Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-26

1976-1 C.B. 10

Section 61
Section 752

IRS Headnote

Ownership of housing project financed by New York State agency. A limited partnership formed under New York State law is the owner, for Federal income tax purposes, of a low-income housing project the title to which is held by its corporate general partner as provided by the New York State Urban Development Corporation Act under which the project was financed; Rev. Rul. 75-31 distinguished.

Full Text

Rev. Rul. 76-26

Based on the facts and circumstances set forth below, advice has been requested whether a limited partnership formed under New York State law is to be treated as the owner of certain land and improvements thereon for Federal income tax purposes.

X was formed as a limited partnership under the laws of the State of New York for the purpose of building and operating a 139-unit housing project (the project) to provide low-income housing. The project was financed by a mortgage loan from the New York State Urban Development Corporation (UDC).

UDC is created under Section 6254 of the New York State Unconsolidated Laws as a "corporate governmental agency of the state constituting a political subdivision and public benefit corporation" and is charged under the New York State Urban Development Corporation Act (UDC Act) with the supervision and development of various types of projects, residential and non-residential, including the making of mortgage loans, monitoring the progress of construction, specifying the allowable rentals, regulating the owner's profits and distributions, and approving all contracts of the owner. Under the UDC Act, loans may only be made to a Limited Profit Housing Corporation (LPHC), as described in Article 2 of the New York State Private Housing Financing Law (PHFL) and then only if the LPHC is a subsidiary of UDC.

X has 3 general partners, including M, a domestic corporation which serves as managing general partner, S, a nominally capitalized LPHC, and P, a domestic corporation which owns all the outstanding stock of S. In addition, X has 15 limited partners.

S was initially formed as a subsidiary of UDC with UDC subscribing for but not purchasing, all of the shares of S and electing all its directors. The certificate of incorporation of S was approved by UDC and recites that S is organized to serve a public purpose, that S shall remain subject to the supervision and control of UDC so long as Article 2 of the PHFL remains applicable to the project and that all property acquired, created or rehabilitated by S shall be deemed acquired. created, or rehabilitated for the proper effectuation of the purposes of the article and the UDC Act. At the closing of the mortgage loan discussed below, UDC surrendered its subscription rights for the shares of S to P.

Although all of S's stock is owned by P, in the event UDC determines that M is not meeting its responsibility as managing general partner, UDC has the right under a stock pledge agreement and irrevocable proxy between UDC, S and P to vote the stock of S, to assume control of S and to direct S to assume all the functions and powers of the managing general partner of X. Under the stock pledge agreement and irrevocable proxy, P transfers all its right, title and interest in the S stock back to UDC. UDC's rights under the stock pledge agreement and irrevocable proxy are also recited in the partnership agreement. The purposes of the pledge, as recited therein, are to secure the performances of S and X under an Equity and Regulatory Agreement (described below) and to protect the public interest and the interest of UDC in the project.

UDC, S, and X entered into an Equity and Regulatory Agreement that sets forth the manner of payment of the costs of the project, the responsibilities for and regulations of the project and the remedies of UDC in the event of default. UDC agrees that neither it nor any subsequent holder of the note shall have any claim to proceed personally against S, X or any partner and that it will look solely to the project assets for satisfaction of any claim. The agreement acknowledges that X, pursuant to the partnership agreement has active responsibility and will actively carry out the development, construction, management, operation, and maintenance of the project, subject to the rights of UDC under the stock pledge agreement and the partnership agreement to have S assume management responsibilities for the project.

The cost of the Project was 4,000X dollars of which 450X dollars was provided by the capital contribution of the limited partners. The balance of the cost, 3,550X dollars was obtained by S through a loan from UDC.

Hence, all the equity capital of X was contributed by the limited partners with none of the equity capital invested by S. None of X's capital was invested in S and none of the limited partners of X had any interest in S. The limited partners, under the partnership agreement, have a 97-percent interest in the items of income, gain, loss, deduction, and credit of X. M, in its capacity as managing general partner, has a 3-percent interest in these items. S has no interest in any item of income, deduction, gain, loss, or credit of X during the existence of X or in any property of X upon its dissolution or liquidation. No amount was or will be paid to S by X or any general partner for any act performed by S on behalf of X.

