Mar 12, 2010

Seminar Paper: The "Historic" Rehabilitation Tax Credit

I'm publishing here a series of papers written by Loyola law students in my 'Property, Heritage and the Arts' seminar from the Fall of 2009. This paper was written by Andrew Prihoda.
The “Historic” Rehabilitation Tax Credit
Why the Current Tax Code is Stifling Incentives
to Invest in Our Nation’s History

By: Andrew Prihoda

I.                 I.  Introduction

By affixing his signature to the National Historic Preservation Act (“NHPA”) in 1966,[1] President Johnson joined Congress in both declaring historical preservation to be a national prerogative and directing the federal government to take an active role in promoting preservation activities.  Congress had raised some awareness of the goal of preserving historical properties;[2] however, these statutes merely provided penalties for unauthorized injury to or destruction of such properties[3] and mandated categorization and, where possible, acquisition of such properties by the Secretary of the Interior.[4]  While these statutes represented a huge step toward the goal, neither had clearly stated the need for historic preservation by Federal action, nor provided a mechanism by which that preservation could be achieved.[5]
Congress enacted the NHPA in 1966 to fill both of these voids.  To remedy the first, Congress emphasized that preservation of our historical foundations as a living part of our community development was necessary “to give a sense of orientation to the American people”[6] and that, further, an expansion and acceleration of federal preservation activities was necessary to encourage and support private investment.[7]  Congress further elucidated this need in its 1980 amendments to the NHPA, declaring that increased knowledge and better administration of our historic resources will improve the planning and execution of federally sponsored projects and will assist the economic growth and development of the nation.[8]  Thus, the Act intended to foster a consistent and coherent policy of preservation among federal agencies, which would encourage “the use of historic properties to meet the contemporary needs of society.”[9]
Addressing the second, the NHPA authorized Interior to create and maintain an increased and improved categorization of historic properties, the National Register of Historic Places (“Register”), inclusion in which would qualify owners of such properties for federal grants-in-aid.[10]  To assist in this process, Congress later amended the Act to encourage the establishment of state historical preservation offices (SHPOs),[11] which were tasked to administer the state’s preservation plan, with responsibilities including identifying historic properties, determining the eligibility of, and nominating, properties for listing on the Register, and evaluating eligibility for Federal preservation incentives.[12]  Thus, the SHPOs came to assume the role of gatekeepers, maintaining access both to the Register and to the benefits attached to it. 
Although these programs were intended to provide the means by which to pursue a national preservation policy, Congress began to recognize they alone would not be enough to “overcome existing biases in favor of investment in new construction.”[13]  The original grant program’s limited fund availability made developers question whether the stringent application process required for inclusion on the Register, and the conditions imposed therewith, were worth the benefits received.  Therefore, Congress acted swiftly in 1976, creating multiple new incentives.  In addition to a new grant and loan program,[14] Congress enacted the Tax Reform Act of 1976 (“TRA”),[15] which created the first federal tax incentives for historic preservation.  Over the following 30 years, Congress has tinkered with the tax incentives to provide an incentive that is both workable and effective.
This paper will proceed in 3 parts.  Part II will track the attempts of Congress to revise and adjust the historic preservation tax incentives to serve the goals of the NHPA.  Part III will discuss tax credits generally and the current rules concerning the Federal rehabilitation credit.  Finally, Part IV will review recently a proposed amendment to the rehabilitation credit to determine whether it better satisfies the goals of the NHPA.

II.              II.  The “Historic” Tax Incentive

The TRA provided two alternative incentives for owners of qualified historic buildings which were used in the owner’s trade or business or for the production of income: first, owners could amortize, or write off, their entire qualified rehabilitation expense over a period of 60 months, thus speeding up a process that before required that the expense be considered a capital expenditure and depreciated over the life of the property;[16] second, in the alternative, owners who performed a “substantial rehabilitation” could elect to depreciate the entire building at a rate normally available only to owners or developers of new commercial building.[17]  What constitutes a “substantial rehabilitation” will be covered below in Part III.
