Huge Win for Refined Coal: DC Appeals Court Permits Tax Credits

By and on August 16, 2022

On August 5, 2022, the US Court of Appeals for the District of Columbia Circuit upheld the US Tax Court’s bench opinion in favor of partners and investors in a refined coal business. The Internal Revenue Service (IRS) has consistently fought taxpayers’ attempts to claim a tax credit for refining coal despite a clear congressional mandate in Internal Revenue Code section 45(c)(7)(A). The IRS has repeatedly taken the position that the partnerships formed to utilize the tax credits generated by the refined coal business are not bona fide because the partnerships could never make an economic profit without the tax credits.

In Cross Refined Coal LLC, the IRS examined the partnership’s 2011 and 2012 tax years and disallowed $25.8 million of refined coal production tax credits and $25.7 million of claimed operating losses. The IRS argued that:

  • The partnership did not exist as a matter of fact.
  • The partnership was not, in substance, a partnership for federal income tax purposes because it was not formed to carry on a business or for the sharing of profits and losses from the production or sale of refined coal by its purported members/partners, but rather was created to facilitate the prohibited transaction of monetizing refined coal tax credits.
  • The transaction was entered into solely to purchase refined coal tax credits and other tax benefits.
  • Claimed expenses were not ordinary and necessary or credible expenses in connection with a trade or business or other activity engaged in for profit.

After a two-week trial involving several witnesses and thousands of exhibits, the Tax Court held that the partnership was legitimate because its partners made substantial contributions to the partnership, participated in its management and shared in its profits and losses. The IRS appealed to the DC Circuit.

In affirming the Tax Court, the DC Circuit held that the partners intended to form a partnership and had legitimate non-tax motives for the business. The Court diffused any concern that the partnership included tax benefits, explaining that “there was nothing untoward about seeking partners who could apply the refined-coal credits immediately, rather than carrying them forward to future tax years.” The Court also recognized that “Congress expressly provided for coal refiners to employ this investment strategy, for the tax code specifies how the credit must be divided when a refining facility has multiple owners.” The Court was not persuaded by the IRS’s concern that the partners did not enter the partnership to obtain a pre-tax profit: “[a]ccording to the Commissioner, Cross’s partners did not have the requisite intent to carry on a business together because Cross was not ‘undertaken for profit or for other legitimate nontax business purposes.’” The Court disagreed, explaining:

As a general matter, a partnership’s pursuit of after-tax profit can be legitimate business activity for partners to carry on together. This is especially true in the context of tax incentives, which exist precisely to encourage activity that would not otherwise be profitable.

The DC Circuit found that the partners “had much skin in the game.” Through their initial investments and contributions, the partners put millions of dollars at risk in amounts proportionate to their respective ownership interests. These, the Court ruled, are the hallmarks of a legitimate partnership for tax purposes.

Practice Point: Cross Refined Coal is a helpful case for partnerships that are used to syndicate congressionally sanctioned tax benefits. In the aftermath of the DC Circuit’s decision, it will be harder for the IRS to sustain its argument that a partnership is not bona fide merely because it is not economically profitable without the associated tax benefits.

Andrew R. Roberson
Andrew (Andy) R. Roberson focuses his practice on tax controversy and litigation matters. He represents clients before the Internal Revenue Service (IRS) Examination Division and Appeals Office and has been involved in over 75 matters at all levels of the federal court system, including the US Tax Court and Federal District Courts, several US Courts of Appeal and the Supreme Court. Andy has experience settling tax disputes through alternative dispute resolution procedures, including Fast Track Settlement and Post-Appeals Mediation, and in representing clients in Compliance Assurance Process (CAP) audits. In addition to representing corporations and partnerships in tax disputes, he also represents high net-worth individuals and assists taxpayers needing to make voluntary disclosures. Read Andy Roberson's full bio.


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.

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