Tax Sham or Prudent Investment : Deconstructing the Government's Pyrrhic Victory in Salina Partnership V. Commissioner

This article examines one of the leading tax shelter cases to wind its way through the federal court system: Salina Partnership, LP v. Commissioner (Salina). 80 T.C.M. (CCH) 686 (2000). In Salina, Florida Power & Light Co. (FPL), through an ingenious series of transactions, "refreshed" an earlier sustained capital loss, allowing the loss to remain on its books indefinitely and be used at FPL's convenience. The IRS contended that FPL efforts lacked economic substance and were merely a tax sham. The court disagreed and allowed FPL to receive the tax benefits. This article critiques the Salina decision, examines the legal and financial steps of Salina, uses a series of flowcharts to highlight Salina's labyrinthine transactions, and concludes that FPL's transactions lack economic substance. This article was drafted with access to unpublished trial documents, revenue agent reports, and the full trial transcript of the decision. Dr. Alan Tucker's presence as an expert witness provided invaluable insight into the nuances of the case and the implications of the final decision. This is the one of the first articles to examine the Salina decision and its impact on current tax law. In addition, this article provides a financial discussion of widely-used short sale transactions applied in the Salina case. This article raises arguments regarding valuation symmetry, the economic substance doctrine, and debtor creditor relationships that will be useful to tax practitioners and academics alike. A discussion of tax shams and partnerships is particularly timely given the recent scrutiny given to Enron and other companies regarding their treatment of partnerships and taxation