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[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 2125 Introduced in Senate (IS)]

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.

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

SECTION 1. TAX TREATMENT OF SECTION 42 HOUSING COOPERATIVES AND 
              SHAREHOLDERS OF SUCH COOPERATIVES.

    (a) In General.--Part III of subchapter T of chapter 1 of the 
Internal Revenue Code of 1986 (relating to cooperatives and their 
patrons) is amended by adding at the end the following new section:

``SEC. 1389. SPECIAL RULES FOR SECTION 42 HOUSING COOPERATIVES AND 
              THEIR SHAREHOLDERS.

    ``(a) Allowance of Deductions and Credits.--
            ``(1) Non-patron shareholders.--In the case of a section 42 
        housing cooperative (as defined in subsection (b)(1)), the non-
        patron shareholders of such cooperative shall be allowed to 
        take into account for purposes of calculating the taxable 
        income of such shareholders the following tax items:
                    ``(A) 100 percent of all low-income housing tax 
                credits to which the section 42 housing cooperative is 
                entitled under section 42.
                    ``(B) 100 percent of all interest allowable as a 
                deduction to the cooperative under section 163 and 
                which is incurred and accrued but unpaid by the 
                cooperative on its indebtedness contracted--
                            ``(i) in the acquisition, construction, 
                        alteration, rehabilitation, or maintenance of 
                        the houses or apartment buildings, or
                            ``(ii) in the acquisition of the land on 
                        which the houses (or apartment buildings) are 
                        situated.
            ``(2) Patron shareholders.--In the case of a section 42 
        housing cooperative, the patron shareholders of such 
        cooperative shall be allowed a deduction equal to 100 percent 
        of the amounts paid by the cooperative within the taxable year 
        for the following items, except that in no event may a patron 
        shareholder deduct an amount in excess of such patron 
        shareholder's proportionate share of such specified items:
                    ``(A) Real estate taxes allowable as a deduction to 
                the cooperative under section 164 which are paid or 
                incurred by the cooperative on the houses or apartment 
                buildings and on the land on which such houses (or 
                apartment buildings) are situated.
                    ``(B) The interest allowable as a deduction to the 
                cooperative under section 163 for the taxable year and 
                which is paid by the cooperative during such taxable 
                year on its indebtedness contracted--
                            ``(i) in the acquisition, construction, 
                        alteration, rehabilitation, or maintenance of 
                        the houses or apartment buildings, or
                            ``(ii) in the acquisition of the land on 
                        which the houses (or apartment buildings) are 
                        situated.
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Section 42 housing cooperative.--The term `section 42 
        housing cooperative' means a corporation--
                    ``(A) having no more than 2 classes of stock 
                outstanding, consisting of--
                            ``(i) shares of stock issued to persons who 
                        make an equity contribution to the cooperative 
                        but who are not residents in the houses or 
                        apartment buildings owned by the cooperative; 
                        and
                            ``(ii) shares of stock issued to persons 
                        who make an equity contribution to the 
                        cooperative and who are residents in the houses 
                        or apartment buildings owned by the 
                        cooperative;
                    ``(B) in which each of the holders of patron stock 
                is entitled, solely by reason of the patron's ownership 
                of such stock in the cooperative, to occupy for 
                dwelling purposes a house, or an apartment in a 
                building, owned by such cooperative;
                    ``(C) no shareholder of which is entitled (either 
                conditionally or unconditionally) to receive any 
                distribution not out of earnings and profits of the 
                cooperative except on a complete or partial liquidation 
                of the cooperative;
                    ``(D) 80 percent or more of the gross income of 
                which for the taxable year in which the taxes and 
                interest described in subsection (a) are paid or 
                incurred is derived from patron shareholders; and
                    ``(E) which is entitled to claim a low-income 
                housing tax credit under section 42.
            ``(2) Shareholder's proportionate share.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `proportionate share' means 
                that proportion which the stock of the cooperative 
                housing corporation owned by a particular patron 
                shareholder is of the total outstanding patron stock of 
                the corporation (including any stock held by the 
                corporation).
                    ``(B) Special rule where allocation of taxes or 
                interest reflect cost to corporation of patron 
                shareholder's unit.--
                            ``(i) In general.--If, for any taxable 
                        year--
                                    ``(I) each dwelling unit owned or 
