Art Momjian to Speak on Historic Tax Credits at Duane Morris CLE Program


On Tuesday April 8, 2014 Art Momjian Chair of the Duane Morris Affordable Housing, Community Development, and Syndication Practice Group will speak at a continuing legal education program titled "The Historic Tax Credit Program: Who is a Partner after the New IRS Safe Harbor Rules and the Historic Boardwalk Hall".  The Program is scheduled for 12:30 pm EST at the Philadelphia Office of Duane Morris LLP.  The program will also be video cast in most of the Duane Morris national offices.  For further information and to register please contact either Art Momjian at ajmomjian@duanemorris.com or Richard Weinstein at rmweinstein@duanemorris.com

 
 
 
 

Historic Tax Credit Safe Harbor - Part III: Investor's Capital Contributions


Revenue Procedure 2014-12 (the “Rev Proc”) which establishes a safe harbor for structure Federal Historic tax credit transactions provides guidance on the staging of capital contributions by the Historic Tax Credit investor. First, the Rev Proc requires that at least 20% of the tax credit investor’s aggregate capital contribution be contributed before the project is placed in service.  In this vein at least 75% of the tax credit investor’s aggregate capital contribution must be fixed at the time of placement in service of the project.  The effect of these two requirements of the Rev Proc is to limit the provision in the sponsor’s partnership agreement or master tenant agreement which would adjust the capital required to be contributed by the tax credit investor to 25% of the scheduled investor capital contribution of the tax credit investor.  Finally the Rev Proc provides an example to illustrate that the tax credit investor’s expected fixed capital commitment may be conditioned upon the achievement of mutually agreed upon milestones (e.g., receiving National Park Service approvals, leasing the Building to tenants).

 

 

 

 
 
 
 

Historic Tax Credit Safe Harbor - Part II: Guarantees


 

 Revenue Procedure 2014—12 (the "Rev Proc") issued by the Internal Revenue Service creates a safe harbor for investors in the Federal Historic Tax Credit. Traditionally the tax credit investor has obtained a guaranty with respect to the benefit of the Federal Historic tax credit from the sponsor of the transaction. However, the Rev Proc prohibits funded guarantees and certain "impermissible guarantees. "Impermissible" guarantees are defined as guarantees: (1) to insure the Investor’s ability to claim the historic tax credit, or the repayment of any portion of the Investor’s contribution due to inability to claim historic tax credit in the event the Internal Revenue Service (the "Service") Service challenges all or a portion of the transactional structure of the Partnership; (2) that the Investor will receive Partnership distributions or (3) to pay the Investor’s costs or indemnify the Investor for the Investor’s costs if the Service challenges the Investor’s claim of the historic tax credit. The Rev Proc defines permitted guarantees as guarantees: (1) for the performance of any acts necessary to claim the historic tax credit; (2) for the avoidance of any act (or omissions) that would cause the Partnership to fail to qualify for the historic tax credits or that would result in a recapture of historic tax credit; and, (3) that are not described as impermissible guarantees . The Rev Proc also provides the following as examples of unfunded guarantees permitted: completion guarantees, operating deficit guarantees, environmental indemnities, and financial covenants.

 
 
 
 

The Historic Tax Credit Safe Harbor - Part I


Revenue Procedure 2014—12 (the “Rev Proc”) issued by the Internal Revenue Service creates a safe harbor for investors in the Federal Historic Tax Credit.  It is anticipated that in the aftermath of the Rev Proc changes will be made in the underwriting and structuring of Federal Historic Tax Credit transactions.  The Rev Proc requires that a tax credit investor receive reasonably anticipated value, exclusive of tax benefits, as a result of its investment in developer partnership or master tenant.  The issue of value may be satisfied by the traditional preferential return although a preferential return cannot be guaranteed and must be dependent upon the success of the project.  With respect to the back end, the Rev. Proc prohibits an option to the developer to purchase the Investor’s interest but does permit the traditional “put” right of the tax credit investor to sell its interest to the sponsor as long as the sale is for not more than the fair market of the value of the investor’s interest and the tax credit investor does not abandon its interest.  Accordingly it appears that the traditional preferred return to the tax credit investor and the investor “put” right are preserved by the Rev. Proc provided that the preferred return is not guaranteed  and the economic interest of the tax credit investor is not reduced by “unreasonable” fees and expenses which would distort the economic benefit to the tax credit investor.

