IRS Releases Internal Memorandum on Historic Rehabilitation Credits That Impacts Energy Credits

The IRS has recently released aninternal memorandum dated August 30, 2012 setting forth the IRS's position with respect to partnership structures that allocate historic rehabilitation credits. These credits were enacted by Congress to encourage investment in rehabilitation of historic buildings. Similar credits are available for investment in wind, solar and other renewable energy projects. In many cases the developer of these projects cannot efficiently use such credits because of a lack of tax capacity and often partners with profitable companies (sometimes referred to as "tax equity") provide an equity investment in the project in return for a disproportionate allocation of tax credits from the project. The Third Circuit last year in Historic Boardwalk Hall LLC v. Commissioner disallowed historic rehabilitation credits allocated to Pitney Bowes Corp. on the basis that Pitney Bowes lacked any meaningful upside potential or downside risk in the project and therefore was not a bona fide partner in the tax partnership. Some nine pages of the IRS Memo setting forth counter arguments and litigation risks of the IRS's position have been redacted from the publicly released memo.