IRS Denied Summary Judgment on Partnership’s Disallowed Loss

PEKING INVESTMENT FUND LLC, PEKING INVESTMENT HOLDINGS LLC,
TAX MATTERS PARTNER,
Petitioner(s),
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Pursuant to Tax Court Rule 50(f), orders shall not be treated as precedent,
except as otherwise provided.

UNITED STATES TAX COURT
WASHINGTON, DC 20217

ORDER

This is a partnership-level action brought in response to a notice of final partnership administrative adjustment (FPAA) sent to Peking Investment Fund, LLC (PIF), a Delaware limited liability company classified as a partnership for Federal tax purposes. See sec. 301.7701-3(b)(1), Proced. & Admin. Regs. Respondent has moved for partial summary adjudication in his favor that his FPAA properly disallowed a loss of $26,903,619 that PIF claimed for its taxable year ended December 31, 2001, as a result of its exchange of an interest in one portfolio of nonperforming loans (NPLs) for another. Specifically, PIF transferred an interest in a portfolio of NPLs originated by China Construction Bank (the CCB NPL portfolio) that it had received as a contribution from China Cinda Asset Management Corporation (Cinda). In exchange, PIF received interests in portfolios of NPLs originated by Korean Development Bank (the KDB NPL portfolios). Respondent justifies his disallowance of the claimed loss on two alternative grounds. First, he argues that "PIF may be disregarded as a matter of law under the sham partnership doctrine". Alternatively, he claims that section 482¹ allows him to reduce Cinda's basis in the CCB NPL portfolio so that PIF acquired its interest in that portfolio with a basis, determined under section 723, of $774,999. Because PIF reported an amount realized from its receipt of interests in the KDB NPL portfolios in approximately the same amount (with an apparent $1 rounding difference), respondent concludes that PIF realized no loss on its receipt of those interests in exchange for its interest in the CCB NPL portfolio. Petitioner objects to the granting of respondent's motion. Because the validity of each of respondent's two arguments in support of justifying the FPAA's disallowance of the loss in issue turns on disputed questions of material fact, we will deny respondent's motion.

Summary Judgment

Summary judgment is appropriate "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b).

Background

On the basis of the parties' submissions, we understand that the following facts are not in dispute:

During late 2001, Chenery Associates Incorporated (Chenery) promoted an investment program it referred to as the Chenery Distressed Asset Fund program. The program involved the formation of funds to invest in the Asian distressed security market. The transactions implemented as part of that program appear to be at least broadly similar to those commonly referred to as "Distressed Asset/Debt" or "DAD" transactions. See, e.g., Superior Trading, LLC v. Commissioner, 137 T.C. 70, 71 (2011), aff'd, 728 F.3d 676 (7th Cir. 2013); Russian Recovery Fund Ltd. v. United States, 122 Fed. Cl. 600, 601 (2015), aff'd, 851 F.3d 1253 (Fed. Cir. 2017).

Chenery hired Houlihan Valuation Advisors (Houlihan) to value the CCB NPL portfolio, which Cinda had purchased from CCB in June 2001. In a report dated December 20, 2001, Houlihan stated its view that the portfolio was worth $7,627,000 as of December 7, 2001. The Houlihan appraisal served as the basis for negotiations between Chenery and Cinda concerning the portfolio's value. In particular, Chenery viewed the Houlihan appraisal as establishing a ceiling or cap on that value.

Chenery also engaged the law firm of Dorsey & Whitney LLP (Dorsey & Whitney) to review the documentation of the loans in the CCB NPL portfolio. Dorsey & Whitney was to begin its work on December 2, 2001, in preparation for an acquisition of the CCB NPL portfolio initially scheduled to close on December 7, 2001. Because of the "short time period prior to closing", Dorsey & Whitney's review was not as thorough as it would otherwise have been.

