Qualified Residential Rental Projects (I.R.C. § 142(d)); Low-Income Housing Credit (I.R.C. § 42)

January 29, 2011

Qualified Residential Rental Projects – Basic Discussion:

Residential rental property can be financed, among other sections, under I.R.C. §§ 42 (LIHTC), 142(d) (Exempt Facility Bonds) or 145(d) (Qualified 501(c)(3) Bonds).  See this posting for additional 142-related matters discussed in the context of the low-income housing credit.

Qualified Residential Rental Projects under I.R.C. § 142(d):

See this posting for general information applicable to exempt facility bonds.

Section 142(a)(7) provides that the term “exempt facility bond” includes any bond issued as part of an issue 95% or more of the net proceeds of which are to be used to provide qualified residential rental projects.

Section 142(d)(1) provides that the term “qualified residential rental project” means any project for residential rental property if, at all times during the qualified project period, such project meets the requirements under I.R.C. § 142(d)(1)(A) or (B) (the “set-aside requirements“), whichever is elected by the issuer at the time of the issuance of the issue with respect to such project.

The set-aside requirements include the 20/50 and 40/60 set aside thresholds:

  • A project meets the requirements of I.R.C. § 142(d)(1)(A) if 20 percent or more of the residential units in the project are occupied by individuals whose income is 50 percent or less of the area median gross income (AMGI).
  • A project meets the requirements of I.R.C. § 142(d)(1)(B) if 40 percent or more of the residential units in the project are occupied by individuals whose income is 60 percent or less of the AMGI.  (There is a special rule for a city having 5 boroughs and a population in excess of 5,000,000 – i.e., New York City.)

Once available for occupancy, each unit in the residential rental project must be rented or available for rental on a continuous basis during the longer of the remaining term of the obligations, or the qualified project period.  Treas. Reg. § 1.103-8(b)(5).

Residential rental property” means, as defined in I.R.C. § 168(e)(2)(A), any building or structure if 80% or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.  For example, a project that has commercial rental income that exceeds 20% of the gross rental income of the building would fail to satisfy the residential rental property test and would not be eligible for tax-exempt financing under the qualified residential rental project qualification.  Property does not fail to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. House Report No. 98-432 (PL 98-369) p. 1695 clarified that under this “mixed use” rule, a building may qualify as residential rental property even though all or a portion of the bottom floor is used for commercial use.  However, only the portion used for residential rental use qualified for tax-exempt financing.  Therefore, under the definition in I.R.C. § 168(e)(2)(A), a qualified residential rental project for tax-exempt bond purposes is defined as any project for property comprised of any building or structure if 80% or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.  I.R.C. § 142(d)(1) flush language.  See also Novogradac Low-Income Housing Tax-Exempt Bond Handbook – 2012 Edition.

The regulations provide that a project is residential rental property if it is not used on a transient basis and is available for use by the general public.

The term “residential rental property” for purposes of I.R.C. § 42 has the same meaning as for I.R.C. § 142(d).  See Conference Committee Report to the 1986 Act, CCH paragraph 7252, and General Explanation, TRA ’86, page 157.  See also Rev. Rul. 98-47.  Congress has indicated that the tax-exempt bond financing regulations should be used for general guidance.  Conference Committee Report to the 1986 Act, CCH paragraph 7252.

Project” or “Residential rental project,” as defined in Treas. Reg. § 1.103-8(b), means the following:

  • A residential rental project is a “building or structure,” together with any functionally related and subordinate facilities, containing one or more similarly constructed units (a) which are used on other than a transient basis, and (b) which satisfy the requirements of paragraph (b)(5)(i) of this section and are available to the general public in accordance with the requirements of paragraph (a)(2) of this section.  Substantially all of each project must contain such units and functionally related and subordinate facilities.  Hotels, motels, dormitories, fraternities and sorority houses, rooming houses, hospitals, nursing homes, sanitariums, rest homes and trailer parks and courts for use on a transient basis are not residential rental projects.
  • Proximate buildings or structures which have similarly constructed units are treated as part of the same “project” if they are owned for federal tax purposes by the same person and if the buildings are financed pursuant to a common plan.  Buildings are “proximate” if they are located on a single tract of land.  The term “tract” means any parcel or parcels of land which are contiguous except for the interposition of a road, street, stream or similar property.  Otherwise, parcels are contiguous if their boundaries meet at one or more points.  A “common plan of financing” exists if, for example, all such buildings are provided by the same issue or several issues subject to a common indenture.
  • A project does not include any building or structure which contains fewer than five units, one unit of which is occupied by an owner of the units.  Treas. Reg. § 1.103-8(b)(4)(iv).
  • A “building or structure” generally means a discrete edifice or other man-made construction consisting of an independent foundation, outer walls and roof.  A single unit which is not an entire building but is merely a part of a building is not a building or structure.  As such, while single townhouses are not buildings if their foundation, outer walls and roof are not independent, detached houses and row houses are buildings.
  • All of the units in the project must be used for rental.  See Treas. Reg. § 1.103-8(b)(9), ex. 3.

Functionally related and subordinate facilities“:  Facilities that are functionally related and subordinate to residential rental projects include facilities for use by the tenants.  This includes, for example, swimming pools, other recreational facilities, parking areas and other facilities that are reasonably required for the project, for example, heating and cooling equipment, trash disposal equipment or units for resident managers or maintenance personnel.

Qualified project period,” as defined in I.R.C. § 142(d)(2)(A), means the period beginning on the first day on which 10 percent of the residential units in the project are occupied (or the issue date, if after the 10-percent date) and ending on the latest of:

  1. the date that is 15 years after the date on which 50 percent of the residential units in the project are occupied;
  2. the first day on which no tax-exempt private activity bonds issued with respect to the project is outstanding; or
  3. the date on which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates.

The income of individuals and “AMGI” is determined by the Secretary in a manner consistent with determinations of lower income families and AMGI under section 8 of the United States Housing Act of 1973.  Determinations include adjustments for family size.  You may disregard payments under section 403 of title 37, U.S.C., as a basic pay allowance for housing with respect to a “qualified building.”  I.R.C. § 142(d)(2)(B).

Residential units” or “unit” (as defined in Treas. Reg. § 1.103-8(b)(8)(i)) means any accommodation containing separate and complete facilities for living, sleeping, eating, cooking and sanitation.  Such accommodations may be served by centrally located equipment, such as air conditioning or heating.  Thus, for example, an apartment containing a living area, a sleeping area, bathing and sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator and sink, all of which are separate and distinct from other apartments, would constitute a “unit.”

Rules for Students: Rules similar to I.R.C. § 42(i)(3)(D) apply with respect to students.  A unit does not fail to be treated as a low-income unit merely because it is occupied by an individual who is a student and receiving assistance under title IV of the Social Security Act, a student who was previously under the care and placement responsibility of certain state agencies, enrolled in job training program receiving certain types of assistance, or an individual who is a full-time student if the student is a single parent and the and their children and such parents are not dependents, or married and file a joint return. I.R.C. § 142(d)(2)(C).

