Can a partner who owns only a tiny fraction of a low-income housing project be allocated 100% of Utah's state low-income housing tax credit?

Plain-English summary

The Utah Housing Finance Agency (called "the Agency" in the response letter) asked the Tax Commission to confirm how flexibly Utah's state low-income housing tax credit could be allocated among investors in a qualifying project, because the program's design creates a common mismatch: many large investors want the federal low-income housing credit but have no Utah income tax liability to use the state credit against, so developers route the Utah credit disproportionately to whichever partner can actually use it.

The Commission confirmed that Utah's credit amount is set by agreement between the taxpayer and the housing sponsor, not by ownership share (§ 59-7-607(2); § 59-10-129(2)). That produces a clean answer to both structures the request described:

• Structure 1 — a partner ("Utah Partner") owning just 0.01% of the project directly, with the rest owned by an unrelated investor who can't use the state credit. The Utah Partner can be allocated 100% of the Utah credits, notwithstanding the tiny ownership stake, as long as the partnership agreement says so.
• Structure 2 — a second-tier partnership holds a 0.01% interest in the project and then reallocates the Utah credits among its own partners, pro rata or disproportionately, however its own partnership agreement provides. Same result: the ownership percentage at either level doesn't cap the credit allocation.

Beyond the core allocation question, the Commission addressed several related mechanics: partnerships can amend their agreements year to year to add new partners or change how credits are split, with no restriction under the housing credit law; a partner who can't use its full allocation in a given year can instead carry it back three years or forward five years (§ 59-10-129(10)(b)); the Utah credit amount for a project each year equals the federal credit amount multiplied by a percentage the Agency sets on Form TC-40TCAC, which the Commission itself has no authority to change; recapture only follows federal recapture — if a taxpayer must give back federal credits, the same percentage of state credits must be recaptured too, but Utah doesn't add its own penalty on top; and all of these rules apply the same way regardless of entity type — partners in a partnership, members of an LLC, and shareholders of an S corporation are all treated as "taxpayers" entitled to the credit under § 59-7-607(1)(h)/§ 59-10-129(h).

What this means for you

Affordable housing developers and sponsors

You have real flexibility in how you write the partnership/operating agreement to route the Utah credit to whichever investor can actually use it — ownership percentage doesn't limit or dictate the credit split, only the agreement does. That flexibility extends to multi-tier structures where a second partnership reallocates the credit again among its own partners.

Investors in low-income housing partnerships

If you have Utah tax liability but only a token ownership stake, you can still be the one who receives the state credit by agreement — useful in deals structured around investors who want the (larger) federal credit but can't use Utah's.

Accountants and tax professionals structuring these deals

Note the asymmetric treatment: the allocation percentage is a matter of private agreement (reported on Form TC-40LIS), but the total credit pool for a project is fixed externally — federal credit amount × the percentage the Agency sets on Form TC-40TCAC — and the Commission cannot adjust that percentage. Also track the carryback/carryforward option (3 years back, 5 forward) for partners who can't use their full allocation in the credit year.

Common questions

Q: Does a partner need to own a proportional share of the project to claim a proportional share of the credit?
A: No — the credit allocation is set by agreement between the taxpayer and the housing sponsor, independent of ownership percentage.

Q: Can the partnership change who gets the credit from year to year?
A: Yes. Nothing in the law prevents amending the partnership agreement to add partners or reallocate credits, including raising or lowering a given partner's percentage compared to the prior year.

Q: What happens if we can't use all our allocated credit in one year?
A: You can carry the unused credit back three years or forward five years against Utah tax liability under § 59-10-129(10)(b).

Q: If the project's federal credits get recaptured, do we owe a separate Utah penalty?
A: No — the same percentage of state credits must be recaptured as federal credits, but the Commission does not add its own penalty on top of that recapture.

Q: Does this apply to LLCs and S corporations too, or only limited partnerships?
A: The same rules apply across entity types — members of an LLC and shareholders of an S corporation are treated the same as partners of a partnership under the statutory "taxpayer" definition.

