Virginia Historic Tax Credit Fund 2001 LP v Commissioner of Internal Revenue

US Court of Appeals, Fourth Circuit, Nos. 10-1333, 10-1334, 10-1336, March 29, 2011: Reverses the US Tax Court and holds that certain transactions between a partnership to market Virginia historic rehabilitation tax credits and its partners amounted to taxable sales for purposes of federal tax law.

The following are excerpts from the Miller & Chevalier Tax Appellate Blog: “Under Virginia law, taxpayers can receive tax credits for investment in historical renovation projects.   The tax credits are made available to stimulate investment in such projects because they are often unprofitable, and as a result, financing for the projects is often difficult to obtain.   Because of restrictions on the direct transfer of the tax credits, the taxpayers in this case set up several investment partnerships that pooled funds from many investors and then contributed the funds to several lower-tier developer-partnerships.   In exchange for investment in the developer-partnerships the upper-tier partnerships received partnership interests that entitled them to tax credits generated by specific projects.   The tax credits would then be pooled by the upper-tier partnerships and distributed to the investors.  The IRS took the position that the scheme was a disguised sale of tax credits in exchange for the investors’ cash.”

The Tax Court rejected the IRS position. The IRS appealed. “Agreeing with the government’s disguised sale theory, the [Fourth Circuit] court reversed the Tax Court and ruled that the transactions at issue were taxable sales of state tax credits, as opposed to non-taxable capital contributions followed by partnership distributions.”

Decision available at

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