A unit does not fail to be treated as a residential unit merely because the unit is a single-room occupancy unit, within the meaning of I.R.C. § 42.  I.R.C. § 142(d)(2)(D).  A single-room occupancy unit is not treated as used on a transient basis merely because it is rented on a month-by-month basis.

Section 142(d)(3) contains rules for purposes of determining whether an increase in the income of individuals that occupy a residential unit will cause the individuals to no longer qualify as low-income tenants:

  1. The determination of whether the income of a resident of a unit in a project exceeds the applicable income limit is made at least annually on the basis of the current income of the resident, but not for any year if during that year no residential unit is occupied by a new resident whose income exceeds the applicable income limit.
  2. If the income of the resident did not exceed the applicable income limit when the resident moved in, the income of that resident is treated as continuing to not exceed the applicable income limit.  That exception no longer applies if (a) the income exceeds 140% of the applicable income limit and (b) a residential unit of comparable or smaller size in the project is occupied by a new resident whose income exceeds the applicable income limit.  I.e., the next available unit must be rented out to someone within the income limit.  This provision is adjusted in the case of a project with respect to which a LIHTC is permitted – by substituting “building” (within the meaning of I.R.C. § 42) for “project.”

There are special rules in I.R.C. § 142(d)(4) for deep rent skewed projects which are projects in which, among other requirements, 15 percent or more of the low-income units in the project are occupied by individuals whose income is 40 percent or less of AMGI.  For deep rent skewed projects, the test in paragraph 2 above becomes a 175% test instead of a 140% test, and (b) in that paragraph becomes “any low-income unit in the same project is occupied by a new resident whose income exceeds 40% of AMGI.”  “Low-income unit” in this context means any unit which is required to be occupied by individuals who meet the applicable income limit.

It appears that the special office space rule limits the amount of exempt facility bond proceeds for qualified residential rental projects that may be used to finance an office.  I.R.C. § 142(b)(2).

Note that the reimbursement rules for exempt facility bonds in Treas. Reg. § 1.142-4 state that, generally one is to apply the reimbursement rules in Treas. Reg. § 1.150-2 for expenditures for a facility paid before the issue date of the bonds.  If the proceeds, however, are used to pay principal or or interest on an obligation other than a State or local bond (for example, temporary construction financing of the conduit borrower), that issue is not a refunding issue and must satisfy the reimbursement rules and new money rules, generally.  See this posting for additional discussion of the reimbursement rule and the rule treating a refunding of a non-State or local bond as a new money financing.

Interest on an exempt facility bond for a qualified residential rental project is includable in gross income if the obligation is held by a substantial user (I.R.C. § 147(a)(1)) or a related person (I.R.C. § 144(a)(3)).  Treas. Reg. § 1.103-8(a)(1)(i).

See example 5 at Treas. Reg. § 1.103-8(b)(9) for a project in which the developer subsequently converts 80% of the units to condominiums.  Repayment of the obligations is not enough to cure noncompliance.  “The obligations are not used to provide a residential rental project within the meaning of section 103(b)(4)(A), and all of the interest paid or to be paid on such obligations will be includable in gross income.”

Residential Rental Projects under I.R.C. § 145(d):

Section 145(d)(1) generally states that a bond cannot be a “qualified 501(c)(3) bond” if any portion of the net proceeds are used to provide residential rental property.  There are three exceptions, however, under which a bond for such purpose can nevertheless qualify as a “qualified 501(c)(3) bond”:

  1. If the property is “residential rental property for family units” (see Treas. Reg. 1.103-8(b)(10)) the first use of which is pursuant to such bond issue; or
  2. If the property constitutes “qualified residential rental projects” as defined in Section 142(d); or
  3. If the property is substantially rehabilitated.
In addition, a facility similar to a residential rental facility, but for nursing-type care/assisted living, may qualify separately for financing with qualified 501(c)(3) bond proceeds. See Rev. Rul. 98-47 for a good analysis of the residential rental facility status of three buildings that are part of a single complex.
“Residential rental property for family units” can include a single, self-contained building.  See the regulations under 103.
Student housing probably is not restricted because student housing does not necessarily constitute property “for family units” as referred to in 1.103-8(b)(10).  The regulations explain that “dormitories” are not residential real property for family units.  Is this the correct explanation? There is probably a better explanation elsewhere.
YMCA camps with counsel residential buildings.  Those residential buildings might be used for more than a transient basis.

First Use Exception:

In 1989, the Donnelly amendment (H.R. 151) provided the following exceptions for purposes of the “first use” exception:  To determine whether the first use of the property is pursuant to tax-exempt financing:

  • The 1st use of the property is treated as being pursuant to the tax-exempt financing if: (1) the 1st use of the property is pursuant to taxable financing (note Q&A below); (2) there was a reasonable expectation (at the time the taxable financing was provided) that the financing would be replaced by tax-exempt financing; and (3) the taxable financing is in fact so replaced within a reasonable period after the taxable financing was provided.
  • [Special rule where no operating state or local program for tax-exempt financing]

Refunding of tax-exempt issue that originally financed the property should be permitted even though the first use of the property is not pursuant to that refunding issue.  The refunding issue, for this purpose, should be able to step in the shoes of the refunded original tax-exempt issue.  The refunding does not change the fact that the first use was pursuant to “tax-exempt financing” generally.

Qualified Residential Rental Projects:

Section 145(d) provides that bonds issued to acquire existing residential rental property for family units must meet the same low-income targeting rules applicable to qualified residential rental facilities under Section 142(d) of the Code, unless substantially rehabilitated.  Note that the qualified 501(c)(3) bonds must, of course, satisfy the exempt purpose of the 501(c)(3) organization in order to be tax-exempt.  Such activities might be charitable if they “relieve the poor and distressed,” as described in Treas. Reg. 1.501(c)(3)-1(d)(2).  It does not follow that a project that satisfies Section 142(d) must automatically have an organization that is a 501(c)(3) organization – thus, ensure that the 501(c)(3) organization status is valid and within the scope of the project.

See also Notice 93-1 (safe harbor guidelines for 501(c)(3) determination) and subsequent Rev. Proc. 96-32.

Substantially Rehabilitated:

Property is “substantially rehabilitated” for purposes of Section 145(d) of the Code if:

  1. Rehabilitation begins during the 12-month period preceding or following the date the property is acquired; and
  2. Rehabilitation expenditures during a two-year testing period (beginning with the date described in (1) above) exceed the greater of $5,000 or the adjusted basis of the building (and its structural components).  See Section 47(c)(1)(C) of the Code for rules relating to determination of substantial rehabilitation.

Assisted Living Facilities:

Assisted Living Facility” means a residential facility in which continual or frequent nursing, medical or psychiatric services, within the meaning of Rev. Rul. 98-47, 1998-2 C.B. 399, are made available to the residents.

