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Washington Tax Alert April 3, 2007 (transfer of state tax credits)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
April 3, 2007

The IRS National Office announced last month that examining agents have been given blanket authority to apply the partnership anti-abuse regulation (Treas. Reg. § 1.701-2) to partnerships organized to facilitate the sale of state tax credits from developers to investors.

Earlier, in January 2007, the National Office issued legal memoranda and chief counsel advice ( see ILM 200704028 and ILM 200704030) in which it concluded that partnerships organized to facilitate the sale of state tax credits from developers to investors should be ignored for Federal income tax purposes, and the transactions treated as taxable sales of the credits by the developers, followed by a second taxable transaction when the investors use the credits to satisfy their state tax liabilities. In the cases considered by the National Office, the investors were partners of the partnership for only a small portion of the tax year and sold their partnership interests at a loss immediately after the state tax credits were allocated to them.