The dispute between sure house owners of pursuits in low revenue housing tasks and never for revenue sponsors has taken an unsightly flip. AMTAX Holdings 227, LLC has filed go well with in the US District Court docket for the Southern District of New York in opposition to accounting agency CohnReznick LLC. CohnReznick is a prime twenty agency. In keeping with their web site, their inexpensive housing group has greater than 75 devoted companions.

AMTAX alleges breach of fiduciary responsibility, skilled negligence and fraud. The claims concern the computation of “exit taxes”, which is a little bit complicated as a result of there’s no taxing authority concerned within the case. The allegations come from the peculiar method the federal authorities makes use of the tax code to subsidize inexpensive housing and the mini trade that has developed across the program.

The Low Earnings Housing Tax Credit score

The foremost federal subsidy to inexpensive housing is embedded in Part 42 of the Inside Income Code – the Low Earnings Housing Tax Credit score. The credit score is apportioned among the many states primarily based on inhabitants and doled out to tasks by state housing authorities. There’s a desire in favor of not-for-profit sponsors. After all the NFPs haven’t any use for the credit which is why we find yourself with entities like Tenants Improvement II LP (TDLP), which is handled as a partnership for revenue tax functions. TDLP owned and operated a 185 scattered web site housing undertaking within the South Finish of Boston known as SETH II (Do not confuse the South Finish with South Boston. Belief me.).

AMTAX is the investor restricted associate in TDLP proudly owning 99.99%. Alden Torch LLC manages a portfolio of LIHTC investments together with AMTAX’s. Alden Torch acquired the administration relationships from the chapter of Capmark. Tax Credit score Holdings III, LLC (TCH) additionally managed by Alden Torch is a particular restricted associate proudly owning 0.001%. Tenant Improvement II Company (GP) is the the overall associate of TDLP proudly owning 0.009%. Tenants Improvement Company (TDC) is a Massachusetts public charitable company concerned in selling inexpensive housing in Boston’s Historic South Finish. TDC owns GP. It additionally has a proper of first refusal (ROFR) that enables it to purchase the undertaking for a sure value if the ROFR is triggered. TDC additionally, apparently, owns the land that the undertaking is positioned on as it’s entitled to floor rents which have collected over time.

That ROFR value is what creates the meat with CohnReznick, however to grasp that we have to know a little bit extra in regards to the credit score. The best way the credit score works is that it’s claimed by TDLP over ten years, which most likely means it exhibits up on eleven tax returns with lower than a full yr credit score within the first and eleventh years. The credit score is contingent on the undertaking being operated as inexpensive housing in accordance with some fairly complicated rules. After the ten years are up there are 5 years the place it’s topic to recapture. There’s a additional fifteen yr affordability requirement however that’s dealt with by state companies. The IRS is solely out of the image at this level.

That could be a good level for AMTAX to get out of proudly owning the undertaking. AMTAX has a number of investor companions possible a financial institution or banks that put cash in to assist fund the event and in addition pay all of the legal professionals, accountants and whatnot who’re required to make this all work. AMTAX can even have a GP possible owned by Alden Torch or some associated get together. The buyers bought the credit they bargained for and not must be involved with recapture. Time to maneuver on.

That was the state of affairs in 2017.

The Orignal ROFR Worth

The minimal value that the investor could be required to take beneath a LIHTC ROFR is the debt securing the property that’s a minimum of 5 years outdated plus taxes attributable to the sale i.e. “exit taxes”. For the reason that present mortgages are usually assumed in these offers the one cash that adjustments fingers is the cost to the investor restricted associate for exit taxes. As of June 30, 2017 CohnReznick computed the exit taxes for AMTAX to be $7,737,812. The computation was primarily based on a grossed up company tax fee utilized to AMTAX’s deficit capital account, A subsequent computation additionally by CohnReznick lowered the quantity to $5,382,990 in recognition of the discount in company charges because of the Tax Cuts And Jobs Act of 2017.