On December 10, 2001, Cinda contributed to PIF an 11.06836% interest in the CCB NPL portfolio in exchange for a 99% interest in PIF. As a result of its contribution, Cinda received a capital account credit of $774,999. At that time, Chenery Management Incorporated (CMI) owned the remaining 1% interest in PIF. Also on December 10, 2001, Cinda entered into an agreement that required it to act as servicer of the CCB NPL portfolio.

On December 24, 2001, Cinda contributed to Peking Investment Holdings LLC (PIH), another Delaware limited liability company, a 98% interest in PIF in exchange for a 99% interest in PIH. On that same date, Cinda sold its entire interest in PIH to Li Chien Tsai, Phil Groves, Larry J. Austin, and Roy E. Hahn (collectively, the U.S. investors), who paid Cinda an aggregate purchase price of $767,170 ($774,999 × 98/99).

On December 26, 2001, PIF first exchanged its interest in the CCB NPL portfolio for interests in the KDB NPL portfolios and then exchanged its interests in the KDB NPL portfolios for an interest in a portfolio of NPLs originated by Bank of China (the Bank of China NPL portfolio). On a Form 1065, U.S. Return of Partnership Income, that PIF filed for a taxable year beginning on December 25, 2001, and ending on December 31, 2001, the partnership reported a loss of $26,903,619 from its exchange of its interest in the CCB NPL portfolio for its interests in the KDB NPL portfolios. The claimed loss represented the excess of a claimed basis of $27,678,617 in PIF's interest in the CCB NPL portfolio over an amount realized of $774,998.

Sham Partnership Doctrine

The Parties' Arguments

Respondent, quoting Commissioner v. Culbertson, 337 U.S. 733, 742 (1949), argues: "To form a genuine partnership for federal tax purposes, the parties must 'in good faith and acting with a business purpose' intend 'to join together in the present conduct of the enterprise.'" He advances three purportedly alternative grounds to support his claim that PIF fails the Culbertson test and thus should be disregarded as a "sham partnership". First, he asserts that PIF and PIH were formed to implement a "tax scheme" intended to allow the U.S. investors to claim tax losses without being exposed to an economic risk of loss. In support of his claim that the investors in the partnerships sought to avoid economic risk of loss, respondent refers to two letters signed by Roy Hahn, who (in addition to being one of the US investors) was Chenery's Managing Director. Each letter was written to a potential investor in Chenery's Distressed Asset Fund Program and states:

Chenery has arranged the fund so that any of the investments owned by the fund at the time of purchase can be sold or exchanged before December 31, 2001 without risk of economic loss. As the Manager of the fund, Chenery has decided to allow fund members the opportunity to request that the fund sell or exchange the investments currently owned by the fund. Therefore, please review all of the information you have received to determine if the * * * meets your investment criteria.

Second, respondent contends that Cinda did not intend to become a partner in PIF or PIH or to conduct the business of collecting NPLs. In support of that claim, he points to Cinda's contribution of a 98% interest in PIF to PIH and its prompt sale to the US investors of its entire interest in PIH. Respondent also alleges that "although Cinda was contractually obligated to collect on the NPLs for PIF, Cinda took no such collection action". Finally, respondent claims that "Cinda had only a fleeting, nominal interest in PIF and had no real participation in the profits or activities of PIF".

Third, respondent claims that none of PIF's or PIH's partners intended to conduct the business of collecting NPLs and that transactions he alleges were engaged in by the U.S. investors to increase their outside bases in PIH demonstrates that PIF and PIH were formed to generate tax losses. Respondent also alleges that Cinda breached its agreement to service the CCB NPL portfolio and that "neither PIF nor any of its direct or indirect partners * * * [took] any action, other than transmitting strongly worded letters, against Cinda". Respondent points to a memorandum provided by Dorsey & Whitney to Roy Hahn dated January 8, 2002, that describes the firm's efforts to review the documentation underlying the CCB NPL portfolio and expresses concerns about the enforceability of many of the loans in that portfolio.

