A Botched Inverted Lease

Publication February 8, 2016

A botched inverted lease was given more time.

Parties to two tax equity transactions structured as overlapping inverted leases for what appear to be solar equipment were given more time by the IRS to file paperwork to make the transactions work.

The IRS granted the extra time in two private rulings that were made public in mid-December. The rulings are Private Letter Rulings 201550023 and 201550024

In an inverted lease, a solar company leases solar equipment to a tax equity investor. The parties agree in writing that the lessor will pass through the investment tax credit on the equipment to the tax equity investor as lessee. The lessee then files that statement with its tax return for the year the transaction closes. 

In the two transactions, both the lessor and lessees were partnerships. Each lessee was a partner in the lessor. 

The parties failed to do the proper paperwork to transfer the investment tax credits to the lessee. Instead, each lessor partnership allocated the full credits to the lessee in its capacity as a partner in the lessor.

The IRS may have raised questions on audit.

The parties then asked the IRS national office in Washington for more time to put the paperwork in place. The IRS gave them 120 days after the rulings were issued. The agency said it will grant companies more time in cases where “the taxpayer acted reasonably and in good faith, and . . . granting relief will not prejudice the interests of the government.” In this case, the tax credits had already been claimed.

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