rp-14-12.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability
(Also: Part I, Sections 47 and 704; 1.46-3, 1.704-1.)

Rev. Proc. 2014-12

SECTION 1. PURPOSE
This revenue procedure establishes the requirements (the Safe Harbor) under
which the Internal Revenue Service (the Service) will not challenge partnership
allocations of § 47 rehabilitation credits by a partnership to its partners. The Treasury
Department and the Service intend for the Safe Harbor to provide partnerships and
partners with more predictability regarding the allocation of § 47 rehabilitation credits to
partners of partnerships that rehabilitate certified historic structures and other qualified
rehabilitated buildings.
SECTION 2. BACKGROUND
Section 38(a) provides a credit against income taxes for certain business credits.

Business credits include the investment credit determined under § 46. Section 38(b).
Section 46 provides that, for purposes of § 38, the amount of the investment credit
includes the rehabilitation credit.
Section 47(a) provides that the rehabilitation credit for any taxable year is the
sum of 10 percent of the qualified rehabilitation expenditures with respect to any
qualified rehabilitated building other than a certified historic structure, and 20 percent of
the qualified rehabilitation expenditures with respect to any certified historic structure.
Section 47(b)(1) provides that qualified rehabilitation expenditures with respect to
any qualified rehabilitated building shall be taken into account for the taxable year in
which the qualified rehabilitated building is placed in service.
Section 50 provides additional rules for computing the investment credit. Section
50(d)(5) makes applicable rules similar to the rule of former § 48(d) (relating to certain
leased property). Accordingly, a person who is a lessor of certain property may elect
with respect to the property to treat the lessee as having acquired the property if
specified requirements are met, including the income inclusion requirement of former
§48(d)(5).
Section 704(a) provides that a partner's distributive share of income, gain, loss,
deduction, or credit shall be, except as otherwise provided in chapter 1 of subtitle A of
Title 26, determined by the partnership agreement. Under § 704(b), a partner's
distributive share of income, gain, loss, deduction, or credit (or item thereof) is
determined in accordance with the partner's interest in the partnership (taking into
account all facts and circumstances) if (1) the partnership agreement does not provide

as to the partner's distributive share of income, gain, loss, deduction, or credit (or item
thereof), or (2) the allocation to a partner under the agreement of income, gain, loss,
deduction, or credit (or item thereof) does not have substantial economic effect.
Section 1.704-1(b)(4)(ii) provides that, with respect to the investment tax credit
provided by § 38, allocations of cost or qualified investment made in accordance with
§ 1.46-3(f) shall be deemed to be made in accordance with the partners’ interests in the
partnership. Under § 1.46-3(f)(2)(i), for purposes of § 47, each partner's share of the
qualified rehabilitation expenditures is determined in accordance with the ratio in which
the partners divide the general profits of the partnership (that is, the taxable income of
the partnership described in § 702(a)(8)) regardless of whether the partnership has a
profit or loss for its taxable year during which the qualified rehabilitation building is
placed in service.

In Historic Boardwalk Hall, LLC. v. Commissioner, 694 F.3d 425 (3d Cir. 2012),
cert. denied
, U.S., No. 12-901, May 28, 2013, the Third Circuit considered whether an
investor’s interest in the success or failure of a partnership that incurred qualifying
rehabilitation expenditures was sufficiently meaningful for the investor to qualify as a
partner in that partnership. The agreements governing the Historic Boardwalk Hall
transaction ensured that the investor would receive the § 47 rehabilitation credits (or
their cash equivalent) and a preferred return, with only a remote opportunity for
additional sharing in profit. Both the § 47 rehabilitation credits and the preferred return
were guaranteed as part of the transaction. The preferred return guarantee was
funded. The Third Circuit determined that the investor’s return from the partnership was

effectively fixed, and that the investor also had no meaningful downside risk because its
investment was guaranteed. The Third Circuit agreed with the Commissioner’s
reallocation of all of the partnership’s claimed losses and tax credits from the investor to
the principal, holding that “because [the investor] lacked a meaningful stake in either the
success or failure of [the partnership], it was not a bona fide partner.” Id. at 463.
SECTION 3. SCOPE