 

 

 

 
 
 
 

IRS Publishes Safe Harbor for Historic Tax Credit Investors


In an effort to stabilize the Federal Historic Tax Credit industry in the aftermath of the Third Circuit Decision in Historic Boardwalk Hall LLC , the Internal Revenue Service (the “IRS”) published Revenue Procedure 2014-12 (the “HTC Rev Proc”) which outlines a safe harbor for investors (an “Investor”) in Federal Historic Tax Credits  (the “Tax Credit”).  An Investor receives the Tax Credit through an ownership interest in a partnership which owns and develops a historic building or through the election of the partnership to pass the Tax Credit to a master tenant owned by the Investor.  In a nutshell the HTC Rev Proc requires: (1) the Investor to have at least a 5% interest in all interests in the partnership; (2) the Investor’s interest in the partnership must represent reasonably anticipated value exclusive of tax benefits; (3) the Investor cannot be protected from losses from partnership activity and must participate in profits in a manner not limited to a preferred return; (4) the ability of the master tenant owned by the Investor to lease the building back to the developer is severely limited; (5) the Investor must contribute at least 20% of the total anticipated capital on or prior to the building being placed in service and this capital contribution must be protected against loss; (6) at least 75% of the Investor’s total anticipated capital must be fixed before the building is placed in service; (7) guarantees to the Investor will be limited to a guaranty with respect to any act or omission which would prevent the partnership from qualifying for the Tax Credit; and (8) the developer may not have the right to acquire the Investor’s interest in the Partnership and the Investor may have a right to compel the developer to purchase the Investor’s interest at its fair market value.  The Rev Proc echoes the position of the IRS in a 2007 Revenue Procedure  which provided a safe harbor with respect to investors in the wind production tax credit as well as the Historic Board Hall case.
 
 
 
 

Historic Tax Credit Industry Waits for Boardwalk Guidance from the IRS


In the aftermath of the Third Circuit Court of Appeals reversal of the lower Tax Court decision of the Historic Boardwalk case while industrial investments in the Federal historic tax credits continue the Historic Tax Credit industry has been waiting from promised guidance by the Internal Revenue Service (the “IRS”) in the form of a Revenue Procedure.  In this interim, transactions are being structured to address concerns of the IRS voiced in its appeal of Historic Boardwalk and some of the principles contained in Revenue Procedure 2007-65.  On October 19th 2007 the IRS issued Revenue Procedure 2007-65 (the “Wind Rev. Proc. establishing a “safe harbor” for the “flip” structures for partners and partnership that own and produce electricity from qualified wind energy facilities under Section 45 of the Internal Revenue Code.  The energy tax credit and the federal rehabilitation tax credit are investment tax credits under the Code and the Revenue Procedure to be issued by the IRS may mirror may of the provisions contained in Wind Rev. Proc.  It is hoped that the Historic Tax Credit Revenue Procedure will be issued by the IRS by the end of the year.

