IRS may require added reporting to trace rehabilitation credits

Plain-English summary

Chief Counsel considered reporting requirements for section 47 rehabilitation credits passed through multiple entities or transferred from lessors to lessees. It advised that the IRS may require a non-owner passthrough entity serving as a conduit to file Form 3468 and identify the entity from which it received qualified rehabilitation expenditures. Requiring every entity in the ownership chain to report allows the IRS to trace the credit from the claimant back to the entity that incurred the expenditures. Chief Counsel also advised that a lessor making a section 50(d)(5) election may be required to give the lessee the National Park Service project number and final certification date. The lessee needs that information to complete Form 3468 when treated as having acquired the rehabilitated property.

Ruling snapshot

• Question: May the IRS require Form 3468 reporting by a non-owner conduit entity and require an electing lessor to supply historic-certification details to its lessee?
• Outcome: Advice given: yes to both reporting requirements.
• Key authorities: IRC §§ 38, 47, 48, 50(d)(5), and 6011; Treas. Reg. §§ 1.48-4, 1.48-12(d)(7)(iv), and 301.6011-1(b).

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 201641022
Release Date: 10/7/2016
CC:PSI:B5:JWRider Third Party Communication: None
POSTN-117094-16 Date of Communication: Not Applicable

UILC: 47.00-00, 50.00-00

date: August 23, 2016

to: Randall L. Eager, Assistant Associate Area Counsel
(SB/SE Area Counsel, Group 1, CC:SB:9:KCY:1)

Kimberly Mattonen, Special Counsel
(SB/SE Division Counsel, CC:SB)

from: Jeanne F. Ross, Senior Level Counsel, Office of the Associate Chief Counsel
(Passthroughs & Special Industries, CC:PSI)

subject: Form 3468 and Section 47 Rehabilitation Credits

This Chief Counsel Advice responds to your request for assistance. This advice may
not be used or cited as precedent.

ISSUES

1. For purposes of the rehabilitation credit, if a passthrough entity is not an owner of a
   qualified rehabilitated building and certified historic structure, but is merely a conduit
   passing through the qualified rehabilitated expenditures (QREs) of another entity, may
   the IRS require the passthrough entity to file Form 3468, Investment Credit.

2. For purposes of the rehabilitation credit, if a lessor of new § 38 property makes an
   election under § 50(d)(5) of the Internal Revenue Code to treat the lessee as having
   acquired the property, 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.

CONCLUSIONS

1. Yes. For purposes of the rehabilitation credit, if a passthrough entity is not an owner
   of a qualified rehabilitated building and certified historic structure, but is merely a

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conduit passing through the QREs of another entity, the IRS may require the
passthrough entity to file Form 3468.

2. Yes. For purposes of the rehabilitation credit, if a lessor of a new § 38 property
   makes an election under § 50(d)(5) of the Internal Revenue Code to treat the lessee of
   as having acquired the property, the IRS may require the lessor to provide the lessee
   with the NPS project number assigned by, and the date of the final certification of
   completed work received from, the Secretary of the Interior.

FACTS

In general, the purpose of Form 3468 is to claim the investment credit, which includes
the rehabilitation credit.

The current Instructions for Form 3468 require a passthrough 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
passthrough entity that is not the owner to file the form.

The form’s instructions state:

Generally, (a) an estate or trust whose entire qualified rehabilitation
expenditures or bases in energy property are allocated to beneficiaries, (b)
an S corporation, or (c) a partnership (other than an electing large
partnership) does not have to complete and attach Form 3468 to its tax
return. However, if the estate or trust, S corporation, or partnership is the
owner of a certified historic structure, the entity must complete lines 11k
and 11l of the form and attach it to its tax return even if the credit is not
being claimed by the entity.

Line 11k of Form 3468 requests either the assigned NPS project number or the
passthrough entity’s employer identification number (EIN). Line 11l of Form 3468
requests the date that the NPS approved the Request for Certification of Completed
Work.

For purposes of the rehabilitation credit, when a lessor of new § 38 property makes an
election under § 50(d)(5) to treat the lessee as having acquired the property, the IRS
does not currently require the lessor to provide the lessee with the NPS project number
assigned by, and the date of the final certification of completed work received from, the
Secretary of the Interior. The IRS currently 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.

