This recently issued Revenue Ruling addresses the issue of whether or not Section 42 of the Internal Revenue Code requires or even encourages Housing Finance Agencies (HFAs) to reject proposals for low-income housing tax credit (LIHTC) developments if the locality where the project will be located does not specifically support the project.
While not referenced in the ruling, this guidance is a direct response to criticisms of HFAs (and the lack of IRS oversight of HFAs) in a recent Government Accountability Office (GAO) study of the LIHTC program.
The ruling uses an unidentified state as an example. It should be noted that the GAO report found that 12 HFAs (Alaska, Arkansas, Chicago, Georgia, Illinois, Kansas, Montana, Nevada, New Mexico, North Dakota, Oklahoma, and South Dakota) make approval of LIHTC applications contingent on letters of support from local officials, and another ten agencies (Guam, Indiana, Kentucky, Massachusetts, Ohio, Texas, Virginia, Washington, DC, West Virginia, and Wisconsin) award points for such local support. The QAP of the particular state used as an example contains provisions that strongly favor applications for LIHTC projects that receive direct local government support. For example, under the point system that the HFA uses in judging among projects, points are granted to projects that –
- Show measurable community support for the project, such as written statements from neighborhood organizations in the area of the proposed project;
- Receive a commitment of development funding by the locality; and
- Receive written support for the project, as evidenced by a written statement from the state legislator elected from the district in which the project is proposed to be developed.
The HFA takes the position that Section 42 requires that allocations be made only to projects that receive the approval of the locality where the proposed project is to be located. If such approval is not forthcoming, the HFA will reject the application. This basically gives communities a “local veto” over proposed LIHTC projects.
In this particular state, local approval is much more likely for projects in areas with a higher percentage of minority residents. This results in fewer economic opportunities for minorities in higher-opportunity, non-minority communities. In effect, it allows communities to perpetuate segregation by race. This practice as resulted in the allocation of tax credits in predominately lower-income or minority areas, resulting in the continuation of residential racial and economic segregation.
Section 42(m)(1)(A)(ii) does prohibit an allocation of credits to a building unless the allocating agency “notifies the Chief Executive Officer (or the equivalent) of the local jurisdiction within which the building is located of such project and provides such individual a reasonable opportunity to comment on the project.”
Analysis
The IRS ruling (which based on any reasonable reading of the law is correct) is that the HFA is misinterpreting the code provision. The HFA interpretation of the law is inconsistent with both the language of Section 42 and federal fair housing policy.
The Language in the Code
The code requires that each local jurisdiction be given a “reasonable opportunity” to comment on any proposal to allocate tax credits within the jurisdiction. It does not require the jurisdiction’s “approval.” The clear meaning of “reasonable opportunity to comment,” according to the IRS ruling, is that the jurisdiction has the right to comment, or even object, to the proposal, but they do not have the right of final approval.
The HFA must use its own judgment in the approval or denial of a project, and local officials should not be given veto authority.
Federal Fair Housing Requirements
As significant as the HFA’s misreading of Section 42 is, the most serious failure of the HFA policy is that it perpetuates racial segregation in clear violation of federal fair housing law.
The only way the HFA reading of the code could be correct is if Congressional intent, when creating the LIHTC program, was to reverse or circumvent federal fair housing policy. There is no legislative history on which the HFA could have reached this conclusion. There is nothing in either the language of Section 42 or its legislative history indicating that Congress intended to change the original intent of the Fair Housing Act, which was “to provide, within Constitutional limitations, for fair housing throughout the United States.”
The Ruling
“When state housing credit agencies allocate housing credit dollar amounts, Section 42 (m) (1)(A)(ii) does not require or encourage these agencies to reject all proposals that do not obtain the approval of the locality where the project developer proposes to place the project. That is, it neither requires nor encourages housing credit agencies to honor local vetoes.”
Whether or not the IRS would have issued this ruling without the recent GAO report is unknown. What is clear is that the ruling is on point relative to both the wording and intent of the code. There is no question that it is the intent of some local governing authorities to prevent integration of certain communities. This ruling will make it more difficult for HFAs to be complicit in such local attempts. Owners and developers operating in states where QAPs give any degree of veto authority to local government over the awarding of federal tax credits should remind the HFA of this ruling.