Following the Third Circuit Court of Appeals’ decision that a historic tax credit investor was not a bona fide partner in Historic Boardwalk Hall, LLC, which owned Atlantic City’s Historic Boardwalk Hall, investments in historic projects slowed dramatically.

In the Historic Boardwalk Hall case, the IRS successfully argued that the investor was too insulated against "upside" and too protected against "downside," and accordingly, not a partner for federal income tax purposes and ineligible to be allocated millions of dollars of tax credits.

In response to the resulting equity market uncertainty, Revenue Procedure 2014-12 was issued in late December (and revised in early January) providing a "safe harbor," to give taxpayers confidence that their investment won't be challenged. The safe harbor is not a statement of law; a taxpayer can be more aggressive than is called for and still not be audited, or be audited and still reach a favorable settlement with the IRS.

The revenue procedure only applies to historic tax credit transactions. Nonetheless, investors or developers in any tax credit transaction should be familiar with its rules. Advisors are split on whether participants in non-historic transactions should try to comply. Housing and New Markets transactions appear to be quite distinguishable in how their credits work, while the investment tax credit for renewables looks more like the historic credit.

A quick summary of the safe harbor:

• LP must have a minimum 20 percent of its investment made before the project is placed in service. Many, if not all, affordable housing transactions already do this and more.

• At least 75 percent of the investor's total expected capital contributions must be fixed in amount before the building is placed in service. The IRS has indicated that there can still be adjusters to these fixed amounts.

• Minimum 1 percent interest for the general partner. A .01 percent GP interest is currently common in housing.

• The investor's interest can be flipped to as little as 5 percent of what it had been (e.g., 99 percent flipping to 4.95 percent). Many housing deals feature flips to 10 or 20 percent for "residuals," and flips have started to appear in the post-credit period of housing deals.

• The investor’s interest must have a reasonably anticipated value commensurate with the investor's overall percentage interest, aside from tax benefits. For a 99 percent partner, getting 99 percent of cash flow would clearly work, but so would many other structures, based on preferred and deferred returns.

• The value of the investor's interest cannot be reduced by unreasonable fees or "arrangements." The historic credit is allocated in accordance with profits, while the housing credit is allocated in accordance with depreciation of the facility. In housing, where the credit is allocated in accordance with depreciation, there is a tradition of "incentive fees" payable to general partners.

• The revenue procedure provides that no one "involved" in the transaction can guarantee credits, cash in lieu of credits, against "structure risk," or pay the investor's costs associated with an IRS audit. Combining this rule with the preceding two will give an investor great incentive to assure that it has a "commensurate" interest, and that the fees charged are reasonable.

• The general partner may provide many other guarantees to the investor, provided they are not backed by cash or property. The investor cannot require the manager to maintain a minimum net worth, but there can be an operating reserve to meet one year's expenses. It's not clear how similar covenants with a lender might apply.

• An investor can have a "put" to force a purchase of its interest for not more than fair market value. The revenue procedure also prohibits an investor abandoning its interest. This prevents an investor claiming an ordinary loss when it exits and not whether the put price is so low as to resemble abandonment.

Forrest David Milder is a partner with Nixon Peabody LLP and a member of the firm’s tax credit finance and syndication practice group.