On December 30, 2013, the Internal Revenue Service (IRS) issued much anticipated guidance (Revenue Procedure 2014-12) outlining safe harbor provisions for the allocation of historic tax credits (HTC) in business partnerships. The guidance is intended to provide these partnerships with increased predictability in acceptable tax credit allocations following the decision in the Historic Board Hall, LLC v. Commissioner, 694 F.3d 425 (3d Cir. 2012).
The release of this guidance is good news for the rehabilitation industry. The Historic Boardwalk decision created significant marketplace uncertainty regarding what type of partnership structure would be honored by the IRS. In its decision, the Court found that a private sector investor in a rehabilitation tax credit partnership had no meaningful stake in the partnership and was not a bona fide partner for federal income tax purposes. As a result, the Court revoked all historic rehabilitation tax credits allocations flowing to the investor in Historic Boardwalk Hall.
Soon after, the Historic Tax Credit Coalition (HTCC) held a series of meetings with the Department of Treasury aimed at drafting a revenue procedure that would give investors and developers a clear roadmap for compliance. The HTCC submitted written suggestions to help government officials better understand how HTC transactions are completed in the marketplace and what guidance provisions would help restore investor confidence. Having adopted many of these suggestions, the Revenue Procedure establishes conditions under which the IRS will not challenge the allocation of historic tax credits for partnerships established to rehabilitate historic structures.
These conditions provide guidance on minimum partnership interests, investor contributions, guarantees and loans, and call and put options. A more detailed review of the revenue procedure can be found at the links below.
- Historic Tax Credit Coalition Memo
- HTC Industry Reacts Positively to IRS Revenue Procedure (via Novogradac) by John Leith-Tetrault
While clarification is being sought from the IRS regarding certain provisions in the Revenue Procedure, it is expected that with the release of the guidance, the historic tax credit industry will resume normal activity to complete historic tax credit transactions. The hope is that the improved predictability associated with the guidance will result in an increased flow of capital back into rehabilitation projects.