Revenue Procedure 2014-12: IRS Follow-Up To Historic Boardwalk

On December 30, 2013, the Internal Revenue Service (the "IRS") released Revenue Procedure 2014-12 (the "Revenue Procedure"), describing a "safe harbor" for the allocation among partners of rehabilitation credits under section 47 of the Internal Revenue Code of 1986, as amended (the "Code"). A copy of the Revenue Procedure can be found here. If the requirements of the safe harbor are met, the IRS will not challenge a partnership's allocation of rehabilitation credits.

BACKGROUND

The impetus for the Revenue Procedure was Historic Boardwalk Hall, LLC. v. Commissioner,2 in which the Third Circuit determined that an investor was not a "bona fide partner" in a partnership that incurred qualifying rehabilitation expenditures and, accordingly, was denied the rehabilitation credits allocated to it under the partnership agreement. The key factors underlying the Third Circuit's opinion in Historic Boardwalk included that the developer partner guaranteed that the investor partner would receive the allocated rehabilitation credits and a preferred return. The court determined that the investor partner lacked a "meaningful stake in either the success or failure of [the partnership]" and as result was not a "bona fide partner."

The IRS expressly limited the Revenue Procedure to transactions involving rehabilitation credits, which are credits for rehabilitating certain buildings and structures. Notwithstanding this express limitation, the Revenue Procedure may provide some insight into the positions the IRS might take when analyzing the allocation of other types of tax credits, including the investment tax credit under Codesection 48 for certain renewable energy property, Code section 48A for qualifying advanced coal projects, and Code section 48B for qualifying gasification projects, as well as the production tax credit under Code section 45. This, however, may be wishful thinking as the rationale for some of the requirements set forth in the Revenue Procedure is unclear. Further, although the Revenue Procedure seems to borrow from some of the requirements and the analysis in a previously published Revenue Procedure that sets forth the widely-followed safe harbor for "flip partnership" investments in wind energy facilities ("Revenue Procedure 2007-65"),3 at least with respect to one material feature of these transactions, the Revenue Procedure states a position that is contrary to and in direct conflict with the position set forth in Revenue Procedure 2007-65.4 Consequently, the value of the Revenue Procedure in connection with analyzing partnership investments in other asset classes is unclear.

THE SAFE HARBOR

As an initial matter, in order to satisfy the safe harbor criteria, allocations under the partnership agreement must satisfy the requirements of Code section 704(b) and the Treasury Regulations thereunder, and the...