Transfer of Rehab Credit Validated
2011; American Institute of Certified Public Accountants; Volume: 211; Issue: 4 Linguagem: Inglês
ISSN
0021-8448
Autores Tópico(s)Housing Market and Economics
ResumoThe Tax Court held that a partnership created to transfer a historic rehabilitation credit to a taxable corporation was valid and that the transfer and the corporation's participation in the partnership had objective economic substance. The state of New Jersey in 1992 authorized the New Jersey Sports and Exposition Authority (NJSEA) to build and operate a new convention center on Atlantic City's famous Boardwalk and to rehabilitate and operate the old one, subsequently known as Historic Boardwalk Hall. The rehabilitation would generate a federal tax credit under section 47, which allows a credit of 10% of qualified expenditures of rehabilitating a building built before 1936, or 20% of qualified expenditures to rehabilitate a structure listed in the National Register of Historic Places or certified as having historic significance within a registered historic district. To generate the funds to fulfill the project, the NJSEA created Historic Boardwalk Hall (HBH), an LLC treated for tax purposes as a partnership, with business equipment and services company Pitney Bowes Inc. as investor member. HBH's operating agreement allocated 100% of the section 47 credit to Pitney Bowes, plus a 3% preferred return. The parties also signed a contract that contained future purchase options. One option allowed the NJSEA to purchase Pitney Bowes' interest during the 12-month period following the section 47 holding period (60 months after the property is placed in service). A second option gave Pitney Bowes the right to demand that the NJSEA purchase its interest during the 12 months following 24 months after the expiration of the holding period. Both options' prices were set to provide Pitney Bowes a return of its investment plus the 3% preferred return. (Pitney Bowes would have already received the tax benefit from the section 47 credit.) HBH was required to purchase a contract from a bank that guaranteed the funds to fulfill the purchase options. The government denied Pitney Bowes the tax credit on the grounds that the transaction lacked economic substance and that HBH was a sham. In addition, the government contended that Pitney Bowes was not a partner, since its contribution was actually a loan, and that the NJSEA never transferred ownership of the hall to HBH. The court first considered whether the transaction had economic substance, that is, whether it had both a profit potential and a business purpose. The government argued that the project would not be profitable to Pitney Bowes without the tax credit, and therefore, the project did not have a valid nontax profit potential. The court rejected this argument on the grounds that Congress enacted section 47 to stimulate otherwise unprofitable rehabilitation projects, and therefore the credit should be included in the analysis. Combining the credit with the 3% preferred return was sufficient, according to the court, to provide a profit potential. Next, the court determined the subjective business purpose requirement was met, because the partnership was created to allow Pitney Bowes to invest in the hall's rehabilitation. Given that the rehabilitation was necessary for the hall to generate any future revenue, the court concluded that the rehabilitated hall would be a viable business location and that Pitney Bowes was an investor in the business. The government pointed out that the original investment documents referred to the transaction as a sale of tax credits. …
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