To encourage the rehabilitation of historic structures, Congress provided that taxpayers could receive federal tax credits by engaging in these restoration projects. The good news is that these tax credits are dollar-for-dollar credits against federal tax, which potentially could transform the unprofitable undertaking of fixing up a cherished, but dilapidated, landmark into a worthwhile investment opportunity. The bad news is that the developer who would earn these tax credits often has nowhere near the amount of income that would be needed to take full advantage of them.
In order to avoid this conundrum, developers that rehabilitate historic structures often enter into some kind of arrangement with a “tax credit investor” in which the investor gets at least some return on its investment and receives the lion’s share of the federal tax credits. Suppose that the IRS were to come in and say that this transaction is really just an impermissible attempt to sell tax credits. Who would win? In a recent Tax Court case, the victor was the taxpayer.
Historic Rehabilitation
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