PLR 200029044: Transfer of bare title does not recapture housing credits

Plain-English summary

A partnership operating a low-income housing project planned to transfer record title to its nonprofit general partner and lease the project back. The arrangement was intended to secure a local real estate tax exemption while leaving the partnership with the benefits and burdens of ownership. The IRS ruled that, on those representations, a transfer of bare legal title would not trigger recapture of low-income housing credits under section 42(j). It expressly did not decide whether the transaction was truly free of a sale or ownership shift, or whether the project otherwise qualified for the credit. Those assumptions were material to the ruling.

Ruling snapshot

• Question: Would transferring only bare legal title to the general partner trigger section 42(j) credit recapture?
• Outcome: Approved on the stated ownership assumptions.
• Key authorities: IRC § 42(j).

Full text (IRS public release)

Internal Revenue Service                           Department of the Treasury

Index No.: 42.10-00                                P.O. Box 7604
                                                   Ben Franklin Station
                                                   Washington, DC 20044
Number: 200029044
Release Date: 7/21/2000                            Person to Contact:

                                                   Telephone Number:

                                                   Refer Reply To:
                                                   CC:DOM:P&SI:5 –– PLR-103371-00
                                                   Date: April 24, 2000



In re: Request for Private Letter Ruling under § 42(j) of the Internal Revenue Code

Legend:

Taxpayer            =


Corp                =


Project             =


State               =
District            =
Place               =
Town                =
Authority           =
d                   =
h                   =
j                   =

       This letter responds to a letter dated February 7, 2000, submitted on behalf of
Taxpayer, requesting a private letter ruling regarding the application of § 42(j) of the
Internal Revenue Code to a proposed transfer of bare legal title to certain real property
owned by Taxpayer to Corp.

        Taxpayer represents the following facts:

      Taxpayer, a State limited partnership, was established to acquire, hold, invest in,
and otherwise deal with particular real estate located in Place. Taxpayer has
constructed and operates a j unit low-income residential rental housing project located

PLR-103371-00                               -2-

in Place (the “Project”). Corp, the general partner of Taxpayer, is a nonprofit
corporation formed under the laws of State to construct, rehabilitate, own, and operate
affordable housing. Corp is an exempt organization under § 501(c)(3).

       Under applicable State law, the Project is subject to real estate taxes levied by
Town. Under State law, if Corp were to own the Project and use it for its own purposes,
the Project would not be subject to real estate taxes in Town. Therefore, Taxpayer
intends to transfer record title in the Project to Corp through a quitclaim deed and lease
the Project back from Corp. The parties do not intend to transfer any of the benefits or
burdens of ownership of the Project, which will remain with Taxpayer.

       Taxpayer acquired the land underlying the Project on d, and built the Project with
the proceeds of a construction loan from a commercial lender and an investment in
Taxpayer by a limited partner. Taxpayer repaid the construction loan with, inter alia, the
limited partner’s investment in Taxpayer and the proceeds of loans from the Authority
(the § 42 low-income housing credit allocating agency for State). The loans are
evidenced by two nonrecourse promissory notes, and are secured by mortgages on the
Project in favor of Authority as mortgagee.

       Taking into account the rental income restrictions under § 42, the payment of
real estate taxes to Town jeopardizes Taxpayer’s ability to operate the Project
economically. Taxpayer has been advised by Town that the Project currently does not
qualify for real estate tax exemption under State law, but that it would qualify if it were
owned by Corp and leased back to Taxpayer. Taxpayer has informed Town of the
intended sale-leaseback transaction. Subject to review of the transaction
documentation, Town has agreed that the Project would be exempt from real estate
taxes after the sale-leaseback.

        Taxpayer intends to transfer to Corp record title to 1) the real estate and
improvements with respect to the Project, subject to existing easements and
encumbrances pursuant to a statutory form quitclaim deed with covenant in
consideration of $h, and 2) the personal property (primarily equipment and furniture)
with respect to the Project pursuant to a bill of sale in consideration of $h. Immediately
after this transaction, Corp would lease the property back pursuant to a lease
agreement (the “Lease”). Taxpayer represents that Taxpayer would retain all of the
benefits and burdens of ownership; therefore, there will be no sale or exchange of the
Project for federal or state income tax purposes.

       Based on the foregoing, which assumes that under these facts the transfer of
bare legal title to the Project from Taxpayer to Corp is not a sale or exchange (for
federal and state income tax purposes), and does not result in a shift in the benefits
and burdens of ownership (for federal and state income tax purposes), Taxpayer
requests a ruling that the section 42(j) recapture provisions do not apply to the
proposed transfer of bare legal title to the Project by Taxpayer to Corp.

