WASHINGTON - The Internal Revenue Service's standard on low-income housing will contradict federal housing policies and be far more restrictive than the housing standards set forth by tax and housing laws even if it is revised, lawyers told an IRS official Friday.
The lawyers attacked the safe harbor standard at a housing conference here after Lynn Kawecki, an IRS official, described the standard and IRS staff proposals for expanding it.
The safe harbor standard, which the IRS published in Notice 93-1 in January 1993, says that an organization building or acquiring housing qualifies for tax-exempt status if at least 75% of the units are rented to families earning 60% or less of an area's median income. The remaining 25% of the units must be set aside for "persons at the lower end of the economic spectrum."
Kawecki stressed at the conference that the standard is a safe harbor, not a requirement, and is intended to assure a housing organization that if it meets these low-income limits, it will be "relieving the poor and distressed" - one of several charitable goals through which an organization can qualify for tax-exempt status.
Kawecki conceded bond lawyers and housing experts have complained the standard is too restrictive. But the IRS staff does not want to withdraw it because "it serves many organizations very well," he said.
Instead, IRS staff officials have proposed the IRS provide housing organizations with an alternative safe harbor under which they would qualify for tax-exempt status if at least 20% of their units are rented to individuals earning 50% or less of an area's median income or at least 40% of their units are rented to individuals earnings 60% or less of area's median income. The remaining units would have to be rented to individuals earning 80% or less of area median income.
Kawecki said that for organizations that cannot meet these standards, the IRS would take into account other "facts and circumstances" that demonstrate evidence of a charitable purpose. These might include that the organization provides community services or has a community-based board, he said.
But bond lawyers and housing experts at the conference said neither the safe harbor standard nor the proposed alternative would be acceptable.
Wayne Neveu, a lawyer with Foley and Judell in New Orleans, who was moderating the panel session, charges the IRS standard is creating the conditions "for disaster" and running afoul of federal housing policies by concentrating low-income individuals in housing developments.
Department of Housing and Urban Development officials and others at the conference made clear that federal policy is aimed at developing mixed-income housing, Neveu said. Housing experts contend that concentrating low-income individuals in housing creates ghettos and trouble-ridden areas developments.
Diane Dorius, an official with the Federal Housing Finance Board who formerly was counsel to the House Banking Committee's housing sub-committee, said that Congress, in enacting affordable housing programs, never intended for nonprofit organizations to meet such strict low-income housing limits.
She recommended that lawyers attending the conference let their members of Congress know what the IRS is doing. The lawyers should also try to educate the IRS about housing policies and standards, she said.
Howard Zucker, a lawyer with Hawkins, Delafield & Wood in New York, said later that Congress had rejected such strict low-income housing limits for tax-exempt bond financing several years ago. Zucker is in charge of writing an American Bar Association project report on the inconsistencies in federal housing laws and regulations.
Meanwhile, Debra Kawecki, another IRS official on the panel who described the IRS' new bond enforcement program, said the IRS is not happy that some of its field agents are auditing the bonds of state and local issuers who apply for refunds of arbitrage payments.
Kawecki said the agents were assigned the task of processing claims for refunds but that some have been overzealous and begun full-blown audits of the bond issues for which refunds are being sought.
"That was not the intent of the program," she said, "We're going to correct that situation."
Kawecki said IRS agents were asked to audit bond issues that were either the source of complaint or fell under certain targeted areas of concern.
