If a partnership or LLC receives Illinois Historic Preservation Tax Credits, can the partners divide up those credits by agreement instead of strictly by their partnership interests?

Subject

Credits

Plain-English summary

A national bank holding company ('Applicant,' identity redacted), a major investor in federal and state tax credit projects through its wholly-owned subsidiary ('COMPANY'), wrote to the Illinois Department of Revenue seeking a private letter ruling about a proposed structure for investing in Illinois's Historic Preservation Tax Credit (the 'Credits'), created by the Historic Preservation Tax Credit Act and available for tax years beginning on or after January 1, 2019 and ending before January 1, 2024. Because of the nature of the request and information provided, the Department responded with a General Information Letter (GIL) instead of a binding Private Letter Ruling.

Applicant described a complex structure: it and COMPANY would form an 'IL Fund' (an LLC taxed as a partnership) that would invest in various 'IL Partnerships' owning historic structures being restored in Illinois. The IL Fund would receive 100% of each IL Partnership's Credits, and COMPANY, as Fund Manager, would then negotiate annual allocations of those Credits among the IL Fund's Class A Member (Applicant) and Class B Members (other outside investor-'Purchasers'), each of whom would pay COMPANY an agreed 'Payment' for their allocated share.

Applicant posed seven detailed questions about this structure -- e.g., whether the IL Fund would be respected as a partnership, whether Class B Members needed to qualify as federal tax partners, how recapture would apply, and how the timing of capital contributions would affect a member's ability to claim credits. The Department's actual RULING section, however, focused narrowly on the core allocation question: whether Credits awarded to a partnership must be divided among partners strictly according to each partner's partnership interest (as IRC Section 704(b) would generally require for tax credits), or whether the credit can instead be divided as the partners themselves agree.

The Department held that Section 10(b) of the Historic Preservation Tax Credit Act (35 ILCS 31/10) permits a partnership to allocate the credit among partners 'in the same manner partners share income or loss, or otherwise as provided in the partnership agreement,' and separately allows credits awarded to a partnership or other multiple owners of property to be divided 'pursuant to an executed agreement among the partners...documenting any alternate distribution method' -- regardless of whether that agreed allocation matches the partners' underlying partnership interests. Each partner must attach to their return the certificate (or documentation of their proportional share) along with their executed agreement; no partner may claim more than their agreed share, and the total claimed by all partners cannot exceed the credit actually awarded.

As the letter itself states repeatedly, this is a GIL, not a Private Letter Ruling: it 'does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department' (2 Ill. Adm. Code 1200.120(b) and (c)).

What this means for you

Investors and fund sponsors syndicating historic preservation credits

If you are structuring an investment vehicle (like the 'IL Fund' described here) to acquire and allocate Illinois Historic Preservation Tax Credits among multiple investors, this GIL indicates the Department views the credit-allocation mechanics under the Historic Preservation Tax Credit Act as flexible: partners can divide the credit by agreement rather than being locked into an allocation that mirrors their capital or profit-sharing interests. But note that the Department's ruling addressed only the core allocation question -- it did not issue rulings on the other six items Applicant asked about (partnership classification, Class B Member qualification, disguised-sale treatment, recapture, and timing of contributions), so those points remain open questions for taxpayers using similar structures.

Accountants and tax professionals preparing partner returns

The ruling ties the credit allocation to documentation: 'Each partner should attach to the partner's tax return claiming the credit a copy of their executed agreement documenting the partner's proportional share of the credit certificate.' The letter also stresses hard caps -- no partner may claim an amount exceeding their agreed-upon share, and the aggregate credits claimed by all partners cannot exceed the total amount awarded by the Department of Natural Resources (DNR).

Anyone relying on this letter for a similar transaction

Because this is a General Information Letter rather than a Private Letter Ruling, it is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120(b) and (c)). The letter also does not resolve several of Applicant's specific structuring questions (e.g., whether the proposed 'disguised sale' federal tax treatment of the Credit allocations would be respected for Illinois purposes), so a taxpayer relying on a similar structure would need its own analysis or a binding Private Letter Ruling.

Common questions

Q: Can historic preservation credits awarded to a partnership be split unevenly among the partners?
A: Yes. The Department ruled that under Section 10(b) of the Historic Preservation Tax Credit Act, credits granted to a partnership (or other multiple owners of property) can be divided among the partners 'pursuant to an executed agreement among the partners... documenting any alternate distribution method,' regardless of whether that matches each partner's underlying partnership interest.

Q: Does this override the general federal rule that partnership tax credits follow each partner's interest in the partnership?
A: The general federal default rule under IRC Section 704(b) and Treas. Reg. 1.704-1(b)(4)(ii) is that credits are allocated according to the partners' interests in the partnership. The Department's ruling explains that Illinois's Historic Preservation Tax Credit Act, Section 10(b), separately allows partners to instead follow their own income/loss-sharing arrangement or an executed agreement documenting an alternative distribution method -- so, for this specific Illinois credit, the statutory allocation mechanism controls.

