Office of Chief Counsel

Office of Chief Counsel

Internal Revenue Service

memorandum

Number: 201505038

Release Date: 1/30/2015

CC:PSI:5:RBChapman

POSTN-132625-14

UILC:

50.04-00; 48.04-05 R 1990

date:

December 1, 2014

to:

from:

subject:

Mary Ann Waters, Senior Counsel

SB/SE Division Counsel, Area 2, CC:SB:2:RCH

Paul Handleman, Chief, Branch 5, Office of the Associate Chief Counsel

(Passthroughs & Special Industries), CC:PSI:5

Income Inclusion Amount under Section 50(d)(5)

This Chief Counsel Advice responds to your request for assistance dated August 18,

2014. This advice may not be used or cited as precedent.

ISSUE

If the lessor of a qualified rehabilitated building makes an election under § 50(d)(5) and

former § 48(d) of the Internal Revenue Code to treat the taxpayer as having acquired

the property for purposes of the investment credit, does the taxpayer include ratably in

gross income an amount equal to 50 percent or 100 percent of the amount of the credit

determined under § 47?

CONCLUSION

If the lessor of a qualified rehabilitated building makes an election to treat the taxpayer

as having acquired the property for purposes of the investment credit, the taxpayer must

include ratably in gross income an amount equal to 100 percent of the amount of the

taxpayer’s credit determined under § 47.

LAW AND ANALYSIS

Section 38(a) provides a credit against income taxes for certain business credits. Under

§ 38(b), business credits include the investment credit determined under § 46. Section

46 provides that, for purposes of § 38, the amount of the investment credit includes the

rehabilitation credit.

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Section 47(a) provides that the rehabilitation credit for any taxable year is the sum of 10

percent of the qualified rehabilitation expenditures with respect to any qualified

rehabilitated building other than a certified historic structure, and 20 percent of the

qualified rehabilitation expenditures with respect to any certified historic structure.

Section 47(b)(1) provides that qualified rehabilitation expenditures with respect to any

qualified rehabilitated building shall be taken into account for the taxable year in which

the qualified rehabilitated building is placed in service.

Section 50 provides additional rules for computing the investment credit. Section 50(c)

provides rules for adjustments to basis. Section 50(d)(5) provides that, for purposes of

the rules governing the investment credit, rules similar to the rules in former § 48(d)

(relating to certain leased property), as in effect on the day (November 5, 1990) before

the enactment of Revenue Reconciliation Act of 1990 (RRA 1990) shall apply.

Prior to the enactment of § 50 in RRA 1990, former § 48(q)(1) provided generally that if

the investment credit was determined with respect to section 38 property, the basis of

the property was to be reduced by 50 percent of the credit so determined. However,

former § 48(q)(3) provided a special rule for the rehabilitation credit, under which the

basis reduction was not limited to 50 percent but was instead the full amount of the

credit determined. As originally enacted by Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. 97-248 (TEFRA), former § 48(q)(3) stated:

In the case of any credit determined under section 46(a)(2) for any qualified

rehabilitation expenditure in connection with a qualified rehabilitated building

other than a certified historic structure, paragraphs (1) and (2) shall be applied

without regard to the phrase '50 percent of’.

Former § 48(d)(1) provided that the lessor of property the basis of which is taken into

account in figuring the investment credit may elect to treat the lessee as having

acquired the property and therefore as the taxpayer for purposes of claiming the

investment credit. Former § 48(d)(5)(A) provided that if a lessor elected under former

§ 48(d) to treat the lessee as the taxpayer who was entitled to claim the investment

credit, then former § 48(q), including the basis-adjustment rule of former § 48(q)(3),

would not apply to the property. Former § 48(d)(5)(B) also provided that the lessee of

such property was required to include ratably in gross income over the shortest

recovery period which could be applicable under § 168 with respect to such property an

amount equal to 50 percent of the amount of the credit allowable under § 38 to the

lessee with respect to such property.

The TEFRA Conference Report indicates that the Conference agreed to the Senate

amendment, which provided for a 50 percent basis reduction for regular, energy, and

certified historic structure investment tax credits. H.R. Rep. 97-760, at 481 (1982)

(Conf. Rep.). With respect to the income inclusion rule, the report states:

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[W]hen lessors elect to pass through the investment credit to lessees

under section 48(d), the lessor does not have to make a basis adjustment.

Instead, the lessee includes in income ratably over the ACRS recovery

period for the property an amount equal to one-half of the credit allowable.

Id., at 482.

Although TEFRA as enacted provided for a basis reduction for a qualified rehabilitated

building of 100 percent of the rehabilitation credit and ratable inclusion for lessees of 50

percent of the rehabilitation credit, the Joint Committee’s Bluebook for TEFRA states

that “Congress intended that in the case of the 15- or 20-percent rehabilitation credit,

the lessee must include in income an amount equal to the full credit allowable.” Joint

Committee on Taxation, General Explanation of the Revenue Provisions of the

Tax Equity and Fiscal Responsibility Act of 1982, 97th Cong., 2nd Sess. (1982), at 36,

n.1.

