PARTNERSHIP FLIP structures are under study in Washington.

In a partnership flip, a developer who cannot use tax benefits brings in a partner who can, and the two form a partner- ship to own a project. The structures are popular in wind farms and other types of renewable energy projects. The partnership allocates 90% to 100% of partnership items — with the possible exception of cash — to the investor until the tax benefits have run or, if later, the investor reaches a target return. At that point, the investor’s interest in the partnership flips down to a small percentage usually in the range of 5% to 10%, and the developer has an option to buy out the investor for the fair market value of his interest determined at the time. There are many variations on this basic theme and many other details.

The IRS is not happy with 100% allocations to investors. It is working on a revenue procedure that will create a “safe harbor” for partnership flip deals. Deals that fit in the safe harbor will not be questioned. Others may have to be defended on audit.

IRS officials had hoped earlier to issue the guidance by year end, but they now say work on it has slowed.

Keith Martin