Q: What paperwork does a partner need to claim their share of the credit?
A: Per Section 10(c) of the Credit Act, the taxpayer must attach to the return on which the credit is claimed the certificate (issued by DNR) or legal documentation of their proportional share of that certificate. The Department's ruling adds that each partner should also attach a copy of the executed agreement documenting their proportional share.

Q: Is there a limit on how much credit any one partner can claim?
A: Yes. The ruling states that in no event may a partner claim an amount of credit exceeding the partner's agreed-upon share, and the aggregate credits claimed by all the partners cannot exceed the total amount of credit awarded.

Q: Did the Department rule on all seven questions Applicant asked, such as whether the transactions are 'disguised sales' or how recapture would work?
A: No. Applicant's letter posed seven distinct rulings requests covering partnership classification, member qualification, disguised-sale treatment, recapture liability, and timing of capital contributions. The Department's formal RULING section addresses only the core question of how the historic preservation credit is allocated among partners under Section 10(b) of the Credit Act -- it does not separately confirm or deny the other requested conclusions.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued in response to a request for a private letter ruling, because 'the nature of your request and the information provided requires that we respond with a General Information Letter.' Under 2 Ill. Adm. Code 1200.120(b) and (c), a GIL 'is not a statement of Department policy and is not binding on the Department.'

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2020/it20-0007-gil.pdf

Original ruling text

IT 20-0007-GIL 04/03/2020 CREDITS
Historic Preservation Credit may be Allocated to Partners Pursuant to Agreement of Partners.
(This is a GIL.)

April 3, 2020
Re:

Illinois Historic Preservation Credit

Dear Xxxx:
This is in response to your letter dated October 17, 2019 in which you request a private letter ruling
on behalf of the above-named taxpayer. The nature of your request and the information provided
requires that we respond with a General Information Letter (GIL). A GIL is designed to provide
general information, is not a statement of Department policy and is not binding on the Department.
See 2 Ill. Adm. Code § 1200.120(b) and (c), which may be accessed from the Department’s web site
at www.ILtax.com.
Your letter states as follows:
The Illinois legislature, through the Statute, created the Illinois Historic Preservation Tax Credit
(the “Credits”). The Statute became effective on January 1, 2019 and currently authorizes
Credits to be allocated by the Illinois Department of Natural Resources (“DNR”) for tax years
beginning on or after January 1, 2019 and ending prior to January 1, 2024. The circumstances
(described below) explain Applicant’s need for immediate guidance from the DOR in regard to
Applicant’s proposed plans to invest in “Qualified Historic Structures” (indirectly through
investment in “Qualified Taxpayers” that own the Qualified Historic Structures), each as
defined hereafter and by the Statute, that are located in Illinois.
Statement of Facts: Business Reason for the Proposed Transactions
Applicant is a national banking association authorized to do business in the State of Illinois
(“Illinois”). Applicant, through the activities of its wholly-owned subsidiary, COMPANY
(“COMPANY”), is one of the nation’s most active federal and state tax credit investors.
Applicant invests primarily in four main types of federal, and, where applicable, state tax credit
projects: low-income housing, new markets, historic rehabilitation, and renewable energy.
Applicant frequently seeks to invest in federal tax credit projects located in states that, as with
the Program, have state tax credit programs designed to complement their federal
counterparts. Applicant also invests directly in various other state tax credit programs (not
linked to federal credit programs) such as brownfield revitalization and film production projects.
In addition to syndicating federal tax credits, Applicant is also able to make certain,
transferable state tax credits available to other investors through COMPANY. In 19XX, the
Office of the Comptroller of the Currency licensed COMPANY as the first broker of state tax
credits. Since that time, COMPANY has become a significant investor and has participated as
syndicator in numerous states’ tax credit programs. For instance, Applicant has invested in
Illinois’ Film Production Services Tax Credit Program and Illinois’ Live Theater Production Tax
Credit Program (collectively, the “Film and Theater Credits”), and also in the Illinois
Affordable Housing Credits (“IAH Credits”) and Illinois Hospital Credits (“IH Credits”).
Accordingly, Applicant would also like to become an investor in the Credits.

