Can Tennessee limited partnerships that received federal low-income housing credits in 1987-1989, before an extended low-income housing commitment was federally required, still claim Tennessee's affordable-housing franchise and excise tax exemption without one?

Subject

Whether affordable-housing limited partnerships without an extended low-income housing commitment qualify for the franchise and excise tax exemption.

Plain-English summary

The Tennessee Department of Revenue denied a franchise and excise (F&E) tax exemption to a group of Tennessee limited partnerships that were organized to provide affordable housing and had received federal low-income housing tax credits between 1987 and 1989. Tennessee's affordable-housing exemption under Tenn. Code Ann. § 67-4-2008(a)(8) requires two things: (1) an allocation of federal low-income housing credits under IRC § 42, and (2) an "extended low-income housing commitment" (a recorded restrictive covenant, defined in IRC § 42(h)(6)(B)) in effect for each residential building.

The taxpayers had the credit allocation but not the commitment — because in 1987-1989, when they received their credit allocations, federal law didn't yet require an extended commitment (that requirement was added by a 1989 amendment to IRC § 42, effective for allocations from 1990 forward). Instead, their property deeds contained different restrictive-use covenants that were never entered into with the Tennessee Housing Development Agency. The taxpayers argued the legislature must have intended to exempt everyone who qualified for the federal credit, including pre-1990 recipients who couldn't have gotten a commitment. The Department rejected that argument: the statute's language unambiguously requires the IRC § 42(h)(6)(B) commitment to be "in effect," courts read tax exemptions narrowly against the taxpayer, and the taxpayer bears the burden of proving an exemption applies — a burden these partnerships couldn't meet no matter how sympathetic their timing problem was.

What this means for you

Affordable housing developers and limited partnerships

If your entity holds a Tennessee franchise and excise tax exemption claim tied to the federal low-income housing credit, check that you actually have an extended low-income housing commitment recorded as a restrictive covenant, as defined in IRC § 42(h)(6)(B) — not just a credit allocation or a different kind of deed restriction. This ruling shows Tennessee will deny the exemption even where the gap exists only because federal law didn't require a commitment when your credits were originally allocated (pre-1990).

Accountants and tax professionals

This is a clean example of Tennessee's strict-construction-against-the-taxpayer rule for tax exemptions: even a sympathetic "the legislature couldn't have meant to exclude us" argument fails against unambiguous statutory language, per American Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000) and Boarman v. Jaynes, 109 S.W.3d 286 (Tenn. 2003). Any exemption analysis tied to a cross-referenced federal credit provision should verify which version of the federal requirement applied when the taxpayer's credit was actually allocated.

Common questions

Q: Does simply receiving a federal low-income housing tax credit qualify an entity for Tennessee's F&E affordable-housing exemption?
A: No. The entity also needs an extended low-income housing commitment under IRC § 42(h)(6)(B) recorded as a restrictive covenant, in effect for each residential building.

Q: What if the extended commitment wasn't required by federal law when the taxpayer got its credit allocation?
A: It doesn't matter under this ruling — the Tennessee exemption statute requires the commitment to be "in effect," with no exception for taxpayers who received allocations before 1990 (when the federal commitment requirement began).

Q: Does the franchise tax exemption depend on the excise tax exemption?
A: Yes. Tenn. Code Ann. § 67-4-2105(a) exempts an entity from the franchise tax only if it's exempt from the excise tax under § 67-4-2008 — so failing the excise exemption here meant losing the franchise exemption too.

Q: Does this ruling apply to my affordable-housing entity?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed, and cannot be relied on by others. It shows how the Department reasons about this exemption, but your facts may differ.

