[Congressional Record Volume 150, Number 101 (Tuesday, July 20, 2004)]
[Senate]
[Pages S8475-S8477]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. LINCOLN:
  S. 2689. A bill to amend the Internal Revenue Code of 1986 to replace 
the recapture bond provisions of the low income housing tax credit 
program; to the Committee on Finance.
  Mrs. LINCOLN. Mr. President, I am introducing legislation today to 
correct a problem that is impairing the efficiency of the Low-Income 
Housing Tax Credit program. As my colleagues know, the low-income 
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 which is generally 15 years from the first 
taxable year the credit is claimed.
  Today, virtually all of the equity for housing credit investments 
comes from publicly-traded corporations investing through housing 
credit funds. An investor wishing to dispose of an interest in 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. 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 tax 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 tax liability. 
This was a potential 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 no longer has any validity. When 
the housing credit program was enacted, policymakers were thinking in 
terms of previous affordable housing tax incentives that supported an 
aggressive

[[Page S8476]]

tax shelter market dominated by individual investors. As it turns out, 
over 99 percent of the investment capital in the housing credit program 
comes from publicly-traded corporations that pose none of the risks of 
noncompliance that motivated enactment of the recapture bond rules in 
the first place. Ironically, sales of individual partnership interests 
in low-income housing fund public partnerships with more than 35 
investors are exempt from the recapture bond rules.
  There are also a number of 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. Because bond filings are done building-by-building, and 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 a very 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 non-compliance 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 that occurred in 2002, the 
surety market has been 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. In the absence of the recapture bond 
requirement, more dollars would flow into affordable housing itself and 
less into the higher rate of return that must be paid to investors to 
compensate for the dead weight costs that the bonds impose on the 
program.
  The IRS recently responded to a series of questions posed about the 
recapture bond requirement. According to the IRS, between 1997 and 
2003, recapture bonds covering approximately $1.8 billion of tax 
credits have been posted with the Treasury but in the 17 years since 
the requirement was enacted, the Service has never made a single claim 
on a recapture bond. That works out to bond premium payments in excess 
of $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.
  My 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, 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 also 
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.
  These changes will improve the overall efficiency of the housing 
program and ensure that more dollars actually flow into affordable 
housing. This is a very important improvement in an otherwise excellent 
program, and I encourage my colleagues to join with me in cosponsoring 
this legislation.
  I ask unanimous consent that the text of the bill be printed in the 
Record. The legislation is identical to a bill that Congressmen 
Houghton, Johnson, Neal, and Rangel have introduced in the House. I 
also ask unanimous consent to include a copy of a letter from 12 
national housing organizations to Chairman Bill Thomas endorsing the 
House bill, H.R. 3610.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2689

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

     SECTION 1. REPEAL OF RECAPTURE BOND RULE.

       (a) In General.--Paragraph (6) of section 42(j) of the 
     Internal Revenue Code of 1986 (relating to recapture of 
     credit) is amended to read as follows:
       ``(6) No recapture on disposition of building (or interest 
     therein) reasonably expected to continue as a qualified low-
     income building.--
       ``(A) In general.--In the case of a disposition of a 
     building or an interest therein, the taxpayer shall be 
     discharged from liability for any additional tax under this 
     subsection by reason of such disposition if it is reasonably 
     expected that such building will continue to be operated as a 
     qualified low-income building for the remaining compliance 
     period with respect to such building.
       ``(B) Statute of limitations.--
       ``(i) Extension of period.--The period for assessing a 
     deficiency attributable to the application of subparagraph 
     (A) with respect to a building (or interest therein) during 
     the compliance period with respect to such building shall not 
     expire before the expiration of 3 years after the end of such 
     compliance period.
       ``(ii) Assessment.--Such deficiency may be assessed before 
     the expiration of the 3-year period referred to in clause (i) 
     notwithstanding the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.''.
       (b) Information Reporting.--
       (1) In general.--Subpart B of part III of subchapter A of 
     chapter 61 of such Code (relating to information concerning 
     transactions with other persons) is amended by inserting 
     after section 6050T the following new section:

     ``SEC. 6050U. RETURNS RELATING TO PAYMENT OF LOW-INCOME 
                   HOUSING CREDIT REPAYMENT AMOUNT.

