Fair Housing Initiatives Program - HUD

For Fiscal Year 2012, $42,500,000 is appropriated for the Fair Housing Initiatives Program (FHIP). This appropriated amount may be supplemented by recaptured FHIP funds awarded in previous years. Of this amount, approximately $41,180,000 is being made available on a competitive basis to eligible organizations.

HUD expects to award a cost reimbursable cooperative agreement or grant agreement to each applicant selected for award. The type of funding instrument HUD may offer a successful applicant which sets forth the relationship between HUD and the awardee will be a grant or cooperative agreement, where the principal purpose is the transfer of funds, property, services, or anything of value to the awardee to accomplish an eligible public purpose.

The agreement will identify the eligible activities to be undertaken, financial controls, and special conditions, including sanctions for violations of the agreement, reporting requirements including sub-recipient reporting requirements under the Federal Financial Assistance Accountability and Transparency Act of 2006, and integrity requirements under Section 872 of the Duncan Hunter Defense Authorization Act of 2009. HUD will determine the type of instrument under which the award will be made and monitor progress to ensure that the awardee has achieved the objectives set out in the agreement. Failure to meet such objectives may be the basis for HUD determining the awardee to be in default of the grant or cooperative agreement and for exercising available sanctions, including suspension, termination, and/or recapture of funds. Also, HUD may refer violations or suspected violations to enforcement offices within HUD, the Department of Justice, or other enforcement authorities.

If funds are provided subject to a Cooperative Agreement, HUD will also exercise the right to have substantial involvement by conducting monitoring reviews, requesting quarterly reports, approval of all proposed deliverables documented in the applicant’s Work Plan or Statement of Work (SOW), and determining whether the agency meets all certification and assurance requirements.

For planning purposes, HUD will require a start date of May 31, 2012. Applicants should adjust their budgets, staffing, and SOWs to adhere to this mandatory start date.

Eligible applicants are Qualified Fair Housing Enforcement Organizations (QFHOs) and Fair Housing Enforcement Organizations (FHOs), see 24 CFR 125.103; public or private not-for-profit organizations or institutions, and other public or private entities that are formulating or carrying out programs to prevent or eliminate discriminatory housing practices; agencies of State or local governments; and agencies that participate in the Fair Housing Assistance Program (FHAP).

The application deadline is 11:59:59 p.m. eastern time on March 16, 2012.

Choice Neighborhoods Initiative - HUD Funding Notice

HUD recently announced the availability of approximately $110 million in FY2012 funds for Choice Neighborhoods grants. HUD anticipates awarding four to five grants not to exceed $30,000,000 each.  At its discretion, HUD may use remaining FY2011 and additional FY2012 Choice Neighborhoods funding to make Implementation Grant awards. At least $80,000,000 of the total FY2012 Choice Neighborhoods funding must be awarded to applications in which a public housing authority is the Lead Applicant or Co-Applicant. Furthermore, HUD will set aside one Implementation Grant to an applicant that targets a multifamily HUD-assisted housing property that is receiving project-based rental assistance under section 8 of the United States Housing Act of 1937 (exclusive of tenant-based or project-based vouchers), section 221(d)(3) or section 236 of the National Housing Act, section 202 of Housing Act of 1959, or section 811 of the National Affordable Housing Act of 1990.

Choice Neighborhoods eligible applicants are Public Housing Authorities (PHAs), local governments, tribal entities, nonprofits, and for-profit developers that apply jointly with a public entity.

Choice Neighborhoods is focused on three core goals: (1) Housing: Transform distressed public and assisted housing into energy efficient, mixed-income housing that is physically and financially viable over the long-term; (2) People: Support positive outcomes for families who live in the target development(s) and the surrounding neighborhood, particularly outcomes related to residents‟ health, safety, employment, mobility, and education; and (3) Neighborhood: Transform distressed, high-poverty neighborhoods into viable, mixed-income neighborhoods with access to well-functioning services, high quality public schools and education programs, high quality early learning programs and services, public assets, public transportation, and improved access to jobs.

The application deadline date is April 10, 2012.

Preserving Subchapter S Election

Avoid transfers to ineligible shareholders. In general, only individual U.S. citizens or residents, decedent estates, certain types of trusts, and certain exempt organizations may be S corporation shareholders. Therefore, it is important that you confirm that all the shareholders are eligible shareholders, i.e., (i) that no shareholder is a nonresident alien, a partnership, or a corporation; (ii) that all trusts are properly structured to be eligible shareholders, and (iii) that any election required for a trust shareholder are made.

