BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                     AB 771


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 771  
          (Atkins) - As Amended May 12, 2015




                                      SUSPENSE



          Majority vote.  Tax levy.  Fiscal committee. 


          SUBJECT:  Personal income and corporation taxes: credits:  
          rehabilitation.


          SUMMARY: Allows a temporary income tax credit for qualified  
          costs paid or incurred by a taxpayer in rehabilitation of a  
          certified historic structure, as defined ("the Historic  
          Preservation Tax Credit"), in modified conformity with the  
          federal income tax laws, subject to an aggregate annual cap of  
          $50 million. Specifically, this bill:  












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          1)Declares legislative intent to preserve and restore  
            California's historic buildings, which are an important asset  
            to communities throughout California, and to create tools to  
            incentivize economic development and revitalize economically  
            distressed areas. 

          2)Allows an income tax credit, under both the Personal Income  
            Tax (PIT) and the Corporation Tax (CT) laws, in an amount  
            equal to 20% of the qualified rehabilitation expenditures with  
            respect to a certified historic structure, as defined.

          3)Increases the applicable percentage to 25% in the case of a  
            certified historic structure that meets one of the following  
            criteria:

             a)   The structure is located on federal surplus property,  
               state, or local surplus property, as defined;

             b)   The rehabilitated structure includes affordable housing  
               for lower-income households, as defined by Health and  
               Safety Code Section 50079.5;

             c)   The structure is located in a designated census tract,  
               as defined in Revenue and Taxation Code Section  
               17053.73(b)(7);

             d)   The structure is a part of a military base reuse  
               authority established pursuant to Title 7.86 commencing  
               with Section 67800 of the Government Code; or,

             e)   The structure is a transit-oriented development that is  
               a higher density, mixed-use development within a walking  
               distance of one-half mile of a transit station. 

          4)Allows the credit for taxable years beginning on or after  
            January 1, 2016, and before January 1, 2021.

          5)Provides that the term "certified historic structure" means a  











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            certified historic structure, as defined in Section 47(c)(3)  
            of the Internal Revenue Code (IRC), that is a structure  
            located in this state and is listed on the California Register  
            of Historical Resources.

          6)Defines a "qualified residence" by reference to IRC Section  
            163(h)(4), as a residence that will be owned and occupied, or  
            will be occupied after the rehabilitation, by an individual  
            taxpayer as a taxpayer's principal residence, provided that  
            the taxpayer's modified adjusted gross income is $200,000 or  
            less. 


          7)Defines the term "qualified rehabilitation expenditure" by  
            reference to IRC Section 47(c)(2), but modifies the federal  
            definition to provide that "qualified rehabilitation  
            expenditures" may include both of following:


             a)   Expenditures in connection with the rehabilitation of a  
               building even if the building is, or is reasonably expected  
               to be, tax-exempt use property. 


             b)   Expenditures incurred by the taxpayer with respect to a  
               qualified principal residence for the rehabilitation of the  
               exterior of the building or rehabilitation necessary for  
               the functioning of the home, including, but not limited to,  
               rehabilitation of the electrical, plumbing, or foundation  
               of the principal residence. 


          8)Allows the Historic Preservation Tax Credit for qualified  
            rehabilitation expenditures for a qualified residence only if  
            the residence is determined jointly by the CTCAC and the OHP  
            to have a public benefit in the year of completion.  The  
            amount of the Historic Preservation Tax Credit shall only be  
            allowed in an amount equal to or more than $5,000, not to  
            exceed $25,000; and the tax credit shall only be allowed to a  











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            taxpayer once every 10 taxable years.


          9)Requires a taxpayer to request an allocation of the Historic  
            Preservation Tax Credit from California Tax Credit Allocation  
            Committee (CTCAC), in the form and manner prescribed by CTCAC.


          10)Specifies that a tax credit allocation provided to a taxpayer  
            shall not constitute a determination by CTCAC regarding a  
            taxpayer's eligibility for the Historic Preservation Tax  
            Credit.


          11)Provides that rehabilitation must commence within 18 months  
            of the issuance of the tax credit allocation; otherwise, the  
            allocation shall be forfeited and the credit amount associated  
            with the tax credit reservation shall be treated as an unused  
            allocation tax credit amount. 