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Applicant has been approached by several Illinois real estate developers with proposals for
Applicant and its affiliates to invest in the federal rehabilitation credits (the “Federal
Rehabilitation Credit”) under § 47 of the Internal Revenue Code (as amended through the
date hereof, the “Code”) and/or to become the Credits investor in certain limited partnerships
and/or limited liability companies, each referred to herein as an “IL Partnership”. Each IL
Partnership intends to restore, preserve and own a historic structure located in Illinois that
qualifies as a “Qualified Historic Structure,” pursuant to a “Qualified Rehabilitation Plan,”
each as defined hereafter and by the Statute. Applicant is respectfully requesting rulings and
guidance from the DOR for a proposed acquisition structure that is intended to increase
Applicant’s ability to:
•

invest in multiple Qualified Historic Structures (indirectly through investment in Qualified
Taxpayers that own the Qualified Historic Structures) on behalf of itself and other investors,

•

make larger capital contributions to Qualified Historic Structures (indirectly through investment
in Qualified Taxpayers that own the Qualified Historic Structures), and

•

increase the number of Illinois corporate, individual, and trust and estate taxpayers who can
invest in Qualified Historic Structures (indirectly through investment in Qualified Taxpayers that
own the Qualified Historic Structures) and who are qualified as “Qualified Taxpayers” under
the Statute for purposes of acquiring and utilizing Credits.
The proposed acquisition and allocation structure will increase the tax revenues that Illinois will
receive from Illinois’ investments in Credits.
Unlike the Film and Theater Credits, the IAH Credits, and the IH Credits, the Credits are not
transferable. Before Applicant and Illinois developers can enter into letters of intent, and
eventually enter into certain binding agreements pursuant to which Applicant will invest in
Federal Rehabilitation Credits and/or Credits, Applicant seeks additional guidance from and
approval of Applicant’s proposed structure (and the Illinois income tax treatment of the
proposed structure) prior to making investment commitments with respect to numerous
proposed Credit transactions (the “Transactions”).
Statement of Facts: Interested Parties, Description of Proposed Transactions, and
Analysis

1. The Parties. The following parties are involved in or related to the proposed Transactions.
   a. IL Fund: COMPANY1, a Missouri limited liability company taxed as a partnership (to
   be formed), and the Credits investor in existing or to be formed IL Partnerships that
   restore, preserve and own Qualified Historic Structures located in Illinois.
   b. Applicant: APPLICANT, a national banking association taxed as a corporation, and
   the only Class A Member of the IL Fund.
   c. COMPANY: COMPANY, a Minnesota corporation and a one hundred percent (100%)
   owned subsidiary and affiliate of Applicant, to become the organizing Member and
   partner of the IL Fund (for federal income tax purposes) and to be designated as the
   Fund Manager under the (to be formed) IL Fund operating agreement.

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d. Purchaser(s): Unrelated third-party corporations, individuals, and trusts and estates
who have Illinois tax liabilities and who will be admitted to the IL Fund as Class B
Members of the IL Fund (to be identified).
e. IL Partnership(s): Certain limited partnerships or limited liability companies that
restore, preserve and own Qualified Historic Structures located in Illinois (to be
identified).

2. Applicant and COMPANY propose to form the IL Fund that would be classified, structured, and
   treated as a partnership for federal and Illinois income tax purposes. For purposes of these
   rulings, please assume that the IL Fund will qualify as a partnership for federal income
   tax purposes.
   a. COMPANY will first form the IL Fund as a single member limited liability company under
   Missouri law.
   b. Soon thereafter, Applicant would be admitted to the IL Fund as the “Class A Member”
   in exchange for a nominal capital contribution of one hundred dollars ($100.00). At this
   point, the IL Fund will become a partnership between COMPANY (“Fund Manager”)
   and Applicant (the Class A Member) for federal and state income tax purposes. For
   purposes of these rulings, please assume that the Member interests owned by
   both Fund Manager and the Class A Member qualify as partnership interests for
   federal income tax purposes.
   i. Applicant would have basis in its “Class A Member Interest” equal to its capital
   contribution, and the IL Fund would not recognize gain on receipt of the
   contribution of capital.
   ii. The Class A Member’s rights in the IL Fund would consist of:
   1.
   a proportional percentage of all of the tax attributes of the IL Fund, except for the
   Credits and
   2.

the right to negotiate for an annual allocation of Credits with Fund Manager.
c. The IL Fund would be admitted to own an interest in each IL Partnership (an “IL
Partnership Interest”), from time to time, in exchange for an arms-length negotiated
contribution of capital. Please assume that each IL Partnership Interest will qualify
as a partnership interest in each IL Partnership for federal income tax purposes.
i. The IL Fund would have basis in each IL Partnership Interest equal to its capital
contribution, and such IL Partnership would not recognize income on the
admission of the IL Fund as a partner.
ii. The IL Partnership Interest would be entitled to a proportional share of all of the
tax attributes of the IL Partnership, except for the Credits.

