The IRS recently issued Revenue Procedure 2014-12, providing a safe harbor under which the IRS will not challenge partnership allocations of “section 47” federal rehabilitation tax credits. In the aftermath of the IRS’s win in Historic Boardwalk Hall, LLC v. Commissioner, the Revenue Procedure is intended to provide more predictability regarding the allocation of section 47 rehabilitation credits to partners of partnerships that rehabilitate certified historic structures and other qualified rehabilitated buildings.
The Revenue Procedure is limited to section 47 rehabilitation credits. Nevertheless, it deserves the attention of the renewable energy community, as the section 48 federal energy credit for renewable energy property (simply known as the ITC in the renewable energy community) and the section 47 renewable credit are similar investment tax credits. This means that we should expect that the IRS would use a similar analysis as expressed in the Revenue Procedure when evaluating a section 48 energy ITC transaction.
As provided in the Revenue Procedure, the IRS will not challenge a partnership’s allocations of validly claimed section 47 rehabilitation credits if a partnership and its partners satisfy each of the safe harbor requirements. Like any safe harbor, it is important to remember that the failure to satisfy these requirements does not mean that the IRS will automatically disallow the partnership allocations. Rather, it just means that the safe harbor is not available. In fact, the Revenue Procedure itself states that no inference should be drawn as to the validity of partnership allocations for taxpayers that fail to satisfy the safe harbor.
While a discussion of each of the safe harbor conditions is beyond the scope of this client alert, the following items in the Revenue Procedure are worth noting:
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The Revenue Procedure allows both partnership flip structures and master lease structures.
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For a partnership flip, the Investor Partner’s interest cannot be greater than 99 percent and cannot “flip” to less than 5 percent of its largest percentage share (i.e., 4.95 percent if the Investor Partner has 99 percent before the flip). This matches the IRS’s guidance provided under the production tax credit (PTC) in the form of Revenue Procedure 2007-65.
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For a master lease, the Investor Partner may invest indirectly in the developer partnership through the master tenant partnership. This should provide investors currently using the master tenant structure solely for the benefit of the ITC to now also seek federal depreciation benefits available at the developer partnership level.
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The Investor Partner must make a minimum unconditional investor contribution of at least 20 percent of its total capital contribution prior to the date the property is placed in service.
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At least 75 percent of the Investor Partner’s total expected capital contributions must be fixed in amount before the date the property is placed in service.
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The Revenue Procedure limits the types of guarantees and other protections that may be provided to the Investor Partner.
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The Investor Partner may not be subject to a call option or other contractual right to sell the Investor Partner’s interest in the partnership (even if that call is at fair market value). However, the Investor Partner may be provided with a fair market value withdraw (or put) right.
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Partnership allocations of income, gain, loss, and credits must otherwise satisfy the rules applicable to partnership tax allocations.
As mentioned above, the Revenue Procedure applies only with respect to section 47 rehabilitation credits. However, as both the rehabilitation credit and the section 48 energy credit are similar investment tax credits, we expect that it will influence the IRS’s review of energy ITC transactions.
