Can Illinois Historic Preservation Tax Credits be divided among partners or LLC members however they agree in a contract, instead of strictly by ownership percentage?

Subject

Credits

Plain-English summary

The Illinois Department of Revenue confirmed that the state's Historic Preservation Tax Credit (SHTC) can be divided among partners in a partnership, or members of an LLC taxed as a partnership, according to whatever alternate distribution method the partners spell out in a written agreement -- it doesn't have to match their actual ownership percentages.

A representative wrote in on behalf of a "Fund," an LLC involved in a multi-layer real estate deal to rehabilitate a historic building. Illinois' Department of Natural Resources had awarded up to $3,000,000 in SHTCs to the project. Under a chain of operating agreements, the project owner was to allocate 100% of the credits to a general partner entity, which in turn would allocate 100% to the Fund, which in turn would allocate the credits to its own members ("end users") -- all under negotiated agreements rather than based on each party's percentage ownership interest.

The problem was that two Illinois statutes seemed to conflict: 35 ILCS 5/228 says historic preservation credits granted to a partnership or S corp "shall be allowed to the partners or shareholders in accordance with the determination of income and distributive share of income" under IRC Sections 702 and 704 (which, per IRS regulations, generally ties credit allocations to a partner's actual ownership interest because credit allocations can't have "substantial economic effect"). But 35 ILCS 31/10(d), part of the Historic Preservation Tax Credit Act itself, says the credit "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."

The Department resolved the tension in favor of the more flexible provision. It relied on its own prior General Information Letter, IL 20-0007-GIL (April 3, 2020), which it called "directly on point," and concluded that under 35 ILCS 31/10(d) a partnership or LLC "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." Only in the absence of any such agreement does the statute default to allocating credits by ownership share.

This is a General Information Letter (GIL), not a Private Letter Ruling. The requester actually asked for a binding Private Letter Ruling, but the Department decided the request warranted only a GIL instead. A GIL is expressly non-binding on the Department (2 Ill. Adm. Code 1200.120(b) and (c)) -- it merely explains how the Department reads the law and points to relevant authority, and it does not carry the taxpayer-specific, binding force of a PLR.

What this means for you

Partnerships and LLCs claiming the Historic Preservation Tax Credit

If your partnership or LLC (taxed as a partnership) receives an award of Illinois Historic Preservation Tax Credits, you are not locked into allocating the credit strictly by each partner's or member's ownership percentage. Under 35 ILCS 31/10(d), you can instead divide the credit however your partners or members agree in an executed agreement documenting an "alternate distribution method" -- as this GIL and the Department's reasoning show, that agreement doesn't need to track anyone's actual share of income, gain, or loss. Each partner must attach documentation of their agreed-upon share to the return that claims the credit (35 ILCS 31/10(c)), and no partner may claim more than their agreed share, nor may the group's claims exceed the total credit DNR awarded.

Fund sponsors and syndicators structuring multi-tier deals

This GIL describes exactly the kind of layered structure (project owner to general partner to fund to end-user investors) commonly used to syndicate historic tax credits. The Department's reasoning supports passing the credit down through multiple tiers of entities, each governed by its own operating agreement specifying a distribution method other than pro rata by ownership -- as happened here with the Project Owner LPA, General Partner OA, and Fund OA. If you're structuring a similar deal, document the intended allocation clearly in each entity's governing agreement at every tier.

Accountants and tax professionals

Because a GIL is not binding on the Department (unlike a Private Letter Ruling), you cannot rely on this letter the way you could a PLR issued to your own client. It does, however, show how the Department resolves the apparent conflict between 35 ILCS 5/228 (which ties the credit to IRC Sections 702/704 distributive-share rules) and 35 ILCS 31/10(d) (which allows an alternate distribution method by agreement): the Department treats 35 ILCS 31/10(d)'s agreement-based allocation as controlling, with the income/loss-based default under 35 ILCS 5/228 and IRC Section 704(b) applying only when no such agreement exists. If a client wants certainty specific to their own transaction, they would need to request (and the Department would need to grant) an actual Private Letter Ruling under 2 Ill. Adm. Code 1200.110 -- which is what the requester here originally sought but did not receive.