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iii. The IL Partnership Interest would be entitled to an allocation of one hundred
percent (100%) of the Credits generated by the restoration and preservation of
each IL Partnership’s Qualified Historic Structure per the written agreement.
iv. The intended federal and Illinois income tax consequences of this transaction
include the following:

1. The IL Partnership would not recognize gain or loss on the IL Fund’s
   contribution of capital to the IL Partnership.
2. The IL Fund would receive basis in its IL Partnership Interest equal to the
   contribution of capital to the IL Partnership.
3. The IL Fund will not be entitled to a capital loss for its capital contribution
   in each IL Partnership until it exits each IL Partnership.
4. The IL Fund would admit Purchasers, each as a Class B Member to the IL Fund. Each
   Purchaser would make a nominal capital contribution to the IL Fund in exchange for its “Class
   B Membership Interest”.
   a. A Purchaser’s Class B Membership Interest could be structured as either an interest
   that would qualify the Purchaser as a partner in the IL Fund for federal income tax
   purposes, or an interest that would merely qualify as a recognized ownership interest in
   the IL Fund for Illinois corporate law and the Statute’s purposes only. Applicant would
   prefer to structure the Class B Member’s interest as merely qualifying as a recognized
   ownership interest in the IL Fund for Illinois corporate law and the Statute’s purposes
   only.
   b. The Class B Membership Interest would entitle the Purchaser to negotiate with Fund
   Manager for the current year’s share of Credits that are allocated from the IL Fund on
   an annual basis.
5. Allocations of Credits would be affected in the following manner:
   a. The IL Fund would be admitted to one or more IL Partnerships, entitling the IL Fund to
   an allocation provided in a written agreement of one hundred percent (100%) of each IL
   Partnership’s Credit allocations under the Statute.
   b. Under the terms of IL Fund’s operating agreement, COMPANY would be entitled to
   receive an allocation of one hundred percent (100%) of the IL Fund’s Credits from all IL
   Partnerships. COMPANY can choose to receive an allocation from the IL Fund of all or
   part of the IL Fund’s Credits for COMPANY’s own use, or COMPANY, as Fund
   Manager, can direct the IL Fund to allocate all or part of the IL Fund’s Credits to Class A
   or Class B Members; provided that, any Credits allocated to COMPANY for its own use
   may not be further allocated to other members.
   c. One or more Purchasers would be admitted as Class B Members of the IL Fund.

IT 20-0007-GIL
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d. On or before each December 31st prior to an annual Credit vesting year, COMPANY, as
Fund Manager, will negotiate the allocation of the IL Fund’s Credits for such year with
the IL Fund’s Class A Member and each of the Class B Members. The IL Fund will
allocate the Credits to the Class A and B Members. The Class A Member and the
Class B Members will make an additional payment to COMPANY for the agreed upon
“purchase price/additional contribution of capital” (a “Payment”) for such Class A
Member’s and Class B Members’ agreed to allocation of the IL Fund’s available Credits
on or before each delivery of Credits in the year following the relevant annual Credit
vesting year.
e. The IL Partnerships generate the first year’s allocation of Credits and allocate them to IL
Fund. Under the direction of COMPANY, the IL Fund allocates the agreed to shares of
the Credits to the Class A Member and the Class B Members.
f. For federal and Illinois income tax purposes, the parties intend for the “Allocations”
described in Paragraphs 4(d) and 4(e) to be treated as “disguised sales” of the Credits
from COMPANY to the Class A Member and each of the Class B Members who
received them, and for Illinois state law and the Statute’s purposes, the parties intend
for such Allocations to be treated as allocations of the Credits from the IL Fund to the
Class A Member and Class B Members. The proposed federal and Illinois tax and state
law/Statute treatment of these transactions are as follows:
i. In the year following each Credit allocation year, for federal and Illinois income
tax purposes, COMPANY will recognize one hundred percent (100%) of each
Payment as taxable gain from the “deemed sale” of the Credit, and the Class A
Member and each Class B Member will receive basis in the allocated Credit
equal to its Payment.
ii. When the Class A Member or a Class B Member utilizes the Credits to offset its
Illinois tax liabilities, the Class A Member or such Class B Member will recognize
gain equal to the difference between the face value of the Credits utilized and the
Payment it paid to COMPANY for the Credits.
iii. This process will be repeated for each annual allocation year in which IL Fund
receives Credits from an IL Partnership.
iv. Applicant and COMPANY anticipate that IL Fund will be admitted to numerous IL
Partnerships, and that more than one Purchaser will be admitted as Class B
Members of the IL Fund.

5. Example:
   a.
   IL Fund is formed on September 20, 2019 and Applicant is admitted as the Class A
   Member on September 21, 2019.
   b.
   IL Fund is admitted to an IL Partnership (“ILP1”) on September 30, 2019. ILP1 is
   entitled to receive from the DNR (i) $1,000 of Credits in 2019 and (ii) $1,000 of Credits in 2020,
   pursuant to Qualified Rehabilitation Plans that are completed, with respect to Qualified Historic

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Structures that are Placed in Service (as defined in the Statute), in 2019 and 2020,
respectively.
c.
Under the terms of ILP1’s partnership agreement, IL Fund is entitled to receive one
hundred percent (100%) of the Credits ($1,000 of Credits for 2019 and $1,000 of Credits for
2020).
d.

