IRS Determines Refined Coal Transaction Doesn’t Have Economic Substance

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.

Kevin Spencer
Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.


Madeline Chiampou Tully
Madeline Chiampou Tully represents clients on federal income tax matters relating to taxable and tax-free mergers, acquisitions and divestitures, corporate restructurings and finance transactions. Within these areas, her tax practice focuses on energy tax issues, including advising on renewable energy transactions such as solar and wind projects. Read Madeline Chiampou Tully's full bio.


Philip Tingle
  Philip (Phil) Tingle represents energy companies such as utilities, independent power producers and financial institutions on a wide range of energy tax-related matters. He is the global head of the Firm's Energy Advisory Practice Group. Phil provides advice regarding all aspects of renewable-energy projects, including tax equity structures, refinancings, acquisitions and dispositions, restructurings and workouts. He has extensive experience with the production tax credit and with the application of renewable credits to new technologies. Moreover, he works with the investment tax credit for numerous kinds of solar projects. Read Philip Tingle's full bio.

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