WASHINGTON — The Internal Revenue Service granted an extension to an issuer so that it could correct a form it filed for multifamily housing bonds without jeopardizing the tax-exempt status of the bonds, according to a recently issued private-letter ruling.
The IRS did not identify the issuer, which wanted to sell the bonds and loan the proceeds to a developer to finance construction of a qualified residential rental project.
According to the IRS, the issuer mistakenly elected on its Form 8038, which must be filed for PABs, that the bonds to be issued would satisfy the 20-50 test, one of two tests for such projects. However, the issuer had intended for the bonds to meet the 40-60 test.
Under the tax law, tax-exempt PABs can be issued for qualified residential rental projects if at least 20% of the units will be occupied by individuals with incomes of 50% or less than the area median gross income or if at least 40% of the units will be occupied by residents who have 60% or less of the area median gross income.
"Both the election of the 20-50 test on Form 8038 and the covenant to satisfy the 20-50 test in the agreement were clerical errors of those drafting the agreement and Form 8038 who confused the bonds with another issue of bonds they were working on at the same time," the IRS said in the May 2 letter ruling, which was not publicly released until Monday.
"Whatever you elect at closing is what you have to live with," said Linda Schakel, partner with Ballard Spahr LLP.
The issuer offered the IRS two arguments that suggested they never intended to proceed with the 20-50 test.
First, they said that the state authority, which allocated private-activity bond volume cap, indicated that over 40% of the residential units would be occupied by individuals whose income was 60% or less of the area median income.
Second, the issuer's staff summarized the project and made recommendations to the issuer that indicated it would use the 40-60 test.
"All along, there was no doubt they wanted to use the 40-60 test and they made a mistake on the Form 8038," said Rick Ballard, also a partner at the Ballard firm. "I would have been surprised if it was a different ruling."
Both Ballard and Schakel said this type of private-letter ruling isn't common, but it is common for an issuer to ask the IRS for help on something.
As a result of the evidence presented to the IRS, the issuer was granted an extra 45 days from the date of the letter ruling to make a different election and file an amended Form 8038 that states it will meet the 40-60 test.
"We conclude that the issuer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government," the IRS said. "The project has not yet been placed in service and, therefore, cannot currently be in violation of the 40-60 test."
The IRS cautioned that the ruling is only directed to the taxpayer that requested it and should not be used or cited as precedent.