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LAW AND ANALYSIS

Issue 1: Section 1.48-12(d)(7)(iv)(A) of the Income Tax Regulations requires a taxpayer
claiming the credit for rehabilitation of a certified historic structure for a taxable year
beginning after December 31, 2001, to provide with the return for the taxable year in
which the credit is claimed, the NPS project number assigned by, and the date of the
final certification of completed work received from, the Secretary of the Interior.

Section 1.48-12(d)(7)(iv)(B) requires a taxpayer to provide the information required
under § 1.48-12(d)(7)(iv)(A) on Form 3468 filed with the taxpayer’s return. In addition,
the taxpayer must retain a copy of the final certification of completed work for as long as
its contents may become material in the administration of any internal revenue law.

Section 1.48-12(d)(7)(iv)(C) applies the requirements of § 1.48-12(d)(7)(iv) only to the
entity in the case of a credit for QREs of a partnership, S corporation, estate, or trust.
Each partner, shareholder, or beneficiary claiming a credit for QREs from a passthrough
entity must, however, provide the EIN of the entity on Form 3468.

Section 301.6011-1(b) authorizes the IRS to prescribe in forms, instructions, or other
appropriate guidance the information or documentation required to be included with any
return or any statement required to be made or other document required to be furnished
under any provision of the internal revenue laws or regulations.

By its terms, § 1.48-12(d)(7)(iv) requires a passthrough entity that is the owner of a
qualified rehabilitated building and certified historic structure to file Form 3468 even
though it does not claim the rehabilitation credit. Section 1.48-12(d)(7)(iv)(A) requires
the taxpayer claiming the credit to provide the NPS project number and the final
certification date with the return for the taxable year in which the credit is claimed.
Section 1.48-12(d)(7)(iv)(B) further requires the taxpayer to provide this information on
Form 3468. In the case of a credit for the QREs of a passthrough entity, § 1.48-
12(d)(7)(iv)(C) generally imposes these requirements on the entity only, except that
each partner, shareholder, or beneficiary who claims the credit must also file Form 3468
and provide the EIN of the passthrough entity. The current Instructions for Form 3468
accordingly require a passthrough entity that is the owner of a qualified rehabilitated
building and certified historic structure to file the form even though it does not claim the
credit.

Nothing in § 1.48-12(d)(7)(iv) prevents the IRS from also requiring the filing of Form
3468 by a non-owner passthrough entity that passes through the QREs of another
passthrough entity. When a non-owner passthrough entity is also a partner,
shareholder, or beneficiary of a passthrough entity, and the non-owner passthrough
entity merely serves as a conduit passing through QREs to a partner, shareholder, or
beneficiary, § 1.48-12(d)(7)(iv)(C) may reasonably be interpreted to permit the IRS to
require reporting by the non-owner passthrough entity. Interpreting § 1.48-12(d)(7)(iv)
as a whole to impose a reporting obligation on the passthrough entity that owns the

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qualified rehabilitated building and certified historic structure and on each partner,
shareholder, or beneficiary who is the credit claimant, but to prevent the IRS from
imposing a reporting obligation on the passthrough entity that serves as a conduit
between the passthrough entity that incurs the QREs and the credit claimant would
result in the IRS not receiving reporting from all entities in the ownership chain.

If the IRS does not receive reporting from every entity in the ownership chain, it cannot
trace the credit from the claimant to the passthrough entity that incurs the QREs. The
regulations should not be interpreted to allow this result. Section 301.6011-1(b) permits
the IRS to prescribe in forms and instructions the information required to be included
with any return required to be made under any provision of the internal revenue laws or
regulations. Thus, the IRS may require a non-owner passthrough entity to file Form
3468 and provide the EIN of the passthrough entity from which the non-owner
passthrough entity receives an allocation of QREs, and may revise its forms and
instructions accordingly.

Issue 2: Section 50(d)(5) provides that, for purposes of an investment credit, rules
similar to former § 48(d) (as in effect prior to the enactment of Revenue Reconciliation
Act of 1990) apply. Former § 48(d)(1) permitted a lessor of property to elect to treat
new § 38 property as having been acquired by the lessee for an amount equal to its fair
market value (or, if the lessor and lessee were members of a controlled group of
corporations, equal to the lessor’s basis).

