Opinion ID: 3168238
Heading Depth: 3
Heading Rank: 1

Heading: 707-3(b)(2)(v));

Text: • That Virginia Conservation received a 1% interest in the LLC and yet received 97% of Route 231’s state tax credits for the “contribution” of $3,816,000 while Carr and Humiston each received a 50% (later reduced 10 We reject Route 231’s argument that the amended operating agreements’ indemnity clause should not serve as proof that Virginia Conservation’s right to the tax credits or their value was secured. Route 231 contends that the indemnity clause did not “fully protect [it] from partnership risks” because Route 231, Carr, and Humiston had minimal available assets should any one of them have been required to pay Virginia Conservation in satisfaction of the indemnity obligation. That argument misunderstands the relevant factor, which is whether “the partner’s right to receive the transfer of money or other consideration is secured in any manner[.]” 26 C.F.R. § 1.707- 3(b)(2)(iii). The regulation only asks whether the secured right exists, not whether there is a risk that the secured party may not in fact be able to collect on a judgment for breach of contract at some point in time. Because the indemnity clause creates a legally enforceable right of indemnity, the Tax Court appropriately concluded that this factor weighed in favor of a disguised sale. 20 to 49.5%) interest in the partnership and yet received 3% and 0% of Route 231’s conservation tax credits for their “contributions” of $2,300,000 (cf. 26 C.F.R. § 1.707-3(b)(2)(ix); Va. Historic, 639 F.3d at 144); and • That Virginia Conservation had no obligation to return or repay the tax credits to Route 231, but exercised full ownership rights in them (cf. 26 C.F.R. § 1.707- 3(b)(2)(x); Va. Historic, 639 F.3d at 144). These facts and circumstances form the basis for our conclusion that the Tax Court correctly determined that this transaction was a sale under 26 C.F.R. § 1.707-3(b)(1). Viewing all the circumstances surrounding this transaction, and in particular the terms of the amended operating agreements, the Tax Court did not err in finding that “Route 231 would not have transferred $7,200,000 of Virginia tax credits to Virginia Conservation but for the fact that Virginia Conservation had transferred $3,816,000 to it” and vice versa. J.A. 1526; cf. 26 C.F.R. § 1.707-3(b)(1)(i). Moreover, Virginia Conservation’s right to the tax credits did not depend on the entrepreneurial risks of Route 231’s operations. Cf. 26 C.F.R. § 1.707-3(b)(1)(ii). Arguing to the contrary, Route 231 points to Virginia Conservation’s assuming certain entrepreneurial risks as a partner in an ongoing partnership, but 26 C.F.R. § 1.707-3(b)(1)(ii) focuses on whether the later of the two transfers depended on the entrepreneurial risks of Route 231. Here, the plain language of 21 the amended operating agreements created a fixed cash-to-credit ratio to determine what each party would exchange. They also contained a specific guarantee that Virginia Conservation would receive all of the tax credits it paid for and that it would be entitled to reimbursement in cash for any shortfall. At bottom, Virginia Conservation’s right to the tax credits depended on fixed contractual terms, not the entrepreneurial risks of Route 231’s operations. For these reasons, our review of the record leads us to the firm belief that Route 231 failed to rebut the presumption that the transaction between Route 231 and Virginia Conservation was a sale. Cf. 26 C.F.R. § 1.707-3(c) (creating a presumption that transfers made within two years are presumed to be a sale “unless the facts and circumstances clearly establish” otherwise). Accordingly, we hold that the Tax Court did not err in agreeing with the Commissioner that the money Route 231 received from Virginia Conservation was “income” for federal tax purposes.