To qualify for this tax treatment, a building must either have been included in the Register, or located in a district designated by the Secretary of the Interior or by the state or local government as historically significant,[18] and must have been used in the owner’s trade or business or for the production of income.[19]  Furthermore, the renovations must have been certified by the Secretary of the Interior as being consistent with the historic character of such property or district.[20]
Congress enacted further incentives in 1978 (“1978 Act”),[21] attempting to qualify more rehabilitation projects for tax benefits.  This new incentive provided an investment credit, under then-section 46 of the Internal Revenue Code, equal to 10% of the rehabilitation expenses, including reconstruction but excluding acquisition or enlargement costs, for a qualified commercial historic building.[22]  However, Congress relaxed the qualification rules, requiring only that the building have been in use for twenty years prior to the rehabilitation and that at least 75% of the existing walls be retained as existing walls.[23]  The 1978 Act did not override the TRA, but, to prevent double dipping by taxpayers, it did specifically limit the ability of a taxpayer to claim both the amortization incentive and the investment credit.[24]  The provision did not so limit the ability of a taxpayer to claim the investment credit and the accelerated deprecation incentive.
Largely encouraged by the success of the 1978 Act, Congress revisited the tax incentives in 1981’s Economic Recovery Tax Act (“ERTA”).[25]  The ERTA repealed the amortization and accelerated depreciation incentives under the TRA,[26] electing instead to expand and increase the credit program enacted in the 1978 Act.  In place of the 10% credit, the ERTA created a three-tier investment credit under which an owner could receive a credit of 15%, 20%, or 25% of rehabilitation expenditures depending on the classification of the property rehabilitated.[27] The ERTA raised the minimum age for a qualified rehabilitated building from twenty to thirty years,[28] while retaining the “walls test” and the restriction to commercial buildings.[29]  Further, the ERTA allowed for a 25% investment credit for certified historic structures, retaining the definition of such structures under the TRA.[30]  Preservationists cheered the strengthening of the incentives, which one article estimated would “stimulate an additional 24 percent in annual growth of restoration activities.”[31]
However, taxpayers quickly realized an opportunity to reduce their tax liabilities to negligible levels by combining multiple deductions and credits from activities outside their main income-producing activity with the alternative minimum tax to create a “tax shelter.”  Therefore, in an attempt to limit the availability of these structures, Congress reversed course with the Tax Reform Act of 1986 (“1986 Act”), a complete overhaul of the Internal Revenue Code of 1954.[32]  Reflecting a policy of reducing credit amounts, the 1986 Act replaces the three-tier rehabilitation credit with a two-tier credit.[33]  This allows a credit of only 20% of rehabilitation expenses for certified historic structures, and 10% for buildings “other than certified historic structures,” which were originally placed in service prior to 1936.[34] 
Additionally, the 1986 Act restricts the ability of taxpayers to claim losses or credits earned from activities in which the taxpayer did not materially participate.[35]  This provision disallows, or postpones, any losses or credits earned from such “passive activities,”[36] but provide an exception for individual taxpayers in the case of passive rental real estate losses or credits, in which the individual holds at least a 10% interest in such an activity.[37]  This exception allows such an individual to claim a deduction of up to $25,000 of the amount of credit or loss from the passive activity.[38]  However, this amount is reduced, or “phased out,” by the amount by which the individual’s adjusted gross income (“AGI”) exceeds $100,000.[39]  Thus, the Act allows an individual whose AGI is $100,000 or less to claim a deduction of $25,000, but prohibits any allowance where the individual’s AGI exceeds $150,000. 
The 1986 Act does make an attempt to maintain the rehabilitation incentive by making a further exception to the rental real estate allowance where a taxpayer claims the rehabilitation credit.  For these taxpayers, these sections relax the participation requirement[40] and raise the phase-out limitation from $100,000 to $200,000.[41]  Thus, a taxpayer who participates in any measure and whose AGI is less than $250,000 may claim a deduction of up to $25,000 of his qualified rehabilitation expenses per year.  Although this provision may have the best of intentions, the restrictions of § 469 still have the effect of reducing the ability of many taxpayers, particularly individuals, to claim the rehabilitation tax credit in the first place.  This will be discussed in more detail in the next section.
