In Rev. Proc. 2014-12, 2014-3 IRB 1 (12/30/2013), the Internal Revenue Service issued guidance explaining under what set of circumstances it will not challenge a partnership allocation of section 47 rehabilitation tax credits to its partners, i.e., the investor partner seeking a full or large allocation of the available credits. The need for such guidance was obvious, at least to this commentator. That is due to the Third Circuit’s eye-grabbing decision in Historic Boardwalk Hall, LLC v. Commissioner, 694 F.3d 425 (3d Cir. 2012), cert. denied, U.S., No. 12-901, May 28, 2013.
In Historic Boardwalk Hall, LLC, supra, the Third Circuit held that the Tax Court, 136 T.C. 1 (2011)(opinion by Goeke, J.) had erred in its determination that a corporation that the “investor member” in an LLC/partnership formed with the New Jersey Sports and Exposition Authority (NJSEA) to rehabilitate a historic hall owned by the government, was a valid partner and therefore was entitled to be specially allocated all of the section 47 rehabilitation credits available attributable to the renovation of the historic structure. Instead, there was no partnership according to the Third Circuit finding that the investor did not share in a joint undertaking for profits but only to effectuate a sale and purchase of the available rehabilitation tax credits. According to the Third Circuit, the operative agreements and associated tax benefit guaranty issued by the NJSEA made the investment essentially “risk-free” to the investor. Similarly, there was a lack of any meaningful upside potential in that the investor-corporation was not entitled to any profits from the partnershyip over and above a fixed preferred return which was also guaranteed by NJSEA. In short, the investor had no meaningful stake in either the partnership’s success or failure and was not, therefore, a bona fide partner. a meaningful stake in either the success or failure of [the partnership], it was not a bona fide partner.”
In light of the Third Circuit’s decision, which had been negatively received by many participants in the rehabilitation tax credit industry, the Treasury and the IRS decided to announce a safe harbor as favorable guidance to provide partnerships and partners with more predictability about the allocation of section 47 rehabilitation credits to partners of partnerships that rehabilitate certified historic structures and other qualified rehabilitated buildings. According to the Revenue Procedure, The IRS won’t challenge a partnership’s allocations of validly claimed section 47 rehabilitation credits if the partnership and its partners satisfy the safe harbor. This means, as set forth in the conclusion to this post, that if you follow the analysis of the Third Circuit in setting up the deal, you won’t be challenged by the Service. The question is whether the market for such funds will go elsewhere in light of the fact that the provider of funds (credit recipient) will not be able to get credit warrantees and economic indemnification of any loss associated from the investment from any person or entity directly involved in the transaction.
Scope of Revenue Procedure 2014-12
It is important to note that the revenue procedure applies only to allocations of section 47 rehabilitation credits from qualified rehabilitation expenditures. According to the guidance, the safe harbor doesn’t provide substantive rules and no inference should be drawn about the validity of partnership allocations for taxpayers that fail to satisfy the safe harbor. The IRS will not provide (favorable) private letter rulings to individual taxpayers on the allocation of section 47 rehabilitation credits.
Ok, So What About the Revenue Procedure Format for Providing Favorable Guidance?
It should be noted that a “revenue procedure” is issued by the Service as guidance for the general public. Revenue procedures are approved by the Associate Chief Counsel (Technical) as well as other affected branches such as Associate Chief Counsel (International) and Assistance Commissioner (EP/EO). Revenue procedures have been stated to be simply the IRS’ position on an issue and to a court in review lacks binding precedential value). See Snap-on Tools, Inc. v. U.S., 26 Cl. Xt. 1045 (1992), aff’d, 26 F3d 137 (Fed. Cir. 1994). See also Estate of Shapiro v. Comm’r, 111 F.3d 1010 (2nd Cir. 1997)(limits of the Service’s obligation to follow its revenue procedures discussed).
A passage from the Second Circuit’s decision in Estate of Shapiro, supra, should be kept in mind by the tax advisor when evaluating the degree of reliance a taxpayer may place on a revenue procedure.
“ It is well-established that, as a general rule, “the I.R.S.’s Revenue Procedures are directory not mandatory.” (citations omitted). …. In other words, the “failure to comply with [a] Revenue [Procedure]…is not dispositive, as IRS procedures are mere guidelines without the force of law.” (citations omitted). It has been noted, however, that “these cases did not purport to announce a rule applicable to all revenue procedures,” and that if a Revenue Procedure “is properly characterized as a substantive statement rather than a procedural directive,” the IRS may be required to follow it in every case. Eli Lilly & Co. v. Commissioner, 856 F.2d 855, 865 (7th Cir. 1988). But the instances in which the IRS can be bound by its own Revenue Procedures appear to be quite rare.
