super factor.”).

39 Those steps consisted of the borrowing and purchase of AAA notes, the formation of two lower-tier partnerships, the deferral of gain to the redeemed partners, the step-up in the basis of the real estate, and the lack of a basis step-down in the AAA notes.

40 See Countryside, T.C. Memo. 2008-3, at 60 n.29 (noting that the “totality of the actions taken by Countryside” might violate the antiabuse rule or the economic substance doctrine).

41 See Countryside Limited Partnership v. Commissioner, No. 22023-05 (T.C. May 26, 2011); Countryside Limited Partnership v. Commissioner, No. 3162-05 (T.C. May 26, 2011); CLP Promisee LLC v. Commissioner, No. 2176-08 (T.C. May 26, 2011); Manchester Promisee LLC v. Commissioner, No. 2178-08 (T.C. May 26, 2011).

42 The redeemed partners were also liable for a 20 percent penalty on a portion of the tax underpayment. The stipulated decision eliminated the basis duplication portion of the transaction but left intact the redeemed partners’ gain deferral. See id.

44 Having ruled on the economic substance issue, Judge Halpern treated the business purpose requirement under the section 701 antiabuse rule essentially as an afterthought. See Countryside, T.C. Memo. 2008-3. In arguing that the section 701 antiabuse rule did not alter the tax consequences under section 731, Dow Chemical relied on Countryside’s determination that the redemption, in isolation, had economic substance and did not violate substance-over-form principles. Burke and McCouch, “Sham Partnerships and Equivocal Transactions,” 69 Tax Law. 625, 656-657 (2016); Chemtech Royalty Assoc. LP v. United States, 766 F.3d 453, 465-466 (5th Cir. 2014) (finding partnership was not a valid partnership).

45 Tribune Brief, supra note 5, at 1.

46 See ILM 201324013; Amy S. Elliott, “Practitioners Question IRS Analysis in Challenge of Next-Generation Canal Transaction,” Tax Notes Today, June 6, 2013.

47 Canal Corp. v. Commissioner, 135 T.C. 199, 211-217 (2010) (applying the specific antiabuse rule of reg. section 1.752-2(j)).

48 See Elliott, “Tribune Settles with IRS Over Leveraged Partnership Dispute,” Tax Notes, Sept. 26, 2016, p. 1777.

49 See supra note 2; Government Brief, supra note 6, at 2 (asserting that the transaction’s goal was “tax avoidance” rather than “tax deferral”); cf. Tribune Brief, supra note 5, at 1 (“Importantly, the regulations allow Tribune only to defer the tax and pay it over a period of years, not to avoid paying tax entirely.”). After Tribune converted again to a C corporation in 2012 it was taxable on income corresponding to the remedial allocations to the other partner that generated amortization deductions equal to the value of the Cubs franchise over 15 years. Tax Matters Agreement, Exhibit H to Formation Agreement, In re Tribune Co., No. 08-13141 (D. Del. Dec. 8, 2008); Paul Caron, “Lawsky: The Tax Savings Behind the Sale of the Chicago Cubs for $845 Million,” TaxProf Blog, Sept. 18, 2009.

50 Reg. section 1.701-2(b). See Burke and McCouch, supra note 44, at 656 (“A basic premise of Subchapter K, implicit in the basis provisions, is that any realized gain deferred through basis adjustments and tax-free distributions will be preserved and will ultimately be accounted for by the partners.”).

51 Cf. Richard M. Lipton, “Tribune Media: A Split Decision for the Chicago Cubs’ Leveraged Partnership Transaction,” 136 J. of Tax’n 6, 6 (Feb. 2022) (“These transactions have become a regular part of tax planning for partnerships, and the decision in Tribune Media confirms that a properly-structured transaction works.”).

52 Government Brief, supra note 6, at 26. See Pritired 1 LLC v. United States, 816 F. Supp. 2d 693, 741-743 (S.D. Iowa 2011); Fidelity International Currency Advisor A Fund LLC v. United States, 747 F. Supp.2d 49, 234-235, 244 (D. Mass. 2010), aff’d, 661 F.3d 667 (1st Cir. 2011).

53 McKee et al., supra note 11, at para. 1.05[1][a].

54 See Sowell, supra note 8, at 103 (“Much has happened since the adoption of reg. section 1.701-2. Case law has developed in a way that generally has been favorable to the IRS in attacking aggressive partnership structures, and Congress has enacted Code Sec. 7701(o) codifying the economic-substance doctrine.”); see also Fidelity, 747 F. Supp. 2d at 234 (describing partnership antiabuse rule as “a complement to the common-law doctrines”).

55 See Sowell, supra note 8, at 103 (“On balance, a narrow antiabuse rule like reg. section 1.752-2(j) seems perfectly justifiable.”); id. (describing reg. section 1.752-2(j) as a “good” antiabuse rule).

56 See Tribune Brief, supra note 5, at 21, 58-62; Government Brief, supra note 6, at 21-27.

57 In addition to Tribune’s illusory guarantee, the transaction exploited the remedial allocation method: But for the use of the remedial allocation method, it would have been nonsensical for the Ricketts to have agreed to acquire the Cubs’ assets with their existing low basis. Thus, Tribune’s claim that the transaction was structured to result in mere deferral overlooks the fact that remedial income allocable to Tribune was nontaxable as long as its S status was preserved. See reg. section 1.704-3(a)(1) (cross-referencing the section 701 antiabuse rule).

58 See Government Brief, supra note 6, at 29 (arguing that “the Tax Court’s interpretation could eviscerate” the section 701 antiabuse regulations).

59 See Pritired 1 LLC, 816 F. Supp. 2d 693, 743 (noting that “‘substantial business purpose’ implies a higher standard than a ‘business purpose’”).

60 See Countryside T.C. Memo. 2008-3, at 60 n.29 (noting that the “totality of the [taxpayer’s] actions” might “present grounds for . . . invoking” the antiabuse rule, but declining to address the applicability of reg. section 1.701-2 as “not germane” to the motion before the court). Although the Tax Court relied heavily on Countryside for its business purpose analysis in Tribune Media, on appeal neither party’s brief mentions Countryside or the subsequent stipulated decision applying the section 701 antiabuse rule.

61 See Sowell, supra note 8, at 76 (noting that a “weighing of nontax business purpose against tax savings crept into the analysis” as a result of case law development independent of the antiabuse rule) (citing ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998); ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000)).

62 Alternatively, the Seventh Circuit could remand the case to the Tax Court for proper application of the section 701 antiabuse rule to the Tribune facts.

END FOOTNOTES

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