[Federal Register Volume 59, Number 42 (Thursday, March 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3515]
[[Page Unknown]]
[Federal Register: March 3, 1994]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8520]
RIN 1545-AR15
Carryover Allocations and Other Rules Relating to the Low-Income
Housing Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations concerning the low-
income housing credit under section 42 of the Internal Revenue Code.
The regulations provide guidance with respect to: Eligibility for a
carryover allocation; procedures for electing an appropriate percentage
month; the general public use requirement; utility allowances to be
used in determining gross rent; and the inclusion of the cost of
certain services in gross rent. The regulations incorporate and expand
upon the guidance provided by Notice 89-1, 1989-1 C.B. 620, and Notice
89-6, 1989-1 C.B. 625. This information will assist State and local
housing credit agencies and taxpayers in complying with the
requirements of section 42. The regulations affect taxpayers that apply
for or claim the low-income housing tax credit and State and local
housing credit agencies.
DATES: These regulations are effective May 2, 1994.
For dates of applicability of these regulations, see Sec. 1.42-12.
FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson (202) 622-3040
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this final regulation
have been reviewed and approved by the Office of Management and Budget
in accordance with the requirements of the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control number 1545-1102. The estimated annual
burden per State or local government respondent/recordkeeper varies
from 18.60 hours to 51.63 hours, with an estimated average of 39.61
hours. The estimated annual burden for all other respondent/
recordkeepers varies from 1.90 hours to 6.20 hours, with an estimated
average of 4.50 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Background
On December 29, 1992, the IRS published a notice of proposed
rulemaking in the Federal Register (57 FR 61852) proposing amendments
to the Income Tax Regulations (26 CFR part 1) under section 42 of the
Internal Revenue Code of 1986, as amended. These amendments provide
guidance on several requirements of the low-income housing tax credit
and incorporate and expand upon the guidance provided by Notices 89-1
and 89-6.
Written comments responding to the notice of proposed rulemaking
were received. A public hearing was scheduled for February 16, 1993,
pursuant to a notice of public hearing published simultaneously with
the notice of proposed rulemaking. However, the IRS received no
requests to speak at the public hearing by the designated date. On
February 8, 1993, the IRS published a notice (58 FR 7497) cancelling
the public hearing on the proposed regulations. After consideration of
the comments received, the proposed regulations are adopted as revised
by this Treasury decision.
Explanation of Provisions
Carryover Allocations
Section 42 provides for a low-income housing credit that may be
claimed as part of the general business credit under section 38. In
general, the credit is allowable only to the extent that the owner of a
qualified low-income building receives a housing credit allocation from
a State or local housing credit agency (Agency).
Under section 42(h)(1)(E), an allocation may be made to a qualified
building that has not yet been placed in service, provided the building
is placed in service not later than the close of the second calendar
year following the calendar year of the allocation (a carryover
allocation). Section 42(h)(1)(E)(ii) defines a qualified building as
any building that is part of a project if the taxpayer's basis in the
project (as of the close of the calendar year of the allocation) is
more than 10 percent of the taxpayer's reasonably expected basis in the
project (as of the close of the second calendar year following the
calendar year of the allocation). For these purposes, the taxpayer's
basis equals the taxpayer's basis in land and depreciable property. See
2 H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. II-82 (1988), 1988-3
C.B. 572. A carryover allocation may also be made to a multiple-
building project under section 42(h)(1)(F).
Commentators requested clarification on when a carryover allocation
is treated as if it had never been made. The final regulations clarify
that only a failure to satisfy a requirement of section 42(h)(1) (E) or
(F) that must be satisfied by the close of the calendar year of
allocation will cause a carryover allocation to be treated as if it had
not been made.
