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Section 1

Citation
Section 1
Parent Document
United States v. Southland Management Corp., 326 F.3d 669 (2002)
Effective Date
2002-05-22
Original Source
https://www.courtlistener.com/opinion/27565/united-states-v-southland-managem... ↗

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1
        Because of the significant tax benefits involved, this
program became a popular source of “tax shelters” for individual
investors in the early 1980s. Frequently such tax shelters were
structured as limited partnerships, as in the instant case.
Typically, individuals formed a limited partnership, made a
minimal initial capital contribution, and obtained a non-recourse
mortgage guaranteed by the federal government to cover the bulk
of the costs of building or rehabilitating a property. While the
limited partners were liable only to the extent of their initial
capital investment, the partnership was a “pass through” entity
for tax purposes – i.e., the partnership allocated gains or
losses to individual partners, who reported such items on their
individual tax returns. Because the tax laws allowed the
partnership to depreciate the building (or the improvements to an
existing property) on an accelerated timetable, these projects
tended to accrue large “losses” in their early years. The
individual members of the partnership used these “passed through”
losses to offset individual income, thereby “purchasing” more
than one dollar of tax savings with each dollar of capital they
contributed. At the same time, the excess cash flows generated
by the project during its early years were paid out to the
partnership rather than preserved for the support of the project.
     When the accelerated depreciation period was over and the
shelter had (in the vernacular) “burned out,” if the partnership
defaulted on the mortgage (because of inadequate cash flow or any
other reason), HUD (as guarantor) was compelled to institute
proceedings to foreclose on the property. This default did not
put the investors’ personal assets at risk, as the mortgage was
non-recourse debt. See generally Arthur R. Hessel, Heard from
HUD, 6 SUM J. Affordable Housing & Community Dev. L. 268, 270
(1997) (describing the tax incentives for private investors to
participate in construction and rehabilitation of low-income
housing); Daryl S. Alterwitz, Low Income Housing Under the New
Conservatism: Trickle Down or Dry Up?, 26 Santa Clara L. Rev.