Partnership Denies Transactions Lacked Economic Substance

The partnership states that it was formed on September 15, 1989, and that its members were the Dun & Bradstreet Corp. (D&B), Tonneau Corp., and A.C. Nielsen Company (ACN). At that time, D&B, ACN, and Tonneau made capital contributions to the partnership of $125 million, $125 million, and $750 million respectively. Nieuw Willemstad states that it was formed for the business purpose of investing in highly rated debt instruments and that D&B, ACN, and Tonneau shared the risks and rewards of the partnerships' investments in accordance with the partnership agreement.

Nieuw Willemstad also states that it made a series of purchases and sales in various floating-rate notes and certain short-term debt obligations in September and October of 1989. The partnership states that Tonneau was unrelated to D&B and CAN and that the transactions of the partners with the partnership and with one another were at arm's length. Nieuw Willemstad further contends that its purchase and sale of all the notes were not prearranged or predetermined and were the product of arm's-length negotiations and had economic substance.

Period and Amount at Issue: 1986 -- $99 million; 1987 -- $2.3 million; 1988 -- $381 million; 1990 -- $55 million; 1991 -- $25 million

Code Sections: 6226; 704, 453

COMPLAINT

Plaintiffs, Nieuw Willemstad Partnership and R. H. Donnelley, Corporation, Tax Matters Partner, by and through its attorneys, McDermott, Will & Emery, pursuant to 26 U.S.C. section 6226(a)(2), hereby files this Petition for Readjustment of the partnership items set forth by the Commissioner of Internal Revenue (the "Commissioner"), in a Notice of Final Partnership Administrative Adjustment, dated June 26, 2000. As the basis for the case, Plaintiffs herein allege as follows:

JURISDICTION

1. Jurisdiction is proper in this Court pursuant to 28 U.S.C 1346. Jurisdiction is proper in this judicial district because the Nieuw Willemstad Partnership was liquidated on or about June 30, 1991, and, thus, is no longer a partnership.

2. Pursuant to 26 U.S.C. section 6226(e)(1), R. H. Donnelley, Corporation deposited with the Secretary the following amounts: $99,001,263, $2,336,727, $380,570,339, $55,029,763, and $24,644,575 for its taxable years ended December 31, 1986, December 31, 1987, December 31, 1988, December 31, 1990, and December 31, 1991, respectively. R. H. Donnelley, Corporation has determined, in good faith, that these are the amounts by which its tax liabilities for these taxable years would be increased if the treatment of the partnership items on its consolidated federal income tax returns of The Dun & Bradstreet Corporation (as predecessor to R. H. Donnelley, Corporation) were made consistent with the treatment of partnership items on the Nieuw Willemstad Partnership federal income tax returns, as adjusted by the Notice of Final Partnership Administrative Adjustment ("FPAA").

3. Plaintiffs timely filed this Complaint pursuant to 26 U.S.C. section 6226(a)(2) within ninety (90) days after the Internal Revenue Service mailed the FPAA to Plaintiffs. The FPAA was mailed to Plaintiffs on or about June 26, 2000, and is attached hereto as "Exhibit A."

PARTIES

4. R. H. Donnelley, Corporation ("RHD") is the Tax Matters Partner of Nieuw Willemstad Partnership (the "Partnership" or "NWP"). The Partnership's Employer Identification Number is [EIN omitted]. RHD's Employer Identification Number is [EIN omitted].

5. RHD's corporate offices are located at One Manhattanville Road, Purchase, New York 10577.

6. The Partnership was liquidated on or about June 30, 1991.

FACTS

7. The Partnership was formed on September 15, 1989, under the New York General Partnership Law. Pursuant to the Partnership Agreement, the members of the Partnership were The Dun & Bradstreet Corporation (predecessor to RHD) ("D&B"), A.C. Nielsen Company ("ACN"), and Tonneau Corporation, N.V. ("Tonneau").

