IRS Issues Safe Harbor for Historic Rehabilitation Tax Credit Partnerships
Jan. 9, 2014
The IRS released Revenue Procedure 2014-12 on Dec. 30, 2013, providing a safe harbor under which it will not challenge partnership allocations of historic rehabilitation tax credits (HRTC). The safe harbor was issued in response to the 2012 court decision in Historic Boardwalk Hall LLC v. Commissioner of Internal Revenue. The safe harbor generally requires investors to bear significant economic risk of loss with respect to their investment in the partnership and to the ultimate realization of the HRTC.
One significant element of the safe harbor limits the guarantees that can be provided to investors with respect to realization of the HRTC. The safe harbor requires guarantees be unfunded. A guarantee is unfunded if no money or property is set aside to fund all or any portion of the guarantee, and if neither the person making the guarantee nor any person under the control of the guarantor agrees to maintain a minimum net worth in connection with the guarantee. The safe harbor also limits the nature of the unfunded guarantees that can be provided. For example, a partnership can provide to the investor a guarantee related to the avoidance of acts that would cause the partnership to fail to qualify for the HRTC, such as a failure to obtain the necessary approvals from the National Park Service. However, the safe harbor does not allow the partnership to provide the cash equivalent of the HRTC to the investor in the event the IRS challenges all or a portion of the partnership HRTC structure.
Another significant element of the safe harbor prohibits the principal or the partnership from having an option to purchase or redeem the investor’s interest in the partnership even if the purchase or redemption requires the payment of fair market value of the interest. A second component of this safe harbor precludes the investor from having the contractual right to sell its interest to the principal or the partner at a fair market value in excess of the fair market value of the interest at the date of sale, even if the contractual right is negotiated at arms-length by the parties.
It is important to note that many existing HRTC partnerships will not satisfy some or all of the elements of the safe harbor outlined in the revenue procedure. Failure to satisfy all elements of the safe harbor does not necessarily mean that the partnership’s HRTC allocations are at risk. Rather, it means the partnership’s HRTC allocation should be evaluated under the court’s holding in Historic Boardwalk Hall and related case law.
The revenue procedure is effective for HRTC allocations made by a partnership to its partners on or after Dec. 30, 2013. If a building was placed in service before Dec. 30, 2013, and the partnership and its partners satisfied all the requirements of the safe harbor at the time the building was placed in service and thereafter, the IRS will not challenge the partnership’s HRTC allocation.
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