                                leased by a section 42 housing 
                                cooperative is separately allocated a 
                                share of such cooperative's real estate 
                                taxes described in subsection (a)(2)(A) 
                                or a share of such cooperative's 
                                interest described in subsection 
                                (a)(2)(B), and
                                    ``(II) such allocation reasonably 
                                reflects the cost to such cooperative 
                                of such taxes, or of such interest, 
                                attributable to the shareholder's 
                                dwelling unit (and such unit's share of 
                                the common areas),
                        then the term `proportionate share' means the 
                        shares determined in accordance with the 
                        allocations described in subclause (II).
                            ``(ii) Election by cooperative required.--
                        Clause (i) shall apply with respect to any 
                        section 42 housing cooperative only if such 
                        cooperative elects its application. Such an 
                        election, once made, may be revoked only with 
                        the consent of the Secretary.
            ``(3) Prior approval of occupancy.--
                    ``(A) In general.--For purposes of this section, in 
                the following cases there shall not be taken into 
                account the fact that (by agreement with the section 42 
                housing cooperative) the person or the person's nominee 
                may not occupy the house or apartment without the prior 
                approval of such cooperative:
                            ``(i) In any case in which a person 
                        acquires stock of a section 42 housing 
                        cooperative by operation of law.
                            ``(ii) In any case in which a person other 
                        than an individual acquires stock of a section 
                        42 housing cooperative.
                            ``(iii) In any case in which the original 
                        seller acquires any stock of the section 42 
                        housing cooperative from the cooperative not 
                        later than 1 year after the date on which the 
                        apartments or houses (or leasehold interests 
                        therein) are transferred by the original seller 
                        to the cooperative.
                    ``(B) Original seller defined.--For purposes of 
                subparagraph (A)(iii), the term `original seller' means 
                the person from whom the cooperative has acquired the 
                apartments or houses (or leasehold interest therein).
            ``(4) Application of section to mutual housing 
        associations.--
                    ``(A) In general.--In the case of a section 42 
                housing cooperative which is a mutual housing 
                association, this section shall be applied--
                            ``(i) by substituting `membership 
                        certificates' for `stock' or `shares of stock', 
                        and
                            ``(ii) by substituting `membership 
                        certificate-holders' for `shareholders'.
                    ``(B) Mutual housing association.--For purposes of 
                subparagraph (A), the term `mutual housing association' 
                means a resident-controlled, State-chartered 
                organization described in section 501(c)(3) and exempt 
                from tax under section 501(a).
    ``(c) Treatment as Property Subject to Depreciation.--
            ``(1) In general.--
                    ``(A) By non-patron shareholders.--Non-patron 
                shares of stock (within the meaning of subsection 
                (b)(1)(A)(i)) shall be treated as property subject to 
                the allowance for depreciation under section 167(a). 
                Such shares of stock shall be treated as residential 
                real property for purposes of determining the 
                appropriate depreciation method under section 168(b), 
                the applicable recovery period under section 168(c), 
                and the applicable convention under section 168(d).
                    ``(B) By patron shareholders.--So much of the 
                shares of stock of a patron shareholder (within the 
                meaning of subsection (b)(1)(A)(ii)) as is allocable, 
                under regulations prescribed by section 216(c), to a 
                proprietary lease or right of tenancy subject to the 
                allowance for depreciation under section 167(a) shall, 
                to the extent such proprietary lease or right of 
                tenancy is used by such patron shareholder in a trade 
                or business or for the production of income, be treated 
                as property subject to the allowance for depreciation 
                under section 167(a).
            ``(2) Deduction limited to adjusted basis in stock.--
                    ``(A) In general.--The amount of any deduction for 
                depreciation allowable under section 167(a) to a non-
                patron or patron shareholder with respect to any stock 
                for any taxable year by reason of subparagraph (A) or 
                (B) of paragraph (1), respectively, shall not exceed 
                the adjusted basis of such stock as of the close of the 
                taxable year of the shareholder in which such deduction 
                was incurred.
                    ``(B) Carryforward of disallowed amount.--The 