With only minimal amendments, the 1986 Act remains largely the law in force.[42]  The next section of this paper will discuss this current law and its implications for the future of historic preservation. 
Additionally, on Oct. 1, 2009, members of the U.S. Senate and House of Representatives introduced legislation[43] that would make potentially beneficial changes to the federal rehabilitation tax credit and provide a greater incentive for the reuse of historic and older buildings.  Part IV of this paper will review these suggested changes and discuss whether they will help the tax incentive program better serve the goals of the NHPA.

III.            The Federal Rehabilitation Credit

As a preliminary consideration, this paper wishes to define a tax “credit” and, further, to distinguish a “credit” from a “deduction.”  A tax credit is a dollar-for-dollar reduction in tax owed. A tax deduction, on the other hand, is a reduction in taxable income, and is considered before computing the tax owed.  Thus, because the amount of tax owed is based on a percentage of taxable income, the taxable value of a credit greatly outweighs the value of a deduction.
As a second consideration, the current Internal Revenue Code (26 U.S.C.) considers the rehabilitation credit as one of several credits[44] that comprise the investment credit under section 46.  The investment credit, in turn, is subject to the section 38 General Business Credit.[45]  Generally, section 38 uses the alternative minimum tax provided under I.R.C. § 55 to limit the amount any credit allowed under the section.[46]  This effectively restricts the use of business credits to offset alternative minimum tax liability.  Additionally, like other business credits, the rehabilitation credit is available only for properties used by the taxpayer in his trade or business or for the production of income.[47]
Section 47 of the Internal Revenue Code authorizes the rehabilitation credit and governs its mechanics.  Generally, the section serves four functions: first, it describes the amounts of the credit;[48] second, it determines the timing for taking rehabilitation expenditures into account;[49] third, and perhaps most importantly, it defines property to which the section applies;[50] and, fourth, it provides a process to accelerate recovery of the credit in certain situations.[51]
In determining the amount of the credit, as mentioned above in Part II, section 47 varies based on the classification of the building: for a building which is a “certified historic structure,” the owner, developer, or, under certain circumstances, lessee may claim a credit for 20% of the “qualified rehabilitation expenses;” for a building which is not a certified historic structure, but was originally placed in service prior to 1936, the credit is 10%.[52]  Definitions of these terms will be discussed below.
As discussed in Part II, the current credit is a reduction from the high-water mark of 25% set under the 1981 ERTA.[53]  The NPS is quick to trumpet the successes of the preservation incentives, including over $50 billion in investment since 1976, including a record $5.64 billion in 2008 alone.[54]  However, a more careful review of the annual report reveals that investment in historic properties declined to record lows during the period immediately following the 1986 Act, and did not begin to rise until the more business-friendly tax acts beginning in the late 1990s.[55]  So, while it is true that the two decades since 1986 have seen an enormous growth in the investment in historic preservation, this likely has been spurred less by a true availability of the tax credit and more by corporations seeking tax shelters contrary to the purposes of the 1986 Act if the first place.
Next, the timing provisions require that the expenditures be taken into account in the year in which the building is placed in service.[56]  Generally, this means that the project has been completed to a point, which would allow for occupancy of either the entire building or, at least, of some identifiable portion of the building.[57]  If the building is never removed from service, however, the “placed in service” date will be the same as the project completion date.[58]  Additionally, if the building is used for personal purposes after the rehabilitation, the credit will not be allowed until the property is converted to business use.[59]  While these provisions are important to designate when expenditures may be claimed, they also serve to reinforce the allowance of the credit only for income-producing property.
