[Congressional Record Volume 144, Number 67 (Friday, May 22, 1998)]
[Senate]
[Pages S5454-S5455]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. D'AMATO:
  S. 2125. A bill to amend the Internal Revenue Code of 1986 to provide 
for the tax treatment of section 42 housing cooperatives and the 
shareholders of such cooperatives, and for other purposes; to the 
Committee on Finance.


               low-income housing tax credit legislation

 Mr. D'AMATO. Mr. President, today I introduce legislation that 
will create a new homeownership opportunity with a proven method of 
building affordable housing. Current low-income housing production in 
the United States is driven largely by the low-income housing tax 
credit. The credit supports the development of 94 percent of all 
federally assisted multi-family affordable housing construction. Under 
current law, however, only rental housing can be developed with the 
credit. Everyone would agree that building homeownership is better than 
simply building homes for people. Homeowners are invested in their 
communities, take pride in their property, and will do what it takes to 
preserve the security and appearance of their homes.
  The legislation that I propose today will enable housing cooperatives 
and mutual housing associations to be developed with the credit. With 
these types of multi-family homeownership, tax credit investors can 
become non-resident shareholders of the developed property while 
allowing the residents to own their share of the property as well. From 
the very start, the residents will have a real ownership stake and 
control over their homes.
  A study undertaken by Abt Associates, Inc., commissioned by the 
National Cooperative Bank found that this legislation could result in 
the annual production of 1,600 units of low-income housing within five 
years of enactment. That means as many as 15,000 renters could be 
homeowners within five years.
  Mr. President, I urge my colleagues to join me in cosponsoring 
legislation to help bring the American dream of homeownership to many 
more Americans.
  Mr. President, I ask unanimous consent that the complete text of the 
bill be placed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2125

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. TAX TREATMENT OF SECTION 42 HOUSING COOPERATIVES 
                   AND SHAREHOLDERS OF SUCH COOPERATIVES.

       (a) In General.--Part III of subchapter T of chapter 1 of 
     the Internal Revenue Code of 1986 (relating to cooperatives 
     and their patrons) is amended by adding at the end the 
     following new section:

     ``SEC. 1389. SPECIAL RULES FOR SECTION 42 HOUSING 
                   COOPERATIVES AND THEIR SHAREHOLDERS.

       ``(a) Allowance of Deductions and Credits.--
       ``(1) Non-patron shareholders.--In the case of a section 42 
     housing cooperative (as defined in subsection (b)(1)), the 
     non-patron shareholders of such cooperative shall be allowed 
     to take into account for purposes of calculating the taxable 
     income of such shareholders the following tax items:
       ``(A) 100 percent of all low-income housing tax credits to 
     which the section 42 housing cooperative is entitled under 
     section 42.
       ``(B) 100 percent of all interest allowable as a deduction 
     to the cooperative under section 163 and which is incurred 
     and accrued but unpaid by the cooperative on its indebtedness 
     contracted--
       ``(i) in the acquisition, construction, alteration, 
     rehabilitation, or maintenance of the houses or apartment 
     buildings, or
       ``(ii) in the acquisition of the land on which the houses 
     (or apartment buildings) are situated.
       ``(2) Patron shareholders.--In the case of a section 42 
     housing cooperative, the patron shareholders of such 
     cooperative shall be allowed a deduction equal to 100 percent 
     of the amounts paid by the cooperative within the taxable 
     year for the following items, except that in no event may a 
     patron shareholder deduct an amount in excess of such patron 
     shareholder's proportionate share of such specified items:
       ``(A) Real estate taxes allowable as a deduction to the 
     cooperative under section 164 which are paid or incurred by 
     the cooperative on the houses or apartment buildings and on 
     the land on which such houses (or apartment buildings) are 
     situated.
       ``(B) The interest allowable as a deduction to the 
     cooperative under section 163 for the taxable year and which 
     is paid by the cooperative during such taxable year on its 
     indebtedness contracted--
       ``(i) in the acquisition, construction, alteration, 
     rehabilitation, or maintenance of the houses or apartment 
     buildings, or
       ``(ii) in the acquisition of the land on which the houses 
     (or apartment buildings) are situated.
       ``(b) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Section 42 housing cooperative.--The term `section 42 
     housing cooperative' means a corporation--
       ``(A) having no more than 2 classes of stock outstanding, 
     consisting of--
       ``(i) shares of stock issued to persons who make an equity 
     contribution to the cooperative but who are not residents in 
     the houses or apartment buildings owned by the cooperative; 
     and
       ``(ii) shares of stock issued to persons who make an equity 
     contribution to the cooperative and who are residents in the 
     houses or apartment buildings owned by the cooperative;
       ``(B) in which each of the holders of patron stock is 
     entitled, solely by reason of the patron's ownership of such 
     stock in the cooperative, to occupy for dwelling purposes a 
     house, or an apartment in a building, owned by such 
     cooperative;
       ``(C) no shareholder of which is entitled (either 
     conditionally or unconditionally) to receive any distribution 
     not out of earnings and profits of the cooperative except on 
     a complete or partial liquidation of the cooperative;
       ``(D) 80 percent or more of the gross income of which for 
     the taxable year in which the taxes and interest described in 
     subsection (a) are paid or incurred is derived from patron 
     shareholders; and
       ``(E) which is entitled to claim a low-income housing tax 
     credit under section 42.
       ``(2) Shareholder's proportionate share.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the term `proportionate share' means that proportion which 
     the stock of the cooperative housing corporation owned by a 
     particular patron shareholder is of the total outstanding 
     patron stock of the corporation (including any stock held by 
     the corporation).
       ``(B) Special rule where allocation of taxes or interest 
     reflect cost to corporation of patron shareholder's unit.--
       ``(i) In general.--If, for any taxable year--

