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Federal Partnership Tax Treatment in Mining Agreements: Selected Basic Concepts

Michael Mulroney, Mining Agreements III

I. Overview of Federal Tax Concepts

A. Characterization of Transactions

1.The common law of federal taxation causes a transaction to be characterized by reference to its substance, if that departs from its form. State or local law is not necessarily determinative. Federal tax law, both statutory and decisional, controls.1

2.Terminology used by the parties does not necessarily establish the character of the transaction.2 However, the parties' view of the transaction may be evidence of its character.3

3.The substance of a transaction is generally determined by identifying the economic relationships created by the parties.4 As a general proposition, while the Service is free to attempt to ferret out the substance of the transaction, the taxpayer may have scant latitude in attempting to impeach the form he has chosen.5

4.The intent of the parties may be evidence of the substance of the transaction, but the ultimate test is what they actually did.6

B. Classification of the Taxpayer

1.The Internal Revenue Code recognizes four categories of taxable persons: individuals, corporation, trusts, and estates. Partnerships and S Corporations are not taxpayers; instead they are flow-through entitles whose tax attributes are reported by their taxpayer-owners. To some extent, the Code's tax rates and rules apply differen