Karen C. Burke (San Diego) & Grayson M.P. McCouch (San Diego) have posted Snookered Again: Castle Harbour Revisited, 128 Tax Notes 1143 (Sept. 13, 2010), on SSRN. Here is the abstract:

In this special report, the authors examine the Castle Harbour transaction, which used a partnership financing structure to shift substantial amounts of taxable rental income from domestic corporations to untaxed foreign banks. Although the Second Circuit determined that the foreign banks were not bona fide equity partners under the Culbertson totality-of-the circumstances test, the district court on remand held that the banks qualified as partners under § 704(e) based on their ownership of a capital interest in a capital-intensive partnership. The district court’s reading of § 704(e) calls into question longstanding doctrine concerning partner status under § 761. After explaining the interaction of partnership income and loss allocations with guaranteed payments, the authors review the background of the family partnership rules and conclude that § 704(e) should be read in conjunction with, rather than in derogation of, the general definitions of partners and partnerships in § 761.