Questions continue to be raised regarding whether developers should document the obligation to pay deferred development fees with a note. Section 467(g) of the Internal Revenue Code was enacted in 1984 and directs Treasury to issue regulations which would apply time value of money analysis to the federal income tax consequences of deferred payments for services rendered. The legislative history clearly provides that the new rules would become effective only after Treasury promulgates guidance to address the difficult technical issues that arise from deferred payments for services. In the intervening 30 years, Treasury has never issued guidance under Code Section 467(g) and the promulgation of such guidance has never been included in the IRS business plan.
Given the clear requirements of Code Section 467(g), the IRS does not have authority to require taxpayers to issue notes to evidence the obligation to pay deferred development fees. Should taxpayers decide to document the obligation to pay deferred fees with a note, interest should be charged at a rate not less than the applicable federal rate. Interest charges at rates lower than the applicable federal rate invite the IRS to present value the deferred fee payments and as a result, reduce the amount of the deferred development fee which would be includable in eligible basis.
A collateral effect of using a note with AFR interest is to increase the aggregate amount payable to the developer and to extend the time over which project cash flow is used to discharge the full amount of the development fee. In some circumstances, the project partnership may not generate sufficient cash to discharge the entire amount of the development fee within the 15 year LIHTC compliance period. In such a case, the IRS could argue that the amount of the development fee which could not reasonably be expected to be repaid within the compliance period should not be included in eligible basis. Accordingly there may be negative consequences to the utilization of developer fee notes.