IRS, Treasury and CDFI Fund Representatives Share LIHTC, NMTC and HTC Insights

Published by Nicolo R. Pinoli on Friday, June 3, 2016 - 12:00am

A number of regulation and guidance projects are making their way towards publication that will significantly impact the historic tax credit (HTC), new markets tax credit (NMTC) and low-income housing tax credit (LIHTC), according to remarks made May 25, 2016, at the ABA Forum on Affordable Housing and Community Development by representatives from the Internal Revenue Service, Community Development Financial Institutions (CDFI) Fund and Treasury Department. It’s important to note that the representatives of these agencies did not speak on behalf of their respective agencies, but rather provided personal observations and reflections. The speakers also repeatedly emphasized that, with respect to forthcoming guidance, the standard-setting process is often unpredictable and can result in changes to the guidance up until the time such guidance is issued. That said, the many key insights they shared are worth noting.

Partnership Audit Procedures

Of interest to tax credit partnerships in general, Greg Armstrong, senior technical reviewer in the IRS Office of Chief Counsel (Procedure & Administration), reported that the IRS is in the process of developing guidance regarding how partnerships are to apply the specific provisions outlined in the statute enacting the new partnership audit procedures. Although there is no timetable for issuing the guidance, Armstrong said the IRS is working diligently to complete the guidance in advance of the 2018 commencement date. Additionally, for partnerships required to pay the tax associated with any audit adjustments, Armstrong said existing guidance provides that if the partnership cannot pay the tax then the partners will be required to pay the tax, although the IRS expects to provide further clarification on this point.

Historic Tax Credits – Section 50(d)

Jennifer Records an attorney in Branch 6 (Passthroughs and Special Industries) of the IRS reported that guidance on several issues relating to 50(d) income is expected soon. The request for guidance is included on the Priority Guidance Plan, and the IRS has committed to issuing guidance. Records observed that the Priority Guidance Plan year ends in June, but hastened to note that doesn’t mean the guidance will be issued by June. However, she did say the guidance is reportedly far along in the process.

Many questions around the details of the forthcoming guidance were posited during the panel, including whether the guidance would be applied prospectively or retroactively. Although not explicit on this point, Records seemed to imply that the guidance might be applied prospectively, with the possibility of a grandfathering provision that could even include deals closed prior to the issuance of the guidance, but not yet placed in service.

Additionally, questions were posed about whether the eagerly anticipated 50(d) guidance would generally hew to a partnership or a partner approach to viewing 50(d) income, or whether these broad concepts could be mixed and matched depending on the particular issue. Records hinted that she expected that a single general method would be used as a guiding principle to address most issues. Additionally, she said that during internal discussions, the IRS has expressed concern regarding the possibility of one entity receiving the benefit of the credit, while another entity would receive the burden (i.e., all or a portion of the 50(d) income) associated with the credit.

New Markets Tax Credits – Timing of Next Award Announcement

David Meyer, program manager for certification, compliance monitoring and evaluation with the CDFI Fund, said the next round of awards would be announced in the fall of 2016, and affirmatively declared that the announcement would not be delayed until 2017. When pressed to specify whether the awards would be announced before the election, Meyer declined to comment, but did note that the CDFI Fund is bringing additional staff on board to expedite the process.

New Markets Tax Credits – FAQs 42 through 44

Regarding the recently issued FAQs, particularly numbers 42 through 44, Meyer confirmed that the Obama administration has participated in the general policy setting process at the CDFI Fund, much more so than previous administrations.

He confirmed the FAQs are intended to be applied prospectively, beginning with allocations that will be announced this fall. Meyer also said that the CDFI Fund has no intention of penalizing applicants who choose not to follow the FAQs for prior allocations.

Meyer said the CDFI Fund understands the impact that the FAQs may have on many nonprofits, simply due to the challenges they will encounter in meeting the 24-month look-back requirement in the face of the often lengthy development process for nonprofits. He also confirmed that the CDFI Fund had considered whether the FAQs should be revised to contemplate the challenges associated with transactions involving nonprofits, but in the end, at least for now, has chosen to not revise the FAQs to address this issue.

With respect to the next round of applications, Meyer said that the CDFI Fund expects to include similar provisions in the notice of allocation availability as contemplated in FAQs 42 through 44. He also noted that the next administration might have opinions that would further affect the FAQs.