       ``(I) each dwelling unit owned or leased by a section 42 
     housing cooperative is separately allocated a share of such 
     cooperative's real estate taxes described in subsection 
     (a)(2)(A) or a share of such cooperative's interest described 
     in subsection (a)(2)(B), and
       ``(II) such allocation reasonably reflects the cost to such 
     cooperative of such taxes, or of such interest, attributable 
     to the shareholder's dwelling unit (and such unit's share of 
     the common areas),

     then the term `proportionate share' means the shares 
     determined in accordance with the allocations described in 
     subclause (II).
       ``(ii) Election by cooperative required.--Clause (i) shall 
     apply with respect to any section 42 housing cooperative only 
     if such cooperative elects its application. Such an election, 
     once made, may be revoked only with the consent of the 
     Secretary.
       ``(3) Prior approval of occupancy.--
       ``(A) In general.--For purposes of this section, in the 
     following cases there shall not be taken into account the 
     fact that (by agreement with the section 42 housing 
     cooperative) the person or the person's nominee may not 
     occupy the house or apartment without the prior approval of 
     such cooperative:
       ``(i) In any case in which a person acquires stock of a 
     section 42 housing cooperative by operation of law.
       ``(ii) In any case in which a person other than an 
     individual acquires stock of a section 42 housing 
     cooperative.
       ``(iii) In any case in which the original seller acquires 
     any stock of the section 42 housing cooperative from the 
     cooperative not later than 1 year after the date on which the 
     apartments or houses (or leasehold interests therein) are 
     transferred by the original seller to the cooperative.
       ``(B) Original seller defined.--For purposes of 
     subparagraph (A)(iii), the term `original seller' means the 
     person from whom the cooperative has acquired the apartments 
     or houses (or leasehold interest therein).
       ``(4) Application of section to mutual housing 
     associations.--
       ``(A) In general.--In the case of a section 42 housing 
     cooperative which is a mutual housing association, this 
     section shall be applied--
       ``(i) by substituting `membership certificates' for `stock' 
     or `shares of stock', and
       ``(ii) by substituting `membership certificate-holders' for 
     `shareholders'.
       ``(B) Mutual housing association.--For purposes of 
     subparagraph (A), the term `mutual housing association' means 
     a resident-controlled, State-chartered organization described 
     in section 501(c)(3) and exempt from tax under section 
     501(a).
       ``(c) Treatment as Property Subject to Depreciation.--

[[Page S5455]]