PLR-103371-00                                -3-

       Section 42(a) provides a tax credit for investment in low-income housing
buildings placed in service after December 31, 1986. For any taxable year in a 10-year
credit period, the amount of credit is equal to the applicable percentage of the qualified
basis of each qualified low-income building.

        In the case of any qualified low-income building placed in service by the taxpayer
after 1987, section 42(b) provides, in part, that the term "applicable percentage" means
the appropriate percentage prescribed by the Secretary for the month applicable under
section 42(b)(2)(A)(i) or (ii). Section 42(b)(2)(B) provides that the percentages
prescribed by the Secretary for any month shall be percentages that will yield over a 10-
year period amounts of credit that have a present value equal to:
(i) 70 percent of the qualified basis of new buildings that are not federally subsidized for
the taxable year (70-percent present value credit), and (ii) 30 percent of the qualified
basis of existing buildings, and of new buildings that are federally subsidized for the
taxable year (30-percent present value credit).

         Section 42(c)(1)(A) provides that the qualified basis of any qualified low-income
building for any taxable year is an amount equal to the applicable fraction (defined in
section 42(c)(1)(B)) of the eligible basis of such building. In general, under section
42(d)(1), the eligible basis of a new building is its adjusted basis as of the close of the
first taxable year of the credit period.

       Section 42(j) provides rules concerning the recapture of low-income housing tax
credits. Section 42(j)(1) provides that if as of the close of any taxable year in the
compliance period, the qualified basis of any building with respect to the taxpayer is
less than the amount of qualified basis as of the close of the preceding taxable year,
the taxpayer’s tax for the taxable year shall be increased by the credit recapture
amount. The credit recapture amount for a recapture event occurring during any year in
the credit period (as defined in section 42(f)(1)) is one-third of all credits claimed
(assuming no prior recapture) plus interest at the overpayment rate under section 6621,
beginning with the date the recaptured amount was claimed.

       The legislative history to section 42 provides generally that any change in
ownership during the compliance period is a recapture event and that all dispositions of
ownership interests in buildings are treated as transfers for purposes of recapture. See
2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., II-96 and II-102 (1986), 1986-3 (Vol.
4) C.B. 1, 96, 102. However, under section 42(j)(6), in the case of a disposition of a
low-income building or an interest therein, a taxpayer can avoid recapture liability for
the disposition if the taxpayer posts a satisfactory bond using Form 8693, Low-Income
Housing Credit Disposition Bond, and it is reasonably expected that the building will
continue to be operated as a qualified low-income building for the remaining
compliance period of the building.

     Taxpayer represents in the above facts that the transfer of bare legal title from
Taxpayer to Corp is not a sale or exchange for federal and state income tax purposes

PLR-103371-00                               -4-

and will not result in a shift of the benefits and burdens of ownership for federal and
state income tax purposes from Taxpayer to Corp. This representation is a material
fact in this case. Therefore, the issue being considered in this case is not whether a
sale or exchange or a transfer of the burdens and benefits of ownership is, for federal
income tax purposes, a recapture event under section 42, but whether the transfer of
bare legal title under the above facts is a disposition or change in ownership
contemplated by the section 42 legislative history that results in a recapture event.

        The transfer of bare legal title under the above circumstances would not be
made for the evasion or avoidance of federal income tax. Further, the federal tax
treatment of the proposed transaction has been disclosed to Town officials. Taxpayer
represents that all indicia of ownership of the Project (other than bare legal title) would
remain unchanged. Consequently, the transfer of bare legal title in this case is not a
disposition or change in ownership contemplated by the section 42 legislative history to
result in a recapture event.

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

       The transfer of bare legal title to the Project by Taxpayer to Corp will not, under
these facts, result in recapture under section 42(j).

       No opinion is expressed or implied regarding the application of any other
provisions of the Code or regulations. Specifically, no opinion is expressed or implied
regarding whether the transfer of bare legal title to the Project from Taxpayer to Corp is
a sale or exchange (for federal or state income tax purposes), or causes a shift in the
benefits and burdens of ownership (for federal or state income tax purposes). Nor is
any opinion expressed or implied regarding whether the Project otherwise qualifies for
the low-income housing credit under section 42.

        According to the power of attorney on file with the ruling request, a copy of this
letter was sent to Taxpayer.

      This letter 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.

                                   Sincerely yours,
                                   Harold E. Burghart
                                   Assistant to the Branch Chief, Branch 5
                                   Office of Assistant Chief Counsel
                                   (Passthroughs and Special Industries)
Enclosure:
      6110 copy