Over the weekend, the Internal Revenue Service (the “IRS”) released Private Letter Ruling 200916007 (the “PLR”), confirming that certain infrastructure costs (so called offsites) associated with the construction and development of a low-income housing project are includable within eligible basis under Section 42 of the Internal Revenue Code (the “Code”).
The PLR marks the IRS’ continued slow retreat from the “terrible TAMs” of nearly a decade ago. In that prior line of Technical Advice Memoranda (“TAMs”), the IRS very narrowly construed the nature of ancillary development costs includable within eligible basis (see, e.g., TAM 200043016 (October 27, 2000)). Those TAMs were widely criticized as being inconsistent with the capitalization concepts of Code Section 263A, which provides, in relevant part, that direct costs and properly allocable portions of indirect costs of “producing” real or tangible personal property must be capitalized to the property produced. The IRS withdrew those TAMs several years later and started to apply a 263A analysis in later rulings (see, e.g., Rev. Rul. 2002-9). Still, the IRS’ rather nebulous approach regarding which costs are allocable to a building resulted in some tax credit investors taking at times conservative, and inconsistent, positions about what infrastructure costs could be included in eligible basis.
In this most recent PLR, the IRS applied a 263A analysis to find that a wide variety of infrastructure costs are properly designated as eligible basis items for purposes of Section 42(d)(1) of the Code. Under the specific fact pattern presented in this PLR, those infrastructure costs include the construction of two-lane streets and curbs (to serve residential buildings nearly two football fields’ distance from the closest main arterials), sidewalks, storm water drainage, water in-flow, and underground utilities and casings, all of which were required to be publicly dedicated to the city upon completion. Technically, these costs qualify as dedicated improvements under Treasury Regulation 1.263(a)-(4)(d)(8)(iv).
This PLR provides greater certainty for new projects, as well as existing projects whose rehabilitation activities affect offsite property. The ruling should ease tax credit investor concerns regarding inclusion of offsites in eligible basis and add greater predictability to the credit calculation process. Further, the broad nature of the IRS’ 263(A) analysis in this PLR raises many planning opportunities. The PLR suggests that many other infrastructure costs (e.g., parks, other publicly dedicated structures, etc.) could also qualify as eligible basis costs. Because infrastructure costs can be such a substantial cost, this PLR also raises the question whether developers should consider the possibility of modifying the eligible basis positions taken on prior cost certifications in order to maximize tax credit equity.
We have provided a link to the PLR 200916007 (PDF) for your review.
If you have any questions concerning this Alert, please do not hesitate to contact Steve Ryan at (415) 262-5150 or at firstname.lastname@example.org