Section 1.48-4(f)(1) authorizes a lessor to make the election by filing a statement with
the lessee, signed by the lessor and including the written consent of the lessee, with the
following information:

(i) The name, address, and taxpayer account number of the lessor and the
lessee;
(ii) The district director’s office with which the income tax returns of the lessor
and the lessee are filed;
(iii) A description of each property for which the election is being made;
(iv) The date on which possession of the property (or properties) is transferred
to the lessee;
(v) The estimated useful life category of the property (or properties) in the
hands of the lessor, that is 3 years or more but less than 5 years, 5 years or
more but less than 7 years, or 7 years or more;
(vi) The amount for which the lessee (or sublessee) is treated as having
acquired the leased property under § 1.48-4(c)(2) or (3); and
(vii) If the lessor is itself a lessee, the name, address, and taxpayer account
number of the original lessor, and the district director’s office with which the
income tax return of such original lessor is filed.

Section 1.48-4(g)(1) and (2) permit a lessor, in lieu of making elections on a property-
by-property basis under § 1.48-4(f), to make a general election for a particular year to

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treat the lessee as having purchased all properties transferred under lease by the lessor
to the lessee during the lessee’s taxable year. The lessor makes the general election
by filing a statement with the lessee, signed by the lessor and including the written
consent of the lessee, with the following information:

(i) The name, address, and taxpayer account number of the lessor and the
lessee;
(ii) The taxable year of the lessee for which the general election is made;
(iii) The district director’s office with which the income tax returns of the lessor
and the lessee are filed;
(iv) If the lessor is itself a lessee, the name address, and taxpayer account
number of the original lessor, and the district director’s office with which the
income tax return of such original lessor is filed.

Section 1.48-4(g)(4) requires a lessor making a general election to provide the lessee,
on or before the date required for filing the statement under § 1.48-4(g)(2), with a
statement containing the information required by § 1.48-4(f)(1)(iii), (iv), (v), and (vi) for
all properties possession of which the lessor transfers to the lessee under lease during
the taxable year.

Section 1.48-4(j) requires the lessor to attach to its income tax return a summary
statement of all property leased during the taxable year for which the lessor made an
election containing the following information: (1) The name, address, and taxpayer
account number of the lessor; and (2) in numerical account number order, each lessee’s
account number, name, and address, the estimated useful life category of the property
(or, if applicable, the estimated useful life expressed in years), and the basis or fair
market value of the property, whichever is applicable.

For purposes of the rehabilitation credit, if a lessor of new § 38 property makes an
election under § 50(d)(5) to treat the lessee as having acquired the property, the IRS
may require the lessor to provide the lessee with the assigned NPS project number and
the final certification date. Former § 48(d)(1) permitted a lessor of property to elect to
treat new § 38 property as having been acquired by the lessee for an amount equal to
its fair market value. As a result, for purposes of the rehabilitation credit, the lessee is
deemed to have incurred all or a portion of the QREs incurred by the lessor and may be
eligible to claim the credit.

Because the lessee is treated as having purchased the property, it is subject to the
reporting requirements of § 1.48-12(d)(7)(iv). Thus, the lessee must file Form 3468 and
provide the assigned NPS project number on line 11k, and the date of the final
certification of completed work on line 11l pursuant to § 1.48-12(d)(7)(iv)(A). Unless the
lessee receives the assigned NPS project number and the final certification date from
the lessor, the lessee is unable to comply with these two reporting requirements.

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Section 1.48-4(f)(1)(iii) requires the lessor to furnish the lessee with an election
statement that includes a description of the property for which the election is being
made. This requirement also applies to a lessor that makes a general election pursuant
to § 1.48-4(g)(4). Section 301.6011-1(b) permits the IRS to prescribe the information
required to be included with any statement required to be made under any provision of
the internal revenue laws or regulations. Thus, for purposes of the rehabilitation credit,
the IRS may require a lessor who makes an election under § 50(d)(5) to provide the
lessee with the NPS project number and the final certification date as part of the
description of the property for which the election is being made.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call James W. Rider at (202) 317-4137 if you have any further questions.