Residential Rental Project” means a building or structure, or group of proximate buildings or structures, containing units that provide separate and complete facilities for living, sleeping, cooking, eating and sanitation for individuals or families, not on a transient basis, and functionally related and subordinate facilities thereto, all as described in Treas. Regs. §§ 1.103‑8(b)(4) and (8), issued under the Code, and within the meaning of Section 145(d)(2) of the Code.  See definition and additional discussion above.

To find that a facility is an assisted living facility, and not a residential rental project, look for the following characteristics:

  1. Is it a nursing home? (Specifically excluded from “residential rental project,” but cannot rely on name only – must be a nursing home based on actual operation)
  2. Unit does not have cooking and/or eating facilities (Note discussion below)
  3. There are state licensing requirements for the operation of the facility
  4. Non-housing and healthcare services are offered to residents

What level of medical services is offered?  (Look for continual or frequent nursing, medical or psychiatric care, which is required by Treas. Reg. 1.42-11(b))

Note that the 2008 housing act appears to state that it is not relevant anymore whether a unit is a complete living unit with cooking and/or eating facilities.

Section 501(c)(3) Status for Section 145(d) Purposes:

It goes without saying that the conduit borrower, for Section 145(d) purposes, must have received a Section 501(c)(3) designation letter from the Internal Revenue Service and qualify as a Section 501(c)(3) organization.  See Rev. Proc. 96-32 regarding guidelines for tax-exemption under Section 501(c)(3) for organizations that provide low-income housing.  The revenue procedure provides a safe harbor, describes the actual facts and circumstances test and points out that there are other charitable purposes that may qualify the organization under Section 501(c)(3).  In sum, it is not enough for the organization’s operations to satisfy the “normal” 40/60 test under Section 142(d)(1)(B).

Also note that an organization that provides assistance to the aged or physically handicapped who are not poor must satisfy the requirements set forth in Rev. Rul. 72-124, Rev. Rul. 79-18 and Rev. Rul. 79-19, among others.

Low-Income Housing Tax Credits:

Section 42(a) of the Code provides that the amount of the low-income housing credit for any taxable year in the credit period is an amount equal to the applicable percentage of the qualified basis of each qualified low-income building.

Under section 42(c)(1)(A), the qualified basis of any qualified low-income building for any taxable year is an amount equal to the applicable fraction (determined as of the close of the taxable year) of the eligible basis of the building.

See PLR 200305015 for a discussion of how “eligible basis” is calculated, and what may be considered capitalizable costs.

See this presentation for a helpful, quick overview of the LIHTC program.

Tax credit equity for the project =

  1. Calculate qualified basis from the development budget
  2. Multiply by the credit percentage to determine the credit amount
  3. Multiply the total 10-year credit by the market price for credits (e.g., 75 cents per credit dollar).

The credit is claimed annually for a period of 10 years. I.R.C. § 42(f)(1).  The types of costs that generally can qualify for the credit are acquisition costs, rehabilitation expenses and new construction costs.  I.R.C. § 42(d) and (e).

The calculation of the LIHTC involves two parts: (1) the initial year calculation and (2) the succeeding year calculations.

The initial year calculation has four components:

  1. Qualified low-income building;
  2. Credit percentage;
  3. Low-income occupancy percentage; and
  4. Eligible basis.

To qualify for the credit, a project must be a “qualified low-income building.”  To calculate LIHTC for the initial year, the building owner must determine the building’s qualified basis.  A buildings qualified basis is the product of the building’s applicable fraction (generally its low-income occupancy percentage) and its eligible basis.  When calculating a building’s eligible basis, taxpayers must ensure that they have sufficient “at-risk” basis.  The amount of LIHTC that a building power may claim in the initial year is the building’s qualified basis multiplied by the credit percentage.

In succeeding years, three of the previously enumerated four items will affect the amount of LIHTC that a building owner may claim and whether a tax credit recapture situation exists.  They are: Qualified low-income building; low-income occupancy percentage; and eligible basis.  To claim the LIHTC, annual LIHTC certifications are required.

The calculation of the credit percentage depends on whether the project involves new or existing buildings, whether any federal subsidies are used and when the project was placed in service.

New buildings generally are allowed a higher credit percentage.  This credit is referred to as the 9% credit.  Existing buildings are eligible for the lower credit.  This lower credit is referred to as the 4% credit.

A new building that receives a federal subsidy is not eligible for the 9% credit but rather is eligible for the 4% credit.  The building will be deemed to be federally subsidized for a particular year if the federal subsidy is outstanding at any time during such taxable year, or was outstanding during any prior taxable year.

For buildings that were placed in service in 1987, the 4% and 9% credits are exactly 4% and 9%, respectively.  For buildings that are placed in service after 1987, the 4% credit is recalculated on a monthly basis to yield a present value of 30% of costs that qualify for the credit.  The 9% credit is similarly recalculated on a monthly basis to yield a present value of 70%.

Cash Collaterizalized Multifamily Residential Rental Bonds:

A common structure for short-term cash collateralized bonds is as follows: (1) Short-term bonds are issued and the proceeds are deposited to a “treasury account” of the project fund (and usually also to a capitalized interest account).  The bonds typically have a maturity of around 2.5 years. (2) The treasury account is invested in treasury bills until the bond proceeds are disbursed to pay project costs. (3) Disbursement to the developer occurs each time the trustee receives the collateral moneys (HUD loan proceeds, HUD grants, equity, etc.).  The collateral moneys are deposited to a collateral account.  The trustee liquidates the treasury account investments and transfers the proceeds to the developer.  The trustee then uses the collateral moneys to purchase the liquidated treasury bills as investments for the collateral account. (4) Upon maturity of the bonds, the trustee liquidates the collateral account and uses the proceeds to pay off the bonds.

The short-term cash backed bond structure allows developers to secure an allocation of the four percent LIHTCs and lock in the long-term rate available in the credit markets using either the FHA, Freddie Mac or Fannie Mae conventional loan alternative.

Certain current developments have promoted the use of short-term cash backed bonds: high grade taxable rates that have been lower than comparable tax-exempt multifamily rates; GNMA’s bonds have traded extremely tight to Treasury bonds; the FHA has streamlined its approval process for certain loans; and Freddie Mac and Fannie Mae have been aggressively looking to finance low-income developments.

See Rev. Rul. 80-328 regarding two fact patterns in which a political subdivision’s short-term notes that are issued contemporaneously with long-term bonds will be arbitrage bonds.  The financings are considered an artifice or device and constitute an overissuance.

Compliance with Set-Aside Requirements:

Section 1.103-8(b)(6)(i) of the Regulations has a noncompliance correction rule.  If a project does not comply with the set-aside requirements continuously during the qualified project period, the project will not be a qualified residential rental project (all the way back to the issue date!), unless the noncompliance is corrected within a reasonable period.  The “reasonable period” is at least 60 days after the noncompliance is first discovered or would have been discovered by the exercise of reasonable diligence.  If noncompliance is not corrected within a reasonable period, subsequent compliance does not alter the taxable status of the bonds that financed the project.

