[Congressional Record Volume 149, Number 171 (Saturday, November 22, 2003)]
[Extensions of Remarks]
[Pages E2409-E2410]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 A BILL TO IMPROVE THE LIQUIDITY OF THE MARKET FOR INVESTMENTS IN LOW-
                  INCOME HOUSING TAX CREDIT PROPERTIES

                                 ______
                                 

                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                       Friday, November 21, 2003

  Mr. HOUGHTON. Mr. Speaker, today Representatives Nancy Johnson (R-
CT), Charles Rangel (D-NY) and Richard Neal (D-MA) are joining me in 
introducing legislation to correct a problem that is impairing the 
liquidity of the market for investments in Low-Income Housing Tax 
Credit (housing credit) properties. The housing credit has been a 
remarkably successful incentive for encouraging investment in 
residential rental housing for low-income families. Under Section 42 of 
the Internal Revenue Code, a tax credit is available for investment in 
affordable housing. The credit is claimed annually over a period of ten 
years. Qualified residential rental projects must be rented to lower-
income households at controlled rents and satisfy a number of other 
requirements throughout a prescribed compliance period (generally, 15 
years from the first taxable year the credit is claimed).
  Today, virtually all of the equity for housing credit investments 
comes from widely held corporations investing through housing credit 
funds. A significant number of corporate investors have transferred 
these fund interests in recent years, typically due to a change in 
their income tax status. An investor wishing to dispose of an interest 
in a Low-Income Housing Tax Credit (``housing credit'') property during 
its 15-year compliance period is subject to a recapture of housing 
credits previously claimed unless a bond or U.S. Treasury securities 
are posted to the Internal Revenue Service (IRS). The amount of the 
bond to be posted is based on the amount of housing credits claimed and 
the duration remaining in the compliance period. The purpose of the 
bond is to guarantee to the IRS that it can collect the appropriate 
recapture amount in the event that the property is no longer in 
compliance with the requirements of the housing credit program.
  At the time the housing credit program was enacted in 1986, the 
drafters of the statute were concerned that owners would claim the 
benefits of the tax credits and then avoid the continuing compliance 
requirements by transferring the credits to a straw party with minimal 
assets that the IRS could go after to collect recapture liability. This 
was a potential

[[Page E2410]]

concern because housing credits are provided on an accelerated basis in 
the sense that they are claimed over a ten-year period, while the 
property must remain in compliance with the targeting rules over a 
minimum 15-year period.
  However, the experience with the housing credit over the past 15 
years demonstrates that this concern is no longer valid. When the 
housing credit program was enacted, policymakers thought in terms of 
previous affordable housing tax incentives that supported an aggressive 
tax shelter market dominated by individual investors. As it turns out, 
virtually all (99% today) investment capital in the housing credit 
program is from publicly traded corporations that pose none of the 
risks of noncompliance that motivated enactment of the recapture bond 
rules. Ironically, sales of individual partnership interests in public 
partnerships with more than 35 investors are exempt from the recapture 
rules.
  There are also other provisions in Code section 42 that adequately 
address potential noncompliance. In 1989, Congress added the 
requirement that all state allocating agencies adopt ``extended use 
agreements'' to be recorded as restrictive covenants on housing credit 
properties, which require the property to remain in compliance. In 
addition, the state allocating agencies were given oversight 
responsibilities to ensure continued compliance through site 
inspections and property audits.

  The requirement to purchase recapture bonds forces investors to incur 
unnecessary costs and has produced a complex administrative burden on 
the IRS. Since bond filings are done building by building, and since 
single sales transactions frequently involve hundreds of properties, 
each with dozens of buildings, bond filings may involve thousands of 
separate filings. Worse yet, the few remaining surety companies writing 
this type of business operate in an inefficient market. Recapture 
surety bonds are priced in a fashion that does not measure the true 
risk of non-compliance, but rather relies solely on the credit rating 
of the company requesting the bond. This is a function of the fact that 
surety underwriters do not understand the housing credit program in 
general or the risk of noncompliance in particular.
  At the same time, the incidence of non-compliance with housing credit 
program rules is exceedingly rare. Meanwhile in the aftermath of the 
September 11th terrorist acts and the spate of corporate accounting 
scandals, the surety market is in turmoil. Recapture bond premiums, 
even for highly rated public companies, have more than tripled over the 
past two years. This has imposed dead weight costs on the housing 
credit program. By making it more difficult to transfer credit 
investments, the recapture bond rule impairs the liquidity of housing 
credit investments, reducing credit prices generally, and undermining 
the overall efficiency of the program.
  The IRS recently responded to a series of questions we posed about 
the recapture bond requirement. According to the IRS, since just 1997, 
recapture bonds covering approximately $1.8 billion of tax credits have 
been posted--but in the 17 years since the requirement was enacted, the 
Service has never made a claim on a recapture bond. That works out to 
bond premium payments of about $150 million, to ensure against an event 
that has never occurred. These costs are unnecessary and are imposing a 
real drag on the market for investments in housing credit properties.
  Our bill will solve this problem by repealing the recapture bond 
requirement effective for disposition of interests in LIHTC properties 
after the date of enactment. An owner of a building (or interest 
therein) (generally, a limited partnership) that has been the subject 
of a disposition and is still within the remaining 15-year compliance 
period with respect to such building would be required to submit a 
report to its former investors when a recapture event with respect to 
such building occurs. A copy of recapture event forms sent to investors 
would be required to be filed with the IRS in order to provide the 
Service with the information necessary to ensure that all recapture 
liabilities are timely paid. The general statute of limitations 
applicable to taxpayers would be modified so that investors who dispose 
of a building after the effective date of the legislation would remain 
liable for any potential recapture liability for a period extending 
through the compliance period for such building to provide the IRS with 
additional time to audit the partnership's return to ensure the 
building's continuing compliance with the credit's requirements. 
Taxpayers who disposed of a building (or interest therein) prior to the 
date of enactment would not be required to maintain existing recapture 
bonds (or other alternative security), but cancellation of existing 
bonds would trigger an extension of the statute of limitations provided 
for in the legislation.
  We encourage you to join us in cosponsoring this important 
legislation.

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