One of the key components in calculating an investor’s return on federal historic tax credit (“HTC”) investment in a pass-through structure is the treatment of phantom income received by the master tenant under Section 50(d) of the Internal Revenue Code. In a single tier historic tax credit investment, Code Section 50(c)(1) reduces the basis of the rehabilitated building by the amount of the HTC claimed by the owners of the building. Where HTC is passed through to a master tenant, the building owner does not claim the credit and the Code Section 50(c)(1) basis reduction rule is not applicable. To correct for this omission, Code Section 50(d) requires that Master Tenant to take into income an amount equal to the basis reduction applicable under HTC transactions over the shortest reasonable depreciation period. Rather than draft new language to restate this rule when the statute was amended in 1990, Code Section 50(d) provides that rules “similar to” the rules of the certain provisions as in effect on the day before enactment of the Revenue Reconciliation Act of 1990 remained effective. Prior to the enactment of the Revenue Reconciliation Act of 1990, the amount of basis adjustment applicable to HTC transactions was 50 percent, not the 100 percent adjustment applicable today. In an audit context, the IRS has suggested that the Code Section 50(d) phantom income amount should be based upon the 50 percent requirement that was in effect prior to the 1990 legislation.
While the IRS position is clearly correct based upon the literal language of the statute, most tax advisors believed that the language “similar to” incorporated the subsequent increase of basis adjustment calculation for 50 percent to the current 100 percent basis adjustment. HTC transaction participants, as well as their accountants and attorneys could consider whether to adopt the current IRS interpretation that 50(d) income is limited to 50 percent of the amount of the HTC.
Much about the treatment of Code Section 50(d) income remains uncertain, including whether such income is accelerated upon the disposition of an investor’s interest in the master tenant and whether an investor’s basis in its master tenant interest is increased by Code Section 50(d) income. The Historic Tax Credit Coalition intends to submit a letter to IRS and Treasury on the interpretation of the “correct” treatment of Code Section 50(d) income. Nobody can predict whether IRS and Treasury will issue formal guidance and if guidance is issued, what the form and content of such guidance will be.