January 12, 2012
[Note: Miller and Chevalier represents amicus National Trust for Historic Preservation in this case]
We present here a guest post by our colleague David Blair who has considerable experience in this area and authored the amicus brief in this case on behalf of the National Trust for Historic Preservation.
The government has appealed to the Third Circuit its loss before the Tax Court in Historic Boardwalk Hall, LLC v. Comm’r, which involves a public/private partnership that earned historic rehabilitation tax credits under Code section 47. The partnership rehabilitated East Hall, which is located on the boardwalk in Atlantic City. East Hall was completed in 1929, hosted the Miss America Pageant for many years, and is listed on the National Register of Historic Places. The IRS sought to prevent the private partner, Pitney Bowes, from claiming the historic rehabilitation tax credits, but the Tax Court upheld the taxpayer’s position after a four-day trial.
In its opening brief, the government advances the same three arguments in support of its disallowance that it made in the Tax Court. First, it asserts that Pitney Bowes was not in substance a partner because it did not have a meaningful stake in the partnership under the Culbertson-Tower line of cases. Second, it argues that the partnership was a sham for tax purposes under sham partnership and economic substance cases. Third, it argues that the partnership did not own the historic building for tax purposes and thus was not eligible for the section 47 credits for rehabilitating the building. In making the first two arguments, the government relies heavily on its recent victory in Virginia Historic Tax Credit Fund 2001 LP v. Comm’r, where the Fourth Circuit overturned the Tax Court and found a disguised sale of state tax credits. (See our previous reports on that case here.) Similarly, the government’s brief places heavy reliance on its first-round victory before the Second Circuit in TIFD III-E, Inc. v. Comm’r (Castle Harbor), which is now back up on appeal. (See our previous reports on that case here.) In support of its sham partnership theory, the government cites provisions in the partnership agreement that protect investors from unnecessary risks, including environmental risks. On the third argument, the government asserts that the partnership never owned the building for tax purposes because the benefits and burdens of ownership never transferred.
Having won at trial, the taxpayer’s brief emphasizes the Tax Court’s factual findings in its favor. It also emphasizes the historic character of the building and the Congressional policy of using the tax laws to encourage private investment to preserve this type of historic structure. The taxpayer argues that the partnership was bona fide because the partners joined together with a business purpose of rehabilitating East Hall and earning profits going forward. The taxpayer also argues that the partnership has economic substance. In this regard, the taxpayer argues that the Ninth Circuit’s decision in Sacks v. Comm’r, 69 F.3d 982 (9th Cir. 1995), requires a modification of the normal economic substance analysis where Congress has offered tax credits to change taxpayers’ incentives. The taxpayer also argues that the partnership owned East Hall for tax purposes and therefore was eligible for the section 47 credits.
The National Trust for Historic Preservation filed an amicus brief in support of the taxpayer. That brief sets out the longstanding Congressional policy of offering the section 47 credit to encourage taxpayers to invest in historic rehabilitation projects that would not otherwise make economic sense. It further explains that historic rehabilitation projects typically involve partnerships between developers and investors that are motivated in part by the availability of the credit. It also is typical for these partnership agreements to protect the investors from unnecessarily taking on business risks. The amicus brief argues that, in applying the economic substance doctrine, courts should not override the narrowly focused Congressional policy of encouraging rehabilitation projects through the section 47 credit. Thus, courts should not simply review the non-tax business purpose and pre-tax profitability of investments in historic rehabilitation projects, but should acknowledge that the taxpayer can properly take into account the credits that Congress provides for historic rehabilitation projects. To do otherwise, as the Ninth Circuit observed in Sacks, “takes away with the executive hand what [the government] gives with the legislative.” The amicus argues that, at any rate, the transaction met the economic substance doctrine under Third Circuit precedent and that the partnership and Pitney Bowes interests were bona fide. It also points out that the Virginia Historic case is inapplicable because it involved a disguised sale, which the government has not alleged in this case. Similarly, the Castle Harbor case is distinguished on its facts due to the differences in the partnership agreements in the two cases.
The Real Estate Roundtable also filed an amicus brief, which highlights to the court that the recent codification of the economic substance doctrine in Code section 7701(o) places significant pressure on the distinction between, on the one hand, the economic substance doctrine, and on the other hand, substance-over-form and other “soft doctrine” attacks on transactions. This is due to the strict liability penalty that can apply to transactions that violate the economic substance doctrine. As the IRS has recognized in recent guidance under section 7701(o), it is necessary for the IRS and courts to carefully distinguish between cases where the economic substance doctrine is “relevant” and those where other judicial doctrines apply. The Real Estate Round Table then argues that the transaction at issue had economic substance.
The government’s reply brief is due January 31.