Capital Gains

Capital Gains

September 15, 2010

Capital gains may be hard to claim on sales of projects, including in tax equity transactions.

The IRS said in a technical advice memorandum, or ruling by the national office to settle a dispute stemming from an audit, that a company that is a specialty retailer of consumer electronics and home office products cannot treat its gains and losses from sales of its stores in sale-leaseback transactions to raise financing as capital in nature. They are ordinary income, the IRS said.

Individuals pay lower taxes on their capital gains. Corporations pay taxes on capital gains at the same rate as on ordinary income, but need capital gains to offset any unused capital losses they are carrying forward. Capital losses are hard to use.

All income from asset sales is considered capital unless it falls into one of eight categories in section 1221 of the US tax code. One of those categories that produces ordinary income is if the store or other property is considered inventory — “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”

The taxpayer in this case argued that its business was the sale of consumer electronics goods. However, the IRS said it sold and leased back enough stores during the year that such sales were part of its business model. The business model freed up capital that could be redeployed in building other stores. The stores were held primarily for sale to customers, the IRS said.

The ruling is Technical Advice Memorandum 201027045. The agency released it in late July.

The ruling has broader implications for wind, solar and other renewable energy developers who use “partnership flip” and sale-leaseback transactions to raise capital for their projects. In many partnership flip transactions, the developer is treated for tax purposes as selling an undivided interest in the projects directly (rather than selling a partnership interest). The ruling could also affect developers who regularly sell projects to utilities that are unwilling to enter into long-term power contracts to buy the output.

Keith Martin