(M.M. Hussong, 13 Taxation of Exempts 275 (May/June 2002).)
Pro bono project for low-income groups
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Protecting exempt status in low-income housing tax credit partnerships.
The low-income housing tax credit of Section 42 provides federal tax incentives to encourage private investors to contribute funding for developing housing for low-income households.
Tax-exempt, affordable housing developers generally do not owe taxes and cannot directly use credits. Exempt developers, therefore, sell the credits to for-profit investors who use the credits to reduce their tax liabilities. In addition to the credits, the for-profit investors gain an ownership interest in the project. The project generally is structured as a limited partnership in which the exempt organization serves as the general partner and retains 1% interest, while the investors serve as limited partners, obtaining a 99% interest in the partnership profits, losses, deductions, and credits. As general partner, the exempt organization assumes the partnership liabilities. To qualify for exempt status, the exempt organization must maintain control of the day-to-day activities of the partnership to demonstrate that it is furthering its exempt purpose. This article discusses how the resulting partnership may jeopardize the tax-exempt status of the nonprofit developer.
(M.M. Hussong, 13 Taxation of Exempts 275 (May/June 2002).)
Bob Hughes
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