IRS guidance on auditing new "economic substance" provisions may give comfort to renewable energy investors

Alternative & Renewable Energy Tax Newsalert

On July 15th, the IRS's Large Business & Industry Division published a directive (the "LB&I Directive") for examiners and managers on how to apply the recently codified provisions of the economic substance doctrine to business transactions. Under the Health Care and Education Reconciliation Act of 2010, Congress codified the common-law economic substance test and established a strict liability penalty of up to 40% for engaging in transactions that lack economic substance.

Although the Joint Committee on Taxation's report on this legislation clarifies that the codification of economic substance was not intended to affect certain alternative energy tax credit transactions, there has been some concern that the IRS could seek to apply the economic substance doctrine to transaction structures that allocate energy tax credits among investors.

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