Even if a corporation's initial shareholders are all eligible shareholders, its S corporation status will terminate if any shares are transferred to a nonresident alien individual, a corporation, a partnership, or a trust (other than the specific types of trusts which may be S corporation shareholders).

In order to prevent a shareholder from terminating an S corporation's status by transferring his shares to an ineligible shareholder, a shareholders' agreement should prohibit transfers of any shares to any person other than a permitted S corporation shareholder and require a similar undertaking on the part of any transferee as a condition to any transfer. In addition, if permitted by local law, a restriction should be imposed in the corporation's charter or by-laws that would void a purported transfer to an ineligible shareholder.

Avoid violating the shareholder limitation. An S corporation cannot have more than 100 shareholders at any time. Even if this limit is not exceeded at organization, the S status will terminate if the limit is exceeded at any time in the future, whether as a result of new issuances or transfers of shares.

New issuances of stock require corporate action. You should keep this in mind when considering future issuances of stock to avoid exceeding the 100 shareholder limit.

Transfers by shareholders can be somewhat more problematic, since they can occur without any action on the part of the corporation. Therefore, a shareholders' agreement should prohibit any transfer of shares to a person who is not already a shareholder or if the transfer would cause the 100 shareholder limit to be exceeded and transfers should be conditioned on the transferee being subject to the same restriction. If permitted by local law, an appropriate restriction should also be imposed in the corporation's charter or by-laws so that a purported transfer that caused the limit to be exceeded would be void.

Don't issue more than one class of stock. An S corporation can only have one class of stock. Be sure to keep this requirement in mind when considering future changes to the capital structure of the corporation, including purported debt owed by the corporation that may be recharacterized as equity. The IRS allows S corporations to use various equity incentive compensation arrangements without violating the one class of stock restriction. If you want to create an equity incentive compensation plan, I would be happy to discuss with you how to structure the plan.

Avoid excess passive investment income. If an S corporation has accumulated earnings and profits (because it was once a C corporation or is a transferee of a C corporation), its S election will terminate if, for a period of three consecutive tax years, its “passive investment income” exceeds 25% of its gross receipts.

The first step in avoiding an inadvertent termination under this rule is to keep track of the corporation's passive investment income to determine whether the 25% limitation may be exceeded. Although excess passive income is subject to a special tax, S corporation status will terminate only if the limit is exceeded for three consecutive years. Thus, if you are willing to pay the tax, you can monitor the results of two years' operations while you plan to avoid a termination.

If a corporation is in danger of exceeding the 25% passive income limitation for three consecutive years, there are two basic approaches to avoid termination of S corporation status. Since termination will only occur if the corporation has accumulated earnings and profits from C corporation years, termination can be avoided by stripping out those earnings and profits by way of a dividend. Ordinarily, distributions by an S corporation reduce pre-S corporation earnings and profits only after the accumulated income from all S corporation years has been distributed. However, it is possible to elect to treat distributions as coming from pre-S corporation earnings and profits first. Moreover, if it desired to strip out earnings and profits without actually depleting the corporation's cash or other liquid assets, a “deemed” dividend election can be made. Be aware, however, that a distribution out of pre-S corporation earnings and profits (whether actual or under the deemed dividend election) is generally taxable to shareholders as a dividend (unlike a distribution from accumulated S corporation income which is generally a return of capital).

A second approach to avoiding termination under the passive income rules is to tailor the corporation's operations so that the 25% passive income limit is not exceeded. Since termination will occur only after the limit is exceeded for three consecutive years, if you are willing to incur the tax on excess passive income, there should be sufficient time to take action to avoid a termination.

This can be done by reducing the amount of passive investment income, or by increasing the amount of other income. Since the test is applied to gross receipts, acquiring a business which produces receipts which are not passive investment income, even if it does not produce much in the way of net income, is one possible solution. It may also be possible to restructure certain operations so that passive income (e.g., certain rental income) becomes active income. (Unfortunately, an investment in municipal bonds producing tax-exempt interest is not a solution under these rules.)

REIT Status

In order for a corporation to qualify as a REIT it must:

(1) satisfy certain organizational and structural requirements.

(2) satisfy certain income and assets tests.

(3) distribute at least 90% of its real estate investment trust income annually, plus certain other amounts.

(4) not have any pre-REIT earnings and profits.

