Historic Boardwalk Hall, LLC v. Commissioner of Internal Revenue

US Third Circuit Court of Appeals, No. 11-1832, August 27, 2012: Structure of transaction to transfer historic rehabilitation tax credits from a tax exempt entity to taxable entity resulted in taxable entity not being a true partner, therefore not eligible to claim credits.

The Internal Revenue Code allows a tax credit of 20% of the “qualified rehabilitation expenditures” for restoration of any “certified historic structure”. Although the owner of the structure may take these historic rehabilitation tax credits (“HRTCs”), the HRTCs cannot be sold.

The restoration of East Hall a/k/a Historic Boardwalk Hall (“East Hall”) in Atlantic City, New Jersey, generated HRTCs. The New Jersey Sports and Exposition Authority (“NJSEA”), a government entity, owned a leasehold interest in East Hall and was responsible for its restoration. NJSEA, as a tax-exempt entity, could not use the 20% federal tax credit. NJSEA, seeking to find a way to allow a for-profit taxable entity to claim the HRTCs and in exchange gain a financial benefit for the state, created a New Jersey limited liability company, Historic Boardwalk Hall, LLC (“HBH”). HBH elected to be treated for tax purposes as a partnership, not a corporation. A subsidiary of Pitney Bowes (“PB”) invested in and became a member of HBH so it could earn the HRTCs generated from the East Hall rehabilitation. The IRS rejected the claim by PB of the credits.

The transaction, as described by the Court, underwent significant negotiation and revision before it closed, all with the aim of minimizing or eliminating the risk to PB that it might not realize the tax credits in certain amounts. Evidently, PB was too successful in achieving that goal, because the Court ruled that PB was not a bona fide partner in HBH for tax purposes. The Court agreed with the IRS that the transaction was “a vehicle to impermissibly transfer HRTCs from NJSEA to PB and that all HRTCs taken by PB should be reallocated to NJSEA.”

While emphasizing that it recognized the Congressional intent to give preferential tax treatment in support of rehabilitation of certified historic structures the Court found that PB’s investment in the East Hall project was not necessary for the project to be completed, that “PB bore no meaningful risk in joining HBH, as it would have had it acquired a bona-fide partnership interest”, and that PB would never receive any economic benefits from HBH.

A Tax Court decision in 2011 had gone against the IRS and allowed allocation of the tax credits to PB. The Appeals Court reversed the Tax Court.

Decision available at http://www.ca3.uscourts.gov/opinarch/111832p.pdf?goback=.gde_2173129_member_154919854.

Thanks to Patricia Pregmon, Esq., www.pregmonlaw.com, for bringing this decision to my attention.

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