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.