The section does permit for an early accounting of the expenditures in the case of self-rehabilitated buildings, where more than 50% of the expenditures will be made directly by the taxpayer.[60]  These so-called “progress expenditures” are proper where taxpayer reasonably expects that the rehabilitation will be completed within a two-year period and that the building will be a qualified rehabilitated building upon completion.[61]  Additionally, no amount may be claimed under this section during the year in which the building is put in service, because at that point the entire credit becomes available.[62]
Application of section 47(d) requires an election by the taxpayer, which is irrevocable except with consent of the Secretary of the Treasury.[63]  Progress expenditures may provide a measure of relief to individual developer-taxpayers; however, they additionally seem geared toward assisting corporate taxpayers, which have large amounts of available cash and do not require financing to complete the rehabilitation project.
Turning, finally, to the definitions, the section clearly delineates between two categories of buildings to determine the credit amount.  These definitions depend on certain characteristics of the building, and each carries with it a different set of responsibilities for the developer.  To claim the credit under either category, the building must have undergone a “substantial rehabilitation,” which requires that the qualified rehabilitation expenditures must exceed the greater of the buildings adjusted basis or $5,000, over a 24-month period including or ending in the taxable year in which the taxpayer claims the credit.[64]  Alternatively, owners may qualify for a 60-month timeframe, where they have made greater upfront effort to develop a phased architectural plan.[65]
Preliminarily, this paper should define “qualified rehabilitation expenses.”  These include any depreciable expenditure for the rehabilitation of property, which is nonresidential real property, residential rental property, or an addition or improvement to either of the above.[66]  Certain costs, however, are specifically excluded by section 47.  For instance, neither acquisition costs, nor costs to enlarge an existing structure will be included.[67] 
Moving to the first category of rehabilitated property, a “certified historic structure,” [68] is either a building that is listed in the National Register of Historic Places (“Register”), or that is located in a “registered historic district” and has been certified by the Secretary of the Interior as being historically significant to that district.  A “registered historic district” must either be listed in the Register, or substantially meet all the requirements for listing and have been designated by a state or local government “as containing criteria that will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district.[69]
Where a building meets the above requirements, the National Park Service (NPS) and state and/or local historic preservation organization, where available, must conduct a thorough review of the building and any proposed rehabilitation project to ensure that the project meets the standards set forth by the Secretary of the Interior.[70]  During this certification process, the developer completes a three-part application, in which he must certify the historic nature of the building,[71] describe in detail the work to be done,[72] and, upon completion, submit evidence of the rehabilitation for final certification by Interior.[73]  The NPS recommends that Parts I and II be certified before beginning construction, as a denial at either stage may disallow the tax credit.[74] 
Additionally, the NPS charges an application fee based on the size of the rehabilitation ranging from free, for projects with a budget under $20,000, to $2,500, for projects exceeding $1 million.[75]  Furthermore, any property certified by Interior as historic bears an additional burden as it must meet Interior’s guidelines regarding its treatment once it is put in service.[76]
Beyond the “certified historic structure,” section 47 extends the credit to “qualified rehabilitated buildings.” [77]  This category includes buildings placed in service prior to 1936, but which are not “certified historic structures,” which have been “substantially rehabilitated,” and which satisfy the “walls test.”[78]  As mentioned in Part II, the “walls test” requires that at least 75% of the exterior walls of the original building are retained, at least 50% as external walls, and that at least 75% of the interior framework also be retained.[79]
The requirements for a “qualified rehabilitated building” are more relaxed than those for a “certified historic structure,” but are still relatively inaccessible to individual owners.  For one thing, while the 20% certified historic structure credit may reach housing, albeit only rental housing, the 10% credit is not allowed for any residential property.  Additionally, there are fewer and fewer buildings left which have been in use since 1936 and the number is only growing smaller.  This trend is slowly rendering ineffective the 10% credit.  Allowing for use of the credit in more residential situations and a more reasonable age requirement would certainly open the door for more historic investment.
As an additional limiting factor affecting the ability of individuals to access either category, the substantial rehabilitation requirements do not take into account inflation or higher real estate costs in certain parts of the country.  Therefore, in some areas it is more difficult for individuals or persons with smaller rehabilitation projects to reach the substantial rehabilitation’s adjusted basis requirement.  A relaxed or reduced substantial rehabilitation requirement that considers real estate values across the country would very much help to satisfy the goals of preservation.