The Safe Harbor in section 4 of this revenue procedure applies in the case of a
partnership that validly claims the § 47 rehabilitation credit (Partnership). The Service
will not challenge a Partnership’s allocations of validly claimed § 47 rehabilitation credits
if the Partnership and its partners satisfy the Safe Harbor. However, taxpayers should
not infer that compliance with the Safe Harbor ensures that the § 47 rehabilitation
credits are otherwise valid. A Partnership and its partners that do not satisfy each of the
requirements in section 4 of this revenue procedure do not qualify for the Safe Harbor.
Partners in a Partnership may include one or more managers authorized to act
for the Partnership (Principals) and one or more Investors (as defined in section 4.01 of
this revenue procedure). A Partnership can be structured as either a Developer
Partnership or a Master Tenant Partnership. A Developer Partnership is a Partnership
that owns and restores a qualified rehabilitation building or a certified historic structure
(Building). A Master Tenant Partnership is a Partnership that leases a Building from a
Developer Partnership (Head Lease) and for which an election is made pursuant to
§ 1.48-4(a)(1) to treat the Master Tenant Partnership as having acquired the Building
solely for purposes of the § 47 rehabilitation credit.

This revenue procedure applies only with respect to allocations of § 47
rehabilitation credits from qualified rehabilitation expenditures. This revenue procedure
does not apply to federal credits other than the § 47 rehabilitation credit or to state credit
transactions. It does not indicate the circumstances under which the Service may
challenge allocations of such other credits or the circumstances under which a transfer
of state credits by a partnership may be treated as a disguised sale under
§ 707(a)(2)(B). Determinations of whether an expenditure is a qualified rehabilitation
expenditure and whether a Partnership is the owner of a Building for purposes of
claiming the § 47 rehabilitation credit are also outside the scope of this revenue
procedure. In addition, this revenue procedure does not address how or if the tax-
exempt use property rules under § 168(h) apply.
The Safe Harbor set forth in this revenue procedure is not intended to provide
substantive rules and no inference should be drawn as to the validity of partnership
allocations for taxpayers that fail to satisfy the Safe Harbor. Further, this revenue
procedure does not address how a Partnership is required to allocate the income
inclusion required by § 50(d)(5). The Treasury Department and the Service do not view
the Safe Harbor as determinative of whether an Investor is a partner or acting in its
capacity as a partner in an arrangement or transaction that is outside the scope of this
revenue procedure. The Treasury Department and the Service do not intend the
inclusion of any particular criterion in the Safe Harbor to be an indication either of our
views of the significance of that criterion with respect to any other federal or state tax
credit transactions, or of whether a Partnership has the requisite benefits and burdens

of ownership of a Building. The Service will not provide private letter rulings to
individual taxpayers regarding the allocation of § 47 rehabilitation credits.
SECTION 4. SAFE HARBOR
.01 Investors Defined. Investors are Partnership partners (other than Principals)
that hold an interest in the Partnership that is described in section 4.02(2) of this
revenue procedure. An Investor may be an initial partner in the Partnership or may be a
person who later becomes an Investor by purchasing a Partnership interest. If the
Investor receives an allocation of § 47 rehabilitation credits from a Master Tenant
Partnership, the Investor cannot also invest in the Developer Partnership other than
through an indirect interest in the Developer Partnership held through the Master
Tenant Partnership. This prohibition does not apply to a separately negotiated, distinct
economic arrangement (e.g., a separate arm’s length investment into the Developer
Partnership to share in allocations of federal new markets tax credits or low income
housing credits).
.02 Partners’ Partnership Interests.
(1) Principal’s minimum Partnership interest
. The Principal must have a
minimum one percent interest in each material item of Partnership income, gain, loss,
deduction, and credit at all times during the existence of the Partnership.
(2) Investor’s Partnership interest
.
(a) Investor’s minimum Partnership interest. The Investor must have, at all times
during the period it owns an interest in the Partnership, a minimum interest in each
material item of Partnership income, gain, loss, deduction, and credit equal to at least

