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New safe harbor for partnership allocations of rehabilitation credits

In Revenue Procedure 2014-12, 2014-3 IRB, IRS has issued a new revenue procedure which provides a safe harbor under which IRS won’t challenge partnership allocations of Code Sec. 47 rehabilitation credits by a partnership to its partners. IRS says it intends for the safe harbor to provide partnerships and partners with more predictability regarding the allocation of Code Sec. 47 rehabilitation credits to partners of partnerships that rehabilitate certified historic structures and other qualified rehabilitated buildings.

Background on historic rehabilitation tax credits.
A Code Sec. 47 historic rehabilitation tax credit (rehabilitation credit) is available for the qualified rehabilitation of a qualified building first placed in service before ’36, and a certified historic structure regardless of when placed in service. The rehabilitation credit for a building is generally 10% (20% for a certified historic structure) of the qualified rehabilitation expenditure.

Rehabilitation credits are available only to the owner of the property interest. (Code Sec. 47) According to an IRS publication titled “Tax Aspects of Historic Preservation,” the rehabilitation credit cannot be bought or sold.

A partner’s distributive share of income, gain, loss, deduction, or credit generally is determined by the partnership agreement. (Code Sec. 704(a)) Under Code Sec. 704(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partner’s interest in the partnership (taking into account all facts and circumstances) if (1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.

Reg. § 1.704-1(b)(4)(ii), provides that, with respect to the investment tax credit (which includes the rehabilitation credit) provided by Code Sec. 38, allocations of cost or qualified investment made in accordance with Reg. § 1.46-3(f) are deemed to be made in accordance with the partners’ interests in the partnership. Under Reg. § 1.46-3(f)(2)(i), for purposes of Code Sec. 47, each partner’s share of the qualified rehabilitation expenditures is determined in accordance with the ratio in which the partners divide the general profits of the partnership regardless of whether the partnership has a profit or loss for its tax year during which the qualified rehabilitation building is placed in service.

In Historic Boardwalk Hall, LLC, (CA 3 08/27/2012) 110 AFTR 2d 2012-5710, the Court of Appeals for the Third Circuit, reversing the Tax Court, held that a corporate investor in an LLC formed to rehabilitate a historic property wasn’t a bona fide partner because it had no “meaningful stake” in the entity’s failure or success. Rather, the transaction was, in substance, a prohibited sale of historic rehabilitation tax credits. Subsequently, the Third Circuit declined to rehear the case and the Supreme Court declined to review it.

Scope of safe harbor. The safe harbor in Rev Proc 2014-12, Sec. 4 applies in the case of a partnership that validly claims the Code Sec. 47 rehabilitation credit (Partnership). IRS won’t challenge a Partnership’s allocations of validly claimed Code Sec. 47 rehabilitation credits if the Partnership and its partners satisfy the safe harbor. However, taxpayers should not infer that compliance with the safe harbor ensures that the Code Sec. 47 rehabilitation credits are otherwise valid. A Partnership and its partners that do not satisfy each of the requirements in Rev Proc 2014-12, Sec. 4 do not qualify for the safe harbor.

Rev Proc 2014-12 applies only with respect to allocations of Code Sec. 47 rehabilitation credits from qualified rehabilitation expenditures. It does not apply to federal credits other than the Code Sec. 47 rehabilitation credit or to state credit transactions.

Qualifying for the safe harbor.
To qualify for the safe harbor, numerous requirements must be satisfied. They are set forth in Rev Proc 2014-12, Sec. 4.

Effective date. Rev Proc 2014-12 is effective for allocations of Code Sec. 47 rehabilitation credits made by a Partnership to its partners on or after Dec. 30, 2013. If a building was placed in service before Dec. 30, 2013 and the Partnership and its partners satisfied all the requirements of the safe harbor provided in Rev Proc 2014-12, Sec. 4 at the time the Building was placed in service and thereafter, IRS won’t challenge the Partnership’s allocations of Code Sec. 47 rehabilitation tax credits to Investors that are in accordance with Code Sec. 704(b).

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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