PLR 200003037: Foreclosure placement date ignored for housing credit waiting period

Plain-English summary

A taxpayer bought a low-income housing project after an intervening owner acquired it through foreclosure and placed it in service. The taxpayer asked whether that intervening placement date reset the ten-year waiting period for the existing building credit. Based solely on the stated foreclosure, prior placement date, and resale within 12 months, the IRS ruled that § 42(d)(2)(D)(ii)(IV) allowed the intervening placement date to be ignored for that waiting period. The IRS expressly did not decide whether the project qualified for the credit, whether the bond and loan documents constituted a purchase-money security interest, or several underlying cost and timing facts.

Ruling snapshot

• Question: Did the foreclosure owner's placement in service reset the ten-year waiting period?
• Outcome: Approved: the intervening placement date was disregarded on the represented facts.
• Key authorities: IRC § 42(d)(2)(B)(ii), (D)(ii)(IV).

Full text (IRS public release)

Internal Revenue Service   Department of the Treasury
                           Washington, D.C. 20044
Index No.: 42.04-02
Number: 200003037
Release Date: 1/21/2000
                           Person to Contact:

                           Telephone Number:

                           Refer Reply To:
                           CC:DOM:P&SI:5 –– PLR-108139-99
                           Date:
                           October 26, 1999


Legend:

Taxpayer         =




District         =
State            =
Project          =



Partnership      =
County 1         =
County 2         =
Company A        =
Company B        =
Buyer            =
a                =
b                =
c                =
d                =


PLR-108139-99                              -2-


e                  =
f                  =
g                  =
h                  =
i                  =


Dear          :

      This letter responds to your letter dated April 20, 1999, and subsequent
correspondence, submitted on behalf of Taxpayer, requesting a private letter ruling
under § 42(d)(2)(D)(ii)(IV) of the Internal Revenue Code to permit an exception to the
10-year holding period requirement under § 42(d)(2)(B)(ii).

       Taxpayer represents that the facts are as follows:

FACTS:

        Taxpayer is a calendar year taxpayer that uses the accrual method of
accounting. The District Office of the Internal Revenue Service that has examination
jurisdiction over Taxpayer is District.

       Taxpayer is a State limited liability company that was formed to operate a low-
income housing project known as the Project. Taxpayer intends to qualify for § 42 low-
income housing tax credits with respect to the acquisition and rehabilitation of the
Project.

      Partnership, a State limited partnership, was the prior owner of the Project
pursuant to a leasehold interest in a parcels of land located in County 1 and County 2.
The Project was placed in service by Partnership on b. Company A acquired the bond
and loan documents on the Project on i.

       Partnership and Company A entered into negotiations whereby Partnership
agreed to an uncontested foreclosure of the Project pursuant to a purchase-money
security interest. The date of the foreclosure sale was c.

        Company B is an affiliate of Company A which holds title to any real estate
collateral which Company A acquires (whether by foreclosure or deed in lieu thereof) in
connection with any loan assets held by Company A. After Company A successfully
“bid-in” the Project at the foreclosure sale on c, Company A assigned its successful


PLR-108139-99                              -3-


foreclosure bid to Company B. Pursuant to State law, the foreclosure process became
final on e, and Company B placed the Project in service on f.

       As of d, Buyer, Taxpayer’s managing member, entered into an agreement with
Company A and Company B for the sale of the Project to Taxpayer. On g, Buyer
entered into an amendment to the agreement. The Closing Date for the purchase of
the Project was h, when the Project was resold to Taxpayer.

      Taxpayer has made the following additional representations and certification with
respect to the Project:

      (1) The acquisition of the Project by Taxpayer was by purchase (as defined in
§ 179(d)(2), as applicable under § 42(d)(2)(D)(iii)(I)).

       (2) The Project was not previously placed in service by Taxpayer, or by a person
who was a related person (as defined in § 42(d)(2)(D)(iii)(II)) with respect to Taxpayer
as of the time the Project was last placed in service.

