IRS Revenue Ruling
2002-21

 
Code Secs. 42, 103, 146

<<FULL TEXT>>

26 CFR 1.42-1T: Limitation on low-income housing credit allowed with
respect to qualified low-income buildings receiving housing credit
allocations from a state or local housing credit agency (temporary).
(Also sections 103, 146.)

Low-income housing credit; tax-exempt bond financing. Amounts received
from investing proceeds of tax-exempt bonds are counted toward satisfying
the 50-percent aggregate basis test under section 42(h)(4)(B) of the Code.


REV. RUL. 2002-21

ISSUE

Are amounts received from investing proceeds of tax-exempt bonds
counted toward satisfying the 50-percent aggregate basis test under
section 42(h)(4)(B) of the Internal Revenue Code?


FACTS

Partnership was formed to develop and operate in State X a low-income
housing building in accordance with section 42. In December 1999, the
State X bond-issuing authority (Issuer) issued at par $5.7 million of
tax-exempt housing bonds, and loaned the $5.7 million to Partnership to
finance a portion of the construction of the low-income housing project.
Issuer received an allocation of section 146 volume cap in the amount of
$5.7 million for the bonds. Principal payments on this financing are to be
applied within a reasonable period to redeem the bonds.

Partnership's aggregate basis for the building and the land on which
the building is located is $11.8 million. Partnership earned $300,000 in
investment earnings from investing the original $5.7 million of proceeds
of the bonds. The sum of these amounts, $6 million, was expended on
construction of the building.


LAW AND ANALYSIS

Section 42(a) provides for a tax credit for investment in qualified
low-income residential rental buildings placed in service after December
31, 1986.

Section 42(h)(1)(A) provides that the amount of credit determined under
section 42 for any taxable year with respect to any building shall not
exceed the housing credit dollar amount allocated to the building under
section 42(h).

Section 42(h)(4)(A) provides that section 42(h)(1) does not apply to
any portion of the credit otherwise allowable under section 42(a) which is
attributable to eligible basis financed by any obligation the interest on
which is exempt from tax under section 103 if--

(i) the obligation is taken into account under section 146, and

(ii) principal payments on the financing are applied within a
reasonable period to redeem obligations the proceeds of which were used to
provide the financing.


Section 42(h)(4)(B) provides that, if 50 percent or more of the
aggregate basis of any building and the land on which the building is
located is financed with tax-exempt obligations specified in section
42(h)(4)(A), section 42(h)(1) does not apply to any portion of the
low-income housing credit allowable under section 42(a) with respect to
the building.

Section 1.42-1T(f)(1) of the temporary Income Tax Regulations provides
that no housing credit allocation is required in order to claim a credit
under section 42 with respect to the entire qualified basis (as defined in
section 42(c)) of a qualified low-income building if 70 percent or more of
the aggregate basis of the building and the land on which the building is
located is financed with the proceeds of tax-exempt bonds which are taken
into account for purposes of the volume cap under section 146. The
reference to 70 percent in section 1.42-1T(f)(1) has been superseded by an
amendment to section 42(h)(4)(B), which changed 70 percent to 50 percent.
Revenue Reconciliation Act of 1989, P.L. 101-239, section 7108(j).

Except as otherwise provided, section 103 provides that gross income
does not include interest on any state or local bond. An exception under
section 103(b)(1) is that interest on a private activity bond is included
in gross income unless it is a qualified bond within the meaning of
section 141. Generally, section 141(e)(2) requires that a qualified bond
meet the volume cap requirements of section 146.

Section 146(a) provides that a private activity bond issued as part of
an issue meets the volume cap requirements if the aggregate face amount of
the private activity bonds issued pursuant to the issue, when added to the
aggregate face amount of tax-exempt private activity bonds previously
issued by the issuing authority during the calendar year, does not exceed
the authority's volume cap for the calendar year.

Proceeds is not specifically defined for purposes of section
1.42-1T(f)(1). However, for other purposes of the Code, tax-exempt bond
proceeds are generally defined to include amounts received from investing
proceeds. See section 1.148-1(b) of the Income Tax Regulations.
Accordingly, given the similarity of purposes for determining bond
proceeds under section 1.42-1T(f)(1) and the tax-exempt bond provisions of
the Code, it is appropriate to treat proceeds for purposes of section
1.42-1T(f)(1) to include amounts received from investing proceeds.

In the present situation, Partnership properly includes the $300,000
amount from investing proceeds to determine if it met the 50-percent
aggregate basis test in section 42(h)(4)(B). Because $6 million
($5,700,000 plus $300,000) is greater than 50 percent of the aggregate
basis of the building and the land ($11,800,000), Partnership satisfies
the 50-percent test in section 42(h)(4)(B).


HOLDING

Amounts received from investing proceeds of tax-exempt bonds are
counted toward satisfying the 50-percent aggregate basis test under
section 42(h)(4)(B).


DRAFTING INFORMATION

The principal author of this revenue ruling is Jack Malgeri of the
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). For further information regarding this revenue ruling,
contact Mr. Malgeri at (202) 622-3040 (not a toll-free number).

<<END RULING>>

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