Sophisticated Tax Issues By Forrest David Milder Nixon

Sophisticated Tax Issues By Forrest David Milder Nixon Peabody LLP 617 -345 -1055

Audit Related Issues • Importance of Good Record Keeping – State Agency, Form 4506, CPA • Role of Form 8609 – – Who got the allocation? Date of Allocation and 2 -year rule Max allocation, max percentage Eligible Basis and Reductions -- Federal funds, Swimming pools and garages 2

Other Issues • Development Fee Agreements – Related parties, what do they cover? • Form 8823 “Notice of Noncompliance” – State Agency Review (e. g. , Spectrum) – Address quickly • Technical Advice vs. Private Letter Ruling – “bias”, cost, timing 3

Tax Exempt Bond problems • Must pass the “ 50% Test” – Try to get well over 50% – Watch out for costs of issuance • What to do if you’re going to fail – Reduce Developer Fee – Don’t forget Construction Period Earnings – Issue More Bonds 4

Recapture of the Credit • Disposition of the Project • Disposition of >33% Interest in Project • Interesting Exceptions – Consolidated Group – 708 terminations – Nominal Ownership Change – Section 47 regs (mere change in form) 5

Example • Project is awarded $150, 000 per year of credits, a total of $1, 500, 000 in total • Remember: – Credit Period is ten years – Compliance Period is fifteen years 6

Computing the Accelerated Portion Year 1 2 3 … 10 11 12 … 15 Credit(1/10) Credit (1/15) Excess (Ann) 150 100 50 (Cum) 50 100 150 0 0 100 100 50 -100 500 400 300 0 100 -100 0 7

Posting a Bond • No recapture if you post a bond or securities • Must expect that the Project will continue to be low income • Recapture Bonds -- Revenue Ruling 90 -60 – (Based on Credits taken, bond factor, – interest disposed of, credit worthiness) • File Form 8693 within 60 days. Requires 8609 to be attached 8

Deferred Development Fees and Reallocation of Losses and Credits 1. Once the Capital Account of Limited Partner hits zero, losses and credits are allocated based on the lowest priority debt which is usually Deferred Development Fee. 2. If Development Fee obligation is recourse or the Developer is related to a General Partner (80% test) losses and credits attributable to it will have to be allocated to the General Partner. 9

Will renegotiating the Fee affect the Credit? 1. 2. If the Development Fee was reasonably likely to be paid at the end of the first year of the credit, a renegotiation of the fee in a later year should not impact Eligible Basis. If the problems that resulted in the workout existed in the first year of the credit period then it is possible that this would call into question the reasonably likely to be paid test above. 10 1544167

Deferred Development Fees and Reallocation of Losses and Credits Solutions. A. Refinancing the Development Fee obligation with third party non-recourse debt will fix problem. B. If Developer owns the General Partner, it can transfer 21% of the GP interest to a third party. C. If Development Fee obligation is non-recourse the Developer can transfer the Development Fee Note to unrelated person. 11

Renegotiation of Deferred Development Fees and Cancellation of Debt Income 1. 2. 3. If payment of fee is forgiven, there will be cancellation of debt income (CODI). If Development Fee note is transferred to Partnership or Related Person, it will cause CODI. If terms of the Development Fee are changed, it can cause CODI. 12

Changing the Terms of the Fee Changing the terms of a Development Fee can cause CODI if it impacts the Interest Rate, Maturity Date, Collateral, or a Guarantee. A. Short extension of Maturity Date B. Elimination of General Partner obligation C. Use interest rate equal to the AFR 13