II

105TH CONGRESS

2D SESSION S. 2125

To amend the Internal Revenue Code of 1986 to provide for the tax treatment

of section 42 housing cooperatives and the shareholders of such cooperatives, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 22, 1998

Mr. D’AMATO introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for the tax treatment of section 42 housing cooperatives

and the shareholders of such cooperatives, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. TAX TREATMENT OF SECTION 42 HOUSING CO4 OPERATIVES AND SHAREHOLDERS OF SUCH

5 COOPERATIVES.

6 (a) IN GENERAL.—Part III of subchapter T of chap7 ter 1 of the Internal Revenue Code of 1986 (relating to
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1 cooperatives and their patrons) is amended by adding at

2 the end the following new section:

3 ‘‘SEC. 1389. SPECIAL RULES FOR SECTION 42 HOUSING CO4 OPERATIVES AND THEIR SHAREHOLDERS.

5 ‘‘(a) ALLOWANCE OF DEDUCTIONS AND CREDITS.—

6 ‘‘(1) NON-PATRON SHAREHOLDERS.—In the

7 case of a section 42 housing cooperative (as defined

8 in subsection (b)(1)), the non-patron shareholders of

9 such cooperative shall be allowed to take into ac10 count for purposes of calculating the taxable income

11 of such shareholders the following tax items:

12 ‘‘(A) 100 percent of all low-income housing

13 tax credits to which the section 42 housing co14 operative is entitled under section 42.

15 ‘‘(B) 100 percent of all interest allowable

16 as a deduction to the cooperative under section

17 163 and which is incurred and accrued but un18 paid by the cooperative on its indebtedness con19 tracted—

20 ‘‘(i) in the acquisition, construction,

21 alteration, rehabilitation, or maintenance

22 of the houses or apartment buildings, or

23 ‘‘(ii) in the acquisition of the land on

24 which the houses (or apartment buildings)

25 are situated.
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1 ‘‘(2) PATRON SHAREHOLDERS.—In the case of

2 a section 42 housing cooperative, the patron share3 holders of such cooperative shall be allowed a deduc4 tion equal to 100 percent of the amounts paid by the

5 cooperative within the taxable year for the following

6 items, except that in no event may a patron share7 holder deduct an amount in excess of such patron

8 shareholder’s proportionate share of such specified

9 items:

10 ‘‘(A) Real estate taxes allowable as a de11 duction to the cooperative under section 164

12 which are paid or incurred by the cooperative

13 on the houses or apartment buildings and on

14 the land on which such houses (or apartment

15 buildings) are situated.

16 ‘‘(B) The interest allowable as a deduction

17 to the cooperative under section 163 for the

18 taxable year and which is paid by the coopera19 tive during such taxable year on its indebted20 ness contracted—

21 ‘‘(i) in the acquisition, construction,

22 alteration, rehabilitation, or maintenance

23 of the houses or apartment buildings, or
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1 ‘‘(ii) in the acquisition of the land on

2 which the houses (or apartment buildings)

3 are situated.

4 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur5 poses of this section—

6 ‘‘(1) SECTION 42 HOUSING COOPERATIVE.—The

7 term ‘section 42 housing cooperative’ means a cor8 poration—

9 ‘‘(A) having no more than 2 classes of

10 stock outstanding, consisting of—

11 ‘‘(i) shares of stock issued to persons

12 who make an equity contribution to the co13 operative but who are not residents in the

14 houses or apartment buildings owned by

15 the cooperative; and

16 ‘‘(ii) shares of stock issued to persons

17 who make an equity contribution to the co18 operative and who are residents in the

19 houses or apartment buildings owned by

20 the cooperative;

21 ‘‘(B) in which each of the holders of pa22 tron stock is entitled, solely by reason of the

23 patron’s ownership of such stock in the cooper24 ative, to occupy for dwelling purposes a house,
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1 or an apartment in a building, owned by such

2 cooperative;

3 ‘‘(C) no shareholder of which is entitled

4 (either conditionally or unconditionally) to re5 ceive any distribution not out of earnings and

6 profits of the cooperative except on a complete

7 or partial liquidation of the cooperative;

8 ‘‘(D) 80 percent or more of the gross in9 come of which for the taxable year in which the

10 taxes and interest described in subsection (a)

11 are paid or incurred is derived from patron

12 shareholders; and

13 ‘‘(E) which is entitled to claim a low-in14 come housing tax credit under section 42.

