Federal Tax Credit Supported Rehabilitation of Boardwalk Hall Deemed Illegitimate in Court
Rehabilitation projects utilizing the Federal Historic Tax Credit may face a harder time attracting private investors , thanks to a Third Circuit Court of Appeals ruling handed down at the end of August.
In November 2011, Preservation NJ joined the National Trust for Historic Preservation, the National Alliance of Preservation Commissions, the National Conference of State Historic Preservation Officers, AIA-New Jersey, and Preservation Pennsylvania, in filing an amicus brief in the Third Circuit Court, which was hearing the case of Boardwalk Hall in Atlantic City, on appeal from the U.S. Tax Court.
Boardwalk Hall, one of few historic resources left along the Atlantic City boardwalk and known nationwide as the birthplace of the Miss America pageant in 1921, was restored beginning in 2000 by the New Jersey Sports and Exposition Authority (NJSEA). In a commonly-used arrangement, a for-profit investor, in this case a subsidiary of Pitney-Bowes, invested $18 million in the project, and thereby became a percentage owner of the limited liability company that owned Boardwalk Hall, with NJSEA retaining the additional ownership. This fairly typical arrangement enabled the for-profit investor to take tax credits on the restoration of Boardwalk Hall- credits that are not applicable to the NJSEA, as a public entity.
In this particular case, substantial measures were taken to both minimize the investor’s risk and ensure a return on their investment. The IRS later challenged these measures in court, claiming the the LLC formed by NJSEA and the investor was a sham, and while the U.S. Tax Court originally ruled that the structure was legitimate and acceptable, the IRS appealed, landing the case in the Third Circuit Court in 2011. In August, the Third Circuit Court overturned the U.S. Tax Court’ ruling.
What appears to have most concerned the Third Circuit Court is the degree to which the deal was structured to shift operating costs away from the investor/NJSEA partnership, while also ensuring the investor a profit, even if the project were to run an operating deficit. Essentially, the Third Circuit Court found simply that the investor did incur what it considers to be substantial enough risk in order to justify the deal. You can read the full decision here>>
PNJ is working with our partners at Preservation Action and the National Trust to gain further clarity on the overall implications of this case and ruling on the Federal Historic Preservation Tax Credit. While many elements of this deal were what’s considered commonplace in the structuring of tax credit projects, there appear to have been some extraordinary arrangements that may mean this ruling has less of an impact on more typical tax credit projects than once feared.
Regardless, it’s clear that the IRS, despite never having provided guidance on the subject, is now scrutinizing Federal Historic Preservation Tax Credit projects to an unprecedented degree. This could of course result in investor wariness to become involved in such projects- and historic buildings would end up paying the price.
Preservation New Jersey will continue to keep you posted on this case and additional developments regarding the Federal Historic Tax Credit. For the Boardwalk Hall case, a petition for rehearing would be due by October 11.