In Technical Advice Memorandum 2017-29-020 (July 21, 2017) (the “TAM”), the IRS denied claims by two tax equity investors (the “Investors” or each an “Investor”) for renewable energy tax credits on grounds that the transaction was structured solely to facilitate the purchase of tax credits. The Investors claimed credits under section 45(e) (8) of the Internal Revenue Code (the “Code”), which provides a credit for production of certain refined coal over a ten-year period. The credits at issue were derived from the production of refined coal at two production facilities owned by a joint venture in which the Investors purchased interests. The TAM suggests that the IRS is reviewing renewable energy investments with a heightened level of scrutiny.

The TAM is puzzling—not so much in the result reached as in the articulation of the principle relied on to reach the result. As is discussed in more detail below, the IRS found that the transaction constituted an illegal sale of tax credits. The availability of Code section 45 tax credits to investors normally turns on the investors being valid partners for U.S. federal tax purposes and the arrangement furthering the purpose for which the credit was enacted—here the production of refined coal. Thus, normally, a conclusion that credits were “illegally sold” is the punchline that follows a finding based on legal principle, for example, that a taxpayer is not a partner (see Historic Boardwalk Hall LLC v. Commissioner). But in the TAM, the IRS specifically denied finding that the Investors were not partners, the entity was not a partnership, or pre-tax profit potential was required, despite analyzing the transaction based on factors that would be

common to those findings. The TAM raises questions about whether the IRS has minted a new tax common law principle and, if so, how it differs from the Culbertson test and the economic substance test. Perhaps it is merely a new version of substance-over-form.