IRS Issues Guidance On Historic Tax Credits

The Internal Revenue Service (IRS) recently issued Revenue Procedure 2014-12 which contains guidance establishing safe harbor requirements (the "Safe Harbor") under which the IRS will not challenge partnership allocations of federal historic tax credits (HTCs) by a partnership to its partners. The IRS intends for the Safe Harbor to increase the level of predictability for such allocations following the uncertainty created by the Third Circuit U.S. Court of Appeals in Historic Boardwalk Hall, LLC et al. v. Commissioner, 694 F.3d 425 (3d Cir. 2012).

Background

The Safe Harbor applies to a partnership that validly claims HTCs (a "Partnership"). A "partnership" is commonly understood to be a term of art that includes any legal entity, such as a limited liability company, that is treated as a "partnership" for federal income tax purposes. A Partnership can be structured as either a Developer Partnership or a Master Tenant Partnership. A Developer Partnership is a Partnership that owns and restores a qualified rehabilitated building or a certified historic structure (a "Building") in a manner that qualifies for HTCs. A Master Tenant Partnership is a Partnership that leases a Building from a Developer Partnership and for which an election is made pursuant to Treasury regulations to transfer the HTCs from the Developer Partnership to the Master Tenant Partnership. The tax credit investor (the "Investor") invests in the Partnership that is entitled to the HTCs and receives an allocation of HTCs from that Partnership.

The Safe Harbor sets forth rules that distinguish between Investors and Principals of a Partnership. Investors are partners in a Partnership who are not Principals and who meet certain requirements. Principals are managers authorized to act for the Partnership. Although it is not clearly stated in the Safe Harbor, the term "Principal" presumably includes the general partner of a partnership and the managing member of a limited liability company. The term does not appear to apply to a non-member manager of a limited liability company who has no ownership interest in the Partnership.

The Safe Harbor applies to allocations of HTCs on or after Dec. 30, 2013. If the Safe Harbor is met, the IRS will not challenge a Partnership's allocations of validly claimed HTCs. To satisfy the Safe Harbor, all of its requirements must be met.

Safe Harbor Requirements

Investors

Investors are Partnership partners that hold interests in the Partnership that meet certain of the Safe Harbor requirements. If an Investor receives HTCs from a Master Tenant Partnership, the Investor cannot also invest in the Developer Partnership. However, the Master Tenant Partnership may hold an interest in the Developer Partnership. In addition, this prohibition does not prevent the Investor from holding an interest in the Developer Partnership under a separately negotiated, arm's length arrangement of...