As one of its last items of business in 2013, the IRS released its long-awaited Revenue Procedure addressing Historic Tax Credits on December 30 (Revenue Procedure 2014-12, 26 C.F.R. § 601.105). The Rev Proc “establishes the requirements (the Safe Harbor) under which the [IRS] will not challenge partnership allocations of § 47 rehabilitation credits by a partnership to its partners” (Section 1). Early reviews report that the document resolves many of the questions the HTC community has been dealing with since the Third Circuit decided the Historic Boardwalk case last year. That case caused reluctance among tax credit investors to invest in new projects. Rev. Proc. 2014-12 is designed to address the ambiguity created by Historic Boardwalk and to encourage investment in historic structures by providing a reasonable safe harbor for HTC projects.
The Rev Proc applies to allocations made on or after December 30, 2013; for buildings placed into service before December 30, the IRS will not challenge allocations if they meet the same criteria. Here is a brief summary of the Rev Proc’s requirements:
- The investor must invest at least 20% of its total expected contributions, and at least 75% of the total contributions must be fixed in amount, before the building is placed in service.
- The investor must maintain at least 5% interest in each item of partnership income, losses, and tax credits for the taxable year for which the investor’s percentage share of that item is the largest.
- The investor’s interest must have “a reasonably anticipated value commensurate with the Investor’s overall percentage interest in the Partnership,” and cannot be a substantially fixed amount.
- The investor cannot be substantially protected from losses and must participate in profits in a manner not limited to a preferred return.
- The developer (Principal) must have at least a 1% interest in income, losses and tax credits.
- Several limitations on the investor’s master tenant in an “inverted lease” to sublease the building back to the developer.
- The developer’s promises to the investor are limited to “the performance of any acts necessary to claim the § 47 rehabilitation credits.” They must be unfunded, meaning that “no money or property is set aside to fund all or any portion of the guarantee, and if neither the person making the guarantee (the guarantor) nor any person under the control of the guarantor agrees to maintain a minimum net worth in connection with the guarantee.”
- The developer cannot indemnify the investor against loss of tax credits in the case of an IRS challenge, although the investor is entitled to procure insurance from “persons not involved with the rehabilitation or the Partnership.”
- The developer may not have a right to repurchase the investor’s interest, but the investor may have a right to force the developer to repurchase at fair market value.