Tax increment financing, government grants, and developer tax consequences: An analysis of statutes, regulations, case law and related policy Considerations

Urban Lawyer

Volumn 40, Issue 2, 2008, Pages 299-329

  Woolever, Alan ^a  

^a UNIVERSITY OF MISSOURI KANSAS CITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

DEVELOPMENT PROJECT; ECONOMIC PLANNING; POLICY STRATEGY; REDEVELOPMENT; REGULATORY APPROACH; TAX SYSTEM; URBAN PLANNING; URBAN POLICY;

KANSAS CITY; MISSOURI; NORTH AMERICA; UNITED STATES;

EID: 70349830122     PISSN: 00420905     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (184)

1. See Council of Dev. Fin. Agencies, Tax Increment Finance Best Practices Reference Guide, 1,3 (2007) [hereinafter TIF Best Practices Reference Guide].
2. During the 2006-2007 calendar year, the Tax Increment Financing Commission of Kansas City, Missouri, approved over $ 126 million in TIF projects. Economic Development Corporation of Kansas City, Missouri, 〈http://www.edckc.com/tif/plans/index〉.htm (last visited Dec. 17, 2007) [hereinafter EDC of KC].
3. Id.
4. Id.
5. Id.
6. Kevin Helliker, Hometown Makes Good - In the 'Other' Kansas City, Finally a Reason for Cheer; A Lost Son's Holiday Return, Wall St. J., Dec. 22, 2006, at Wl.
7. Id.
8. See TIF Best Practices Reference Guide, supra note 1, at 1, 3 (Today forty-nine states and the District of Columbia have TIF enabling legislation. Arizona is the only state that does not have locally controlled TIF enabling legislation.);
9. EDC of KC, supra note 2.
10. TIF Best Practices Reference Guide, supra note 1, at 39-97.
11. I.R.C. § 61 (2000).
12. See William Sanders, Incentives Can Create Tax Liability In Certain Ownership Structures, Kan. City Bus. J., Mar. 9-15, 2007, at 20, available at http://bizjournals.com/kansascity/stories/2007/03/12/focus6.html.
13. See, e.g., Kan. Stat. Ann. §§ 12-1770-12-17,155 (2001); Mo. Ann. Stat. §§ 99.800-99.865 (West 1998); see Handling Tax Increment Financing (TIFs), 2001 A.L.I. A.B.A. 303, 305 [hereinafter ALI-ABA 2001 Course Materials].
14. Larry Marks, The Evolving Use of TIF, Review (Summer 2005), available at http://www.cdfa.net/cdfa/cdfaweb.nsf/fbaad5956b2928b086256efa005c5f78/ 529cccf9cd806eae8625714c00783dfd/$FILE/evolving-tif.pdf;
15. TIF Best Practices Reference Guide, supra note 1, at 1,3.
16. TIF Best Practices Reference Guide, supra note 1, at 1, 3.
17. See, e.g., TIF Best Practices Reference Guide, supra note 1, at 1, 3; Sanders, supra note 11, at 20.
18. See, e.g., Mo. Ann. Stat. § 99.810 (West 1998);
19. TIF Best Practices Reference Guide, supra note 1, at 8
20. See, e.g., Mo. Ann. Stat. § 99.810 (West 1998);
21. TIF Best Practices Reference Guide, supra note 1, at 8.
22. See, e.g., TIF Best Practices Reference Guide, supra note 1, at 28-31;
23. ALI-ABA 2001 Course Materials, supra note 12, at 305.
24. See, e.g., TIF Best Practices Reference Guide, supra note 1, at 28-31;
25. ALI-ABA 2001 Course Materials, supra note 12, at 305.
26. See, e.g., TIF Best Practices Reference Guide, supra note 1, at 28-31;
27. ALI-ABA 2001 Course Materials, supra note 12, at 305.
28. I.R.C. § 61(a) (2000).
29. Section IV below provides a detailed discussion of section 118 which may provide an exclusion from gross income for TIF developers. Other Code sections may provide an applicable exclusion from gross income for TIF developers under appropriate facts.
30. See, e.g., Rev. Rul. 76-395, 1976-2 C.B. 16 (ruling that grants to low-income homeowners for home rehabilitation were in the nature of general welfare and excludible from the recipient's gross income).
