Can an investor amend a return to claim the River Edge Historic Preservation Tax Credit late, carry it forward, and transfer it to a new investor?

Plain-English summary

The Illinois Department of Revenue issued this private letter ruling to an investor ("Investor") holding a River Edge Historic Preservation Tax Credit that had been allocated to it after it had already filed its 2016 Illinois partnership return. (The taxpayer's own letter referred to the "Illinois Historic Preservation Tax Credit," but the Department noted the statute cited actually governs the River Edge Historic Preservation Tax Credit, so that is what the ruling addresses.) The credit originated with a developer that earned it for rehabilitating a historic property (the Lehmann-Stern Knitting Mill), and it flowed down through two levels of pass-through entities to Investor.

The Department answered three separate questions, and the outcome is mixed:

• Amended return allowed. Investor may file an amended 2016 Illinois income tax return (Form IL-1065) to claim the credit, because 35 ILCS 5/911(a)(1) allows an amended return within three years of the (extended) due date of the original return, and nothing in 35 ILCS 5/221(c) requires the credit to be claimed on an original return.
• Pass-through and carryforward to 2017 allowed. The credit passes through to Investor's members under 35 ILCS 5/221(d). Those members may file amended 2016 returns to use the credit against 2016 tax and carry forward any unused amount to 2017. The statute itself does not provide for a carryforward, but the Department's own 2016 Schedules 1299-C and 1299-D mistakenly told taxpayers there was a five-year carryforward. Under the Taxpayers' Bill of Rights, the Department honored that mistaken instruction for the one extra year (2017) even though it isn't in the statute — but the ruling makes clear no carryforward is allowed for years after that, since the schedules were corrected starting with tax year 2017.
• Transfer to a new investor denied. The credit cannot be reallocated or transferred to any person who was not a member of the pass-through entity in the year the qualified rehabilitation expenditures were incurred. The statute does not authorize transfers, and each member's distributive share must follow the partnership's actual ownership in the year the expenses were incurred.

What this means for you

Investors and developers holding River Edge Historic Preservation Tax Credits

If a credit is allocated to you after you've already filed your Illinois partnership or income tax return for that year, you are not out of luck — you can file an amended return within the normal three-year window to claim it. But you cannot fix a "we brought in this credit too late" problem by simply handing (transferring) the credit to a different investor who joins later. Only the people who were actually members in the year the rehabilitation costs were incurred can receive an allocation of the credit.

Pass-through entities (partnerships, LLCs, S corporations)

The credit flows through to members/partners/shareholders based on their distributive share for the year the qualifying expenditures were incurred — not the year the credit happens to be claimed or discovered. If you allocate the credit late (after members have already filed), those members can amend their own returns too, and can carry any unused credit forward one additional year if they're in the same position as this taxpayer (i.e., relying on the Department's now-corrected Schedule 1299-D instructions for tax year 2016 credits).

Accountants and tax professionals

Note the narrow, fact-specific nature of the carryforward result: the statute (35 ILCS 5/221(c)) says the credit cannot reduce liability below zero and, per the Department's own prior rulings, does not itself provide for any carryover. The one-year carryforward to 2017 granted here rests entirely on reliance on the Department's mistaken 2016 Schedule 1299-C/1299-D instructions and the Taxpayers' Bill of Rights — not on the underlying statute. Don't assume this carryforward treatment extends to other tax years or other taxpayers who didn't rely on that same erroneous guidance.

Common questions

Q: Can we amend a prior-year Illinois return to claim a River Edge Historic Preservation Tax Credit that was allocated after the original return was filed?
A: Yes. Under 35 ILCS 5/911(a)(1), an amended return can be filed within three years of the extended due date of the original return, and nothing in 35 ILCS 5/221(c) requires the credit to be claimed on the original return.

Q: Can unused credit be carried forward to the next tax year?
A: In this ruling, yes — but only because the Department's own 2016 Schedules 1299-C and 1299-D mistakenly told taxpayers there was a five-year carryforward, and the Department honored that under the Taxpayers' Bill of Rights for the 2017 tax year. The statute itself does not provide for a carryforward, and the schedules were corrected for tax year 2017 and forward, so this one-year grace period does not repeat in later years.

Q: Can the credit be transferred or sold to a new investor?
A: No. The ruling holds that 35 ILCS 5/221 does not authorize transfers of the River Edge Historic Preservation Tax Credit, and it cannot be allocated to anyone who was not a member of the pass-through entity in the year the qualified rehabilitation expenditures were incurred.

Q: Does this ruling apply to my company's credit situation?
A: No. This is a private letter ruling binding on the Department only as to the specific Investor who requested it, and only if the facts as described were correct and complete. It will also stop binding the Department if the underlying statute, case law, rules, or material facts change.

Q: Is this the same as the "Illinois Historic Preservation Tax Credit"?
A: The requester's letter used that name, but the Department clarified that the statute actually cited is the River Edge Historic Preservation Tax Credit under 35 ILCS 5/221, and the ruling addresses that credit specifically.