                amount of any deduction which is not allowed by reason 
                of subparagraph (A) shall, subject to the provisions of 
                subparagraph (A), be treated as a deduction allowable 
                under section 167(a) in the succeeding taxable year.
            ``(3) No limitation on deduction by section 42 housing 
        cooperative.--Nothing in this section shall be construed to 
        limit or deny a deduction for depreciation under section 167(a) 
        by a section 42 housing cooperative with respect to property 
        owned by such cooperative and occupied by the patron 
        shareholders thereof.
    ``(d) Disallowance of Deduction for Certain Payments to the 
Cooperative.--No deduction shall be allowed to the holder of non-patron 
or patron stock in a section 42 housing cooperative for any amount paid 
or accrued to such cooperative during any taxable year to the extent 
that such amount is properly allocable to amounts paid or incurred at 
any time by the cooperative which are chargeable to the cooperative's 
capital account. The shareholder's adjusted basis in the stock in the 
cooperative shall be increased by the amount of such disallowance.
    ``(e) Restriction on the Resale of Patron Stock.--Upon the transfer 
of patron stock, the consideration received by the holder of such stock 
shall not exceed the shareholder's adjusted equity in such stock. For 
purposes of this subsection, the term `adjusted equity' means the sum 
of--
            ``(1) the consideration paid for such stock by the first 
        shareholder, as adjusted by a cost-of-living adjustment and any 
        other acceptable adjustments determined by the Secretary, and
            ``(2) payments made by such shareholder for improvements to 
        the house or apartment occupied by the shareholder.
    ``(f) Distributions by Section 42 Housing Cooperative.--Except as 
provided in regulations under section 216(e), no gain or loss shall be 
recognized on the distribution by a section 42 housing cooperative of a 
dwelling unit to a holder of patron stock in such cooperative if such 
distribution is in exchange for the shareholder's stock in the 
cooperative and such exchange qualifies for nonrecognition of gain 
under section 1034(f).''.
    (b) Conforming Amendments.--
            (1) Section 42 of the Internal Revenue Code of 1986 
        (relating to low-income housing credit) is amended by adding at 
        the end the following new subsection:
    ``(o) Section 42 Housing Cooperatives.--In the case of a section 42 
housing cooperative (as defined in section 1389(b)(1)), the holders of 
the non-patron stock (within the meaning of section 1389(b)(1)(A)(i)) 
shall be entitled to any and all tax credits that would otherwise be 
available to such cooperative under this section. Any recapture of 
credit calculated against the section 42 housing cooperative under 
subsection (j) shall be an increase in the tax under this chapter for 
the holders of the non-patron stock in proportion to the relative 
holdings of such stock during the period giving rise to such 
recapture.''.
            (2) Section 42(g)(2)(B) of such Code is amended by striking 
        ``and'' at the end of clause (iii), by striking the period at 
        the end of clause (iv) and inserting ``, and'', and by 
        inserting after clause (iv) the following new clause:
                            ``(v) does not include any amounts paid by 
                        a tenant in connection with the acquisition or 
                        holding of any patron stock (within the meaning 
                        of section 1389(b)(1)(A)(ii)).''.
            (3) Section 42(i) of such Code is amended by adding at the 
        end the following new paragraph:
            ``(8) Impact of section 42 housing cooperative's right of 
        first refusal to acquire stock of a section 42 housing 
        cooperative.--
                    ``(A) In general.--No Federal income tax benefit 
                shall fail to be allowable to a non-patron or patron 
                shareholder (within the meaning of section 1389(b)(1)) 
                of a section 42 housing cooperative (as defined in 
                section 1389(b)(1)) with respect to any qualified low-
                income building merely by reason of a right of first 
                refusal or option or both held by the section 42 
                housing cooperative to purchase non-patron stock of the 
                cooperative after the close of the compliance period 
                for a price which is not less than the minimum purchase 
                price determined under subparagraph (B).
                    ``(B) Minimum purchase price.--For purposes of 
                subparagraph (A), the minimum purchase price for the 
                stock of a section 42 housing cooperative is an amount 
                equal to the present value of the remaining 
                depreciation deductions which would be allowable under 
                section 1389(c)(1) to the holder of such stock. For 
                purposes of determining present value, the discount 
                rate provided in subsection (b)(2)(C)(ii) shall be 
                applicable as determined at the time of the exercise of 
                such option or right of first refusal.''.
            (4) Section 1381(a) of such Code is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting '', and'', and by adding 
        at the end the following new paragraph:
            ``(3) any section 42 housing cooperative (as defined in 
        section 1389(b)(1)).''.
            (5) The table of sections for part III of subchapter T of 
        chapter 1 of such Code is amended by adding at the end the 
        following new item:

        ``Sec. 1389. Special rules for section 42 housing cooperatives 
                            and their shareholders.''.
                                 <all>
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