Common parlance in the real estate industry is to talk about buying and selling tax credits. In reality, though, tax credits generally cannot be sold. However, as we discussed in our last column, arrangements can be structured in which a “tax credit investor” owns an interest in a partnership that earns tax credits, gets at least some return on its investment, and receives the lion’s share of the tax credits. The problem is that there often is a fine line in determining whether the partnership is allocating tax credits to its partners or the whole arrangement is really just a sale of the tax credits. In a recent decision of the U.S. Court of Appeals for the Fourth Circuit, a transfer of state historic rehabilitation tax credits by a partnership to its partners found itself on the wrong side of the line. What does this mean for the ability of real estate developers to engage in tax credit transactions?
Background
Historic Rehabilitation Tax Credits. In order to encourage the rehabilitation of historic structures, Congress provided that taxpayers could receive federal tax credits by engaging in these restoration projects. Internal Revenue Code section 47 entitles a taxpayer to federal tax credits in an amount equal to 20 percent of qualifying rehabilitation expenditures incurred with respect to a certified historic structure. Certain states have also enacted provisions enabling taxpayers to receive state tax credits upon rehabilitating historic structures.
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