Further making both categories inaccessible are the “passive loss” rules of I.R.C. § 469, described above in Part II.[80]  As previously mentioned, where a taxpayer does not materially participate in an income-producing activity, any loss or credit from that activity is disallowed until a later year when the taxpayer does materially participate.  Although there is an exception to this disallowance in the case of rental real estate, the exception does not make this credit any more accessible because it converts the credit into a deduction to be taken before the assessment of tax.  Losing the dollar-for-dollar tax reduction of the credit renders this incentive far less beneficial or attractive.
Moreover, taxpayer-owners are unable to transfer or alienate the credits, without resorting to some convoluted “investment vehicle.”[81]  The investment vehicle of choice for most developers is the flow-through entity, typically in the form of a limited partnership or limited liability company.[82]  Using this vehicle, the developer may seek out an investor in a higher tax bracket, like a bank or corporation, who might provide much-need upfront capital for the rehabilitation in return for use of the credit.  This concept, therefore, provides flexibility in the allocation of profits from the building once placed in service, while allowing the rehabilitation credit to flow through to an investor, who might be able to use it.[83] 
This process, however, is still cumbersome and requires the release of some rights.  Additionally, taken together with the passive loss limitation, it could keep a potential developer from being able to enjoy the tax benefit, thus reducing the incentive to invest in a historic property in the first place.  It is likely that both of these issues could be resolved by allowing open transferability or refund of the credit, which would enable lower income owners to obtain equity necessary to complete a rehabilitation project. Both measures have been employed with great success by a few state rehabilitation credit programs.[84]
Part II of this paper mentioned that efforts were under way in Congress to amend the rehabilitation tax credit.  These proposed amendments address many of these concerns.  The next section of this paper will briefly discuss this legislative effort.

IV.           The CRRA: Rehabilitating the Rehabilitation Credit

On October 1, 2009, members of both houses of Congress proposed identical bills to amend the historic tax credit.[85] This new bill, popularly known in the House of Representatives as the “Community Restoration and Revitalization Act of 2009” (“CRRA”), is not a complete overhaul of the credit, but provides several resolutions to the problems discusses above in Part III.  This section will explore the main provisions of the CRRA and discuss their impact on preservation efforts.
The first proposal is an increase in the credit amount for what are termed “smaller projects.”  The CRRA provides for a 30% credit in cases where the qualified rehabilitation expenditures are less than $7.5 million.[86]  On its face, this provision appears to hearken back to the ERTA of 1981,[87] which should have preservationists jumping for joy.  Additionally, it reflects recognition by Congress that individuals and small businesses have difficulties accessing the credit.
The proposed amendment would provide a second fix by allowing rental residential property to qualify for the 10% credit.[88]  Currently, section 47 allows a credit for rehabilitation of housing where the property is a “certified historic structure.”  Because housing is a popular use of rehabilitated property, this proposal would satisfy well the goal of the NHPA to use “historic properties to meet the contemporary needs of society.”[89]  As an added benefit, Congress would create more incentive[90] to rehabilitate older properties located in downtown settings to provide moderate- to low-rent housing for the people who need it most.
Third, the CRRA would provide for a more practical modification of the age requirement for non-historic property, by replacing “placed in service before 1936” with “placed in service at least 50 years prior to the rehabilitation.”[91]  As mentioned above, the stock of available non-historic buildings put in service prior to 1936 is dwindling.  Therefore, by opening the 10% credit to a wider category of buildings, Congress is both protecting the effectiveness of that credit, and further providing for NHPA goals by encouraging use of older properties.
Fourth, the CRRA would permit recovery of the credit where the rehabilitation may be classified as moderate, rather than substantial.[92]  The “moderate rehabilitation” requirement would modify the current rules by requiring that rehabilitation expenditures exceed only one-half the adjusted basis, instead of the full basis.[93]  As mentioned above, this provision would take into account inflation and more expensive real estate markets, so not to penalize developers in such areas.  Beyond merely opening up the credit to more properties, this policy will promote the goals of the NHPA by encouraging more minor rehabilitations and preventative maintenance.
