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| May 31, 2011 9:44 pm |
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Economic Substance |
Craig Johnson
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Economic Substance
In a recent tax court decisions have been favorable to those investors who invest in surplus clean energy tax incentive transactions.
In Historic Boardwalk Hall LLC v. Commissioner, 136 TC No. 1, the court found that a tax equity transaction had economic substance through three devices: 1. A 3% preferred return, 2. A potential for profit, and 3. The business activity - owning and renovating the historic structure Boardwalk Hall. The court further ruled that it was the intent of Congress to incentivize activity that would not be profitable without the favorable tax treatment. Historic Boardwalk Hall LLC is good news for renewable energy investors because clean energy tax equity partnerships are similar to those in the Boardwalk case.
Sacks v. Commissioner, 69 F. 3d 982 (9th Cir. 1995). In “Sacks”, the Ninth Circuit Court of Appeals allowed, over the objection of the IRS, a solar transaction that was economical only after taking into account solar energy tax credits.
According to Mintz Levin, “…the intent of Congress to overcome profitability concerns through tax incentives is even more clear with respect to renewable energy investments. The court approved of various methods to assure investors of their tax benefits while protecting them against unforeseen loss. This should give parties greater flexibility in negotiating deals that give each side what they really want without fear of an “economic substance” attack from the IRS. Tax credit investors should now hold their heads high knowing they are doing the work of angels…or at least Congress.”
http://www.mintz.com/newsletter/2011/Advisories/0895-0111-NAT-ECT/TaxEquityPartnershipsPromoteCongressionalIntent.htm
Larry Farris, Investment Operations
Adam Capital Clean Energy Asset Finance LLC
adamcapital.com
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