PHANTOM OF THE 50(d) INCOME

By Greenberg, Leonard I. | Boston University Law Review, October 1, 2017 | Go to article overview

PHANTOM OF THE 50(d) INCOME


Greenberg, Leonard I., Boston University Law Review


INTRODUCTION

Taxpayers have long dealt with a specter of uncertainty surrounding their investments in certain tax credit projects, especially the phantom income attributed to taxpayers that lease investment tax credit properties and claim the tax credits arising from the projects.1 This ghastly situation finally came to an end in July 2016 when the Internal Revenue Service ("IRS") dispatched the Ghostbusters to issue new regulations.2 However, as with many ghost stories, the new regulations leave us with several lingering questions.

I.R.C. § 50(d)(5) effectively requires lessees of investment credit property who claim the resulting tax credits (which include, among others, the rehabilitation credit3 and the energy credit4) to include in their gross income an amount equal to the tax credits (or, in the case of the energy credit, 50% of that amount) ratably over the applicable recovery period of the property.5 However, until 2016, the law was unclear as to how lessees that are treated as partnerships should treat this so-called "phantom" income, usually referred to as "Section 50(d) income," named for its progenitor statute.6 Specifically, practitioners were uncertain whether the partners could use an allocation of Section 50(d) income to increase their basis in the lessee partnership, often called the partner's "outside basis."7 Almost all participants in the investment tax credit industry filed tax returns reflecting an increase in their outside basis in the lessee partnership,8 believing it to be consistent with the textual provisions of the Internal Revenue Code,9 despite misgivings about whether Congress intended such partners to be able to report a basis increase and whether the IRS would respect such a basis increase. These misgivings were based largely on I.R.C. § 50(c), which requires owners of investment tax credit property to decrease their basis in the property when the owner is the claimant of the tax credits.10 It was difficult to believe Congress and the IRS11 would permit partners of a creditclaiming lessee to increase their basis in the lessee partnership while requiring credit-claiming owners to decrease their basis in the property (and partners of such owners to decrease their basis in the owner partnership).

Temporary Treasury Regulation § 1.50-1T12 resolved this longstanding ambiguity under § 50(d)(5).13 Among other things, the regulations provide that Section 50(d) income cannot increase a partner's basis in the lessee partnership.14 By their terms, the regulations apply to properties "placed in service on or after September 19, 2016."15 They carry the caveat, however, that "[t]he temporary regulations should not be construed to create any inference concerning the proper interpretation of section 50(d)(5) prior to the effective date of the regulations."16 At the same time, though, the regulations claim to be consistent with congressional intent and statutory purpose,17 and further claim that contrary positions taken by taxpayers prior to the new regulations are "inconsistent with Congressional intent,"18 suggesting that the new regulations could be applied retroactively. The regulations make this claim, and the potential for retroactive application exists, despite the fact that the regulations are themselves somewhat inconsistent with prior guidance from the IRS that suggested different treatment of § 50(d)(5).19 These seemingly contradictory positions raise two questions. The first question is a technical tax question: Are the regulations themselves the best interpretation of § 50(d)(5)? The second question is normative: How should the IRS treat transactions that fall outside of the purview of § 1.50-1T?

This Note seeks to provide a framework to answer these two questions. Part I provides background on investment credits, their political and social history, and why they matter. It then describes the basic structures of investment tax credit transactions, as they are somewhat varied but are driven in several ways by § 50. …

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