8. The Partnership is a partnership for federal income tax purposes.

9. The Partnership held partnership meetings and conducted all of its activities in accordance with the New York General Partnership Law and the Partnership Agreement.

10. The Partnership was formed for a valid business purpose to invest in highly rated debt instruments. D&B, ACN, and Tonneau shared the risks and rewards of the Partnership's investments in accordance with their respective partnership interests as set forth in the Partnership Agreement.

11. The allocation of the Partnership's income, gain, loss, and deduction was in accordance with the Partnership Agreement and had substantial economic effect pursuant to Treas. Reg. section 1.704- 1(b)(2) or, alternatively, was in accordance with the partners' interests in the Partnership pursuant to Treas. Reg. section 1.704- 1(b)(3).

12. On or about September 15, 1989, D&B, ACN, and Tonneau made capital contributions to the Partnership of $125 million, $125 million, and $750 million, respectively, for a total investment of $1 billion.

13. The Partnership retained Merrill Lynch Capital Markets to act as its investment advisor.

14. On September 28, 1989, the Partnership invested $300 million in certain floating-rate notes issued by Fleet/Norstar Financial Group, Inc. ("Fleet/Norstar"), $100 million in certain floating-rate notes issued by Heller Financial, Inc. ("Heller Financial"), and $350 million in certain floating-rate notes issued by Citicorp. The notes were not registered under the Securities Act of 1933 and were not traded on an established securities market.

15. The remaining $250 million was invested by the Partnership in certain short-term debt obligations.

16. On or about October 27, 1989, the Partnership sold $250 million in principal amount of the Citicorp notes to Fuji Capital Markets Corporation ("Fuji") and Sumitomo Bank Capital Markets ("Sumitomo"). The Partnership also sold $100 million in principal amount of the Fleet/Norstar notes to Fuji and $50 million in principal amount of the Heller Financial notes to Sumitomo. The aggregate consideration received by the Partnership from the sales consisted of $340 million cash and certain Installment Purchase Agreements providing for contingent payments (the "Fuji and Sumitomo LIBOR Notes"). The Fuji and Sumitomo LIBOR Notes required Fuji and Sumitomo to make 20 quarterly payments, starting on February 1, 1990, equal to three-month LIBOR multiplied by stated notional amounts. The amount of the first quarterly payments under the Fuji and Sumitomo LIBOR Notes did not become fixed until November 1, 1989.

17. On October 30, 1989, the Partnership sold $200 million principal amount of the Fleet/Norstar notes to the Mitsubishi Bank, Ltd. ("Mitsubishi") and Merrill Lynch Capital Services ("MLCS"). The Partnership also sold $50 million in principal amount of the Heller Financial notes and $100 million in principal amount of the Citicorp notes to Mitsubishi. The aggregate consideration received by the Partnership from the sales consisted of $297.5 million cash and certain Installment Purchase Agreements providing for contingent payments (the "Mitsubishi and MLCS LIBOR Notes"). The Mitsubishi and MLCS LIBOR Notes required Mitsubishi and MLCS to make 20 quarterly payments, starting on February 1, 1990, equal to three-month LIBOR multiplied by stated notional amounts. The amounts of the first quarterly payments under the Mitsubishi and MLCS LIBOR Notes did not become fixed until November 1, 1989.

18. The Partnership properly reported the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes to Fuji, Sumitomo, Mitsubishi, and MLCS under the installment method pursuant to section 453 of the Internal Revenue Code of 1986, and the contingent payment sales provisions in Treas. Temp. Reg. section 15A.453-(c)(1), because the aggregate selling price of the Fleet/Norstar, Heller Financial, and Citicorp notes could not be determined by the close of the Partnership's taxable year of sale.

19. Under Treas. Temp. Reg. section 15A.453-1(c)(3), the installment method required ratable basis recovery of the Partnership's basis in the Fleet/Norstar, Heller Financial, and Citicorp notes.

