CCA 200920050: The general partner’s state of mind determines a partnership’s profit motive

Plain-English summary

Chief Counsel advised that section 165(c) measures a partnership’s profit motive by the motive of the partnership itself. That motive is reflected by the general partner’s state of mind when acting for the partnership. An individual partner’s reason for joining is still relevant to whether a partnership was actually formed for federal tax purposes. In that setting, the partner’s motive bears on economic substance and whether the partnership is a sham. Counsel said those issues may be determined in a final partnership administrative adjustment under section 6233(b).

Ruling snapshot

• Question: Whose profit motive matters under section 165(c), and can an individual partner’s motive be considered in a partnership proceeding?
• Outcome: Advice given: use the general partner’s state of mind for the partnership’s section 165(c) motive, while considering individual motives when testing whether the partnership is genuine.
• Key authorities: IRC §§ 165(c), 6233(b); Brannen v. Commissioner; Garcia v. Commissioner; Culbertson; Tower.

Full text (IRS public release)

ID: CCA_2009040614341537 Number: 200920050
Release Date: 5/15/2009
Office: --------------
UILC: 6233.02-00

From: -------------------
Sent: Monday, April 06, 2009 2:34:16 PM
To: -------------------
Cc: -----------
Subject: RE:

No. For purposes of section 165(c), profit motive is determined by the profit motive of the partnership as reflected by the state of mind of the general partner acting on the partnership's behalf. See Brannen v. Commissioner and Garcia v. Commissioner.

The partner's profit motive in entering the partnership is relevant, however, to whether a partnership was formed for federal tax purposes under the Supreme Court case in Culbertson and Tower. In this context that partners' profit motive is relevant to economic substance and shamming the partnership. These issues may be determined in an FPAA under section 6233(b).