       ``(a) Requirement of Reporting.--Every person who, at any 
     time during the taxable year, is an owner of a building (or 
     an interest therein)--
       ``(1) which is in the compliance period at any time during 
     such year, and
       ``(2) with respect to which recapture is required by 
     section 42(j)

     ,shall, at such time as the Secretary may prescribe, make the 
     return described in subsection (b).
       ``(b) Form and Manner of Returns.--A return is described in 
     this subsection if such return--
       ``(1) is in such form as the Secretary may prescribe, and
       ``(2) contains--
       ``(A) the name, address, and TIN of each person who, with 
     respect to such building or interest, was formerly an 
     investor in such owner at any time during the compliance 
     period,
       ``(B) the amount (if any) of any credit recapture amount 
     required under section 42(j), and
       ``(C) such other information as the Secretary may 
     prescribe.
       ``(c) Statements to Be Furnished to Persons With Respect to 
     Whom Information Is Required.--Every person required to make 
     a return under subsection (a) shall furnish to each person 
     whose name is required to be set forth in such return a 
     written statement showing--
       ``(1) the name and address of the person required to make 
     such return and the phone number of the information contact 
     for such person, and
       ``(2) the information required to be shown on the return 
     with respect to such person.

     The written statement required under the preceding sentence 
     shall be furnished on or before March 31 of the year 
     following the calendar year for which the return under 
     subsection (a) is required to be made.
       ``(d) Compliance Period.--For purposes of this section, the 
     term `compliance period'

[[Page S8477]]

     has the meaning given such term by section 42(i).''.
       (2) Assessable penalties.--
       (A) Subparagraph (B) of section 6724(d)(1) of such Code 
     (relating to definitions) is amended by redesignating clauses 
     (xii) through (xviii) as clauses (xiii) through (xix), 
     respectively, and by inserting after clause (xi) the 
     following new clause:
       ``(xii) section 6050U (relating to returns relating to 
     payment of low-income housing credit repayment amount),''.
       (B) Paragraph (2) of section 6724(d) of such Code is 
     amended by striking ``or'' at the end of subparagraph (AA), 
     by striking the period at the end of subparagraph (BB) and 
     inserting ``, or'', and by adding after subparagraph (BB) the 
     following new subparagraph:
       ``(CC) section 6050U (relating to returns relating to 
     payment of low-income housing credit repayment amount).''.
       (C) Clerical amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 of such Code is 
     amended by inserting after the item relating to section 6050S 
     the following new item:

``Sec. 6050U. Returns relating to payment of low-income housing credit 
              repayment amount.''.

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply with respect to any liability for the credit recapture 
     amount under section 42(j) of the Internal Revenue Code of 
     1986 that arises after the date of the enactment of this Act.
       (2) Special rule for low-income housing buildings sold 
     before date of enactment of this act.--In the case of a 
     building disposed of before the date of the enactment of this 
     Act with respect to which the taxpayer posted a bond (or 
     alternative form of security) under section 42(j) of the 
     Internal Revenue Code of 1986 (as in effect before the 
     enactment of this Act), the taxpayer may elect (by notifying 
     the Secretary of the Treasury in writing)--
       (A) to cease to be subject to the bond requirements under 
     section 42(j)(6) of such Code (as in effect before the 
     enactment of this Act), and
       (B) to be subject to the requirements of section 42(j) of 
     such Code (as amended by this Act).
                                  ____