          12)Authorizes the California Tax Credit Allocation Committee  
            (CTCAC) to allocate the Historic Preservation Tax Credit and  
            requires CTCAC to do all of the following:


             a)   On and after January 1, 2016, and before January 1,  
               2021, to allocate tax credits to applicants, as provided.

             b)   Establish a procedure for applicants to file with the  
               CTCAC a written application, on a form jointly prescribed  
               by CTCAC and the Office of Historic Preservation (OHP) for  
               the allocation of the tax credit. 

             c)   Establish criteria for allocating tax credits,  
               consistent with the requirements of the tax credit program.  
                Criteria shall include, but not be limited to, all of the  
               following:












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               i)     The number of jobs created by the rehabilitation  
                 project, both during and after the rehabilitation of the  
                 structure;

               ii)    The expected increase in state and local tax  
                 revenues derived from the rehabilitation project,  
                 including those from increased wages and property taxes;  
                 and,

               iii)   Any additional incentives or contributions included  
                 in the rehabilitation project from federal, state, or  
                 local governments.

               iv)    Finding of a public benefit, as determined jointly  
                 with the OHP, in the case of qualified rehabilitation  
                 expenditures with respect to a qualified residence. 

             d)   Determine and designate, in consultation with the OHP,  
               applicants that meet the specified requirements to ensure  
               that the rehabilitation project meets the Secretary of the  
               Interior's Standards for Rehabilitation, as specified. 

             e)   Process and approve, or reject, all tax credit  
               allocation applications.

             f)   Allocate an aggregate amount of the tax credits, under  
               both the PIT and the CT laws, and any carryover of  
               unallocated credits from prior years, subject to the annual  
               cap of $50 million. 

             g)   Certify tax credits allocated to taxpayers. 

             h)   Allocate a tax credit pursuant to the taxpayer's tax  
               credit allocation upon receipt of a cost certification for  
               the qualified rehabilitation expenditures.  For projects  
               with qualified rehabilitation expenditures in excess of  
               $250,000, the cost certification must be issued by a  
               licensed certified public accountant. 












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             i)   Provide the Franchise Tax Board (FTB) an annual list of  
               the taxpayers that were allocated a credit, as specified,  
               including each taxpayer's taxpayer identification number  
               and the amount allocated. 

             j)   Establish procedures for the recapture of amounts  
               allocated for a tax credit for the rehabilitation of a  
               qualified residence if the taxpayer does not use the  
               qualified residence as his/her principal residence within  
               two years after the rehabilitation. 

          13)Requires CTCAC to set aside $10 million of tax credits each  
            calendar year for taxpayers with qualified rehabilitation  
            expenditures of less than $1 million.  To the extent that this  
            amount is not fully reserved in any calendar year, the unused  
            portion shall become available for reservation to other  
            taxpayers. 


          14)Allows the CTCAC to adopt a reasonable fee in an amount  
            sufficient to cover its expenses and the expenses by the OHP  
            incurred in administering the Historic Preservation Tax Credit  
            program.

          15)Authorizes the taxpayer to carry forward the tax credit to  
            the following tax year, and succeeding seven years, if  
            necessary, until the credit is exhausted.

          16)Disallows any deduction for the amount of paid or incurred by  
            the taxpayer for which a credit is allowed to the taxpayer.

          17)Requires the basis of the property to be reduced by the  
            amount of the Historic Preservation Tax Credit allowed.


          18)Adds a five-year tax credit recapture provision, in  
            conformity with IRC Section 50(a), when the property, or  
            interest in the property, is sold. 












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          19)Provides that the credit shall be allocated to the partners  
            of a partnership owning the historic rehabilitation project in  
            accordance with the partnership agreement, regardless of how  
            the federal historic rehabilitation tax credit, with respect  
            to the project, is allocated to the partners, or whether the  
            allocation of the credit under the terms of the agreement has  
            substantial economic effect, within the meaning of Section  
            704(b) of the Internal Revenue Code (IRC). 

          20)Allow the Historic Preservation Tax Credit to be used to  
            reduce the taxpayer's tax liability below the tentative  
            minimum tax. 


