Remarks by:
Richard Michael Price, Esq.
Counsel to CARH
Nixon Peabody LLP
202.585.8716
www.nixonpeabody.com
THE TAX MIASMA
I’m sitting here thinking: Ray talked about money, and money is a good thing. Jeff Eckland is going to talk about damages. Damages are money, and money is a good thing. The only thing I really have to talk about is a swirling vortex of Tax miasma. So I’m the depressing part of the panel.
I was trying a couple of weeks ago to think what I wanted to talk about. There have been a couple of cases out there in the country on Fair Housing and whatnot which are important. There have been some evolutionary things in Tax Credits about casualty loss. But there wasn’t anything scintillating.
Then President Bush gave me something to talk about which is fairly scintillating. He proposed a $674 billion tax cut as a way to get the economy moving a bit more quickly. The centerpiece of that is the end to what is sometimes referred to as the end of double taxation of corporations.
Law of Unintended ConsequencesIf we have time I’ll explain why I don’t think there is such a thing as double taxation on corporations per se, but that’s fair enough. That’s where he’s focussed. The problem with this, and the underscored point, is that the corporations at issue would first have to pay taxes at the corporate tax rate, which tends to be lower than the individual tax rate. If they pay taxes and if they pay dividends, then the dividends received by shareholders would be tax-free. That is the proposal that is presently contemplated.
Our industry, the development wing of our industry, is based in large part on Low Income Housing Tax Credits and Tax-exempt Bonds. The premise to the Tax Credits and Bond buyers is that corporations want to shelter income. Well, if you propose a plan that basically incentivizes corporations to pay taxes, they’re not going to want to shelter any income. Kind of just takes all the impetus out of buying Tax Credits. That’s bad.
Industry ConcernAn industry letter is being circulated, and CARH is signing on. It is being promoted by the National Council of State Housing Agencies.
Now, of course you can’t really change this proposal. The whole idea is to cut these taxes through ending this so-called double taxation. So you are either in on this proposal or against it. It is important, I think, that we oppose it and that folks in our industry are against it.
Now, there are a couple of things about this. It’s not just bad for affordable housing, it’s bad for all real estate. Basically it puts real estate in general (partnerships, REITs) on the same footing financially, the same tax footing, as corporations. Corporations are fictional entities, but are citizens, and they have a life span that is indefinite. If you have a small corporation and you want to avoid this tax burden, you form a Subchapter S corporation — the vehicle is already there. We’re talking about large corporations such as Microsoft, Ford, GE.
It would also hurt the tax-exempt bond market because people buy tax-exempt bonds because of the tax exemption on the interest. So now folks in the tax-exempt bond market will be competing against tax-exempt dividends. So you have competition between two vehicles.
Retirement AccountsIn the larger sense this is not a terribly swift idea for most of the people in this room. For example, if you have money in an IRA or 401K, and this proposal goes through, the tax-exempt status of that dividend would flow through to the IRA, but it wouldn’t flow through when you took money out of the IRA or 401K plan, by and large. The one exception is the Roth IRA, which has a different tax structure.
A lot of us in Washington are trying to figure out what the real benefit of this is. To offset this, there have been a few comments in the press — thoughts by people outside the real estate industry — by a lot of folks who have noted that only a third of corporate income is taxed. Corporate tax rates hover around 15%, even though the highest corporate tax rate is around 35%. The only good news is there may not be so much income there to shelter through the tax-exempt dividend. But if it does work out the way it is projected, it’s going to make up most of the $674 billion, close to $400 billion worth, of this tax cut. It can be rather significant.
New Market Tax Credits are in the same kind of situation. An article in the Wall Street Journal noted that folks in the tax shelter business, in all different kinds of Tax Credits, are going to likely come out against this amendment. That’s happening — not just Housing. It’s the whole vehicle that comes into question.
Of course, it’s not to say it gets rid of Tax Credits or tax shelters. There has been speculation that, should this proposal pass, an excellent way to shelter income would be to come up with some kind of virtual ownership of stock for some short period of time, and thereby gain the benefits of having tax-exempt income. That is, take a slice of the dividend payment even though you won’t own the share of stock for more than a few minutes. The tax professionals are going to be very busy with this, but it’s just not going to be real-estate focussed.
