Supreme Court declines to hear Historic Boardwalk Hall; Virginia Historic Tax Credit Fund files new FPAA challenge

The U.S. Supreme Court on May 28 declined to hear an appeal of the Third Circuit’s decision denying historic structure rehabilitation credits for a state authority’s partnership with Pitney Bowes Inc. to redevelop the Atlantic City, N.J., Boardwalk Hall.

Historic Boardwalk Hall LLC, with Pitney Bowes as investor member, funded the venue’s restoration. The Third Circuit, reversing the Tax Court, held in 2012 that the LLC, formed by the New Jersey Sports and Exposition Authority (NJSEA), was not a valid partnership and Pitney Bowes was not a bona fide partner (see “Tax Matters: IRS Wins Again on Appeal of Rehabilitation Credit,” JofA, Nov. 2012, page 64).

The partnership agreement guaranteed Sec. 47 rehabilitation credits for Pitney Bowes, plus a 3% preferred return. Put and call options gave NJSEA the right and duty under certain conditions to purchase Pitney Bowes’s interest, and NJSEA indemnified Pitney Bowes against certain risks. Despite those features, the Tax Court held the transaction had economic substance, considering the legislative purpose of Sec. 47 of encouraging otherwise unprofitable rehabilitation projects (Historic Boardwalk Hall, LLC, 136 T.C. 1 (2011); see also “Tax Matters: Transfer of Rehab Credit Validated,” JofA, April 2011, page 52).

Like the Tax Court, the Third Circuit applied the factors of Culbertson, 337 U.S. 733 (1949), to determine the validity of the partnership and of Pitney Bowes as a partner. However, focusing on what it said was the lack of any meaningful downside risk for Pitney Bowes or upside potential for Historic Boardwalk Hall, the appellate court reached the opposite conclusion. (For the IRS’s position in this and similar cases, see also Field Attorney Advice 20124002F.)

In another case of an investor partnership claiming historic rehabilitation credits, the plaintiffs in Virginia Historic Tax Credit Fund 2001 LLC, 639 F.3d 129 (4th Cir. 2011), in May filed a new petition in the Tax Court challenging the IRS’s Feb. 7, 2013, notice of final partnership administrative adjustment (FPAA) for timeliness in one tax year and for what it said was a “whipsaw” position by the IRS with respect to another.

The Fourth Circuit, also reversing the Tax Court, in 2011 ruled that Virginia state rehabilitation credits were “property” to which the disguised-sale rules of Regs. Sec. 1.707-3 applied, making includible in the fund’s gross income what the fund claimed were contributions to capital by the investors who received the credits (see “Tax Matters: IRS Wins Historic Credit Fund Appeal,” JofA, June 2011, page 66).

In the new Tax Court petition, the fund claimed that the FPAA was time-barred and, alternatively, any income the fund recognized from any sale of the credits was largely offset by cost of goods sold.

  Historic Boardwalk Hall, LLC, No. 11-1832 (3d Cir. 8/27/12), cert. denied, Sup. Ct. Dkt. No. 12-901 (U.S. 5/28/13); Virginia Historic Tax Credit Fund 2005 LP, T.C. docket No. 10216-13 (petition filed 5/8/13)