Courts have “established a two part test for determining whether a published rule has the force and effect of law.” Ward v. Commissioner, 784 F.2d 1424, 1430 (9th Cir. 1986). The IRS will be bound by a published rule if 1) the rule “prescribes substantive rules — not interpretive rules, general statements of policy or rules of agency organization, procedure or practice, and 2) the agency promulgated the rules pursuant to a specific statutory grant of authority and in conformance with the procedural requirements imposed by Congress.” Id. at 1430-31 (citations, brackets, and internal quotation marks omitted).
A Revenue Procedure will ordinarily not be binding under this test, since it “is a procedural rule promulgated by the Commissioner of the IRS without need of approval from the Secretary of the Treasury. As such it is not considered as a rule which confers rights upon taxpayers but rather is a mere internal procedural guide and is not mandatory.” Noske v. United States,Nos. 6-97-399, 6-87-400, 1988 WL 146612, at *1 [63 AFTR 2d 89-367] (D. Minn. Oct. 18, 1988). Compare 26 C.F.R. section 601.601(d)(2)(i)(b) (“A “Revenue Procedure” is a statement of procedure….”) (emphasis added), with Id. section 601.601(d)(ii)(v)(a) (“[C]ommunications involving substantive tax law…are published in the form of Revenue Rulings.”) (emphasis added). Cf. Boulez v. Commissioner, 810 F.2d 209, 215 (D.C. Cir. 1987) (IRS’s Statement of Procedural Rules is not binding, as it concerns matters of procedure and is “[i]ssued by the Commissioner, without need for approval by the Secretary [of the Treasury]”); Cataldo v. Commissioner, 499 F.2d 550 (2d Cir. 1974) (per curiam), aff’g 60 T.C. 522 (1973) (same).”
The opinion by the Second Circuit continues:
“This does not, however, end our inquiry. Even when the IRS is not bound to follow a published procedural rule, such as a Revenue Procedure, an abuse of discretion can occur where the Commissioner fails to observe self-imposed limits upon the exercise of his discretion, provided he has invited reliance upon such limitations. Capital Fed. Sav. and Loan, 96 T.C. at 217. 9 Revenue Procedure 81-27 “set[s] forth the procedure to be followed by an estate.” Rev. Proc. 81-27, 1981-2 C.B. 547, at section 1. As such, it invites taxpayers to rely on it, [pg. 97-2160] and implies that the IRS will permit taxpayers to do so. See generally Rev. Proc. 89-14, 1989-1 C.B. 814, at section 7.01(5) (“Taxpayer[s] generally may rely upon…revenue procedures published in the Bulletin in determining the tax treatment of their own transactions….”).”
With the nature and possible limitations on the ability of a taxpayer to fully rely on a revenue procedure, let’s move on to the “safe harbor” under section 47 rehabilitation tax credits.
Rev. Proc. 2014-12:
Rev. Proc. 2014-12 provides examples of the safe harbor requirements applied to a transaction in which the investor invests in a partnership to obtain the section 47 rehabilitation credits. The examples assume that the tax-exempt use property rules of section 168(h) do not apply and that the partnership may validly claim the section 47 rehabilitation credits for the rehabilitation of a building.
The revenue procedure is effective for allocations of section 47 rehabilitation credits made by a partnership to its partners after December 29, 2013. If a building was placed in service before December 30, 2013, and the partnership and its partners satisfied all the requirements of the safe harbor when the building was placed in service and thereafter, the IRS won’t challenge the partnership’s allocations of section 47 rehabilitation tax credits to eligible investors. Indeed the procedure announces:
“This revenue procedure establishes the requirements (the Safe Harbor) under which the Internal Revenue Service (the Service) will not challenge partnership allocations of § 47 rehabilitation credits by a partnership to its partners. The Treasury Department and the Service intend for the Safe Harbor to provide partnerships and partners with more predictability regarding the allocation of § 47 rehabilitation credits to partners of partnerships that rehabilitate certified historic structures and other qualified rehabilitated buildings”.
