Third Circuit Strikes Down Historic Tax Credit Deal


In Historic Boardwalk Hall, LLC, New Jersey Sports and Exposition Authority, Tax Matters Partner v. Commissioner of Internal Revenue, the U.S. Court of Appeals for the Third Circuit invalidated the allocation of federal historic tax credits (HTCs) to the tax credit investor, calling into question long-standing, industry-standard syndication structures for not only HTCs but also low-income housing tax credits (LIHTCs) and other federal tax credit programs. The decision has potentially far-reaching effects because the court held that the tax credit investor was not a true partner for tax purposes in the limited liability company owning the convention center (the “Owner”).

Background -

The HTC syndication at issue in the Third Circuit’s opinion stems from the rehabilitation of an Atlantic City convention center (known as East Hall) and appears to have played out along fairly standard industry lines. After being approached by a tax credit consultant on the East Hall project, the project’s sponsor, the New Jersey Sports and Exhibition Authority (the “Sponsor”), decided to raise additional funds through an HTC syndication. A large corporate tax credit investor (the “Investor”) agreed to make a capital contribution to the Owner, in return for a 99.99% membership interest (including a 3% preferred return) in the Owner and an allocation of the underlying HTCs. The Investor was obligated to make its capital contributions based on the achievement of progress milestones, while the Sponsor provided construction completion, operating deficit, environmental and tax credit recapture guarantees. In due diligence, projections demonstrated non-tax economic returns to the Investor, although the court did note that some of the assumptions were overly optimistic and, in practice, the Owner ran substantial operating deficits.

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