Tax Court Holds for Taxpayers – Upholds Use of Limited Liability Company to Generate Tax Credits

Feb 07, 2011   

On January 3, 2011, the Tax Court in Historic Boardwalk Hall, LLC, et al. v. Comm’r, 136 T.C. No. 1, disagreed with the IRS and held that

  1. The limited liability company (“LLC”) was not a sham and did not lack economic substance;
  2. One of the purported partners/members was in fact a partner/member of the limited liability company;
  3. One of the purported partners/members did effectuate a transfer of property for income tax purposes; and
  4. Internal Revenue Code section 6662 penalty was not applicable.

The IRS had attacked the limited liability company established to generate historic rehabilitation tax credits as a sham that lacked economic substance and asserted that the LLC was not to be respected for income tax purposes. The IRS asserted that the substance of the transaction was akin to the sale of rehabilitation credits.

The Tax Court in looking at tax credits noted that without certain tax credits a party would not be able to earn a sufficient net economic benefit on the transaction, and that the purpose of tax credit are directed at this problem. The significance of this decision is that tax credits can be a legitimate reason for entering into a transaction that would not have otherwise make economic sense. In other words, the economic substance doctrine includes looking at the entire transaction, including tax credits.

This decision bodes well for those individuals that participated in the U.S. Virgin Islands Economic Development Credit program and who are currently under audit or are in litigation with the IRS over the validity of those credits.

The attorneys at Fuerst Ittleman are experienced in litigating against the IRS regarding the U.S. Virgin Island Economic Development Credit, tax credits in general, partnerships, and economic substance. See other blogs from Fuerst Ittleman on the rapidly emerging law regarding the IRS growing use of economic substance rule.