[Congressional Record Volume 148, Number 27 (Tuesday, March 12, 2002)]
[Senate]
[Pages S1783-S1785]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRAHAM (for himself, Mr. Hatch, Mr. Jeffords, Mr. Kerry, 
        and Mr. Torricelli):
  S. 2006. A bill to amend the Internal Revenue Code of 1986 to clarify 
the eligibility of certain expenses for the low-income housing credit; 
to the Committee on Finance.
  Mr. GRAHAM. Madam President, today I am introducing legislation that 
will improve the effectiveness of one of the most effective programs we 
have to help Americans get affordable housing, the Low Income Housing 
Tax Credit. I am proud to be joined in this effort by my esteemed 
colleagues Senator Hatch, Senator Jeffords, Senator Kerry and Senator 
Torricelli.
  The Low Income Housing Tax Credit was created in 1986 to attract 
private sector capital to the affordable housing market. It has been 
the major engine for financing the production of low income multi-
family housing. The program offers developers and investors in 
affordable housing credit against their Federal income tax in return 
for their investment. Since its inception, the Low Income Housing Tax 
Credit has assisted in the development and availability of roughly 
850,000 new and rehabilitated units of affordable housing.
  Last fall, the Internal Revenue Service issued its first guidance in 
the program's 16 year history. That guidance was issued in the form of 
several technical advice memoranda, or TAMs, and specified which 
development costs will be eligible and ineligible for the credit, known 
as eligible basis.
  TAMs are not official guidance, reviewed by the Treasury Department, 
but instead, IRS legal opinion providing direction to IRS agents 
conducting audits. They are not citable in court proceedings because 
they are not official guidance. In the absence of official guidance, 
TAMs could be taken as the official government position. In fact, that 
is exactly what is happening. The IRS's position is contrary to common 
industry practice, and eliminates many reasonable, legitimate and 
necessary costs from the tax credit. This has caused uncertainty among 
investors as to whether the credits for which they have been paid, will 
be realized. Moreover, these guidelines could adversely affect the 
ability of States to target affordable housing to those who need it the 
most.
  It is important to understand, this legislation will not increase the 
number of low-income housing tax credits available. The maximum amount 
of credits that states may allocate to developers of affordable housing 
properties is set by the Internal Revenue Code. Thanks to legislation 
that we enacted in 2000, the amount available to each state has 
increased from $1.50 to $1.75 times the State's population.

[[Page S1784]]

That 40 percent increase is expected to produce about 30,000 more units 
a year. Since the unmet demand for affordable housing is many times 
greater than what can be built with the help of the credit, our 
legislation should not affect revenues. In fact, the only way for this 
legislation to have a revenue impact is if the legislation makes it 
easier for the States to use the credits we intend for them to have 
under present law.
  What this legislation does do, however, is very important. To 
understand its importance, it may be useful to have a little background 
on how the low-income housing tax credit works.
  In economic terms, the credit is equity financing which replaces a 
portion of debt that would otherwise be necessary to finance a 
property. By replacing debt, credits work to reduce interest costs. 
This allows a property owner to offer lower rents than otherwise would 
be the case.
  The most unique feature of the program is that State Housing Finance 
Agencies award Federal tax credits to developers of rental housing. 
Since these agencies have considerable flexibility in how they 
distribute the credits, developers compete for the limited number of 
tax credits by submitting project proposals. The Housing Finance 
Agencies rate the proposals, and allocate credits to individual 
properties based on criteria provided in the Internal Revenue Code, and 
on the State's particular housing needs and priorities.
  The amount of credits a State may allocate to a particular property 
is also limited by the Internal Revenue Code. The limit is determined 
as percentage of the basis of a property. The basis is, generally 
speaking, the costs of constructing a building that is part of an 
affordable housing project. Non-federally subsidized new construction 
may receive a 9-percent credit. Existing buildings and new buildings 
receiving other Federal subsidies may get a 4-percent credit.
  The problem at hand is this. The IRS takes the position that certain 
construction costs should not be included in basis. This position makes 
a large number of affordable housing properties financially infeasible, 
and weakens the economics of those that still pass minimum underwriting 
requirements. The loss of equity would surely affect the properties 
that serve the lowest income tenants, provide higher levels of service, 
or operate in high cost areas. The reason that this is problematic is 
simple. Reducing the amount of credits does not reduce the development 
costs. It merely removes a source of financing, forcing either higher 
rents or lower quality construction.
  Apparently, the Treasury Department and Internal Revenue Service 
agree that this is an issue worthy of review, as both agencies have 
included it in their business plan. As recently as this month, the IRS 
issued new guidance on one of the items addressed by the TAMs, but 
there does not appear to be a full review of the effect of the 
positions set forth in the TAMs anytime soon.
  This legislation would amend Section 42(d) of the Internal Revenue 
Code to specify that various associated development costs are to be 
included in eligible basis. In many cases, the largest item excluded 
from eligible basis under the TAMs is ``impact fees.'' Impact fees are 
fees required by the Government ``as a condition to the development'' 
and considered ineligible because they are one-time costs, unlike 
building permits which need to be renewed each time a building is 
built. These fees cover a wide range of infrastructure improvements 
including sewer lines, schools, and roads. Certainly, whether or not 
they are includible in basis for the purpose of calculating the amount 
of tax credit, these costs will be incurred and will impact the 
economics of the property. As I mentioned previously, the IRS has 
recently addressed the inclusion of impact fees in eligible basis, but 
not other costs directly related to building construction.
  Other items that would be severely restricted or excluded from 
eligible basis under the interpretations expressed in the TAMs are site 
preparation costs, development fees, professional fees related to 
developing the property, and construction financing costs. The 
legislation we are introducing today will clarify that any cost 
incurred in preparing a site which is reasonably related to the 
development of a qualified low income housing property, any reasonable 
fee paid to the developer, any professional fee relating to an item 
includible in basis, and any cost of financing attributable to 
construction of the building is includible in basis for the purpose of 
calculating the maximum amount of credit a state may allocate to a low-
income housing property.
  The intent of these clarifications is simply to codify common 
industry practice before the issuance of the TAMs. Not only will the 
legislation allow the low-income tax credit program to provide better 
quality housing at lower rental rates than would be possible if the 
positions taken in the TAMs are followed, but clarification will help 
simplify administration of the credit by giving both taxpayers and the 
Internal Revenue Service a clearer statement of the standards that 
apply in calculating credit amounts.
  Our economy is not doing as well as we would like, and there is a 
significant likelihood that we are going to need even more affordable 
housing in the not too distant future. We should be proud that we 
increased the amount of low-income housing tax credits that will be 
available to help finance this housing. What we need to do now is to 
make sure that these credits are used as efficiently as possible to 
provide housing for those who need it the most. The legislation we are 
introducing today will help achieve that goal.
  I ask unanimous consent that the text of this bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2006

