WB Partners v. CIR

A joint venture is a valid partnership when evidenced by: (1) the parties executing the terms of their agreement; (2) each party contributing; (3) the parties controlling their income and capital and reserving the right to make withdrawals; (4) each party being a principal and coproprietor sharing profits and losses equally; (5) conducting business in the joint names of both parties; (6) the parties filing Federal partnership returns; (7) separate books of accounts existing; and (8) parties mutually controlling responsibilities for the enterprise.

Daren Barone and Gregory Watkins were experienced in asbestos removal, and subsequently established an environmental remediation company, Watkins Contracting, Inc. (WCI). Through fear of personal liability from WCI, Barone and Watkins formed two holding corporations – those two corporations entered a partnership, WB Partners an S corporation. WCI and WB Partners formed the Naval Training Center (NTC) Joint Venture where WCI would receive 30% of profits from environmental remediation work and WB Partners would receive 70% of the profits for supplying financial guarantees. The tax court held that the NTC Joint Venture was not a valid partnership for tax purposes. On de novo review, the Ninth Circuit resolved the issue of whether the NTC Joint Venture was a valid partnership for the purpose of the venture’s profits constituting income to WCI. Under 26 U.S.C. §§ 761(a), 7701(a)(2), a “partnership” for tax purposes includes joint ventures. Moreover, a joint venture is a valid partnership if “the parties in good faith and acting with a business purpose intended to join together.” Culbertson. Furthermore pursuant to Luna v. Comm’r, this intent can be deduced by considering eight factors. The most relevant factors included: (1) the parties’ conduct did not reflect their agreement as was evidenced by the profit cap on WB Partners; (2) WB Partners did not make any contributions to the venture; (3) the profit cap suggested that WB Partners had no control over income and capital and that WB Partners was not a bona fide partner; and (4) WCI and WB Partners did not share a mutual proprietary interest in the net profits and losses. Therefore the panel held that the joint venture was not valid for tax purposes and thus all profits from the venture constituted taxable income. AFFIRMED.