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Cities, counties sue to amend rules governing Sec. 42 rules

The Mississippi Association of Supervisors, the Mississippi Municipal League and dozens of cities and counties have sued the Mississippi Department of Revenue  over the guidelines that agency has in place to calculate tax obligations of Section 42 housing developments.

The complaint was filed in Hinds County Chancery Court earlier this month.

When developers, a lot of whom are from out of state, build Section 42, or what are commonly called affordable rental housing developments, they get federal tax credits for doing so. The credits are awarded by the federal government to the property, but what often happens is the developers sell the tax credits, bringing in millions of dollars when they do so. Buyers of these tax credits have to become listed owners on the limited liability partnerships, limited liability corporations or whatever entity owns the property.

In return for receiving these tax credits, the developers have to meet certain federal regulations that require them to maintain the property. If they fail to meet those requirements, they forfeit the tax credits.

The fact the developers receive these tax credits for building these affordable rental housing developments isn’t the issue the MML, MAS and the cities and counties have.

Here’s the issue: When tax assessors conduct their annual property valuations on these developments, which determines how much ad valorem tax the counties collect from them, they use the income capitalization approach, which calculates the income derived from the developments in one year. They can’t include the income developers make from selling federal tax credits.

The only income tax assessors are allowed to consider is the rent the developers collect from the tenants.  Because the housing is for low-income tenants, the rent is capped by the federal government.

In 2005, the Legislature passed, and Gov. Haley Barbour approved, Senate Bill 3100, which the plaintiffs believe allowed tax assessors to include income from tax credit sales for the developments’ ad valorem liability.

Shortly after the bill passed, former chairman Joseph Blount of the then-State Tax Commission changed that agency’s Land Valuation Manual to preclude the use of income derived from tax credit sales. Blount has since been replaced by Ed Morgan, who is named as the defendant in the lawsuit.

In their complaint, which represents one side of a legal argument, the plaintiffs allege that the Department of Revenue, because it is not allowing the inclusion of the tax credit sale revenue, is ignoring legislative intent. They cite in their complaint an amendment inserted into SB 3100 that did not allow for the inclusion of the revenue from tax credit sales. That amendment was stripped before the bill got to Barbour’s desk,  and the plaintiffs allege that proves the Legislature intended for tax assessors to calculate the tax credit sale revenue.

In the complaint, the MML, the MAS and the other plaintiffs assert that the exclusion of income derived from the sale of tax credits related to Section 42 housing developments has cost cities and counties untold millions of dollars.

The plaintiffs seek a declaratory judgment that would force the Department of Revenue to allow tax assessors to use the tax credit sale income in calculating tax liability for Section 42 housing developments.

Derrick Surrette, executive director of the Mississippi Association of Supervisors, said his organization has spent the legislative sessions since 2005 trying to get the law clarified to the point that the Department of Revenue would amend its LVM to allow for the accounting of tax credit sale revenue. He added that hearings with lawmakers and the development lobby and meetings with Morgan failed to produce an agreement.

“We were out of options,” he said of the decision to pursue litigation. “We felt compelled to do something.”

Kathy Waterbury, spokesperson for the Department of Revenue, did not return a phone message seeking comment. Efforts to reach MML executive director George Lewis were unsuccessful.

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