Finally,[94] and most importantly in the view of this paper, the CRRA would permit free transferability of the rehabilitation credit.[95]  Allowing this free transferability would alleviate, if not eliminate, the problems created by the passive loss rules, without destroying the policy of section 469.  Additionally, to prevent fraud or the reemergence of tax shelters, the amendment would cap the transferable amount of the credit at $5 million.[96]  The ability to transfer or alienate the rehabilitation credit will allow the developer to seek and receive capital and equity necessary to complete the rehabilitation project without being forced to resort to an investment vehicle.
While the proposed amendment does not go so far as to allow taxpayers to claim the rehabilitation credit for non-income producing residential property, it seems that it will provide significant assistance for a program that was struggling to meet its purpose.  Hopefully, Congress will pass this amendment the second time around, and allow the rehabilitation credit to be more accessible and to better serve the goals of preservation.

V.              Conclusion

The foregoing is not intended to be an indictment of the current federal rehabilitation tax credit program.  This paper merely set out to explain the development of this program, with an eye toward the principles, which underlie that development.  Within that framework, this paper concludes that the current tax rules severely limit the ability of individuals and small business owners to claim the federal rehabilitation tax credit.  For the many reasons stated above in Parts III and IV, investment in rehabilitation projects dropped 75% between 1986 and 1997.[97]  Only recently, and because of business friendly legislation, have the investment figures begun to rise again.
However, this influx of corporate cash is not sustainable and continued effectiveness will require some modification to the rehabilitation credit system itself.  Fortunately, Congress has gotten the message and is beginning to bring the system more in line with the “historic” rehabilitation credit.  With an eye toward the future of historic preservation, it is this paper’s hope that Congress acts quickly and decisively to forge a more permanent solution to what has historically been a very successful program.

[1] National Historic Preservation Act of 1966, Pub. L. No. 89-665, 80 Stat. 915 (codified as amended at 16 U.S.C. § 470a-470x (2006) [hereinafter NHPA]).
[2] See Antiquities Act of 1906, ch. 3060, § 2, 34 Stat. 225, 225 (codified at 16 U.S.C. § 431) (authorizing the President to declare national monuments); and Historic Sites Act of 1935, ch. 593, § 1, 49 Stat. 666, 666 (codified at 16 U.S.C. § 461) (declaring a national policy to preserve for public use historic sites, buildings, and objects of national significance for the inspiration and benefit of the people of the United States”).
[3] Antiquities Act § 1 (codified at 16 U.S.C. § 433).
[4] Historic Sites Act § 2 (codified at 16 U.S.C. § 462).
[5] Advisory Counsel on Historic Pres., An Overview of Federal Historic Preservation Case Law, 1966-1996, A.L.I.-A.B.A., April 2007, at 215, 220 [hereinafter Overview].
[6] § 1(b), 80 Stat., supra note 1, at 915.
[7] Id. at § 1(d).
[8] Pub. L. No. 96-515, § 1(b)(6), 94 Stat. 2987, 2987 (1980) (codified at NHPA § 470(b)(6)).
[9] Overview, supra note 5, at 220.
[10] Overview, supra note 5, at 221
[11] sec. 201(a), § 101(b)(1), 94 Stat at 2988 (codified at NHPA § 470a(e)).
[12] Pub. L. No. 102-575, sec. 4004(4), §101(b)(6)(A), 106 Stat. 4600, 4754-55 (1992) (codified at NHPA § 470a(b)(3)).
[13] Susan Feigenbaum & Thomas Jenkinson, Government Incentives for Historic Preservation, 37 Nat’l Tax J. 113, 113 (1984).
[14] Pub. L. No. 94-222, 90 Stat. 1320 (1976) (codified at NHPA § 470a(e)(1)-(2)).
[15] Tax Reform Act of 1976, Pub. L. 94-455, § 2124, 90 Stat 1916 (codified as amended at I.R.C. § 47 (2006)).
