Rehabilitation credits disallowed.

• Author: Beavers, James A.

The Third Circuit held that a corporate partner in a partnership was not entitled to claim historic rehabilitation credits passed through to it from the partnership because the corporation was not a bona fide partner in the partnership.

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Background

The New Jersey Sports and Exposition Authority (NJSEA) and Pitney Bowes (PB) formed Historic Boardwalk Hall LLC to allow PB to invest in the historic rehabilitation of the East Hall, a popular convention center in Atlantic City, N.J. The East Hall, which was built in 1926, had become run-down from its many years of use and needed significant work to make it a useful part of the new convention center complex the NJSEA was building. After beginning renovation, the NJSEA learned of the market for historic rehabilitation tax credits (HRTCs) among corporate investors and of the additional revenue that market could bring to the state through a syndicated partnership with one or more investors. These credits were useless to the NJSEA, which was a tax-exempt entity, but could be valuable to a large taxable corporate entity.

Therefore, the NJSEA created a New Jersey limited liability company, Historic Boardwalk Hall LLC (HBH), and subsequently sold a membership interest in HBH to a wholly owned subsidiary of Pitney Bowes Inc. Through a series of agreements, the transactions executed to admit PB as a member of HBH and to transfer ownership of the NJSEA's property interest in the East Hall to HBH were designed so that PB could earn the HRTCs generated from the East Hall rehabilitation. As part of the overall arrangement, in addition to receiving the tax credits, PB was to receive a 3% preferred return on its investment in HBH.

To ensure that PB received the benefits of the credits if the IRS was successful in challenging PB's use of them, HBH and PB executed a "Tax Benefits Guaranty" agreement under which HBH guaranteed the projected tax benefits to PB, and the NJSEA was required to fund any payments necessary under the agreement. The arrangement also included put and call buyout agreements for PB's membership interest in HBH between the NJSEA and PB.

On its Forms 1065, U.S. Return of Partnership Income, for 2000, 2001, and 2002, HBH claimed qualified rehabilitation expenditures and allocated those expenditures to PB, allowing PB to claim HRTCs pursuant to Sec. 47.

On audit, the IRS determined that either HBH was a sham that was used to improperly pass the tax benefits of the...