Tax Credit Community Keeps Watchful Eye on Outcome of Key Historic Tax Credit Court Cases

February 18, 2011, 9:33 AM

When structuring a historic tax credit transaction, tax practitioners regularly compile and apply IRS rules, regulations and court decisions. Practitioners and other members of the tax credit community are keenly interested in the outcome of two recent key cases.

In Historic Boardwalk Hall LLC vs. Commissioner, the Tax Court squarely addressed the tax consequences of the structure commonly used in tax credit transactions, ruling that a partnership formed to invest in the rehabilitation of the East Hall of the Atlantic City, New Jersey convention center was not a sham lacking economic substance. The decision is the first indication that the Tax Court will not disturb federal tax credit transactions that involve government and tax-exempt entities. While the tax credit community breathed a sigh of relief with the Tax Courts decision, practitioners are cautiously optimistic given that (a) the IRS could distinguish future cases from the Historic Boardwalk decision since the decision was not based on new rules imposing a statutory test for economic substance not taking tax benefits into account and (b) it is not clear that the IRS raised an issue regarding the tax exempt use of the property, therefore the IRS may still challenge government/non-profit participation in federal historic tax credit transactions. Moreover, the IRS is likely to appeal the Tax Courts decision.

On a related note, in January 2011, the Fourth Circuit Court of Appeals heard oral arguments in the IRSs appeal of the Tax Courts December 2009 ruling in Virginia Tax Credit Fund 2001 vs. Commissioner in which the Tax Court appeared to bless the structure of Virginias allocated state historic tax credit, regardless of the size of the investor's ownership interest or the length of time the investor remains in the tax credit partnership. A decision in favor of the IRS would be a blow to Virginias historic tax credit program as well as other state historic tax programs in which the credits can be allocated disproportionately to the tax credit investor regardless of the size of the investors ownership interest in the tax credit partnership. The Commonwealth of Virginia filed an amicus brief in support of the taxpayer.

Saundra Hirth is a partner in Kaufman & Canoles tax credit and real estate finance practice groups. Ms. Hirth can be reached at (804) 771-5721 or srhirth@kaufcan.com. --Saundra R. Hirth