Many companies demonstrate their commitment to their communities by investing in projects to rehabilitate historic buildings. Congress encourages these investments by providing an income tax credit for certain qualified rehabilitation expenditures. These investments are commonly structured as partnerships managed by a tax-exempt or local governmental entity with the credits generally being allocated to the taxable investors.
It was thus a surprise to many in the summer of 2012, when a U.S. Court of Appeals agreed with the IRS that the investors in the partnership rehabilitating the Historic Boardwalk Hall in Atlantic City, New Jersey—the historic home of the Miss America Pageant—were not partners for federal income tax purposes and, consequently were not entitled to the tax credit. In that case, the IRS successfully argued that because the investor’s return was effectively fixed, they lacked a meaningful stake in either the success or failure of the partnership and were, thus, not a bona fide partner.
The result in that case unsettled the historic rehabilitation industry and many deals were put on hold because of uncertainty as to whether the transactions would be respected by the IRS. Moreover, the theory of the IRS’s case could be used to attack other tax credit deals as well. So taxpayers were relieved when on December 29, 2013, the government issued guidance providing a safe harbor illustrating how these deals could be structured.
The guidance (Revenue Procedure 2014-12) provides that the IRS will not challenge a partnership’s allocations of rehabilitation tax credits if the partnership and the partners satisfy each of the following requirements:
These factors resemble the safe harbor that the IRS had previously announced for wind energy credits (Rev. Proc. 2007-65, revised by Announcement 2007-112). While the safe harbor is expressly limited to rehabilitation, it nevertheless provides a useful template for testing other types of transactions.
The safe harbor is not intended to provide substantive rules, so taxpayers who fail to satisfy the requirements may still have valid investments. The guidance is effective for rehabilitation tax credits allocated on or after December 30, 2013.
Action Step—Taxpayers who are considering investing in (or have already invested in) rehabilitation credit transactions (and other types of tax credit deals) should carefully review these guidelines to ensure that they obtain the benefits for which they bargained. Our federal income tax experts are available to assist you with this important analysis.
Robert M. Gordon
Robert J. McDonald
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