15 ‘‘(2) SHAREHOLDER’S PROPORTIONATE

16 SHARE.—

17 ‘‘(A) IN GENERAL.—Except as provided in

18 subparagraph (B), the term ‘proportionate

19 share’ means that proportion which the stock of

20 the cooperative housing corporation owned by a

21 particular patron shareholder is of the total

22 outstanding patron stock of the corporation (in23 cluding any stock held by the corporation).

24 ‘‘(B) SPECIAL RULE WHERE ALLOCATION

25 OF TAXES OR INTEREST REFLECT COST TO
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1 CORPORATION OF PATRON SHAREHOLDER’S

2 UNIT.—

3 ‘‘(i) IN GENERAL.—If, for any taxable

4 year—

5 ‘‘(I) each dwelling unit owned or

6 leased by a section 42 housing cooper7 ative is separately allocated a share of

8 such cooperative’s real estate taxes

9 described in subsection (a)(2)(A) or a

10 share of such cooperative’s interest

11 described in subsection (a)(2)(B), and

12 ‘‘(II) such allocation reasonably

13 reflects the cost to such cooperative of

14 such taxes, or of such interest, attrib15 utable to the shareholder’s dwelling

16 unit (and such unit’s share of the

17 common areas),

18 then the term ‘proportionate share’ means

19 the shares determined in accordance with

20 the allocations described in subclause (II).

21 ‘‘(ii) ELECTION BY COOPERATIVE RE22 QUIRED.—Clause (i) shall apply with re23 spect to any section 42 housing cooperative

24 only if such cooperative elects its applica25 tion. Such an election, once made, may be
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1 revoked only with the consent of the Sec2 retary.

3 ‘‘(3) PRIOR APPROVAL OF OCCUPANCY.—

4 ‘‘(A) IN GENERAL.—For purposes of this

5 section, in the following cases there shall not be

6 taken into account the fact that (by agreement

7 with the section 42 housing cooperative) the

8 person or the person’s nominee may not occupy

9 the house or apartment without the prior ap10 proval of such cooperative:

11 ‘‘(i) In any case in which a person ac12 quires stock of a section 42 housing coop13 erative by operation of law.

14 ‘‘(ii) In any case in which a person

15 other than an individual acquires stock of

16 a section 42 housing cooperative.

17 ‘‘(iii) In any case in which the original

18 seller acquires any stock of the section 42

19 housing cooperative from the cooperative

20 not later than 1 year after the date on

21 which the apartments or houses (or lease22 hold interests therein) are transferred by

23 the original seller to the cooperative.

24 ‘‘(B) ORIGINAL SELLER DEFINED.—For

25 purposes of subparagraph (A)(iii), the term
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1 ‘original seller’ means the person from whom

2 the cooperative has acquired the apartments or

3 houses (or leasehold interest therein).

4 ‘‘(4) APPLICATION OF SECTION TO MUTUAL

5 HOUSING ASSOCIATIONS.—

6 ‘‘(A) IN GENERAL.—In the case of a sec7 tion 42 housing cooperative which is a mutual

8 housing association, this section shall be ap9 plied—

10 ‘‘(i) by substituting ‘membership cer11 tificates’ for ‘stock’ or ‘shares of stock’,

12 and

13 ‘‘(ii) by substituting ‘membership cer14 tificate-holders’ for ‘shareholders’.

