## Facts

- Alvin V. Graff built and owned a low- and moderate-income housing project in Irving, Texas under § 236 of the National Housing Act.
- Section 236 provided incentives for project sponsors, including “interest reduction payments” made by HUD on the sponsor’s behalf to reduce the sponsor’s borrowing costs.
- HUD made the interest reduction payments directly to Graff’s mortgagee; Graff paid only the reduced interest amount on the mortgage.
- For 1973 and 1974, the Commissioner determined income tax deficiencies (and initially asserted a negligence addition for 1973, later conceded).
- Graff argued the HUD payments were nontaxable social welfare benefits and, separately, that the Commissioner should be estopped from asserting deficiencies based on representations by HUD/FHA officials about nontaxability.
- The parties agreed that if the payments were includable in income, amounts allocable to interest were deductible as interest under I.R.C. § 163.
- Graff also challenged the constitutionality of the I.R.C. § 56 minimum tax on items of tax preference or argued it was a deductible excise tax.

## Issues

1. Whether § 236 HUD interest reduction payments made to the mortgagee on the sponsor’s behalf are includable in the sponsor’s gross income.
2. Whether the Commissioner is equitably estopped from assessing deficiencies due to incorrect tax-treatment representations by HUD/FHA officials.
3. Whether the § 56 minimum tax on items of tax preference is unconstitutional or, alternatively, a deductible excise tax.

## Decision

- The Tax Court sustained the deficiencies on the remaining issues (with the § 6653(a) addition to tax for 1973 removed by concession).
- The court held the § 236 interest reduction payments were includable in Graff’s gross income, notwithstanding that HUD paid the amounts directly to the mortgagee.
- The court accepted that interest components were deductible under § 163 when the payments were included in income.
- The court rejected equitable estoppel against the Commissioner based on HUD/FHA officials’ erroneous statements about tax consequences.
- The court upheld the constitutionality of the § 56 minimum tax and held it was not a deductible excise tax.

## Legal Principles

- Government payments made on a taxpayer’s behalf that reduce the taxpayer’s liabilities or borrowing costs may constitute taxable income as an economic benefit, even if paid directly to a third party.
- Absent clear statutory language, courts do not infer exclusions from gross income for subsidy programs that confer economic benefits to taxpayers.
- Equitable estoppel generally does not bar the Commissioner from enforcing the tax laws based on another agency’s erroneous statements of law, particularly where the statements are not binding IRS determinations.
- The § 56 minimum tax on items of tax preference is a valid exercise of Congress’s taxing power and is treated as part of the income tax system, not as a deductible excise tax.

## Conclusion

The Tax Court held that HUD § 236 interest reduction payments paid to a sponsor’s mortgagee are taxable income to the sponsor (with a corresponding interest deduction where applicable), that HUD/FHA misstatements do not estop the Commissioner from assessing tax, and that the § 56 minimum tax is constitutional and not deductible as an excise tax.


Graff v. Commissioner, 74 T.C. 743 (1980)