On January 3, 2011, the United States Tax Court filed its opinion in the case of Historic Boardwalk Hall, LLC v. Commissioner, 136 T.C. No. 1, No. 11273-01. The opinion delivers an important victory for historic tax credit rehabilitations by upholding a partnership designed to syndicate federal historic tax credits to a third party investor.
Background
The New Jersey Sports and Exposition Authority (NJSEA) formed Historic Boardwalk Hall, LLC (HBH) as a tax partnership for the purpose of rehabilitating East Hall, a building that is listed as a National Historic Landmark and is located on the Boardwalk in Atlantic City, New Jersey. East Hall had been used since its construction in 1926 to host public events including hockey matches, trade shows, musical performances by the Beatles and The Rolling Stones, the Miss America pageant and others. HBH subsequently admitted an investor member that would receive allocations of federal historic credits expected to be generated by the project.
Both NJSEA and HBH carefully reviewed the risks of the project, consulted advisors and accountants regarding its anticipated performance, and documented their economic agreement. NJSEA and the investor member also obtained legal opinions regarding important aspects of the transaction, including the status of the project as a partnership for tax purposes.
Ruling
The IRS argued that HBH should not be respected for tax purposes, that the investor member was not a true partner and that the transaction lacked economic substance. The Tax Court reviewed the HBH operating agreement, projections, legal opinions, complex structure and the parties' other agreements regarding the project and allocation and distributions to be made by HBH, noting the documentation supported finding the transaction to be bona fide. The Court also found that a preferred return on the investor member's invested capital plus an allocation of the federal credits to the investor member supported finding that the transaction had economic substance and that HBH was a bona fide partnership for tax purposes. The transaction impacted the parties' respective economic positions, as the investor member's capital reduced the overall project capital cost to NJSEA and the investor member economically benefited from the preferred return and the federal tax credits received through the project. Most importantly, the Court held that the value of historic credits should be taken into account in determining if a transaction has economic substance in cases where Congress intends such credits to provide an incentive to undertake certain transactions.
Take Away
This decision is important for credit syndications, specifically, the decision validates an investment structure that is common in the industry and reaffirms that tax credits can be viewed as an economic motivation for investors in historic projects. However, project owners and developers should continue to be careful to address the requirements of the recently codified economic substance doctrine in current and future credit projects and syndications.
Hirschler Fleischer's Tax Credit Group has expertise with a wide variety of state and federal tax credit issues, including, historic, low-income, new market, energy production investment tax credits, and land conservation projects and credits. The Tax Credit Group assists developers, real estate companies and landowners with projects intended to generate these credits, and structures, negotiates and prepares the partnership and/or other investment vehicles for syndicating such credits. In addition, the Group counsels investment entities in structuring partnerships, private investment funds (including opportunity funds) and private development entities interested in investing in these credit projects, and also counsels brokers selling such credits. Hirschler Fleischer's Tax Credit Group is ready to assist you with projects involving such credits.
