SHARE

August 16, 2022

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

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all Law.com OnPractice content.
Register Now

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.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From McDermott Will & Emery

Merck Fosters Healthcare Of The Future

By McDermott Will & Emery attorneys McDermott Will & Emery December 02 , 2022

Artificial intelligence and machine learning have led a digital transformation in healthcare, expanding providers’ resources and improving the lives of people around the world.

A Tsunami of Lawsuits Is Expected to Slam Institutions in the Wake of New York Adult Survivors Act

By Greer Griffith McDermott Will & Emery December 01 , 2022

A new revival window opened on Thanksgiving Day for filing sexual assault and abuse lawsuits that would otherwise be time-barred by the New York statute of limitations.

Tax Court Holds That Deficiency Petition 90-Day Time Limit Is Jurisdictional

By Andrew R. Roberson McDermott Will & Emery December 01 , 2022

Last summer, the Supreme Court of the United States held that the 30-day time limit to file a Collection Due Process (CDP) petition is a non-jurisdictional deadline subject to equitable tolling (Boechler, P.C. v. Commissioner).

More From Tax

Tax Court Holds That Deficiency Petition 90-Day Time Limit Is Jurisdictional

By Andrew R. Roberson McDermott Will & Emery December 01 , 2022

Last summer, the Supreme Court of the United States held that the 30-day time limit to file a Collection Due Process (CDP) petition is a non-jurisdictional deadline subject to equitable tolling (Boechler, P.C. v. Commissioner).

Treasury Announces Initial Guidance on the Inflation Reduction Act's Labor Requirements for Renewable Energy Tax Credits and Incentives

By John Eliason Greenberg Traurig November 30 , 2022

The U.S. Department of the Treasury announced initial wage and apprenticeship guidance under the Inflation Reduction Act of 2022 (IRA) that applies to taxpayers in order to increase available credit amounts for federal tax incentives, including the Investment Tax Credit (ITC) and Production Tax Credit (PTC).

IRS Issues New Procedures for Large Corporate Audit Disclosures

By Andrew R. Roberson McDermott Will & Emery November 30 , 2022

For decades, large corporate taxpayers under continuous audit have been able to make disclosures under Revenue Procedure 94-69 at the beginning of an examination to notify the Internal Revenue Service (IRS) of adjustments (both positive and negative) to their tax returns and thereby obtain protection from various penalties and obviate the need to file a formal amended tax return. In 2020, the IRS questioned the continuing utility of this disclosure process and invited comments on said process.

Featured Stories
Closeclose
Search
Menu

Working...