I think one of the things to take away from this talk is that it is important to contact your Congressional delegations to support the effort. This is a bread-and-butter issue, not a “for taxes” or “opposed to taxes” sort of issue. This is about an issue that is disproportionately burdensome to our sector of the economy.
On some of the more mundane topics, there is right now a sort of struggle on the Low Income Housing Tax Credit. I want to go from the big picture issue down to more typical things.
I’m going to do that because I honestly don’t expect this tax proposal to pass. It’s been pilloried by commentators on the left and on the right and in the center. A lot of people have a lot of angst about it. It’s important to keep all that in mind, and then move on from there.
LIHTC IssuesMoving on from there you have the day-to-day issues of the Low Income Housing Tax Credit. Over the past couple of years we’ve talked about the TAMMs and so forth, and most recently two pieces of guidance which have come out about the LIHTC. The first is having to do with combining Vouchers with Tax Credit projects. There was a recent Notice which said, helpfully, when combining Vouchers with Tax Credits, instead of rents you look at comparable unassisted rents, meaning non-Tax Credit unit rents. This is not terribly earth-shattering to the folks in this room, but it is the type of clarification that has been needed because some of the HUD staff have gotten confused.
Casualty LossOn a somewhat less positive note, the IRS Office of General Counsel came out with a memorandum a couple of months ago on casualty loss. Basically, the guidance from staff has been, up until now, that if you repair a unit that has suffered casualty loss, and do it in a reasonable amount of time, then you remain in compliance — a reasonable amount of time being two years. Well, the IRS memorandum said two years is fine, but during that repair period you: (1) could not claim the credit, and (2) the HFA at issue would have to issue an 8823 showing, essentially, noncompliance. So this is something the folks in Washington went back and talked to a couple of members of Congress about. Congresswoman Johnson and Congressman Rangel have written a letter to the IRS asking that it reconsider that position. We believe the position is wrong. We believe, much as with the TAMMs, that it is going to start getting reversed, but it hasn’t happened yet.
The big excitement on the tax side is the New Market Tax Credit. In the last few months there have been issuances from the IRS that you can combine the New Market Tax Credit with the Historic Tax Credit, and, just this past week, that you can leverage the New Market Tax Credit. I could spend a lot of time talking about the New Market Tax Credit, but I’ll let the panel talk about it. That’s sort of where a lot of development focus should be.
Mold LitigationThere are a couple of deals out there and a couple of lawsuits that I think are worth noting. First I’m going to talk about a couple of lawsuits. One is Allison v. Fire Insurance Exchange, which is a mold lawsuit in Texas. There is a real mold scare. By some counts, 10,000 lawsuits about potential damages related to mold have been filed. I’m one of those folks that understands that these lawsuits exist, but I’m skeptical about the cause of action and the ability to recover. Thankfully, at least one Texas Appeals case has now turned around and reversed a $33 million judgment. So we’re starting to get a little bit of push-back. I think it’s important to note because mold has been a bit of a scare out there, but I think it’s something that is more a scare than a real threat.
Fair Housing CaseAlso, the Supreme Court just decided a case in the Fair Housing area, Meyer v. Holley (available at supremecourtus.gov). That’s worth noting because it demonstrates that in renting — or, in this case, selling — a piece of property, the Fair Housing Act makes the employee’s discriminatory act the employer’s responsibility. That’s a pretty basic concept. It establishes a vicarious responsibility, but also puts a limit on it. So the company would be liable, but in this case the president of the company was sued personally. The Supreme Court ruled the company president is not personally liable. This is a development in that field.
On the Deals side, there have been a couple of trends that really show the same characteristic: combining Tax Credits with Section 514 Labor Housing, and using Tax Credits for specific purposes, such as art-centered housing as part of an art center.
Available to PublicWhat we’re starting to see — and this is the segue from Fair Housing — is an interpretation that in determining that a unit is generally available to the public, we take a look at the Federal and state programs at issue, and we also take a look at whether or not the program limitations involve the Fair Housing Act, assuming it comports with the Fair Housing Act requirements as defined by the HUD Handbook 4350.3 and the HUD Office of Fair Housing.
We’re getting developers and syndicators who are now more willing to look at special uses — farm workers, artists, etc. That is opening up a lot of interesting opportunities for special purpose developments that use housing as part of the special purpose sort of development.
And that, as they say, is that.
Thank you.
Next: The Progress of the Litigation