IL Fund admits a Purchaser (“P1”) as a Class B Member on October 15, 2019.

e.
On December 1, 2019, under the terms of IL Fund’s operating agreement, COMPANY,
as Fund Manager, negotiates the Allocation of $500 of the 2019 Credits to P1 and $500 of the
2019 Credits to Applicant (the Class A Member).
f.
P1 and Applicant both make a Payment to COMPANY equal to the fair market value of
their respective shares of 2019 Credits on or before the delivery date for the 2019 Credits (in
2020).
g.
On May 15, 2020, ILP1 allocates the $1,000 of Credits to IL Fund, and IL Fund allocates
$500 of the Credits to P1 and $500 of the Credits to Applicant.
h.
Under Applicant’s proposed treatment, for book and state corporate law/Statute
purposes, $500 of the Credits are allocated to each of P1 and Applicant on its Form K-1
received from the IL Fund. For federal and Illinois tax purposes, P1 and Applicant will claim
their shares of the Credits against their 2019 Illinois tax liabilities on their 2019 returns, filed in
2020. On their 2020 returns, P1 and Applicant will each report a gain equal to the difference
between the face value of the 2019 Credits received and their Payments for the Credits in
2020. COMPANY will report the 2020 Payments received from P1 and Applicant as taxable
gain on its 2020 federal and Illinois income tax returns.
i.
On January 15, 2020, IL Fund is admitted as the Credit investor in a second IL
Partnership (“ILP2”). ILP2 is entitled to receive $10,000 of Credits from the DNR for Qualified
Expenditures incurred in 2019 and 2020 in connection with a Qualified Rehabilitation Plan that
is completed in 2020. ILP2’s Qualified Historic Structure will be Placed in Service on April 1,
2020.
j.
On October 1, 2020, IL Fund admits another Purchaser (“P2”) as a Class B Member.
On December 1, 2020, COMPANY negotiates the Allocation of $11,000 of IL Fund’s Credits to
P2, or 100% of IL Fund’s Credits to be received from both ILP1 and ILP2 for the 2020 tax year.
P1 and Applicant remain members of the Fund but do not negotiate allocations of 2020
Credits.
k.
On May 15, 2021, ILP1 allocates $1,000 of Credits to IL Fund, ILP2 allocates $10,000
of Credits to IL Fund, and IL Fund allocates $11,000 of Credits to P2.
l.
Under Applicant’s proposed treatment, for book and state corporate law/Statute
purposes, $11,000 of Credits are allocated to P2 on its Form K-1 received from IL Fund for
2020. For federal and Illinois tax purposes, P2 will claim $11,000 of Credits against its 2020
Illinois tax liabilities on its 2020 return filed in 2021. On its 2021 return, P2 will report a gain
equal to the difference between the face value of the 2020 Credits received and its 2021

IT 20-0007-GIL
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Payment for the Credits. COMPANY will report one hundred percent (100%) of the 2021
Payment received from P2 as taxable gain on its 2021 federal and Illinois income tax returns.

Statement of Statutory Authority
The Credits offset the taxes imposed by 35 ILCS 5/201(a)-(b), which includes an income tax
imposed on individuals, corporations and trusts and estates (the “Qualified Taxes”). The
Credit eligibility is administered by the DNR.
The Credits are based on the federal rules for costs and expenses that satisfy the definition of
a “qualified rehabilitation expenditure” under § 47 of the Code (“Qualified Expenditures”), that
are incurred in the restoration and preservation of certain historic structures located in Illinois
that satisfy the definition of a “certified historic structure” under § 47(c)(3) of the Code
(“Qualified Historic Structure”), by the owner of the Qualified Historic Structure or any other
person who qualifies for the Federal Rehabilitation Credits with respect to that Qualified
Historic Structure (“Qualified Taxpayer”), pursuant to a project that is approved by the DNR
and the National Park Service as being consistent with the United States Secretary of the
Interior’s Standards for Rehabilitation (“Qualified Rehabilitation Plan”).
With respect to taxable years that begin on or after January 1, 2019 and end prior to January
1, 2024, the total amount of Qualified Expenditures incurred by a Qualified Taxpayer in the
restoration and preservation of a Qualified Historic Structure located in Illinois pursuant to a
Qualified Rehabilitation Plan must (i) equal Five Thousand and no/100 Dollars ($5,000.00) or
more or (ii) exceed the adjusted basis of the Qualified Historic Structure on the first day the
Qualified Rehabilitation Plan begins. If the Qualified Rehabilitation Plan spans multiple years,
the aggregate Credit for the entire project shall be allowed in the last taxable year.
Under the terms of the Statute, the Credits are neither freely transferable nor refundable, but
the Statute permits Credits granted to a partnership or a limited liability company taxed as a
partnership to be bifurcated (i.e., disproportionally allocated under such pass-through entity’s
partnership agreement or operating agreement).
The Credits may not reduce the taxpayer’s liability for the Qualified Taxes to less than zero. If
the amount of the Credit exceeds the liability for Qualified Taxes for the year, the Credits have
a ten (10) year carryforward period but no carryback period.
Upon completion of the project, the DNR will issue a single certificate in the amount of the
eligible Credits equal to twenty-five percent (25%) of the Qualified Expenditures incurred
during the eligible taxable years, and a taxpayer must attach the certificate or legal
documentation of her or his proportional share of the certificate to the tax return on which the
Credits are claimed.
If a Recapture Event (as defined in the Statute) occurs during the five (5) year Recapture
Period (as defined in the Statute) with respect to a Qualified Historic Structure, then for any
taxable year in which the Credits are allowed, the applicable Qualified Taxes shall be
increased by applying a Recapture Percentage (as determined under the Statute) to the tax
decrease resulting from the application of Credits to the taxable year in question.