          21)Requires the Legislative Analyst Office, beginning January 1,  
            2017, to collaborate with the CTCAC to review the  
            effectiveness of the historic building tax credit program.   
            Provides that the review shall include an analysis of the  
            demand for the tax credit, the types and uses of projects  
            receiving the tax credit, the jobs created by the use of the  
            tax credit, and the economic impact of the tax credit.

          22)Contains legislative findings and declarations relating to  
            the goals, purposes and objectives of the tax credit, as well  
            as performance indicators, as required by Section 41 of the  
            Revenue and Taxation Code (R&TC). 

          23)Takes effect immediately as a tax levy. 

          EXISTING FEDERAL LAW:  


          1)Allows a two-tiered tax credit for the rehabilitation expenses  
            of older or historic buildings.  Specifically, it provides:

             a)   A 10% credit for the rehabilitation expenses of  
               non-historic buildings with an additional requirement that  
               the building must have been originally constructed before  











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               1936; and, 

             b)   A 20% credit for the rehabilitation expenses of a  
               certified historic structure, i.e. a structure that is  
               listed on the national Register of Historic Places or  
               located in a Registered Historic District and determined to  
               be of significance to the Historical District.

          2)Allows a taxpayer engaged in a trade or business to deduct all  
            expenses that are considered ordinary and necessary in  
            conducting that trade or business. 

          EXISTING STATE LAW does not conform to the federal tax credit  
          for rehabilitation expenses of older or historic buildings, but  
          does allow taxpayers, in conformity with the federal law, to  
          deduct ordinary and necessary business expenses.  
           
          FISCAL EFFECT:  The FTB staff estimates that this bill will  
          result in an annual revenue loss of $19 million in the fiscal  
          year (FY) 2015-16, $41 million in FY 2016-17, and $48 million in  
          FY 2017-18.  
          
          COMMENTS:  


           1)The Author's Statement  :  The author has provided the following  
            statement in support of this bill:


            "California is one of the few states to not provide an  
            incentive for the preservation of our historic buildings.  A  
            state tax credit for this purpose would help stimulate local  
            economies, revitalize downtown areas and communities, promote  
            and increase the supply of affordable housing, support smart  
            growth through infill development, encourage property  
            maintenance and rehabilitation, and leverage use of the  
            federal rehabilitation tax credit.













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            "Additionally, it would increase construction and building  
            industry job creation, increase state tax revenues through  
            increased employment and wages, increase local property tax  
            revenues through increased property values, and increase local  
            tax revenues through sales tax and heritage tourism.


            "AB 771 helps communities adjust to the phase-out of  
            redevelopment dollars and stimulates public and private  
            investment, all while building civic pride as we celebrate our  
            heritage and preserve California's past."


           2)Federal Historic Tax Credit (HTC)  .  The Federal Historic  
            Preservation Tax Incentives Program, created in 1976, is  
            administered by the National Park Service in partnership with  
            the State Historic Preservation Office.  The goal of the  
            program is to promote community revitalization and encourage  
            private investment through historic building rehabilitation.   
            Over 39,600 projects to rehabilitate historic buildings have  
            been undertaken since the first project using the historic tax  
            incentives was completed in 1977.<1>  The HTC is claimed not  
            only by large projects.  As reported by the National Park  
            Service, in fiscal year 2013, almost 8% of the certified  
            projects were under $100,000, 46% were under $500,000, and the  
            majority of all projects - 59% - involved less than $1 million  
            in costs.  (Id., p. 11.)   



          Housing has been the single most important use for rehabilitated  
            historic buildings under the program.  Over the past five  
            years, between 36% and 69% of the projects have included  
            housing.  Almost one-half of the projects certified in 2013,  
            or 46%, reported housing as a final primary use, including  
          ---------------------------
          <1> Federal Tax Incentives for Rehabilitating Historic  
          Buildings, U.S. Department of the Interior, National Park  
          Service Technical Preservation Services, Washington, DC, March  
          2014.  










