In what some might view as a Holiday surprise, the IRS and Treasury today released a safe harbor revenue procedure for a partnership’s allocation of historic rehabilitation tax credits.  While on its face the guidance is limited to the housing rehabilitation credit, in the absence of other guidance, it should provide important insights into the government’s view on the use of single or multiple partnership structures to finance investment credit transactions more broadly, including structures related to renewable energy.  Like the existing production tax credit guidance, the safe harbor sets minimum investment standards, and requires the credits to be allocated in accordance with other partnership items.

What the guidance does.  Consistent with the court’s decision in Historic Boardwalk Hall, the guidance confirms that total return guarantees are impermissible, and outlines the types of unfunded investor guarantees that the government views are permissible in these transactions (all funded guarantees are prohibited).  Of great interest, the guidance sanctions the use of master tenant/developer partnership structures with certain limitations, and prohibits any developer call right to remove an investor while allowing investor put rights if they are at fair market value at the time the put is exercised.  The guidance does not reserve the government’s ability to challenge structures within the safe harbor on economic substance grounds, which should insulate against any such challenge under Historic Boardwalk Hall or otherwise.

What the guidance does not do.  The guidance requires tax equity to have value commensurate with an investor’s percentage interest in the partnership, but does not address whether or how credits may be taken into account in determining value.  The guidance specifically provides that it may not be relied upon to determine whether (or to what extent) the credits are available.  Thus, compliance with the safe harbor provisions will not ensure the availability or the amount of the credits.

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Photo of Kurt Baca Kurt Baca

Kurt Baca is a member of the firm’s Tax Practice Group. He has a diverse transactional and planning practice ranging from advising on bank mergers and acquisitions, including mutual bank mergers, REIT structuring and qualification issues, internal reorganizations, various debt financing transactions, including…

Kurt Baca is a member of the firm’s Tax Practice Group. He has a diverse transactional and planning practice ranging from advising on bank mergers and acquisitions, including mutual bank mergers, REIT structuring and qualification issues, internal reorganizations, various debt financing transactions, including convertible debt issuances with integrated bond hedges and capped calls, project finance, currency hedging and related straddle issues, interest deductibility planning, including section 163(j) planning, the use of REMIC residual interests, and the use of various financial products for efficient investment structures and intra-group tax asset utilization. Much of his work involves cross-border issues, subpart F and NCTI (formerly GILTI) planning, and PFIC issues.

While his practice is diverse, Kurt is particularly interested in innovative uses of financial products and fundamental tax issues relating to the character of income, tax ownership, debt/equity, economic substance, and aggregate vs. entity treatment of pass-through entities as they relate to planning tax-efficient transactions and structures. Recent examples of Kurt’s projects include:

Advising asset managers on innovative derivative investments in various types of funds, involving swaps and variable forward contracts;
Advising on the development of structured notes to be acquired by life insurance companies to support variable annuity contracts and private placement life insurance contracts;
Advising on the availability of the dividends received deductions for dividends received on shares of a basket of stock acquired to hedge the risks related to writing options on equity indices;
Advising on the use of revenue strips in intra-company/intra group transactions to effectively use tax attributes;
Advising on the structuring of bond hedges and capped call options acquired in connection with the issuance of convertible debt to meet the requirements for tax integration;
Advising on the use of commodity swaps to transfer income risks and benefits between member of a multi-national group of companies;
Advising on the structuring of off-shore energy projects to assure the desired income treatment for U.S. tax purposes; and
Advising a REIT on the use of REIT subsidiaries and protective trusts to meet REIT qualification requirements.

Some of this work has included advising clients on issues connected with acquiring tax insurance.

Kurt has nearly 30 years of experience. He has advised on a significant variety of innovative transactions over that time. Those transactions have, among other things, involved foreign tax credits, contingent payment debt instruments, credit default swaps, and partnership allocations. He has also represented issuers and underwriters in the development and execution of high profile capital market transactions, including various forms of convertible debt and structured investment units. Kurt has experience in advising clients in controversies arising from corporate financing transactions.