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New Procedures Issued for Allocation of Section 47 Rehabilitation Credits



The IRS recently issued safe harbor guidance for purposes of allocating Section 47 rehabilitation credits (“§47 credits”) in Revenue Procedure 2014-12. Partners and partnerships must abide by specific rules to have their allocations of these credits upheld.


As a background to this Revenue Procedure, the Third Circuit handed down the Historic Boardwalk Hall case (“HBH”). In HBH, an investor purchased an interest in a partnership that incurred qualifying rehabilitation expenses. The agreements between the partnership and the investor revealed that the investor would receive guaranteed §47 credits or their cash equivalent, but no other profit-sharing. The court ruled that this investor’s return was essentially fixed, and that the investor had no meaningful risk. As the investor had no meaningful stake in the partnership’s profits and losses, the court held that the investor was not a bona fide partner.

The IRS recently issued Revenue Procedure 2014-12 to provide partnerships with greater predictability when making allocations of §47 credits. To that end, Revenue Procedure 2014-12 establishes a safe harbor for partnership allocations of the §47 credit to its partners. This Revenue Procedure will apply only to the §47 credit. If a partnership follows these standards, the IRS will not challenge the partnership allocations of the §47 credit to its partners.

A partnership may only use this safe harbor when it otherwise validly claims the §47 credit under Section 47. The safe harbor has many prongs which a partnership must meet:

  • Definition of “Investor.” An investor (“Investor”) is a partner in a partnership, other than a principal partner (“Principal”), whose partnership interest meets the requirements below.
  • Partners’ Partnership Interests. A Principal must have a minimum 1% interest in the partnership’s income and loss at all times during the life of the partnership. An Investor must maintain a minimum interest in partnership income and loss equal to 5% of their percentage interest. An Investor’s partnership interest must constitute a “bona fide” investment with a reasonably anticipated value commensurate to his interest.  The value of the Investor’s interest may not be reduced by fees or other rights to distributions.
  • Investor’s Minimum Unconditional Contribution. An Investor must contribute a minimum unconditional amount to the partnership on the date the rehabilitated building is placed in service. The Investor must maintain this minimum contribution as long as it has an interest in the partnership.
  • Contingent Consideration. At least 75% of the Investor’s total expected capital contributions must be fixed before the date the rehabilitated building is placed in service.
  • Guarantees and Loans. The partnership may make certain specific unfunded guarantees to the Investor, such as guarantees for the performance of any act necessary to claim the §47 rehab credit or to avoid any act that would cause the PS to fail to qualify for the § 47 credit. However, the partnership may not guarantee or insure the Investor’s ability to claim the § 47 credit or the repayment of the Investor’s contribution if the credit cannot be claimed. Further, the partnership and Principal may not lend the Investor any funds to acquire part or all of the Investor’s interest in the partnership.
  • Purchase and Sale Rights. Generally, neither the partnership nor the Principal may have a right to purchase or redeem the Investor’s interest at a future date. The Investor also may not have a right to require any person to purchase its partnership interest for more than fair market value.
  • Allocation of Section 47 Rehabilitation Credits. Partnership allocations must satisfy the current rules and regulations related to partnership allocations. Allocations of the §47 credit specifically must follow Treasury Regulation §1.704-1(b)(4)(ii).

This Revenue Procedure applies to all partnerships, Principals, and Investors in a §47 deal. Related persons must follow the same procedures outlined above.

What Does CohnReznick Think?
The IRS has issued guidance creating “safe harbor” standards in which it will not challenge a partnership’s allocations of section 47 credits to its partners. These standards apply only to allocations of section 47 credits.  No inference should be drawn about the validity of partnership allocations that fail to satisfy the safe harbor tests.  This guidance applies to allocations of section 47 credits made by a partnership after December 29, 2013.  If a building was placed in service prior to December 29, 2013 and satisfies the requirements of the safe harbor when the building was placed in service and thereafter, the IRS will not challenge the partnership’s allocations of section 47 rehabilitation tax credits to eligible investors.

For more information, please contact Thomas Nice, Partner, at 301-961-5542. To learn more about CohnReznick’s tax services, please visit our website.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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