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            multiple-family housing.  As a result of this program, more  
            than 130,000 of low- and moderate-income housing units have  
            been created.  According to the report issued by the National  
            Park Service, one of the objectives of the program is to  
            create and retain affordable housing. (Id., p. 12.)  Other  
            incentives utilized by developers, in addition to the HTC,  
            include the New Market Tax Credit Program, Tax Increment  
            Financing, and local property tax abatements.  

          To qualify for the historic tax credit, a project must satisfy  
            the requirements of IRC Section 47 and related regulations, as  
            well as architectural standards regulated by the National  
            Parks Service.  Certification of Historic Significance is the  
            first step in establishing eligibility for the HTC.  A  
            building must be individually listed in the national Register  
            of Historic Places or be certified as contributing to a  
            registered historic district in order to qualify for the 20%  
            credit.  A building that has been certified as non-significant  
            (i.e., not contributing to a National Register historic  
            district), but was built before 1936, can qualify for a 10%  
            tax credit if it is rehabilitated for income-producing,  
            non-residential purposes.  A developer must submit an  
            application detailing the plans and specifications for the  
            rehabilitation.  The plans must satisfy the Secretary of  
            Interior Standards for Rehabilitation. 

          Once the project is completed, a request for certification of  
            completion is submitted.  If the request is granted, the  
            rehabilitation is considered a "certified rehabilitation."  A  
            certification of a completed project is issued only when all  
            work has been finished on the certified historic building.   
            Generally, the HTC must be claimed in the tax year in which  
            the rehabilitated building is placed in service.  However, the  
            credit may be claimed before the date the property is placed  
            in service under the rules for qualified progress expenditures  
            (IRC Section 47(d).)  Existing federal law contains a  
            so-called "recapture provision," which provides that a portion  
            of the tax credit must be recaptured (returned to the Federal  
            Government) if the rehabilitated building is sold or otherwise  











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            ceases to qualify within five years from the date the building  
            is placed in service. 
           3)The Financing Structure  .  In order to raise funds for  
            rehabilitation of historic buildings, the owners, in most  
            cases, enter into various financing transactions with private  
            entities using the HTC, among other tax and financial  
            incentives.  A property owner, because of his/her tax  
            position, may elect to syndicate the HTC to a third party  
            through the issuance of partnership or limited liability  
            company (LLC) interests.  The financing of a historic building  
            rehabilitation using the HTC requires the participation of a  
            private investor (mostly a taxable corporation) that could  
            take advantage of the credits to reduce its income tax  
            liability.  A typical arrangement is to match a corporate tax  
            credit investor entity with a project developer, creating a  
            partnership (such as a LLC) where the investor is allocated  
            the tax credits in exchange for cash and the developer acts as  
            a managing partner (or member).  Usually, the percentage of  
            allocated tax credits matches the percentage of allocated  
            profits.  Thus, if an investor entity is allocated all of the  
            tax credits, then that entity will also receive all or nearly  
            all of the profits for at least five years.  In exchange, the  
            developer will receive a developer fee or other distributions.  
             An investor must retain ownership of the property (i.e.  
            remain in the partnership) for at least five years after the  
            project is placed in service in order to receive the full  
            benefit of the tax credits, or the tax credits will be subject  
            to recapture.  At the end of this period, either the developer  
            will buy out the investor or the investor will sell its  
            interest in the partnership.  



          In the case of a HTC, a certified historic structure, i.e. a  
            building, must be owned by either the entity that utilizes the  
            credit or a master tenant that leases the entire building from  
            the owner.  In a case of a master tenant partnership  
            structure, the corporate entity will be allocated most, if not  
            all, of the credit and profits.  The corporate entity will  











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            also likely to receive an annual priority return, the amount  
            of which is equal to a very small percentage of the investor's  
            equity in the project.  In exchange, the investor will  
            contribute cash to the partnership to provide financing for  
            the rehabilitation project.  It is expected that after the  
            expiration of the five-year recapture period the financing  
            structure will be unwound and the property owner will directly  
            own the historic building. 
           4)Tax Incentives:  Do They Work  ?  Generally, advocates for tax  
            incentives, such as Arthur Laffer and N. Gregory Mankiw, argue  
            that reduced taxes allow taxpayers to invest money that would  
            otherwise be paid in taxes to better use, thereby creating  
            additional economic activity.  "Supply-siders" posit that  
            higher taxes do not result in more government revenue;  
            instead, they suppress additional innovation and investment  
            that would have led to more economic activity and, therefore,  
            healthier public treasuries, under lower marginal tax rates.   
            Industry-specific credits complement this theory by lowering  
            tax costs for industries that provide positive multiplier  
            effects, such as stimulating economic activity among suppliers  
            and increasing economy-wide purchasing power resulting from  
            hiring additional employees. 


