Historic Boardwalk Hall, LLC v. Commissioner of Internal Revenue
2012 U.S. App. LEXIS 18107
3rd Cir.2012Background
- This appeal concerns the availability of federal historic rehabilitation tax credits (HRTCs) connected to the East Hall renovation in Atlantic City.
- NJSEA formed HBH to syndicate HRTCs to a corporate investor, PB, through a series of related agreements.
- HBH’s formation treated PB as a 99.9% member with a 3% preferred return and a substantial potential tax credit allocation.
- IRS challenged HBH’s structure, arguing PB was not a bona fide partner and that HRTCs should be reallocated to NJSEA.
- Tax Court rejected the IRS’s position, but the Third Circuit reverses, holding PB was not a bona fide partner and PB did not share in the enterprise’s true profits and losses.
- Key documentary evidence included the AREA, the Confidential Memorandum, and various guaranties and options aimed at securing the HRTCs for PB.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether PB was a bona fide partner in HBH under Culbertson. | Commissioner asserts PB had no meaningful stake. | HBH contends PB was a genuine equity participant. | PB was not a bona fide partner. |
| Whether the Castle Harbour and Virginia Historic guideposts support recharacterizing PB’s interest. | Commissioner relies on Castle Harbour and Virginia Historic to show lack of true equity. | HBH argues those cases are inapplicable or distinguishable. | Guideposts support reallocation of benefits away from PB. |
| Whether PB faced meaningful downside risk or meaningful upside potential. | Commissioner argues PB bore no genuine risk and therefore was not an equity partner. | HBH contends terms still reflect business purpose and risk exchange. | PB lacked meaningful downside risk and meaningful upside potential. |
| Whether the transaction constitutes a disguised sale or a substance-over-form arrangement in substance, if not in form. | IRS treats arrangement as a disguised sale of credits. | HBH maintains substance reflects a partnership with business purpose. | Substance-over-form governs; PB not a bona fide partner. |
Key Cases Cited
- Commissioner v. Culbertson, 337 U.S. 733 (Supreme Court 1949) (tests the existence of a partnership based on intent to share profits and losses)
- Castle Harbour, L.L.C. v. United States, 459 F.3d 220 (2d Cir. 2006) (assesses whether purported equity interest is truly equity given downside risk and upside limits)
- Virginia Historic Tax Credit Fund 2001 LP v. Commissioner, 639 F.3d 129 (4th Cir. 2011) (disguised-sale framework; investors’ risk profile and return structure)