The proposed regulations provide that a taxpayer does not have
carryover-allocation basis in a project unless, by the close of the
calendar year of allocation, the taxpayer is the owner, for federal
income tax purposes, of land or depreciable real property expected to
be part of the project. The final regulations do not explicitly contain
this requirement. After further consideration, the IRS believes that
satisfaction of the requirements of Sec. 1.42-6 is sufficient to ensure
that a taxpayer intends to complete a qualified low-income housing
project. For example, if a taxpayer has basis in land or depreciable
property that is reasonably expected to be part of a project and the
requirements of Sec. 1.42-6 are otherwise satisfied, the taxpayer has
carryover-allocation basis with respect to the land or depreciable
property. This basis includes all items that are properly capitalizable
with respect to the land or depreciable property. Thus, notwithstanding
the rule in Notice 89-1 to the contrary, a nonrefundable downpayment
for, or an amount paid to acquire an option to purchase, land or
depreciable property may be included in carryover-allocation basis if
properly capitalizable into the basis of land or depreciable property
that is reasonably expected to be part of a project.
Commentators objected to the exclusion of credit application fees
from carryover-allocation basis and requested that the final
regulations permit these fees to be included in carryover-allocation
basis. On further consideration, it appears that an absolute
prohibition against the inclusion of application fees (and compliance
monitoring fees, which were also not included) in carryover-allocation
basis is not warranted. Accordingly, the final regulations subject
credit application and compliance monitoring fees to the same standards
imposed upon other fees under the regulations. For example, if a fee is
properly capitalizable as part of the taxpayer's basis in land or
depreciable property that is reasonably expected to be part of a
project, the fee is included in carryover-allocation basis.
Verification of Basis
The proposed regulations provide verification requirements and
procedures that an Agency must follow to ensure that the minimum basis
requirement that is required to be met by the close of the year of
allocation is, in fact, met. A commentator suggested that the basis
verification requirements are too burdensome to Agencies and that
Agencies lack the expertise to verify the costs includible in basis.
The IRS does not expect Agencies to audit projects or make legal
determinations. Rather, the proposed regulations provide that an Agency
may verify the basis requirement by requiring the taxpayer to obtain a
certification from an attorney or certified public accountant that the
taxpayer has incurred the minimum required basis by the close of the
calendar year of allocation. Accordingly, the final regulations adopt
the basis verification requirement of the proposed regulations.
Requirements for Making Carryover Allocations
The proposed regulations provide guidance on the information needed
for carryover allocation documents. A commentator suggested that the
final regulations clarify whether a newly constructed building that
receives an allocation of credit in different calendar years must have
a separate Form 8609 for each allocation and, if so, whether the same
building identification number (B.I.N.) should be used.
The final regulations clarify that, in this and similar situations,
a separate Form 8609 is necessary for both allocations and that the
B.I.N. assigned to the building for the first allocation also is used
for the subsequent allocation.
Use by the General Public
The legislative history of section 42 provides that residential
rental units must be for use by the general public. Residential rental
units are not for use by the general public, for example, if the units
are provided only for members of a social organization or provided by
an employer for its employees. The proposed regulations provide an
exception for an employer-provided resident manager unit that is a
facility reasonably required by a project.
Commentators suggested that the exception for a resident manager
unit be expanded to include a unit occupied by a full-time maintenance
person. After further review, IRS the Service and the Treasury have
concluded that the reference to a resident manager unit in the proposed
regulations was inappropriate because the general public use
requirement only applies to residential rental units. A unit that is
occupied by a full-time resident manager or a full-time maintenance
person is not a residential rental unit but is a facility reasonably
required by a project. See Rev. Rul. 92-61, 1992-2 C.B. 7. Accordingly,
the final regulations remove the reference to a resident manager unit.
Utility Allowances
A commentator suggested that the final regulations provide that in
areas where there is a utility allowance increase without a
corresponding increase in area median gross income, an owner may adjust
the rent upwards so that rent receipts do not decrease below the
minimum rent floor of section 42(g)(2)(A). Because a change of this
nature requires an amendment to the statute, the final regulations do
not adopt this suggestion.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866. It
has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply to these regulations, and, therefore,
a Regulatory Flexibility Analysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, the notice of the proposed
rulemaking for the regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regulations is Christopher J. Wilson,
Office of the Assistant Chief Counsel (Passthroughs and Special
Industries), Internal Revenue Service. However, other personnel from
the IRS and the Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.42-6, 1.42-8, 1.42-9, 1.42-10, 1.42-11, and 1.42-12
also issued under 26 U.S.C. 42(n); * * *
Par. 2. Section 1.42-6 is added, Sec. 1.42-7 is added and reserved,
and Secs. 1.42-8 through 1.42-12 are added to read as follows:
Sec. 1.42-6 Buildings qualifying for carryover allocations.
