I recently returned from Novogradac’s 2015 Historic Tax Credit Conference held last week in San Antonio, Texas. This national conference draws a wide range of professionals, investors, and developers who share a love of historic properties and work in the historic tax credit space. While a wide range of topics were discussed, the “hot topic” on the minds of many attendees was the IRC Section 50(d) income acceleration issue. In a nutshell, there is uncertainty in the industry as to the tax accounting treatment for IRC Section 50(d) income that arises from use of the popular Master Tenant pass-through structure in historic tax credit deals. Unfortunately, no one at the conference brought their crystal ball – the issue remains in the hands of the Internal Revenue Service which is anticipated to provide clarification on this issue in the coming months. In the meantime, the panelists provided the following input on how they are seeing current deals addressing the 50(d) issue, as well as some planning thoughts:
- One obvious solution is to employ a direct investment structure. A direct structure avoids the 50(d) issues. Easier said than done, however, as a direct structure creates its own issues for the investor and developer. That’s a topic for another blog article.
- Some investors may decrease their pricing on Master Lease structures in order to compensate for the possibility of being liable on 50(d) income.
- For deals that have reached the end of the compliance period, we may see investors waiting to exercise their put options until the IRS issues guidance on the issue. This will enable the investors to understand the tax implications of their exit. One practitioner noted it will be important for investors and developers to review their put option agreements to understand when the option expires, and, if appropriate, to negotiate an extension of the put option.
- Developers, be prepared – as you may be asked to indemnify investors against the 50(d) income realization risk.
- For deals that have already closed, pull out your closing documents and take a look at how the 50(d) issue was handled in your transaction. Whether you are a developer or investor, it is important to understand how this issue could affect your position. This will be especially important after the IRS issues guidance on the topic. Your review should consider whether there is a way to fairly allocate the risk, depending, of course, on your interest in the property.
While the 50(d) issue has not cooled the historic tax credit market too dramatically (as it did, for example, when the Boardwalk Hall case and associated Revenue Procedure 2014-12 were pending), the ideal resolution to the issue by the IRS would be one that preserves the incentives to developers to restore our nation’s historic properties, reduces speculation, and restores efficiency in the HTC market for both investors and developers.