That exit tax computation appears to the usual follow within the trade. The deficit capital represents losses in extra of capital contributions that have been allotted to the investor restricted partnership giving them a tax profit along with the credit that they have been allotted. So far as I can inform no person within the trade wonders if that’s the precise tax influence on the investor, which is what a very literal minded particular person like me would consider. Realistically that’s simply not sensible. Additionally there appears to be an implicit assumption that the capital account is an revenue tax foundation capital account.

AMTAX talking by way of Alden Torch indicated that they weren’t all in favour of being taken out for that paltry sum believing that the property was value much more and it ought to go available on the market. In the marketplace it went and there have been some gives. Tenants Improvement Company claimed that the gives triggered its ROFR which it was now exercising. The ROFR sort of blind sided AMTAX which tried to withdraw its authorization on the market.

That triggered litigation which I coated in 2021 as did Beth Healy of WBUR. the end result of that litigation was that the ROFR being worded the way in which it’s to fulfill the requirement of a an Inside Income Code part (42(i)(7) doesn’t make a federal case out of it. So the battle has moved to Massachusetts Superior Court docket in Suffolk County the place Tenants Improvement Company is suing AMTAX and Alden Torch for slander of title, breaches of contract, and tortious interference with contract. That case was filed June 17, 2020 and primarily based on the file seems to be simply ready for a choice.

The New ROFR Worth

On November 30 2019 CohnReznick got here up with a brand new dramatically totally different tax computation. It was zero. The argument is that the sale of the property doesn’t exit the investor from the partnership. So the one legal responsibility that’s deemed proceeds of the sale is the mortgage of roughly $17 million, which is lower than the property’s foundation. The opposite $25 million or so of nonrecourse liabilities that have been accessible to permit AMTAX’s capital account to go adverse are usually not affected by a sale of the property.

The rules beneath 704(b) have an idea referred to as “minimal achieve”. Minimal achieve locations a restrict on the quantity of losses that may be allotted to a restricted associate past their contribution. Simplistically that’s how far adverse their capital account can go. If you wish to dig into the small print and explanations of CohnReznick’s computations they’re accessible right here in displays within the Mass Superior Court docket litigation. It’s exhausting to see how liabilities might have been counted as going into minimal achieve, however have them nonetheless hanging after disposition of the property.

Minimal achieve is outlined in Reg 1.704(d)(1):

“The quantity of partnership minimal achieve is set by first computing for every partnership nonrecourse legal responsibility any achieve the partnership would understand if it disposed of the property topic to that legal responsibility for no consideration aside from full satisfaction of the liabilities…”

Within the displays there may be an electronic mail dated November 2, 2022 from CohnReznick responding to Alden Torch’s considerations in regards to the new tax computation which included:

“The ‘fourth calculation’ that you simply reference is a sale of the property on the minimal buy value as outlined in Inside Income Code Part 42(i)(7), it isn’t an exit tax computation. Extra particularly, it not an exit tax calculation given the unsecured debt state of affairs that exists right here.”

How did debt that’s unsecured work its method into the minimal achieve computation? If I used to be educating a course for a Masters in Tax program, I would use that as an excellent examination query.

Who Is The Consumer?

Within the electronic mail in regards to the fourth calculation CohnReznick couldn’t go into to particulars due to consumer confidentiality. The consumer was TDLP. AMTAX managed by Alden Torch is the 99.99% restricted proprietor of TDLP. The computation might decide how cash cut up between them and the entity that owned the 0.009% basic associate. It might need been a good suggestion to incorporate them within the dialogue relatively than having this sprung on them. Regardless, it could have been good to incorporate a tax lawyer within the evaluation significantly if I’m proper about there being a possible inconsistency in together with liabilities within the minimal achieve computation however not the ROFR computation.

Within the motion in opposition to CohnReznick AMTAX appears to argue that different litigation is the results of its efforts to put aside the “sham ROFR calculation” and that it’s entitled to a minimum of $8.5 million in exit taxes. That is in keeping with the truth that the preliminary federal authorized actions have been filed in Could of 2020 not lengthy after the ultimate CohnReznick ROFR computation.

AMTAX filed its grievance on February 9, 2023. The newest motion is letters about when CohanReznick might be submitting a solution.

Different Protection

Law360 has CohnReznick Secretly Diverted Tax, Partnership Tells Court docket by Anna Scott Farrell.