            Critics, however, assert that tax incentives rarely result in  
            additional economic activity.  Companies locate in California  
            because of its competitive advantages, namely its environment,  
            weather, transportation infrastructure, access to ports,  
            highways, and railroads, as well as its highly skilled  
            workforce and world class higher education system.  These  
            advantages trump perceived disadvantages resulting from  
            California's tax structure and other policies.  Additionally,  
            critics argue that industry-specific tax incentives do not  
            actually effect business decisions; instead, enhanced credits  
            and deductions reward firms for investments they would have  
            made anyway.  [See, e.g., D. Neumark, J. Zhang, and J. Kolko,  
            Are Businesses Fleeing the State?  Interstate Business  
            Location and Employment Change in California, (a PPIC report  
            showing that, while California loses jobs due to firms leaving  











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            the state, these losses have a minimal effect on the economy);  
             D. Neumark and J. Kolko, Are California Companies Shifting  
                                                             Their Employment to Other States? (finding that, while  
            California companies have shifted jobs to other states,  
            out-of-state firms have offset these losses by hiring more in  
            California).]  



            As noted by the Legislative Analyst Office (LAO) in the  
            presentation at this Committee's hearing "Assessing Tax  
            Expenditure Programs in Light of California's Fiscal  
            Challenges" on February 22, 2012, "Policymakers should regard  
            many TEPs [tax expenditure programs] evaluations with  
            skepticism."  It was further explained that, "Analysis of  
            alternative uses of public funds is difficult and often  
            omitted entirely from . . . studies [of TEPs].  These studies  
            also usually rely on extensive and sometimes subjective  
            assumptions which, if changed, can produce very different  
            results . . . .  It is rare that the value of TEPs can be  
            demonstrated conclusively compared to these alternate uses of  
            tax dollars.  If the Legislature wishes to use TEPs, despite  
            these challenges, it is important that TEPs be used  
            cautiously, structured carefully, and reviewed regularly to  
            consider if they operate in an effective and cost-efficient  
            manner."
           5)The Proposed Historic Preservation Tax Credit: a Different  
            Kind of Credit  ?  This bill creates a historic preservation tax  
            credit program modeled after the federal HTC.  Unlike the  
            federal HTC, however, the proposed credit is not permanent;  
            the credit is allowed for seven taxable years, beginning with  
            the 2016 tax year.  This bill also provides for an increased  
            tax credit rate of 20% and allows an additional 5% for certain  
            projects, such as low-income housing; a transit-oriented  
            development; and a structure located on federal, state, or  
            local surplus property, in a designated census tract, on a  
            specified military base.  A building that is not included in  
            the National Register of Historic Places may still qualify for  
            the state credit if it appears on the California Register of  











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            Historical Resources. 



          The proposed credit is different from other state tax credits,  
            where a certain class of individuals or businesses may claim a  
            credit based on membership in a certain industry or business  
            location.  In contrast to many tax incentives in California,  
            the proposed tax credit is targeted, is capped at $50 million  
            per calendar year, and is required to be allocated to  
            taxpayers by the CTCAC on a competitive basis.  In many  
            respects, it is similar to a grant program.  This bill  
            prescribes certain criteria for CTCAC to utilize in  
            determining whether a project should be awarded the state HTC,  
            including the estimated number of jobs and potential state and  
            local tax revenues to be generated by the project.  Thus, the  
            proposed credit is intended to result in a quantifiable public  
            benefit.  Finally, the LAO is required to review the  
            effectiveness of this tax credit program, on an annual basis.  
            The credit program sunsets on December 1, 2021, and is not  
            refundable.   
           6)How Effective Are Historic Tax Credit Programs in Other  
            States  ?  Thirty-five states offer state tax incentives of  
            various kinds for historic preservation rehabilitation  
            projects.  In many states, the income tax credit programs are  
            similar to the federal HTC program.  Several studies conducted  
            by Rutgers University have shown that "in many parts of the  
            country, $1 million in historic rehabilitation yields markedly  
            better effects on employment, income, GSP, and state and local  
            taxes than an equal investment in new construction or many  
            other economic activities (e.g., manufacturing or services)."  
            <2>  It was concluded that states with the strongest  
            historical preservation tax credit statutes regularly lead the  
            nation in the use of the federal HTC, which, due to its  
            leverage and multiplier effects, benefits both state economies  
            and the national economy.  For example, an annual report of  

