Fourth Circuit tax credits transfer disguised sale | KPMG | GLOBAL

Fourth Circuit: LLC’s transfer of tax credits was “disguised sale”

Transfer of tax credits was "disguised sale"

The U.S. Court of Appeals for the Fourth Circuit today affirmed a memorandum opinion of the U.S. Tax Court, finding that a capital contribution to a limited liability company (LLC) in exchange for the LLC’s state tax credits was actually gross income to the LLC under the “disguised sale” rules of section 707(a).


Related content

The case is: Route 231, LLC v. Commissioner, No. 14-1983 (4th Cir. January 8, 2016).  Read the decision [PDF 81 KB]


Two individuals formed an LLC to hold real estate, and the LLC in 2005 purchased two parcels of land in Virginia. At that time, the state offered state income tax credits equal to 50% of the fair market value of the land donated to a public or private agency for conservation or preservation purposes. 

The LLC agreed to allow another entity to join the LLC by contributing money to the LLC and then receiving a majority of the Virginia tax credits that would be earned as a result of three proposed conservation donations. Under this arrangement, approximately $3.8 million was deposited by that entity into an escrow account. Once the state issued letters stating that the conservation donations were eligible for the tax credits, the funds in escrow were released to the LLC.

The IRS, on audit, determined that the $3.8 million had been improperly characterized as a capital contribution because it was, in fact, income from the sale of the Virginia tax credits by the LLC to the entity. The LLC challenged the assessment before the Tax Court. The Tax Court upheld the IRS determination that the transaction was a “disguised sale” under the rules of section 707, and thus the $3.8 million was gross income to the LLC.

The Fourth Circuit today affirmed. 

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal