Sellers Certificate, Representations Warranties

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					The Institute for Professional Development
            TAX CREDIT PROPERTY DISPOSITION
A New Generation of Rights, Obligations and Opportunities through Year 15 and Beyond
                                 October 11 & 12, 2007
                          Seaport Hotel, Boston, Massachusetts




       TAX CREDIT RECAPTURE AND
           RECAPTURE BONDS

                                          By:            Walter C. Spiegel, Esq.
                                                         Nixon Peabody, LLP
                                                                      2

                         BASIC RULE
If,
(A) as of the close of any taxable year in the compliance period,
   the amount of qualified basis of any building with respect to
   the taxpayer is less than
(B) the amount of such basis as of the close of the preceding
   taxable year, then the taxpayer’s tax for the taxable year shall
   be increased by the credit recapture amount
      Section 42(j)(1)
            QUALIFIED BASIS/DECREASE IN                                     3

                  QUALIFIED BASIS
• In general, qualified basis is the portion of a building that comprises
  low-income units (based upon the number of low-income units in the
  building compared to all of the units, or the floor space of the low-
  income units compared to the floor space of all of the units, whichever
  is smaller).
• Decrease in qualified basis, therefore, is a decrease in the number of,
  or floor space of, low-income units; a decrease in the number of low-
  income units can result from:
    •   low-income unit not being in compliance with Section 42
        •       failure to satisfy income/rent restrictions
        •       damage/destruction due to casualty (not promptly
                restored)
    •   disposition of the project
    •   disposition of more than one-third of interests of a partner in
        partnership, limited liability company that owns the project
                                                            4
SPECIAL RULE: DISPOSITION OF 1/3 OR
  LESS OF A TAXPAYER’S INTERST
• Recapture not triggered upon disposition of one-third
  or less of a taxpayer’s interest in a low-income
  building or of his interests in a partnership that owns
  a low-income building.
Revenue Ruling 90-60 and subsequent IRS guidance.
                                                                     5

    TAX CREDIT RECAPTURE AMOUNT
• Equal to the sum of –
  (A) the accelerated portion of the credit FOR ALL PRIOR
  TAXABLE YEARS with respect to the decrease in qualified
  basis, plus
  (B) interest at the overpayment rate, on the accelerated
  portion, for each prior taxable year for the period beginning on
  the due date for filing the return for the prior taxable year
  involved.
  Section 42(j)(2)
      ACCELERATED PORTION OF THE                                           6

               CREDIT
• Generally speaking, the concept in Section 42 is that a taxpayer
  earns tax credits for each year of a 15-year compliance period
  that taxpayer maintains property in compliance with the Section
  42 Program.
• However, Section 42 allows a taxpayer to claim 15 years worth of
  credits over the first 10 years of the life of a project; i.o.w., Sec.
  42 allows a taxpayer to accelerate 5 years worth (or 1/3) of the
  total credits over the first 10 years of the project, even though
  taxpayer hasn’t yet “earned” the credit with respect to keeping the
  project in compliance for the final 5 years of the compliance
  period.
• Therefore, for each of the first 10 years of the compliance period,
  1/3 of the tax credits the taxpayer is entitled to claim has not yet
  been earned. This is the accelerated portion of the credit.
                                                                           7
      ACCELERATED PORTION OF THE
              CREDIT con’t
• Starting in year 11 of the compliance period through year 15, the
  accelerated portion of the credit is reduced ratably over the last 5
  years of the compliance period; i.e. by keeping property in
  compliance, taxpayer “earns down” the credit for the last 5 years.
• Example:
    • Partnership A is entitled to claim $15 for credits
    • For the first 10 years, $5 per year ($50 total) is the accelerated
      portion
    • Starting at the end of year 11, the accelerated portion is
      reduced by 20% per year or $1 per year; i.e. at the end of year
      11, the accelerated portion is $4 per year or $40 total ($4 X 10
      years); and so on
 SPECIAL RULE: TAXPAYER WILL NOT INCUR                                8

 RECAPTURE UPON THE DISPOSITION OF A
   BUILDING OR AN INTEREST THEREIN IF:

(A) The taxpayer furnishes to the IRS a bond in an amount
    satisfactory to the IRS and for the period required by the IRS;
    AND
(B) The taxpayer reasonably expects that the building will
    continue to be operated as a qualified low-income building for
    the remainder of the compliance period.
Section 42(j)(6)
                                                                                            9
    “RECAPTURE BONDS” – REVENUE RULING 90-60
•   Rev Rule 90-60 sets forth IRS guidance as to “recapture bond” requirements.
•   Bond must be secured by a surety holding a Certificate of Authority from Department
    of Treasury, Financial Management Service.
     •   Authorized bonding companies are listed in Treasury Department Circular 570
     •   See http://www.fms.treas.gov/570 for current list of authorized companies.
•   Bond must be maintained for a period that ends no sooner than 58 months after the
    last day of compliance period for building.
•   Amount of bond is determined by reference to a table of “bond factor” amounts
    published by IRS.
     •   See http://www.irs.gov/businesses/lists/0,,id=98230,00.html
     •   In general, the “bond factor” equals the maximum tax credit recapture liability,
         including interest
                                                                                10
    “RECAPTURE BONDS” – REVENUE RULING 90-60
                                                                CON’T



•   Bond must be filed with IRS within 60 days of the recapture event.
•   IRS Form 8693, Low-Income Housing Credit Disposition Bond, together with:
     • Computation work pages supporting bond amount
     • 8609
     • Bond
     • Corporate resolution for authorized bond signers
     • Ownership organization structure at time of recapture
                                                        11

      RECAPTURE RISK TO SELLERS
• Sellers can suffer recapture if Buyer fails to keep
  property in compliance with Section 42.
• Purchase and Sale Agreement provisions important
   • Buyer representations and warranties
   • Buyer/Guarantor indemnifications

				
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