PLR 200033017: federally assisted housing project receives a 10 year holding period waiver

Plain-English summary

A partnership acquired an existing apartment project financed under a federal rural housing program and planned to rehabilitate it. Because fewer than 10 years had passed since the project's last placed in service date, it sought a waiver of the holding period requirement for the low income housing credit. The Rural Housing Service had designated the project as troubled, with federal mortgage funds at risk. The IRS waived the 10 year requirement for the acquisition, provided the project receives a low income housing credit allocation from the state authority. The letter gave no opinion on whether the acquisition and rehabilitation costs otherwise qualify for the credit.

Ruling snapshot

• Question: May the partnership receive a waiver of the section 42(d)(2)(B)(ii) 10 year holding period for its federally assisted project?
• Outcome: Approved, conditionally. The waiver applies if the project receives a credit allocation from the state housing authority.
• Key authorities: IRC §§ 42(d)(2)(B)(ii), 42(d)(6)(A)(i), 42(d)(6)(B), 42(h), 179(d)(2), and 708(b)(1); Treas. Reg. § 1.42-2.

Full text (IRS public release)

Internal Revenue Service      Department of the Treasury

Index Number: 42.04-07        Washington, DC 20224



Number: 200033017             Person to Contact:
Release Date: 8/18/2000       Telephone Number:

                              Refer Reply To:
                              CC:DOM:P&SI:B5/PLR-107741-00
                              Date:
                              May 16, 2000


LEGEND:

      Partnership         =


      Seller              =

      Project             =

      Authority           =

      State A             =

      B                   =

      City C              =

      D                   =

      Corp M              =

      Corp N              =

      b                   =

      c                   =

      d                   =

      e                   =

      f                   =

      g                   =
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       h                   =

       i                   =

       t1                  =

       t2                  =

       t3                  =

       t4                  =

       t5                  =

       t6                  =

       t7                  =

       t8                  =

Dear

        This ruling letter responds to your letter dated March 16, 2000, and subsequent
correspondence, submitted on behalf of Partnership requesting a private letter ruling
that will waive for the Project the 10-year holding period requirement for existing
buildings of § 42(d)(2)(B)(ii) of the Internal Revenue Code, under the authority of the
exception for the acquisition of certain federally-assisted buildings provided in
§ 42(d)(6)(A)(i).

       Partnership was organized on t1 as a State A limited partnership to acquire,
rehabilitate, and operate an apartment complex (the Project). Partnership consists of
Corp M, as the general partner with a b percent partnership interest, and individual B,
as the limited partner with a c percent partnership interest. At some future date
syndication is planned.

       The Project consists of d apartment units housed in e residential buildings, with f
units each, and an additional common usage building containing an office, laundry, and
a maintenance/storage area. The Project, located in City C, was constructed and
placed in service by a prior owner in t2. Federal assistance for the Project was initially
provided by a loan from the Farmers Home Administration (FmHA) under § 515 of the
Housing Act of 1949.

       Partnership represents that in t3, Corp N purchased the general partnership in
the Project from individual D. In t4, Corp M, the general partner of Partnership,
acquired Corp N and the related general partnership in the Project. During both of
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these acquisitions the limited partners remained the same. On t5, Corp M transferred
the general partnership in Corp N to itself. On t6, the Project was transferred to
Partnership by act of sale and assumption of the mortgage held by the United States
Department of Agriculture, Rural Housing Service (RHS-formerly FmHA). On t7, the
limited partners in the former partnership (Seller) were bought out and a termination of
the partnership was effected under the provisions of § 708(b)(1).

       You represent that the Project was acquired by Partnership as the result of a
servicing action by RHS, to advert federal funds being at risk. The Rural Housing
Service has submitted a letter, dated t8, to the Internal Revenue Service designating the
project as a “troubled project” based on a history of financial distress and mortgage
default.

       Consideration for the Project is equal to the amount of an assumed renegotiated
loan with RHS in the amount of $g. In addition, RHS has approved a subsequent loan
of $h that will assist in needed rehabilitation. Partnership further represents that it
intends to spend approximately $i to rehabilitate the Project.

       Under the state low-income housing limitations provided by § 42(h), Partnership
applied for a reservation for an allocation of the low-income housing tax credit dollar
amount from the State A Housing Finance Authority (Authority).

