When the financial markets deteriorated in the second half of 2008, so did the market for Low Income Housing Tax Credits (LIHTC). Funds and individuals who typically acquired interests in LIHTC transactions had no profits or taxable income, and no need to purchase LIHTCs. As a result, developments which relied on LIHTCs could not obtain needed financing.
Congress responded by creating two separate financing programs in The American Recovery and Reinvestment Act of 2009: (1) the Tax Credit Assistance Program (TCAP), and (2) the Section 1602 Exchange Program. TCAP provided grant funding for investment in LIHTC projects through formula-based allocation. The Section 1602 Exchange Program, by contrast, provided LIHTC project funding through an exchange of cash grants for LIHTCs.
In Notice 2010-18 the Internal Revenue Service (IRS) indicated that Section 1602 Exchange Program funds are not includible in the recipient’s gross income. The IRS recently released an internal IRS memorandum from its Chief Counsel Office to the field, Chief Counsel Memorandum 201106008, indicating its opinion that TCAP funds should be includible in the recipient’s gross income.
While the TCAP and Section 1602 Exchange Program were both designed to provide funding for LIHTC developments (and could in fact both fund a single LIHTC development), an IRS position that TCAP funds should be includible in the recipient’s gross income is not surprising. TCAP funds were provided to LIHTC projects and did not require the developer to give up anything in exchange. The Section 1602 Exchange Program, however, required developers to forgo valuable tax credits in exchange for a cash grant.
Chief Counsel Memorandum 201106008 also provides guidance on when a partnership/developer must include TCAP funds in income. Although the guidance does not address the Section 1602 Exchange Program, the year in which TCAP funds must be included in income is relevant because this would also be the year that tax basis should arise as a result of the receipt of Section 1602 Exchange Program funds.
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