31. See Baboquivari Cattle Co. v. Comm'r, 135 F.2d 114 (9th Cir. 1943).
32. See, e.g., Rev. Rul. 98-19, 1998-1 C.B. 840 (ruling that relocation payments made by a local government to an individual whose home was damaged in a flood was in the nature of general welfare and excludible from the recipient's gross income); Rev. Rul. 74-205, 1974-1 C.B. 20 (ruling that replacement housing payments received by individuals under the Housing and Urban Development Act of 1968 were in the nature of general welfare and excludible from the recipient's gross income).
33. I.R.S. Priv. Ltr. Rul. 2006-25-006 (June 23, 2006) (citing Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106,1982-1 C.B. 16).
34. See I.R.S. Priv. Ltr. Rul. 2006-25-006 (June 23, 2006); I.R.S. Priv. Ltr. Rul. 2006-51-003 (Dec. 22,2006); I.R.S. Priv. Ltr. Rul. 2007-09-008 (Mar. 2, 2007).
35. Rev. Rul. 76-131,1976-1 C.B. 16.
36. I.R.S. Priv. Ltr. Rul. 2006-25-006 (June 23,2006).
37. I.R.S. Priv. Ltr. Rul. 2006-51-003 (Dec. 22,2006).
38. I.R.S. Priv. Ltr. Rul. 2007-09-008 (Mar. 2, 2007).
39. See I.R.S. Priv. Ltr. Rul. 2006-25-006 (June 23, 2006).
40. I.R.S. Priv. Ltr. Rul. 2006-51-003 (Dec. 2, 2006).
41. I.R.S. Priv. Ltr. Rul. 2007-09-008 (Mar. 2,2007).
42. I.R.S. Notice 2003-18, 2003-1 C.B. 699.
43. Id. at 17; see also Bailey v. Comm'r, 88 T.C. 1293,1300-01 (1987) (holding that a governmental grant awarded based on property ownership and compliance with building code without regard to individual need was not excludible from gross income under the general welfare exclusion). 37. I.R.S. Priv. Ltr. Rul. 80-38-037 (June 24, 1980).
44. Id.
45. Rev. Rul. 57-102,1957-1 C.B. 26.
46. Rev. Rul. 76-395, 1976-2 C.B. 16.
47. Rev. Rul. 98-19, 1998-1 C.B. 840.
48. See I.R.S. Priv. Ltr. Rul. 80-38-037 (June 24, 1980).
49. See I.R.S. Notice 2003-18, 2003-1 C.B. 699. 44. Id.
50. See Rev. Rul. 76-395,1976-2 C.B. 16.
51. See id.
52. See Comm'r v. Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990) (An electric company required certain customers to make deposits with it to ensure payment for future services. The Supreme Court held that because the taxpayer did not have complete dominion over the customer deposit at the time it was made that the deposit was excludible from gross income at the time it was made).
53. See id. 49. 126 F.2d 725 (5th Cir. 1942).
54. Id. at 726.
55. Id.
56. Id.
57. Id. at 727.
58. Lykes Bros. S.S. Co., 126 F.2d at 727.
59. Id.
60. 135 F.2d 114(1943).
61. Id. at 115.
62. Id.
63. Id.
64. Id. at 115-16. 61. Baboquivari, 135 F.2d at 116.
65. Id.
66. Id.
67. 88 T.C. 1293 (1987).
68. Id.
69. Id. at 1296.
70. Id. at 1301-02.
71. Id. at 1301. The URA made grants to taxpayers who purchased property within a National Register historic district and a city historic district in exchange for the purchaser's agreement to remodel the interior of the structure. The URA would not make a grant until it had received bids for the rehabilitation work, chosen a contractor to perform the work, and entered into a contract with the successful bidder. The amount of the façade grant was determined in advance and never revealed to the taxpayer. Id. at 1295.
72. Bailey, 88 T.C. at 1295.
73. Id. at 1302-03.
74. Id. at 1303.
75. 268 U.S. 628 (1925).
76. Id. at 628-29.
77. Id. at 630-32.
78. Id. at 629, 631.
79. Id. at 632.
80. 93 F.2d 875 (4th Cir. 1938).
81. Id. at 876.
82. Id.
83. Id.
84. Id. at 876-77.
