Tax Credits That Bond a Partnership: Revisiting Cross Refined Coal

In our monthly Blue J Predicts column, we use Blue J’s tax research software to analyze pending or recently decided federal income tax cases. This month we consider the judgment of the D.C. Circuit in Cross Refined Coal,¹ which addressed whether a business venture that was guaranteed to be unprofitable pretax could still be considered a bona fide partnership for federal income tax purposes.

Last year, we examined the Tax Court’s decision in this case and predicted with 90 percent confidence that the D.C. Circuit would find that the taxpayer, Cross Refined Coal LLC, operated as a partnership for federal tax purposes and that the IRS’s appeal would be dismissed. The D.C. Circuit has done just that with its August 5 decision.

This month, we unpack the D.C. Circuit’s de novo decision and take a deeper dive into the factors that influenced the outcome. The decision is favorable for taxpayers who are partners in a partnership trying to profit from the tax credits created by Congress. Although the IRS adopted the position that a partnership formed solely to turn a profit on tax credits is not a bona fide partnership, the D.C. Circuit held that “partnerships formed to conduct activity made profitable by tax credits engage in legitimate business activity for tax purposes.” This is consistent with Congress’s expressed intent to use tax incentives to encourage economic activity, as well as with limitations on judicial doctrines disallowing congressionally intended benefits, including section 45 tax credits.²

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