To welcome in the new year, the Internal Revenue Service (the “IRS”) issued Rev. Proc. 2014-12, 2014-3 I.R.B. 415, to provide administrative guidance to the federal historic tax credit industry in the aftermath of the Third Circuit’s decision in Historic Boardwalk Hall, LLC v. Commissioner, 694 F.3d 425 (3d Cir. 2012), cert. denied, 133 S.Ct. 2734 (2013). Rev. Proc. 2014-12 includes a safe harbor (the “Safe Harbor”) pursuant to which the IRS will not challenge the allocation of rehabilitation tax credits (“Historic Credits”) under Section 47 of the Internal Revenue Code of 1986, as amended (the “Code”), among partners in a partnership. Overall, the guidance is a good faith and useful attempt by the IRS to set reasonable Safe Harbor parameters while addressing its concerns with the deal structure in the Historic Boardwalk case. Unfortunately, it does also include some puzzling elements.
In the Historic Boardwalk case, the Third Circuit addressed whether an equity investor in a partnership which completed the rehabilitation of a historic building in a manner which qualified for Historic Credits should be regarded as a partner in the partnership for federal income tax purposes. In this case, the New Jersey Sports and Exposition Authority (the “NJSEA”) was the lessee and operator of a historic structure which required substantial renovation. To complete the rehabilitation, NJSEA created Historic Boardwalk Hall, LLC (“HBH”), in which it served as the managing member. A subsidiary of Pitney Bowes (“PB”) was admitted to HBH as the investor member. The building was subleased by NJSEA to HBH for a term of 87 years.
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