85. 319 U.S. 98 (1943).
86. Id. at 99.
87. Id. at 100.
88. Id.
89. Id. at 102.
90. Detroit Edison Co., 319 U.S. at 102.
91. Id. at 103.
92. Id.
93. See id. at 102.
94. See id.
95. 339 U.S. 583 (1950).
96. Id. at 586.
97. Id. at 587.
98. Id.
99. Id. at 589.
100. Brown Shoe Co., 339 U.S. at 589, 591.
101. Id. at 593.
102. See H.R. Rep. No. 83-1337 (1954); S. Rep. No. 83-1622 (1954).
103. I.R.C. § 118(b) (2000).
104. See H.R. Rep. No. 83-1337 (1954); S. Rep. No. 83-1622 (1954); H.R. Rep. No. 94-1515 (1976) (Conf. Rep.); H.R. Rep. No. 95-1800 (1978) (Conf. Rep.); H.R. Rep. No. 98-861 (1984) (Conf. Rep.); H.R. Rep. No. 99-426 (1986); H.R. Rep. No. 99-841 (1986) (Conf. Rep.); H.R. Rep. No. 104-737 (1996) (Conf. Rep.).
105. I.R.S. Gen. Couns. Mem. 38,944 (Dec. 27, 1982) (citing Eisner v. Macomber, 252 U.S. 189, 207 (1920) (arguing that "income was then read as applying only to the gain derived from capital, labor, or both")).
106. See United States v. Chicago, Burlington & Quincy R.R. Co., 412 U.S. 401 (1973).
107. I.R.C. § 362(c) (2000).
108. See Brown Shoe Co., 339 U.S. at 593; William T. Carman & Robert J. Gaughan, Jr., Contributions to a Partnership by a Nonpartner: A Gift Horse Whose Mouth Should Be Checked, 7 J. Partnership Tax'n 69 (1990).
109. See I.R.S. Gen. Couns. Mem. 38,944 (Dec. 27,1982); Carman & Gaughan, Jr., supra note 105, at 69.
110. See Wyo. Stat. Ann. § 17-15-103 (1977).
111. See Treas. Reg. §§ 301.7701-1 to -3 (2006).
112. See I.R.C. §§ 1361,1362 (2000).
113. See Treas. Reg. § 301.7701-1 (2006).
114. See Edward J. Schnee & Eugene Seago, New Developments Prompt a New Look at Section 118 Contributions to Capital, 108 J. Tax'n 24 (2008) (arguing the benefits of section 118 are not available to noncorporate taxpayers, but that the benefits of section 118 should be available to a noncorporate entity that checks the box to be treated as a corporation for federal taxation purposes and should be available to a corporation's disregarded entity through its corporate owner).
115. See sources cited supra note 101.
116. See Rev. Rul. 72-132, 1972-1 C.B. 21.
117. 412 U.S. 401 (1973).
118. Id. at 403.
119. The Court's inquiry was a narrow one and did not address the issue of whether the claimed capital contribution was includible in the taxpayer's gross income because the issue was not raised in the case. See id. at 408.
120. Id. at 412 (The Court felt the distinction between its Detroit Edison and Brown Shoe decisions was based on the nature of the benefit to the transferor and upon whether that benefit was direct or indirect, specific or general, certain or speculative.).
121. Id. at 413 (The Court will look to whether the contributed funds were intended to benefit not only the transferor but also the transferee.).
122. Chicago, Burlington & Quincy R.R. Co., 412 U.S. at 413.
123. Id. at 413-14.
124. Id. at 414.
125. Id.
126. See id. at 415. Some describe the Chicago, Burlington and Quincy Railroad Co. decision as having replaced the transferor's intent test with a transferee's economic effect test. Schnee & Seago, supra note 111.
127. See Chicago, Burlington & Quincy R.R. Co., 412 U.S. at 415-16.
128. See Cuba R.R. Co., 268 U.S. 628; Claiborne-Annapolis Ferry Co., 93 F.2d 875; Brown Shoe Co., 339 U.S. 583; Chicago, Burlington & Quincy R.R. Co., 412 U.S. 401.
129. See I.R.S. Tech. Adv. Mem. 79-50-002 (Aug. 2,1979).
130. Id.
131. Id.
132. Id.
133. Id.