Citations and references

Statutes and rules:

• 35 ILCS 5/221 (River Edge Historic Preservation Tax Credit)
• 35 ILCS 5/221(c) (credit may not reduce liability below zero)
• 35 ILCS 5/221(d) (allocation of credit to qualified taxpayers/members)
• 35 ILCS 5/911(a)(1) (three-year deadline to file an amended return claiming a refund)
• 2 Ill. Adm. Code 1200.110 (private letter ruling procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2018/it-18-0001-plr.pdf

Original ruling text

IT 18-0001-PLR 01/29/2018

HISTORIC PRESERVATION

River Edge Redevelopment Zone credit may not be transferred.

January 29, 2018
RE: Request for Private Letter Ruling – River Edge Historic Preservation Tax Credit
This is in response to your letter dated December 18, 2017, in which you request a Private Letter Ruling
on behalf of Sugar Creek State Credit Fund, LLC (“Investor”). Although your letter identifies the Illinois
Historic Preservation Tax Credit, the statute cited pertains to the River Edge Historic Preservation Tax
Credit. Accordingly, this Ruling will relate to the River Edge Historic Preservation Tax Credit. Review
of your request for a Private Letter Ruling indicates that all information described in paragraphs 1
through 8 of subsection (b) of 2 Ill. Adm. Code 1200.110 is contained in your request. This Private
Letter Ruling will bind the Department only with respect to Investor. Issuance of this ruling is conditioned
upon the understanding that Investor and/or any related taxpayer(s) is not currently under audit or
involved in litigation concerning the issues that are the subject of this ruling request.
The facts and analysis as you have presented them are as follows:
On behalf of taxpayer INVESTOR (“Investor”) (EIN ###) ABC requests a private letter ruling
(“PLR”) regarding the Illinois Historic Preservation Tax Credit for the PROPERTY located at
ADDRESS. Power of Attorney for NAME 1 and NAME 2 of ABC is attached.
Background Information
DEVELOPER (EIN ###) applied and was approved for the Illinois Historic Preservation Tax
Credit (“Tax Credit”) for the Property for qualified rehabilitation expenditures incurred during the
2016 tax year, pursuant to 35 Illinois Compiled Statutes Section 5/221. The application and credit
certification are enclosed as Exhibit A. The amount of the Tax Credit awarded to the Developer
was $$$. COMPANY 1 (EIN ####) is a 90% member manager of the Developer. Enclosed as
Exhibit B is an entity organizational chart for the Developer and its members. The Developer
allocated 100% of the Tax Credit to COMPANY 1 (“Holder”) pursuant to 35 ILCS 5/221(d). See
Exhibit C, COMPANY 2 2016 Form IL-1065.
Investor is a capital member of COMPANY 1. COMPANY 1 allocated 100% of the Tax Credit to
Investor. See Exhibit D, COMPANY 1 2016 Form IL-1065. Investor filed its 2016 tax return prior
to the allocation of the credit by Holder and therefore the allocated credit was not reported on
its’ 2016 Form IL-1065 and accordingly not passed through to its’ members. Investor is pursuing
two options to allow for full utilization of the Tax Credit.
The first option is for Investor to file an amended Form IL-1065 for tax year 2016 to claim the
Tax Credit that was allocated for the tax year. The Tax Credit will then be passed through to its’
members who will in turn also file amended returns and apply the credit against 2016 income
tax liabilities and/or carry over the credit to offset 2017 liabilities.
The second option being explored by Investor is reallocation to a new investor. Investor wishes
to reallocate the Tax Credit to an entity that can claim the Tax Credit against its 2016 Illinois
income tax liability by amending the original 2016 filing.

IT 18-0001-PLR
Page 2
Rulings Requested
1) Authority for Ruling: 35 Illinois Compiled Statutes Section 5/911 provides that a tax return can
be amended to claim a refund due if filed within three (3) years of the date it was filed. There is
no requirement in 35 Illinois Compiled Statutes Section 5/221(c) that the credit must be claimed
on an original return.
Ruling Requested: Please confirm that an amended return may be filed by investor to claim the
Tax Credit on its 2016 Illinois income tax return (Form IL-1065).
2) Authority for Ruling: 35 Illinois Compiled Statutes Section 5/221(c) provides that the “tax credit
under this section may not reduce the taxpayer’s liability to less than zero”. In prior rulings the
Department has held that this language limits the ability to generate any tax refunds related to
the credit and that the statute does not provide for the carryover of credits. This is contrary,
however, to the Department’s representation on 2016 Schedule 1299-D (and instructions in
Form 1299-C) which provides for a 5 year carryover period for the credit. In conversations with
Richard Sgro from the Illinois Department of Revenue, the Developer has received guidance
that given the reliance on the Department’s representation on Schedule 1299-D the Department
will permit the carryover of the credit to tax year 2017. Schedule 1299-D has been corrected for
tax year 2017 and forward. Therefore, no credit carryforward will be permitted to be claimed for
tax years after 2016.
Ruling Requested: Please confirm that the Tax Credit claimed on an amended Form IL-1065 by
Investor may be carried forward to the 2017 tax return year.
Ruling Requested: Please confirm that as the Tax Credit passes through the Investor to its’
members that amended 2016 Illinois income tax returns may be filed to either apply the credit to
a 2016 tax liability or claim a credit carry-forward to the 2017 tax year.
3) Authority for Ruling: 35 Illinois Compiled Statutes Section 5/221(d) defines a “qualified
taxpayer” as “the owner of the qualified historic structure or any other person who qualifies for
the federal rehabilitation credit allowed by Section 47 of the Internal Revenue Code with respect
to the qualified historic structure. Partners, shareholders of the subchapter S corporations, and
owners of limited liability companies are entitled to a credit under this Section to be determined
in accordance with the determination of income and distributive share of income under Sections
702 and 703 of the Internal Revenue Code.” There is no direct prohibition within 35 Illinois
Compiled Statutes Section 5/221 against allocating credit to an investor that participates in the
development after the tax year in which the investment is made and the credit is granted.
Authorities contrary to the Ruling requested: Illinois Private Letter Ruling IT 15-0001– July 13,
2015
Ruling Requested: Because there is no direct prohibition within 35 Illinois Compiled Statutes
Section 5/221 against allocating the Tax Credit to a new investor, Investor wishes to determine
whether the Tax Credit can flow through to a member of an LLC that was not a member during
the tax year when the qualified rehabilitation expenditures were incurred.
Business Reason for the Transaction