       ``(1) In general.--
       ``(A) By non-patron shareholders.--Non-patron shares of 
     stock (within the meaning of subsection (b)(1)(A)(i)) shall 
     be treated as property subject to the allowance for 
     depreciation under section 167(a). Such shares of stock shall 
     be treated as residential real property for purposes of 
     determining the appropriate depreciation method under section 
     168(b), the applicable recovery period under section 168(c), 
     and the applicable convention under section 168(d).
       ``(B) By patron shareholders.--So much of the shares of 
     stock of a patron shareholder (within the meaning of 
     subsection (b)(1)(A)(ii)) as is allocable, under regulations 
     prescribed by section 216(c), to a proprietary lease or right 
     of tenancy subject to the allowance for depreciation under 
     section 167(a) shall, to the extent such proprietary lease or 
     right of tenancy is used by such patron shareholder in a 
     trade or business or for the production of income, be treated 
     as property subject to the allowance for depreciation under 
     section 167(a).
       ``(2) Deduction limited to adjusted basis in stock.--
       ``(A) In general.--The amount of any deduction for 
     depreciation allowable under section 167(a) to a non-patron 
     or patron shareholder with respect to any stock for any 
     taxable year by reason of subparagraph (A) or (B) of 
     paragraph (1), respectively, shall not exceed the adjusted 
     basis of such stock as of the close of the taxable year of 
     the shareholder in which such deduction was incurred.
       ``(B) Carryforward of disallowed amount.--The amount of any 
     deduction which is not allowed by reason of subparagraph (A) 
     shall, subject to the provisions of subparagraph (A), be 
     treated as a deduction allowable under section 167(a) in the 
     succeeding taxable year.
       ``(3) No limitation on deduction by section 42 housing 
     cooperative.--Nothing in this section shall be construed to 
     limit or deny a deduction for depreciation under section 
     167(a) by a section 42 housing cooperative with respect to 
     property owned by such cooperative and occupied by the patron 
     shareholders thereof.
       ``(d) Disallowance of Deduction for Certain Payments to the 
     Cooperative.--No deduction shall be allowed to the holder of 
     non-patron or patron stock in a section 42 housing 
     cooperative for any amount paid or accrued to such 
     cooperative during any taxable year to the extent that such 
     amount is properly allocable to amounts paid or incurred at 
     any time by the cooperative which are chargeable to the 
     cooperative's capital account. The shareholder's adjusted 
     basis in the stock in the cooperative shall be increased by 
     the amount of such disallowance.
       ``(e) Restriction on the Resale of Patron Stock.--Upon the 
     transfer of patron stock, the consideration received by the 
     holder of such stock shall not exceed the shareholder's 
     adjusted equity in such stock. For purposes of this 
     subsection, the term `adjusted equity' means the sum of--
       ``(1) the consideration paid for such stock by the first 
     shareholder, as adjusted by a cost-of-living adjustment and 
     any other acceptable adjustments determined by the Secretary, 
     and
       ``(2) payments made by such shareholder for improvements to 
     the house or apartment occupied by the shareholder.
       ``(f) Distributions by Section 42 Housing Cooperative.--
     Except as provided in regulations under section 216(e), no 
     gain or loss shall be recognized on the distribution by a 
     section 42 housing cooperative of a dwelling unit to a holder 
     of patron stock in such cooperative if such distribution is 
     in exchange for the shareholder's stock in the cooperative 
     and such exchange qualifies for nonrecognition of gain under 
     section 1034(f).''.
       (b) Conforming Amendments.--
       (1) Section 42 of the Internal Revenue Code of 1986 
     (relating to low-income housing credit) is amended by adding 
     at the end the following new subsection:
       ``(o) Section 42 Housing Cooperatives.--In the case of a 
     section 42 housing cooperative (as defined in section 
     1389(b)(1)), the holders of the non-patron stock (within the 
     meaning of section 1389(b)(1)(A)(i)) shall be entitled to any 
     and all tax credits that would otherwise be available to such 
     cooperative under this section. Any recapture of credit 
     calculated against the section 42 housing cooperative under 
     subsection (j) shall be an increase in the tax under this 
     chapter for the holders of the non-patron stock in proportion 
     to the relative holdings of such stock during the period 
     giving rise to such recapture.''.
       (2) Section 42(g)(2)(B) of such Code is amended by striking 
     ``and'' at the end of clause (iii), by striking the period at 
     the end of clause (iv) and inserting ``, and'', and by 
     inserting after clause (iv) the following new clause:
       ``(v) does not include any amounts paid by a tenant in 
     connection with the acquisition or holding of any patron 
     stock (within the meaning of section 1389(b)(1)(A)(ii)).''.
       (3) Section 42(i) of such Code is amended by adding at the 
     end the following new paragraph:
       ``(8) Impact of section 42 housing cooperative's right of 
     first refusal to acquire stock of a section 42 housing 
     cooperative.--
       ``(A) In general.--No Federal income tax benefit shall fail 
     to be allowable to a non-patron or patron shareholder (within 
     the meaning of section 1389(b)(1)) of a section 42 housing 
     cooperative (as defined in section 1389(b)(1)) with respect 
     to any qualified low-income building merely by reason of a 
     right of first refusal or option or both held by the section 
     42 housing cooperative to purchase non-patron stock of the 
     cooperative after the close of the compliance period for a 
     price which is not less than the minimum purchase price 
     determined under subparagraph (B).
       ``(B) Minimum purchase price.--For purposes of subparagraph 
     (A), the minimum purchase price for the stock of a section 42 
     housing cooperative is an amount equal to the present value 
     of the remaining depreciation deductions which would be 
     allowable under section 1389(c)(1) to the holder of such 
     stock. For purposes of determining present value, the 
     discount rate provided in subsection (b)(2)(C)(ii) shall be 
     applicable as determined at the time of the exercise of such 
     option or right of first refusal.''.
       (4) Section 1381(a) of such Code is amended by striking 
     ``and'' at the end of paragraph (1), by striking the period 
     at the end of paragraph (2) and inserting '', and'', and by 
     adding at the end the following new paragraph:
       ``(3) any section 42 housing cooperative (as defined in 
     section 1389(b)(1)).''.
       (5) The table of sections for part III of subchapter T of 
     chapter 1 of such Code is amended by adding at the end the 
     following new item:

``Sec. 1389. Special rules for section 42 housing cooperatives and 
              their shareholders.''.

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