Tax Alert: IRS Provides Safe Harbor for Allocating Historic Tax Credits


With the issuance of Revenue Procedure 2014-12, the IRS has established a safe harbor for allocating the historic tax credit by a partnership in an attempt to provide more predictability regarding the allocation of these credits. The IRS is attempting to eliminate agreements where investors are allocated these tax credits without participating in the basic risks and upside associated with the partnership’s business.

The Revenue Procedure provides for the following criteria to be met in order to comply with the safe harbor provisions.

  • The Principal (general partner or managing member) must have at least 1% ownership interest in each material item of partnership income, gain, loss, deduction, and credit at all times during the existence of the partnership.
  • The investor’s minimum partnership interest in each material item of partnership income, gain, loss, deduction, and credit must at all times during their ownership be at least 5% of the investor’s largest ownership percentage for each items during any tax year of their ownership. (Therefore, an investor with an initial ownership of 99% can reduce their ownership to 5% and be in compliance with the safe harbor.)
  • The investor’s partnership interest must be a bona fide equity investment with a reasonably anticipated value contingent upon the partnership’s net income, gain, and loss and is not substantially fixed in amount.
  • There may not be any arrangements to reduce the value of the investor’s partnership interest such as unreasonable developer, management and incentive fees, lease terms or similar arrangements.
  • The investor must contribute a minimum unconditional capital contribution equaling at least 20% of the investor’s total expected capital contribution prior to the date the building is placed in service.
  • A minimum of 75% of the investor’s capital contribution must be fixed prior to the date the building is placed in service.
  • Only certain unfunded guarantees can be provided to the investor including completion guarantees, environmental indemnities, financial covenants, and operating deficit guarantees.
  • Neither the principal nor the partnership can have a call option or contractual right to purchase or redeem the investor’s ownership interest.
  • The investor may not have a contractual right to require any person associated with the rehabilitation project to purchase their ownership interest at a future date that is greater than its fair market value at the time of sale.

These safe harbor provision apply both to partnerships which own the building (developer partnership) and claims the credit as well as master tenant partnerships who claim the credit based on an election under § 1.48-4(a)(1). The Revenue Procedure also does not allow for the investor to hold a direct ownership interest in both the developer partnership and master tenant unless there is a separately negotiated, distinct economic arrangement with the developer partnership such as for allocations of low income housing tax credits or new markets tax credits. The investor is allowed to own an indirect interest in the developer partnership through the master tenant.

As with any business transaction it is important to communicate well in advance with your tax professionals and advisors in order to ensure proper compliance and planning. We are happy to provide you with assistance on this issue, or any other tax related matters.

Please contact your Wilkin & Guttenplan advisor if you have any questions or would like additional information.

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