The Internal Revenue Service is contemplating a regulatory project to provide guidance on qualified contracts for the sale of low-income tax credit projects at the end of their compliance period. A proposed rule on qualified contracts was included on the IRS semiannual regulatory agenda, which was published in the June 28 Federal Register, with an October 2004 target date for publication of the rule.

The IRS has not yet determined exactly what will go into the rule, and the agency is soliciting comments from the industry about what issues need to be clarified. Under existing rules of the Internal Revenue Code, a project's extended low-income use requirement can be terminated if, upon the owner's request at the end of the 14th year of the compliance period, a state allocating agency is unable to produce a qualified contract for the purchase of the project by a buyer who will continue its low-income use.

Under the statute, the non-low-income portion of a tax credit project is to be acquired for its fair market value, and the low-income portion for the proportionate share of outstanding secured debt, adjusted investor equity, and other capital contributions, reduced by actual or available cash distributions.

While the non-low-income portion of the statutory formula is relatively straightforward because it involves using the fair market value as established by an appraisal, the calculation gets ambiguous because of uncertainty over how to determine the value of low-income units. Also, even though the statute provides for secured debt, questions still remain whether unsecured debt can be included in setting a qualified contract price.

Comments concerning the IRS qualified contract regulatory project may be sent to Internal Revenue Service, Office of Chief Counsel, Passthroughs and Special Industries, CC:PSI:5, Room 5111, 1111 Constitution Ave., N.W., Washington, D.C. 20224. Contact 202-622-3040 for additional information.