five percent of the Investor’s percentage interest in each such item for the taxable year
for which the Investor’s percentage share of that item is the largest (as adjusted for
sales, redemptions, or dilution of the Investor’s interest).
(b) Requirements regarding the Investor’s Partnership interest
. The Investor’s
Partnership interest must constitute a bona fide equity investment with a reasonably
anticipated value commensurate with the Investor’s overall percentage interest in the
Partnership, separate from any federal, state, and local tax deductions, allowances,
credits, and other tax attributes to be allocated by the Partnership to the Investor. An
Investor’s Partnership interest is a bona fide equity investment only if that reasonably
anticipated value is contingent upon the Partnership’s net income, gain, and loss, and is
not substantially fixed in amount. Likewise, the Investor must not be substantially
protected from losses from the Partnership’s activities. The Investor must participate in
the profits from the Partnership’s activities in a manner that is not limited to a preferred
return that is in the nature of a payment for capital.
(c) Arrangements to reduce the value of the Investor’s Partnership interest
. The
value of the Investor’s Partnership interest may not be reduced through fees (including
developer, management, and incentive fees), lease terms, or other arrangements that
are unreasonable as compared to fees, lease terms, or other arrangements for a real
estate development project that does not qualify for § 47 rehabilitation credits, and may
not be reduced by disproportionate rights to distributions or by issuances of interests in
the Partnership (or rights to acquire interests in the Partnership) for less than fair market
value consideration. A sublease agreement of the Building from the Master Tenant

Partnership back to the Developer Partnership or to the Principal of either the Developer
Partnership or Master Tenant Partnership will be deemed unreasonable unless the
sublease is mandated by a third party unrelated to the Principal. The terms of a
sublease agreement of the Building by the Master Tenant Partnership to any person will
be deemed unreasonable unless the duration of the sublease is shorter than the
duration of the Head Lease. The Master Tenant Partnership may not terminate its lease
of the Building from the Developer Partnership during the period in which the Investor
remains as a partner in the Master Tenant Partnership.
.03 Investor’s Minimum Unconditional Contribution. The Investor must contribute
a minimum unconditional amount (the Investor Minimum Contribution) to the
Partnership before the date that the Building is placed in service. The Investor
Minimum Contribution equals 20 percent of the Investor’s total expected capital
contributions required under the agreements relating to the Partnership as of the date
the Building is placed in service. The Investor must maintain the Investor Minimum
Contribution throughout the duration of its ownership of its Partnership interest in the
Partnership (and the Investor Minimum Contribution must not be protected against loss
through any arrangement, directly or indirectly, by any person involved with the
rehabilitation except as permitted under section 4.05(1) of this revenue procedure).
Contributions of promissory notes or other obligations for which the Investor is the
maker are not included in determining whether the Investor satisfies the Investor
Minimum Contribution.
.04 Contingent Consideration. At least 75 percent of the Investor’s total expected

