Immediately upon its publication, The United States Court of Appeals for the Third Circuit’s decision in Historic Boardwalk Hall, LLC  v. Commissioner, 694 F.3d 425 (3d Cir. 2012), cert. denied, 133 S. Ct. 2734 (2013) put lenders, developers, tax credit investors and other parties involved in historic tax credit financing, on notice that certain transactional structures and risk mitigating techniques common to the industry were running afoul of the tax code.

For many, the decision created more questions than answers, and for nearly a year and half the historic tax credit industry waited in limbo for clarification from the Internal Revenue Service (IRS).  After much anticipation and speculation, on December 30, 2013, the IRS issued Revenue Procedure 2014-12, which provided the industry with some much needed answers and guidance. An overview of Boardwalk and Revenue Procedure 2014-12 follows:


In Boardwalk, the Third Circuit disqualified a tax credit investor from receiving federal historic rehabilitation tax credits (“HRTCs”) because it “lacked a meaningful stake in the success or failure” of the tax credit owner tasked with rehabilitating the project.  694 F.3d at 463.  Historic Boardwalk Hall, LLC (“HBH”), a single purpose entity, was created by the New Jersey Sports and Exposition Authority (“NJSEA”) to rehabilitate Historic Boardwalk Hall (“East Hall”) on the famed boardwalk of Atlantic City, New Jersey.  As part of the construction financing, a wholly-owned subsidiary of Pitney Bowes, Inc. (“PB”) was admitted to HBH as a tax credit investor.  In exchange for an equity investment in the approximate amount of $18.2 million and a loan in the amount of $1.1 million, PB was slated to receive a 3% preferred return along with the HRTCs generated by the qualified rehabilitation expenditures (“QREs”) spent on the project.

Under Section 47 of the Internal Revenue Code of 1986, as amended (the “Code”), a taxpayer is eligible to claim HRTCs equal to 20% of the QREs if the taxpayer is the “owner” of the property interest. Tax credit investors are typically eligible to receive HRTCs on a pass through basis by virtue of their ownership interest in the entity owning the certified historic structure.  In the case of Boardwalk, PB expected to receive the HRTCs on the basis of its partnership interest in HBH.  The Third Circuit, however, agreed with the IRS’s contention in the original tax court case, that PB was ineligible to receive the HRTCs because its partnership with NJSEA creating HBH was not legitimate. The Third Circuit concluded that, based on a totality of the circumstances, PB acted more like a purchaser of the HRTCs rather than a partner of NJSEA, which, under the Code, is strictly prohibited. 

Central to the Third Circuit’s analysis is the fundamental tenet of partnership law, that in order for a legitimate partnership to exist, each partner must have a meaningful stake in the success or failure of that partnership.  In order to determine the extent of PB’s stake in HBH, the Third Circuit analyzed PB’s downside risk as well as  its share of the project’s upside potential.  In both instances, the Third Circuit found the evidence lacking.  It reasoned that PB did not assume a significant amount of downside risk because:

  1. PB’s equity installments were always made after HBH had incurred enough QREs, therefore, PB was never at risk of receiving less HRTCs than the amount of equity it contributed.
  2. HBH provided a tax benefits guaranty backed by NJSEA, which promised to repay PB in the event the IRS ever successfully challenged and disallowed any of the HRTCs.
  3. NJSEA provided an unlimited completion guaranty, eliminating, in the Third Circuit’s mind, any chance that the HRTCs would be jeopardized by a failure to construct the project.
  4. NJSEA provided an unlimited operating deficit guaranty that shielded PB from excess operational costs borne by the project.
  5. PB’s 3% preferred return was never truly at risk because PB’s put option, if exercised, required NJSEA to purchase the project for a minimum price equal to PB’s accrued and unpaid preferred return, the funds for which were guarantied by an investment contract that NJSEA was compelled to obtain.

In addition, the Third Circuit concluded that PB did not have  a sufficient interest in the upside potential of the project either. Although the structure of the transaction nominally provided that PB could potentially receive cash distributions and a chance to share in the project’s profits, the project never materialized into, nor was the Third Circuit convinced that the principals ever realistically expected it to turn into, a profit-making venture.  The Third Circuit reasoned further that even if the project did become profitable, NJSEA possessed a call option in which it could purchase the project and cut PB off from any cash distribution.  In the end, the Third Circuit concluded that PB had no downside risk and no upside potential and therefore lacked any meaningful stake in the success or failure of HBH. As a result, according to the Third Circuit, PB did not have a true interest in the profit or loss of HBH, and therefore could not be considered a bona fide partner in the partnership, and consequently, was not eligible to receive the HRTCs.


The purpose of Revenue Procedure 2014–12 is to establish guidelines under which the IRS would not challenge a tax credit investor’s status as a partner within a partnership receiving HRTCs. These guidelines are intended only to provide a “Safe Harbor.”  The fact that some partnerships might not comply with the guidelines does not mean that those partnerships are improper.  Rather, complying with the guidelines ensures only that the IRS will not challenge a tax credit investor’s partner status.  The following is a summary of the material guidelines of the Safe Harbor:

  1. The general partner, or any other principal or sponsor of the partnership, must maintain an interest of not less than 1% in the partnership at all times.
  2. The tax credit investor must maintain an interest in the partnership of not less than 5% of its highest allocation percentage for any taxable year (for example, if the tax credit investor receives an initial allocation for a 99% interest in the partnership, then its interest may never be reduced to less than 5% of 99% (4.95%)).
  3. A tax credit investor must contribute 20% of its expected capital contributions prior to the date the building is placed in service, and at least 75% of its total expected capital contributions must be fixed in amount before the date the building is placed in service.
  4. A tax credit investor’s investment must be commensurate with its overall percentage interest in the partnership, its return must be contingent upon the partnership’s net income, gain, and loss and otherwise not substantially fixed in amount, and the tax credit investor cannot be protected from losses generated by the partnership’s activities.
  5. A tax credit investor may receive completion guaranties, operating deficit guaranties, environmental indemnities and financial covenant guaranties, along with guaranties that protect against the failure of the partnership to qualify for HRTCs.  An operating reserve may be funded in an amount of up to twelve months of reasonably projected partnership operating expenses, but otherwise guaranties cannot be “funded” or collateralized by cash or any other assets of the guarantors. The tax credit investor is also not permitted to receive any sort of guaranty or indemnity that protects it against an inability to claim HRTCs in the event of an IRS challenge to the “transactional structure” of the partnership.
  6. Neither the general partner, nor any other principal or sponsor of the partnership, may have a call option to repurchase the tax credit investor’s interest.  The tax credit investor is permitted to have a put option to force the general partner, or another principal or sponsor, to repurchase its interest provided that the put price is not above fair market value when exercised.
  7. A tax credit investor may not “abandon” its interest in the partnership at any time or otherwise it will face the presumption that it acquired its interest in the partnership with the intent to abandon.

Undoubtedly, as the Safe Harbor guidelines are put into practice, questions will arise about their application.  It remains to be seen how industry participants will interpret some of the provisions. For the time being, however, after nearly a year and a half of questions, Revenue Procedure 2014-12 has provided the historic tax credit industry with answers and a much needed boost of stability and certainty.