(a) Carryover allocations. A carryover allocation is an allocation
that meets the requirements of section 42(h)(1) (E) or (F). If the
requirements of section 42(h)(1) (E) or (F) that are required to be
satisfied by the close of the calendar year are not satisfied, the
allocation is treated as if it had not been made. For example, if the
taxpayer's basis in the project as of the close of the calendar year of
allocation is not more than 10 percent of the taxpayer's reasonably
expected basis in the project as of the close of the second calendar
year following the year of allocation, the carryover allocation is not
valid and is treated as if it had not been made.
(b) Carryover-allocation basis--(1) In general. Subject to the
limitations of paragraph (b)(2) of this section, a taxpayer's basis in
a project for purposes of section 42(h)(1) (E)(ii) or (F) (carryover-
allocation basis) is the taxpayer's adjusted basis in land or
depreciable property that is reasonably expected to be part of the
project, whether or not these amounts are includible in eligible basis
under section 42(d). Thus, for example, if the project is to include
property that is not residential rental property, such as commercial
space, the basis attributable to the commercial space, although not
includible in eligible basis, is includible in carryover-allocation
basis. The adjusted basis of land and depreciable property is
determined under sections 1012 and 1016, and generally includes the
direct and indirect costs of acquiring, constructing, and
rehabilitating the property. Costs otherwise includible in carryover-
allocation basis are not excluded by reason of having been incurred
prior to the calendar year in which the carryover allocation is made.
(2) Limitations--For purposes of determining carryover-allocation
basis under paragraph (b)(1) of this section, the following limitations
apply.
(i) Taxpayer must have basis in land or depreciable property
related to the project. A taxpayer has carryover-allocation basis to
the extent that it has basis in land or depreciable property and the
land or depreciable property is reasonably expected to be part of the
project for which the carryover allocation is made. This basis includes
all items that are properly capitalizable with respect to the land or
depreciable property. For example, a nonrefundable downpayment for, or
an amount paid to acquire an option to purchase, land or depreciable
property may be included in carryover-allocation basis if properly
capitalizable into the basis of land or depreciable property that is
reasonably expected to be part of a project.
(ii) High cost areas. Any increase in eligible basis that may
result under section 42(d)(5)(C) from a building's location in a
qualified census tract or difficult development area is not taken into
account in determining carryover-allocation basis or reasonably
expected basis.
(iii) Amounts not treated as paid or incurred. An amount is not
includible in carryover-allocation basis unless it is treated as paid
or incurred under the method of accounting used by the taxpayer. For
example, a cash method taxpayer cannot include construction costs in
carryover-allocation basis unless the costs have been paid, and an
accrual method taxpayer cannot include construction costs in carryover-
allocation basis unless they have been properly accrued. See paragraph
(b)(2)(iv) of this section for a special rule for fees.
(iv) Fees. A fee is includible in carryover-allocation basis only
to the extent the requirements of paragraph (b)(2)(iii) of this section
are met and--
(A) The fee is reasonable;
(B) The taxpayer is legally obligated to pay the fee;
(C) The fee is capitalizable as part of the taxpayer's basis in
land or depreciable property that is reasonably expected to be part of
the project;
(D) The fee is not paid (or to be paid) by the taxpayer to itself;
and
(E) If the fee is paid (or to be paid) by the taxpayer to a related
person, and the taxpayer uses the cash method of accounting, the
taxpayer could properly accrue the fee under the accrual method of
accounting (considering, for example, the rules of section 461(h)). A
person is a related person if the person bears a relationship to the
taxpayer specified in sections 267(b) or 707(b)(1), or if the person
and the taxpayer are engaged in trades or businesses under common
control (within the meaning of subsections (a) and (b) of section 52).