[16] § 2124(a)(1), 90 Stat. at 1916, repealed by Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 212(d)(1), 95 Stat 172, 239.
[17] § 2124(d)(1), 90 Stat. at 1919, repealed by Economic Recovery Tax Act, § 212(d)(1).
[18] § 2124(a)(1), 90 Stat. at 1917 (current version at I.R.C. § 47(c)(3)).  Buildings meeting this requirement are commonly referred to as “certified historic structures.”
[19] Id. (current version at I.R.C. § 47(c)(1)(A)(iv)).  To qualify, the current statute requires that “depreciation . . . is allowable with respect to such building,” which, under I.R.C. § 167(a), only applies to property “used in the trade or business, or . . . held for the production of income.”
[20] Id. (current version at I.R.C. § 47(c)(2)(C)).
[21] Revenue Act of 1978, Pub. L. No. 95-600, § 315, 92 Stat. 2828 (codified as amended at I.R.C. § 47).
[22] Id.
[23] Id. § 315(b).  Structures meeting the twenty-year requirement are commonly referred to as “qualified rehabilitated buildings.”
[24] Id. § 315(c).
[25] Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 212, 95 Stat 172.
[26] § 212(d)(1), 95 Stat. at 239.
[27] § 212(a)(2), 95 Stat. at 236 (codified as amended at I.R.C. § 47).
[28] § 212(b), 95 Stat. at 236.
[29] Id.
[30] Id. at 238.
[31] Feigenbaum & Jenkinson, supra note 13, at 117.
[32] Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085.  This Act is now designated the “Internal Revenue Code of 1986,” and represents the current law on the subject.
[33] § 251(a), 100 Stat. at 2183 (codified at I.R.C. § 47).
[34] Id.
[35] § 501, 100 Stat. at 2233 (codified at I.R.C. § 469). A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is regular, continuous, and substantial.”  I.R.C. § 469(h)(1).    Section 469(c)(1) designates activities that do not satisfy this material participation requirement as “passive activities.” 
[36] Id.  Any losses or credits earned from passive activities are disallowed in the current tax year and must be postponed until a later year in which the activity is no longer passive, or in which the taxpayer’s completely disposes of his interest in the activity.
[37] § 501(a), 100 Stat. at 2237-8 (codified at I.R.C. § 469(i)).
[38] Id.
[39] Id. (codified at I.R.C. § 469(i)(3)(A)).  Generally, AGI is determined by subtracting from a taxpayer’s gross income several categories of deductions and expenses listed under I.R.C. § 62.  For the considerations of § 469, AGI further makes further exclusions but these are beyond the scope of this paper and will not be discussed.  § 469(i)(3)(F).
[40] Id. (codified at I.R.C. § 469(i)(6)(B)).
[41] Id. (codified at I.R.C. § 469(i)(3)(B)).
[42] Thomas R. Curran, Jr., The Rehabilitation Tax Credit: Historic Preservation, Affordable Housing, and Community Development, 6 J. Affordable Housing & Community Dev. L. 145, 146 (1997).
[43] Community Restoration and Revitalization Act of 2009, H.R. 3715, 111th Cong. (2009); S. 1743, 111th Cong. (2009).
[44] I.R.C. § 46.  The investment credit is the sum of the rehabilitation credit, the energy credit, the qualifying advanced coal project credit, the qualifying gasification project credit, and the qualifying advanced energy project credit.  This distinction may be important where a taxpayer claims several of these credits; however, this paper is solely concerned with the rehabilitation credit, and will not consider the intersection with these other credits.
[45] § 38(b).
[46] § 38(c).  Generally, a business credit may not exceed the excess of the taxpayer’s income tax liability over either the tentative minimum tax, or 25% of the amount by which the taxpayer’s taxable income exceeds $25,000, whichever is greater. 
[47] § 47(c)(1)(A)(iv).
[48] § 47(a).
[49] § 47(b).
[50] § 47(c).
[51] § 47(d).
[52] § 47 (a).
[53] See supra note 25.