Common questions

Q: Does the Illinois Historic Preservation Tax Credit have to be split among partners based on their ownership percentage?
A: No, not necessarily. Under 35 ILCS 31/10(d), the credit can be passed through to partners, members, or owners on a pro rata basis, OR pursuant to an executed agreement documenting any alternate distribution method. Only if there's no such agreement does the allocation default to following partnership interests (per 35 ILCS 5/228 and IRC Sections 702/704).

Q: Doesn't federal tax law require credits to follow a partner's actual ownership interest?
A: Generally, yes, for federal tax credits -- Treasury Regulation Section 1.704-1(b)(4)(ii) says tax credit allocations can't have "substantial economic effect," so they must follow the partners' interests in the partnership absent other guidance. But this GIL concludes that Illinois's own statute, 35 ILCS 31/10(d), specifically overrides that default for the state historic preservation credit by allowing an alternate distribution method set out in an agreement.

Q: What happens if the partnership agreement doesn't specify how to split the credit?
A: Then the statute's default rule applies, and the credit is allocated to partners or members in accordance with their distributive share of income or loss (i.e., generally their partnership/ownership interest), consistent with 35 ILCS 5/228 and IRC Sections 702 and 704.

Q: Is this GIL binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter, not a Private Letter Ruling. A GIL is expressly non-binding on the Department under 2 Ill. Adm. Code 1200.120(b) and (c) -- it explains the Department's general reading of the law but doesn't bind the Department to any outcome for a specific taxpayer's transaction, unlike a PLR issued under 2 Ill. Adm. Code 1200.110.

Q: Why didn't the requester get the Private Letter Ruling they asked for?
A: The letter states that "the nature of your request and the information provided requires that we respond with a General Information Letter (GIL)" instead of the requested PLR. The original text doesn't spell out further detail on why a PLR specifically was denied, though the requester's own submission notes the Department had previously issued only a GIL (IL 20-0007-GIL) on a similar, not-yet-closed transaction.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0005-gil.pdf

Original ruling text

IT-21-GC-0005 08/30/2021 CREDITS

Historic Preservation Tax Credit Historic Preservation Credit may be
Allocated to Partners Pursuant to Agreement of Partners. (This is a GIL.)
August 31, 2021

Re: COMPANY
Dear NAME:

This is in response to your letter received June 1, 2021, in which you requested 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.tax. illinois.gov.

The facts and analysis as you have presented them are as follows:

We are writing to you on behalf of our client, COMPANY, a STATE limited
liability company ("Fund"), to resolve issues with the Illinois Historic Preservation
Tax Credit ("SH TC") stated below. The Illinois Historic Preservation Tax Credit
Act, 35 ILCS 31/1 et seq. ("Act") which authorizes the SHTCs, became effective
on January 1, 2019, and permits a tax credit against certain taxable income in an
aggregate amount equal to 25% of qualified expenditures incurred by a qualified
taxpayer undertaking a qualified rehabilitation plan of a qualified historic structure.
The issue regarding the SHTCs and the Act involves the method of allocation of
the SHTCs among partners in or members of a partnership or limited liability
company which has an indirect ownership interest in the qualified taxpayer; various
Illinois statutes, namely 35 ILCS 5/228 and 35 ILCS 31/l0(d), provide conflicting
guidance on the extent to which such allocations can be made. We are seeking
guidance in the form of a Private Letter Ruling under Title 2, Section 1200.110 of
the Illinois Department of Revenue Regulations to resolve the conflicting guidance.
More specifically, we are requesting that for the transaction at issue, the parties be
permitted to allocate the SHTCs pursuant to an alternate distribution method that
does not involve allocation of the SHTCs in accordance with partnership or
membership interests.