(3) Reasonably expected basis. Rules similar to the rules of
paragraphs (a) and (b) of this section apply in determining the
taxpayer's reasonably expected basis in a project (land and depreciable
basis) as of the close of the second calendar year following the
calendar year of the allocation.
(4) Examples. The following examples illustrate the rules of
paragraphs (a) and (b) of this section.
Example 1. (i) Facts. C, an accrual-method taxpayer, receives a
carryover allocation from Agency, the state housing credit agency,
in September of 1993. As of that date, C has not begun construction
of the low-income housing building C plans to build. However, C has
owned the land on which C plans to build the building since 1985.
C's basis in the land is $100,000. C reasonably expects that by the
end of 1995, C's basis in the project of which the building is to be
a part will be $2,000,000. C also expects that because the project
is located in a qualified census tract, C will be able to increase
its basis in the project to $2,600,000. Before the close of 1993, C
incurs $150,000 of costs for architects' fees and site preparation.
C properly accrues these costs under its method of accounting and
capitalizes the costs.
(ii) Determination of carryover-allocation basis. C's $100,000
basis in the land is includible in carryover-allocation basis even
though C has owned the land since 1985. The $150,000 of costs C has
incurred for architects' fees and site preparation are also
includible in carryover-allocation basis. The expected increase in
basis due to the project's location in a qualified census tract is
not taken into account in determining C's carryover-allocation
basis. Accordingly, C's carryover-allocation basis in the project of
which the building is a part is $250,000.
(iii) Determination of whether building is qualified. C's
reasonably expected basis in the project at the close of the second
calendar year following the calendar year of allocation is
$2,000,000. The expected increase in eligible basis due to the
project's location in a qualified census tract is not taken into
account in determining this amount. Because C's carryover-allocation
basis is more than 10 percent of C's reasonably expected basis in
the project of which the building is a part, the building for which
C received the carryover allocation is a qualified building for
purposes of section 42(h)(1)(E)(ii) and paragraph (a) of this
section.
Example 2. (i) Facts. D, an accrual-method taxpayer, receives a
carryover allocation from Agency, the state housing credit agency,
on September 11, 1993. As of that date, D has not begun construction
of the low-income housing building D plans to build and D does not
have basis in the land on which D plans to build the building. In
1993, D incurs some costs related to the planned building, including
architects' fees. However, at the close of 1993, these costs do not
exceed 10 percent of D's reasonably expected basis in the project.
(ii) Determination of whether building is qualified. Because D's
carryover-allocation basis is not more than 10 percent of D's
reasonably expected basis in the project of which the building is a
part, the building for which D received a carryover allocation is
not a qualified building for purposes of section 42(h)(1)(E)(ii) and
paragraph (a) of this section. The carryover allocation to D is not
valid, and is treated as if it had not been made.
(c) Verification of basis by Agency--(1) Verification requirement.
An Agency that makes a carryover allocation to a taxpayer must verify
that, as of the close of the calendar year of allocation, the taxpayer
has incurred more than 10 percent of the reasonably expected basis in
the project (land and depreciable basis).
(2) Manner of verification. An Agency may verify that a taxpayer
has incurred more than 10 percent of its reasonably expected basis in a
project by obtaining a certification from the taxpayer, in writing and
under penalty of perjury, that the taxpayer has incurred by the close
of the calendar year of the allocation more than 10 percent of the
reasonably expected basis in the project. The certification must be
accompanied by supporting documentation that the Agency must review.
Supporting documentation may include, for example, copies of checks or
other records of payments. Alternatively, an Agency may verify that the
taxpayer has incurred adequate basis by requiring that the taxpayer
obtain from an attorney or certified public accountant a written
certification to the Agency, that the attorney or accountant has
examined all eligible costs incurred with respect to the project and
that, based upon this examination, it is the attorney's or accountant's
belief that the taxpayer has incurred more than 10 percent of its
reasonably expected basis in the project by the close of the calendar
year of the allocation.