Petitioner accepts that "the legal standard for partnership for Federal income tax purposes * * * is principally Culbertson" but nonetheless disputes respondent's claim that PIF can be disregarded as a sham under the Culbertson test. Petitioner reasons that respondent's evidence about the U.S. investors' interest in tax losses does "not rebut PIF's over-arching profit-making business purpose."

In countering respondent's claim that Cinda did not meaningfully participate in PIF's profits or activities and had only a "fleeting" and "nominal" interest in the partnership, petitioner refers to "Cinda's continuing 1% PIF interest".

Petitioner acknowledges that one of the "Investment Reports" regarding the CCB NPL portfolio that respondent submitted in support of his claim that Cinda failed to perform its collection obligations does show "some Cinda underperformance and steps taken to correct". But petitioner observes that other reports respondent submitted show proceeds from collection.

Analysis

Applicable Legal Standard

To determine whether respondent has submitted sufficient evidence to establish that, as a matter of law, PIF should be disregarded as a sham, we must first identify the relevant legal standard. The prior cases that have disregarded DAD partnerships as shams applied the Culbertson test. See Southgate Master Fund, LLC v. United States, 659 F.3d 466, 485 (5th Cir. 2011); Kenna Trading, LLC v. Commissioner, 143 T.C. 322, 351 (2014); Superior Trading, LLC v. Commissioner, 137 T.C. at 81; Russian Recovery Fund Ltd. v. United States, 122 Fed. C1. at 615. And, as noted above, the parties before us appear to agree that Culbertson provides the governing test. Therefore, for purposes of the present motion, we will treat Culbertson test as the legal standard governing the recognition of a partnership for Federal income tax purposes. But see AD Inv. 2000 Fund, LLC v. Commissioner, T.C. Memo. 2015-223, at *25 (observing that Culbertson predated entity classification regulations adopted in 1997 that "may place the question of whether there is a tax-recognized entity ahead of the classification of the entity as a partnership or corporation for tax purposes"), vacated and superseded on reconsideration, T.C. Memo. 2016-226.

Partners' Tax Motivations and Protection Against Economic Loss

Respondent's first argument does not justify disregarding PIF as a sham. Again, in that argument, respondent claims that PIF and PIH were formed to generate tax losses for the U.S. investors without economic risk of loss. The first part of his argument is legally inadequate, the second unsupported by the record. The mere fact that the generation of tax losses was one of the purposes of a partnership's formation would not justify disregarding the partnership as a sham under the Culbertson test. That test requires us to ask "whether, considering all the facts * * * the parties in good faith and acting with a business purpose intended to join together in the present conduct of * * * [a business] enterprise." Commissioner v. Culbertson, 337 U.S. at 742. Even if the generation of tax losses is the primary purpose for a partnership's formation, the partnership may also have as a secondary purpose the conduct of a business enterprise. To prevail in disregarding a DAD partnership as a sham under Culbertson, the Commissioner must establish that carrying out a business of collecting NPLs was so minimal a factor in the decision to form the partnership that it can be dismissed. In prior cases in which this Court and others have disregarded DAD partnerships as shams, the evidence showed that the partners ultimately had no real interest in collecting the NPLs. See, e.g., Superior Trading, LLC v. Commissioner, 728 F.3d at 680 (noting that partnership's "purportedly active partner" made only "a few, feeble attempts" at collection and dismissing those efforts as "window dressing" because the partnership had not taken measures necessary under Brazilian law to pursue collection); Southgate, 659 F.3d at 485 (reasoning that partners' decision to abandon efforts to improve collection by servicer "manifests an unmistakable intent to forego the joint conduct of a profit-seeking venture"); Kenna Trading, LLC v. Commissioner, 143 T.C. at 353 (finding ambiguities in the record regarding the identity of the partners and their proportionate interests and observing that "[p]arties genuinely embarking on a joint business endeavor * * * would not accept such ambiguity"). But if the facts show an objective of profiting from collection, even though that objective may be outweighed by investors' objective of realizing the benefit of substantial tax losses, the partnership should not be disregarded as a sham under Culbertson.