To rectify this mismatch, former § 48(q)(3) was amended by section 306(a)(3) of the

Technical Corrections Act of 1982, Pub. L. 97-448, to state that in the case of any credit

determined under former § 46(a)(2) for any qualified rehabilitation expenditure in

connection with a qualified rehabilitated building other than a certified historic structure,

paragraphs (1) and (2) and paragraph (5) of subsection (d) shall be applied without

regard to the phrase “50 percent of.” Therefore, former § 48(q)(3), as amended by the

Technical Corrections Act of 1982, expressly required that if a former § 48(d) election

were made for a qualified rehabilitated building (other than a certified historic structure),

former § 48(d) was to be applied by requiring the ratable inclusion of the entire credit

amount, not merely 50 percent, of the rehabilitation credit.

The Tax Reform Act of 1986, Pub. L. 99-514, section 251(c), deleted the phrase “other

than a certified historic structure” from former § 48(q)(3), thus requiring ratable inclusion

of the entire amount of the rehabilitation credit for any qualified rehabilitated building

with respect to which a former § 48(d) election had been made. The Bluebook for the

Tax Reform Act of 1986 explains:

A taxpayer in whose hands property qualifies for transition relief can make an

election under section 48(d) to pass the credit claimed to a lessee. In applying

section 48(d)(5), which coordinates the section 48(d) election with the section

48(q) basis adjustment, Congress intended the income inclusion to equal 100

percent of the credit allowed to the lessee.

Joint Committee on Taxation Staff, General Explanation of the Tax Reform Act of 1986,

100th Cong., 1st Sess. (1987), at 124.

When Congress made the 1982 technical correction to former § 48(q)(3), it did not,

however, make a corresponding correction to former § 48(d)(5)(A), which continued to

state that if a former § 48(d) election were made, then subsection (q), other than

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paragraph (4), would not apply to the property with respect to which the election was

made. It could perhaps be suggested that former § 48(d)(5)(A) renders the 1982

technical correction, located in subsection (q), inapplicable both to former § 48(d) and to

the rules similar to former § 48(d) that are required by § 50(d)(5). This would be an

inappropriate conclusion for three reasons.

First, a purely technical reading of former § 48(d)(5)(A) would suggest that

subparagraph (A) made subsection (q)(3) inapplicable only to the property and therefore

only to the basis of the property but not to the portion of subsection (q)(3) that mandated

the taxpayer ratably include in income the entire amount of the allowable credit.

Because this portion of the rule in subsection (q)(3) applied to the taxpayer and not to

the property, subsection (d)(5)(A) could not, if read literally, have the effect of making

the 1982 technical correction inapplicable even though it appeared in subsection (q).

Second, even if former § 48(q)(3) were read as applying to the property rather than to

the taxpayer, former § 48(d)(5)(A) could not reasonably be read to render inoperative

the rule in former § 48(q)(3) that specified how former § 48(d)(5) was to apply to the

rehabilitation credit. The agency’s duty is to effect the expressed intent of Congress.

See, e.g., Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.

837, 842-43 (1984). One canon of statutory interpretation in determining that intent is

that statutes should be read to avoid making any provision “superfluous, void, or

insignificant.” U.S. v. Home Concrete & Supply, LLC, -- U.S. --,132 S.Ct. 1836, 184142, 182 L.Ed.2d 746 (2012); TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001). Similarly,

conflicting statutes should be interpreted so as to give effect to each but to allow a laterenacted, more specific statute to amend an earlier, more general statute. See, e.g.,

Mangano v. United States, 529 F.3d 1243, 1247 (9th Cir. 2008). The very election that

would render 1982 amendment to § 48(q)(3) relevant cannot properly be said to be the

same election that renders the amendment inapplicable. It is, therefore, not reasonable

to conclude that Congress intended to enact its 1982 amendment to former § 48(q)(3)

null and void ab initio; nor is it any more reasonable to conclude that Congress intended

in 1986 to extend to certified historic structures the applicability of a provision that can

never apply. As explained in the Bluebooks both for TEFRA and for the Tax Reform Act

of 1986, Congress intended that if an election was made under former § 48(d) with

respect to a qualified rehabilitated building, the entire amount of the allowable

rehabilitation credit from that property be ratably included in gross income under former

§ 48(d)(5)(B).

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Finally, § 50(d) mandates that “rules similar to” the rules in former § 48(d) apply. There

is no reason to presume or require that rules similar to former § 48(d) must necessarily

include this merely apparent and obviously unintended anomaly. We believe that, in

accord with the intent of § 50(d)(5), if the taxpayer would have used 100 percent for

purposes of basis reduction under § 50(c) (were it to have applied), then the taxpayer

must similarly use 100 percent as the amount of the allowable credit that must be

included in gross income under the rule similar to former § 48(d)(5)(B).

Please call Robert Chapman (202) 317-5116 if you have any further questions.