LIHTC Nonprofit Set aside: Material Participation Anne Powell Staff Attorney January 18, 2018
• It is important that you consult with your legal counsel to ensure that your project meets the requirements of Sections 42 and 469 of the Internal Revenue Code (“IRC”). MHDC does not represent or warranty that the resources provided are current or accurate, only that they represent authority and information available from the Department of Treasury, Internal Revenue Service. At no time does MHDC certify your compliance with Sections 42 and 469, through this presentation of information or otherwise, and MHDC assumes no responsibility or liability for your failure to comply with Sections 42, 469 and LIHTC requirements.
Background: • Section 42 of the IRC or (the “Code”) requires at least 10% of the federal 9% Credit available must be allocated to developments that involve a “qualified nonprofit organization.”
What is a qualified nonprofit? Section 42(h)(5)(C) of the Code defines a qualified nonprofit organization as: a. A 501(c)(3) or (c)(4) nonprofit organization; b. Having an express purpose of fostering low-income housing; c. One that will own an interest in the development and materially participate in the development and operation of the development throughout the Compliance Period ; and d. Is not affiliated with, nor controlled by, a for-profit organization.
Material Participation defined • Material participation is defined in §469(h) of the Code as “involve[ment] in the operations of the activity on a basis which is regular, continuous, and substantial. ”
Why is an understanding of Material Participation important? • To be considered for the nonprofit set-aside priority, the following must be included with the MHDC application: ▫ Nonprofit Org’s Certificate of Incorporation ▫ Articles of Incorporation and By-Laws ▫ Missouri Certificate of Good Standing ▫ IRS letter evidencing nonprofit standard ▫ MHDC Nonprofit Questionnaire which describes the organization’s role in detail, including how material participation pursuant to §469(h) of the Code will be met and what share of profits, losses, and fees go to the nonprofit organization. • The failure of a nonprofit set aside to materially participate in a project is a reportable noncompliance event on Department of Treasury, IRS Form 8 8 23 .
Material Participation may be present if Nonprofit:* Has a general partner (GP) or co ‐ GP interest, or managing 1. member interest in LLC; Is involved in day ‐ to ‐ day activities, or on a regular, not sporadic 2. basis; 3. Involved in regular activities throughout the year; and 4. Is onsite regularly; and/ or 5. Hires third party management but pays the management company and management company reports to nonprofit, involving the nonprofit in regular decision making; 6. Is involved more than 500 hours a year; or 7. Is involved more than 100 hours a year and this participation is not less than any other owner. * This analysis uses Treasury regulations for “ individual” and “ corporate” taxpayer m aterial participation as a reference for “ nonprofit” m aterial participation, so the rules should only be review ed for illustrative purposes and not brightline indicators and param eters to use w hen assessing nonprofit’s role. See §1.469-5T IRC §469(h)(4) and Treas. Reg.§1.469-5T(g)(3). The general facts and circum stances test w ithin IRC §469(h)(1) is the test applicable to nonprofit organizations.
Material Participation is not likely to be present, or not present, if Nonprofit:* 1. Only has a limited partner role or investor member role; 2. Participates only sporadically; 3. Only passively consents to decisions by the management; 4. Is involved less than 100 hours a year; 5. Is not onsite regularly; and/ or 6. Third party management is supervised by a for ‐ profit entity. * This analysis uses Treasury regulations for “ individual” and “ corporate” taxpayer m aterial participation as a reference for “ nonprofit” m aterial participation, so the rules should only be review ed for illustrative purposes and not brightline indicators and param eters to use w hen assessing nonprofit’s role. See §1.469-5T IRC §469(h)(4) and Treas. Reg.§1.469-5T(g)(3). The general facts and circum stances test w ithin IRC §469(h)(1) is the test applicable to nonprofit organizations.
Resources • Sections 42 and 469 of the IRC and Treasury Regulation §1.469-5T • MHDC Material Participation Guidance http:/ / www.mhdc.com/ program_compliance/ documents/ Guidance _on_LIHTC_Nonprofit_Material_Participation.pdf
Anne Powell Staff Attorney Missouri Housing Development Commission (314) 877-0967 apowell@mhdc.com
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