Economically equivalent transactions may take different forms, which can have vastly divergent tax implications. As a result, the Internal Revenue Service will sometimes contend that the form of a transaction that was selected by a taxpayer lacks economic substance and should not be respected. In a recent case, Virginia Historic Tax Credit Fund 2001 LP v. Commissioner,1 the Tax Court wrestled with what the appropriate characterization of a transaction should be in a situation where investors contributed money to a partnership and received allocations of tax credits. Were these investors really partners, or should they be more appropriately viewed as merely purchasers of tax credits?
Background
The Supreme Court has held that whether a partnership exists depends on whether, considering all of the facts and circumstances, “the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.”2
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