20. The amount of capital gain reflected by the Partnership with respect to the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes on Exhibit A of the FPAA, $512,187,928, is the amount properly calculated under the ratable basis recovery method set forth in Treas. Temp. Reg. section 15A.453-1(c)(3).

21. On November 6, 1989, D&B and ACN purchased portions of Tonneau's interest in the Partnership for $124,007,247 and $124,037,875, respectively.

22. On November 7, 1989, the Partnership made the following pro- rata distributions: 100% of the Fuji, Sumitomo, Mitsubishi, and MLCS LIBOR Notes to D&B and ACN and $118,142,391 of cash and commercial paper to Tonneau.

23. On or about December 7, 1989, D&B sold its LIBOR Notes to Unibarik A/S for $53,499,740 and ACN sold its LIBOR Notes to Nissho Iwai American Corporation for $53,493,626. D&B and ACN properly reported aggregate losses of $519,566,997 on the sales of the LIBOR Notes.

24. On or about January 19, 1990, the Partnership redeemed a portion of Tonneau's interest by distributing to it $9 million in cash.

25. On April 6, 1990, the Partnership redeemed a portion of Tonneau's interest by distributing to it $307,600,000 in cash.

26. On September 28, 1990, the Partnership redeemed the remainder of Tonneau's interest in the Partnership by distributing to it $71,267,926 in cash.

27. Tonneau was unrelated to both D&B and ACN, and the transactions of the partners with the Partnership and one another were at arm's length and pursuant to the Partnership Agreement.

28. The Partnership's purchases and subsequent sales of the Fleet/Norstar, Heller Financial, and Citicorp notes were not prearranged or predetermined, were the product of arm's length negotiations, and had economic substance.

29. D&B and ACN properly reported their tax bases in the LIBOR Notes received from the Partnership.

30. The sales and dispositions by D&B and ACN of the Fuji, Sumitomo, Mitsubishi, and MLCS LIBOR Notes were not prearranged or predetermined, were the product of arm's length negotiation, and had economic substance.

31. The Partnership filed federal income tax returns for the taxable years ended October 31, 1989, October 31, 1990, and December 31, 1990, and June 30, 1991, with the Internal Revenue Service Center in Philadelphia, Pennsylvania.

32. On January 19, 1990, NWP made an investment of $130,000,000 in Oud Philipsburg Partnership.

BASIS FOR READJUSTMENT OF PARTNERSHIP ITEMS

33. The FPAA, a copy of which is attached hereto as Exhibit A, was mailed to Plaintiffs on or about June 26, 2000, and was issued by the Office of the District Director of the Internal Revenue Service in New York, New York. The FPAA was issued for the Partnership's taxable years ended October 31, 1989, October 31, 1990, December 31, 1990, and June 30, 1991. The adjustments, as set forth in Exhibits A, B, and C to the FPAA, and explained in the Explanation of Adjustments, are based on the following erroneous determinations:

34. The Commissioner erred in determining that NWP should not be recognized as a partnership for federal income tax purposes and that D&B, ACN, and Tonneau should not be recognized as partners of the Partnership on the basis that the relevant transactions involving the purchase and sale of the Fleet/Norstar, Heller Financial, and Citicorp notes lacked economic substance, were prearranged and predetermined, and had no legitimate business purpose. As a result of this determination, the Commissioner erroneously determined that the items of income, gain, loss, and deduction of the Partnership should be allocated in the manner set forth in Exhibit A to the FPAA.

35. The Commissioner erred in determining that the basis of the LIBOR Notes distributed by the Partnership on November 7, 1989, to D&B and ACN was zero, and that no gain was recognized by the Partnership for federal income tax purposes on the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes.

