Tax Court's ‘Canal' Ruling Has Debt-Financed Distributions Implications

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The U.S. Tax Court's August decision in Canal Corp. v. Commissionerthat a leveraged partnership transaction was taxable under the partnership disguised sale rules raises not only issues for debt-financed distributions, but issues regarding the court's treatment of opinions and the circumstances under which penalties will be applied, practitioners say. “This case has broad implications for opinions and penalties,” Jeffrey H. Paravano, managing partner at Baker Hostetler LLP in Washington, D.C., says at a luncheon sponsored by the D.C. Bar Taxation Section. Practitioners at the luncheon also say they were troubled by the court's decision to ignore an intercompany obligation in applying the partnership rules.