The Chief Counsel's Office issued a memorandum (CCA 201641022) in which it concluded that the IRS can require a pass-through entity to provide certain information on Form 3468 in order to claim a rehabilitation tax credit.

The CCA also provided that the Service may require a lessor that elects to treat its lessee as having acquired rehabilitated property to provide the lessee with the National Park Service project number and date of final certification of completed work received from the Interior Department.

Background

The rehabilitation credit is part of the investment credit, which is part of the general business credit. The rehabilitation credit provides an incentive for the rehabilitation of certain property. The historic rehabilitation credit is awarded to taxpayers who incur an expenditure to rehabilitate a structure deemed to be historically significant (A "qualified rehabilitation expenditure" or QRE).

To claim a rehabilitation tax credit, a building owner must show his building was substantially rehabilitated (Section 47(c)(1)(C)), placed in service as a building before commencement of the rehabilitation work, and considered a certified historic structure. A certified historic structure (Section 47(c)(3)(A)) is any building that is either listed in the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as being of historic significance to the district. The owner may obtain certification by filing a three-part application with the National Parks Service. Final certification of the building and the rehabilitation work is not necessary when the credit is taken, but the building owner or taxpayer must ultimately obtain certification.

The Revenue Reconciliation Act of 1990 moved the tax credit from Code Section 48(g) to Section 47. However, the regulations are still under Reg. Section 1.48

Reg. Section 1.48-12(c) defines "qualified expenditures" as including costs charged to a capital account and made in connection with the rehabilitation of a qualified building. The cost of the land on which a building sits is not included in qualified expenditures. Adjusted basis, for purposes of the substantial rehabilitation test, is determined on the first day of the 24-month period the taxpayer selects and includes the cost of the property, excluding land, plus or minus adjustments to basis.

For a building owned by a partnership or S corporation, the substantial rehabilitation test is determined at the entity level rather than at the partner or shareholder level.

Expenditures may be included only for costs incurred through the end of the tax year in which the 24-month period ends, so Reg. Section 1.48 provides for multiple test periods to qualify costs incurred in later years. Multiple overlapping test periods would typically be used in projects when buildings contain multiple sections with different placed-in-service years.

Lessees, in addition to building owners, can claim the rehabilitation tax credit. The substantial rehabilitation test for lessees requires that the aggregate of qualified rehabilitation expenditures incurred by the lessor and any lessees must exceed the aggregate adjusted basis of all parties with an interest in the building. Therefore, the property owner and several lessees could qualify for the credit as long as the aggregate rehabilitation expenditures of all parties are considered when determining if the project meets the substantial rehabilitation test. Each party could claim a portion of the credit based on the amount that party expended during the rehabilitation.

The lessee is responsible for establishing the lessor's basis when trying to meet the substantial rehabilitation test. If the lessor does not provide the lessee with this information, the lessee must show that the qualified rehabilitation expenditures the lessee incurred during the 24-month period exceeded the fair market value of the building.

Section 48(d) allowed a pass-through election in which a lessor and lessee to agree to treat the lessee as having incurred all or part of the rehabilitation expenditures incurred by the lessor. (Section 48(d) was repealed in 1990 but its content was reenacted under Section 50(d)(5).) There are detailed requirements for a lessee to qualify for the pass-through rehabilitation tax credit, in particular, the property must be new Section 38 property in the lessor's hands; the property must be such that it would constitute new Section 38 property to the lessee if the lessee had purchased the property; a statement of election to treat the lessee as purchaser must be made (Reg. Section 1.48-4); and the lessor cannot be a mutual savings bank, cooperative bank, or any entity described in Reg. Section 1.48-4(a)(1)(v).

Discussion

The CCA did not set out a specific fact pattern, the Chief Counsel's office was asked to provide advice to the Passthroughs and Special Industries group on two issues concerning reporting requirements for certain entities involved in historic tax credit transactions:

Issue 1 — Can the IRS require a pass-through entity to file Form 3468, Investment Credit, if the entity is not an owner of a qualified rehabilitated building and certified historic structure, but is merely a conduit passing through the QREs of another entity?

Reg. Section 1.48-12(d)(7)(iv) requires certain entities involved with credits for qualified rehabilitation buildings and certified historic structures to file a Form 3468 with the tax return for the year the credit is claimed.

Form 3468's instructions provide that if a pass-through entity is the owner of a certified historic structure, the entity must provide certain information on the form and attach it to its tax return even if the credit is not being claimed by the entity. The entity must provide either the assigned NPS project number or the pass-through entity's employer identification number (EIN). The entity must also provide the date that the NPS approved the Request for Certification of Completed Work.

The current Instructions for Form 3468 require a pass-through entity to file the form for purposes of the rehabilitation credit only if the entity is the owner of the qualified rehabilitated building and certified historic structure. The instructions do not require a pass-through entity that is not the owner to file the form.

The Chief Counsel's office noted that, although the Form 3468 instructions do not currently require a non-owner pass-through entity to file the form, the regulations do not prevent the IRS from also requiring the filing of Form 3468 by a non-owner conduit that is passing through the QREs.

The IRS needs reporting from every entity in the ownership chain in order to trace the credit from the claimant to the pass-through entity that incurs the QREs. The IRS is authorized to prescribe in forms and instructions the information required to be included with any return required to be filed with the IRS.

Therefore, the Chief Counsel's Office advised that the IRS can require additional information be transmitted on Form 3468 concerning rehabilitation credits in situations where a non-owner pass-through entity acts as a conduit for the rehabilitation credit, but does not claim it for itself.

Issue 2 - If a lessor of new Section 1.48-12(d)(7)(iv) 38 property makes an election under 50(d)(5) of the to treat the lessee as having acquired the property for which the QRE is being claimed, may the IRS require the lessor to provide the lessee with the National Park Service (NPS) project number assigned by, and the date of the final certification of completed work received from, the Secretary of the Interior.

For purposes of the rehabilitation credit, when a lessor of new Section 1.48-12(d)(7)(iv) 38 property elects to treat the lessee as having acquired the property, the lessor is not subject to the Section 1.48-12(d)(7)(iv) reporting requirements, which require the filing of a Form 3468. The reporting requirements for the lessor of new Section 38 property are set forth in the regulations under Sections 1.48-4(f) — 4(j). The IRS currently only requires the lessor to provide the lessee with a statement of election to treat the lessee as the purchaser of the property. A statement of election must include a description of the property for which the election is being made.

The CCA concluded that where a lessor has elected under  Section 50(d)(5) to treat a lessee as having acquired qualified rehabilitation property for an amount equal to its fair market value, and thus the lessee is deemed to have incurred all or a portion of the QREs incurred by the lessor, the lessee may be eligible to claim the rehabilitation credit. The lessee is then subject to the Reg. Section1.48-12(d)(7)(iv) reporting requirements.

The IRS may require the lessor to provide the NPS project number and final certification date as part of the property description provided to the lessee, as required under Reg. Section 1.48-12(d)(7)(iv), so that the lessee could fulfill the reporting requirements with regard to any rehabilitation credit.

Implications

Certain entities that were not previously subject to the reporting requirements set forth in the regulations under Code Section 48, may now be required file Form 3468 and provide certain information to the IRS.

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