134. I.R.S. Tech. Adv. Mem. 79-50-002 (Aug. 2, 1979); see Edwin G. Schuck, Jr., The Low-Income Housing Tax Credit For New Construction: Eligible Basis and Planning Possibilities, 48 Tax Law. 321,335 (1995). There is some evidence in subsequent publications that the Service feels as though the qualification that "the transfer must not be compensation for goods or services" is the most important factor for determining whether the transfer had the necessary economic effect to qualify as a contribution to capital. See I.R.S. Field Service Advisory 1994 WL 1866000 (Jun. 29,1994); Schnee & Seago, supra note 111.
135. I.R.S. Tech. Adv. Mem. 79-50-002 (Aug. 2,1979).
136. Id.; see Schuck, Jr., supra note 131, at 335.
137. See Chicago, Burlington & Quincy R.R. Co., 412 U.S. at 401. This has led some to believe that the Service has interpreted the cases following Cuba Railroad Co. as weakening the doctrine to the point where a governmental grant similar to that in Cuba Railroad Co. would be considered by the Service as includible in gross income even though the function of the grant was to benefit the general public. See Schuck, Jr., supra note 131, at 335.
138. Chicago, Burlington & Quincy R.R. Co., 412 U.S. at 401.
139. See I.R.S. Priv. Ltr. Rul. 80-38-037 (Jun. 24, 1980).
140. Id.
141. Id.
142. Others also acknowledge that even though the Service established a two-part test it is does not always follow the test. Schnee & Seago, supra note 111. 140. Id.
143. See infra Part IV. F.
144. See I.R.S. Gen. Couns. Mem. 38,944 (Dec. 27,1982).
145. Id.
146. Id.
147. Id.
148. Id.
149. I.R.S. Gen. Couns. Mem. 38,944 (Dec. 27,1982).
150. Id.
151. Id.
152. Id.
153. Id.
154. See, e.g., Carman & Gaughan, Jr., supra note 105, at 72 (acknowledging that the case law codified in section 118 involved corporate recipients of contributions, but arguing that the rationale of the cases does not focus on the legal form of the recipient).
155. See sources cited supra note 101.
156. Schnee and Seago reach a similar conclusion regarding the Service's misguided fear regarding the existence of a potential double tax benefit. Schnee & Seago, supra note 111.
157. See infra Part IV. F.
158. See I.R.S. Gen. Couns. Mem. 39,583 (Nov. 25, 1986) (citing earlier in the G.C.M. Section 1012 regarding cost basis).
159. Id.
160. See I.R.S. Tech. Adv. Mem. 90-32-001 (Aug. 10, 1990).
161. Id.
162. Id.
163. Id.
164. Id.
165. Appoloni v. United States, 450 F.3d 185, 194 (6th Cir. 2006) (citing Skidmore v. Swift & Co., 323 U.S. 134,140 (1944), but comparing Ammex, Inc. v. United States, 367 F.3d 530,535 (6th Cir. 2004)) (finding that Revenue Rulings get the same deference as Treasury Regulations).
166. I.R.S. Director Directive No. LMSB-04-1106-016 (Dec. 28, 2006).
167. Id.
168. I.R.C. § 1012(2000).
169. See Carman & Gaughan, Jr., supra note 105, at 72.
170. I.R.C. § 705(a)(1)(B) (2000).
171. William S. McKee, William F. Nelson & Robert Whitmire, Federal Taxation of Partnerships and Partners § 6.02[3][a] (2007).
172. Id.
173. Id.
174. I.R.C. § 167 (2000).
175. See Weiss v. Wiener, 279 U.S. 333 (1929).
176. See Treas. Reg. § 1.167(a)-4 (1960); Victoria Eve Kelly, Depreciation: General Concepts; Non-ACRS Rules, Tax Mgmt. Portfolios, 530-3rd, at Al 1.
177. For a detailed discussion see Kelly, supra note 174, at Al 1
178. I.R.C. § 109 (2000).
179. Bailey v. Comm'r, 88 T.C. 1293,1302 (1987).
180. Id. at 1303.
181. See I.R.C. § 1012(2000).
182. See I.R.S. Gen. Couns. Mem. 39,583 (Nov. 25, 1986).
183. See TIF Best Practices Reference Guide, supra note 1, at 4-10.
184. See Schuck, Jr., supra note 131, at 337-38.