capital contributions must be fixed in amount before the date the Building is placed in
service. The Investor must reasonably expect to meet its funding obligations as they
arise.
.05 Guarantees and Loans.
(1) Permissible guarantees
.
(a) The following unfunded guarantees may be provided to the Investor--(i)
Guarantees for the performance of any acts necessary to claim the § 47 rehabilitation
credits;
(ii) Guarantees for the avoidance of any act (or omissions) that would cause the
Partnership to fail to qualify for the § 47 rehabilitation credits or that would result in a
recapture of the § 47 rehabilitation credits; and,
(iii) Guarantees that are not described as impermissible guarantees under
section 4.05(2) of this revenue procedure.
(b) Examples of unfunded guarantees permitted under this section include
completion guarantees, operating deficit guarantees, environmental indemnities, and
financial covenants.
(c) For purposes of this section 4.05(1), a guarantee is unfunded if no money or
property is set aside to fund all or any portion of the guarantee, and if neither the person
making the guarantee (the guarantor) nor any person under the control of the guarantor
agrees to maintain a minimum net worth in connection with the guarantee. Further,
reserves in an amount less than or equal to the Partnership’s reasonably projected
operating expenses for a twelve-month period will not constitute an amount set aside to

fund the guaranteed amount for purposes of this section.
(2) Impermissible guarantees.
(a) No person involved in any part of the rehabilitation transaction may directly or
indirectly guarantee or otherwise insure the Investor’s ability to claim the § 47
rehabilitation credits, the cash equivalent of the credits, or the repayment of any portion
of the Investor’s contribution due to inability to claim the § 47 rehabilitation credits in the
event the Service challenges all or a portion of the transactional structure of the
Partnership. Further, no person involved in any part of the rehabilitation transaction
may guarantee that the Investor will receive Partnership distributions or consideration in
exchange for its Partnership interest (except for a fair market value sale right described
in section 4.06(2)). This requirement does not prohibit the Investor from procuring
insurance from persons not involved with the rehabilitation or the Partnership.
(b) No person involved in any part of the rehabilitation transaction may pay the
Investor’s costs or indemnify the Investor for the Investor’s costs if the Service
challenges the Investor’s claim of the § 47 rehabilitation credits.
(c) No person involved in any part of the rehabilitation transaction may offer a
guarantee described in section 4.05(1) of this revenue procedure that is not an
unfunded guarantee described in section 4.05(1)(c).
(3) Loans
. A Developer Partnership, a Master Tenant Partnership, or the
Principal of either the Developer Partnership or the Master Tenant Partnership may not
lend any Investor the funds to acquire any part of the Investor's interest in the
Partnership or guarantee or otherwise insure any indebtedness incurred or created in

connection with the Investor’s acquisition of its Partnership interest.
.06 Purchase Rights and Sale Rights.
(1) Purchase rights
. Neither the Principal nor the Partnership may have a call
option or other contractual right or agreement to purchase or redeem the Investor’s
interest at a future date (other than a contractual right or agreement for a present sale).
(2) Sale rights
. The Investor may not have a contractual right or other agreement
to require any person involved in any part of the rehabilitation transaction to purchase or
liquidate the Investor’s interest in the Partnership at a future date at a price that is more
than its fair market value determined at the time of exercise of the contractual right to
sell.
(3) Determination of fair market value
. A determination of the fair market value of
the Investor’s interest in the Partnership may take into account only those contracts or
other arrangements creating rights or obligations that meet the requirements of section
4.02(2)(c) of this revenue procedure and that are on arm’s length terms.
(4) Payment of preferred returns, fees, and tax distributions
. Nothing in this
paragraph prohibits the payment of any accrued but unpaid fees, preferred returns, or
tax distributions owed to the Investor.
(5) Abandonment
. An Investor may not acquire its interest in the Partnership
with the intent of abandoning the interest after the Partnership completes the qualified
rehabilitation. If an Investor abandons its interest in the Partnership at any time, the
Investor will be presumed to have acquired its interest with the intent of later
abandoning it unless the facts and circumstances clearly establish that the Investor did