Citations and references

Statutes and cases:

• Tenn. Code Ann. § 67-4-2008(a)(8) (affordable-housing excise tax exemption, requires federal credit allocation AND extended low-income housing commitment)
• Tenn. Code Ann. § 67-4-2105(a) (franchise tax exemption tied to excise exemption)
• IRC § 42 (federal low-income housing tax credit); IRC § 42(h)(6)(A)-(B) (extended commitment requirement added by 1989 amendment, effective for post-1989 allocations)
• Boarman v. Jaynes, 109 S.W.3d 286 (Tenn. 2003); Saturn Corp. v. Johnson, 197 S.W.3d 273 (Tenn. Ct. App. 2006); American Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000) (statutory construction; exemptions construed against the taxpayer)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/07-11fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 07-11
WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.
SUBJECT
Whether the Taxpayers are exempt for Tennessee franchise and excise tax purposes as providers
of affordable housing pursuant to Tenn. Code Ann. § 67-4-2008(a)(8).
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling and a retroactive revocation of the ruling must inure to his detriment.
FACTS
This letter ruling involves the following taxpayers: [NAMES OF ENTITIES]. Each Taxpayer is
a Tennessee limited partnership organized exclusively for the purpose of providing affordable
housing.
Between 1987 and 1989, each Taxpayer received an allocation of federal low-income housing
credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended (“IRC § 42”).

In accordance with IRC § 42 as it was in effect at the time, Taxpayers did not enter into extended
low-income housing commitments with the Tennessee Housing Development Agency
(“THDA”) when they applied for allocations of federal low-income housing credits between
1987 and 1989. Instead, the deeds of trust to the Taxpayers’ real property contain certain
restrictive use covenants. These covenants are not agreements entered into with THDA.
The Taxpayers have requested a letter ruling stating that they are exempt for Tennessee franchise
and excise tax purposes pursuant to Tenn. Code Ann. § 67-4-2008(a)(8), despite the lack of an
extended low-income housing commitment, because the commitment was not required when the
Taxpayers received their allocations of federal credits.
QUESTION
Are the Taxpayers exempt for Tennessee franchise and excise tax purposes as providers of
affordable housing, pursuant to Tenn. Code Ann. § 67-4-2008(a)(8)?
RULING
No. The Taxpayers are not exempt for Tennessee franchise and excise tax purposes pursuant to
Tenn. Code Ann. § 67-4-2008(a)(8).
ANALYSIS
Tenn. Code Ann. § 67-4-2008(a)(8) 1 provides an exemption from the Tennessee excise tax for
limited partnerships and limited liability companies that are organized exclusively for the
purpose of providing affordable housing, provided they meet the following criteria: (1) the entity
must have received an “allocation of low-income housing tax credits pursuant to Section 42 of
the Internal Revenue Code of 1986, as amended;” and (2) an “extended low-income housing
commitment as defined in Section 42(h)(6)(B) of the Internal Revenue Code of 1986, as
amended, must be in effect with respect to each residential building owned by the entity for the
period covered by the return.” Tenn. Code Ann. § 67-4-2105(a) exempts from the Tennessee
franchise tax any entity that is exempt from the excise tax under Tenn. Code Ann. § 67-4-2008.
IRC § 42 provides a credit for federal income tax purposes to taxpayers that provide low-income
housing and that satisfy a number of statutory requirements. The federal low-income housing
credit is available only if an allocation of the credit is obtained from the housing agency of the
state in which a project is located; in the Taxpayers’ case, the allocation must be obtained from
THDA. Since 1990, IRC § 42(h)(6)(A) has required that an extended low-income housing
commitment be in effect as of the end of the taxable year in which the federal credit is claimed. 2
1

Tenn. Code Ann. § 67-4-2008(a)(8) was enacted in 2004, and applies to all taxable years ending on or after June
30, 2003.
2
IRC § 42(a), prior to its amendment in 1989, allowed a ten-year tax credit for investment in qualified low-income
buildings placed in service after December 31, 1986, and, with certain limited exceptions, before January 1, 1990.
As enacted, IRC § 42 allowed allocations in calendar years 1987, 1988, and 1989. The 1989 amendment extended
the credit to allow allocations after 1989 and amended certain provisions of IRC § 42. Among the changes made by
the 1989 amendment to IRC § 42 was the addition of IRC § 42(h)(6)(A), which provides that a building will be

