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IRS issues safe harbor guidance for purposes of allocating rehabilitation credits

January 8, 2014

On December 30, 2013, the Internal Revenue Service (IRS) released Revenue Procedure 2014-12, which establishes a safe harbor (Safe Harbor) under which the IRS will not challenge partnership allocations of IRC Section 47 rehabilitation credits (Historic Tax Credits) by a partnership to its partners. The Safe Harbor is intended to provide partnerships and partners with more predictability regarding the allocation of Historic Tax Credits in light of the Third Circuit Court of Appeals’ decision in Historic Boardwalk Hall LLC v. Commissioner. In that case, the court disallowed credits to an investor in a partnership that rehabilitated a historic property on the grounds that the investor failed to qualify as a bona fide partner for tax purposes due mainly to being protected from risk of loss and assured of receiving a virtually fixed (after-tax) return on investment.

The Safe Harbor is effective for allocations of Historic Tax Credits made by a partnership to its partners on or after December 30, 2013. However, the IRS stated in Revenue Procedure 2014-12 that if a qualified rehabilitation building or a certified historic structure was placed in service before December 30, 2013 and the partnership and the partners satisfied all of the requirements of the Safe Harbor on the placed in service date and thereafter, the IRS will not challenge a partnership’s allocations of Historic Tax Credits that are in accordance with IRC Section 704.

For more information regarding Safe Harbor or any other real estate related issue, please contact any of the attorneys in Honigman's Real Esate Practice Group.