Blue J Predicts: Tax Credits That Bond A Partnership

Benjamin Alarie (Osler Chair in Business Law, University of Toronto; CEO, Blue J Legal) & Bettina Xue Griffin (Senior Legal Research Associate, Blue J Legal), Tax Credits That Bond a Partnership: Revisiting Cross Refined Coal, 176 Tax Notes Fed. 2069 (Sept. 26, 2022):

In this article, Alarie and Griffin revisit Cross Refined Coal, a case for which they used Blue J’s analytical software to successfully predict in June 2021 that the IRS’s appeal would be decided in favor of the taxpayer.

In our monthly Blue J Predicts column, we use Blue J’s tax research software to analyze pending or recently decided federal income tax cases. This month we consider the judgment of the D.C. Circuit in Cross Refined Coal, which addressed whether a business venture that was guaranteed to be unprofitable pretax could still be considered a bona fide partnership for federal income tax purposes. ...

Last year, we examined the Tax Court’s decision in this case and predicted with 90 percent confidence that the D.C. Circuit would find that the taxpayer, Cross Refined Coal LLC, operated as a partnership for federal tax purposes and that the IRS’s appeal would be dismissed. The D.C. Circuit has done just that with its August 5 decision.

This month, we unpack the D.C. Circuit’s de novo decision and take a deeper dive into the factors that influenced the outcome. The decision is favorable for taxpayers who are partners in a partnership trying to profit from the tax credits created by Congress. Although the IRS adopted the position that a partnership formed solely to turn a profit on tax credits is not a bona fide partnership, the D.C. Circuit held that “partnerships formed to conduct activity made profitable by tax credits engage in legitimate business activity for tax purposes.” This is consistent with Congress’s expressed intent to use tax incentives to encourage economic activity, as well as with limitations on judicial doctrines disallowing congressionally intended benefits, including section 45 tax credits. ...

As our machine-learning model demonstrates, courts are understanding of partners who entice others to join the partnership by allowing the new partner to minimize its risk because the new partner can provide something important for the business. When this is no longer true, and the financial contribution of the partner is neither necessary nor valuable, this can significantly reduce the likelihood of a finding that a valid partnership exists to a mere coin toss.

Prior TaxProf Blog coverage:

• Blue J Predicts: An Unprofitable Pretax Venture Can Still Be A Partnership (June 29, 2021)
• Blue J Predicts With 68% Confidence That IRS's Economic Substance Challenge Will Fail In District Court Perrigo Case (Aug. 6, 2021)
• Blue J Predicts With 77% Confidence That Reserve’s § 501(c)(15) Appeal Will Be Dismissed By The Tenth Circuit (Sept. 10, 2021)
• Blue J Predicted With 95% Confidence That 7th Circuit Would Affirm Tax Court In Innocent Spouse Cases (Oct. 5, 2021)
• Blue J Predicts With 74% Confidence That 8th Circuit Will Find Customary/Usual Management Fees Are Deductible Under § 162 (Nov. 3, 2021)
• Blue J Predicts: Taxpayers Face Uphill Battle In Assignment Of Income Cases (Dec. 8, 2021)
• Blue J Predicts: Worker Classification In The Gig Economy (Dec. 20, 2021)
• Blue J: Using Machine Learning To Crack The Tax Code (Feb. 8, 2022)
• Blue J Predicts With 86%-95% Confidence That 10th Circuit Will Find That Taxpayer In Olsen Was Not Engaged In A Trade Or Business (Feb. 28, 2022)
• Blue J Predicts With 65%-94% Confidence Federal Circuit's Step Transaction Decision In GSS Holdings (Apr. 5, 2022)
• Blue J Predicts With 86% Confidence Debt-Equity Decision In Tribune Media (May 4, 2022)
• Blue J's AI Prediction Of Result Of Tax Court Appeal Faces First Test In Federal Circuit Court (June 14, 2022)
• Blue J: Reserve Mechanical Microcaptive Insurance Arrangement Denied On Appeal (July 7, 2022)
• Blue J: Accurate Financial Recordkeeping And Business Deductions (Aug. 12, 2022)
• Blue J: Deducting Legal Expenses In Mylan (Sept. 7, 2022)