The IRS issued a Chief Counsel Advice (CCA) memorandum on March 26, 2015 on the subject of Noncompliance Resulting from Conflicting Program Requirements in the Low-Income Housing Tax Credit program. The memorandum was issued in order to change the advice given in a CCA issued August 20, 2007. The 2007 memorandum provided guidance to IRS agents in situations where an owner of a §42 building implements policies or procedures that result in not renewing a tenant’s lease in a §42 low-income unit when the tenant’s income rises to a certain income threshold that violates other program requirements (e.g., a state, local, or other federal program). Since the §42 program permits occupants to remain in occupancy if their income exceeds the income limits for the tax credit program, the CCA determined that requirements of other programs that require an occupant to vacate the premises due to an increase in income would conflict with the requirements of §42. The CCA determined that if an owner follows the conflicting rules of other programs, the project would not be in compliance with §42 and no credit would be permitted.
This advice was of significant concern to the tax credit industry when it was issued, and while informal IRS guidance since then has indicated that violation of the rules of other programs may provide “good cause” for removal of an occupant in a tax credit project, until the issuance of this new CCA, no formal guidance existed.
Under §42(h)(6)(B)(i), a project’s extended use agreement must prohibit the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit. This new CCA states “A building can still be a qualified low-income building under §42(c)(2)(A) if an owner does not renew the lease of a tenant when the tenant’s income exceeds the applicable income limitation under §42(g)(1), even though §§42(g)(2)(D)(i) or (ii) would allow the unit to continue to qualify as a low-income unit on renewal. However, unless good cause exists to not renew a lease, an owner is required to continue the tenancy of a tenant in a low-income unit who upon initial occupancy satisfied the applicable income limitation.” This means that an increase in income above the applicable income limitation, by itself, is not good cause to end the leasing of the unit to the tenant. The CCA goes on to say that IRS agents do not need to determine whether good cause existed when an owner fails to renew the lease of any tenant. However, an appropriate party (e.g., the tenant or housing credit agency) can enforce the extended use agreement to the extent there is a question of whether there was good cause for non-renewal of a lease. Good cause should be determined under state or local law, and the fact that a local, state, or other federal program’s requirements conflict with §§42(g)(2)(D)(i) or (ii) may be relevant for this determination.
The current CCA recommends that the August 20, 2007, memorandum be withdrawn and instead IRS agents should determine that an extended low-income housing commitment satisfying the requirements of §42 is in effect at the end of the taxable year(s) at issue. As long as the extended use agreement is in effect, and the agreement meets the requirements of §42, credit is allowable. However, if the State Agency determines that good cause did not exist for removal of a resident, a credit loss and recapture could result.
As a result of this CCA, it now appears that State HFAs may consider the requirements of other programs as well as state or local law, when determining whether or not there was good cause to remove an occupant from a §42 unit. My advice is that prior to terminating occupancy by a resident due to the requirements of another program or state or local law, owners should confer with the State HFA to determine whether or not it will permit such termination, without reporting it to the IRS.