Still, the Service was careful to limit the “reliance” taxpayers may place on the guidance:
“This revenue procedure applies only with respect to allocations of § 47 rehabilitation credits from qualified rehabilitation expenditures. This revenue procedure does not apply to federal credits other than the § 47 rehabilitation credit or to state credit transactions. It does not indicate the circumstances under which the Service may challenge allocations of such other credits or the circumstances under which a transfer of state credits by a partnership may be treated as a disguised sale under § 707(a)(2)(B). Determinations of whether an expenditure is a qualified rehabilitation expenditure and whether a Partnership is the owner of a Building for purposes of claiming the § 47 rehabilitation credit are also outside the scope of this revenue procedure. In addition, this revenue procedure does not address how or if the tax-exempt use property rules under § 168(h) apply.
Background on Qualified Rehabilitation Credits
Section 38(a) provides a credit against income taxes for certain business credits. Section 46 provides that, for purposes of § 38, the amount of the investment credit includes the rehabilitation credit. Section 47(a) provides that the rehabilitation credit for any taxable year is the 10% of the qualified rehabilitation expenditures as to “any qualified rehabilitated building”other than a certified historic structure, and 20% of the qualified rehabilitation expenditures with respect to any certified historic structure. Section 47(b)(1) provides that qualified rehabilitation expenditures with respect to any qualified rehabilitated building are taken into account for credit purposes for the taxable year in which the qualified rehabilitated building is placed in service.
Section 704(a) provides that a partner’s distributive share of income, gain, loss, deduction, or credit is, unless otherwise provided in Subchapter K, based on the partnership agreement. Under section 704(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partner’s interest in the partnership (taking into account all facts and circumstances) if (1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit,or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit violates the substantial economic effect test. As to the allocation of tax credits of a partnership, Treas. Reg. §1.704-1(b)(4)(ii) provides that allocations of cost or qualified investment made in accordance with Treas. Reg. § 1.46-3(f) shall be deemed to be made in accordance with the partners’ interests in the partnership.
Under Treas. Reg. § 1.46-3(f)(2)(i), for purposes of § 47, each partner’s share of the qualified rehabilitation expenditures is determined in accordance with the ratio in which the partners divide the general profits of the partnership (that is, the taxable income of the partnership described in § 702(a)(8)) regardless of whether the partnership has a profit or loss for its taxable year during which the qualified rehabilitation building is placed in service.
In Historic Boardwalk Hall, LLC., supra, agreements governing the Historic Boardwalk Hall transaction ensured that the investor would receive the § 47 rehabilitation credits (or their cash equivalent) and a preferred return, with only a remote opportunity for additional sharing in profit. Both the § 47 rehabilitation credits and the preferred return were guaranteed as part of the transaction. The preferred return guarantee was funded. The Third Circuit determined that the investor’s return from the partnership was effectively fixed, and that the investor also had no meaningful downside risk because its investment was guaranteed. As previously mentioned, the Third Circuit agreed with the Commissioner’s reallocation of all of the partnership’s claimed losses and tax credits from the investor to the principal, holding that “because [the investor] lacked a meaningful stake in either the success or failure of [the partnership], it was not a bona fide partner.”
The Safe Harbor provision states that the guidance is not intended to provide substantive rules and no inference should be drawn as to the validity of partnership allocations for taxpayers that fail to satisfy the Safe Harbor. The Treasury Department and the Service do not view the Safe Harbor as determinative of whether an Investor is a partner or acting in its capacity as a partner in an arrangement or transaction that is outside the scope of this revenue procedure. The Treasury Department and the Service do not intend the inclusion of any particular criterion in the Safe Harbor to be an indication either of our views of the significance of that criterion with respect to any other federal or state tax credit transactions, or of whether a Partnership has the requisite benefits and burdens of ownership of a Building. The Service will not provide private letter rulings to individual taxpayers regarding the allocation of § 47 rehabilitation credits.
Safe Harbor Requirements.
Section 4.01 of the Revenue Procedure that starts off with a set of defined terms including: (i) investors; (ii) master tenant partnership; and (iii) developer partnership and describing what can and can not be the relationships between these parties under the safe harbor. Notably the investor cannot also invest in the developer other by an indirect interest held via the master tenant partnership. Section 4.01 recites that this prohibition does not apply to a separately negotiated economic arrangement involving the developer partner to share in allocations of federal new markets tax credits (Section 45D) or low income housing credits (Section 42).
Section 4.02 describes the partners’ interests in the partnership. A minimum 1% interest must be held by a “principal” at all times. The investor’s minimum percentage interest at all times must be at least 5% of the investor’s percentage interest for such interest for the taxable year for which the investor’s percentage share of that item is the largest (as adjusted for sales, redemptions, or dilution of the Investor’s interest).
