The IRS recently issued Revenue Procedure 2014-12, providing a safe harbor under which the IRS will not challenge partnership allocations of “section 47” federal rehabilitation tax credits. In the aftermath of the IRS’s win in Historic Boardwalk Hall, LLC v. Commissioner, the Revenue Procedure is intended to provide more predictability regarding the allocation of section 47 rehabilitation credits to partners of partnerships that rehabilitate certified historic structures and other qualified rehabilitated buildings.
The Revenue Procedure is limited to section 47 rehabilitation credits. Nevertheless, it deserves the attention of the renewable energy community, as the section 48 federal energy credit for renewable energy property (simply known as the ITC in the renewable energy community) and the section 47 renewable credit are similar investment tax credits. This means that we should expect that the IRS would use a similar analysis as expressed in the Revenue Procedure when evaluating a section 48 energy ITC transaction.
As provided in the Revenue Procedure, the IRS will not challenge a partnership’s allocations of validly claimed section 47 rehabilitation credits if a partnership and its partners satisfy each of the safe harbor requirements. Like any safe harbor, it is important to remember that the failure to satisfy these requirements does not mean that the IRS will automatically disallow the partnership allocations. Rather, it just means that the safe harbor is not available. In fact, the Revenue Procedure itself states that no inference should be drawn as to the validity of partnership allocations for taxpayers that fail to satisfy the safe harbor.
While a discussion of each of the safe harbor conditions is beyond the scope of this client alert, the following items in the Revenue Procedure are worth noting:
As mentioned above, the Revenue Procedure applies only with respect to section 47 rehabilitation credits. However, as both the rehabilitation credit and the section 48 energy credit are similar investment tax credits, we expect that it will influence the IRS’s review of energy ITC transactions.