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. Altho ugh for-profit and nonprofit developers compete for credits, the federal go vernment reserves ten percent of the credits for nonprofit, tax-exempt deve lopers. Exempt developers often sell the credits to for-profit investors, f orming a partnership through which the exempt organization develops the hou sing and the investors receive tax benefits in exchange for capital contrib utions. The partnership formation, however, may jeopardize the tax-exempt s tatus of the nonprofit organizations and result in the partnership losing t he LIHTC. To maintain exempt status, the Internal Revenue Code requires tha t organizations be organized and operated to promote a charitable purpose a nd that no net earnings inure to private individuals. A combination of bind ing and non-binding authority provides confusing guidelines for exempt orga nizations 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 de termine whether partnership structures jeopardize exempt status. This Comme nt argues that exempt developers in LIHTC partnerships need binding authori ty that details the level of control of partnership activities the exempt o rganization must retain, provides an exception for certain partnership guar antees by exempt organizations that are standard within the development ind ustry, and allows investors to receive private benefits to a greater degree without jeopardizing the organization's exempt status.