36. The Commissioner erred in alternatively determining that, if NWP is recognized as a partnership for federal income tax purposes, then the transactions financing the purchase and sale of the Fleet/Norstar, Heller Financial, and Citicorp notes, including the characterization of Tonneau as a partner, as well as the purchase and sale of the Fleet/Norstar, Heller Financial, and Citicorp notes, the distribution of the LIBOR Notes and NWP's transactions financing the purchase and sale of Oud Philipsburg Partnership's PPNs should not be recognized for federal income tax purposes on the basis that the transactions did not have economic substance or were Parts Of prearranged or predetermined transactions that had no legitimate business purpose. As a result of this determination, the Commissioner erroneously determined that: (i) the taxable years of the Partnership were the calendar years ended December 31, 1989, December 31, 1990, and June 30, 1991, rather than the fiscal years ended October 31, 1989, October 31, 1990, December 31, 1990, and June 30, 1991; (ii) the items of income, gain, loss, and deduction of the Partnership should be allocated in the manner set forth in Exhibit B of the FPAA; and (iii) the basis of the LIBOR Notes distributed by the Partnership on November 7, 1989, to D&B and ACN was zero, and that no gain was recognized by the Partnership for federal income tax purposes on the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes.

37. The Commissioner erred in alternatively determining that, if NWP is recognized as a partnership for federal income tax purposes and Tonneau is recognized as a partner, then the transactions financing the purchase and sale of the Fleet/Norstar, Heller Financial and Citicorp notes and the distribution of the LIBOR Notes should not be recognized for federal income tax purposes on the basis that the transactions did not have economic substance or were parts of prearranged or predetermined transactions that had no legitimate business purpose. As a result of this determination, the Commissioner erroneously determined that the basis of the LIBOR Notes distributed by the Partnership on November 7, 1989, to D&B and ACN was zero, and that no gain was recognized by the Partnership for federal income tax purposes on the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes.

38. The Commissioner erred in alternatively determining that no gain or loss should be recognized on the purchase and sale of the Fleet/Norstar, Heller Financial, and Citicorp notes, nor on the purchase and distribution of the LIBOR Notes under the step transaction doctrine.

39. The Commissioner erred in alternatively determining that, if NWP is determined to be a partnership, then Tonneau was not a partner in the Partnership and that Tonneau in substance made a loan (and not a capital contribution) to the Partnership. As a result of this determination, the Commissioner erroneously determined that the items of income, gain, loss, and deduction of the Partnership should be allocated in the manner set forth in Exhibit C of the FPAA and that the taxable year of the Partnership is the calendar year rather than a fiscal year ending October 31.

40. The Commissioner erred in alternatively determining that, if NWP is recognized as a partnership and Tonneau is determined to be a partner, then Tonneau was only a transitory partner in the Partnership. As a result of this determination, the Commissioner erroneously determined that the allocation of installment sale gain reported by the Partnership for its taxable year ended October 31, 1989, did not have substantial economic effect and that all of the Partnership's installment sale gain should be allocated to D&B and ACN or, alternatively, that 33 1/3% of such gain should be allocated to each of D&B, ACN, and Tonneau, respectively.

41. The Commissioner erred in alternatively determining that the gain from the sales of the Fleet/Norstar, Heller Financial, and Citicorp notes did not qualify for installment sale reporting on the basis that the steps necessary to create a market for the LIBOR Notes were taken at the time of the issuance of the LIBOR Notes.

42. The Commissioner erred in alternatively determining that D&B was not entitled to the basis in certain notes it contributed to the Partnership because the transaction lacked economic substance and business purpose, was prearranged and predetermined, and no substantive obligation was created by the transaction.

WHEREFORE, Plaintiffs pray that this Court try this case and:

A.1. Determine that the Commissioner erred as alleged in paragraphs 33 through 41 above;

A.2. Determine that there should be no adjustments to partnership items for the taxable years at issue;

A.3. Determine that Plaintiffs are entitled to the correction of all mathematical, computational, and typographical errors in the FPAA; and

A.4. Grant Plaintiffs such other and further relief to which Plaintiffs are entitled, including, but not limited to, the refund of all amounts deposited with the Secretary with respect to this action, together with interest thereon.

RESPECTFULLY SUBMITTED,