In the midst of the economic downturn in 2009, federal legislation was enacted to increase the attractiveness of low-income housing projects to potential investors. Although low-income housing tax credits had been available at this time, many potential investors had been facing reduced or no taxable income to offset with such credits, due to the state of the economy. Therefore, the legislation required that the Treasury Department provide the housing credit agency of each state with a grant based on that particular state’s population. Each state, in turn, is to provide “subawards” to low-income housing developers, which is in addition to the low-income housing tax credit.
In recent months, the Internal Revenue Service has issued a private letter ruling that ruled on certain tax effects, on both an S corporation and its shareholders, of a partnership owned in part by the S corporation that receives a “subaward” under the low-income housing grant program. The private letter ruling cites Notice 2010-18 which provides that “subawards” for low-income housing are excluded from gross income, and are therefore tax-exempt to recipients. In addition, Notice 2010-18 states that these “subawards” do not otherwise reduce the depreciable or eligible basis of the building, and are permanently excludible from gross income. The private letter ruling ultimately concluded that an S Corporation would not include the “subaward” in its accumulated adjustments account (AAA), since such accounts do not include tax-exempt income; it also concluded that an S Corporation’s shareholders may increase their basis in their respective shares of the S Corporation to the extent that the shareholders are allocated tax-exempt income from the “subaward.”
W&G Observation: Although private letter rulings are not to be used or cited as precedent, they provide guidance on the IRS’s current position on the tax issue. This favorable guidance is welcome news to S corporation investors in entities in receipt of these “subawards”.