 
 
 
 

U. S. Supreme Court denies Cert. on the Historic Boardwalk Hall Case


The Historic Boardwalk Hall Case in which the Internal Revenue Service challenged the traditional structure used by tax credit investors in the syndication of Federal Historic Tax Credits came to an uncerimonial end with the denial by the United State Supreme Cout of the taxpayer's writ of certiorari to the high court.  As reported in an earlier entry on this blog, the Service has announced its intention to provide guidance, most likely in the form of a Revenue Procedure, which  will provide a safe harbor for investors in Federal Historic Tax Credits.  It is anticipated that the safe harbor will reflect the position of the Service in the Historic Boardwalk Hall Case and an investor must demonstrate that it is a partner for Federal income tax purposes with downside risk and upside potential as a partner.[Read More]
 
 
 
 

IRS to Issue Historic Tax Credit Safe Harbor


In the aftermath of the Third Circuit's decision in Historic Boardwalk Hall LLC v. Commissioner, the IRS has announced its intention to provide guidance for  tax structures where developers work with investors to use Federal Historic Tax Credits to further the development of historic structures.  While the Service acknowledges that Congress supports the rehabilitation of historic buildings, the position of the Service is that partnerships with investors must conform to the Service’s historic requirements for tax partnerships.  It is anticipated that the guidance from the IRS to come in a revenue procedure that provides a safe harbor similar to what Rev. Proc. 2007-65, 2007-45 offers for the section 45 wind energy production tax credit.. If this is the case, we can expect the Service to require that the investors have real upside and downside as a partner which was the Service’s position articulated in the Historic Boardwalk Hall LLC case. 

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Appeal of Historic Boardwalk Hall Case made to the U. S. Supreme Court


On Thursday, January 17, 2013 Counsel for Historic Boardwalk Hall and the New Jersey Sports and Exposition Authority filed a Petition for a Writ of Certiorari in the United States Supreme Court seeking reversal of the Third Circuit Opinion in the Historic Boardwalk Hall Case. The Third Circuit in the Historic Boardwalk Hall case had reversed the Tax Court decision and ruled that the Pitney Bowes affiliate was not a true partner in Historic Boardwalk Hall, LLC. As a result, the Third Circuit affirmed the IRS Administrative Adjustment to reallocate all of the Historic Rehabilitation Tax Credits from Pitney Bowes to the tax-exempt New Jersey Sports and Exposition Authority, a political subdivision of the State of New Jersey. The taxpayer in the petition argues that “…this is the first litigated case in the country in which the IRS has made a sweeping challenge to the allocation of federal HRTCs from a partnership to a partner in the very type of rehabilitation project that formed the basis for Congressional enactment of the HRTC statute. In a true sense, this case represents a dramatic legal clash between the Legislative Branch’s clearly stated intent in enacting the HRTC statute to encourage private investment in the restoration of historic properties…”. [Read More]
 
 
 
 

Third Circuit Denies Historic Boardwalk Petition for Rehearing


The petition for rehearing filed by taxpayer in the Historic Boardwalk case was reviewed the Third Circuit Court of Appeals judges who participated in the Historic Boardwalk case and the other available circuit judges of the Third Circuit Court of Appeals. The Third Circuit Court of Appeals noting that no judge who concurred in the Historic Boardwalk decision asked for a rehearing, and a majority of the circuit judges of the circuit in regular service did not vote for rehearing, denied the petition for rehearing by the panel and the Third Circuit Court of Appeals en banc. The only appeal left to the taxpayer in the Historic Boardwalk case is to the United States Supreme Court.

[Read More]
 
 
 
 

Petition Filed for Rehearing of Historic Boardwalk Case


Following the reversal by the Third Circuit Court of Appeals of the Tax Court’s decision in the Historic Boardwalk case, the taxpayer has filed a petition for a rehearing or rehearing en banc of the Historic Boardwalk Hall case. The taxpayer’s brief in support of the petition asserts that the Third Circuit Court of Appeals misapplied the reasoning of the U. S Supreme Court case of Commissionerv. Culbertson. Under Culbertson, a partnership exists if, based on the totality of the facts and circumstances, it is determined that "the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." The brief also contends that the Court of Appeals made a fundamental error in treating the historic tax credits as a return of capital. [Read More]
 
 
 
 

After Historic Boardwalk - A New Look at the Wind "Safe Harbor"


