Partnership flip structures will be addressed by the Internal Revenue Service in a “revenue procedure,” perhaps as early as this summer.

Partnership flips are used by developers of wind, solar, geothermal and other renewable energy projects to get value for tax subsidies that the developers are unable to use.

The developer brings in an institutional equity investor as a partner to own one or more projects. The investor is allocated 90, 95, 99 or 100% of the economic returns from the projects — apart possibly from cash — until a future “flip date,” after which the investor’s interest in the partnership drops to as little as 5% and the developer has an option to repurchase the investor’s interest. The flip date is often the later of when the tax benefits have run or the investor reaches a target internal rate of return. Most of the tax benefits in a wind farm or geothermal project, for example, take 10 years to run.

The IRS issued two private letter rulings in November 2005 confirming that partnership flip transactions work to transfer tax benefits. However, it placed a hold on any further rulings in May 2006.

The IRS is expected to draw lines in guidance this summer about what terms it is prepared to accept in such transactions. Transactions that fall outside the guidelines may face questions on audit.

The agency is expected to say that no more than 95% of partnership items can be allocated to the equity investor. It will require that the investor retain at least a 5% interest in the partnership after the flip. It will bar deals where one of the partners guarantees the investor at least a minimum return from the transaction.

IRS officials caution that the guidelines still face a review process within the IRS and Treasury. The content may remain in flux until the end.

Keith Martin