IRS Rev. Proc 2005-37 – Safe harbor for tax credit agencies determining compliance with “good cause” requirement (June 21, 2005)

On July 30, 2004, the IRS issued Revenue Ruling 2004-82, which, among other things, clarified that the Internal Revenue Code Section 42(h)(6)(B)(i) requires “commitments” (regulatory agreements between the state tax credit agency and owners of tax credit properties), to include the prohibition against evictions or terminations of tenancy of existing tenants except for good cause and the prohibition against any rent increases except as permitted under IRC Section 42. In Q & A – 5 of Section 42(h)(6)(B)(i) requires state tax credit agencies to review existing commitments by December 31, 2004 to ensure that each contains the aforementioned prohibition.

Rev. Proc. 2005-37 creates a safe harbor for agencies with respect to the aforementioned review obligations. Specifically, it says that for any commitments entered into before January 1, 2006, the agency may satisfy its compliance review obligation as follows:

(1) that 42(h)(6)(B)(i) is satisfied if the commitment (regulatory agreement) contains catch-all language requiring owners to comply with IRC Section 42;

(2) the agency must notify owners on or before December 31, 2005 that such catch-all language prohibits evictions without good cause or rent increases outside of the requirements of Section 42

(3) owners must certify compliance with the prohibitions in (2) annually;

(4) the agency shall file an IRS Form 8823 re noncompliance if it does not receive an owner certification as described in (3) or the agency learns of a violation or the aforementioned prohibitions.

Bottom line: The IRS’ clarification of the good cause eviction requirement remains intact, but the tax credit agency’s obligation with respect to compliance review and enforcement is significantly lessened. [Download]