The Fund's federal identification number is ##-#######. Its address is
ADDRESS and its telephone number is #####-#H#Ht-HHHI. The Fund has been
organized as a STATE limited liability company under ACT, and is currently
operating subject to an Amended and Restated Operating Agreement dated as of
February 1, 2020 ("Fund OA", attached hereto as Exhibit A). The issue, as it
applies to Fund, is not currently under investigation or audit by the Illinois
Department of Revenue ("DOR") nor subject to any pending litigation, nor is Fund
pursuing any protest, litigation or negotiation on the issue with DOR. There is no

case law or regulations dispositive of the request at issue. To the best knowledge
of the Fund and the Fund's representative, the DOR has not previously ruled on
the same or similar issue for Fund or an affiliate or predecessor of Fund. Neither
Fund nor any representative of Fund has previously submitted this issue or a
similar issue to the DOR. Fund requests that all Operating Agreements (as defined
below) be deleted from any publicly disseminated version of a Private Letter Ruling
or other ruling as may be issued by the DOR, as the Operating Agreement contain
proprietary and trade secrets that could financially harm the Fund in the event of
their release. To the extent that the Project Owner (as defined below) and the
General Partner (as defined below) would also be required to obtain a Private
Letter Ruling to resolve the issues within the Transaction (as defined below), the
Transaction is such that the Fund, Project Owner, and General Partner are all the
members of a "unitary group" as defined in Title 2, Section 1200.110(a)(3)(A)(ii) of
the Illinois Department of Revenue Regulations wherein Fund should be permitted
to file a request for a Private Letter Ruling with applicability to all such parties
without such request being considered a prohibited combined transaction, as all
issues in the Transaction are common to all such parties.

Statement of the Issues

The issue at hand is whether the SHTCs can be allocated by the original
recipient of the SHTCs to entities holding direct and indirect partnership and
membership interests in the original recipient, including but not limited to Fund,
and whether Fund can further allocate the SHTCs to its members pursuant to a
series of executed agreements among the partners, members or owners
documenting an alternate distribution method other than allocation to partners and
members 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.

Statement of the Facts and Desired Position

Under 35 ILCS 31/20(a), the State Historic Preservation Office ("SHPO"), a
division within the Illinois Department of Natural Resources, is permitted to
annually award an aggregate of $15,000,000 of total SHTCs pursuant to qualified
rehabilitation plans for qualified historic structures, as such terms are defined in
the Act. SHPO is not permitted to award more than $3,000,000 in HTCs with
regard to a single qualified rehabilitation plan.

In connection with allocation of SHTCs in the second round of 2019, SHPO
awarded up to $3,000,000 of SHTCs to the PROJECT, located at ADDRESS
(award attached hereto as "Exhibit B"). This project, also known as
DEVELOPMENT, involves the rehabilitation of BUILDINGS ("Project"), with the
Project to be developed, owned, and operated by BUSINESS, a STATE limited
partnership ("Project Owner"). In addition to qualifying for the SHTCs, the Project
Owner also received an allocation of low income housing tax credits pursuant to
Internal Revenue Code ("IRC") Section 42, and the Project Owner anticipated

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qualifying for federal historic rehabilitation tax credits pursuant to IRC Section 47.
BUSINESS, a STATE limited liability company ("General Partner") serves as the
general partner of the Project Owner and is entitled to certain allocations of profits,
losses, and cash flow from the Project Owner under the AGREEMENT, dated as
of DATE ("Project Owner LPA", attached hereto as "Exhibit C"). In addition,
Section 4.5.15 of the Project Owner LPA provides that the Project Owner shall
allocate 100% of the SHTCs to the General Partner. Under the Project Owner's
Certificate of Limited Partnership filed with the Illinois Secretary of State on DATE,
the Project Owner is a limited partnership for state law purposes. Under Section
11.5.2 of the Project Owner LPA, the General Partner shall not make any election
that would cause the Project Owner not to be treated as a partnership for federal
income tax purposes - in other words, the Project Owner will be treated as a
partnership for federal income tax purposes.

