PLR 1045013: Carryback of unused rehabilitation credits qualifies for the specified-credit rule

Plain-English summary

The IRS ruled that the specified-credit limitation rule applies when taxpayers carry back unused rehabilitation credits. The credits arose from qualified rehabilitation expenditures allocated to individual taxpayers through an S corporation. The taxpayers had been unable to use all of the investment credit in the year it was generated and intended to carry the excess back to the prior year. The ruling was based on the taxpayers' representations that the rehabilitation credits were properly taken into account in the credit year, and it did not express an opinion on the validity of the credits themselves.

Ruling snapshot

• Question: Does the specified-credit rule apply to a carryback of unused rehabilitation credits?
• Outcome: Approved
• Key authorities: IRC §§ 38, 39, 46, and 47

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201045013 [Third Party Communication:
Release Date: 11/12/2010 Date of Communication: Month DD, YYYY]
Index Number: 38.00-00, 46.00-00, 47.00-00
Person To Contact:
----------------------------------------- ----------------, ID No. -----------------
-------------------- Telephone Number:
------------------------------------------ ---------------------
Refer Reply To:
CC:PSI:5
PLR-114583-10
Date: August 3, 2010

                                                   LEGEND

Taxpayers = ---------------------------------------------------
------------------------------------------------

Corp = ------------------------------------------
-----------------------

b = ---------------------

c = -------

d = -------

City = -------------------

e = --------------

f = --------------

Dear -------------------------------:

  This letter responds to your authorized representative’s letter on your behalf,

dated b, and subsequent correspondence, requesting a private letter ruling involving the
special rule for specified credits under § 38(c)(4).

     The relevant facts as represented in your submission are set forth below.

PLR-114583-10 2

  You (hereinafter referred to as “Taxpayers”) own a controlling interest in a

number of passthrough entities that own and operate rental properties including
shopping centers, apartments, office buildings, and industrial flex space.
Among these, Taxpayers own an interest in Corp, an S corporation.

Taxpayers represent that distributable items from Corp for d included qualified
rehabilitation expenditures (QREs) taken into account under § 47 in d that were
attributable to an office building in City undergoing renovation. Taxpayers further
represent that these QREs were progress expenditures for which they made in d the
election under § 47(d)(5), and that their distributable share of these QREs generated an
investment credit in d of approximately $e. This amount was reported by Taxpayers on
their jointly filed d individual tax return, Forms 3468 and 3800. However, Taxpayers
could not use all of the investment tax credit generated in d, resulting in an excess
business credit of $f, which Taxpayers intend to carry back to c.

   Taxpayers generated no other business credits in d, and did not have any credit

carryforwards to c or d. Taxpayers have not yet filed a return reporting an excess
business credit carryback to c.

   Taxpayers request a ruling that the rule for specified credits under

§ 38(c)(4) applies to a carryback of its unused d rehabilitation credits in c.

    Section 38(a) allows an income tax credit for a taxable year equal to the business

credit carryforwards carried to the taxable year, the amount of the current year business
credit, plus the business credit carrybacks carried to the taxable year.

    Under § 38(b)(1), one component of the current year business credit is the

investment credit determined under § 46. Under § 46(1), the amount of the investment
credit includes the rehabilitation credit under § 47.

    Section 47(a) provides that the rehabilitation credit for any taxable year is the

sum of 10 percent of the QREs with respect to any qualified rehabilitated building other
than a certified historic structure, and 20 percent of the QREs with respect to any
certified historic structure.

   Section 38(c)(1) provides that the general business credits allowed for any

taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over
the greater of either the tentative minimum tax for the taxable year, or 25 percent of
so much of the taxpayer’s net regular tax liability as exceeds $25,000.

    Under § 38(c)(4)(A)(ii), in applying § 38(c)(1) to specified credits, the tentative

minimum tax shall be treated as being zero. Section 38(c)(4)(B)(vii) includes in the
definition of specified credits the credit determined under § 46 to the extent that such
credit is attributable to the rehabilitation credit under § 47, but only with respect to

PLR-114583-10 3

qualified rehabilitation expenditures properly taken into account after December 31,
2007. The legislative history to § 38(c)(4)(B)(vii), enacted as part of the Housing
Assistance Tax Act of 2008 (P.L. 110-289, § 3022(c)), clarifies that the effective date of
this provision includes any carryback of the credit. [See, Technical Explanation of
Division C of H.R. 3221, “The Housing Assistance Tax Act of 2008” As Scheduled for
Consideration By the House of Representatives on July 23, 2008. Joint Committee on
Taxation publication JCX-63-08, at 31.]

    Section 39(a)(1) provides that if the sum of the business credit carryforwards to

the taxable year plus the amount of the current year business credit for the taxable year
exceeds the amount of the limitation imposed by § 38(c) for the taxable year (“unused
credit year”), the excess (to the extent attributable to the amount of the current year
business credit) shall be a business credit carryback to the taxable year preceding the
unused credit year and a business credit carryforward to each of the 20 taxable years
following the unused credit year.

  Taxpayers represent that their rehabilitation credits were properly taken into

account in d. Accordingly, based solely on the foregoing law and facts and
representations made by Taxpayers, we rule that § 38(c)(4)(A)(ii) applies to a carryback
of Taxpayers’ unused rehabilitation credits in c.

   Except as specifically set forth above, no opinion is expressed or implied

concerning the federal income tax consequences of the above described facts under
any other provision of the Code or regulations. In particular, no opinion is expressed or
implied regarding the validity of any rehabilitation credits claimed by Taxpayers, nor
whether Taxpayers’ rehabilitation credits were properly taken into account in d.

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

                                      Sincerely,


                                      Christopher J. Wilson
                                      Senior Counsel, Branch 5
                                      Office of Associate Chief Counsel
                                      (Passthroughs and Special Industries)

Enclosure: 6110 copy