IT 18-0001-PLR
Page 3
Investor was allocated $1,088,184 of tax credits which currently have not been utilized since
they were allocated subsequent to the filing of Investor’s 2016 Illinois Form 1065. In order to
make the project financially attractive to Investor the credits need to claimed on an Amended
Illinois Form 1065 and then either utilized against 2016 tax liabilities or carried forward to tax
year 2017. Investor seeks confirmation of the ability to claim these credits to ensure the
economic feasibility of the Lehmann-Stern Knitting Mill property project.
Statement of Material Facts
The Developer applied for and was granted certification for the Tax Credit and incurred qualified
rehabilitation expenditures in tax year 2016. The Tax Credit was 100% allocated to its member,
COMPANY 1. COMPANY 1 allocated 100% of the Tax Credit to its member, Investor. Investor
had already filed its 2016 Illinois income tax return when it was allocated the Tax Credit. Investor
seeks to amend its’ tax return to claim the Tax Credit and pass it through to its’ members. Such
members will also file amended 2016 Illinois income tax returns to either utilize the Tax Credit
against 2016 Illinois income tax liabilities or carry forward the Tax Credit to be utilized against
2017 Illinois income tax liabilities. In the alternative, the Investor seeks to allocate the Tax Credit
to an entity that was not a member of INVESTOR in the year the qualified rehabilitation
expenditures were incurred.
Investor’s Representations
The tax period at issue is calendar year 2016. There is no audit or litigation pending with the
Department over this matter with the Investor. To the best of the knowledge of both Investor and
NAME 1 the Department has not previously ruled on the same or similar issue for the taxpayer
or a predecessor. The Investor nor any of its representatives has previously submitted or
withdrawn a letter ruling with the same or similar issue to the Department. All contracts, licenses,
agreements, instruments or other documents relevant to the request are enclosed.
RULING

NO.1

Investor may file an amended return for 2016 to claim the River Edge Historic Preservation Tax Credit
within 3 years of the extended due date of the original return. 35 ILCS 5/911(a)(1).
RULING NO. 2
Investor passes the River Edge Historic Preservation Tax Credit through to its members in accordance
with IITA section 221(d). The members may file 2016 amended returns to claim the tax credit and carry
over any unused tax credit to their 2017 tax year. Although the statute does not provide a five-year
credit carryforward, the Department’s 2016 Schedules 1299-C and 1299-D mistakenly instructed
taxpayers to carry over any unused River Edge Historic Preservation Credit. Therefore, under the
Taxpayers Bill of Rights, Investor’s members may carry any unused credit from their individual 2016
amended return to the 2017 tax year.
RULING NO. 3
IITA section 221 does not authorize transfers of the River Edge Historic Preservation Tax Credit.
Because transfers are not specifically authorized, neither Investor nor its members may transfer any
tax credit to another taxpayer. Under Subchapter S of the Internal Revenue Code, each member’s
distributive share of the credit shall be determined in accordance the partnership agreement, and the

IT 18-0001-PLR
Page 4
credit cannot be allocated to any person that was not a member in the year in which the expenses were
incurred.
This ruling shall bind the Department for taxable years for which Taxpayer obtains a credit certificate
under IITA Section 221, except as limited pursuant to 2 Ill. Adm. Code 1200.110(d) and (e). The facts
upon which this ruling is based are subject to review by the Department during the course of any audit,
investigation or hearing and this ruling shall bind the Department only if the material facts as recited
and incorporated in this ruling are correct and complete. This ruling will cease to bind the Department
if there is a pertinent change in statutory law, case law, rules or in the material facts recited in this ruling.
Sincerely,

Brian E. Fliflet
Member, PLR Committee (Income Tax)