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.