I
105TH CONGRESS
2D SESSION
H. R. 4386
To amend the Internal Revenue Code of 1986 to provide for the tax treatment
of section 42 housing cooperatives and the shareholders of such coopera-
tives, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
AUGUST 3, 1998
Mr. RAMSTAD (for himself, Mr. WELLER, and Mr. METCALF) introduced the
following bill; which was referred to the Committee on Ways and Means
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 Representa-
tives of the United States of America in Congress assembled,
SECTION 1. TAX TREATMENT OF SECTION 42 HOUSING CO-
OPERATIVES AND SHAREHOLDERS OF SUCH
COOPERATIVES.
(a) IN GENERAL.—Part III of subchapter T of chap-
ter 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 CO-
OPERATIVES 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 ac-
count 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 co-
operative 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 un-
paid by the cooperative on its indebtedness con-
tracted—
‘‘(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 share-
holders of such cooperative shall be allowed a deduc-
tion 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 share-
holder deduct an amount in excess of such patron
shareholder’s proportionate share of such specified
items:
‘‘(A) Real estate taxes allowable as a de-
duction 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 coopera-
tive during such taxable year on its indebted-
ness 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 pur-
poses of this section—
‘‘(1) SECTION 42 HOUSING COOPERATIVE.—The
term ‘section 42 housing cooperative’ means a cor-
poration—
‘‘(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 co-
operative 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 co-
operative and who are residents in the
houses or apartment buildings owned by
the cooperative;
‘‘(B) in which each of the holders of pa-
tron stock is entitled, solely by reason of the
patron’s ownership of such stock in the cooper-
ative, 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 re-
ceive 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 in-
come 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-in-
come 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 (in-
cluding 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 cooper-
ative 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, attrib-
utable 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 RE-
QUIRED.—Clause (i) shall apply with re-
spect to any section 42 housing cooperative
only if such cooperative elects its applica-
tion. Such an election, once made, may be
revoked only with the consent of the Sec-
retary.
‘‘(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 ap-
proval of such cooperative:
‘‘(i) In any case in which a person ac-
quires stock of a section 42 housing coop-
erative 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 lease-
hold 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 sec-
tion 42 housing cooperative which is a mutual
housing association, this section shall be ap-
plied—
‘‘(i) by substituting ‘membership cer-
tificates’ for ‘stock’ or ‘shares of stock’,
and
‘‘(ii) by substituting ‘membership cer-
tificate-holders’ for ‘shareholders’.
‘‘(B) MUTUAL
HOUSING
ASSOCIATION.—
For purposes of subparagraph (A), the term
‘mutual housing association’ means a resident-
controlled, State-chartered organization de-
scribed in section 501(c)(3) and exempt from
tax under section 501(a).
‘‘(c) TREATMENT AS PROPERTY SUBJECT TO DEPRE-
CIATION.—
‘‘(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 deprecia-
tion under section 167(a). Such shares of stock
shall be treated as residential real property for
purposes of determining the appropriate depre-
ciation method under section 168(b), the appli-
cable 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 share-
holder (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 allow-
ance for depreciation under section 167(a)
shall, to the extent such proprietary lease or
right of tenancy is used by such patron share-
holder in a trade or business or for the produc-
tion 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 sec-
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 share-
holder’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 consider-
ation received by the holder of such stock shall not exceed
the shareholder’s adjusted equity in such stock. For pur-
poses 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 COOP-
ERATIVE.—Except as provided in regulations under sec-
tion 216(e), no gain or loss shall be recognized on the dis-
tribution 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 non-
recognition 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 hous-
ing 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 amend-
ed by striking ‘‘and’’ at the end of clause (iii), by
striking the period at the end of clause (iv) and in-
serting ‘‘, 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 ac-
quisition 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
HOUSING
CO-
OPERATIVE’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 mean-
ing of section 1389(b)(1)) of a section 42 hous-
ing 
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 sec-
tion 42 housing cooperative to purchase non-pa-
tron stock of the cooperative after the close of
the compliance period for a price which is not
less than the minimum purchase price deter-
mined 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 de-
ductions which would be allowable under section
1389(c)(1) to the holder of such stock. For pur-
poses of determining present value, the discount
rate provided in subsection (b)(2)(C)(ii) shall be
applicable as determined at the time of the ex-
ercise 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 fol-
lowing new paragraph:
‘‘(3) any section 42 housing cooperative (as de-
fined in section 1389(b)(1)).’’.
(5) The table of sections for part III of sub-
chapter 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.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
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