Managing the Exit Tax Burden of the QALICB (Part 1)
The tax credit investor in a leveraged new markets tax credit ﬁnancing commonly enters into a put option agreement entitling it to sell its interest in the qualiﬁed community development entity to an afﬁliate of a qualified active low-income community business (QALICB) for a nominal amount after the end of the seven-year compliance period (the exit transaction). Once a portion of the qualiﬁed low-income community investment (QLICI) loan is used to repay the leverage loan, the afﬁliate and QALICB have effectively eliminated the burden of paying the remaining portion of the QLICI loan. Although the elimination of this burden creates an economic beneﬁt for the family of entities that includes the QALICB and afﬁliate (entity family), the full amount of that beneﬁt may not be reﬂected in their taxable income at the time of the exit transaction.
Part One of this two-part article summarizes the reasons that the entity family may realize little or no cancellation of indebtedness (COD) income from the exit transaction. In Part Two, I will discuss planning strategies for reduction and deferral of the COD income recognized in the exit transaction.
This article first appeared in Novogradac’s Journal of Tax Credits.