A federal appeals court has scrapped a 12-year-old deal that called for a state agency to sell tax credits it received for rehabilitating Atlantic City’s historic Boardwalk Hall.
In the ruling this week, the court rejected the agreement between the New Jersey Sports & Exposition Authority and a former subsidiary of Pitney Bowes Inc., the Connecticut-based mail consolidator. The deal called for the firm to invest in the restoration project in return for some $19 million in so-called historic rehabilitation tax credits, or HRTCs, that the state qualified for under a federal program.
The case centers on the sports authority’s plan to renovate the 83-year-old Boardwalk Hall in the late 1990s. Under a program designed to spur historic restorations, the project was eligible for the federal tax breaks, which the agency sought to sell.
In 2000, the sports authority reached a deal that called for the Pitney Bowes subsidiary to invest $18 million in the project, according to the ruling. In exchange, the firm was given a 99 percent interest in a limited liability company that would collect the HRTCs in the ensuing years.
The project was completed in 2001, but the deal has been the subject of a court battle since 2009 after the Internal Revenue Service sought to invalidate it. The IRS alleged it was a “sham transaction” meant to improperly pass along the tax benefits to a buyer, and that the partnership was illegitimate because Pitney Bowes had no major stake in the success or failure of the project.
The agreement was upheld by a U.S. tax court early last year, but the appeals court on Monday sided with the IRS. The future of the case was not immediately clear today, but an advocate for tax credit programs said the case might have broader implications.
The court ruling was a rarity for the federal program, said John Leith-Tetrault, president of the National Trust Community Investment Corp., which guides and invests in development projects that qualify for tax credits. Some 38,000 projects have benefited from HRTCs, he said, but he knew of only two court cases in the program’s 35-year history.
But the challenge by the IRS raises a broader issue about the lack of guidelines over how tax credit programs can be used to attract investors, he said.
“I think the issue here in general is that the IRS has not published any guidance on the issues that are addressed by the court,” said Leith-Tetrault, who also chairs the Historic Tax Credit Coalition.
In its ruling, the three-judge panel agreed that the company “had no meaningful downside risk” because of a series of provisions that allowed it to recoup its investment in the event of a loss or a challenge by the IRS. The court also noted that the state showed the ability to fund the entire project before deciding to seek a buyer for the tax credits.
“PB and NJSEA, in substance, did not join together in (the LLC’s) stated business purpose — to rehabilitate and operate the East Hall,” the judges wrote. “Rather, the parties’ focus from the very beginning was to effect a sale and purchase of HRTCs.”
A sports authority spokesman said the agency’s attorneys were reviewing the case. A spokeswoman for Pitney Bowes said the firm sold a financial services subsidiary five years ago, but declined to comment further.