Citations and references

Statutes:

• Utah Code Ann. § 59-7-607(2)(a)-(c) (corporate low-income housing tax credit amount, set by agreement)
• Utah Code Ann. § 59-10-129(2)(a)-(c) (individual low-income housing tax credit amount, set by agreement)
• Utah Code Ann. § 59-7-607(8); § 59-10-129(8) (recapture mirrors federal recapture percentage; no separate penalty)
• Utah Code Ann. § 59-10-129(10)(b) (3-year carryback / 5-year carryforward of unused credit)
• Utah Code Ann. § 59-7-607(1)(h); § 59-10-129(h) (definition of "taxpayer" across C corps, partnerships, S corps, and LLCs)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/02-013.htm

Original ruling text

REQUEST LETTER

02-013

Response: 09/04/02

Re: Questions regarding Allocations of Utah Low Income Housing Tax Credits

As NAME of my office has discussed with you, in recent years the CORPORATION has received a number of requests to clarify certain matters with respect to the State of Utah low income housing tax credits "Utah Credits") that may be claimed pursuant to Section 59-7-607 and Section 59-10-129 of the Utah Code (the "Utah Low-Income Housing Tax Credits Law"). Because it is in the interests of the State of Utah and CORPORATION to maximize the value of the Utah Credits so that more affordable housing can be constructed, we would appreciate your issuing an Advisory Opinion as to these matters as specified below. With these clarifications, we believe that developers of affordable housing will experience greater interest in the Utah Credits which I will lead to improving the value of the Utah Credits allocated to projects by CORPORATION.

Background

Before the specific questions are posed, I believe it would be useful to summarize the legislative history of the Utah Low-Income Housing Tax Credits Law. In response to the demonstrable need for more affordable housing, in l993 and 1994, CORPORATION worked with NAME AND NAME to develop a program of state income tax credits. The theory was that, like the federal low-income housing tax credits program, the private sector, with the right incentives, could produce more affordable housing. In structuring the program, a decision was made to minimize the bureaucratic side of the state's program by making it "piggyback" onto the federal program, in the sense that state tax credits would be taken by an owner of an eligible project based on a percentage, determined by CORPORATION, of the amount of the federal tax credit to which the owner would be entitled in any given year, so that neither the State Tax commission nor CORPORATION would need to independently verify any aspect of the Program; the project would need to comply wit the many requirements under federal law but there would not be the need to duplicate the monitoring process. H.B. 205 was enacted into law in the General Session of the Legislature in 1994. The program was a quick success in generating additional affordable housing.

In the next few years, however, it became clear that there are many more potential investors in affordable housing projects with federal income tax liability but no Utah tax liability than investors with both. As a result, the potential pool of investors was restricted, leading to lower capital contributions to affordable housing projects than desirable. To address this problem, CORPORATION worked with staff of the State Tax Commission in 1999 to devise legislation that would amend the state's program to allow different investors in a project to obtain the benefits of the federal tax credits and the benefits of the state tax credits. At the request of CORPORATION, NAME introduced a bill to accomplish this purpose, H.B. 309, which was passed by the Legislature.

Because the details of the Utah Low-Income Housing Tax Credits Law are somewhat more complicated than this summary, investors not familiar with the statutes have asked us for guidance from time to time. While we have provided as much advice as possible, they are seeking additional comfort that they understand how the Utah Credits work. To that end, we have prepared this request letter to allow you, as the agency with the ultimate right to determine to what credits a Utah taxpayer is entitled, to clarify these matters. In the future, we would then be able to supply copies of your response to those making inquiries as to the program.

Structure of Investment

Developers seeking the benefits of the Utah Credits often receive interest from investors (typically large financial institutions) that want to make substantial equity investments in flow-through entities that own otherwise qualifying Utah-based low-income housing projects ("Utah Projects"). The investor intends to utilize the federal low-income housing tax credits generated by these Utah Projects, but has no Utah corporate income tax liability. Thus, in order to make its investments in Utah Projects feasible, the investor would like the flow-through entities that own Utah Projects to allocate the Utah Credits disproportionately to one or more other partners that can utilize them. We have been informed that there are at least two ways that this may be structured:

Structure 1: Pursuant to a partnership agreement, Partner A purchases a 99.98% interest in a Utah Project. The Utah Project admits a second, 0.01% unrelated limited partner ("Utah Partner") that has sufficient Utah income tax liability to utilize the Utah Credits. The other 0.01" interest belongs to the General Partner (the developer). When the Utah Project is entitled to claim the Utah Credits pursuant to the Utah Low-Income Housing Tax Credits Law, the Utah Project allocates 100% of the Utah Credits to the Utah Partner in accordance with its partnership agreement. This structure is depicted as follows:

See Original Letter for drawing.

