Protecting the tax-exempt status of housing developers participating in low-income housing tax credit partnerships

The Low-Income Housing Tax Credit (LIHTC) is an important source of federal funding for developers of affordable housing for low-income persons. Although for-profit and nonprofit developers compete for credits, the federal government reserves ten percent of the credits for nonprofit, tax-exempt developers. Exempt developers often sell the credits to for-profit investors, forming a partnership through which the exempt organization develops the housing and the investors receive tax benefits in exchange for capital contributions. The partnership formation, however, may jeopardize the tax-exempt status of the nonprofit organizations and result in the partnership losing the LIHTC. To maintain exempt status, the Internal Revenue Code requires that organizations be organized and operated to promote a charitable purpose and that no net earnings inure to private individuals. A combination of binding and non-binding authority provides confusing guidelines for exempt organizations seeking to protect their exempt status. This Comment examines the federal requirements for the award of LIHTC and traces the development and application of a two-prong test used by the Internal Revenue Service to determine whether partnership structures jeopardize exempt status. This Comment argues that exempt developers in LIHTC partnerships need binding authority that details the level of control of partnership activities the exempt organization must retain, provides an exception for certain partnership guarantees by exempt organizations that are standard within the development industry, and allows investors to receive private benefits to a greater degree without jeopardizing the organization's exempt status.