                                                February 17, 2004.
     Hon. William M. Thomas,
      Chairman, House Committee on Ways and Means, Washington, DC.
       Dear Chairman Thomas: We are writing in support of H.R. 
     3610, legislation introduced by Representatives Amo Houghton, 
     Nancy Johnson, Charles Rangel, and Richard Neal, to repeal 
     the recapture bond rules under section 42(j) of the Low-
     Income Housing Tax Credit program. We believe that repeal of 
     the recapture bond rules will remove an unnecessary 
     impediment to the transferability of housing credit 
     investments, thereby increasing the overall efficiency of the 
     LIHTC program and ensuring that more private resources wind 
     up in the production of affordable housing in return for 
     federal housing credits.
       Our organizations play an active role in support of 
     affordable housing policies. We represent builders, owners, 
     investors, credit agencies, nonprofit housing groups, and 
     capital aggregators, all with extensive experience with the 
     housing credit program. The housing credit program has been a 
     remarkably successful federal initiative that has delivered 
     affordable housing to over a million low and moderate-income 
     households. The program has operated very successfully and 
     has been an efficient means of delivering federal support. 
     But one notable exception that has been of concern to the 
     industry for many years has been the requirement that when an 
     investor disposes of an interest in housing credit property, 
     a recapture bond must be purchased to guarantee payment to 
     the Treasury of any potential recapture tax liability.
       We believe this requirement impedes the transferability of 
     credits, reduces investor demand for housing credits, and 
     causes yields to be higher than necessary, which means that 
     fewer federal resources wind up in housing credit properties. 
     More importantly, this requirement imposes a significant and 
     unnecessary cost on the program. While tens of millions of 
     dollars have been expended on recapture bond premiums, the 
     IRS has never collected on a recapture bond in the 17-year 
     history of the LIHTC. Furthermore, we believe there is no 
     public policy rationale for such bonds. The housing credit 
     market is made up almost exclusively of large corporate 
     investors who pose no risk to the Treasury that they will 
     ignore their responsibility to pay a potential recapture tax 
     liability. Indeed, there is no other provision in the 
     Internal Revenue Code that requires taxpayers to post a bond 
     to ensure payment of a potential tax liability. Moreover, 
     noncompliance in the housing credit program is very small. In 
     a recent letter to Reps. Houghton and Johnson, the Internal 
     Revenue Service points out that the typical means of 
     ownership through investment partnerships ``minimizes the 
     risk of recapture from any one project.'' In that letter, 
     the Service goes on to say that ``supporting the bond/
     security process is administratively difficult.''
       H.R. 3610 will correct this situation by removing the 
     requirement that a recapture bond be purchased when there is 
     a disposition of interests in LIHTC properties. The 
     legislation replaces this unnecessary and expensive 
     requirement with two new provisions that will improve the 
     ability of the Treasury to collect potential recapture tax 
     liability. First, investors who dispose of an interest in 
     housing credit property would automatically be subject to a 
     longer statute of limitations for any potential recapture tax 
     liability that is identified in the future in connection with 
     their ownership of housing credits. Second, improved 
     information reporting would be required whereby the owner of 
     housing credit property would be required to notify former 
     investors and the IRS of any recapture liability that arises 
     in connection with the period that the former investor owned 
     an interest in the property.
       We believe these changes will improve the administration of 
     the housing credit program, better protect the interests of 
     the Treasury, and result in more private dollars going into 
     the development of affordable housing.
       National Housing Conference; National Association of Home 
     Builders; Affordable Housing Investors Council; National 
     Multi Housing Council; National Leased Housing Association; 
     National Association of Affordable Housing Lenders; National 
     Association of State and Local Equity Funds; Affordable 
     Housing Tax Credit Coalition; Local Initiatives Support 
     Corporation/National Equity Fund; The Enterprise Foundation/ 
     Enterprise Social Investment Corporation; Council for 
     Affordable and Rural Housing; National Association of Local 
     Housing Finance Agencies.
                                 ______