Rev. Proc. 2004-39 sets forth rules to determine whether a residential rental project is in compliance with the set-aside requirements contained in I.R.C. § 142(d) during the qualified project period.

The general rule, under the Revenue Procedure, is that the set-aside requirements apply to the total number of available units, beginning on the first day of the qualified project period (i.e., the later of the first day on which at least 10% of all of the residential units in the project are occupied or the issue date of the bonds).

The special rule in the Revenue Procedure applies to certain existing projects.  In connection with the acquisition of an existing residential rental project, during a transition period of one year beginning on the issue date, failure to comply with the general set-aside rule described above does not cause the project to not be a qualified residential rental project.  If the set-aside requirements are not satisfied by the end of the one-year transition period, however, all bonds issued to finance the project must be redeemed as soon as possible, but in no event later than 18 months after the issue date.  (Note, however, that this special transition period does not apply where more than 90% of the residential units in the project are not “available” units at any time within 60 days after the later of the date the project is acquired or the issue date of the first bonds – for example because the units are not available for occupancy due to renovations.)

“Available units” – to which the set-aside applies – means (1) residential rental units in a residential rental project that are actually occupied, and (2) residential rental units that are unoccupied and have been leased at least once after becoming available for occupancy.  For an existing residential rental project that is acquired, a residential unit is not “available” until it has been leased for the first time after the later of the date the project is acquired or the issue date of the first bonds.  For a residential rental unit that is not available for occupancy due to renovations, such unit does not become “available” until it has been leased for the first time after the renovations are complete.  (Note that I have rephrased the requirements to make them easier to ready – be sure to view the original text.)

Questions and Answers:

  1. Does a unit fail to qualify as a unit of residential rental property if there is no sink specifically dedicated to the kitchen area?  Subject to facts and circumstances specific to each case, generally the unit would not satisfy the requirements for a “unit” of residential rental property under Treas. Reg. § 1.103-8(b)(8). “A ‘unit’ is any accommodation containing separate and complete facilities for living, sleeping, eating, cooking, and sanitation. The regulations note that an example of a unit would be a separate and distinct apartment containing a living area, a sleeping area, bathing and sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator, and sink.” (See Rev. Proc. 98-47.)  In other words, the sink in the unit must be a sink that is in the unit for the purpose of completing the kitchen – not merely a sink that is part of a utility room or bathroom sink. (See also 26 U.S.C. 142(d).)
  2. Taxable Financing Exception (Donnelly) to First Use:  Can the taxable financing be done by the developer, who will then sell the completed facility to the 501(c)(3) entity, which finances such purchase using tax-exempt bonds? It would be reasonable to conclude that the Donnelly amendment requires that the 501(c)(3) entity be the entity which has actually entered into the taxable loan.
  3. Correcting an 8038 Section 142(d) 40-60 Election:  See PLR 201232006.  The issuer had filed Form 8038-G indicating the 20-50 test. The 40-60 test was contemplated by the bond documents and the volume cap resolution of the issuer.  The IRS determined that an amended Form 8038-G could be submitted within 45 days to “make” the correct election.  Query, however, whether the election is properly made in the bond documents rather than in the Form 8038-G.
  4. Getting rid of the LURA:  Assume owners of multifamily facilities subject to I.R.C. 142(d) 15-year land use restrictions wish to convert the facilities into condominiums.  Can the owners remove the 15-year use restrictions by conducting proper remedial actions under Treas. Reg. 1.142-2? It is not clear that this would work.  Notiz 201211251.
  5. Draw-Down Bonds:  Consider Notice 2011-63 regarding issue date and volume cap.

Other Notes:

See Rev. Proc. 2014-49 and Rev. Proc. 2014-50 for certain guidance concerning interpretation of rules for major disaster areas on and after August 21, 2014.

PLR 201515007: The relocation costs of a residential rental building were included in the basis of the building under Code Sec. 42(d)(1). The costs were incurred by the entity constructing the building and due to a city-imposed requirement to relocate an easement. The relocation costs directly benefitted, or were incurred by reason of, the construction of the residential rental building and they were capitalized indirect costs allocable to the residential rental building.  This ruling relates to relocating easements, but not residents.  There is still a question as to whether relocating residents is capitalizable.

FHA insured mortgage loans under Section 221(d)(4):  Section 221(d)(4) of the National Housing Act insures mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped. Single Room Occupancy (SRO) projects may also be insured under this section.  Read more.

FHA Form 2328:  This is a form identifying the contractor’s or mortgagor’s breakdown of proposed costs of the project.  The form is required to be submitted to receive a firm commitment from HUD for an FHA loan.

Draw-Down Bond Matters

January 25, 2011

Issues Re: Draw-Down Loans:

A.  Information Reporting Requirements (1.149(e)-1(e)):

Generally, interest on a bond is included in gross income unless proper information reporting is accomplished with respect to the issue of which the bond is a part.  In a draw-down situation, the relevant question becomes: “what is the issue?”

Under (e)(2), the issue is defined, for information reporting purposes only (!), as bonds issued during the same calendar year. However, under (e)(2)(ii)(B), if the bonds issued pursuant to a draw-down loan meets the requirements of the first sentence of (B) (equally and ratably secured under a single indenture, etc.), bonds may be treated as the same issue even if issued during different calendar years, so long as all amounts to be advanced pursuant to the draw-down loan are reasonably expected to be advanced within three years of the date of issue of the first bond.

Note the special information reporting rules described in IRS Notice 2011-63 for bonds and draw-down loan bonds that have volume cap assigned to them.  The issue date for these bonds may be either the issue date of the bond or the issue date of the issue. If the election is made to use the issue date of the issue, the 8038 should include the phrase “FILED IN ACCORDANCE WITH NOTICE 2011-63 STATE AND LOCAL BONDS: VOLUME CAP AND TIMING OF ISSUING BONDS.”

B.  What is the “issue” and “issue date” of bonds issued pursuant to a draw-down loan?

Section 1.150-1(c)(4)(i) states that bonds issued pursuant to a draw-down loan are treated as part of a single issue.  The issue date of that issue is the first date on which the aggregate draws under the loan exceed the lesser of $50,000 or 5 percent of the issue price.  Notice 2010-81 clarifies that this is the approach to use to determine the issue date of bank qualified (QTEO) and 2% de minimis bonds.

C.  Are draws after 2010 on QTEO issued in 2009 or 2010 eligible for QTEO status ?

There has been discussion concerning what constitutes the issue date of bonds for determining BABs status or QTEO (bank qualification) status of draws made on such bonds after the ARRA provisions expired.  In Notice 2010-81, the IRS determined that, for purposes of determining whether a draw qualifies for BABs treatment, the applicable “issue date” is the date of the actual draw (i.e., the date of the bond resulting from the draw).  However, for purposes of determining whether such a draw qualifies for bank qualification under the ARRA rules, the IRS permits the issuer to use the issue date of the total issue (vs. issue date of the bond resulting from the draw). This means, if a draw-down loan and the related issue is properly issued in 2010, but a subsequent draw occurs in 2011, for purposes of determining that the draw falls within the ARRA QTEO rules, one looks to the issue date of the “issue,” and not the bond resulting from the draw.  See the McGuire Woods discussion of Notice 2010-81 linked here.