15 ‘‘(B) MUTUAL HOUSING ASSOCIATION.—

16 For purposes of subparagraph (A), the term

17 ‘mutual housing association’ means a resident18 controlled, State-chartered organization de19 scribed in section 501(c)(3) and exempt from

20 tax under section 501(a).

21 ‘‘(c) TREATMENT AS PROPERTY SUBJECT TO DEPRE22 CIATION.—

23 ‘‘(1) IN GENERAL.—

24 ‘‘(A) BY NON-PATRON SHAREHOLDERS.—

25 Non-patron shares of stock (within the meaning
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1 of subsection (b)(1)(A)(i)) shall be treated as

2 property subject to the allowance for deprecia3 tion under section 167(a). Such shares of stock

4 shall be treated as residential real property for

5 purposes of determining the appropriate depre6 ciation method under section 168(b), the appli7 cable recovery period under section 168(c), and

8 the applicable convention under section 168(d).

9 ‘‘(B) BY PATRON SHAREHOLDERS.—So

10 much of the shares of stock of a patron share11 holder (within the meaning of subsection

12 (b)(1)(A)(ii)) as is allocable, under regulations

13 prescribed by section 216(c), to a proprietary

14 lease or right of tenancy subject to the allow15 ance for depreciation under section 167(a)

16 shall, to the extent such proprietary lease or

17 right of tenancy is used by such patron share18 holder in a trade or business or for the produc19 tion of income, be treated as property subject to

20 the allowance for depreciation under section

21 167(a).

22 ‘‘(2) DEDUCTION LIMITED TO ADJUSTED BASIS

23 IN STOCK.—

24 ‘‘(A) IN GENERAL.—The amount of any

25 deduction for depreciation allowable under sec-
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1 tion 167(a) to a non-patron or patron share2 holder with respect to any stock for any taxable

3 year by reason of subparagraph (A) or (B) of

4 paragraph (1), respectively, shall not exceed the

5 adjusted basis of such stock as of the close of

6 the taxable year of the shareholder in which

7 such deduction was incurred.

8 ‘‘(B) CARRYFORWARD OF DISALLOWED

9 AMOUNT.—The amount of any deduction which

10 is not allowed by reason of subparagraph (A)

11 shall, subject to the provisions of subparagraph

12 (A), be treated as a deduction allowable under

13 section 167(a) in the succeeding taxable year.

14 ‘‘(3) NO LIMITATION ON DEDUCTION BY SEC15 TION 42 HOUSING COOPERATIVE.—Nothing in this

16 section shall be construed to limit or deny a deduc17 tion for depreciation under section 167(a) by a sec18 tion 42 housing cooperative with respect to property

19 owned by such cooperative and occupied by the pa20 tron shareholders thereof.

21 ‘‘(d) DISALLOWANCE OF DEDUCTION FOR CERTAIN

22 PAYMENTS TO THE COOPERATIVE.—No deduction shall be

23 allowed to the holder of non-patron or patron stock in a

24 section 42 housing cooperative for any amount paid or ac25 crued to such cooperative during any taxable year to the
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1 extent that such amount is properly allocable to amounts

2 paid or incurred at any time by the cooperative which are

3 chargeable to the cooperative’s capital account. The share4 holder’s adjusted basis in the stock in the cooperative shall

5 be increased by the amount of such disallowance.

6 ‘‘(e) RESTRICTION ON THE RESALE OF PATRON

7 STOCK.—Upon the transfer of patron stock, the consider8 ation received by the holder of such stock shall not exceed

9 the shareholder’s adjusted equity in such stock. For pur10 poses of this subsection, the term ‘adjusted equity’ means

11 the sum of—

12 ‘‘(1) the consideration paid for such stock by

13 the first shareholder, as adjusted by a cost-of-living

14 adjustment and any other acceptable adjustments

15 determined by the Secretary, and

16 ‘‘(2) payments made by such shareholder for

17 improvements to the house or apartment occupied by

18 the shareholder.