Discussing how CDEs should comply with the FAQ requirements, Meyer said a direct tracing approach to demonstrate that QLICI proceeds were used within the limits imposed by the policy should mean “the job is done” He also said that the CDFI Fund did not intend to require ongoing detailed reporting or submission of documents to support compliance with the FAQs, but would include CDE certifications as part of ongoing reporting requirements, and would likely only test more detailed records as part of compliance audits.

Regarding the definition of “affiliates,” as used in FAQ 44, Meyer said “affiliate” is defined by the CDFI Fund and suggested the industry use that definition in assessing compliance with the FAQ. When queried regarding specific detailed structures, Meyer suggested that the CDFI Fund would be focused on whether the structure achieves the policy of “bringing in new capital.”

The CDFI Fund is currently engaged in a compliance research project, which Meyer said focused on compliance at the “meta” level. Of particular interest, he said the CDFI Fund is focused on learning more about existing deal structures and evaluating whether FAQs 42 through 44 will achieve the hoped-for policy outcomes.

Addressing the IRS’s position on FAQs 42 through 44, James Holmes, assistant to the branch chief of the Incentives Branch (Branch 5) with the IRS, confirmed that the IRS commonly consults with the CDFI Fund regarding technical issues. Holmes said that the IRS has no current plans to issue guidance of its own that would address topics similar to FAQs 42 through 44, and at a minimum, the IRS prefers that the industry follow the FAQs.

Holmes said that although no guidance is imminent and the topic is not on the Priority Guidance Plan, the IRS is also studying the leverage structure in general, with a goal of better understanding the structure and evaluating whether the current transaction structures are appropriate.

When asked if the IRS would provide a safe harbor, effectively safe harboring structures that follow FAQs 42 through 44 as not being deemed abusive, Holmes suggested that the IRS would likely not take that view in all cases. However, he did support the industry following the FAQs, and noted that the IRS did not intend to have two different regimes of competing rules addressing this issue.

New Markets Tax Credit – Final Regulations

Turning to the proposed regulations issued 8 years ago addressing topics such as the redemption safe harbor, tech terms, and the QALICB reasonable expectation test, Holmes said the IRS is working hard to issue final regulations. He reported the IRS is pretty far along in the process, and is hoping to have those regulations finalized by September.

Low-Income Housing Tax Credits – Right of First Refusal

Michael Novey, associate tax legislative counsel in the Office of Tax Policy at the Treasury Department, said that when considering the nonprofit right of first refusal under IRC 42(i)(7), an option to buy is different than a right of first refusal. He noted that as the statute was being drafted, the wording was initially stated to be an “option,” but later changed to use the term “right of first refusal.” This legislative history suggests that Congress intended for it to be a true right of first refusal, and not an option. Novey said standard setters are concerned about a pre-arranged timeline to sell the property planned in advance. However, he also said that if the property owner were to put the building up for sale, that alone might be enough to trigger a right of first refusal.

Low-Income Housing Tax Credits – 10-Year Hold Rule

The long-awaited guidance related to the exception to the 10-year hold rule when the building is “substantially” federally assisted is still in process. However, Novey said the affordable housing community shouldn’t expect to receive guidance soon. Although this topic has been included in the past on the Priority Guidance Plan, it has since fallen off the list and it’s uncommon for a topic to be re-inserted into the plan unless guidance is imminent.

Low-Income Housing Tax Credits – Exclusion of Bond Issuance Cost from Eligible Basis

Jian Grant, assistant to the branch chief in Branch 7 of the IRS Office of Associate Chief Counsel, Passthroughs and Special Industries, reaffirmed the exclusion of bond issuance costs from eligible basis as being based on Congressional intent.

Low-Income Housing Tax Credits – Scattered Site Income and Rent Restrictions

In addition, Grant re-affirmed the IRS position that both the income and rent restrictions must be met at 100 percent for scattered site LIHTC developments. She said because the statute is unclear, the IRS has the authority to look to the legislative history to interpret the meaning of the statute.

Conclusion

Again, it’s important to remember that while these remarks are interesting and informative, they are not official statements from the IRS, CDFI Fund or Treasury Department. Nonetheless, they are a helpful guidepost along the way, as the tax credit community awaits release of official guidance on these subjects.

If you have questions in the meantime about how these topics affect your tax credit investments, contact a Novogradac & Company office near you.