Section 4.02(b) provides that the investor must have a “bona fide equity investment with a reasonably anticipated value commensurate with the Investor’s overall percentage interest in the Partnership, separate from any federal, state, and local tax deductions, allowances, credits, and other tax attributes to be allocated by the Partnership to the Investor.” A bona fide equity investment exist only if that reasonably anticipated value is contingent upon the Partnership’s net income, gain, and loss, and is not substantially fixed in amount. The investor cannot be substantially protected from losses from the partnership’s activities and must participate in profits in a manner that is not limited to a preferred return that is in the nature of a payment for capital.
Section 4.02(c) warns that the value of the investor’s partnership interest may not be reduced through fees (including developers’, management and incentive fees), lease terms or other unreasonable economic arrangements for a real estate development that does not qualify for § 47 rehabilitation credits, and may not be reduced by disproportionate rights to distributions or by issuances of interests in the Partnership (or rights to acquire interests in the Partnership) for less than fair market value consideration. The Revenue Procedure describes in some detail when a sublease agreement involving the building from the master tenant partnership back to the developer partnership or principal will be deemed unreasonable.
Section 4.03 sets forth an investor’s mandatory minimum unconditional amount be in fact contributed to the partnership prior to the date that the building is placed in service. The investor must contribute at least 20% of his total expected capital contributions required under the agreements relating to the partnership as of the date the Building is placed in service and must be maintained throughout the duration of its ownership in the partnership. The required minimum contribution cannot be protected against loss through any arrangement, directly or indirectly, by any person involved with the rehabilitation except as permitted under section 4.05(1) of this revenue procedure). Contributions of promissory notes or other obligations are not counted towards meeting the minimum contribution requirement.
Section 4.04 sets forth a “contingent consideration” requirement and states that at least 75% of the investor’s total expected capital contributions must be fixed in amount before the date the Building is placed in service.
Section 4.05 pertains to investor permissible guarantees that can be part of a qualified investment which yields § 47 rehabilitation credits. Such include guarantees to avoid any act that would result in the failure to qualify for §47 rehabilitation credits or result in recapture. Other examples of permissible (and nonpermissible) guarantees are set forth pertaining to “unfunded guarantees”, “completion guarantees”, “operating deficit guarantees”, “environmental indemnities” and “financial covenants”. Such information is contained in Section 4.05(1)
Section 4.05(2) sets forth “impermissible guarantees” . As a start, Section 4.05(a) provides that “[N]o person involved in any part of the rehabilitation transaction may directly or indirectly guarantee or otherwise insure the Investor’s ability to claim the § 47 rehabilitation credits, the cash equivalent of the credits, or the repayment of any portion of the Investor’s contribution due to inability to claim the § 47 rehabilitation credits in the event the Service challenges all or a portion of the transactional structure of the Partnership. Further, no person involved in any part of the rehabilitation transaction may guarantee that the Investor will receive Partnership distributions or consideration in exchange for its Partnership interest (except for a fair market value sale right described in section 4.06(2)). This requirement does not prohibit the Investor from procuring insurance from persons not involved with the rehabilitation or the Partnership.” This provision is certainly going to cause many new deals to be revised as investors typically want such reassurance from the developer of the deal. The next prohibited guaranty is set forth in Section 4.05(2)(b) which provides: “[N]o person involved in any part of the rehabilitation transaction may pay the Investor’s costs or indemnify the Investor for the Investor’s costs if the Service challenges the Investor’s claim of the § 47 rehabilitation credits.” The government continues to cause the typical §47 model set of documents to be revised in Section 4.05(c): “[N]o person involved in any part of the rehabilitation transaction may offer a guarantee described in section 4.05(1) of this revenue procedure that is not an unfunded guarantee described in section 4.05(1)(c). “
Section 4.05(3) sets forth a prohibition that the developer, developer partnership, master tenant partnership, principal, etc., may not lend any investor the funds to acquire any part of the Investor’s interest in the partnership or guarantee or otherwise insure any indebtedness incurred or created in connection with the investor’s acquisition of its partnership interest.