Under this structure, the Utah Project files Form TC-40LIS with the Commission, listing the Utah Partner as the sole taxpayer entitled to take the specified amount of the Utah Credits.

Please confirm the following:

1. The Utah Partner is entitled to claim 100% of the Utah Credits notwithstanding the fact that it owns only 0.01% of the Utah Project.

Structure 2: Pursuant to a partnership agreement, Partner A purchases a 99.98% interest in a Utah Project. A second partnership, the PARTNERSHIP, acquires a 0.01 % interest in the Utah Project. The other 0.01% interest belongs to the General Partner (the developer). PARTNERSHIP in turn, is owned by various Utah investors (the PARTNERSHIP) who can utilize the Utah Credits. When the Utah Project is entitled to claim the Utah Credits pursuant to the Utah Low-Income Housing Tax Credits Law, the Utah Project allocates 100% of the Utah Credits to PARTNERSHIP in accordance with its partnership agreement. PARTNERSHIP then allocates all of the Utah Credits to the PARTNERSHIP Partners, either prorata or disproportionately, in accordance with its partnership agreement. This structure is depicted as follows:

See Original Letter for drawing.

Under this structure, the Utah Project files Form TC-40LIS with the Commission, listing the CORPORATION Partners as the taxpayers entitled to take the specified amount of the Utah Credits.

Please confirm the following:

2. The CORPORATION Partners (collectively) are entitled to claim 100% of the Utah Credits notwithstanding the fact that PARTNERSHIP owns only 0.01% of the Utah Project.

3. The amount of the Utah Credits that each CORPORATION Partner may claim is determined by the partnership agreement of CORPORATION, which amount is shown on the Form TC-40LIS that the Utah Project files with the Commission.

4. If a partner of CORPORATION cannot use all of the Utah Credits to which it would otherwise be entitled, nothing under the Utah Low-Income Housing Tax Credits Law would prevent the partnership from amending its partnership agreement to add additional partners and/or to re-allocate the Utah Credits among the partners.

General Questions:

Please confirm the following:

5. A Utah Project is entitled to Utah Credits in any given year if it is eligible for federal low-income housing tax credits for such year, and the amount of the Utah Credits is the amount of such federal tax credits multiplied by the percentage specified on Line 3 of the Form TC-40TCAC issued to the Utah Project by CORPORATION. The Commission cannot change the percentage specified by CORPORATION in Form TC-40TCAC.

6. The Utah Credits may only be recaptured from a Utah Project if the federal low-income housing tax credits which the Utah Project previously claimed are recaptured, in accordance with Section 59-7-607(8). In connection with such a recapture, no penalties would be imposed.

7. While this letter refers to a limited partnership as the entity that owns the Utah Project, all conclusions herein with respect to limited partners in the case of limited partnerships would be equally applicable to members in the case of limited liability companies or shareholders in the case of S corporations.)

I understand that NAME of the State Tax Commission's audit division previously indicated a concern about the subsequent sale of Utah Credits. Unlike most credits, the Utah Credits are available for a period not to exceed the federal credit period, which is normally 10 years, and never more than 15 years. In the case of federal credits, they are frequently syndicated and partnership interests (which include federal credits) are traded on the New York Stock Exchange. However, widely held partnerships are not expected, because of the small amount of State Credits available in Utah.

CORPORATION hereby requests a review of foregoing matters and a discussion before a formal Advisory Opinion is issued. Of course, NAME (PHONE) is available with CORPORATION tax counsel to discuss any questions you may have regarding this request.

Finally, please note that we have always told those who have inquired about the Utah Credits work that we give advice only with respect to the Utah Low-Income Housing Tax Credits Law only, and that we do not give general tax advice or provide any assurances as to how general tax laws, regulations and rules would apply to any specific situation. Likewise, this request for an Advisory Opinion is not expected to cover anything other than the Utah Low-Income Housing Tax Credits Law.

Your assistance in the matter is greatly appreciated. This source of equity for affordable housing has proven to be a valuable asset in the construction and rehabilitation of affordable housing in Utah. An Advisory Opinion that can be broadly applied would be an important policy document for the promotion of this program and the maximization of its value to potential purchasers of the Utah Credits.