D.  In connection with a refunding/new money financing, may a draw-down for refunding establish the issue date, or does the draw-down need to be in respect of new money?

Some bond counsel have determined that the draw-down must be in respect of the new money portion.  A draw to cover the refunding is not sufficient. The 5 percent or $50,000 test is calculated using the full issue price, however (not the portion of the issue price allocable to the new money project).  Other bond counsel read the rule as permitting the initial draw with respect to the refunding without the need to draw on the new money portion as well.

E.  When you make the first draw, and also pay all costs of issuance, those COI may exceed 2% of the first draw. Is this a problem?

This topic was discussed at the 2011 TSLI in Austin, Texas. A March 11 NABL Weekly Wrap had the following to report concerning the matter: “The panel also focused on the requirements for filing Form 8038 when a bond is set up for draw-downs, as in a construction finance situation, and has a volume cap, and addressed the broad concern about Notice 2010-81, issued late last year. Panel Chair Linda Schakel, noted that in a construction situation, when the drawdown is in increments, the costs of the issuance would exceed two percent. Co-panelists John Cross of the IRS Office of Tax Policy, and Clifford Gannett, manager of the TEB Division at IRS, reassured the audience that the IRS and Treasury are working to clarify this before the filing season to avoid amended returns.”

While it may be safest not to permit more than 2% of each draw to be used for costs of issuance, facts and circumstances may suggest that increased percentages from initial draws are acceptable.    Factors to consider are whether a given draw will attempt to include the full 2% costs of issuance amount calculated based on the aggregate of all draws or whether the costs of issuance “overage” for a particular draw is small.  One might also include a covenant in the tax document requiring consultation with bond counsel in the event all expected draws do not occur to facilitate timely final allocation of bond proceeds away from costs of issuance.

F.  Issue date for QTEO draw-down bonds and Volume Cap: Conflicts in interpreting issue date?

From a recent IRS future guidance notice of December 2010: “Notice 2010-81 provided guidance regarding when State and local bonds are considered issued for purposes of various timing deadlines on issuing bonds. Issuers who entered into draw-down loans or commercial paper programs in 2010 before the release of Notice 2010-81 on November 23, 2010 or in earlier years and who acquired private activity bond volume cap under section 146 for the entire loan or program under the assumption that all of the bonds were issued in the year that draws under the loan or program exceeded $50,000 or larger, have expressed to the IRS and Treasury Department concerns that States have taken different approaches towards the treatment of such draws for volume cap purposes under section 146.  States and issuers have indicated that changing the different approaches to volume cap in this area presents administrative difficulties.  A complicating issue with respect to such volume cap awards is that the awards in 2008, 2009, and 2010 may include volume cap from the temporary $11 billion increase in annual private activity bond volume cap established under the Housing Assistance Tax Act of 2008 (See Notice 2008-79).  That temporary volume cap is not available after 2010.”

Relevant Private Letter Rulings and other Publications:

PLR 200147015: The issue date of a bond pursuant to a draw down is the date the interest actually begins accruing. The total project issue will not be issued earlier than necessary for purposes of 1.148-10(a)(4) (overburdening the tax-exempt market). In this letter ruling, the IRS approved the issue date determination and draw-down structure where funds were going to be drawn down over a five-year period.

Rev Rul 89-70 (1989) 1989-1 CB 88: Draw-down note is considered issued, for purposes of 26 USCS § 265(b), on date that more than de minimis amount is first advanced under note; amount of draw-down note is its stated principal amount.

Information concerning 501(c)(3) applications

January 20, 2011


See Rev. Proc. 2011-9 for the most recent Q&A document concerning exempt organization determinations.

See also the I.R.M. in Part 7, Chapter 20, Section 1 for an overview of exempt organization determination letters, including information on how to change an organization’s operations and structure and request updated determination letters.

Changing an Exempt Organization’s Method of Operation or Purposes:


Does an exempt organization need to request a determination ruling to ensure no change in the exempt status occurs if the organization changes its method of operation or purposes (i.e., by amending its articles of incorporation or bylaws)? Can the exempt organization avoid requesting a ruling by requesting a determination letter?


See the Internet publication “Exempt Organizations – Private Letter Rulings and Determination Letters” (or Rev. Proc. 2011-4) for information about getting a determination letter or ruling to ensure that a change in operations does not affect the determination as an exempt organization.

Each determination letter (including letter 1045 and others) includes a paragraph stating substantially the following: “If your organization’s sources of support, or its character, method of operations, or purposes have changed, please let us know so we can consider the effect of the change on the exempt status and foundation status of your organization.” This paragraph is an automatic paragraph in several standard IRS letters (see, e.g., I.R.M. 7.21.5).

Upon receipt of notice of a change affecting an exempt organization, the IRS may use letter 976 to confirm that such change does not affect the exempt status (and the exempt status letter) of the organization.

Whether or not the IRS will provide such letter in response to information it receives concerning changes is not clear.  Determination letters such as this are generally issued by the IRS EO Determinations office “only when a determination can be made based on clearly established rules in the statute, a tax treaty, or the regulations, or based on a conclusion in a revenue ruling, opinion, or court decision published in the Internal Revenue Bulletin that specifically answers the questions presented” (see Section 3.04, Section 7.01 and specifically Section 7.04 of Rev. Proc. 2011-4).  It follows, then, that all other decisions will be made only pursuant to a ruling (which is to be provided by EO Technical) or not at all (see Section 7.02 of Rev. Proc. 2011-4).


PLR 200827038: Ruling requested that proposed amendment to articles and bylaws of an exempt organization will not affect the organization’s status as an organization described under section 501(c)(3) of the Code. The amendments increased the number of board members and made other changes that also implicated the organization’s status as a support organization.

Modifications of Debt Issuance; Reissuance (Treas. Reg. § 1.1001-3)

January 13, 2011

General Matters:

Where changes in the terms of an outstanding security are so material as to amount virtually to the issuance of a new security, the same income tax consequences should follow as if a new security were actually issued. Rev. Rul. 81-169, 1981-1 C.B. 429.

Section 1.1001-3 of the Regulations does not apply to tax exempt bonds that are qualified tender bonds.  Notice 88-130 governs these bonds.  Section 1.1001-3 of the Regulations also does not apply to exchanges of debt instruments between holders.

Significance of a Change in Yield:

In order to compare the yield of a variable rate debt instrument, see the special rule under Section 1.1001-3(e)(2)(iv) of the Regulations for coming up with the correct “annual yield” using the equivalent fixed rate debt instrument rules in Section 1.1275-5(e) of the Regulations.  The following is a basic description of a debt instrument classified as a “Variable rate debt instrument that provides for a single fixed rate” under Section 1.1275-5(e)(4) of the Regulations.