Of course, carrying on a business necessarily involves economic risk. If respondent were correct that PIF and PIH were formed to generate tax losses without the risk of economic loss, we might conclude that the conduct of business was not a material factor motivating the partnerships' formation. But respondent has not established that the partners who formed PIF and PIH had no intent of subjecting themselves to the risk of loss. The letters respondent cites regarding protection against loss that Chenery allegedly offered to investors concerned partnerships other than PIF or PIH. Therefore, the letters are probative of the purposes for the formation of PIF and PIH only to the extent that those partnerships can be tarred by their association with other partnerships formed as part of the same program. Moreover, the reference in each letter to an investor's risk of economic loss relates not to the investor's ongoing investment but instead to a limited opportunity to have his "fund" exchange its initial pool of NPLs for a different pool. Each letter refers to subsequent "opportunities to request that the fund sell or exchange assets" but warns that, "based upon market conditions, the fund will bear the risk of loss (and retain the potential for profit) for all sales and exchanges made after December 31, 2001." Thus, Chenery promised investors that, should they exercise their right to have their fund swap out of its initial asset pool into a different pool before December 31, 2001, the investors would be protected against the risk of economic loss (presumably, because each exchange would be priced — as PIF's apparently was — so that each fund would receive a new pool with a value equal to that assigned to its initial pool). Respondent has provided us with no evidence, however, that investors who exercised that right would be protected against the risk of economic loss should collections on the new portfolio of NPLs fall short of expectations. Therefore, even if Chenery had provided the U.S. investors in PIH with letters similar to the ones to which respondent calls our attention, the letters would not establish that those investors were protected against the risk of loss due to adverse collection experience.

Cinda's Intent to be a Partner and Join in the Conduct of a Business

Although respondent's second argument considers only Cinda's intent in joining PIF, under the circumstances, disregarding Cinda's participation as a partner would require disregarding PIF altogether.² When PIF exchanged its interest in the CCB NPL portfolio for interests in the KDB NPL portfolios, it had three partners: CMI, Cinda and PIH. But PIH acquired its interest in PIF from Cinda. If Cinda never became a partner in PIF, it would have had no partnership interest to transfer to PIH, so that PIH could not be recognized as a partner, either. And of course PIF could not be recognized as a partnership with CMI as its only partner.

But respondent has not introduced evidence that supports his claim regarding Cinda's intentions. As petitioner notes, Cinda retained a 1% interest in PIF after it contributed to PIH most of its PIF interest and then sold its interest in PIH to the U.S. investors. Cinda's prompt disposition of most of its interest in PIF may affect how much of Cinda's interest in PIF should be recognized for tax purposes, but it does not support disregarding Cinda as a partner in PIF altogether. In making his second argument, respondent cites no evidence in support of his allegation that Cinda failed to fulfill any contractual obligations it had to PIF as collection agent for PIF's NPL portfolio. (We consider below the evidence regarding Cinda's collection activities that respondent cites in support of his third argument.) Nor does he cite any evidence for his claim about the reality of Cinda's participation in PIF's profits or activities. He seems to take it as a given that a 1% interest in a partnership is simply too small to be recognized. The law establishes no such per se rule. In fact, under ruling guidelines issued under the entity classification regulations in effect before 1997, the Internal Revenue Service generally required the general partner of a limited partnership to maintain an interest of at least 1% in each material item of partnership income, gain, loss, deduction, or credit. See Rev. Proc. 89-12, sec. 4.01, 1989-1 C.B. 798, 800. Those guidelines, though no longer in effect, provide historical support for the proposition that a 1% interest in a partnership cannot be disregarded as de minimis.

