Indian tribes lost a round with the IRS.

The agency revoked a private letter ruling suggesting that an Indian tribe can transfer the investment tax credit on a solar project the tribe owns by entering into an inverted lease with a tax equity investor. The now-revoked ruling suggested the tribe could also transfer the investment tax credit by entering into a sale-leaseback transaction.

The revocation had been expected. It does not affect any transaction the taxpayer to whom the ruling was issued already closed based on the ruling.

The IRS made public in late September a letter it sent the taxpayer last summer. The letter is Private Letter Ruling 201640010. The revoked ruling was Private Letter Ruling 201310001.

The original ruling was surprising when it was made public in early 2013. An investment tax credit cannot be claimed on equipment “used by” a tax-exempt or government entity. The original ruling said that even though the tribe owned the project, the project would not be “used by” the tribe. The reasoning was narrowly technical. The tribe is not a tax-exempt entity because, as a sovereign nation, it has no need of a tax exemption to escape federal income taxes and it is not the sort of government entity that tax code has in mind. Investment credits are lost only when equipment is used by a federal, state or local government entity, the original ruling said.

By mid-2014, it was clear the IRS planned to withdraw the ruling.

Tribes need to look at other relationships to a solar or other renewable energy project besides ownership or else own a minority interest in an otherwise privately-owned corporation that owns the project.