WASHINGTON - The Internal Revenue Service will modify the controversial low-income housing safe harbor standard it published in January for organizations seeking tax-exempt status, an agency official said.
"I would expect that you'll be seeing a different approach towards the low-income housing safe harbor," Debra J. Kawecki, assistant branch chief for the technical section of the IRS' exempt organizations branch, said at a Government Finance Officers Association seminar here Monday.
Under the safe harbor standard, which the IRS published in Notice 93-1, an organization building or acquiring housing would qualify for tax-exempt status if at least 75% of the units were made available to families earning 60% or less of an area's median income. The remaining 25% of the units would have to be set aside for "persons at the lower end of the economic spectrum."
The Resolution Trust Corp. and housing groups have complained to the IRS, in written comments, that the safe harbor standard is more restrictive than low-income housing requirements in the tax law and federal housing programs.
In a speech about the new tax-exempt bond enforcement program, Kawecki cited the safe harbor standard as an example of how the exempt organizations branch seeks, and is responsive to, public comments on the guidance that it publishes.
Kawecki did not say how or when the low-income housing safe harbor guideline would be modified.
But another IRS official said yesterday that while no decision has been made yet, agency officials are considering either eliminating or easing the restrictions on the number of low-income housing units in a project and the limits on the income levels of the individuals to which the units must be made available.
The IRS official, who did not want to be identified, said one proposal under consideration is to refocus the safe harbor on a community benefit standard so that a housing organization that benefits the local community by acquiring low-income housing could qualify for tax-exempt status.
Another proposal, he said, is to ease restrictions on the number of low-income units and the limits on low-income levels so they are more in line with some of the federal housing programs.
Kawecki told those attending the GFOA seminar that IRS officials had thought the low-income housing safe harbor standard "was a liberalization," and would be "something that everybody was going to like" when it was first proposed. The IRS sent the safe harbor standard to its agents in October 1992.
But "we realized we were working in a vacuum," she said, after the safe harbor standard was published in January 1993 and the IRS began receiving complaints from housing groups and the Resolution Trust Corp. that it would hurt federal housing programs and the organizations trying to become involved in them.
IRS officials had maintained that the safe harbor was only intended to be a test that agents could apply in determining whether an organization would qualify for tax-exempt status.
But several housing groups reported that IRS agents were using it as a requirement for organizations seeking tax-exempt status.
The housing groups said the safe harbor is tougher than tax law provisions that allow tax-exempt bonds to be used to finance new residential rental projects that provide either 20% of the units to persons at or below 50% of area median income, or 40% of the units to persons at or below 60% of area median income.
They also complained that the safe harbor is more restrictive than an RTC program designed to encourage nonprofit organizations to buy and maintain properties acquired by the RTC that have low-income housing.
The RTC program requirements for such projects are that 20% of the units be made available to individuals with incomes below 50% of the area's median income level. Another 15% of the units would have to be made available to persons with incomes below 80% of area median income.
Kawecki said the comments "were looked at very carefully" by IRS officials, and that as a result of the complaints, the agency officials "realized that perhaps this needed a relook."