19 ‘‘(f) DISTRIBUTIONS BY SECTION 42 HOUSING COOP20 ERATIVE.—Except as provided in regulations under sec21 tion 216(e), no gain or loss shall be recognized on the dis22 tribution by a section 42 housing cooperative of a dwelling

23 unit to a holder of patron stock in such cooperative if such

24 distribution is in exchange for the shareholder’s stock in
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1 the cooperative and such exchange qualifies for non2 recognition of gain under section 1034(f).’’.

3 (b) CONFORMING AMENDMENTS.—

4 (1) Section 42 of the Internal Revenue Code of

5 1986 (relating to low-income housing credit) is

6 amended by adding at the end the following new

7 subsection:

8 ‘‘(o) SECTION 42 HOUSING COOPERATIVES.—In the

9 case of a section 42 housing cooperative (as defined in

10 section 1389(b)(1)), the holders of the non-patron stock

11 (within the meaning of section 1389(b)(1)(A)(i)) shall be

12 entitled to any and all tax credits that would otherwise

13 be available to such cooperative under this section. Any

14 recapture of credit calculated against the section 42 hous15 ing cooperative under subsection (j) shall be an increase

16 in the tax under this chapter for the holders of the non17 patron stock in proportion to the relative holdings of such

18 stock during the period giving rise to such recapture.’’.

19 (2) Section 42(g)(2)(B) of such Code is amend20 ed by striking ‘‘and’’ at the end of clause (iii), by

21 striking the period at the end of clause (iv) and in22 serting ‘‘, and’’, and by inserting after clause (iv)

23 the following new clause:

24 ‘‘(v) does not include any amounts

25 paid by a tenant in connection with the ac-
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1 quisition or holding of any patron stock

2 (within the meaning of section

3 1389(b)(1)(A)(ii)).’’.

4 (3) Section 42(i) of such Code is amended by

5 adding at the end the following new paragraph:

6 ‘‘(8) IMPACT OF SECTION 42 HOUSING CO7 OPERATIVE’S RIGHT OF FIRST REFUSAL TO ACQUIRE

8 STOCK OF A SECTION 42 HOUSING COOPERATIVE.—

9 ‘‘(A) IN GENERAL.—No Federal income

10 tax benefit shall fail to be allowable to a non11 patron or patron shareholder (within the mean12 ing of section 1389(b)(1)) of a section 42 hous13 ing cooperative (as defined in section

14 1389(b)(1)) with respect to any qualified low15 income building merely by reason of a right of

16 first refusal or option or both held by the sec17 tion 42 housing cooperative to purchase non-pa18 tron stock of the cooperative after the close of

19 the compliance period for a price which is not

20 less than the minimum purchase price deter21 mined under subparagraph (B).

22 ‘‘(B) MINIMUM PURCHASE PRICE.—For

23 purposes of subparagraph (A), the minimum

24 purchase price for the stock of a section 42

25 housing cooperative is an amount equal to the
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1 present value of the remaining depreciation de2 ductions which would be allowable under section

3 1389(c)(1) to the holder of such stock. For pur4 poses of determining present value, the discount

5 rate provided in subsection (b)(2)(C)(ii) shall be

6 applicable as determined at the time of the ex7 ercise of such option or right of first refusal.’’.

8 (4) Section 1381(a) of such Code is amended

9 by striking ‘‘and’’ at the end of paragraph (1), by

10 striking the period at the end of paragraph (2) and

11 inserting ’’, and’’, and by adding at the end the fol12 lowing new paragraph:

13 ‘‘(3) any section 42 housing cooperative (as de14 fined in section 1389(b)(1)).’’.

15 (5) The table of sections for part III of sub16 chapter T of chapter 1 of such Code is amended by

17 adding at the end the following new item:

‘‘Sec. 1389. Special rules for section 42 housing cooperatives and their

shareholders.’’.

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