the development and operations of a project.
Pursuant to IRC §42(h)(5)(D), the ownership and material participation test can be met by the organization if it owns stock in a qualified corporation that satisfies the ownership and material participation test. A qualified corporation must be a corporation that is 100 percent owned at all times during its existence by one or more qualified nonprofit organizations.
For purposes of reviewing properties for compliance with the requirements of IRC §42(h)(5) during the 15-year compliance period, the state agencies’ responsibility is limited to consideration of whether the qualified nonprofit entity is materially participating in the operation of the project; i.e., both management decision making and the day-to-day operations. In order to materially participate, the qualified nonprofit must be engaged in the activities on a basis that is regular, continuous, and substantial.
Example 1: Qualified Nonprofit Organization Materially Participates
A for-profit organization and a qualified nonprofit organization are general partners for an LIHC project. The state agency sent the review notification letter to the nonprofit and the nonprofit’s executive director was on site at the time of the review to answer questions and participate in the physical inspection. The nonprofit received the compliance report, corrected a noncompliance issue and report back to the state agency.
The owner has demonstrated management involvement.
Example 2: Property Managed by Nonprofit Representatives
A qualified nonprofit organization owns an LIHC project. Not having the expertise to operate an LIHC property on a day-to-day basis, the nonprofit hires an affordable housing management company. The management company reports to, and is paid by, the qualified nonprofit organization.
The application of the material participation rules under IRC § 469 should be flexible. In this case, the owner has demonstrated both management decision making and control of the day-to-day operations through their oversight of the management company.
Out of Compliance A taxpayer is out of compliance if:
1. The qualified nonprofit organization does not materially participate (as determined under IRC §469(h)(1)), or
Revised October 2009