On March 17, 2016, the Internal Revenue Service (IRS) issued a Field Attorney Advice Memorandum, 20161101F (Dec. 3, 2015) (the FAA). In the FAA, the IRS concluded that an investment in a partnership designed to deliver a tax credit allocation did not have a potential for profit or risk of loss, was not a meaningful interest in the venture and, as such, was not a bona fide partnership interest. In analyzing whether the arrangement was in substance a prohibited sale of tax benefits, the IRS determined that promotional materials and the partnership agreement indicated the investors were only interested in creating tax credits, not in operating a profitable refined coal business. The IRS relied heavily on Commissioner v. Culbertson, 337 U.S. 733 (1949), and Historic Boardwalk Hall LLC v. Commissioner, 694 F.3d 425 (3rd Cir. 2012), to determine that the investor did not have the requisite risk of loss or profit potential irrespective of creating tax credits, and that the partnership agreement indicated that the purported partner was to be indemnified for disallowed tax credits and deductions. An important fact for the IRS’analysis was that the payments to be made by the investor were nonrecourse, meaning the investor could walk away at any time. The IRS ruled that because “purported capital contributions are largely to be made in the future and only in relation to the amount of refined coal, and by extension tax credits generated, we believe that the payments are in exchange for tax benefits and do not constitute capital contributions in substance.”
Although a FAA is merely the opinion of one attorney at the IRS, it may be indicative of how the IRS evaluates these issues.