Historic Preservation Tax Credits Are Endangered by Court Ruling

Here is a succinct article describing a pending court challenge to tax credit programs. The appeal is the result of an IRS tax challenge to the syndication of tax credits, and the IRS' recent victory on the point in the Fourth Circuit in front of a three judge panel.  The analysis is complicated and technical, dry reading that only a lawyer could love.  Short version:  The IRS argued successfully that the distribution of tax credits to the partner-investors in a limited partnership equals a disguised sale and should be taxable as ordinary income.  As the article points out, the historic tax credit program has been an economic boon to Richmond and other older cities throughout the Commonwealth, like Staunton, Roanoke and Lynchburg. 

For the average bear, here are the relevant facts.  Taxing the distribution of the credits as a sale will reduce the value of the credits to the developer.  This could make the rehabilitation of historic buildings non-economic.  Oftentimes the tax credits are the difference between a project being sufficiently profitable and not.  This means fewer historic renovations and adaptive reuse projects - the conversion of old apartment buildings and even hospitals to condominiums (cf. Windsor Court Condominiums, One Monument Place, Locke Lane, Ginter Place), the conversion of industrial and commercial spaces to apartments (cf. Tobacco Row, Carolina Consolidated, Lee Street School), the conversion of industrial spaces into commercial buildings (Glave & Holmes' office, the Edgeworth Building) - will be done.

That means:

• Less additional real estate tax revenue to the City, as buildings remain underutilized;
• Fewer construction jobs;
• Less spending on products related to construction;
• The need for more ground-up building; using more green space for building;
• Having to move further out of the urban core to find that green space, with all the ancillary environmental impacts. 

I don't think any of these are good things.  Hopefully, the full panel will revisit the ruling and consider the long-term policy impacts of these programs.