(3) Time of verification. An Agency may require that the basis
certification be submitted to or received by the Agency prior to the
close of the calendar year of allocation or within a reasonable time
after the close of the calendar year of allocation. The Agency will
need to verify basis in order to accurately complete the Form 8610,
Annual Low-Income Housing Credit Agencies Report, for the calendar
year. If certification is not timely made, or supporting documentation
is lacking, inadequate, or does not actually support the certification,
the Agency should notify the taxpayer and try to get adequate
documentation. If the Agency cannot verify before the Form 8610 is
filed that the taxpayer has satisfied the basis requirement for a
carryover allocation, the allocation is treated as if it had not been
made and the carryover allocation document should not be filed with the
Form 8610.
(d) Requirements for making carryover allocations--(1) In general.
Generally, an allocation is made when an Agency issues the Form 8609,
Low-Income Housing Credit Allocation Certification, for a building. See
Sec. 1.42-1T(d)(8)(ii). An Agency does not issue the Form 8609 for a
building until the building is placed in service. However, in cases
where allocations of credit are made pursuant to section 42(h)(1)(E)
(relating to carryover allocations for buildings) or section
42(h)(1)(F) (relating to carryover allocations for multiple-building
projects), Form 8609 is not used as the allocating document because the
buildings are not yet in service. When an allocation is made pursuant
to section 42(h)(1) (E) or (F), the allocating document is the document
meeting the requirements of paragraph (d)(2) of this section. In
addition, when an allocation is made pursuant to section 42(h)(1)(F),
the requirements of paragraph (d)(3) of this section must be met for
the allocation to be valid. An allocation pursuant to section 42(h)(1)
(E) or (F) reduces the state housing credit ceiling for the year in
which the allocation is made, whether or not the Form 8609 is also
issued in that year.
(2) Requirements for allocation. An allocation pursuant to section
42(h)(1) (E) or (F) is made when an allocation document containing the
following information is completed, signed, and dated by an authorized
official of the Agency--
(i) The address of each building in the project, or if none exists,
a specific description of the location of each building;
(ii) The name, address, and taxpayer identification number of the
taxpayer receiving the allocation;
(iii) The name and address of the Agency;
(iv) The taxpayer identification number of the Agency;
(v) The date of the allocation;
(vi) The housing credit dollar amount allocated to the building or
project, as applicable;
(vii) The taxpayer's reasonably expected basis in the project (land
and depreciable basis) as of the close of the second calendar year
following the calendar year in which the allocation is made;
(viii) The taxpayer's basis in the project (land and depreciable
basis) as of the close of the calendar year in which the allocation is
made and the percentage that basis bears to the reasonably expected
basis in the project (land and depreciable basis) as of the close of
the second following calendar year;
(ix) The date that each building in the project is expected to be
placed in service; and
(x) The Building Identification Number (B.I.N.) to be assigned to
each building in the project. The B.I.N. must reflect the year an
allocation is first made to the building, regardless of the year that
the building is placed in service. This B.I.N. must be used for all
allocations of credit for the building. For example, rehabilitation
expenditures treated as a separate new building under section 42(e)
should not have a separate B.I.N. if the building to which the
rehabilitation expenditures are made has a B.I.N. In this case, the
B.I.N. used for the rehabilitation expenditures shall be the B.I.N.
previously assigned to the building, although the rehabilitation
expenditures must have a separate Form 8609 for the allocation.
Similarly, a newly constructed building that receives an allocation of
credit in different calendar years must have a separate Form 8609 for
each allocation. The B.I.N. assigned to the building for the first
allocation must be used for the subsequent allocation.
(3) Special rules for project-based allocations--(i) In general. An
allocation pursuant to section 42(h)(1)(F) (a project-based allocation)
must meet the requirements of this section as well as the requirements
of section 42(h)(1)(F), including the minimum basis requirement of
section 42(h)(1)(E)(ii).