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No Authority to the Contrary
There are currently no rules, regulations, or other guidance published by either the DNR or the
DOR with respect to the operation of these rules. To the best of Applicant’s and Applicant’s
Authorized Representatives’ knowledge, there are no contrary authorities; however, analogous
support for the rulings requested does exist. Applicant received positive rulings from the
Wisconsin Department of Revenue and Georgia Department of Revenue for similar structures
under the state low-income housing tax credit programs in those states, which include similar
attributes to the Program. The Wisconsin and Georgia rulings are available upon request.

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Requested Rulings and Analysis
1.
If the IL Fund is respected as a partnership for federal income tax purposes, it will
be respected as a partnership for Illinois income tax purposes. In general, Illinois’ income
tax law conforms to the Code. Accordingly, we believe that if the IL Fund is treated as a
partnership for federal income tax purposes, it will be respected as a partnership for Illinois
income tax purposes.
2.
If the Fund Manger’s interest and the Class A Member’s interest in the IL Fund are
respected as partner interests for federal income tax purposes, they will be respected
as partner interests for Illinois income tax purposes. In general, Illinois’ income tax law
conforms to the Code. Accordingly, we believe that if each of the Fund Manager’s and Class A
Member’s interest in the IL Fund is treated as a partner interest for federal income tax
purposes, it will be respected as a partner interest for Illinois income tax purposes.
3.
If the IL Fund’s interest in an IL Partnership is respected as a partner interest in
an IL Partnership for federal income tax purposes, it will be respected as a partner
interest for Illinois income tax purposes. In general, Illinois’ income tax law conforms to the
Code. Accordingly, we believe that if the IL Fund’s IL Partnership Interest is treated as a
partner interest for federal income tax purposes, it will be respected as a partner interest for
Illinois income tax purposes.
4.
A Class B Member’s interest in the IL Fund need only be structured so that it
qualifies as a recognized ownership interest in the IL Fund for purposes of being able to
receive allocations of Credits from the IL Fund in accordance with the IL Fund’s
operating agreement. Under the Statute, a “Qualified Taxpayer” includes “the owner of the
[Q]ualified [H]istoric [S]tructure or any other person who may qualify for the [F]ederal
[R]ehabilitation [C]redit…” There is no definition of what constitutes an “owner” of a Qualified
Historic Structure in the Statute. Under the facts presented, the IL Partnership will own,
restore, and preserve a Qualified Historic Structure located in Illinois. The IL Fund will own an
interest in the IL Partnership that will entitle the IL Fund to receive an allocation of one hundred
percent of the Credits generated by the IL Partnership. In turn, COMPANY as founding
Member of IL Fund, Applicant (after admission as the Class A Member of IL Fund) and one or
more Purchasers (after admission as one or more Class B Members of the IL Fund), will each
own, indirectly through the IL Fund, an ownership interest in each IL Partnership to which the
IL Fund is admitted, which in turn, owns directly the Qualified Historic Structure, the restoration
and preservation of which will generate the Credits. Accordingly, each of the IL Fund,
COMPANY, the Class A Member and the Class B Members will own an indirect ownership
interest in each Qualifying Historic Structure in which each IL Partnership invests. It does not
appear that there is anything in the Statute that would require the Class B Members to qualify
as partners for federal and Illinois income tax purposes, so long as the Class B Members
qualify as “state law members” of the IL Fund under Illinois corporate law and the Statute. The
parties intend to structure a Class B Member interest so that it qualifies as a member of a
limited liability company under Missouri and Illinois corporate law.
5.
If the federal income tax treatment of the proposed Allocations is respected, it will
be respected for Illinois income tax purposes. Applicant believes it is likely that the Internal
Revenue Service (“IRS”) will treat the Allocations, as described above, as “disguised sales” for

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federal income tax purposes, based on the holding of Virginia Historic Tax Credit Fund 2001
LLC, et. al., v. Commissioner of Internal Revenue. Under the authority of this case,
Applicant believes that the IRS would hold that IL Fund’s allocations of Credits to its Members
would be collapsed as taxable sales of the Credits by COMPANY to the other IL Fund
Members for federal income taxes. Accordingly, because Applicant desires certainty in its
treatment of the Allocations for federal and Illinois income tax purposes, Applicant intends to
treat the Allocations as taxable sales of Credits for federal and Illinois income tax purposes,
and as allocations of Credits, for Illinois corporate law purposes and for purposes of the
Statute.