S acquired the property on which the Project was constructed from UDC and executed a building loan agreement in the principal amount of 3,550X dollars. This agreement was secured by a mortgage and evidenced by a note. These loan documents provided that neither S nor any partner of X, general or limited, were personally liable for the repayment of the loan. The proceeds of the loan were deposited into accounts of X maintained in a bank approved by the UDC. Withdrawals were made by UDC and were not made by X without authorization from UDC.

S executed the loan documents, the land conveyance agreement, and the deed in its own name and not as a general partner of X, and simultaneously therewith executed a declaration of interest (declaration) which stated that S executed the mortgage loan and acquired the land as general partner of X and that X had equitable interest in the project. Consistent with the declaration, the partnership agreement and certificate of limited partnership provide that S will acquire and hold legal title to the project as general partner of and on behalf of X which holds the equitable interest therein. In addition, the deed to the project site, the mortgage securing the UDC loan, a copy of the certificate of limited partnership of X, and the declaration were all filed in the appropriate records in the office of the local county clerk and thereby made a matter of public record.

S, annually files a Form 56, Notice of Fiduciary Relationship, with the Internal Revenue Service which stated that it acts for or in behalf of X under authority contained in the declaration.

The specific question to be resolved is whether, for Federal income tax purposes, X or S will be treated as the owner of the project and the improvements thereon subject to the UDC indebtedness.

In determining whether X is to be treated as the owner of the project site and the improvements thereon for Federal income tax purposes, it is necessary to determine the capacity in which S holds title to the property, that is, whether it holds title as agent on behalf of X or in its own behalf.

Section 752(c) of the Internal Revenue Code of 1954 provides that, for purposes of section 752, a liability to which property is subject shall, to the extent of the fair market value of the property, be treated as a liability of the owner of the property.

Rev. Rul. 75-31, 1975-1 C.B. 10, involves a similar factual situation in which a housing project was financed by the New York State Housing Finance Agency (HFA) through a LPHC. In determining whether the LPHC owned the project in Rev. Rul. 75-31 as a mere nominee of a limited partnership, the Revenue Ruling utilized a two step analysis that, as applied to the instant case, requires determinations of (1) whether evidence of agency relationship exists between S and X, and if so, (2) whether the relationship results merely from the stockholder relationship between S and P.

In the instant case, the declaration, partnership agreement, and the certificate of limited partnership contain specific acknowledgments by S that it holds record title to the project site and improvements thereon as a general partner of and on behalf of X. These acknowledgments are consistent with S's certificate of incorporation. In addition, knowledge of the existence of the agency relationship was not limited to the contracting parties, but was a matter of public record because the declaration and certificate of limited partnership were properly filed in the county clerk's office.

Furthermore, S is a party to the transaction solely because of the New York State statutory scheme governing low-income housing projects that requires UDC to supervise the development, construction, and management of the project through a LPHC. This supervision and control of the project by UDC is assured by the stock pledge agreement and irrevocable proxy, by the Equity and Regulatory Agreement, and by the partnership agreement. The control that P and X have over S is limited by these agreements and by the rules and regulations incorporated therein.

Accordingly, the agency relationship existing between S and X does not rest upon a corporation-stockholder relationship between S and P and is recognized as existing independently of that relationship. Therefore, for Federal income tax purposes, X is treated as the owner of the project.

This Revenue Ruling does not deal with the requirements for an organization to be classified as a partnership for Federal income tax purposes. See section 301.7701-2 of the Procedure and Administration Regulations. See also Rev. Proc. 72-13, 1972-1 C.B. 735, and Rev. Proc. 74-17, 1974-1 C.B. 438, in connection with obtaining advance rulings regarding the classification of limited partnerships.

The instant case is distinguishable from  Rev. Rul. 75-31 on the question of whether any general partner of the limited partnership is personally liable for repayment of the loan. HFA programs differ from UDC programs in that loans made by the HFA are recourse obligations to the LPHC. In the instant case the loan to S was a nonrecourse obligation under which the UDC agrees to look solely to the project assets for satisfaction of any claim. Hence, the question of the partner's personal liability is not present in the instant case.