Virginia Historic Tax Credit Fund 2001 LP v. Commissioner
639 F.3d 129
4th Cir.2011Background
- Virginia's Historic Rehabilitation Credit Program provides state credits up to 25% of eligible expenditures, usable to offset Virginia taxes.
- Virginia allowed transfer of credits indirectly via partnership allocations, even though direct sales of credits were not permitted.
- In 2001, Gecker, Miller, and Brower formed four linked partnerships (2001 LP, SCP LLC, SCP LP, and 2001 SCP) with 2001 LLC as GP and tax matters partner.
- Investors contributed capital to funds in late 2001–2002, receiving promises of tax credits in exchange for limited partnership interests (roughly 0.01%).
- Funds partnered with developers to obtain credits, sometimes via Virginia's one-time transfer provision, and later bought out investors in 2002 for nominal sums.
- IRS challenged the reporting, arguing investors were not true partners and that contributions plus credits constituted a disguised sale, triggering taxable income; Tax Court initially disagreed, but the Fourth Circuit reversed and held the transactions were sales under § 707.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were investors bona fide partners for federal tax purposes? | Commissioner: investors were not bona fide partners; they were purchasers. | VaHistoric: investors were true partners under Culbertson factors. | Court did not decide readiness here; addressed sales issue first, but acknowledges partnership factors in analysis. |
| Should the investors' transactions be treated as disguised sales under § 707? | Commissioner: yes, transfers fit § 707(a)(2)(B) and § 1.707-3; precludes tax-free treatment. | VaHistoric: not disguised sales; investments carried entrepreneurial risk and were bona fide. | Court held that the transactions were properly treated as sales under § 707. |
| Are Virginia historic credits 'property' for § 707 purposes? | Commissioner: credits constitute property transferable for § 707 purposes. | VaHistoric: credits are nontransferable under state law, not property. | Court held credits are 'property' for § 707 purposes, applying Craft and Drye reasoning. |
| What standard governs the § 707 determination and the level of deference to Tax Court findings? | Commissioner: apply § 707 and review de novo legal conclusions; defer to statutory/regulatory framework. | VaHistoric: defer substantially to Tax Court on factual findings; need to consider entrepreneurial risk. | Court reviews legal conclusions de novo, reviews factual findings for clear error, and finds the sale characterization appropriate. |
Key Cases Cited
- Commissioner v. Culbertson, 337 U.S. 733 (1949) (establishes partnership test for federal tax purposes)
- Randall v. Loftsgaarden, 478 U.S. 647 (1986) (tax credits and income characterization distinctions)
- Craft v. United States, 535 U.S. 274 (2002) (bundle-of-sticks concept; fundamental property rights for federal tax purposes)
- Drye v. United States, 528 U.S. 49 (1999) (breadth of taxpayer control over property; transferability as a consideration)
- Otey v. C.I.R., 70 T.C. 312 (1978) (disguised-sales concept and partnership-item treatment)