The Internal Revenue Service recently released Field Attorney Advice 20124002F, revealing another attempt on audit to invalidate an allocation of historic tax credits (HTCs) to an HTC equity investor. Although only just made public, the Field Attorney Advice actually dates to August 30, 2012, which is three days after the Third Circuit’s decision in Historic Boardwalk Hall, LLC, New Jersey Sports and Exposition Authority, Tax Matters Partner v. Commissioner of Internal Revenue (the “HBH Case”) upholding the IRS’s attack on another HTC transaction.

The deal terms in the transaction described in the Field Attorney Advice are clearly recognizable. The HTC investor’s capital pay-in was priced at 90 cents per HTC dollar, with adjusters for the over- and under-delivery of the HTCs. The partnership purporting to own the historic building (the “HTC Partnership”) and its general partner were obligated to reimburse the HTC investor for any recaptured HTCs. Under the “waterfall,” the HTC investor was entitled to receive the first available cash as a tax distribution and then a preferred return on its invested capital, with any remaining cash to be used to pay additional rent, any unpaid development fees or member (partner) loans and then the residual splits. The HTC investor’s interest in the HTC Partnership was subject to what appear to be typical repurchase and put/call options, including a repurchase option (in the event of a substantial shortfall or delay in the delivery of the HTCs) and the “exit” put/call to take out the HTC investor after the end of the HTC recapture period. The developer principals, who were required to meet certain minimum net worth requirements, guaranteed the repurchase and put/call obligations and also provided construction completion and operating deficit guarantees.