WASHINGTON — Multifamily housing projects that pair tax-exempt private activity bonds with a 4% federal housing tax credit are experiencing a legal snag if they include a preference for military veterans.
That’s because the Internal Revenue Service has told bond attorneys that the law doesn’t explicitly say that veterans are a special needs population under the rules for the tax-exemption for multifamily private activity bonds.
Multifamily PABs must have a public use for the housing, and a preference for a group not recognized as a special needs population might jeopardize them meeting that requirement.
The National Association of Bond Lawyers and the National Council of State Housing Agencies want Congress to enact a tax fix.
But it’s questionable whether lawmakers will include any tax legislation into the jam-packed agenda Congress has this month.
The veterans housing fix is included in a technical corrections tax bill that House Ways and Means Committee Chairman Kevin Brady, R-Tex., introduced last week.
Democrats in the House and Senate have pushed back on considering any tax measures, but California housing groups have pressed two influential home state lawmakers to act — House Republican Majority Leader Kevin McCarthy and Democratic Minority Leader Nancy Pelosi.
“If this doesn’t get fixed, that’s going to be a major problem for the properties that are in the pipeline right now,” said Jennifer Schwartz, director of tax and housing advocacy for the National Council of State Housing Agencies.
About half the of the 4% housing tax credits used nationally are part of multifamily PAB projects and some also are using state funds or foundation grants that require a preference for low-income or homeless veterans.
A second federal housing tax credit which is 9% does have explicit language that includes veterans as a special needs population.
But states are using all of their 9% credits, which are capped nationally, and are increasingly using the 4% program in tandem with multifamily bonds.
“This is an issue for attorneys all over the country and they all have the same problem,” said tax attorney David A. Walton, a shareholder at Jones Hall in San Francisco who is heading a comment project for the National Association of Bond Lawyers on this problem.
The IRS has verified that it is a problem, according to Schwartz. “They have done so verbally to bond counsel,” she said. “They haven’t done it in writing.”
Walton said some bond counsel were uncertain about giving their unqualified opinion for the tax-exemption of the multifamily bonds if there was a veterans preference.
“Some attorneys went in and asked the IRS if in a pre-submission context they would consider a ruling on the issue of a preference for veterans,” Walton said. “Others have asked, ‘What about a preference for public school teachers?’ A lot of cities that are expensive places to live are having a hard time attracting new school teachers and especially teaching assistants. They can’t afford to live in a place like San Francisco.”
In 2008 Congress enacted a provision of the federal housing tax credit — Section 42G9 — that said preferences for specified groups under a federal or state program are permitted and not a violation of public use requirement.
But Congress has not explicitly cross-referenced the applicability of Section 42G9 to Section 142 dealing with tax-exempt facility bonds, which include multifamily housing.
Treasury officials have indicated they don’t want to issue a private letter ruling to clear up the problem, which leaves the solution to be either through congressional legislation or a published guidance such as a revenue notice.
For now, the groups are pursuing legislation in the form of a technical correction.
“The correction clarifies that under Section 142 that veterans are, in fact, a special needs population and adds advice to follow the rules under Section 42,” said Schwartz.