not acquire its interest with the intent of later abandoning it.
.07 Allocation of § 47 Rehabilitation Credits. Allocations under the Partnership
agreement must satisfy the requirements of § 704(b) and the regulations thereunder.
The § 47 rehabilitation credit must be allocated in accordance with § 1.704-1(b)(4)(ii).
Solely for purposes of determining whether a Partnership meets the requirements of this
section 4.07, the Partnership’s allocation to its partners of the income inclusion required
by § 50(d)(5) shall not be taken into account. .08 Related Parties. For purposes of this
revenue procedure, each of the terms Principal, Partnership, Investor, and person
include any related persons. For this purpose, persons are related if they bear a
relationship to each other that is specified in § 267(b) or § 707(b)(1).
SECTION 5. EXAMPLES
The following examples illustrate the application of the requirements of section 4
of the revenue procedure to a transaction in which the Investor invests in a Partnership
to obtain the § 47 rehabilitation credits. The examples assume that the tax-exempt use
property rules of § 168(h) do not apply. The examples also assume that the Partnership
may validly claim the § 47 rehabilitation credits with respect to the rehabilitation of
Building (defined below).
.01 Example 1. (i) Transaction Structure
. The Developer Partnership is a limited
liability company classified as a partnership for federal income tax purposes. The
Developer Partnership is the owner for federal tax purposes of a historic commercial
building (Building) that it plans to rehabilitate. The Developer Partnership is the
Partnership for purposes of satisfying the requirements of this revenue procedure.

The Principal and the Investor will own Partnership. The Principal is the
manager of the Partnership and authorized to act on behalf of the Partnership. The
Investor is an unrelated party that will contribute money to the Partnership in exchange
for an interest in the Partnership.
(ii) Investor’s Contribution to Partnership
. The Investor enters into an agreement
with the Partnership to acquire an interest in the Partnership in exchange for an
expected capital commitment of $100x, of which $75x is fixed. Prior to the date Building
is placed in service, Investor acquires its interest in the Partnership by making an up
front cash contribution of $20x. Investor reasonably expects to contribute the remaining
$80x of its expected capital commitment upon the achievement of mutually agreed upon
milestones (e.g., receiving National Park Service approvals, leasing the Building to
tenants).
(iii) Partnership Interests
. The Partnership is governed by a partnership
agreement that satisfies the requirements of § 704(b). From the date the Investor
becomes a partner until the date that is five years after the Building is placed in service
(Transition Date), the Investor will be allocated 99% of the Partnership’s profits and
losses, as determined for federal income tax purposes. Consistent with the
Partnership’s allocation of profit and loss, the Investor will also be allocated, and will
claim, 99% of the § 47 rehabilitation credits available to the Partnership. The Principal
will be allocated 1% of the profits and losses during this period. As of the Transition
Date and until the earlier of the date that the Investor is no longer a member of the
Partnership and the date that the Partnership terminates, the Investor will be allocated

5% of the Partnership’s profits and losses, and the Principal will be allocated 95% of the
Partnership’s profits and losses. The Investor has a right to receive a pro rata share of
all distributions commensurate with the Investor’s share of the Partnership profits. The
Investor’s partnership interest has a reasonably anticipated value commensurate with
the Investor’s overall percentage interest in the Partnership, separate from any federal,
state, and local tax deductions, allowances, credits, and other tax attributes to be
allocated from the Partnership to the Investor.
(iv) Partnership Operations
. The Partnership will operate the Building and lease
the individual units in the Building to retail businesses under terms that are consistent
with lease terms for a real estate development project that does not qualify for § 47
rehabilitation credits. All fees paid by the Partnership, including any fees paid to the
Principal, are reasonable and are consistent with fees commonly paid in a real estate
development that does not qualify for § 47 rehabilitation credits.
(v) Guarantees
. No party involved in any part of the rehabilitation has directly or
indirectly provided a guarantee to the Investor regarding the Investor’s ability to claim of
§ 47 rehabilitation credits, the cash equivalent of the credits, or the repayment of any
portion of the Investor’s contribution due to an inability to claim the credits in the event
the Service challenges all or a portion of the transactional structure of the Partnership.
Further, no party involved in any part of the rehabilitation has directly or indirectly
guaranteed the Investor that it will receive distributions from the Partnership or that the
Investor will receive consideration in exchange for its Partnership interest (other than
the Investor’s fair market value sale rights described in paragraph (vi) below). The

