New Guidance
The IRS aims to clarify LIHTC rules.
A very unlikely source has made a decision that may open up the pipeline for nonprofits to produce more units with low-income housing tax credits. The Internal Revenue Service recently sent new guidelines to its agents in the Cincinnati branch that processes all of the applications for a determination letter, which helps a nonprofit prove whether it’s a nonprofit or tax-exempt organization. The guidelines are intended to clarify the qualifications for receiving LIHTC funds.
“These guidelines are intended to provide guidance to tax-exempt organizations that are already in existence and participating in LIHTC transactions,” says Jerome A. Breed of Powell Goldstein, a law firm in Washington, D.C. “They are supposed to be included in documents where a tax-exempt organization is the general partner or managing member in a partnership or an LLC that is developing, owning, and operating LIHTC housing.”
Now that the guidelines have come down, Breed expects more LIHTC housing to be produced. “A lot of these applications have been held and these organizations have had a lot of trouble in getting the IRS to acknowledge or grant them tax-exempt status,” he says. “These guidelines will help open up that logjam.”
Some fear that these guidelines may negatively affect investors, though. “The problem that I have with it is that by presenting a safe harbor, the service may have unwittingly overreached in the sense of discouraging more risk-aware investors from investing in nonprofit-sponsored deals,” says David A. Smith, president of Recap Advisors, a Boston-based company that provides financial services related to the recapitalization and preservation of affordable housing.
Specifically, Smith is pointing to language in the IRS guidelines that gives the nonprofit right of first refusal to buy a property and his feeling that by thus protecting the nonprofit, the IRS is putting the charitable cause first.
“I have no problem with the idea that nonprofits are in it to provide affordable housing,” he says. “[But to infer] that it trumps fiduciary duty is a real undermining of the fund premise inherent in the investment vehicle.”
–Les Shaver