A domestic corporation that has over 100 shareholders and is not 50% owned by five or fewer individuals will generally satisfy the organizational and structural requirements.

Because the corporation's operations are limited to owning and operating commercial real properties, it will satisfy the assets test. However, if the corporation provides tenants with services other than services that are usually or customarily rendered in connection with the rental of that type of space, the corporation may be required to have those services provided by an independent contractor or by a taxable REIT subsidiary that is established to provide those services.

The requirement that a REIT not have any pre-REIT earnings and profits requires that your real estate corporation makes a substantial dividend distribution to its shareholders to eliminate the pre-REIT earnings and profits. Because qualified dividend income received by individuals is taxed at the 15% capital gain rate, it is likely that this cost could be acceptable to the shareholders.

Passive Activity Loss Rules

If any business ventures are passive activities, the passive activity loss rules prevent you from deducting any expenses that are generated by those passive activities in excess of the income from those activities. You can't deduct the excess expenses—the losses— against your earned income or against any other nonpassive income. Unfortunately, nonpassive income for this purpose includes passive-sounding income such as interest, dividends, annuities, royalties, gains and losses from most dispositions of property, and income from certain working interests in oil and gas properties. So you can't deduct passive losses against those income items either.

Any losses that you can't use in a particular year because of these rules aren't lost; instead, they're carried forward, indefinitely, to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity aren't used up in this fashion, you will be allowed to use those losses in the tax year in which you dispose of your entire interest in the passive activity in a fully taxable transaction, or in the tax year you die.

Passive activities are trades or businesses, or income-producing activities, in which you don't “materially participate” (defined below—and for special rules governing your rental activities, see further below). The passive activity loss rules also apply to any items passed through to you by partnerships in which you're a partner, or by S corporations in which you're a shareholder. This means that any losses passed through to you by partnerships or S corporations will be treated as passive, unless, for you, the partnership or S corporation activities aren't passive. For example, let's say that in addition to your regular professional or salaried activities you are: a limited partner in a partnership that provides cleaning services to office buildings;  general partner in a partnership that operates an automobile dealership (but you don't participate in the dealership's operations); and  shareholder in an S corporation that operates a manufacturing business (but you don't participate in the business's operations).

If you don't materially participate in the partnerships, or S corporation, those activities would be passive. As a result, you wouldn't be able to deduct the losses they throw off against your earned income, interest, dividends, etc.

If you “materially participate” in an activity, on the other hand, the activity isn't passive (except for rental activities, as discussed below), and the passive activity rules won't apply to the losses from the activity. To materially participate in an activity, you must be involved in the operations of the activity on a regular, continuous, and substantial basis. IRS uses several tests to establish material participation in an activity. Under the most frequently used of these tests, you're treated as materially participating in an activity if you participate in it for more than 500 hours in the tax year. While other tests require fewer hours, all the tests require you to establish how you participated in the activity, and the amount of time you spent doing so. You may establish these factors by any reasonable means. But the most reliable substantiation consists of contemporaneously kept appointment books, calendars, daily time reports, logs, or similar documents. If you fail to substantiate your material participation, you might well lose the right to treat an activity as nonpassive.

Your rental activities are automatically treated as passive, regardless of how much you participate. This means that, even if you materially participate in these activities, you can't deduct the losses from these activities against your earned income, interest, dividends, etc. There are two significant exceptions to this rule: (1) You can deduct up to $25,000 of losses from your rental real estate activities (even though these are passive ) against your earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn't exceed specified levels.  (2) If you qualify as a “real estate professional” (which requires the performance of substantial services in real property trades or businesses), your rental real estate activities are not automatically treated as passive, so losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate in the activities.

Uncertainty Remains About Plant to Extend Tax Cuts

No decisions have been made yet about how or when the House of Representatives will take up legislation to extend roughly five dozen tax benefits that expired at the end of 2011.  The package of tax breaks includes several popular, bipartisan provisions, such as the research and development tax credit, the subpart F active financing exception, and language to allow individuals to deduct their state and local taxes. 

Energy Efficient Buildings Deduction

A new Internal Revenue Service Notice modifies previous guidance by providing an additional set of energy savings percentages that taxpayers can use to qualify for a partial Code Sec. 179D deduction for energy efficient commercial buildings. These new energy savings percentages, which are effective for property placed in service on or after Mar. 12, 2012, are: 25% for the interior lighting system; 15% for the heating ventilation and air conditioning (HVAC) and hot water systems, and 10% for the building envelope.