Section 4.06 addresses “purchase rights and sale rights”. As to “purchase rights” Section 4.06(1) provides that neither the principal nor the partnership may have a call option or right to purchase or redeem the investor’s interest at a future date (other than a contractual right or agreement for a present sale). Section 4.06(2) pertains to the opposite situation, that of “sale rights” possessed by the investor. It provides that the investor may not have a contractual right or other agreement to require any person involved in any part of the rehabilitation transaction to purchase or liquidate the Investor’s interest in the partnership at a future date at a price that is more than its fair market value determined at the time of exercise of the contractual right to sell. Under Section 4.06(3) a definition of “fair market value” is provided.
Section 4.06(4) states that there is no prohibition against the payment of any accrued but unpaid fees, preferred returns, or tax distributions owed to the investor. Section 4.06(5) provides that an investor can not acquire its interest with the intent of abandoning it after the qualified rehabilitation period (and credits) are over unless it can be clearly established that such intent did not exist for an interest that is ultimately abandoned.
Section 4.07. Allocation Requirements. The Revenue Procedure states that allocation of § 47 credits must comply with the regulations under § 704(b) and the regulations thereunder. The § 47 rehabilitation credit must be allocated in accordance with § 1.704-1(b)(4)(ii).
Section 4.08 defines “related parties” as such term is used in the notice. The adopted principles are the related party rules under § 267(b) or § 707(b)(1).
Examples of the requirements under Section 4 of the Revenue Procedure are set forth in factual detail in Section 5 of the Procedure. In the interest of completeness, I will quote the material contained in that provision.
“SECTION 5. EXAMPLES The following examples illustrate the application of the requirements of section 4 of the revenue procedure to a transaction in which the Investor invests in a Partnership to obtain the § 47 rehabilitation credits. The examples assume that the tax-exempt use property rules of § 168(h) do not apply. The examples also assume that the Partnership may validly claim the § 47 rehabilitation credits with respect to the rehabilitation of Building (defined below).
.01 Example 1. (i) Transaction Structure. The Developer Partnership is a limited liability company classified as a partnership for federal income tax purposes. The Developer Partnership is the owner for federal tax purposes of a historic commercial building (Building) that it plans to rehabilitate. The Developer Partnership is the Partnership for purposes of satisfying the requirements of this revenue procedure. The Principal and the Investor will own Partnership. The Principal is the manager of the Partnership and authorized to act on behalf of the Partnership. The Investor is an unrelated party that will contribute money to the Partnership in exchange for an interest in the Partnership.
(ii) Investor’s Contribution to Partnership. The Investor enters into an agreement with the Partnership to acquire an interest in the Partnership in exchange for an expected capital commitment of $100x, of which $75x is fixed. Prior to the date Building is placed in service, Investor acquires its interest in the Partnership by making an up front cash contribution of $20x. Investor reasonably expects to contribute the remaining $80x of its expected capital commitment upon the achievement of mutually agreed upon milestones (e.g., receiving National Park Service approvals, leasing the Building to tenants).
(iii) Partnership Interests. The Partnership is governed by a partnership agreement that satisfies the requirements of § 704(b). From the date the Investor becomes a partner until the date that is five years after the Building is placed in service (Transition Date), the Investor will be allocated 99% of the Partnership’s profits and losses, as determined for federal income tax purposes. Consistent with the Partnership’s allocation of profit and loss, the Investor will also be allocated, and will claim, 99% of the § 47 rehabilitation credits available to the Partnership. The Principal will be allocated 1% of the profits and losses during this period. As of the Transition Date and until the earlier of the date that the Investor is no longer a member of the Partnership and the date that the Partnership terminates, the Investor will be allocated 5% of the Partnership’s profits and losses, and the Principal will be allocated 95% of the Partnership’s profits and losses. The Investor has a right to receive a pro rata share of all distributions commensurate with the Investor’s share of the Partnership profits. The Investor’s partnership interest has a reasonably anticipated value commensurate with the Investor’s overall percentage interest in the Partnership, separate from any federal, state, and local tax deductions, allowances, credits, and other tax attributes to be allocated from the Partnership to the Investor.
(iv) Partnership Operations. The Partnership will operate the Building and lease the individual units in the Building to retail businesses under terms that are consistent with lease terms for a real estate development project that does not qualify for § 47 rehabilitation credits. All fees paid by the Partnership, including any fees paid to the Principal, are reasonable and are consistent with fees commonly paid in a real estate development that does not qualify for § 47 rehabilitation credits.