          ---------------------------


          <2> Annual Report on the Economic Impact of the Federal Historic  
          Tax Credit for FY 2012, Rutgers University, E. Bloustein School  
          of Planning and Public Policy, p. 5.








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            the Ohio Historic Preservation tax credit program states that  
            the $327 million in tax credits approved are projected to  
            leverage more than $2 billion in private investment and  
            federal tax credits, which translates to $6.25 of investment  
            for every dollar of the state tax credit.<3>  The Ohio  
            Historic Preservation tax credit is capped at $60 million per  
            year and allocated to applicants. According to a 2011 economic  
            impact study conducted by Cleveland State University, the $246  
            million in approved tax credits is expected to result, during  
            the construction period alone, in nearly $10 billion in  
            economic activities in the state between 2007 and 2025.   
            Recognizing the economic impact and job creation of the  
            program, the Ohio General Assembly renewed the Program in the  
            state's fiscal year 2012-13 budget.  Similarly, it was found  
            that in Minnesota and North Carolina, respectively, every  
            dollar of the state historic tax credit creates $8.32 in  
            economic activity and $12.51 in economic benefit. 


           7)Bifurcation of the Credit  .  A taxpayer who uses a state tax  
            credit to reduce his/her state tax liability generally loses  
            the ability to take a federal deduction for the state tax paid  
            with the use of the state historic tax credit.  As such, the  
            value of a state tax credit is less that its face value.  In  
            practice, when federal credits are allocated through a  
            partnership to an investor, ownership interests are valued at  
            $0.95 or more on the dollar, while the after-tax value of the  
            state tax credits tends to be in the range of $0.50 to $0.55  
            on the dollar.<4>  Furthermore, a state tax credit has value  
            only to the extent that the taxpayer holding the credit has  
            sufficient tax liability in the state.  To remedy this  
            problem, some states have permitted an outright sale of the  
            credit or made it refundable, while others have allowed a  
          ---------------------------


          <3> Ohio Historic Preservation Tax Credit Program, 2012 Annual  
          Report, prepared by the Ohio Development Services Agency, the  
          Ohio Historical Society and the Ohio Department of Taxation,  
          April 2013, p. 15. 
          <4> State Tax Credits for Historic Preservation, National Trust  
          for Historic Preservation, a policy report, H. Schwartz, p. 3.








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            partnership owning the property to make a disproportionate  
            distribution (or bifurcation) of the federal and state credits  
            to its partners.  The bifurcation approach allows investors to  
            enter into partnership agreements where they can purchase  
            state tax credits without the corresponding federal credits.   
            Thus, bifurcation allows investors to join the developing  
            partnership and be awarded the federal HTC, a state historic  
            tax credit, or both.  Consequently, investors with no federal  
            tax liability, but sufficient state tax liability, would have  
            an incentive to invest in a rehabilitation project that would  
            allow them to offset unrelated state income tax liability with  
            the state HTC.  



          This bill requires that the credit be allocated to the partners  
            of a partnership in accordance with the partnership agreement,  
            regardless of how the federal HTC is allocated to the partners  
            or whether the allocation of the state credit under the  
            partnership agreement has "substantial economic effect."   
            Because this bill specifically excludes any consideration of  
            the "substantial economic effect" of the partners'  
            distributions, it creates a divergence from long-established  
            tax policy and potentially leads to tax shelter opportunities.  