Intent of Other Partners and Alleged Outside Basis Enhancement

Respondent's third argument expands the inquiry to the intent of all of PIF's and PIH's partners while also focusing on option transactions he claims to have been implemented by the U.S. investors with the intent of increasing their outside bases in PIH to enable them to deduct their shares of PIF's expected losses. Respondent's claim about the alleged option transactions has the same flaw as his first argument. If his allegations about the option transactions are correct, they would indicate that the U.S. investors were interested in deducting tax losses in excess of their out-of-pocket investments in PIH. See sec. 704(d) ("A partner's distributive share of partnership loss * * * shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred."). But accepting that the U.S. investors were interested in tax losses does not establish that they had no other intent in joining PIH. If PIF and PIH's partners were also motivated to an appreciable extent by the prospect of benefitting from the collection of the assets in PIF's NPL portfolio, Culbertson would not require disregarding PIF as a sham.

Respondent thus does raise a relevant issue in claiming that PIF's and PIH's partners had no real intention of conducting the business of collecting NPLs. Again, however, the evidence respondent submitted does not support his claim. The Investment Reports and other evidence respondent cites regarding Cinda's failures to perform its obligations to service the CCB NPL portfolio relate to periods after December 26, 2001, when PIF first swapped its interest in the CCB NPL portfolio for interests in the KDB NPL portfolios and then swapped those interests for an interest in the Bank of China NPL portfolio. Therefore whether those reports show sufficient collection activity to demonstrate a profit motive, as petitioner's suggests, is beside the point. Any evidence regarding Cinda's failings, after December 26, 2001, in collecting the CCB NPL portfolio would be irrelevant to the question of the efforts made by or on behalf of PIF to collect the Bank of China NPL portfolio, which was apparently the only NPL portfolio in which PIF owned an interest after that date.

Because PIF did own an interest in the CCB NPL portfolio between December 10 and December 26, 2001, however, any evidence that PIF or its direct or indirect partners were indifferent to the enforceability of the loans in that portfolio might be probative of those partners' motivations in investing in PIF. Although the Dorsey & Whitney memorandum expresses concern about the enforceability of many of the loans in the CCB NPL portfolio, it appears that Houlihan took those concerns into account in its valuation of that portfolio. Houlihan's valuation report states that, in making its appraisal of the CCB NPL portfolio, it received information from various sources, including the authors of the Dorsey & Whitney memorandum. In describing the procedures involved in preparing its valuation, the Houlihan report states that "selected files underwent a legal review by the Dorsey & Whitney LLP legal due diligence team." In describing how it determined "estimated recovery rates" for the loans in the CCB NPL portfolio, Houlihan noted: "Many of the loans were deemed to have no value due to very poor prospects for recovery or questionable legal enforceability." To the extent that the Houlihan appraisal (which served as the basis for negotiations between Chenery and Cinda regarding the value of that portfolio) took into account Dorsey & Whitney's concerns about the enforceability of the loans in the CCB NPL portfolio, those concerns cannot be viewed as evidence that PIF, PIH, and their partners were indifferent to the prospects of collection on those loans.

Conclusion

For the reasons explained above, we find the evidence respondent submitted in support of his motion insufficient to establish that PIF should be disregarded as a sham. Demonstrating that the U.S. investors in PIH were interested in deducting tax losses as a result of their investments does not foreclose the possibility that they were also interested in realizing nontax profits from the collection of the NPL portfolios in which PIF held interests. Respondent has not established, at this juncture, that PIF and its partners were so indifferent to collections that the partnership fails the Culbertson test. At most, the evidence shows that, because of Chenery's interest in completing the relevant transactions before the end of 2001 (perhaps to allow U.S. investors to claim tax losses for that year), the due diligence conducted in regard to the CCB NPL portfolio was rushed and less thorough than it might have been. Even so, those efforts that were made to evaluate the CCB NPL portfolio indicate that Chenery was not absolutely indifferent to the prospect of economic profit. Roy Hahn states in an affidavit that PIF was "organized and operated with the intention of generating a profit apart from income taxes." Respondent alleges that "petitioner bears the burden of proving PIF's business purpose" and would have us dismiss Mr. Hahn's statement as "self-serving [and] uncorroborated". While petitioner will have the burden of proof at trial, Rule 142(a)(1), for purposes of respondent's motion for partial summary judgment, we must view the material submitted by the parties in the light most favorable to petitioner. See Estate of Powell v. Commissioner, 148 T.C. __, __ (2017) (slip op. at 10) (May 18, 2017). Thus, the parties' interest in or indifference to collections on PIF's NPL portfolio is a contested question of fact to be resolved at trial.

