2. The qualified nonprofit organization does not materially participate in both the development and operation of the project; i.e., both management decisions and day-to-day activities.
A property is out of compliance for any taxable year where the entity does not participate on a basis that is regular, continuous and substantial within the meaning of IRC §469(h)(1) for that year. Noncompliance can be identified by interviewing the qualified nonprofit organization’s management representatives and observation while at the property site.
Example 1: Qualified Nonprofit Does Not Participate in Management Decisions
A for-profit organization and qualified nonprofit organization are general partners for an LIHC project. The nonprofit organization fully participated in the development of the project, but has not participated in (directly or through a representative) any monthly management meetings in year 3 of the compliance period and does not otherwise participate on a regular, continuous, or substantial basis.
The property is out of compliance for year 3 of the compliance period.
Example 2: Management Company Employee Provides Volunteer Services
A for-profit organization and qualified nonprofit organization are general partners for an LIHC project. The third party management company operating the property reports to the for-profit general partner. The management company employs a property manager who signed an agreement to be a “volunteer” for the non-profit and provide services for the nonprofit organization.
The property is not in compliance because the property manager’s agreement to be a volunteer is part of its employment responsibilities to the for-profit organization.
Should a state agency become aware of noncompliance with other requirements imposed under IRC §42(h)(5), Form 8823 should be filed noting the issue. Areas of noncompliance may include:
The qualified nonprofit organization loses its exempt status. As part of the preparation for a review of an LIHC property owned by a qualified nonprofit organization under IRC §42(h)(5), state agencies may confirm that the nonprofit is a qualified tax-exempt organization by using the IRS website (www.irs.gov). Enter “78” into the “Search IRS site for” feature; the response will be “Chances are you are looking for Publication 78, Search for Exempt Organizations”; clicking on the underline portion will provide an alphabetical listing of exempt organizations. The state agency should request documentation of tax-exempt status if the organization is not included on the list.
The qualified nonprofit organization does not have an ownership interest in the low-income housing project.
Revised October 2009