Sincerely

NAME

RESPONSE LETTER

September 4, 2002

NAME

ADDRESS

Re: Questions regarding Allocations of Utah Low Income Housing Tax Credits

Dear NAME,

You have requested information regarding Utah low-income housing tax credits. Under Utah Law, taxpayers who are issued an allocation certificate by the Utah Housing Finance Agency (�the Agency�) are allowed a nonrefundable tax credit. (Utah Code Ann. 59-7-607(2)(a) (2001); 59-10-129(2)(a) (2001)). The amount of the credit is equal to the greater of either: (1) a percentage, specified in an allocation certificate issued by the Agency to the taxpayer, of the federal low-income housing tax credit to which the taxpayer is entitled; or (2) the amount of credit specified in a special low-income housing tax credit certificate that the housing sponsor (a C corporation, S corporation, partnership or limited liability company) issues to the taxpayer. (59-7-607(2)(b); 59-10-129(2)(b)).

The credit specified in the tax credit certificate is equal to a percentage, as agreed upon by the taxpayer and the housing sponsor, of the �total amount of low-income housing tax credit that . . . a housing sponsor is allowed for a building and . . . all of the taxpayers may claim with respect to the building . . . .� (59-7-607(2)(c); 59-10-129(2)(c)).

Your letter raised several issues concerning Utah low-income housing tax credits. We will address these issues in the order you raised them.

Question 1. You have described a situation in which a taxpayer owning a minimal interest in a qualified project claims all of the Utah low-income housing credits generated by the project. The percentage of the credit that a taxpayer may receive is determined by agreement between the taxpayer and the housing sponsor. Therefore, if provided in the agreement, a taxpayer may receive all of the credits even though the taxpayer owns a minimal interest in the project.

Question 2. In the scenario you have described, a partnership owns a minimal interest in a Utah project. Because the percentage of credit that a taxpayer may claim is determined in an agreement between the taxpayer and the housing sponsor, the taxpayers that make up the partnership are collectively entitled to claim all of the Utah credits even though the partnership owns a minimal interest in the project.

Question 3. Under the scenario described in Question 2, the amount of the Utah credits that each taxpayer-partner may claim is determined by the agreement between the taxpayer and the housing sponsor.

Question 4. Nothing under the Utah low-income housing tax credit law would prevent the partnership from amending its partnership agreement to add partners or to change the allocation of Utah credits among partners. The amount of credit a taxpayer may claim is a matter of agreement between the taxpayer and the housing sponsor. There is nothing to prevent the taxpayer and the housing sponsor from agreeing in a given year that the taxpayer may claim a higher or lower percentage of the project credit than the taxpayer was allotted in the prior year. Likewise, there is nothing to prevent the housing sponsor from agreeing to allocate a percentage of the credit to a taxpayer who is a new partner. Another option would be for a partner who cannot use all the credits allocated to him to carryback three years or forward five years against the current Utah tax liability (Section 59-10-129(10)(b)).

Question 5. A Utah project is entitled to Utah credits in any year that it is eligible for federal low-income housing credits. The amount of the Utah credits is equal to the amount of the federal tax credits multiplied by a percentage specified on line 3 of the Form TC-40TCAC issued to the project by the CORPORATION. The Tax Commission cannot change the percentage specified by the CORPORATION in Form TC-40TCAC.

Question 6. The Utah credits may only be recaptured from a Utah project if the federal low-income housing tax credits that the Utah project previously claimed are recaptured. Under Utah Code Ann. 59-7-607(8) and 59-10-129(8) (2001), if a taxpayer is required to recapture a portion of any federal low-income housing tax credit, the taxpayer shall also be required to recapture a portion of any state credits. The percentage of the federal credits that the taxpayer must recapture determines the percentage of the state credits the taxpayer must also recapture. In connection with such a recapture, no penalties would be imposed.

Question 7. While your letter refers to limited partnerships, our answer applies equally to members of limited liability companies and shareholders in the case of S corporations. Under Utah Code Ann. 59-7-607(1)(h) and 59-10-129(h) (2001), �taxpayer� means the person entitled to the tax credit, which is the corporation in the case of a C corporation, the partners in the case of a partnership, the shareholders in the case of an S corporation, and the members in the case of a limited liability company.

Should you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

02-013