PARTNERSHIPS with both US taxpayers and foreign or tax-exempt entities as partners got another reprieve from the IRS.

Congress appears inadvertently to have limited the ability of US taxpayers participating in such partnerships to take deductions from them. An example of such a partnership is where a US company owns a wind farm in the United States in partnership with a foreign wind developer or a municipal utility. Any deductions tied to “tax-exempt use property” can only be used to offset income from the partnership. They cannot be used as shelter for income from other sources.

The wind farm will be considered partly tax-exempt use property unless the parties have a straight-up deal in which one fixed percentage is used for sharing all partnership items for the life of the deal — or at least for as long as the foreign or tax-exempt entities remain partners.

The limits on deductions are in section 470 of the US tax code.

IRS said in December that it is delaying enforcement of the limits in most partnership cases for another year. The announcement is in Notice 2006-2. The limits will now be applied for the first time to deductions in tax years that start in 2006.

The IRS acted 48 hours after receiving a letter from the chairmen and two “ranking” members of the House and Senate tax-writing committees asking the agency to delay enforcement in order to give Congress more time to fix the tax code so that the limits no longer apply to most partnerships. The letter said Congress is trying to rewrite section 470 so that it only catches partnerships that are used in “abusive” transactions. The delay in IRS enforcement does not apply to abusers.

An example of an abusive transaction is a “synthetic SILO” where a partnership is used to replicate the benefits that US institutional investors used to get from buying equipment from a foreign or US municipal user of the equipment and leasing it back to the user. The user would put most of the purchase price in a bank account, called a defeasance account, with instructions to the bank to pay rent when due and to pay a purchase option price at the end of the lease term if the user decided to buy back the equipment.