In consolidated cases known as Kenna Trading LLC, the Tax Court shut down an attempt to contribute foreign currency losses into a US partnership and syndicate the losses to investors by selling partnership interests followed soon by the partnership selling the loss assets. According to the court, the persons contributing loss assets did not qualify as partners under the traditional “Culbertson” test. The transaction also failed under the disguised sale rules as well as lacked economic substance.
The Tax Court found the transaction subject to significant penalties including the high “listed transaction” penalty for one of the years at issue based on it being substantially similar to the distressed asset trust shelter. Further the case was analogized to the recent IRS victory in Superior Trading. Note that 2004 legislation has since changed the law to more clearly prevent the syndication of losses imported into a partnership.
