When Congress enacted certain tax credits, they meant to encourage activities otherwise unprofitable. To raise money for these projects, the promoters essentially sold tax credits in exchange for capital. This the Tax Court countenances, and exalts over many other Code provisions,  most recently in Historic Boardwalk Hall, 136 T.C. 1, released 1/3/11.

To make a very long story short, the New Jersey Sports and Exhibition Authority (NJSEA), a creation of the New Jersey State government, wanted to rehabilitate Boardwalk Hall in Atlantic City, New Jersey, as a sports and exhibition venue. The Hall was already on the National Register of Historic Places, so rehabilitation and restoration expenses would have qualified for the 20% tax credit pursuant to IRC§47.

NJSEA shopped their proposed partnership deal through a professional marketer of tax credits, and Pitney Bowes made the winning bid.

Wading through the extensive documentation that spelled out the deal, IRS tried to prove the deal was a sham, that Pitney Bowes had no substantial stake in the outcome of the rehabilitation or the ongoing operation of the Hall. The underpinning of  IRS’s argument is that absent the tax credit, Pitney Bowes’ participation lacked economic substance, and therefore the mandatory analysis of the net effect to Pitney Bowes’ pocketbook should disregard the effects of the tax credit.

The Tax Court responded that to disregard the effects of the tax credits would be to disregard Congress’ will–to encourage the rehabilitation of historic structures; that Congress knew that the majority of such rehabilitation projects could not succeed without tax incentives; and finally the Tax Court ran roughshod over any conflicting provision of Code or Regulations that IRS could muster.

The Third Circuit will no doubt have something to say about this. Follow.