The IRS has issued guidance (Rev. Proc. 2014-12) that responds to Historic Boardwalk Hall, LLC v. Commissioner (694 F.3d 725), in which the Third Circuit held that an investor in a partnership who did not have any meaningful downside risk or upside potential was not a bona fide partner for federal tax purposes, and was therefore not entitled to an allocation of 99.9% of the historic rehabilitation tax credits under Section 47.

Rev. Proc. 2014-12 provides safe harbor guidance on when an investor in a historic rehabilitation credit partnership would be respected as a partner for tax purposes. Such partner status is essential for the investor to receive an allocation of the rehabilitation credits.

The safe harbor includes numerous detailed requirements and limitations, including the following noteworthy aspects:

  • The investor's interest cannot be greater than 99% and cannot "flip" to lower than 5% of itslargest percentage share (i.e., 4.95% if investor has 99% before the flip)
  • There must be a minimum unconditional investor contribution of 20% of total capitalcontribution as of the property placed-in-service date
  • At least 75% of the investor's committed amount has to be fixed (although not contributed)before the property placed-in-service date
  • The safe harbor acknowledges and allows master lease structures

The safe harbor is effective for allocations on or after Dec. 30, 2013 (including projects placed in service prior to that date that satisfy the safe harbor).

The revenue procedure makes clear that it does not apply to federal credits other than the Section 47 rehabilitation credit or to state credit transactions. Additionally, taxpayers should not infer that compliance with the safe harbor ensures that the Section 47 rehabilitation credits are otherwise valid. No inference should be drawn as to the validity of partnership allocations for taxpayers that fail to satisfy the safe harbor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.