 In the aftermath of the Historic Boardwalk case, the Historic tax credit investment community is struggling with a  partnership investment structure which will not be challenged by the Service.  Conceptually one may only need to look to Rev. Proc. 2007-65 in which the Service set forth a safe harbor for investors in partnerships owning qualified energy facilities.   The positions advanced by the Service in its appeal of the Tax Court decision in the Historic Boardwalk case mirrored many of the  safe harbor requirements of the Rev. Proc. 2007-65.  As a result, to follow the safe harbor of Rev. Proc. 2007-65 one would conclude at a minimum future historic tax credit partnership agreements should: (1) provide both cash flow and tax credits to the investor; (2) no longer be structured as “pay as you go” transactions; (3) no longer have tax credit indemnities in favor of the investor; and (4) no longer have an investor “put” to the developer for nominal consideration.

[Read More]
 
 
 
 

Life After the Historic Boardwalk Case


In the aftermath of the Third Circuit Court of Appeal’s decision in the Historic Boardwalk Case, investors, accountants, attorneys, and developers have been analyzing and discussing the ramifications of this case for the Historic Tax Credit industry. Several historic tax credit investors have indicated that they are holding for future historic tax credit investments and many tax counsels to historic tax credit investors have indicated challenges to their ability to issue tax benefit legal opinions to their clients. Some of the preliminary pronouncements from the Historic Tax Credit industry are that future deals will need to generate real cash flow which will not be paid for by investors, non-profit deals will be challenging because of the real lack of upside potential, and for tax opinions to be issued deals may need to be structured to follow the safe harbor provided by the Internal Revenue Service in Revenue Procedure 2007-65 which addressed the partnership flip with the wind production tax credit.[Read More]
 
 
 
 

Court of Appeals Reverses Tax Court Decision in the Historic Boardwalk Case


Dealing a blow to the Historic Tax Credit syndication industry, the Third Circuit Court of Appeals on August 27th reversed the Tax Court decision in the Historic Boardwalk Case. In siding with the Internal Revenue Service, the Court of Appeals examined a partnership structure commonly used in the syndication of federal Historic Tax Credits and ruled that the tax credit investor was not partner in the entity generating the Historic Tax Credits. The Court of Appeals concluded that the tax credit investor “did not have any meaningful downside risk or any meaning upside potential in HBH [the entity generating the historic tax credits]”. Citing a tax credit recapture guaranty in favor of the tax credit investor to protect its capital contributions and a guaranteed investment contract in favor of the tax credit investor to guaranty its 3% preferred return, the Court of Appeals determined there was no downside risk to the tax credit investor. In a similar vein, the Court of Appeals concluded that the consideration contained in the put and call agreements for the sale of the tax credit investor’s partnership interest had no bearing to the economic reality of the transaction. While the Internal Revenue Service appealed the Tax Court decision on several grounds, the Court of Appeals assumed for purposes of its opinion that the transaction had economic substance and based its decision on one issue – whether the tax credit investor was a partner. [Read More]
 
 
 
 

Third Circuit Hears Oral Argument in the Historic Boardwalk Case


On June 25th in Philadelphia Pennsylvania a three judge panel of the Third Circuit Court of Appeals heard oral argument on the appeal by the Internal Revenue Service of the Tax Court decision in the Historic Boardwalk case. The Tax Court had upheld the allocation of a Federal Historic tax credit to the tax credit investor member. One of the primary issues on appeal is whether the tax credit investor member had risk in the transaction. The Service argued that the tax credit investor was not at risk in the transaction and consequently was not a “partner” in the Historic Boardwalk investment entity and entitled to the allocation of the Federal historic tax credit. While it is clearly the intent of Congress that the Federal historic tax credit serve as an incentive for the rehabilitation of historic buildings, there is very little guidance on how the tax credit can be syndicated to investors.[Read More]
 
 
 
 
 

New Markets Tax Credit, Affordable Housing, and Super Storm Sandy

Sharing insights for developers, non-profits, and investors in the structure and implementation of projects which utilize federal tax credit programs, renewable energy, and subsidized and conventional financing programs

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.