Partnership and the Principal have provided the Investor with unfunded guarantees
commonly provided to investors in commercial real estate development transactions
that do not qualify for the § 47 rehabilitation credit. In addition, the Partnership and the
Principal provided an unfunded guarantee to the Investor that the Partnership and the
Principal will undertake any acts necessary for the Partnership to claim the § 47
rehabilitation credit. Similarly, the Partnership and the Principal have provided an
unfunded guarantee to the Investor that the Partnership and the Principal will not
engage in any act that will negatively impact the Partnership’s ability to claim the § 47
rehabilitation credit or that would result in the recapture of the § 47 rehabilitation credit.
The Principal has also provided an unfunded guarantee requiring it to contribute
additional cash to the Partnership to the extent of any Partnership operating deficit.
Under the terms of the guarantee, if the Principal or the Partnership fail to meet their
obligations, the Investor will be repaid all or a part of its contribution and any costs that
Investor has incurred with respect to the transaction. The operating deficit guarantee
does not include amounts required to fund expenses for more than twelve months of
operation.
(vi) Purchase Rights and Sale Rights
. Neither the Partneship nor the Principal
has any contractual right to purchase the Investor’s interest in the Partnership at a
future date. For a period of six months beginning on the date that is six months after
the Transition Date, the Investor has the right to require the Principal to purchase the
Investor’s interest for the fair market value of the interest. The Investor did not acquire
its interest in the Partnership with the intent of abandoning its interest.

(vii) Conclusion. Under the facts of this example, because each requirement set
forth in section 4 of this revenue procedure is met by the Partnership and its partners,
the Service will not challenge the Partnership’s allocation of 99% of the § 47
rehabilitation credits to the Investor.
.02 Example 2. (i) Transaction Structure
. The facts are the same as in Example
1. In addition, the Master Tenant Partnership, a limited liability company classified as a
partnership for federal tax purposes, will lease the Building from the Developer
Partnership (Head Lease). The terms of the Head Lease are comparable to the lease
terms of a real estate development project that does not qualify for § 47 rehabilitation
credits. The Developer Partnership will make an election pursuant to § 1.48-4(a)(1) to
treat the Master Tenant Partnership as having acquired the Building solely for purposes
of the § 47 rehabilitation credits, allowing the Master Tenant Partnership to properly
claim the § 47 rehabilitation credits. Therefore, the Master Tenant Partnership is the
Partnership for purposes of satisfying the requirements of this revenue procedure. The
Partnership will also own an interest in the Developer Partnership. The Investor does
not own an interest in the Developer Partnership other than its indirect interest held
through the Partnership. Further, the Partnership will sublease the Building to retail
businesses as described in Example 1. The duration of these subleases will be shorter
than the Head Lease.
(ii) Conclusion
. Under the facts of this example, because each requirement set
forth in section 4 of this revenue procedure is met by the Partnership and its partners,
the Service will not challenge the Partnership’s allocation of 99% of the § 47

17
rehabilitation credits to the Investor.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for allocations of § 47 rehabilitation credits
made by a Partnership to its partners on or after December 30, 2013. If a Building was
placed in service before December 30, 2013 and the Partnership and its partners
satisfied all the requirements of the Safe Harbor provided in section 4 of this revenue
procedure at the time the Building was placed in service and thereafter, the Service will
not challenge the Partnership’s allocations of § 47 rehabilitation tax credits to Investors
that are in accordance with § 704(b).
SECTION 7. DRAFTING INFORMATION
The principal authors of this revenue procedure are Allison R. Carmody and
Joseph R. Worst of the Office of Associate Chief Counsel (Passthroughs & Special
Industries). For further information regarding this revenue procedure contact Allison R.
Carmody or Joseph R. Worst at (202) 317-5279 (not a toll free call).

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