WASHINGTON -- A U.S. tax court judge has ruled against a proposal that would have allowed New York City to use a greater portion of its bond proceeds for housing loans without violating the tax law's limit on lending proceeds to private individuals.
Judge Lapsley W. Hamblen on Tuesday denied New York's appeal of a 1992 Internal Revenue Service ruling, saying that to approve the city's proposal "would undermine the specific choices Congress made in deciding which loans that benefit both private and public purposes should be eligible for tax-exempt status."
But in issuing the ruling, Hamblen said that the city was well-intentioned in its proposal and noted that Congress could ease the private-loan limit to enable the city to more effectively use bond proceeds for its housing programs.
"We recognize that the proposed transactions were designed to alleviate significant public problems faced by the city," Hamblen said in his ruling.
"We emphasize that our decision is not intended as a rebuke of the city's efforts to address these important issues and is not based on the underlying merits of the [city's housing] programs," Hamblen said. "Congress, if it desires to do so, has the power" to change the private-loan restriction, he said.
New York has not yet decided whether to appeal the ruling, said James Kaplan, special tax counsel for the city. He said that city officials were disappointed with the judge's decision, but plan to "redouble our efforts to seek legislative changes" to liberalize the private loan limit.
At issue is the federal tax law provision that limits the amount of proceeds from a public-purpose bond that can be used to finance private loans to the lesser of 5% or $5 million per issue. For New York City, which issues hundreds of millions of dollars of general obligation bonds each quarter, the rule effectively limits private loans to $5 million.
The city has long contended that the rule severely curbs the amount of GOs that it can use for its housing loan programs. The programs offer heavily subsidized loans and other financial aid to private developers to foster the construction and rehabilitation of low-income housing.
Several years ago the city asked the IRS for a private letter-ruling covering two matters in conjunction with the housing programs. First, the city asked the IRS to clarify that mortgage subsidy payments made by the city under some of the programs could be classified as grants, not loans, and thus exempt from the private-loan limit. The IRS agreed, issuing a favorable ruling in 1991.
But in 1992 the IRS denied the second pan of the city's request: permission to take the time value of money into account on its housing loans. The city proposed that it be allowed to discount the loans at their present value to allow for the fact that low interest rates on the loans would not permit the city to recover its full interest costs. Discounting the loans would thus allow the city to offer a larger amount of loans but still remain under the $5 million limit.
The city appealed to the tax court, which heard the case last February.
Lawyers for the city argued that the amount the city cannot recover because of the interest-rate differential should be considered a grant, which would not count against the $5 million limitation.
But Hamblen disagreed, saying that the fact that the loans "carry a beneficial rate of interest does not, in our opinion, prevent the [loans] from being loans under the common definition of the term."
The city's lawyers also said that because the concept of the time value of money is used in other areas of the law, it can be argued that Congress intended the concept to apply to the private loan restriction as well.
But Hamblen said he believed the opposite to be true. The existence of other statutes in which the time value of money is taken into account illustrates "that Congress knows how to incorporate time value of money concepts into a statute when it so desires, Hamblen said.
"Had Congress chosen to apply these concepts to [the private loan restriction], it is reasonable to assume that it would have explicitly included them in the statutory language," Hamblen said.