On January 8, 2014, the U.S. Treasury and IRS issued a revised Revenue Procedure 2014-12 (the “Guidance”) establishing a “safe harbor” for federal historic tax credit (“HTC”) investments made within a single tier or through a master tenant structure. The Guidance responded to the dislocation in the HTC equity market produced by the decision in Historic Boardwalk Hall, LLC v. Commissioner, in which the U.S. Circuit Court of Appeals for the Third Circuit held that the purported HTC investor was not a partner in the partnership that owned the rehabilitated project because the investor possessed neither a meaningful upside potential nor a meaningful downside risk. Adhering to the principles set forth in the Guidance provides certainty to taxpayers that the HTC generated by a project will be treated as allocated to the investor and that the investor will be respected by the IRS as a partner in the allocating partnership for federal income tax purposes. The Guidance does not address other types of federal or state credits or transactions combining federal historic tax credits with federal low-income housing or new markets tax credits, but the concepts contained therein may prove to be instructive in structuring transactions involving other credits.

Cash Distributions

The investor must receive a reasonably anticipated value, exclusive of tax benefits, commensurate with its percentage interest in the partnership, but there is no minimum amount of cash that must be distributed by the partnership to the investor, which allows “community benefit” projects (e.g., museums, community theaters) that do not generate substantial cash returns to satisfy the requirements of the Guidance. The IRS and Treasury have informally indicated in a public conference that the investor does not need to receive an interest in currentOn January 8, 2014, the U.S. Treasury and IRS issued a revised Revenue Procedure 2014-12 (the “Guidance”) establishing a “safe harbor” for federal historic tax credit (“HTC”) investments made within a single tier or through a master tenant structure. The Guidance responded to the dislocation in the HTC equity market produced by the decision in Historic Boardwalk Hall, LLC v. Commissioner, in which the U.S. Circuit Court of Appeals for the Third Circuit held that the purported HTC investor was not a partner in the partnership that owned the rehabilitated project because the investor possessed neither a meaningful upside potential nor a meaningful downside risk. Adhering to the principles set forth in the Guidance provides certainty to taxpayers that the HTC generated by a project will be treated as allocated to the investor and that the investor will be respected by the IRS as a partner in the allocating partnership for federal income tax purposes. The Guidance does not address other types of federal or state credits or transactions combining federal historic tax credits with federal low-income housing or new markets tax credits, but the concepts contained therein may prove to be instructive in structuring transactions involving other credits.

Cash Distributions

The investor must receive a reasonably anticipated value, exclusive of tax benefits, commensurate with its percentage interest in the partnership, but there is no minimum amount of cash that must be distributed by the partnership to the investor, which allows “community benefit” projects (e.g., museums, community theaters) that do not generate substantial cash returns to satisfy the requirements of the Guidance. The IRS and Treasury have informally indicated in a public conference that the investor does not need to receive an interest in current  

The Guidance confirms that the investor may require a guaranty with respect to damages it has incurred as a result of the developer’s actions or inactions, including a breach of a representation, warranty or covenant that involves actions or omissions of the developer. While the Guidance does not specifically address casualty losses that result in recapture, the IRS and Treasury have indicated that the risk of casualty loss must be borne by the investor. There is no prohibition, however, against an investor procuring third-party insurance covering risks associated with “impermissible” guaranties, including loss of credit due to a casualty. Except for “impermissible” guaranties, unfunded guaranties may cover 100% of environmental liabilities and the amount of the HTC or the capital contributed to the partnership with respect to the HTC due to the developer’s failure to complete the project. The Investor may also be protected by an operating deficit reserve equal to no more than 12 months of project operating expenses and an operating deficit guaranty, which may be unlimited.

Put Options

A developer may not hold an option to acquire the investor’s partnership interest. However, the investor may hold an option to put its partnership interest to the developer for an amount not exceeding its fair market value. While a put of the investor’s interest at a nominal price below fair market value is permissible, an investor may not abandon its interest. Investors doing so will be deemed to have acquired the interest with the intention of abandoning it, unless the facts clearly establish that the interest is worthless.

Effective Date

The Guidance is effective for projects that are placed in service on or after December 30, 2013. Transactions closed prior to the issuance of the Guidance but not yet placed in service may be amended to be consistent with the terms of the Guidance. Taxpayers should consider conforming such transactions to the safe harbor requirements.

Transactions placed in service prior to December 30, 2013 that meet the requirements of the Guidance will not be challenged by the IRS. However, such transactions are unlikely given the highly specific requirements set forth in the Guidance.