The General Partner was organized under STATE law as a limited liability
company pursuant to Articles of Organization filed with the STATE Secretary of
State on DATE. Following the award of the SHTCs by SHPO to Project Owner to
redevelop the DEVELOPMENT, the General Partner was restructured to admit
Fund as a member of General Partner, with the anticipation that Fund would be
allocated the SHTCs. Under the Second Amended and Restated Operating
Agreement of General Partner, made and entered into as of DATE ("General
Partner OA", attached hereto as "Exhibit D", together with the Fund OA and the
Project Owner LPA, the "Operating Agreements"), Fund was admitted as a
member of General Partner and was given a one percent (1%) membership
interest in the General Partner. The Fund remains obligated to make certain
capital contributions to the General Partner, and Section 5.09(v) of the General
Partner OA provides that the managing member of the General Partner shall "take
all steps necessary to cause [the General Partner] to allocate one hundred percent
(100%) of the [SHTCs allocated by Project Owner to General Partner] to [Fund]".
The General Partner OA anticipates that the General Partner will be taxed as a
partnership for federal income tax purposes. Finally, Sections 3.2(b) and 4.3 of
the Fund OA permit the Manager of the Fund to admit, as members into the Fund,
certain end users, who will further receive allocations of the SHTCs for the use of
the end users against taxes imposed by subsections (a) and (b) of Section 201 of
the Illinois Income Tax Act. The transactions as described in the above two
paragraphs by and among the Project, Project Owner, General Partner and Fund
shall be referred to hereafter as the "Transactions".

35 ILCS 31/10(d) states as follows:

[i]f a taxpayer is....(ii) a partnership, or (iii) a limited liability company, the
credit provided under this Act may be claimed by...the partners of the
partnership or the members of the limited liability company in the same
manner as those... partners, or members account for their proportionate
shares of the income or losses of the... partnership or limited liability
company. Credits granted to a partnership, a limited liability company taxed
as a partnership.... shall be passed through to the partners, members or
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owners respectively on a pro rata basis or pursuant to an executed
agreement among the partners, members or owners documenting any
alternate distribution method. (emphasis added).

In structuring the Transaction, the parties relied upon the language in 35
ILCS 31/l0(d) that permits the passing through of SHTCs to partners, members
and owners pursuant to "any alternate distribution method". As such, the SHTCs
were not anticipated to be allocated to the partners of the Project Owner, the
members of the General Partner, or the members of the Fund in accordance with
the determination of income and distributive share of income under Sections 702
and 704 of the Internal Revenue Code. Rather, in reliance on 35 ILCS 31/10(d),
the SHTCs were to be passed through from Project Owner to General Partner,
from General Partner to Fund, and from Fund to certain end users each in
accordance with an alternate distribution method, and each in accordance with an
agreement amongst such parties. General Partner is clearly a partner in the
Project Owner partnership, and Fund holds a membership interest in General
Partner, making the Fund a member of General Partner, a limited liability company.
Finally, end users would be admitted as members of Fund prior to any allocation
of SHTC, and thus would anticipate receipt of such SHTC allocations under 35
ILCS 31/l0(d).

Analysis of the Law

As noted above , 35 ILCS 31/10(d) permits credits granted to a partnership
or a limited liability company taxed as a partnership to 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. (emphasis added). The plain language of this statute
clearly permits the SHTCs to be allocated according to either method. However,
neither the term itself nor any of the individual words in the phrase "any alternate
distribution method" are defined in the Act, and there are no regulations, caselaw,
or further authority on the statute. As such, to further elucidate the meaning and
the intent of the legislature, we turn to other sources. In determining the plain
meaning of a statutory term, it is entirely appropriate to look to the dictionary for a
definition. People v. Perry, 864 N.E.2d 196, 208 (Ill. 2007). Webster's New
Collegiate Dictionary ("Webster's") defines "any" as "used to indicate one selected
without restriction ". Webster's also defines the
adjective "alternate" as "constituting an alternative ". Although the word "distribution" is a noun rather than an adjective, the
closest fitting definition of "distribution" in Webster's as a noun applicable here
would be the definition "a device by which something is distributed." Finally, the
noun "method" is defined by Webster's as "an orderly arrangement, development,
or classification."

Piecing these terms together, it would stand to reason that a partnership or
limited liability would be unrestricted in its selection of an "alternate distribution
method." As to the phrase "alternate distribution method", the dictionary definitions

