IRS, Treasury to Issue Guidance On Historic Rehabilitation Tax Credits

By Michael Bologna  

The IRS and Treasury Department hope to quickly issue a safe harbor revenue procedure that will address certain real estate industry concerns that have emerged over historic rehabilitation tax credit financing, two senior government attorneys said May 1.

Curtis Wilson, IRS associate chief counsel (passthroughs & special industries), said the guidance would respond in part to questions that have emerged following U.S. Tax Court and appeals court rulings involving the dissolution of a partnership between Pitney Bowes Inc. and the New Jersey Sports Authority.

Wilson said the guidance would emphasize the government's position in the litigation that investors with no meaningful “downside risk or upside potential’’ in a partnership would not be treated as partners for tax purposes. At the same time, Wilson said the guidance would address an unexpected chilling effect that has emerged among investors in the rehabilitation credit arena.

Craig Gerson, attorney-adviser in Treasury's Office of Tax Legislative Counsel, said the guidance project is on a “fast track.’’ He said tax practitioners should expect to see the new revenue procedure “sooner rather than later.’’

Wilson and Gerson offered the comments during a Practising Law Institute program on tax planning for partnerships.

Ruling Spurred Guidance

Wilson said the guidance stems from a Tax Court ruling against the government in Historic Boardwalk Hall LLC v. Comr.

The ruling was reversed in August 2012, when the Third Circuit held Pitney Bowes, which had been a private sector investor in Historic Boardwalk, had no meaningful stake in the venture and was not a bona fide partner of the partnership for federal income tax purposes.

The court further held that all allocations of historic rehabilitation tax credits, previously assigned to Pitney Bowes, should be reallocated to the New Jersey Sports and Exposition Authority.

The taxpayer in Historic Boardwalk recently petitioned the Supreme Court for review of the Third Circuit's ruling.

Wilson noted that IRS responded with a field attorney advice memorandum (FAA 20124002F) expressing the view that certain partnerships claiming historic property rehabilitation tax credits should be disregarded as sham transactions for federal tax purposes. Wilson said the IRS believes the Third Circuit's decision is correct and the FAA memorandum provides beneficial guidance to the field on such transactions.

'Nervous' Investors

At the same time, Wilson said IRS has heard concerns that the appellate court decision and the FAA have generated a chilling effect, which was never the IRS's intent.

“It has led to some controversy because a lot of investors in the rehabilitation credit area are now nervous about making investments in rehabilitation credit transactions,’’ Wilson said. “That was never our intent. Congress wants to encourage historic preservation and the Service wants to do its part to make sure those are legitimately claimed.’’

Wilson said IRS and Treasury are having discussions with the rehabilitation credit industry to understand the impact. He said IRS hopes to draft a safe harbor revenue procedure that will give the industry “a little comfort.’’

Gerson and Wilson offered few details about their approach for the guidance, but stressed it would adhere to the government's positions in the Historic Boardwalk litigation.

Gerson added that the guidance would be modeled in some respects on the wind energy credit safe harbor. Under Rev. Proc. 2007-65, the government established a safe harbor under which IRS said it would respect the allocation of wind energy production tax credits by partnerships in accordance with §704(b).

Wilson said the guidance would likely be prospective in its approach.

“Whatever safe harbor we are going to provide is a line that we think reflects a real partnership interest. So it should work both ways,’’ he said.