       Since the interval between when the Project was last placed in service (t 7) and
the date of acquisition (t6) is less than 10 years, Partnership has failed to meet the 10-
year holding period requirement of § 42(d)(2)(B)(ii) for existing buildings. As federal
funds are at risk, Partnership has submitted this request for a waiver of the holding
period requirement under the authority of the exception granted by § 42(d)(6)(A)(i).

       Partnership has made the following representations and certifications concerning
the Project:

       (1)    The acquisition of the buildings in the Project is by purchase (as defined
              under §179(d)(2) and as further restricted by § 42(d)(2)(D)(iii)(I));

       (2)    Partnership acquired the buildings in the Project to provide affordable
              housing to qualified low-income households;

       (3)    Partnership has applied to Authority for an allocation of the low-income
              housing credit dollar amount in order that Partnership may comply with
              the limitation for low-income housing credits to State A, as required by
              § 42(h);

       (4)    The buildings in the Project were not previously placed in service
              by Partnership or by a person who was a related person (as defined in
              § 42(d)(2)(D)(iii)(II)) to Partnership at the time the buildings were last
              placed in service;
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       (5)    As of t6, the buildings in the Project were “federally-assisted buildings”
              as defined in § 42(d)(6)(B)(iii) and §1.42-2(c)(1) of the Income Tax
              Regulations;

       (6)    As of t6, federal mortgage funds for the Project were at risk within the
              meaning of § 1.42-2(c)(2);

       (7)    There have been no nonqualified substantial improvements to the
              buildings in the Project since it was last placed in service on t7,

       (8)    To the best of knowledge of Partnership and its representatives, no prior
              owner of the Project was allowed a low-income housing credit under § 42
              for the Project;

       (9)    All terms and conditions of § 42 and related sections, including substantial
              rehabilitation in excess of the minimum provided by § 42(e)(3), will be met
              except for § 42(d)(2)(B)(ii). Partnership asks that this requirement be
              waived under the authority granted the Secretary of the Treasury by §
              42(d)(6)(A)(i); and

       (10)   This application for the waiver is timely filed as it is within 12 months after
              t7.

        For an existing building to qualify for the 30-percent present value housing tax
credit, § 42(d)(2)(B)(ii) requires 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)(6)(A)(i) provides an exception to the 10-year holding period
requirement of § 42(d)(2)(B)(ii). Upon application by the taxpayer, the Secretary
may waive this requirement for any federally-assisted building if the Secretary (after
consultation with the appropriate federal official) determines that such waiver is
necessary to avert an assignment of the mortgage secured by property in the project
(of which such building is a part) to the Department of Housing and Urban Development
or the Farmers Home Administration.

       Section 42(d)(6)(B) defines the term “federally-assisted building” as including any
building that is substantially assisted, financed, or operated under (i) § 8 of the United
States Housing Act of 1937, (ii) § 221(d)(3) or § 236 of the National Housing Act, or (iii)
§ 515 of the Housing Act of 1949, as such Acts are in effect on the date of enactment
of the Tax Reform Act of 1986 (October 22, 1986).

       Section 42(h) provides a limitation on the aggregate credits allowable to projects
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located in a state. Section 42(h)(1)(F) states that the allocation of the allowable credit
dollar amount may be made on a project basis. To qualify for the credit Partnership
must receive an allocation from the Authority.

        Section 1.42-2 contains requirements that must be satisfied before the Secretary
will grant the waiver referred to in § 42(d)(6)(A)(i). You have represented that
Partnership is in compliance with these requirements.

      Based solely upon the above facts and Partnership’s representations, we have
determined that the buildings in the Project are federally-assisted buildings within the
meaning of § 42(d)(6)(B)(iii), and that federal funds are at risk under § 42(d)(6)(A)(i).
Therefore, we rule as follows:

       The 10-year holding period requirement of § 42(d)(2)(B)(ii) is waived for
       Partnership’s acquisition of the Project provided the Project receives a low-
       income housing dollar amount allocation from the Authority.

       No opinion is expressed or implied regarding the application of any other
provision in the Code or regulations. Specifically, no opinion is expressed or implied
regarding whether Partnership’s costs of acquisition and rehabilitation of the buildings in
the Project will qualify otherwise for the low-income housing credit under § 42.

        This ruling is directed only to Partnership which requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. A copy of this letter should be
filed with the federal income tax return for Partnership and its partners for the first
taxable year in which the low-income housing credit for the Project is claimed.

                                          Sincerely yours,
                                          Harold E. Burghart
                                          Assistant to the Branch Chief, Branch 5
                                          Office of the Assistant Chief Counsel