Taxpayers disposing of interests in low-income housing buildings prior to the effective date of Section 3004(i) of the Act were required to recapture §42 credits unless: (i) the taxpayers furnished bonds in amounts satisfactory to the Secretary of the Treasury for the required period and (ii) it was reasonably expected that the buildings would continue to be operated as qualified low-income buildings for the remainder of the buildings' compliance periods. Changes to the §42 credit regime, as a result of the Act, included elimination of the requirement for taxpayers to post bonds upon disposition if the disposed building is reasonably expected to continue to be operated as a low-income building for the remainder of the building's compliance period. The elimination of the requirement of the bond is replaced by an extension of the statute of limitations period for assessment of tax as a result of a disposition. If a building is disposed of after July 30, 2008 and there is a reduction in qualified basis of the building that results in an increase in tax for the year of disposition or any subsequent taxable year, the limitations period for assessment of a deficiency with respect to that increase in tax shall not expire before the expiration of three years from the date the Secretary is notified by the taxpayer of that reduction in qualified basis.
Although the new law applies to dispositions after July 30, 2008, §42(j)(6) allows taxpayers to elect application of the new law to any prior disposition. A taxpayer that disposed of a building (or an interest in a building) prior to July 30, 2008 can elect to terminate a bond arrangement in favor of the application of the new limitations period to the disposition. Section 4 of Rev. Proc. 2008-60 provides that in order for a taxpayer to make the election the taxpayer must submit a letter to the IRS containing the following information:
- The taxpayer's name, address and taxpayer identification number;
- A statement affirming that the taxpayer reasonably expects that the building will continue to be operated as a qualified low-income building (within the meaning of §42) for the remainder of the building's compliance period;
- A declaration stating: "Under penalties of perjury, I declare that I have examined this letter and the representations made therein, and to the best of my knowledge and belief, they are true, correct, and complete."
The taxpayer must attach to the letter a copy of the Form 8693 that was approved by the IRS for the building, signature page only, and mail the letter and attached page to:
Internal Revenue Service
Attn: LIHC Unit, DP 607 South
Bensalem, PA 19020
Taxpayers making the election will be treated as if the new §42(j) applied to their prior dispositions, eliminating the need for maintenance of any bonds.
Taxpayers interested in making this election should consider the effect of the change in the limitations period and the general feasibility of terminating any bond arrangements currently in place.
For further information on making the election, other recent changes to the law resulting from the Act or new legislation and other legal issues related to low-income housing tax credits, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.