Tax Court Renders Favorable Decision on Rehabiliation Credits In Historic Boardwalk Hall, LLC. v. Commissioner
In Historic Boardwall Hall, LLC. V. Commissioner, 136 T.C. No. (2011) the Tax Court ruled that a LLC which was formed to facilitate a corporation's, i.e, Pitney Bowes, investment in the rehabilitation of an historic government building, East Hall, a National Historic Landmark property in Atlantic City, New Jersey had business purpose and was not a sham.The investment was designed to earn the controlled entity of Pitney Bowes, Historic Boardwalk Hall, LLC, rehabilitation credits under section 47. The Tax Court ruled, therefore, that the corporate partner was entitled to its distributive share of the claimed rehabilitation tax credits.
The Tax Court determined that the LLC that was formed by New Jersey Sports and Exposition Authority (NJSEA) and investment corp. (corp. partner), to allow corp. partner investment in rehabilitation of historic hall/governmentally-owned building and obtain §47 rehabilitation tax credits, had objective economic substance based on fact that corporate partner did not enter into transaction solely for tax credits but also to invest with a realistic possibility of realizing economic gain or profit and that corporate partner’s investment provided NJSEA with more money than it otherwise would have had, that development fee involved was legitimate expense, and that there were real risks involved. Court also viewed the legislative purpose to the rehabilitation credit provision and found that the evidence in the case was not inconsistent with such purpose. The Court rejected arguments lobbied by the government that the corporate partner never obtained partner status, the benefits and burdens of the hall’s ownership were never transferred in a sale to the partnership, and that the purchase option, under which NJSEA could buy back the hall did not cause the taxpayer’s reporting of the rehabilitation credits to be erroneous. The Tax Court further rejected the IRS’s determination under the anti-abuse regulation, Treas. Reg. §1.701-2(b), to recast the transaction so as to deny the corporate partner its desired allocation of the §47 rehabilitation credits.
Economic Substance of Transaction Upheld.
The Court found that there was both an objective profit motive and subject business purpose present under the facts. See CM Holdings, Inc., 90 AFTR 2d 2002-5850 , 301 F3d 96 , 2002-2 USTC ¶50596 (CA-3, 2002)(conjunctive two part test applied by 3rd Circuit). The IRS argued that Boardwalk Hall had no possibility of earning a profit apart from a 3% fixed return and the benefits related to the rehabilitation credits. For the subjective test, the IRS argued that Boardwalk Hall had no business purpose because it was intended solely to facilitate NJSEA's sale of rehabilitation tax credits to Pitney Bowes.
The Tax Court dismissed the arguments by noting that section 47 is intended to encourage taxpayers to participate in what would otherwise be an unprofitable activity. The court added that when the rehabilitation tax credits were taken into account, the objective profit test was adequately satisfied. Further, because Boardwalk Hall pursued the risk-laden objective of rehabilitating a landmark convention center for use as a special events center, the court found that the subjective business purpose requirement was also met. In sum, the Tax Court concluded that Boardwalk Hall had economic substance and was not a sham.
Partnership Status
The IRS also argued that Pitney Bowes was not a partner in Boardwalk Hall because it had no meaningful stake in its success or failure and its interest in Boardwalk Hall was more like debt than equity. The Tax Court dismissed these arguments, stating that Pitney Bowes and NJSEA joined together in a transaction with economic substance to allow Pitney Bowes to invest in the East Hall rehabilitation. Further, the court noted that the decision to invest provided a net economic benefit to Pitney Bowes through its 3% preferred return and rehabilitation tax credits.
Rejection of Application of Partnership Anti-Abuse Regulation
Finally, the IRS argued that it was necessary to recast the transaction under Treas. Reg. §1.701-2(b), the anti-abuse transaction. Because of its finding that the transaction had economic substance, the Court held it was inappropriate to then hear the case under the filter of this GAAR rule for partnerships.
