![The Affordable Housing Tax Credit Coalition [main graphic] A group of developers, syndicators, lenders, nonprofit groups, public agencies, and others concerned with the low-income housing tax credit.](/images/feature_graphics/feature9.jpg?1216325379)
February 15, 2002
By: Richard S. Goldstein
The Internal Revenue Service today released Revenue Ruling 2002-9, in which it held that "impact fees" imposed by state or local governments on the development or expansion of residential rental property are capitalized costs includable in the depreciable basis of the building(s) and, in the case of housing qualified under the Low-Income Housing Tax Credit ("Tax Credit") program, in the eligible basis of the building(s). This ruling is a complete reversal of the position taken in 2000 by the IRS in a series of Technical Advice Memoranda, in which it had held such fees were intangible costs not includable in basis, a position which had been widely criticized in the multifamily and affordable housing industries.
The ruling defined impact fees as one-time charges that are imposed by a state or local government against new developments or expansion of existing developments to finance specific off-site capital improvements for general public use that are necessitated by the developments, which fees are generally refundable if the developments are not constructed. It cited as examples, fees for schools, law enforcement and fire protection facilities in order to compensate the local government for the financial impact of the new or expanded building(s).
The Service cited Oriole Homes Corp. v. U.S., a 1989 Federal District Court case, in holding that the impact fees were capitalizable to the property produced under Internal Revenue Code Section 263(a). Moreover, the Service also held that the impact fees are indirect costs associated with the development under Code Section 263A, citing the 1995 Tax Court case, Von-Lusk v. Commissioner, in which the Court held that such costs are "as much a part of a development project as digging a foundation or completing a structure's frame".
Significantly, the Service held that such fees are entirely allocable to the building(s) in question and not to both buildings and land.
The IRS then went on to state that any change in a taxpayer's treatment of impact fees in order to conform with the Revenue Ruling would amount to a change in method of accounting for which certain procedures must be followed. Nixon Peabody attorneys would be happy to help you with these procedures. The Ruling also stated that if a taxpayer changed its method of accounting for impact fees to conform to the Ruling, the treatment of impact fees would not be raised as an audit issue in any year before the year in which such change occurred. Moreover, if a taxpayer changed its treatment of impact fees in this manner, the IRS made clear that it would not further pursue any challenges already made on audit. In other words, this Ruling appears to be completely retroactive, provided the taxpayer follows the change in method of accounting procedures.
Although this is a significant and positive development for the multifamily and affordable housing industries, a couple of caveats are in order, particularly with respect to the developers utilizing the Tax Credit program. A developer wishing to satisfy the ten percent carryover allocation test under Section 42 must include any impact fees in the calculation of reasonably anticipated basis. Thus, the "target" amount against which the ten percent test must be measured would increase to the extent of any impact fees; of course, any impact fees that are incurred prior to the time required to meet the ten percent test could be included in the taxpayer's carryover allocation basis.
In addition, developers who utilize private activity tax-exempt bond financing with the Tax Credit program should be aware that any impact fees will similarly be included in the "aggregate basis" calculation against which the "50 percent test" will be measured. A developer hoping to obtain Tax Credits by financing a project with such tax-exempt bonds must be sure that the bond proceeds utilized to finance land and buildings is more than 50 percent of the aggregate basis of the project's land and buildings. Impact fees will be includable in the basis of the building(s) and thus, the 50 percent test must be met by taking those fees into account. Developers of projects which have been moving forward assuming that impact fees were not includable should review their numbers to make sure that the 50 percent test can be satisfied under this new Ruling.
If you have any questions or comments about this matter, please feel free to contact Richard Goldstein at (202) 585-8730 or at rgoldstein@nixonpeabody.com, or any other member of the Nixon Peabody Syndication Practice Group (the members of this Practice Group can be identified under the Attorneys listing on our website at www.nixonpeabody.com).
