Partnership’s Allocation of State Tax Credits Recharacterized as Disguised Sale
Income Tax—Partnership’s Allocation of State Tax Credits Recharacterized as Disguised Sale:
TheTax Court held that the Section 707 disguised sale rules applied to a transaction involving a taxpayer’s contribution of cash to a partnership in exchange for an allocation of state tax credits. The Court concluded that the taxpayer would not have transferred money to the partnership but for the corresponding Virginia tax credits. Although the IRS recently issued Rev. Proc. 2014-12, saying it will not challenge partnership allocations of Section 47 rehabilitation income tax credits by a partnership to its partners, it specifically provides that the safe harbor is not available to situations under which a transfer of state credits by a partnership may be treated as a disguised sale under IRC Sec. 707(a)(2)(B). SWF Real Estate LLC, et al,
TC Memo 2015-63 (Tax Ct.).