Section 482

The Law

Section 482 provides:

In the case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades or businesses. * * *

The regulations demonstrate that basis is an "allowance" subject to distribution, apportionment, or allocation under section 482. In particular, section 1.482-1(a)(2), Income Tax Regs., authorizes a district director (as delegatee of the Secretary) to "allocate income, deductions, credits, allowances, basis, or any other item or element affecting taxable income".

The adjustments authorized by section 482 must accord with an "arm's length" standard. Section 482 allows the Commissioner to "place[ ] a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining the true taxable income of the controlled taxpayer." Sec. 1.482-1(a)(1), Income Tax Regs. A controlled taxpayer's "true taxable income" is "the taxable income that would have resulted had it dealt with the other member or members of the group at arm's length." Sec. 1.482-1(i)(9), Income Tax Regs.

The Parties' Arguments

Respondent insists that "PIF's carryover basis must be reduced under I.R.C. § 482 because the two businesses in question — CCB and Cinda — were owned or controlled by the PRC [People's Republic of China] and because the price Cinda paid CCB for the NPLs exceeded the arm's length price." He alleges that "it is undisputed that Cinda and CCB were both owned by the PRC" and claims that those two entities "were also controlled by the PRC." Accordingly, he asserts that "PIF must prove that $27,678,617 was the arm's length price for the purchase of NPLs from CCB by Cinda." According to respondent, "the only price that passes muster * * * is the $774,999 that CMI paid to Cinda for 11.06835% of the NPLs that had a face value of $27,678,617."³ Respondent accepts that price as the value of the interest in the CCB NPL portfolio that Cinda contributed to PIF because it was the only price that "was used as the value in a transaction between parties that were neither commonly owned nor commonly controlled". Although Cinda acquired the CCB NPL portfolio in June 2001, about six months before Cinda's sale to the U.S. investors of a 99% interest in PIH, respondent asserts that "there is no evidence in the record that the value of the NPLs changed materially between June 2001 * * * and December 2001".

In response, petitioner argues that respondent is "incorrect[ ]" in presuming "that Section 482 allows * * * [him] to retroactively adjust tax items resulting from a transaction solely between two foreign corporations, neither of which is subject to U.S. tax". Petitioner also argues that, even if section 482 could be applied to a transaction between nontaxpayers, "the price Cinda paid to CCB for its non-performing loans must be respected" because "[t]he Chinese government mandated the price that Cinda paid for the NPLs."

Finally, petitioner disputes the factual premise underlying respondent's position regarding the relationship between Cinda and CCB: "Cinda and CCB are not commonly controlled by the Chinese government * * *. Cinda and CCB are separate legal and commercial entities with separate internal management, separate supervisory boards, separate regulatory authorities, and different scopes of businesses. While both Cinda and CCB are amorphously state-owned, there is a bright line between state ownership and enterprise management."