       (3) To the best of the knowledge of Taxpayer and its representatives, there have
been no nonqualified substantial improvements to the Project since it was last placed in
service.

       (4) To the best of the knowledge of Taxpayer and its representatives, no prior
owner of the Project was allowed a low-income housing tax credit under § 42 for the
Project.

       (5) All terms and conditions of § 42 and related sections of the Code will be met,
including substantial rehabilitation of a minimum of $3,000 per apartment unit, including
the 10-year holding period requirement provided by § 42(d)(2)(B)(ii) provided the
Service concurs that the exception provided in § 42(d)(2)(D)(ii)(IV) applies.

RULING REQUESTED:

        Taxpayer requests a ruling that the requirements of § 42(d)(2)(D)(ii)(IV) are
satisfied and, therefore, the date Company B placed the Project in service after
acquiring it by foreclosure does not constitute a new placed in service date for purposes
of § 42(d)(2)(B)(ii).




LAW AND ANALYSIS:


PLR-108139-99                                -4-


      For an existing building to qualify for the 30-percent present value low-income
housing tax credit, § 42(d)(2)(B)(ii) requires that there be a period of at least 10 years
between the date of the building’s acquisition by the taxpayer and the later of:

              1.     The date the building was last placed in service, or

              2.     The date of the most recent nonqualified substantial improvement
                     of the building.

       Section 42(d)(2)(D)(ii) provides special rules for certain transfers for purposes of
determining under § 42(d)(2)(B)(ii) when a building was last placed in service. Pursuant
to § 42(d)(2)(D)(ii)(IV), there shall not be taken into account any placement in service by
any person who acquired such building by foreclosure (or by instrument in lieu of
foreclosure) of any purchase-money security interest held by such person if the
requirements of § 42(d)(2)(B)(ii) are met with respect to the placement in service by
such person and such building is resold within 12 months after the date such building is
placed in service by such person after such foreclosure.

       In the present case, Taxpayer represents that, pursuant to State law, there was a
foreclosure of Company B’s purchase-money security interest in the Project.
Taxpayer further represents that Company B placed the Project in service on f.
Taxpayer also represents that the Project was last placed in service by Partnership on
b. Moreover, Taxpayer represents that the Project was resold on h.

        Accordingly, based solely on Taxpayer’s representations, and the relevant law
set forth above, we rule as follows:

              1.     Company B acquired the Project by foreclosure of a purchase-
                     money security interest held by Company B;

              2.     the requirements of § 42(d)(2)(B)(ii) were met with respect to the
                     placement in service of the Project by Partnership on b and the
                     subsequent placement in service of the Project by Company B on f;
                     and

              3.     the Project was resold within 12 months after f.

        Therefore, we conclude that the requirements of § 42(d)(2)(D)(ii)(IV) are
satisfied and the f placement in service by Company B, who acquired the Project by
foreclosure of a purchase-money security interest held by Company B, does not
constitute a new placed in service date for purposes of § 42(d)(2)(B)(ii).

       No opinion is expressed or implied regarding the application of any other
provisions of the Code or Income Tax Regulations. Specifically, we offer no opinion,


PLR-108139-99                               -5-


either expressly or impliedly, on whether the Project qualifies for the low-income
housing tax credit under § 42, the bond and loan documents constitute a purchase-
money security interest in the Project, the validity of the Project’s costs included in
eligible basis, the date the Project was acquired by foreclosure, or the date the Project
was placed in service by Company B.

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

      In accordance with the power of attorney filed with this request, we are sending
a copy of this letter ruling to Taxpayer and Taxpayer’s second authorized
representative.



                                                       Sincerely yours,

                                                       Harold E. Burghart

                                                       Harold E. Burghart
                                                       Assistant to the Branch Chief,
                                                       Branch 5
                                                       Office of Assistant Chief Counsel
                                                       (Passthroughs and Special
                                                       Industries)




Enclosure:   6110 copy