Is it worth meeting all of the requirements of Revenue Procedure 2014-12 (“Guidance”) or is substantial compliance with its terms sufficient?  A revenue procedure does not establish substantive law.  Rather, it creates a safe harbor to provide assurance to taxpayers that if they comply with ALL of the requirements of the revenue procedure, the IRS will not challenge the tax consequences of the transaction.

 The Guidance provides certainty only as to the allocation of historic rehabilitation tax credits (“HTCs”) to an investor partner.  In the case of a pass-through lease transaction, the availability of HTCs to a master tenant entity requires the conclusion that the master lease will be respected as a lease for federal tax purposes sufficient to pass through the HTCs, which conclusion is assumed although not explicitly stated in the Guidance.  Further, the Guidance does NOT protect taxpayers from an IRS challenge to the amount of “qualified rehabilitation expenditures” or QREs, tax-exempt use property issues, at-risk issues, or ownership of the project, but does minimize the overall “structure risk” that now must be borne by the investor partner under the new Guidance.  For this reason alone, full compliance with the Guidance makes sense for investors.

 But wait, there’s more!!!  Full compliance with the Guidance also permits investors to hold a fixed price put and receive an unfunded, unlimited operating deficit guarantee, terms that may well preclude the issuance of an investor grade tax opinion outside the safe harbor.  Consistent with this discussion, we anticipate that many investors will insist upon receipt of such an opinion from counsel thus, mandating that their transactions be structured to comply with the Guidance.