Search
  Share Print Page
Search


Filter results:
Dates: to

Apply Filters

People

Services

 

Alerts/Articles

The Historic Boardwalk Hall decision
September 4, 2012
Tax Credit Alert
Author(s): Forrest Milder
Download PDF

On August 27, 2012, the Third Circuit Court of Appeals overturned the Tax Court’s decision in Historic Boardwalk Hall (HBH). This is a historic rehabilitation tax credit case, but it has implications for all transactions in which a developer and an investor share business and tax benefits.

To refresh your memory, HBH involves the rehabilitation of the convention center where the Miss America pageant has been held for many years. The convention authority in NJ had started a $90M rehabilitation of the facility. When it had spent a little more than $50M, an advisor told it that if the facility was privately owned, it could claim the 20% historic tax credit, and they could raise another $15–$20M, which might then fund a large development fee payable to the convention authority.  Pitney Bowes (PB) invested, and the partnership placed the facility in service and claimed the credit, allocating 99.9% of it to PB. The parties also arranged for a 3% priority cash return, as well as guarantees of many benefits and cash flow to be provided to PB.
 
On audit, the IRS disallowed the allocation of the tax credit to PB, primarily contending that the lack of any upside or downside for the investor meant it was not a partner for tax purposes. The dispute went to Tax Court, and last year, that court held for the taxpayer in a very favorable decision. 
 
The Third Circuit Court of Appeals has now reversed the Tax Court’s decision, finding that PB was not a partner, so that it could not be allocated the tax credits. 
 
Whether PB was a partner turned on whether it had any meaningful stake in the success or failure in the rehabilitation of the facility. While the court considered all the facts surrounding the investment, it appears that there were several reasons why the court found against the taxpayer—(i) the deal was already going forward and adequately funded when the convention authority was persuaded to add the HTC and the corresponding fees; (ii) the parties referred to a “sale” of credits; (iii) the return to PB was guaranteed by both the well-funded convention authority and a guaranteed investment contract; indeed, the advisor compared the return to interest payments on a debt instrument; (iv) PB’s investments were timed to come in only when there was no risk that the credit wouldn’t be obtained; and (v) on account of debts and fees, PB had virtually no chance of getting any “upside” beyond its preferred cash distribution.
 
The decision is based on the particular facts of the deal and does not provide any “bright line” factors to conclude that an investor is a partner. However, the decision does present four basic questions when analyzing the degree of risk/reward an investor needs in order to be considered a partner:

  • How much, and how early, should the investor make its initial investment in the venture?
  • What risk-limiting features can be provided to the investor to limit its downside?
  • What conditions can the investor impose on further capital contributions?
  • What kind of upside should be available to the investor?

We are carefully reviewing the opinion to determine whether any changes to deal structures are appropriate on account of the decision.


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

Pitney Bowes,HTC,Historic Boardwalk Hall,Historic Tax Credit,Third Circuit Court Of Appeals,Tax Credits