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further shed light on this term to mean an "alternative" device other than passing
through on a pro rata basis, so long as the device was an "orderly arrangement."
The Project Owner LPA, the General Partner OA and the Fund OA each, and
collectively, lay out an orderly written arrangement by which the SHTCs are
allocated to the end users. In the Transaction, the Project Owner is the original
recipient of the SHTCs. Section 4.5.15 of the Project Owner LPA provides that
"[njotwithstanding anything to the contrary in this Agreement, the [Project Owner]
shall allocate 100% of the [SHTCs] to the General Partner...and the General
Partner shall not be permitted to allocate the [SHTCs] to any other party except
the [Fund]." Section 5.09(v) of the General Partner OA provides that the managing
member of General Partner "shall take all steps necessary to cause the Company
to cause [Project Owner]...to allocated one hundred percent (100%) of the
[SHTCs] to the Company”, and to further cause General Partner to allocate 100%
of the SHTCs to the Fund. Finally, Section 4.3 of the Fund OA provides that the
Fund shall "allocate and distribute all [SHTCs] to the End-Users pursuant to one
or more Tax Credit Allocation Agreements", all of which end-users would be
members of the Fund. Clearly, through separate agreements at the Project Owner
level, the General Partner level, and the Fund level, there is an intent to allocate
the SHTCs received by the Project Owner to a partner or member of such entity,
in an orderly arrangement and plan of distribution, rather than to such partners or
members in accordance with their partner or membership interests.

Nevertheless, the plain language of 35 ILCS 5/228 must be considered in
light of the above. 35 ILCS 5/228 states, in full, as follows:

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.

35 ILCS 5/228 would seem to counteract the flexibility of 35 ILCS 31/l0(d), in that
35 ILCS 3/228 only permits SHTCs to be allowed to partners and shareholders in
accordance with the determination of income and distributive shares of income
under Sections 702 and 704 and Subchapter S of the Internal Revenue Code
("Code"). Although Section 704(a) of the Code permits income, gain, loss,
deduction and credit to be allocated in accordance with an entity's partnership
agreement, 704(b) of the Code also requires that gain, loss deduction, and credit

shall be determined in accordance with a partner's interest in the partnership if an
allocation to a partner does not have "substantial economic effect".

Under IRC Regulation Section 1.704-I(b)(2)(i), the determination of whether
an allocation of income, gain, loss or deduction to a partner has "substantial
economic effect" involves a two-part analysis. The first portion of the analysis is
to determine if the allocation has "economic effect" (within the meaning of
paragraph (b)(2)(ii) of this section). Id. Further examining the exceptions in
paragraph 1.704-1(b)(4)(ii), as allocations of tax credits and tax credit recapture
are not reflected by adjustments to the partners’ capital accounts, such allocation
cannot have economic effect under paragraph (b)(2)(ii)(b)(1) of this section, and
"the tax credits....must be allocated in accordance with the partners’ interests in
the partnership as of the time the tax credit... arises." IRC Regulation |.704-
I(b)(4)(ii). Adhering to the allocation requirements of federal credits under the |
.104(b) regulations, which would be required a priori under 35 ILCS 5/228, the
SHTCs would have to be allocated to the partners in accordance with partnership
interests as such allocations cannot have "economic effect". The mandate that
SHTCs be allocated to partners in accordance with partnership interests directly
conflicts with the flexible regime of 35 ILCS 31/l0(d), which permits SHTCs to be
allocated pursuant to an executed agreement among the partners, members or
owners documenting any alternate distribution method.

As noted above, there are no regulations issued by the Illinois DOR on
these conflicting statutes, nor has the discrepancy ever been the topic of case law.
However, the DOR addressed the matter in a general information letter issued on
April 3, 2020, IL 20-0007-GIL ("General Information Letter"). In the General
Information Letter, the DOR was asked to opine on whether a member's interest
in an investment fund "need only be structured so that it qualifies as a recognized
owner interest" in such fund "for purposes of being able to receive allocations of
[SHTCs] from the [fund] in accordance with [such fund's] operating agreement."
The facts of the General Information Letter involved a project partnership wishing
to allocate 100% of certain SHTCs to such fund, and the fund wishing to allocate
100% of such SHTCs to its members, not necessarily in accordance with the
partner's interests in each partnership. In fact, the ultimate recipient of such
SHTCs would merely qualify as holding a recognized ownership interest in the fund
for state law purposes only. In the General Information Letter, the DOR addressed
the discrepancy between the two statutes also at issue in the Transaction,
suggesting that "under [35 ILCS 31/10(d)], 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." |d. at p. 12 (emphasis added). Furthermore, the General Information
Letter explained "[35 ILCS 31/l0(d)] allows partners to divide the credit pursuant to
an executed agreement documenting any alternative distribution method." Id.
(emphasis in original). The General Information Letter infers that the two statutes
can work in tandem, in that if an executed agreement documenting an "alternative

distribution method" does not exist, the default of allocating SHTCs in accordance
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with a partner's share of loss or income would apply. In its final application of the
statutes to the facts at hand, the General Information Letter provided that
"[pJursuant to [35 ILCS 31/l0(d)]", the fund at issue and its members "may claim
the respective shares of the historic preservation credit as provided in their
agreement". Id. at p. 12.

