The IRS has issued Revenue Ruling 2021-20, providing clarity on when taxpayers may claim the fixed four percent credit for properties with tax-exempt bonds. The IRS addressed three separate issues relative to the 4% credit:
- Does the minimum 4% applicable percentage (4% floor) apply to buildings that are financed in part with a draw-down of tax-exempt bonds that were issued in 2020 but had drawn downs of the proceeds in 2021?
- Does the minimum 4% applicable percentage (4% floor) apply to buildings that were financed with tax-exempt bonds issued in 2020 but then had a "de minimis" bond issue after 2020?
- Does the minimum 4% applicable percentage (4% floor) apply to buildings that received an allocation of credits in 2020 and a "de minimis" additional allocation after 2020?
- Example #1: Bonds are issued and partly used in 2020, with the remainder of the bond proceeds drawn down in 2021. The amount drawn in 2020 exceeded the lesser of $50,000 or 5% of the issue price, which qualifies the issue as a 2020 issue. The qualified low-income building is placed in service after December 31, 2020.
- Example #2: Assume the same facts as in Example #1, except that instead of a draw-down of bonds in both 2020 and 2021, the Agency issues bonds in 2020 to finance the construction of the project, and in a subsequent year (e.g., 2021), the Agency issues a different issue of tax-exempt bonds, in a de minimis amount, that the Borrower similarly uses to finance construction of the building.
- Revenue Procedure 2021-43 states that an issuance of bonds in a year after the initial issuance is not de minimis if the aggregate amount of the post-2020 obligations is at least 10% of the total bond financing for the project.
- Example #3: In 2020, the Agency and Borrower enter into a binding agreement whereby the Agency will allocate tax credits for the acquisition of an existing building and an additional allocation of credits for the rehabilitation of the building into a low-income building. The allocations of both the acquisition and rehab credit are made in 2020. The allocations were made under §42(h)(1)(E) and was a valid carryover allocation. The owner completes the acquisition and rehab of the building and places the building in service after December 31, 2020. After 2020, but before the building is placed in service, the Agency makes an additional allocation of credits relating to the acquisition of the building. This additional allocation is de minimis and reduces the Agency’s ceiling for housing credit dollar amounts for the year after 2020 in which the allocation is made. I.e., this is not an allocation of credits due to an issuance of tax-exempt bonds.
- Revenue Procedure 2021-43 states that an allocation of credits in a year after the initial allocation is not de minimis if the allocation amount of the post-2020 credit amount is at least 10% of the total allocations for the project.
The ruling indicates that the 4% credit floor does not apply in any of the cited examples, even though all the buildings described in the examples satisfy the requirement of §42(b)(3) that a building is placed in service after 2020. It should be noted that since the IRS considers the placed-in-service date of a building for acquisition purposes to be the date the building is purchased by the new owner, in example #3 above, the building could not be purchased until after December 31, 2020.
Generally, a project without tax-exempt bonds - such as shown in Example #3 - must only meet the post-2020 placed in service test to qualify for the 4% floor for acquisition credits. Properties with tax-exempt bonds must meet two tests: (1) The property must be placed in service after 2020, and (2) the bonds must be issued after 2020. However, the facts presented in Example #3 have led the IRS to the conclusion - based on the Service’s interpretation of Congressional intent - that even being placed in service after 2020 may not automatically entitle the acquisition costs of a non-tax-exempt bond project to the 4% floor. This issue is covered in more detail below.
- IRS Ruling Relative to Example #1: The IRS believes that if the post-2020 draws under the 2020 issue allowed the 4% floor to apply, the result would be a windfall of credits that were not taken into account when the transaction was structured in 2020. Thus, in Example #1, because the loan was issued in 2020, the applicable percentage of the building is determined without regard to the 4% floor. The applicable percentage of the building is the amount determined under §42(b)(1)(B) and (C) for the month that the bonds were issued. The project may not use the 4% floor.
- IRS Ruling Relative to Example #2: In this example, the post-2020 bond proceeds were from a post-2020 issuance of an exempt facility bond issue. Thus, the situation outlined in Example #2 may qualify a project for the 4% floor, but in order to make this determination, an examination of the effect of the post-2020 bond issuance on project feasibility must be made. Since the law allowing the 4% floor was designed to prevent windfalls, it is necessary to consider whether the de minimis post-2020 issue could create a windfall of tax credits. If the post-2020 issuance is non-de-minimis, any concern over a windfall of credits is lessened. In other words, if the post-2020 issuance is not de minimis, the transaction is less likely to have been entirely structured prior to the enactment of the 4% floor. In addition, a greater portion of the total credits generated by applying the 4% floor to the building would be expected to result from basis financed by the post-2020 issuance.
- If the de minimis amount of bond financing is fully issued after 2020, the IRS takes the position that this more closely aligns with a building whose only tax-exempt financing was issued prior to 2021 - even if placed in service after 2020. Thus, the IRS rules that only non-de-minimis post 2020 tax-exempt bond issuance qualifies a project for the 4% floor. For projects that do not meet this test, the applicable percentage for the building will be based on the credit percentage in place during the month of the initial bond issuance, or, at the election of the taxpayer, the placed in-service date.
- IRS Ruling Relative to Example #3: In this example, credits were allocated in 2020 and an additional allocation - of a de minimis amount - occurred after 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, Section 201(b)(1) states that the 4% rate applies to buildings that receive an allocation of housing credit after December 31, 2020, or in the case of tax-exempt bond financed projects (§201(b)(2)), to projects if the bonds were issued after December 31, 2020. So, a plain reading of the statute indicates that in this example, the project should be eligible for the 4% credit floor. However, the IRS takes a different position. The Service once again makes the "windfall" argument. Since the transaction was structured in 2020, and at that time the allocating agency did not take the 4% floor into account, the 4% credit was not needed for deal feasibility.
- In the Ruling, the IRS acknowledges that the windfall effect with an allocation is less than in a building financed with exempt facility bonds. However, the Service believes that the requirements of §201(b)(1) of the Act manifest the same legislative intent of §201(b)(2) of the Act and should therefore be interpreted consistently. For this reason, the principles that govern de minimis amounts of bonds are equally applicable to de minimis allocations.
Therefore, in the example cited here, the 4% floor does not apply to the building described in Example #3, and the credit percentage will be the percentage for the month of the allocation or, at the election of the taxpayer, the month the building was placed in service.
To summarize the IRS ruling -
- Example 1: the 4% floor does not apply to the building, which is financed in part with a draw-down exempt facility bond issue that was issued in 2020 and on which one or more draws are taken after December 31, 2020.
- Example 2: the 4% floor does not apply to the building which is financed in part with proceeds of an exempt facility bond issue that was issued in 2020 and in part with proceeds of a different exempt facility bond issue that is issued in a de minimis amount after December 31, 2020.
- Example 3: the 4% floor does not apply to the building which receives an allocation of credits in 2020 and a de minimis additional allocation after December 31, 2020.
Owners that anticipate the use of the 4% credit floor for properties being placed in service after December 31, 2020, should carefully review this Revenue Ruling for applicability to their project.
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