2

Additionally, IRC § 42(h)(6)(B)(vi) requires that the extended low-income housing commitment
be recorded as a restrictive covenant on the property that is the subject of the credit. Prior to
1990, however, IRC § 42 did not require taxpayers to enter into an extended low-income housing
commitment or to record the commitment as a restrictive covenant to receive an allocation of
federal credits. Because there was no such requirement, the Taxpayers did not enter into
extended low-income housing commitments with THDA when they applied for allocations of
federal low-income housing credits between 1987 and 1989. Instead, the deeds of trust to the
Taxpayers’ real property contain certain restrictive use covenants. These covenants are not
agreements entered into with THDA.
Tenn. Code Ann. § 67-4-2008(a)(8)(B) clearly and unambiguously states that “an extended lowincome housing commitment as defined in Section 42(h)(6)(B) of the Internal Revenue Code of
1986, as amended, must be in effect” for a taxpayer to qualify for the exemption. Because the
requisite extended low-income housing commitments are not in effect in the Taxpayers’ case, the
Taxpayers do not qualify for the exemption under Tenn. Code Ann. § 67-4-2008(a)(8).
The suggestion has been made that, despite the clear and unambiguous requirement under Tenn.
Code Ann. § 67-4-2008(a)(8)(B), the Tennessee legislature intended to provide an exemption to
all entities that qualify for the federal low-income housing credit, including those that received
allocations of credits prior to the enactment of the extended low-income housing commitment
requirement in 1990. This assertion conflicts, however, with established rules of statutory
construction that require one to ascertain legislative intent from the natural and ordinary meaning
of the language used in the statute.
The Tennessee Supreme Court has stated that legislative intent is to be ascertained whenever
possible “without forced or subtle construction that would limit or extend the meaning of the
language.” Boarman v. Jaynes, 109 S.W.3d 286, 290-291 (Tenn. 2003). Similarly, the Tennessee
Court of Appeals has stated that “courts must give effect to the ‘plain import of the language of
the act’ and must not use the strict construction rule to thwart ‘the legislative intent to tax.’”
Saturn Corp. v. Johnson, 197 S.W.3d 273, 276 (Tenn.Ct.App. 2006) (citing International
Harvester Co. v. Carr, 466 S.W.2d 207, 214 (Tenn. 1971)). The plain and ordinary meaning of
Tenn. Code Ann. § 67-4-2008(a)(8)(B) is that the taxpayer must have an extended low-income
housing commitment in place to qualify for the exemption. To read an exception into this
unambiguous language would be a forced construction that would improperly limit the statute’s
meaning. Moreover, an interpretation of Tenn. Code Ann. § 67-4-2008(a)(8)(B) that would apply
the requirement only to taxpayers that received allocations of federal credits beginning in 1990
would simply contradict the plain language of the statute.
Additionally, the clear language of Tenn. Code Ann. § 67-4-2008(a)(8)(B) raises doubts that the
Taxpayers are entitled to the exemption despite the lack of extended low-income housing
commitments. Accordingly, the Taxpayers’ claim of exemption must be denied because the
Taxpayers have the burden of proving that they are entitled to the exemption under Tenn. Code
eligible for the credit only if the taxpayer and the housing credit agency enter into an extended low-income housing
commitment, as defined in IRC § 42(h)(6)(B). See Rev. Rul. 92-79, 1992-2 C.B. 10.

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Ann. § 67-4-2008(a)(8) despite the clear wording of the statute. The Tennessee Supreme Court
has stated that “[a]lthough the rule is well-established that taxing legislation should be liberally
construed in favor of the taxpayer and strictly construed against the taxing authority, it is an
equally important principle of Tennessee tax law that ‘exemptions from taxation are construed
against the taxpayer who must shoulder the heavy and exacting burden of proving the
exemption.’” American Airlines, Inc. v. Johnson, 56 S.W.3d 502, 506 (Tenn.Ct.App. 2000)
(quoting Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34, 36 (Tenn.Ct.App. 1995)). The
Tennessee Supreme Court has also stated that the burden is on the taxpayer to establish the
exemption, and any well-founded doubt is sufficient to defeat a claimed exemption from
taxation. American Airlines, Inc. v. Johnson, 56 S.W.3d at 506 (citing Tibbals Flooring Co. v.
Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525,
527 (Tenn. 1985)).
Accordingly, the Taxpayers are not exempt for Tennessee franchise and excise tax purposes as
providers of affordable housing pursuant to Tenn. Code Ann. § 67-4-2008(a)(8).

Kristin Husat
Tax Counsel

APPROVED:

Reagan Farr
Commissioner of Revenue

DATE:

4/18/07

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