Conclusion

The Transaction is nearly identical to the factual scenario present in the
General Information Letter. The Project Owner desires to allocate SHTCs to the
General Partner, the General Partner desires to allocate SHTCs to the Fund, and
the Fund desires to allocate SHTCs to its members based upon an "alternative
distribution method" memorialized by the operating agreements for such entities,
but not in accordance with the partner's share of loss and income for such entity.
Also similar to the makeup of the parties in the General Information Letter, each of
the General Partner, Fund, and end users hold membership or partnership
interests in the Project Owner, General Partner, and Fund, respectively. The
General Information Letter is directly on point for the Transaction, and the
conclusions reached therein should be applied to permit the parties in the
Transaction to allocate the SHTCs in accordance with their alternate distribution
method.

For this Transaction, we would request DOR issue a Private Letter Ruling
rather than a general information letter. We are mindful that the DOR previously
chose to issue only a general information letter to address the inconsistencies
within the Act's provisions. However, the transaction undergirding the General
Information Letter had not yet closed, triggering an argument that the transaction
was not yet ripe, and such transaction involved the possibility of multiple projects
delivering SHTCs. In the Transaction, all parties have executed the Operating
Agreements which provide for the allocation of the SHTCs, and the SHTCs are
generated from only one Project in which the Fund will indirectly invest. Providing
a Private Letter Ruling specific to this Project and to the allocation of the SHTCs
in this closed, ripe transaction will give the parties more comfort to mitigate
structural risk and mitigate against reallocation of the SHTCs.

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

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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:

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

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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.

In order to obtain a tax credit, Section 10(b) of the Credit Act requires a taxpayer to apply
with the Department of Natural Resources (“DNR”). Section 10(b) also authorizes DNR
to determine the amount of rehabilitation expenditures eligible for the credit. Section 10(f)
of the Credit Act allows DNR to adopt rules to implement Section 10. Section 20 of the
Credit Act authorizes DNR to award not more than an aggregate of $15,000,000 in total
annual tax credits pursuant to qualified rehabilitation plans for qualified historic structures
and limits awards to $3,000,000 with regard to a single qualified rehabilitation plan.
Section 25 of the Credit Act authorizes DNR 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 in the second round of 2019, DNR awarded up to $3,000,000
of State Historic Tax Credits (“SHTCs”) to the Project. The Project was to be developed,
owned and operated by the Project Owner, an Illinois limited partnership. Pursuant to the
Project Owner LPA, the Project Owner is required to allocate 100% of the SHTCs to the
General Partner, an STATE limited liability company. According to the Operating
Agreements, your client, the Fund, was admitted as a member of the General Partner.
Pursuant to the General Partner OA, the General partner shall take all steps necessary
to cause the General Partner to allocate one hundred percent (100%) of the SHTCs
allocated by the Project Owner to the General Partner to the Fund. The Fund OA permits
the Manager of the Fund to admit, as members into the Fund, certain end users, who will
further receive allocations of the SHTCs.

The Project Owner desires to allocate SHTCs to the General Partner, the General Partner
desires to allocate SHTCs to the Fund, and the Fund desires to allocate SHTCs to its
members based upon an “alternative distribution method" memorialized by the operating
agreements for such entities, but not in accordance with the partner's share of loss and
income for such entity. Pursuant to Section 10(d) of the Credit Act, the Fund and its
members may claim the respective shares of the historic preservation credit awarded by
DNR as provided in their operating agreements. Pursuant to Section 10(c) of the Credit
Act, 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 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 by DNR.

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) 782-72844. 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,

Michael D. Mankowski
Associate Counsel - Income Tax

bc: Daily File
Correspondence File:

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