6. Under the Statute, only taxpayers that apply the Credits (in this case, the Class A
   Member and the Class B Members) would be subject to recapture. Under the Statute, if a
   Recapture Event occurs during the Recapture Period with respect to a Qualified Historic
   Structure, then for any taxable year in which the Credits are allowed, the applicable Qualified
   Taxes shall be increased by applying a Recapture Percentage to the tax decrease resulting
   from the application of Credits to the taxable year in question. Accordingly, under the
   transactions presented above, only the Class A Member and the Class B Members of the IL
   Fund would be subject to recapture, if applicable.
7. There are no limitations on the number of Purchasers who may participate in the IL
   Fund’s Credits as Class B Members, so long as each Purchaser is admitted to IL Fund
   prior to the end of the year in which each year’s Credits vest. The Statute permits
   allocations of Credits relating to the restoration and preservation of a Qualified Historic
   Structure that is owned by a partnership or a limited liability company taxed as a partnership to
   be disproportionally allocated under such pass-through entity’s partnership agreement or
   operating agreement. The Statute does not appear to provide any provisions that would limit
   participation in a particular pass-through entity to only those Qualified Taxpayers who owned
   an interest in the pass-through entity prior to the date that the only or last building of the
   restored and preserved Qualified Historic Structure is Placed in Service. Accordingly, under
   the Allocations as presented, to the extent that a Purchaser is admitted as a Class B Member
   to the IL Fund prior to the next annual Credit vesting date (i.e., December 31 st of the Credit
   allocation year, which shall also be the last day of the IL Fund’s tax year) for various existing
   Qualified Historic Structures (in which the IL Fund participates through the IL Partnerships),
   such Purchaser can negotiate with COMPANY for an Allocation of Credits from such next
   vested year’s Credits.
   So long as the Class A Member and Class B Members own their respective Membership
   interests in the IL Fund by December 31 in the year in which Credits are allocated
   (which shall be the last day of the IL Fund’s taxable year), those Members will be able to
   claim their Credits for the allocation year; the timing of making their capital
   contributions or “deemed payments” is irrelevant to when each Member may utilize its
   Credits. The Statute permits allocations of Credits relating to the restoration and preservation
   of a Qualified Historic Structure that is owned by either a partnership or a limited liability
   company taxed as a partnership to be disproportionally allocated under such pass-through
   entity’s partnership agreement or operating agreement. The Statute does not appear to
   contain any requirements about when the partners or members of a pass-through entity must
   make their capital contributions or “deemed payments”. Thus, when partners of partnerships
   or members of limited liability companies make these payments is irrelevant to when the
   partners or members may claim their Credits.

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RULING
Section 228 of the Illinois Income Tax (“IITA” 35 ILCS 5/228) provides:
Historic preservation credit. For tax years beginning on or after January 1, 2019 and ending on
or before December 31, 2023, a taxpayer who qualifies for a credit under the Historic
Preservation Tax Credit Act is entitled to a credit against the taxes imposed under subsections
(a) and (b) of Section 201 of this Act as provided in that Act. If the taxpayer is a partnership or
Subchapter S corporation, the credit shall be allowed to the partners or shareholders in
accordance with the determination of income and distributive share of income under Sections
702 and 704 and Subchapter S of the Internal Revenue Code. If the amount of any tax credit
awarded under this Section exceeds the qualified taxpayer's income tax liability for the year in
which the qualified rehabilitation plan was placed in service, the excess amount may be carried
forward as provided in the Historic Preservation Tax Credit Act.
Section 704(b) of the Internal Revenue Code (IRC) provides:
(b) Determination of distributive share. A partner’s distributive share of income, gain, loss,
deduction, or credit (or item thereof) shall be determined in accordance with the partner’s
interest in the partnership (determined by taking into account all facts and circumstances), if—
(1) the partnership agreement does not provide as to the partner’s distributive share of income,
gain, loss, deduction, or credit (or item thereof), or
(2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit
(or item thereof) does not have substantial economic effect.
Treasury Regulations Section 1.704-1(b)(4)(ii) provides, regarding a partner’s distributive share of
credits of the partnership:
Credits. Allocations of tax credits and tax credit recapture are not reflected by adjustments to
the partners' capital accounts (except to the extent that adjustments to the adjusted tax basis
of partnership section 38 property in respect of tax credits and tax credit recapture give rise to
capital account adjustments under paragraph (b)(2)(iv)(j) of this section). Thus, such
allocations cannot have economic effect under paragraph (b)(2)(ii)(b)(1) of this section, and the
tax credits and tax credit recapture must be allocated in accordance with the partners' interests
in the partnership as of the time the tax credit or credit recapture arises. With respect to the
investment tax credit provided by section 38, allocations of cost or qualified investment made
in accordance with paragraph (f) of § 1.46-3 and paragraph (a)(4)(iv) of § 1.48-8 shall be
deemed to be made in accordance with the partners' interests in the partnership. With respect
to other tax credits, if a partnership expenditure (whether or not deductible) that gives rise to a
tax credit in a partnership taxable year also gives rise to valid allocations of partnership loss or
deduction (or other downward capital account adjustments) for such year, then the partners'
interests in the partnership with respect to such credit (or the cost giving rise thereto) shall be
in the same proportion as such partners' respective distributive shares of such loss or
deduction (and adjustments). See example 11 of paragraph (b)(5) of this section. Identical
principles shall apply in determining the partners' interests in the partnership with respect to tax
credits that arise from receipts of the partnership (whether or not taxable).
Section 10(d) of the Historic Preservation Tax Credit Act (Credit Act) 35 ILCS 31/10(d) states:

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If the taxpayer is (i) a corporation having an election in effect under Subchapter S of the
federal Internal Revenue Code, (ii) a partnership, or (iii) a limited liability company, the credit
provided under this Act may be claimed by the shareholders of the corporation, the partners of
the partnership, or the members of the limited liability company in the same manner as those
shareholders, partners, or members account for their proportionate shares of the income or
losses of the corporation, partnership, or limited liability company, or as provided in the bylaws
or other executed agreement of the corporation, partnership, or limited liability company.
Credits granted to a partnership, a limited liability company taxed as a partnership, or other
multiple owners of property shall be passed through to the partners, members, or owners
respectively on a pro rata basis or pursuant to an executed agreement among the partners,
members, or owners documenting any alternate distribution method.
Sections 10(f) of the Credit Act allows the Department of Natural Resources to adopt rules to
implement Section 10, and Section 25 of the Credit Act authorizes the Department of Natural
Resources to adopt rules for the administration of the Credit Act.
As indicated above, in the case of a partnership, IITA Section 228 states that the historic preservation
credit is allowed to partners in accordance with sections 702 and 704 of the IRC. Under IRC Section
704(b), credits must be allocated to partners in accordance with the partners' interests in the
partnership as of the time the credit arises. However, Section 10(b) of the Credit Act allows partners
to claim the credit in the same manner as the partners account for their proportionate shares of the
income or losses of the partnership or as otherwise provided in the partnership agreement. In
addition, Section 10(b) of the Credit Act provides that in the case of multiple owners of property,
including credits awarded to a partnership, credits may be divided between partners pursuant to an
executed agreement documenting any alternative distribution method. Accordingly, under Section
10(b) of the Credit Act, a partnership may allocate the historic preservation credit to partners in the
same manner partners share income or loss, or otherwise as provided in the partnership agreement,
regardless of whether the agreed upon allocation is in accordance with the partners' interests in the
partnership. In addition, Section 10(b) of the credit Act allows partners to divide the credit pursuant to
an executed agreement documenting any alternative distribution method. In the absence of either a
provision in the partnership agreement or an executed agreement among partners documenting an
alternative distribution method, a partnership may allocate credits to partners in accordance with
distributive shares of income or loss, or in accordance with the partners’ interests in the partnership.
Section 10(c) of the Credit Act requires the taxpayer to attach the certificate or legal documentation of
her or his proportional share of the certificate to the tax return on which the credits are claimed.
Your letter indicates that IL Fund will own partnership interests in IL Partnerships that own qualified
historic structures and receive historic preservation tax credits. Pursuant to the partnership
agreements, 100% of the awarded credits will be allocated to IL Fund. IL Fund is an LLC whose
members include COMPANY, Class A members and Class B members. IL Fund elects to be taxed as
a partnership. Prior to the end of the IL Fund’s taxable year in which a credit is awarded, the partners,
including COMPANY, Class A members and Class B members, will execute an agreement dividing
the credit among the partners. The agreement requires that the Class B members and Class A
members make a payment to COMPANY in consideration for the division of the credit. Pursuant to
Section 10(b) of the Credit Act, COMPANY, the Class A members, and Class B members may claim
the respective shares of the historic preservation credit as provided in their agreement. Each partner
should attach to the partner’s tax return claiming the credit a copy of their executed agreement
documenting the partner’s proportional share of the credit certificate. In no event may a partner claim

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an amount of credit exceeding the partner’s agreed upon share, nor may the aggregate credits
claimed by the partners exceed the amount of credit awarded.
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department. If you have questions regarding
this GIL you may contact Legal Services at (217) 782-7055. If you have further questions related to
Illinois income tax laws, visit our website at www.revenue.state.il.us or contact the Department’s
Taxpayer Information Division at (217) 782-3336.
Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)