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. The historic tax credit industry has developed a structure in which the investor is a “partner” in the ownership entity, receives a preferential return, and is bought out of the investment entity through a put/call agreement after the expiration of the tax credit compliance period. The decision of the Court of Appeals may affect the structure of the syndication of future historic tax credit transactions.
The Pennsylvania state Senate on April 2, 2012 approved the “Historic Preservation Incentive Act”. Pursuant to this Act a taxpayer may apply to the Pennsylvania Department of Community and Economic Development for a tax credit certificate which would provide a state tax credit equal to up to 25% of the “qualified expenditures” (as defined under Section 47(c)(2) of the Internal Revenue Code) incurred by the taxpayer. The issuance of state tax credit certificates by the Pennsylvania Department of Community and Economic Development is: (a) limited to commercial buildings; (b) provided on a first come first serve basis; (c) limited to not more than $10,000,000 of tax credit certificates in any fiscal year; and (d) limited to not more than $500,000 in tax credit certificates to a single taxpayer in any fiscal year. The Act also provides that the applicant taxpayer may assign a tax credit certificate to another taxpayer. The bill is currently pending before the state House.
The Internal Revenue Service has appealed the decision of the Tax Court in the Historic Boardwalk Case to the Third Circuit Court of Appeals. The Tax Court decision upheld the allocation of 99.99% of the rehabilitation tax credits to a corporate investor, which contributed capital of over $18 million to the historic rehabilitation project in consideration for 99.99% of the tax credits, profits and losses including any residual. The basic structure of the Historic Boardwalk Case is typical of many historic rehabilitation transactions. A reversal by the Court of Appeals of the Historic Boardwalk Case may have severe negative implications for the historic tax credit industry. Oral argument in the Third Circuit in Philadelphia is scheduled for June 25, 2012.