Step 1: Calculate the “annual yield” for the unmodified instrument by replacing each fixed rate with a rate (the “market rate”) that will cause the instrument to have a FMV that it actually has as of the modification date.  Then, calculate the fixed equivalent yield of the instrument by treating the instrument as bearing interest at that market rate through the fixed rate period and as bearing the “normal” (formulaic) variable rate during the other periods.

Step 2: For the modified instrument, use a PV equal to the principal amount of the instrument outstanding on the modification date and find the market rate for an instrument with the same future value and payment characteristics as the modified instrument. Finally, use that market rate, together with the formula rate to come up with a yield that can be compared to the yield of the unmodified instrument.

To apply the change in yield test to contingent payment debt instruments, see PLR 201546009 (August 12, 2015).

Changes in Recourse Nature of Debt Instrument:

IRM “Until specific remedial action provisions are provided in regulations or other published guidance, an issuer may remediate deliberate actions impacting build America bonds by taking remedial actions, other than defeasance of nonqualified bonds, under section 1.141-12 of the Regulations. Build America bonds, as taxable bonds, are not included in the exception from the significant modification rule for defeasance of tax-exempt bonds under ITR section 1.1001-3(e)(5)(ii)(B). Therefore, defeasance of a build America bond may cause a reissuance and a bond reissued after December 31, 2010 is not a build America bond pursuant to IRC section 54AA(d)(1)(B).”

Change in Obligor:

Whether or not a change in obligor on a bond is a significant modification depends on whether or not the debt is recourse or nonrecourse.  An “obligor,” according to Treas. Reg. 1.1001-3(f)(5), is the issuer of bonds.  The “obligor” is not the conduit borrower of proceeds, as provided by Treas. Reg. 1.1001-3(f)(6)(i).  “Conduit loan” and “conduit borrower” have the same meanings as in Treas. Reg. 1.150-1(b).  See Module G of the IRS training handbook (“Reissuances”) for a good description of the coordination of Treas. Reg. 1.1001-3 and Treas. Reg. 1.150-1, and change in obligors.

AM2014-009 (Dec. 9, 2014):  Relies on the fact that a reissuance of tax-exempt bonds affects bondholders through no fault of their own, but a reissuance of direct pay build America bonds through defeasance is the “the issuer’s own fault” – so no preferred treatment seems to be warranted.  Found that the tax-exempt bonds defeasance rule does not apply to taxable direct pay build America bonds.

Application of the Reissuance Rules to Qualified Tender Bonds:

In General

IRS Notice 88-130 is the starting point for the reissuance analysis.  Notice 88-130 states that, under regulations that were to be issued subsequent to Notice 88-130, a reissuance of bonds that are not qualified tender bonds occurs in certain specified instances, while a reissuance of bonds that are qualified tender bonds occurs in certain other specific instances.  Thus, a reissuance analysis requires, as a first step, the determination of whether or not bonds are “qualified tender bonds.”  The rules and regulations specific to qualified tender bonds must then be applied.

Notice 88-130 provided the initial definition of qualified tender bonds.  That definition has been superseded by Section 3.2(1) of IRS Notice 2008-41, which redefines a qualified tender bond as a bond that has all of the following features: (1) for each interest rate mode authorized under the original bond terms, the bond bears interest at either a fixed interest rate or a variable interest rate (which must constitute a “qualified floating rate” under Section 1.1275-5(b) of the Regulations); (2) bond interest is paid unconditionally at periodic intervals at least annually; (3) the final bond maturity date is no longer than the lesser of 40 years or the latest date that is reasonably expected to carry out the governmental purpose of the bonds (this requirement is deemed met if the 120% rule is met under Section 147(b) of the Code); and (4) the bond is subject to an optional tender right or a mandatory tender requirement which allows or requires a bondholder to tender the bond for purchase in one or more prescribed circumstances under the terms of the bond.

Notice 88-130 refers to future regulations that are to more clearly address reissuance rules applicable to qualified tender bonds.  Those regulations have not been established yet, even though regulations for non-qualified tender bonds were issued in 1997 as Treas. Reg. § 1.1001-3.  Section (a)(2) of the regulations expressly provides that Treas. Reg. § 1.1001-3 does not apply for purposes of determining whether qualified tender bonds are reissued.  Therefore, at least initially, the reissuance analysis for qualified tender bonds relies on the existing rules in Notice 88-130 (as amended or restated in subsequent notices, including Notice 2008-41).

Under Notice 2008-41, a qualified tender bond will not be treated as reissued or retired solely as a result of (1) a “qualified interest rate mode change” or (2) the existence or exercise of any “qualified tender.”

Notice 88-130 states that a qualified tender bond will be considered reissued or retired, among other reasons, if there is a change to the bond terms which would cause a disposition of the bond under Section 1001 of the Code without regard to the existence or exercise of the tender right.  In addition, Notice 2008-41 points out that, in applying Treas. Reg. § 1.1001-3 to modifications of tax-exempt bonds, any interest variance directly resulting from a qualified interest rate mode change will not be treated as a modification under Treas. Reg. § 1.1001-3, and thus such interest rate variances need not be tested under the change in yield rule for determining significant modifications.

What the foregoing means is that: (1) while Treas. Reg. § 1.1001-3 initially does not apply to qualified tender bonds, the regulations are, in fact, relevant for qualified tender bond reissuance analysis; (2) Treas. Reg. § 1.1001-3 is applied to the qualified tender bonds by ignoring the existence or exercise of tender rights – whether mandatory or optional;  (3) interest rate variances that result from qualified interest rate mode changes do not affect the reissuance analysis.

Qualified Floating Rate

Treas. Reg. 1.1275-5(b) defines the term “qualified floating rate” for purposes of the definition of “qualified tender bonds.”  Under such subsection, a variable rate is a “qualified floating rate” if variations in the value of the rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the debt instrument is denominated.  The rate may measure contemporaneous variations in borrowing costs for the issuer of the debt instrument or for issuers in general.  For example, if at the end of one bank rate mode another bank rate mode is determined, such new bank rate mode would need to reflect the cost of newly borrowed funds at the time such new bank rate mode comes into effect.    This could be established by some type of remarketing analysis under which a determination of the cost of newly borrowed funds is made.

Multiples: Note that the regulations state that a multiple of a qualified floating rate is not a qualified floating rate, except if the variable rate is equal to either:

  1. The product of a qualified floating rate and a fixed multiple that is greater than 0.65 but not more than 1.35; or
  2. The product of a qualified floating rate and a fixed multiple that is greater than 0.65 but not more than 1.35, increased or decreased by a fixed rate.

Caps, Floors, Governors:  Also note that a variable rate is not a qualified floating rate if it is subject to a restriction on the maximum stated interest rate (cap), a restriction on the minimum stated interest rate (floor), a restriction on the amount of increase or decrease in the stated interest rate (governor) or other similar restrictions, unless the cap, floor or governor meets certain exceptions.  For instance, a cap is permitted if the cap is fixed throughout the term of the debt instrument.  This is often the case for municipal bonds that are subject to a certain maximum interest rate authorized by the issuer’s resolution.  See Treas. Reg. 1.1275-5(b)(3) for more details.