Analysis

The Commissioner's ability to make adjustments under section 482 as a result of a transaction between two related foreign entities neither of which is subject to U.S. tax appears to raise a disputed legal question. When the Government sought to apply section 482 to another transaction involving CCB and Cinda in Southgate Master Fund, LLC v. United States, 651 F. Supp.2d 596, 661 (N.D. Tex. 2009), aff'd on other grounds, 659 F.3d 466 (5th Cir. 2011), it "acknowledged that applying Section 482 to two foreign entities transacting business with each other on non-arms-length terms was effectively a matter of first impression." Because section 482 is directed at preventing tax avoidance, the court reasoned that, "[b]y its nature and context, the statute appears to presume that at least one of the entities [involved in a transaction to which it applies] is a United States taxpayer." Id. at 662. The court was thus "unconvinc[ed]" by "the Government's overly broad reading and novel attempted application" of section 482. Id. at 663. By contrast, in Austin Inv. Fund, LLC v. United States, 2015 WL 7303514 (D.D.C. 2015), the District Court granted the Govemment's motion for summary judgment disallowing on the basis of section 482 a loss claimed from another DAD transaction, involving Bank of China and China Orient Asset Management Corporation (China Orient). The court reasoned that, because section 482, by its terms, applies to entities "whether or not organized in the United States", it applies "to adjustments between Bank of China and China Orient even though neither entity is organized in the United States." Id., 2015 WL 7303514 at *5.

Disposing of the motion before us does not require a resolution of the legal issue of whether section 482's reach extends to transactions between nontaxpayers, because respondent has not established that CCB and Cinda were under common ownership or control in June 2001 when Cinda acquired the CCB NPL portfolio from CCB. Respondent cites two exhibits he submitted with his motion to support the proposition that the PRC "used its common ownership and/or control of the parties to require Cinda to pay face value for the NPLs even though they were no longer worth face value." The first exhibit is an unsigned letter to CMI dated December 19, 2001, purportedly from or on behalf of Cinda. The letter describes Cinda as "a corporation incorporated in the Peoples Republic of China and wholly owned by the Ministry of Finance of the Peoples Republic of China". The letter says nothing, however, about CCB's ownership. The second exhibit is the memorandum Dorsey & Whitney prepared describing its due diligence in regard to the CCB NPL portfolio. The page of that memorandum that respondent cites expresses the firm's understanding "that Chinese government policy and regulations would have required that the loans be transferred at face value from CCB to Cinda." But the cited page says nothing about the ownership of either CCB or Cinda.

Respondent seizes on petitioner's acknowledgment of "amorphous" state ownership in claiming that "[p]etitioner does not dispute that CCB and Cinda were both owned by the PRC". In fact, petitioner claims that an affidavit it submitted from Mr. Li Chien Tsai, a former executive of CMI, "proves that CCB and Cinda are not co-owned by the PRC as a matter of fact." While we do not read Mr. Tsai's affidavit as establishing the point for which petitioner invokes it, we nonetheless take petitioner's claim as an indication that he does not concede that CCB and Cinda were under common ownership within the meaning of section 482 at the time of the transfer between them of the CCB NPL portfolio. Common ownership, for that purpose, can be either direct or indirect, but the ownership, in either case, should be clear. We are unconvinced that "amorphous" common ownership is sufficient to authorize the Commissioner to make adjustments under section 482. Cf. Southgate, 651 F. Supp.2d at 647 (recognizing Cinda's and CCB's ownership by the state but reasoning that the "'bright line' between state ownership and enterprise management" allowed each entity to treat its property and assets as its own).

Because respondent has not submitted sufficient evidence to establish that Cinda and CCB were owned or controlled, directly or indirectly, by the same interests in June 2001, when CCB transferred the CCB NPL portfolio to Cinda, we will deny respondent's motion for partial summary judgment that section 482 allows him to disallow PIF's claimed loss by reducing Cinda's basis in that portfolio (and thus the basis in the portfolio to which PIF succeeded under section 723).

For the reasons explained above, it is

ORDERED, that respondent's motion for partial summaryjudgment is denied.

James S. Halpern
Judge

Dated: Washington, D.C.
February 12, 2018