June 25, 2024 | Law360 Tax Authority | 1 minute read

Bracewell’s Jennifer Speck spoke with Law360 about hybrid tax equity structures in light of potential increased Internal Revenue Service scrutiny using an aggressive interpretation of what’s known as the economic substance doctrine.

Speck said hybrid arrangements “could call into question whether there is a beneficial economic change and nontax business reason for the transaction at the taxpayer level.”

“For example, a transaction may be recharacterized if the parties engage in such a transaction with the principal purpose of avoiding any federal tax liability beyond the intent of Section 6418,” Speck said. “This rule ensures taxpayers transact at arm’s length.”

Developers that partner with tax equity investors to claim the investment tax credit under Internal Revenue Code Sections 48 and 48E with plans to sell the credit amount to a third party could be subject to some scrutiny under the economic substance doctrine. The credit rate is equal to 30 percent of the cost basis of an eligible clean energy development property, and developers are able to increase, or step up, the basis under these new forms of partnerships, also known as hybrid structures.

While there are risks in being a part of these hybrid tax equity structures, Speck agreed with practitioners saying the final rules on transferability and some bonus tax credits already include strict due diligence measures and penalties to curb abusive tax practices, which may limit future scrutiny of the transactions’ economic substance.