Partnership and Partner Classification Issues

• Author: William F. Machen
• Pages: 107-128

10.1. Tax Characterization of the

Investment Arrangements

An investor in a syndicated Rehabilitation Tax Credit project may

acquire a limited partnership or membership interest directly in

the owner of the project or in a partnership or limited liability

company that has leased the project from the owner in a manner

that permits the lessee (and its partners or members) to realize

the benets of the credit. In either case, the threshold issue from a

tax‑structuring standpoint is whether the investor will be deemed

to be a partner in the owner or the lessee, as the case may be, for

federal income tax purposes. This issue can itself be divided into

two interrelated questions. The rst is whether the entity compris‑

ing the owner or the lessee will be considered to be a partnership.

The second is whether the investor will be treated as a partner in

such partnership for federal income tax purposes.

As is the case with the lease characterization issue, there is a

very substantial body of law dealing with partnership and partner

classication issues.

197

A detailed discussion of this authority is

197. See, e.g., Comm’r v. Tower, 327 U.S. 280 (1946); Lusthaus v. Comm’r,

327 U.S. 293 (1946); Comm’r v. Culbertson, 337 U.S. 733 (1949); Luna v. Comm’r,

47 T.C. 1067 (1964); Merryman v. Comm’r, 873 F.2d 879 (5th Cir. 1989); ASA

107

Partnership and Partner

Classication Issues 10

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beyond the scope of this publication. In the context of syndicated Rehabili‑

tation Tax Credit transactions, however, the decision of the Third Circuit

in the Historic Boardwalk Hall case is by far the most important case in

the last several decades.

The Historic Boardwalk Hall case involved the rehabilitation of the East

Hall of the Atlantic City Convention Center project in Atlantic City, New

Jersey. The East Hall was listed on the National Register of Historic Places.

The renovation efforts were under the control of the New Jersey Sports

and Exposition Authority (NJSEA). Although funding for the rehabilitation

was available from other sources, NJSEA elected to enter into a syndicated

partnership transaction with Pitney Bowes, Inc. (PB) to provide tax credit

equity for the project.

Under the terms of the syndicated transaction, PB agreed to make a

loan of approximately $1.2 million, together with capital contributions in

the aggregate amount of approximately $20.2 million, to a newly formed

limited liability company (HBH) in exchange for an allocation of substan‑

tially all of the Rehabilitation Tax Credits generated by the renovation and

certain economic benets from the project. HBH was the tax owner of the

East Hall (including the rehabilitation improvements) under the terms of a

long‑term sublease. HBH paid for the property through acquisition nanc‑

ing and NJSEA provided additional construction nancing.

Cash ow generated by the completed project was used to pay a pre‑

ferred return to PB and to repay principal and interest due on the nancing.

NJSEA and PB entered into various put and call options that essentially

assured that PB’s interest would be purchased by NJSEA following the end

of the ve‑year recapture period (plus a short additional period). A portion

of PB’s capital contributions was used by HBH to purchase a guaranteed

Investerings v. Comm’r, 201 F.3d 505 (D.C. Cir. 2000), cert. denied; Saba Partnership v. Comm’r,

273 F.3d 1135 (D.C. Cir. 2001); Boca Investorings v. United States, 314 F.3d 625 (D.C. Cir.

2003), rev’g 167 F. Supp. 2d 298 (D.D.C. 2001), cert. denied; Andantech, LLC v. Comm’r, 331

F.3d 972 (D.C. Cir. 2003); Southgate Master Fund, LLC v. United States, 659 F.3d 466 (5th

Cir. 2011); Pritired I, LLC v. United States, 816 F. Supp. 693 (S.D. Ohio 2011); Broadwood

Investment Fund, LLC v. United States, 2012‑2 U.S.T.C. T50, 616 (C.D. Cal. 2012); Superior

Trading, LLC v. Comm’r, 728 F.3d 676 (7th Cir. 2013); Chemtech Royalty Associates, L.P. v.

United States, 114 A.F.T.R. 2d 2014–5940 (5th Cir. 2014).

The Rehabilitation Tax Credit: A Practitioner's Guide to the Technical Tax Issues

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