The Download: Cash for credits

The US Tax Court is making it easier to turn tax credits into cash.

Travis Blais, a Mintz Levin tax attorney, issued an alert about a recent decision that he says gives tax credit investors a big boost. The case revolved around a $100 million renovation of Boardwalk Hall in Atlantic City, a certified historic structure that over the years hosted the Beatles, the 1964 Democratic National Convention, and the Miss America Pageant.

The renovation qualified for a 20 percent federal historic rehabilitation tax credit, but the renovator, the tax-exempt New Jersey Sports and Exposition Authority, had no use for tax credits. So the authority structured a complicated deal to turn the tax credits into cash by having Pitney Bowes acquire $20 million of tax credits by investing a little over $18 million in the project. The deal largely insulated Pitney Bowes from any losses associated with running Boardwalk Hall, an arrangement rejected by the Internal Revenue Service.

The IRS held that a company seeking to take advantage of tax credits had to have a legitimate economic stake – such as the prospect of profits and losses — in the project generating the credits. But the Tax Court, in its ruling, set the bar lower. It held that Pitney Bowes did have an economic stake in the New Jersey project. It also ruled that rejecting the deal with Pitney Bowes would undermine the intent of Congress.

 “The court found that Congress enacted the rehabilitation tax credit to spur private investment in what would otherwise be an unprofitable activity,” Blais wrote in his alert “If the government attacks investors who respond to that incentive, ‘it takes away with the executive hand what it gives with the legislative.’”

Blais, in an interview, said the decision opens the door to much broader use of tax credits to help finance all sorts of projects. He noted the decision dealt with federal historic rehabilitation tax credits but could just as easily apply to a host of federal energy tax breaks. He said the court’s reasoning could also influence how Massachusetts tax officials would view similar use of state historic rehabilitation and energy tax credits. Under certain circumstances, he said, the ruling could be helpful to Cape Wind in financing its offshore wind farm.

“This should give parties greater flexibility in negotiating deals that give each side what they really want without fear of an ‘economic substance’ attack from the IRS,” Blais wrote. “Tax credit investors should now hold their heads high knowing they are doing the work of angels…or at least Congress.” 

                                                                                                                                                                                            — BRUCE MOHL

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