Examples of “qualified foating rates”:

  1. The interest rate on the bonds (defined as the Bank Purchase Rate) is composed of (1) a qualified floating rate under (b)(1) of the regulations (e.g., LIBOR or the bank’s prime rate) * (2) fixed multiple of 67% (e.g., a tax factor) + (3) increased by a fixed rate (e.g., a ratings margin that is based on the then-current rating of the borrower).  Is this a qualified floating rate under Treas. Reg. 1.1275-5(b)? Yes, it falls within the scope of subparagraph (b)(2)(ii).
  2. Another acceptable rate: LIBOR Index Rate = (a) product of (1) the Tax-Exempt Factor, multiplied by (2) the sum of (A) One-Month LIBOR plus (B) the Liquidity Premium, plus (b) the Credit Spread.  This is a good floating rate assuming the Tax-Exempt Factor is within the 0.65 – 1.35 range.  It is okay that the qualified floating rate component is increased by a fixed amount (the Liquidity Premium) if the fixed amount is needed to reflect cost of borrowing.

Alteration or Modification Results in Non-Debt:

A “modification” occurs if the alteration causes the instrument to no longer be debt for federal income tax purposes, even if the alteration occurs by operation of the original terms of the debt instrument.  As described in Treas. Reg. 1.1001-3(e)(5)(i), such a modification is “significant.”  For purposes of these rules, a deterioration in the financial condition of the issuer between the issue date and the date of the modification is NOT taken into account, unless there is a substitution of a new obligor or the addition or deletion of a co-obligor, as described in Treas. Reg. 1.1001-3(f)(7) and in the preamble to the final regulations (57 F.R. 32926 at 32929, T.D 8675).  This provision is intended to soften the potential for an adverse income tax impact to a financially troubled issuer.  (Note, however, that a deterioration should be taken into account for determining the status of a bond as “debt” where the bond is being refunded, not merely as a result of a reissuance but as a result of a true refinancing.)

The IRS has published proposed regulations Prop Regs 1.1001-3 to clarify the provision regarding deterioration in the financial condition of a debt instrument’s issuer.  The proposed regulations explain how to analyze a change in yield in connection with the modification when part of the change in yield may be attributable to the change in financial condition of the issuer.

Change in Payment Expectations

A change in the reserve requirement for bonds may be a significant modification if there is a change in payment expectations.

Change in Timing of Payments:

In Rev. Rul. 73-160, 1973-1 C.B. 365, the IRS ruled that the extension of the maturity date of the debt instrument for an unspecified period coupled with an agreement by a holder to subordinate his claim to the claims of other holders was not a material modification constituting a taxable exchange.  The IRS noted, however, that the formal means used to effect a change in terms is not controlling, so that material changes amounting virtually to the issuance of a new security will give rise to a taxable exchange whether or not a new security is issued.

An extension of a maturity date is not considered to be a significant modification unless it is a deferral of the timing of payments that is not within the safe harbor. This extension may affect the bond yield, however, and could result in a significant modification.

Under the safe harbor for deferral of payments, the deferred payments must be unconditionally payable by the end of the safe harbor period.  The safe harbor period begins on the original due date of the first scheduled payment that is deferred and extends for a period equal to the lesser of five years or 50 percent of the original term of the bond.

Always test the yield of the modified instrument to determine whether the deferral causes a change in yield.

Impact on Issuers and Bondholders:

The reissued bonds will be subject to tax laws in effect at the time of reissuance.  In a July 25, 2012 submission by NABL to the Treasury Department, NABL stated the following regarding impacts on bondholders:  “Potential consequences of a reissuance include, among other things, a change in yield affecting arbitrage investment restrictions, acceleration of rebate payments, potentially new public approval requirements for qualified private activity bonds, deemed terminations for arbitrage purposes of integrated interest rate swaps under the qualified hedge rules and the required filing of a new information return. Moreover, reissuance can present a problem for certain types of bonds initially issued within a statutory deadline” such as bank qualified bonds under the special $30 million limit and build America bonds.

Bondholders will need to reflect the taxable exchange on their tax returns.

Questions and Answers:

  1. Forbearance Agreements:  Under Treas. Reg. 1.1001-3(c)(4), notwithstanding the general rule regarding modification, “absent a written or oral agreement to alter other terms of the debt instrument, an agreement by a holder to stay collection or temporarily waive an acceleration clause or similar default right (including such a waiver following the exercise of a right to demand payment in full) is not a modification unless and until the forbearance remains in effect for a period that exceeds – (A) two years following the issuer’s initial failure to perform; and (B) any additional period during which the parties conduct good faith negotiations or during which the issuer is a title 11 or similar case.” Notiz 20120123
  2. Upon Reissuance, What is the Issue Price: Assuming a reissuance has occurred, someone will need to calculate the reissued bond’s yield in accordance with the basic yield rules in Treas. Reg. 1.148-4. Specific attention is required, however, in determining what issue price to use for the reissued bonds.  Treas. Reg. 1.148-4(b)(1) says that the present value of the bonds is to be used for purposes of discounting.  “Present value” is defined in subsection (e).  Determination of present value is easy for plain par bonds – it is the outstanding stated principal amount.  However, for bonds with, e.g., OID, present value must be determined under the economic accrual method taking into account various payments and OID allocated to past periods. In other words, one will need to go through the proper exercises to calculate the Adjusted Issue Price on the reissuance date. This means using Treas. Reg. 1.1275-1(b) and 1.1272-1(b)(4).  The examples at 1.1272-1(j) are helpful.  Notiz 20120202.
    1. Issue Price, generally, is defined in 1.148-1(b) as issue price as defined in sections 1273 and 1274.  Section 1274 deals with debt instruments issued for property.  “Debt instrument” obviously refers to the refunding bonds.  “Property,” in the reissuance situation, constitutes the refunded bonds.  Therefore, Section 1274 applies.  See also Section 1273(b)(4).  Bonds are intangible personal property under traditional law concepts.  Under Treas. Reg. 1.1274-2(b), issue price is calculated in various ways, depending on whether or not there is adequate stated interest.  As a rule of thumb, there is always adequate stated interest if the interest rate on the bonds is at least as much as the AFR.
  3. Assume bonds have a nominal maturity of 30 years.  Cash flows show that the bonds are expected to actually mature in 20 years.  The bondholders likely based their investment decision on the 20 year maturity.  Assume the issuer wants to change the investment parameters to extend the actual maturity from 20 years to 24 years, and make some kind of compensation payment to the bondholders to prevent the yield from changing more than 25 basis points.  Does this cause a reissuance? No, look to the facts and circumstances.  It is reasonable to assume the 20-year maturity and then to apply the usual yield and deferral of payments rules.
  4. Upon reissuance, should feasibility studies be retested (to determine debt vs. equity questions)?  Generally, in connection with refunding bonds, one would need to retest the debt equity matter to determine reasonableness of repaying the bonds.  The original bonds must have satisfied the test and the refunding bonds must satisfy the test.  However, if the reissuance occurs as a result of a modification that is significant, there is no need to retest under Prop. Reg. 1.1001-3 unless there is a substitution of the obligor or deletion of a co-obligor, or unless there is a guaranty that is being changed.  See this Alston + Bird publication on retesting debt standards.  The proposed regulations were finalized in 2011.  See T.D. 9513 (February 22, 2011).
  5. Guarantee:  Assume a bond issuer is experiencing trouble making debt service payments and a guarantee is called on to make payments.  Assume also that the issuer decides to refund the bonds to a lower interest rate and that, for the initial periods, interest on the refunding bonds will continue to be paid from calls on the guarantee.  Does the payment cause private loan financing problems?  Is the interest paid with proceeds of the guarantee still eligible for tax exemption?
    1. Assuming the guarantee is provided by the developer/benefitted entity, the payment of the guarantee payments constitute repayments of a private loan.
    2. During the period that interest is paid with proceeds of the guarantee calls, the interest on the bonds is not eligible for tax exemption because it is not interest paid by a governmental issuer with respect to an obligation.
  6. Change in Optional Redemption Date:  Is a modification of the optional redemption date a significant modification? In PLR 9844021, modifications involving interest, repayment, security and redemption rights conferred such legally distinct entitlements in the bondholders that the modifications results in an exchange of the bonds.  All facts and circumstances probably need to be considered.  In Emery v. Commissioner, 166 F.2d 27 (2d Cir. 1948), the court concluded that a reissuance had occurred based on the “different financial value” of the new obligations.