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

     SECTION 1. ELIGIBILITY OF CERTAIN EXPENSES FOR LOW-INCOME 
                   HOUSING CREDIT.

       (a) In General.--Subsection (d) of 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 
     paragraph:
       ``(8) Associated development costs included in basis.--
       ``(A) In general.--Solely for purposes of this section, 
     associated development costs shall be taken into account in 
     determining the basis of any building which is part of a low-
     income housing project to the extent not otherwise so taken 
     into account.
       ``(B) Associated development costs.--For purposes of 
     subparagraph (A), the term `associated development costs' 
     means, with respect to any building, such building's 
     allocable share of--
       ``(i) any cost incurred in preparing the site which is 
     reasonably related to the development of the qualified low-
     income housing project of which the building is a part,
       ``(ii) any fee imposed by a State or local government as a 
     condition to development of such project,
       ``(iii) any reasonable fee paid to any developer of such 
     project,
       ``(iv) any professional fee relating to any item includible 
     in the basis of the building pursuant to this paragraph, and
       ``(v) any cost of financing attributable to construction of 
     the building (without regard to the source of such financing) 
     which is required to be capitalized.''
       (b) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) housing credit dollar amounts allocated after December 
     31, 2001, and
       (2) buildings placed in service after such date to the 
     extent paragraph (1) of section 42(h) of the Internal Revenue 
     Code of 1986 does not apply to any building by reason of 
     paragraph (4) thereof, but only with respect to bonds issued 
     after such date.

  Mr. JEFFORDS. Mr. President, today I join with my colleagues on the 
Finance Committee, Senators Graham and Hatch, to introduce legislation 
to clarify the rules governing the low-income housing tax credit. This 
tax credit has played a critical role in the construction and 
renovation of housing for low-income Americans.
  The Internal Revenue Service has issued five technical advice 
memoranda, TAMs, affecting the definition of eligible basis as defined 
in section 42(d) of the Internal Revenue Code. These TAMs had the 
effect of reducing the amount of tax credits available with respect to 
projects financed with low-income housing tax credits. The bill we 
introduce today recognizes that certain expenses are legitimate 
development costs that are properly includible in the basis eligible 
for the tax credits. Among these development costs are: state and local 
impact fees, site preparation costs, reasonable development fees, 
professional fees, and construction financing costs, excluding land 
acquisition costs.

[[Page S1785]]

  The TAMs drew unworkable distinctions among various costs developers 
incur when they build low-income housing. For example, under the law as 
interpreted by the IRS, a low-income housing developer would have to 
distinguish between those trees and shrubs planted near a housing unit 
and those planted elsewhere on the property. The costs of trees and 
shrub near the housing unit could be included in basis; the costs of 
other landscaping could not. Rules like this are not only illogical; 
they also impose unnecessary burdens both on developers of affordable 
housing projects, but also on the IRS itself, whose employees must draw 
these highly technical distinctions when they audit the project. Our 
bill includes fair and rational rules, introducing the concept of 
``development cost basis'' in lieu of ``adjusted basis'' to determine 
which costs may qualify for tax credits. It assures that reasonable and 
legitimate expenses which incurred only for the purpose of building 
low-income housing will be eligible for tax credit.
                                 ______