(v) Guarantees. No party involved in any part of the rehabilitation has directly or indirectly provided a guarantee to the Investor regarding the Investor’s ability to claim of § 47 rehabilitation credits, the cash equivalent of the credits, or the repayment of any portion of the Investor’s contribution due to an inability to claim the credits in the event the Service challenges all or a portion of the transactional structure of the Partnership. Further, no party involved in any part of the rehabilitation has directly or indirectly guaranteed the Investor that it will receive distributions from the Partnership or that the Investor will receive consideration in exchange for its Partnership interest (other than the Investor’s fair market value sale rights described in paragraph (vi) below). The Partnership and the Principal have provided the Investor with unfunded guarantees commonly provided to investors in commercial real estate development transactions that do not qualify for the § 47 rehabilitation credit. In addition, the Partnership and the Principal provided an unfunded guarantee to the Investor that the Partnership and the Principal will undertake any acts necessary for the Partnership to claim the § 47 rehabilitation credit. Similarly, the Partnership and the Principal have provided an unfunded guarantee to the Investor that the Partnership and the Principal will not engage in any act that will negatively impact the Partnership’s ability to claim the § 47 rehabilitation credit or that would result in the recapture of the § 47 rehabilitation credit. The Principal has also provided an unfunded guarantee requiring it to contribute additional cash to the Partnership to the extent of any Partnership operating deficit. Under the terms of the guarantee, if the Principal or the Partnership fail to meet their obligations, the Investor will be repaid all or a part of its contribution and any costs that Investor has incurred with respect to the transaction. The operating deficit guarantee does not include amounts required to fund expenses for more than twelve months of operation.
(vi) Purchase Rights and Sale Rights. Neither the Partneship nor the Principal has any contractual right to purchase the Investor’s interest in the Partnership at a future date. For a period of six months beginning on the date that is six months after the Transition Date, the Investor has the right to require the Principal to purchase the Investor’s interest for the fair market value of the interest. The Investor did not acquire its interest in the Partnership with the intent of abandoning its interest.
(vii) Conclusion. Under the facts of this example, because each requirement set forth in section 4 of this revenue procedure is met by the Partnership and its partners, the Service will not challenge the Partnership’s allocation of 99% of the § 47 rehabilitation credits to the Investor. (emphasis added).
.02 Example 2. (i) Transaction Structure. The facts are the same as in Example 1. In addition, the Master Tenant Partnership, a limited liability company classified as a partnership for federal tax purposes, will lease the Building from the Developer Partnership (Head Lease). The terms of the Head Lease are comparable to the lease terms of a real estate development project that does not qualify for § 47 rehabilitation credits. The Developer Partnership will make an election pursuant to § 1.48-4(a)(1) to treat the Master Tenant Partnership as having acquired the Building solely for purposes of the § 47 rehabilitation credits, allowing the Master Tenant Partnership to properly claim the § 47 rehabilitation credits. Therefore, the Master Tenant Partnership is the Partnership for purposes of satisfying the requirements of this revenue procedure. The Partnership will also own an interest in the Developer Partnership. The Investor does not own an interest in the Developer Partnership other than its indirect interest held through the Partnership. Further, the Partnership will sublease the Building to retail businesses as described in Example 1. The duration of these subleases will be shorter than the Head Lease.
(ii) Conclusion. Under the facts of this example, because each requirement set forth in section 4 of this revenue procedure is met by the Partnership and its partners, the Service will not challenge the Partnership’s allocation of 99% of the § 47 rehabilitation credits to the Investor. (emphasis added).”
The effective date of the revenue procedure is for allocations of § 47 rehabilitation credits made by a Partnership to its partners on or after December 30, 2013. Where a building was placed in service prior to December 30, 2013, but the requirements of the procedure (safe harbor) set forth in Section 4 are met at the time placed in service and thereafter, the the Service will not challenge the Partnership’s allocations of § 47 rehabilitation tax credits to Investors that are in accordance with § 704(b).
Comment: The safe harbor essentially follows the holding, analysis and detailed observations made by the Third Circuit in Historic Boardwalk Hall LLC, supra. It reaffirms the landmark decisions of the Supreme Court defining “what is a partnership” for federal income tax purposes and therefore the requirements set forth in the notice can be used as a decision matrix or punch list for ensuring partnership status in other situations.
For those who may have assumed that some types of credit deals, such as rehabilitation tax credits, are “cookie-cutter” document driven arrangements where funds are contributed or advanced to a qualifying project in return for guaranteed credits, and without other risk of loss, the Service is essentially stating that its position is that it successfully argued in Historic Boardwalk Hall LLC and those straying from its parameters are on notice that it has adopted the reasoning of the Third Circuit.