          A bifurcation of the proposed tax credit from the federal HTC  
            highlights a natural tension between the need to draw more  
            investors and investment dollars to projects that rehabilitate  
            historic buildings and create more low-income housing units  
            and tax policy that strives to ensure that investments have  
            substance other than tax incentives.  The bifurcation  
            approach, with very little economic impact on investors other  
            than tax credits, balances at the precipice of tax sheltering  
            activities.  However, this approach was already approved by  
            the Legislature in the case of the state's low-income housing  
            tax credit (LIHTC) program.  The bifurcation has been allowed  
            in large part due to the type of projects created from the  
            investment and the difficulty of raising sufficient capital to  











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            create low-income housing absent the credit incentives.  In  
            that case, the Legislature determined that the benefits of  
            increased project capital exceeded the tax policy concerns of  
            sanctioning a state tax shelter.  Traditionally, the  
            low-income housing tax credit (LIHTC) has been administered  
            just as though it were an allocated grant program.  The Tax  
            Credit Allocation Committee evaluates the applications and  
            allocates the available funds (the amount of which is capped)  
            to those investors/developers who promise to produce the most  
            housing for the state's dollar.  Although the program is in  
            the form of a tax credit, all the participants behave  
            virtually as though they were dealing with an allocation of  
            grant funds.  For this reason, the Legislature decided that it  
            is unlikely that a separation of a state and federal LIHTC  
            would result in a significant increase of tax sheltering  
            activities.  The proposed credit is intended as a tool of  
            economic development, especially in economically distressed  
            areas that are difficult to revitalize and in light of the  
            recent dissolution of the redevelopment program.  The  
            Committee may wish to consider whether the proposed historic  
            preservation tax credit program is sufficiently comparable to  
            the LIHTC program and whether it warrants a similar treatment.  
             
           8)Sale or Abandonment of Partnership Interests  .  As discussed,  
            many rehabilitation projects are developed by a partnership or  
            a LLC, in which the developer is the general partner or  
            manager with a de minimus ownership interest and investors are  
            limited partners/members with a 99.9% ownership interest in  
            the partnership for the tax credit compliance period.  A  
            partner who sells or exchanges his/her partnership interest  
            recognizes a capital loss or capital gain on that sale or  
            exchange depending on the partner's basis in the partnership  
            and the purchase price.  If a partner abandons or forfeits  
            his/her partnership interest, he/she will recognize an  
            ordinary loss, provided that there are no partnership  
            liabilities from which the partner is relieved.  The amount of  
            that loss is equal to the partner's basis in the partnership.   













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          One of the concerns raised in connection with the separation of  
            the state and federal LIHTC was that an investor would be able  
            to offset his/her income (albeit in different tax years) with  
            both the LIHTC and a loss realized from the abandonment or  
            sale of his/her partnership interest.  Consequently, the  
            Legislature decided to defer a recognition of that loss until  
            the first taxable year following the expiration of the federal  
            credit, i.e. a 10-year period, which mitigated the negative  
            effect of an allocation of the state credit lacking  
            substantial economic effect.  This bill would add a similar  
            deferral provision for the recognition of loses in the context  
            of the state historic preservation tax credit program.  
          9)Tax Credit Percentages  .  This bill proposes tax credit  
            percentages that are similar or higher than the federal HTC  
            rates. The Committee may wish to consider whether the proposed  
            percentages should be reduced in light of the fact that the  
            California income tax rates are substantially lower than  
            federal income tax rates. 


           10)Related Legislation  .


             a)   AB 1999(Atkins), of the 2013-14 Legislative Session,  
               would have allowed a tax credit substantially similar to  
               the credit proposed by this bill.  AB 1999 was vetoed.


             b)   AB 166 (Cedillo), of the 2001-02 Legislative Session,  
               would have allowed a tax credit in an amount determined in  
               accordance with provisions of the federal historic  
               rehabilitation tax credit.  AB 166 was held on the Assembly  
               Appropriations Committee's Suspense File. 


          REGISTERED SUPPORT / OPPOSITION:












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          Support


          American Institute of Architects California Council


          American Planning Association, California Chapter


          California Association of Realtors


          California Preservation Foundation


          League of California Cities


          City of Burbank




          Opposition


          California Tax Reform Association







          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098












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