[54] 2008 Nat’l Park Serv. Ann. Rep. 2.  Further, NPS notes that more than 67,000 jobs were created by rehabilitation projects in 2008, providing evidence of additional benefits beyond preservation.
[55] Id. at 2-3.  These included reductions in the capital gains tax in 1997 and 2003, and the allowance of more tax deferral procedures.
[56] § 47(b)(1).
[57] Treas. Reg. § 1.46-3(d) (as amended in 1995).
[58] Id.
[59] Id.
[60] § 47(d).
[61] § 47(d)(2).
[62] § 47(d)(3(F).
[63] § 47(d)(5).
[64] § 47(c)(1)(C).  Adjusted basis is a calculation of the amount of capital a taxpayer has in property.  To compute, the taxpayer begins with his purchase price, minus the cost of land, and adds the value of any improvements he has made, while subtracting any depreciation he has taken on the property.  Where the property was obtained by gift, the previous owner’s basis is transferred to the taxpayer.  Similarly, where the taxpayer obtained the property by devise, the fair market value of the property at the time of the testator’s death is the basis.
[65] § 47(c)(1)(C)(ii).
[66] § 47(c)(2)(A)
[67] § 47(c)(2)(B).  Also excluded are any expenditures to rehabilitate a certified historic structure, which have not been certified by the Secretary of Interior; expenditures to rehabilitate tax-exempt property; or expenditures incurred by a lessee whose lease term is expected to expire before the depreciation recovery period for the property as defined under I.R.C. § 168.
[68] § 47(c)(3).
[69] § 47(c)(3)(B).
[70] The Secretary of the Interior's Standards for the Treatment of Historic Properties, 36 C.F.R. §§ 67-68 (1995), illustrates the preservation activities supported by the NHPA, including “protection, rehabilitation, restoration, and reconstruction,” and the criteria NPS uses to certify the project.
[71] 36 C.F.R. §§ 67.4-5.  Generally, only the owner of the property may apply for this certification.  However, state historical preservation organizations and the Secretary of the Interior may initiate an application on their own, after giving notice to the owner and permitting a 30-day period for the owner to contest the application.
[72] 36 C.F.R. § 67.6.  A typical application will include detailed schematics, plans, and drawings compiled by professional architects, the cost of which can exceed the cost of the rehabilitation.  These costs are not barred from recovery with the credit, so a taxpayer may recoup at least some of this burdensome expense.
[73] 36 C.F.R. § 67.7.  This includes photographic and other evidence, detailing all changes in the property.
[74] 36 C.F.R. § 67.6(a)(1).
[75] 36 C.F.R. § 67.11.
[76] 36 C.F.R. § 68.
[77] I.R.C. § 47(c)(1).
[78] § 47(c)(1)(A).
[79] § 47(c)(1)(A)(iii).
[80] See supra notes 35-41.
[81] Curran, supra note 42 at 154-55.
[82] Id.
[83] Id. at 155.
[84] Janette M. Lohman et al., State Rehabilitation Tax Credits: A Rebirth of History Across the U.S., J. Multistate Tax’n & Incentives, Nov.-Dec. 2000 at 1. For example, Missouri, Louisiana, and Maryland permit some form of transferability, while Iowa has a refund provision.
[85] Community Restoration and Revitalization Act of 2009, supra note 43 [hereinafter “CRRA”].
[86] CRRA § 2.
[87] ERTA, supra note 25.
[88] CRRA § 3.
[89] See supra note 9.
[90] This is in addition to the low-income housing credit available under I.R.C. § 42.
[91] CRRA § 4(a).
[92] CRRA § 7.
[93] Id.
[94] The CRRA provides a few other amendments to the rehabilitation credit, including providing better interaction with the energy credit and with state rehabilitation credits, and allowing the use of the rehabilitation credit for tax-exempt property.  However, because these topics received no treatment in this paper, it would seem out of place to discuss them in much detail here.
[95] CRRA § 6(a).
[96] Id.
[97] 2 Christopher J. Duerksen, Rathkopf's The Law of Zoning and Planning § 19:46 (4th ed. 1997).
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