In the wake of an appellate decision denying allocations of Sec. 47 credits to investor partners in a historic rehabilitation project, the IRS issued guidance including a safe harbor for such allocations.
The guidance, Rev. Proc. 2014-12, had been anticipated after the IRS won reversal of a Tax Court opinion in Historic Boardwalk Hall, LLC, 694 F.3d 425 (3d Cir. 2012), cert. denied, No. 12-901 (U.S. 5/28/13). The Third Circuit held that a limited liability company created by a New Jersey state authority with a corporate investor member to rehabilitate and operate a historic theater on Atlantic City’s Boardwalk was not a valid partnership and the corporation was not a bona fide partner. For previous coverage, see “Tax Matters: Supreme Court Declines to Hear Historic Boardwalk Hall,” JofA, Aug. 2013, page 63.
The safe harbor requires (1) allocations of rehabilitation credits under a partnership agreement to satisfy the requirements of Sec. 704(b) and the regulations and (2) the rehabilitation credit to be allocated in accordance with Regs. Sec. 1.704-1(b)(4)(ii). The principal partner and the investor partners in the partnership are required to hold certain minimum interests in each material item of partnership income, gain, loss, deduction, and credit throughout the partnership’s existence. There are also a host of other requirements for the safe harbor regarding the investors’ partnership interests and contributions, guarantees and loans, and purchase and sale rights.
The revenue procedure is effective for allocations made on or after Dec. 30, 2013. It specifically does not apply to any federal credit other than Sec. 47 or to any transfer or disguised sale of state credits. Thus, it would not apply to facts similar to those in another recent partnership case denying historic rehabilitation tax credits, Virginia Historic Tax Credit Fund 2001, LP, 639 F.3d 129 (4th Cir. 2011), since that case involved allocations of state credits that the Fourth Circuit held were properly recharacterized as sales.
Rev. Proc. 2014-12
By Paul Bonner, a JofA senior editor.