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In two related cases, Cal. Ridge Wind Energy, LLC v. United States (Fed. Cl., 2019) and Bishop Hill Energy, LLC v. United States (Fed. Cl., 2019), the Federal Court of Claims ruled that the taxpayers were not entitled to include a multimillion-dollar Development Fee in their cost basis for a Section 1603 energy grant because the Development Fee transactions lacked economic substance. 

Tax Foresight correctly predicted that the Development Fee transactions had no economic substance. It made this prediction based on several factors, including:

  • The taxpayer could have fulfilled the transaction’s stated business for a lower amount of transactional costs than what was actually paid.

  • The taxpayer did not increase the amount of working capital available for the taxpayer’s business as a result of the transaction.

  • The parent company was prevented from having a choice as to how to use the cash received in the transaction (as the transaction involved circular cashflow).

Although both cases discussed economic substance as part of the sham transaction doctrine analysis, the court applied the common law test instead of the statutory economic substance test set out in § 7701(o) of the Internal Revenue Code. Nonetheless, Tax Foresight was still able to predict that the transactions had no economic substance, due to the platform’s multi-factorial approach.

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