SECTION 183 DOES NOT APPLY TO LOW-INCOME HOUSING PROJECT.

Index Nos.: 0183.00-00

May 9, 1985

X will assist Y in rehabilitating a individual housing units within b buildings located in various low-income neighborhoods of the City. The Partnership, described below, will acquire the buildings, many of which are vacant or deteriorated, and renovate them into housing units which will then be leased, with an option to buy, to low-income families.

The Partnership will be organized as a limited partnership under the laws of the State. Its purpose will be to acquire, rehabilitate, and operate the project described below. It will have two general partners: A, a wholly-owned, for-profit subsidiary of X (or a for-profit affiliate of A) and B, a wholly-owned, for-profit subsidiary of Y. It will have one limited partner, C. C will also be a partnership. A (or a for-profit affiliate of A) will be the general partner and D and others will be the limited partners.

X is a nonprofit organization. By letter dated c, the Internal Revenue Service issued an advance ruling classifying X as a "publicly-supported" charitable organization under sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Code. The advance ruling period continues until d.

X was formed to further the purposes of providing affordable housing and other essential social services to the very poor, primarily in areas which are economically depressed and where there has been community deterioration. It provides grants, loans, and technical assistance to neighborhood-based organizations dedicated to the same goals.

X has provided Y with grant and loan support for the acquisition and rehabilitation of low-cost "lease-purchase houses." It has also provided funds to establish a maintenance fund for those houses.

Y is a nonprofit organization. By letter dated e, the IRS issued an advance ruling classifying Y as a "publicly-supported" charitable organization under sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Code. Its advance ruling period continues until f.

Y's basic objective is the encouragement of home ownership. Y acquires vacant houses which often have been vandalized. It rehabilitates these houses and then leases them to low-income families on a lease/option-to-buy basis. Each option may be exercised after five years. A great effort is made to keep rehabilitation costs as low as possible so that the monthly rental to these families can be about g dollars per unit, covering expenses, taxes, and insurance.

A was formed for the purpose of providing below-market financing to neighborhood-based groups whose objectives are to provide decent and affordable housing to low-income families.

A is working to obtain funds at very low interest rates by seeking out "benevolent" investors and lenders who will be willing to provide funds at less than market rate to help provide new housing opportunities for low-income families.

A will use these funds to provide low-cost housing. Its strategy will include the participation in syndication of properties owned by neighborhood groups in which it will obtain an equity position, largely to be able to provide direction and supervision over these low-income housing developments in the event the neighborhood-based general partner falters. Most of the funds it plans to raise, however, will be used to make loans to these syndicates at very low interest rates. In addition, A will provide technical assistance to neighborhood-based groups for them to put together financial packages to maximize their use of available resources.

The Project will consist of b buildings located in various low-income neighborhoods of the City. The Partnership will acquire those b buildings and rehabilitate them into a units of housing for low-income families.

The Project will be typical of other Y low-income housing projects in that the units will be offered initially as rental units. Monthly rentals will be approximately g dollars, with increases in operating costs to be offset by corresponding increases in rent. These rents are comparable to the tenant paid share of rents charged for apartment units in projects within the City area, insured and assisted under section 236 of the National Housing Act, 12 U.S.C. section1701, 1715Z - 1 (1980). Tenants who demonstrate home-ownership responsibility will be given the option to purchase their unit at the end of a fifteen-year term. The purchase price on each unit will be limited to the outstanding indebtedness on the first mortgage and the loan from Y. That price is intended to conform with the limitations of section 167(k)(2)(B)(iii) of the Code and section 1.167(k) - 2(f) of the Income Tax Regulations. If a tenant fails to exercise his option to buy, Y will be given the right of first refusal to purchase the unit before the Partnership can sell it to a third party.

The general partners of the Partnership will each have a h percent interest in the Partnership. C, as limited partner, will have i percent interest in the Partnership. All profits, losses, deductions, gains, credits, and net cash flow remaining after payment of principal and interest on the first and second mortgages, scheduled maintenance, taxes, insurance, and management fees will be allocated and distributed to the partners of the Partnership, pro rata in accordance with their interests.

According to the Project's cash flow projections, it is anticipated that there will be no cash available for distribution during the first fifteen years of the Project's operations. In addition, if a tenant meets the applicable home-ownership requirements and exercises the right to purchase his unit at the end of fifteen years, there will be no cash return to C on such sale, due to the purchase price restrictions under section 167(k)(2)(B)(iii) of the Code. In such case, C's rate of return on that particular unit would be approximately 15 percent.

However, if any tenant does not exercise the purchase option, the Partnership will be entitled to sell that unit at fair market value (subject to a right of first refusal by Y), which may produce cash profits and a significantly higher rate of return to C, depending on the appreciation in the property.

Section 183(a) of the Code provides that in the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

Section 1.183 - 2(a) of the regulations provides, in part, that the determination whether on activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit.

Rev. Rul. 77-320, 1977 - 2 C.B. 78, holds that section 183 of the Code applies to the activities of a partnership, and the provisions of section 183 are applied at the partnership level and reflected in the partners' distributive shares.

When section 183 of the Code was adopted in 1969, the Committee on Finance expressed its desire that this provision would be reasonably administered and stated that the Service should limit the disallowance of the deduction of losses under this provision to cases in which it is generally recognized that this is appropriate. S.Rep. No. 91 - 552, 91st Cong., 1st Sess. 103 - 104 (1969), 1969 - 3 C.B. 423, 490.

Rev. Rul. 79-300, 1979 - 2 C.B. 112, holds that the construction and operation of an apartment project for low and moderate income housing under section 236 of the National Housing Act is not an activity to which section 183 of the Code applies. Consequently, the Service will not use the "not for profit" argument to deny related deductions under sections 162, 165, 167 and 212 of the Code.

The facts in this case are similar to those in Rev. Rul. 79-300. Although payments are not being made under section 236 of the National Housing Act, the formation of partnerships as a vehicle for the participation of private investors in undertakings for the provision of housing primarily for families of low or moderate income is in the purview of section 901 of the National Housing Act which refers to projects undertaken pursuant to federal programs or otherwise.

Accordingly, we conclude that the fact that individual dwelling units may be sold under options to low-income tenants at a price which limits the Partnership's profit will not cause the Project to be treated as "an activity not engaged in for profit" under section 183(a) of the Code, and the Service will not use the "not for profit" argument to deny related deductions under sections 162, 165, 167 and 212.

Except as specifically ruled upon, no opinion is expressed as to the federal income tax consequences of this transaction under any other provisions of the Code.

This ruling is addressed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely yours,