IRS Issues Two Documents Regarding LIHTC and Fair Housing

The Internal Revenue Service (IRS) issued Revenue Ruling 2016-29 stating that the IRS Code does not require or encourage state agencies allocating Low Income Housing Tax Credits (LIHTCs) to reject proposals that do not obtain the approval of the locality where a project is proposed to be developed. The IRS also issued Notice 2016-77 stating that LIHTC Qualified Allocation Plans (QAPs) may only give preference to projects in Qualified Census Tracts (QCTs) if there is a “concerted community revitalization plan” containing more components than just the LIHTC project.

Revenue Ruling 2016-29 notes that the IRS Code requires state agencies that allocate tax credits to distribute them according to their QAP, which must contain certain preferences and selection criteria specified in the Code. The Code also requires agencies to notify the chief executive officer of the local jurisdiction where a proposed LIHTC-assisted property is to be located and to provide that individual with a reasonable opportunity to comment on the project.

The Revenue Ruling presents a hypothetical situation in which a QAP requires an agency to reject a LIHTC application if a proposed project does not secure local approval. The Revenue Ruling observes that securing local approval is much more likely if a proposed LIHTC project is to be located in an area with a greater proportion of minority residents and fewer economic opportunities than in higher-opportunity, non-minority areas.

The IRS states that providing the chief executive officer of a locality a reasonable opportunity to comment on a proposed LIHTC project is not the same as requiring the jurisdiction’s approval. The Revenue Ruling states that the Code does not require or encourage LIHTC allocating agencies to bestow veto power over LIHTC projects either to local communities or to local public officials.

In the hypothetical example, the IRS points out that because the LIHTC allocating agency requires (or in other hypothetical situations gives preference to) projects to secure local approval, a pattern is created that allocates tax credits to projects in predominantly lower-income or minority areas, perpetuating residential and economic segregation. This practice, “therefore, has a discriminatory effect based on race,” which is a protected class under the Fair Housing Act of 1968. The Revenue Ruling refers to HUD’s new final regulations regarding the obligation to affirmatively further fair housing (AFFH) under the Fair Housing Act and declares, “AFFH was firmly established federal housing policy when Section 42 (the section of the IRS Code authorizing the LIHTC program) was enacted, and there is no suggestion that Congress intended Section 42 to diverge from that policy.” Therefore, the section of the Code that requires allocating agencies to notify local officials and offer them an opportunity to comment “does not require or even encourage conduct inconsistent with that policy [to affirmatively further fair housing].”

Notice 2016-77 reminds taxpayers that the Code’s provision requiring QAPs to contain three preferences, one of which is for LIHTC projects located in Qualified Census Tracts (QCTs), also requires a LIHTC-assisted property to contribute to a “concerted community revitalization plan.” A QCT is a census tract with a poverty rate of 25% or in which 50% of the households have incomes less than 60% of the area median income (AMI). The other two preferences are for LIHTC projects serving residents with the lowest incomes and for those serving income-eligible residents for the longest period of time.

Notice 2016-77 observes that in some cases LIHTC allocating agencies have given preference to projects located in QCTs without regard to whether the projects contribute to a concerted community revitalization plan. In other cases, because developing new multifamily housing benefits a neighborhood, a LIHTC project without other types of community improvements has been treated as if it alone constituted a concerted community revitalization plan. The IRS states that placing LIHTC projects in QCTs risks exacerbating concentrations of poverty. Therefore, the Code grants a preference to QCT placements only when there is an added benefit to the neighborhood in the form of the project’s contribution to a concerted community revitalization plan.

Notice 2016-77 notes that the U.S. Department of the Treasury and the IRS have not issued guidance defining the term “concerted community revitalization plan,” but states that the QCT preference fails to apply unless a concerted revitalization plan with more components than the LIHTC project itself is in place before the allocation of the tax credits.

Treasury and IRS indicate that they are considering providing guidance and therefore request public comment by February 10, 2017.

The Revenue Ruling 2016-29 is at: Revenue Ruling 2016-29

Notice 2016-77 is at: Notice 2016-77

More information about LIHTC is on pages 5-29 and 7-34 of NLIHC’s 2016 Advocates’ Guide.