Selling (Naked) Tax Benefits

• In Event: Contemporary Legal Issues in Taxation

Abstract

As part of the U.S.’s largest ever investment in combatting climate change, the Inflation Reduction Act of 2022 (“IRA”) explicitly allowed the sale and transfer of certain energy tax credits to parties that are not at all involved in the credit-earning project. These credits can be sold “naked”—with all economic substance stripped away—in a transaction that is purely tax motivated. This is relatively radical because, historically, selling federal tax benefits generally has not been allowed. Before the IRA, tax benefits were generally not explicitly or directly transferable to an unrelated party, but tax benefits could often be transferred indirectly via a partnership to parties who are co-owners of the benefit-generating activity. Practically, this meant that, pre-IRA, if parties wanted transfer of tax benefits, the parties had to jump though complex hoops.

Why allow explicit transferability for some tax benefits (clean energy) but require hoops to transfer other tax benefits intended to incentivize other important social policy goals (e.g., low-income housing tax credit, rehabilitation tax credit)? If explicit transferability should be expanded, how far, to which tax benefits, and where/how do we draw the line? This project seeks to answer these questions. These are important inquiries because, since the IRA, more than 20 bills have been introduced in Congress that would expand the list of tax credits that could be explicitly transferred. However, the literature generally does not provide guidance about how to determine when (and under what conditions) explicit transferability is normatively desirable.

Author

• Heather Field, fieldh@uclawsf.edu