Rev. Rul. 81-169, 1981-1 C.B. 429:  A reduction in interest rate from 9% to 8.5% coupled with a 10-year extension of the instrument’s maturity date constituted a material modification giving rise to a taxable exchange.

Rev. Rul. 89-122, 1989-2 C.B. 200:  A material modification resulting in deemed exchange found where either: (1) reduction of annual rate of interest from 10% to 6.25%; or (2) reduction of principal amount of $1 million to $650,000.

AM 2012-004 (June 2012):  In generic legal advice, the IRS concluded that the dissolution of a state’s redevelopment agencies and the transfer of all their authority, rights, powers, duties and obligations to successor agencies doesn’t result in a reissuance of tax-exempt bonds and BABs previously issued by the dissolved redevelopment agencies.

PLR 8714034 (Jan. 2, 1986): No reissuance upon change to amortization schedule under rulining preceding Notice 88-130.

PLR 201149017:  Conversion of build America bonds to a new term rate won’t cause a reissuance.

FSA 200116012:  Confusing facts, but generally helpful discussion of basic reissuance matters.  The June 2001 edition of The Bond Lawyer summarized this advice as follows: “In FSA 200116012 (January 5, 2001), the IRS found that the financial benefit received by an issuer in connection with alterations of the terms of certain tax-exempt bonds, including payments received by the issuer from a bondholder through a below market price on a refunding escrow fund, were material changes in the bond yield that gave rise to a reissuance of the bonds under then-applicable law before the effective date of the present regulations under Reg. §1.1001-3. The changes to the bond terms included identification of certain specific bonds to be redeemed instead of leaving that to a lottery process. In this FSA, the IRS interpreted the longstanding general materiality standard for reissuance under Reg. §1.1001-1(a), which provides that whether an exchange of property is a disposition depends on whether the properties exchanged differ materially either in kind or extent. The IRS relied in part on the broad reissuance standard set forth by the Supreme Court in Cottage Savings Association v. Commissioner, 499 U.S. 554 (1991). The unclear breadth of the Cottage Savings standard, often called a “hair trigger” reissuance standard, largely led to the present Section 1001 reissuance regulations under Reg. §1.1001-3. For anyone interested, this FSA has a good discussion of the applicable law on debt reissuance before such present Section 1001 regulations.”

IRS Form 990 – Returns of Organizations Exempt from Income Tax

January 13, 2011

Purpose of the IRS Form 990:

IRS Form 990 is used by exempt organizations, nonexempt charitable trusts and 527 political organizations to satisfy the information and reporting requirements under I.R.C. 6033.

Filing Deadline:  IRS Form 990 must be filed by the 15th day of the 5th month after the organization’s accounting period ends.  The following are examples of accounting periods and related filing deadlines:

  • Accounting period ends December 31:  Filing deadline is May 15
  • Accounting period ends September 30:  Filing deadline is February 15

Extensions are available.  Use IRS Form 8868 to request an automatic three-month extension of time to file.  This form may also be used to request an additional, non-automatic, three-month extension if the original three-month extension was not sufficient.  The non-automatic extension request must be accompanied by information setting froth reasonable cause for the additional time requested.

Organizations exempt under I.R.C. 501(c)(3) must also file Schedule A to Form 990.

The filing requirement applies to all 501(c)(3) organizations, unless limited exceptions apply.  Statutory and regulatory exemptions apply to the following:

  • Churches and related organizations (I.R.C. 6033(a)(3)(A)(i))
  • Organizations that are not private foundations with annual gross receipts of $5,000 or less (I.R.C. 6033(a)(3)(A)(ii))
  • Religious orders (I.R.C. 6033(a)(3)(A)(iii)

Organizations that are exempt from filing Form 990 must still file the “Post Card” return Form 900-N.

Organizations that fail to file the information return for three consecutive years lose their 501(c)(3) exemption.  See I.R.C. 6033(j).

There are other penalties that apply to failure to file.  See I.R.C. 6652(c)(1).

Matters relating to Schedule K:

Schedule K (Form 990) is used by an organization that files Form 990 to provide certain information about the organization’s outstanding liabilities associated with tax-exempt bond issues.

Part II, Line 11 (Final Allocation):

“Has the final allocation of proceeds been made?” goes towards the requirement in Section 1.148-6 of the Regulations which provides that proceeds of a bond issue that are expended for a governmental purpose are no longer treated as gross proceeds of an issue (and are therefore no longer subject to rebate or yield restriction).  The borrower completing Schedule K will check “Yes” for line 11 if the bond proceeds have been spent, and should be in a position to prove such expenditure by records such as trustee statements or otherwise. Allocation of bond proceeds to expenditures is related to allocation that may be done in the tax agreement (or no-arbitration certificate) at the beginning of the project. Such allocation in the tax document will assist in identifying how moneys from various sources are expected to be used. For information concerning allocation of proceeds to expenditures, see Section 1.148-6 of the Regulations. See also page 80 of Fundamentals of Municipal Bond Law (2007 Ed.).

Other Matters

See Rev. Proc. 95-48 for information regarding filing exemptions for governmental units and affiliates of governmental units.

See Rev. Proc. 2015-2 VCAP for organizations that have lost their 501(c)(3) status for not filing Form 990, and the impact on the tax status of section 145 bonds.