A bipartisan group of senators are requesting written U.S. Treasury guidance clarifying that the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, are not Tax-Exempt Controlled Entities (TECE) under Code Sec. 168(h)(6)(F)(i).
In a June 23 letter to Treasury Secretary Janet Yellen, the lawmakers stated that recently, tax counsel for some Low-Income Housing Tax Credit (LIHTC) investors have questioned whether the Federal Housing Finance Agency’s conservatorship of Fannie Mae and Freddie Mac, and the Treasury Department’s senior preferred stock and stock warrants in the GSEs, make them tax-exempt controlled entities.
“It’s imperative for Treasury to issue guidance as uncertainty about the tax status of the GSEs is having a negative impact on their ability to invest in multi-investor LIHTC funds and to fulfill their statutory Duty to Serve requirements in underserved rural areas,” wrote the senators.
According to the Housing Assistance Council, over 5.6 million—or one quarter of rural households—pay more than 30% of their monthly income toward housing costs and are considered cost burdened. The Fannie and Freddie are significant LIHTC investors in rural areas because of their statutory Duty to Serve requirements and the limited number of banks incentivized by the Community Reinvestment Act.
The lawmakers told Yellen that it should also be noted that clarifying that the GSEs are not tax-exempt controlled entities is not only vital to the continued creation of affordable housing for working families, it would also reflect the will of Congress and comport with federal law. However, because Treasury, a tax-exempt entity, could be treated as holding more than 50% of the value of each GSE’s stock, the issue is being raised by stakeholders whether the GSEs are tax-exempt controlled entities, they wrote.
“We believe the GSEs should not be considered TECEs because the tax-exempt controlled entity rule was designed to deal with lease and partnership relationships between taxable entities and tax-exempt entities that could be structured to give the tax-exempt entity the benefit of tax incentives even though they are not taxpayers; a situation that is not at all relevant to the GSEs investment in LIHTC partnerships,” wrote the lawmakers.
While most of the concern focused on leasing transactions, Congress was also concerned that taxable and tax-exempt entities might attempt to avoid the restrictions using partnerships that would use disproportionate allocations of items of income and loss to achieve the same result. Consequently, Congress enacted what is now Code Sec. 168(h)(6)(A), which treats an amount equal to the tax-exempt partner’s proportionate share of the partnership’s property as tax-exempt use property.
“While we are confident that the GSEs should not be treated as tax-exempt controlled entities, we understand that tax counsel for LIHTC investors may be concerned about a negative determination from the IRS,” the senators wrote. “In addition, we understand that the GSEs are limiting their participation in LIHTC projects that also involve historic rehabilitation credits due to the TECE issue. As a result, we request that you issue clarifying guidance that the GSEs are not subject to the TECE rule for purposes of LIHTC partnerships.
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