Three Key Changes to the IRS’ Historic Tax Credit Safe Harbor Guidance

Published by Michael Novogradac on Monday, January 13, 2014 - 12:00am

On Jan. 8, the Internal Revenue Service (IRS) issued a revised draft of Revenue Procedure 2014-12, which was drafted in response to the ruling in the case of Historic Boardwalk Hall LLC v. Commissioner, which is discussed in more detail here. There are three key changes in the revised Revenue Procedure 2014-12.

The first change is in section 4.06(3). The struck-through text below reflects deletions; the red words are additions.

“Determination of fair market value. A determination of the fair market value of the Investor’s interest in the Partnership may take into account only those contracts or other arrangements creating rights or obligations that are entered into in meet the ordinary course requirements of the Partnership’s business section 4.02(2)(c) of this revenue procedure and that are negotiated at on arm’s length with parties that are not related to the Partnership or Investors terms.”

Prior to this change, tax professionals and others speculated as to how it would be possible to determine the fair market value of an investor’s interest in a partnership if you had to ignore any agreement with parties to the partnership. This change removes that exclusion.

The next two changes address the allocation of imputed income as required by Internal Revenue Code (IRC) section 50(d)(5). Tax professionals have long speculated as to the proper manner in which to allocate such imputed income, and were concerned that if that income was determined to not be allocated properly, a partnership might fail the safe harbor. The two changes help alleviate tax professionals’ concerns regarding this issue. One clarification is in the scope section of the procedures, in paragraph four:

“The Safe Harbor set forth in this revenue procedure is not intended to provide substantive rules and no inference should be drawn as to the validity of partnership allocations for taxpayers that fail to satisfy the Safe Harbor. Further, this revenue procedure does not address how a Partnership is required to allocate the income inclusion required by §50(d)(5). “

The other clarification is in section 4.07:

“Allocation of §47 Rehabilitation Credits. Allocations under the Partnership agreement must satisfy the requirements of §704(b) and the regulations thereunder. The § 47 rehabilitation credit must be allocated in accordance with § 1.704-1(b)(4)(ii). Solely for purposes of determining whether a Partnership meets the requirements of this section 4.07, the Partnership’s allocation to its partners of the income inclusion required by § 50(d)(5) shall not be taken into account.

To ensure your harbors stay safe and you don’t drown in confusion regarding these new rules, plan to attend the Novogradac IRS Revenue Procedure 2014-12 and the Safe Harbor for Historic Tax Credit Structures Webinar on Jan. 30.