House Approves Extenders Bill; Final Action Appears Delayed Until 2010
By Caitlin Jones
8 min read
Tax Credit Advisor, January 2010: Supporters of the federal low-income housing, new markets, and historic rehabilitation tax credits relished partial victory in December as the U.S. House of Representatives approved an “extenders” bill (H.R. 4213) containing favorable provisions. But as Congress moved toward adjournment, it appeared virtually certain that final action by Congress on these provisions and on possible additional improvements will not occur until early 2010.
In addition, advocates worried about a tax provision in a separate House-passed health care bill that they suggested could deter future tax credit deals.
Extenders Bill
H.R. 4213, approved by the House on 12/9/09, is a $31 billion package that would extend various federal tax credits and tax incentives scheduled to expire on December 31.
It would extend by one year, through 2010, the low-income housing tax credit (LIHTC) Section 1602 exchange program, which was established in 2009. This and the companion Tax Credit Assistance Program are providing billions of federal dollars through state housing credit agencies (HCAs) to assist stalled LIHTC projects.
H.R. 4213 would continue the Section 1602 program under the current terms. State HCAs could elect to turn in unused or returned housing credits to the U.S. Treasury in exchange for cash, and award these funds to projects. The maximum amount that HCAs could exchange would be 40% of their 2010 per capita housing credit authority and 100% of any remaining credit authority in their 2010 credit ceiling. The exchange rate would be the same, and each state’s 2010 credit ceiling would be reduced by the amount of exchanged credits. State HCAs would have to return to Treasury any exchange fund dollars not used by 1/1/12 to make grants to projects.
New Markets, Historic Provisions
The legislation would extend the federal new markets tax credit (NMTC) program by one year, through 2010, and authorize $5 billion for a 2010 funding round. It would also bump out the carryover period for unused NMTCs through 2015.
The bill would extend for one year the current higher tax credit rates for rehabilitation expenditures for historic and older (i.e. pre-1936) buildings located in the Gulf Opportunity (GO) Zone – parts of Alabama, Mississippi, and Louisiana. These higher rates – 26% rather than the normal 20% for historic structures, and 13% rather than 10% for pre-1936 buildings – would apply to rehab expenditures incurred before 1/1/11.
In addition, H.R. 4213 would extend special favorable tax treatment for charitable contributions of historic preservation easements, renew federal tax incentives for empowerment zones and renewal communities, and order a study of each individual tax incentive program that would be extended by the bill.
Favorable Reaction
Washington, D.C. attorney Jerry Breed, of Bryan Cave LLP, described the bill’s one-year extension and $5 billion in new funds for the NMTC program as “very welcome.” Also offering praise was John Leith-Tetrault, of the National Trust Community Investment Corporation, which syndicates new markets and historic tax credits.
Both, though, still hoped that Congress will approve other pending proposals to improve the program. The NMTC industry in particular has been lobbying for a multi-year extension as well as allowing the new markets credit to offset income tax liability under the federal alternative minimum tax (AMT).
Leith-Tetrault also commended the House bill’s extension of the higher 26% tax credit rate for rehabilitation expenditures for historic buildings in the GO Zone. “We felt that was important because a lot of the effort to rebuild after Katrina has been delayed,” he said. He noted historic rehab projects in the GO Zone have had a tougher time than projects elsewhere obtaining debt and getting started. “The recession’s impact there has been disproportionate.”
The Historic Tax Credit Coalition is also lobbying for passage of a handful of additional improvements to the federal historic and rehabilitation tax credits, including encouraging smaller projects and rewarding greater energy efficiency in old buildings. The Coalition is seeking to get several of its proposed changes in an expected jobs bill. There’s also a parallel effort to try to get the historic “green” provisions included in a forthcoming Senate climate change bill.
Washington, D.C. Richard Goldstein, a partner in the law firm of Nixon Peabody LLP and counsel to the Affordable Housing Tax Credit Coalition, was “happy” about the provision to extend the LIHTC exchange program for a year.
Advocates contend that an extension is vital given the continued shortage of LIHTC equity, asserting that the extra federal dollars will make more projects possible, create additional jobs, and tide the industry over until the equity market returns to normal.
Goldstein and other LIHTC advocates hoped that Congress, in addition to an extension of the exchange program, will approve one or more other pending proposals designed to expand the exchange program, increase LIHTC equity investment, and broaden the investor base. These include proposals to: expand the exchange program to 4% housing credits; extend the carryback period for existing and LIHTC future investments to five years from the current one; and revise the passive loss tax rules so that taxpayers in certain business entities businesses entities, such as S corporations, can utilize the housing credit. These proposals have been developed and are being pushed by a coalition called Rental A.C.T.I.O.N and its member organizations. The National Council of State Housing Agencies has crafted a separate set of proposed changes relating to housing credits and tax-exempt housing bonds. (For details on proposals, see Tax Credit Advisor, September 2009, p. 3, November 2009, p. 3.)
At press time, it wasn’t clear when the U.S. Senate would take up the House-passed extenders package, and whether the House and/or Senate will adopt additional proposed improvements to the housing, historic, and new markets credits.
The House is expected to craft and vote on a jobs bill, and Goldstein cited positive signs that more limited versions of the carryback and passive loss change proposals might be included. “We’re at least in the discussion,” he said. The Senate is also looking at a jobs bill and possibly considering inclusion of a five-year carryback proposal for all general business credits, not just the housing credit.
On 11/18/09, Rep. Bill Pascrell, Jr. (D-N.J.) introduced a bill (H.R. 4109) to extend the carryback period for the housing credit to five years.
Economic Substance Provision
Goldstein, Breed, and Leith-Tetrault expressed concern about a tax provision in a House-passed health care bill (H.R. 3962), suggesting that it would make it difficult for attorneys to issue new legal tax opinions for new housing, historic, and new markets tax credit transactions if enacted in its current form.
The proposed tax law change would incorporate into the federal tax code the “economic substance doctrine.” This tax rule, which has been developed and interpreted differently over the years in a series of court decision, provides that a taxpayer’s motivation for undertaking a transaction can’t be to avoid federal taxes, but rather must have economic substances; that is the expectation or hope of a profit.
H.R. 3962 would “codify” this doctrine and impose a financial penalty for transactions that lack economic substance.
A footnote (No. 260) in the written explanation of the proposed change by the congressional Joint Committee on Taxation (Report JCX-47-09) is intended to provide protection for transactions involving certain tax incentives such as housing credits, which reflect a social purpose spelled out by Congress in the original enabling legislation. Breed, though, noted that this intended protection isn’t explicit enough to clearly protect housing, historic, new markets, and renewable energy investment tax credit transactions.
Breed has drafted proposed language on behalf of the Historic Tax Credit Coalition that would make the protection stronger and explicit, and organizations that advocate for other tax credits are weighing in for a possible multi-industry effort to get behind corrective language and lobby for it.
“We don’t want to chill investment in these transactions,” said Breed, referring to those involving historic, housing, new markets, and renewable energy tax credits. “So it would be helpful to have a more explicit discussion of the nature of the subsidy provided by these Code sections, and that [that] subsidy should be taken into account in the determination of whether there is economic substance present in the transactions.”
The codification proposal is particularly worrisome because the provision would raise substantial revenues to help pay for health care reform legislation.
