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Will Tax Credit Partnerships Continue in 2017 And Beyond?

Will Tax Credit Partnerships Continue in 2017 And Beyond?

Author: James F. McDonoughDate: January 4, 2017

All agree that the Internal Revenue Code is complicated and there are two cases in the historical tax credit area that illustrate this point and the risk one faces in entering into a tax credit deal.

Virginia Historic Tax Credit Fund 2001 LP v. Comr., 639 F.3d 129 (CA-4 2011), the Fourth Circuit Court of Appeals treated the funds paid by the investors to the partnership as a taxable sale rather than a tax-free contribution by partners. At the level below (Tax Court), the IRS argued that the investors were not partners, but lost on that point. The Court of Appeals did not disturb the lower court’s ruling on that issue; instead, the Court held the transfer of state credits was a disguised sale. A transaction between a partnership and a partner may be treated as a transaction between a partnership and one who is not a partner. The income tax consequence is that the investor’s tax-free contribution of capital to the partnership is transformed into gross sales proceeds to the non-contributing partners. Thus, the tax-free transaction is scuttled. Prior to this decision, most viewed qualifying as a partner to be enough to secure the credit.

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