(ii) Requirement of section 42(h)(1)(F)(i)(III). An allocation
satisfies the requirement of section 42(h)(1)(F)(i)(III) if the Form
8609 that is issued for each building that is placed in service in the
project states the portion of the project-based allocation that is
applied to that building.
(4) Recordkeeping requirements--(i) Taxpayer. When an allocation is
made pursuant to section 42(h)(1) (E) or (F), the taxpayer must retain
a copy of the allocation document and file an additional copy with the
Form 8609 that is issued to the taxpayer for a building after the
building is placed in service. The taxpayer need only file a copy of
the allocation document with the Form 8609 for the building for the
first year the credit is claimed. However, the Form 8609 must be filed
for the first taxable year in which the credit is claimed and for each
taxable year thereafter throughout the compliance period, whether or
not a credit is claimed for the taxable year.
(ii) Agency. The Agency must retain a copy of the allocation
document and file the original with the Agency's Form 8610 that
accounts for the year the allocation is made. The Agency must also
retain a copy of the Form 8609 that is issued to the taxpayer and file
the original with the Agency's Form 8610 that reflects the year the
form is issued.
(5) Separate procedure for election of appropriate percentage
month. If a taxpayer receives an allocation under section 42(h)(1) (E)
or (F) and wishes to elect under section 42(b)(2)(A)(ii) to use the
appropriate percentage for a month other than the month in which a
building is placed in service, the requirements specified in Sec. 1.42-
8 must be met for the election to be effective.
(e) Special rules. The following rules apply for purposes of this
section.
(1) Treatment of partnerships and other flow-through entities. With
respect to taxpayers that own projects through partnerships or other
flow-through entities (e.g., S corporations, estates, or trusts),
carryover-allocation basis is determined at the entity level using the
rules provided by this section. In addition, the entity is responsible
for providing to the Agency the certification and documentation
required under the basis verification requirement in paragraph (c) of
this section.
(2) Transferees. If land or depreciable property that is expected
to be part of a project is transferred after a carryover allocation has
been made for a building that is reasonably expected to be part of the
project, but before the close of the calendar year of the allocation,
the transferee's carryover-allocation basis is determined under the
principles of this section and section 42(d)(7). See also Rev. Rul. 91-
38, 1991-2 C.B. 3 (see Sec. 601.601(d)(2)(ii)(b) of this chapter). In
addition, the transferee is treated as the taxpayer for purposes of the
basis verification requirement of this section, and therefore, is
responsible for providing to the Agency the required certifications and
documentation.
Sec. 1.42-7 Substantially bond-financed buildings. [Reserved]
Sec. 1.42-8 Election of appropriate percentage month.
(a) Election under section 42(b)(2)(A)(ii)(I) to use the
appropriate percentage for the month of a binding agreement--(1) In
general. For purposes of section 42(b)(2)(A)(ii)(I), an agreement
between a taxpayer and an Agency as to the housing credit dollar amount
to be allocated to a building is considered binding if it--
(i) Is in writing;
(ii) Is binding under state law on the Agency, the taxpayer, and
all successors in interest;
(iii) Specifies the type(s) of building(s) to which the housing
credit dollar amount applies (i.e., a newly constructed or existing
building, or substantial rehabilitation treated as a separate new
building under section 42(e));
(iv) Specifies the housing credit dollar amount to be allocated to
the building(s); and
(v) Is dated and signed by the taxpayer and the Agency during the
month in which the requirements of paragraphs (a)(1) (i) through (iv)
of this section are met.
(2) Effect on state housing credit ceiling. Generally, a binding
agreement described in paragraph (a)(1) of this section is an agreement
by the Agency to allocate credit to the taxpayer at a future date. The
binding agreement may include a reservation of credit or a binding
commitment (under section 42(h)(1)(C)) to allocate credit in a future
taxable year. A reservation or a binding commitment to allocate credit
in a future year has no effect on the state housing credit ceiling
until the year the Agency actually makes an allocation. However, if the
binding agreement is also a carryover allocation under section 42(h)(1)
(E) or (F), the state housing credit ceiling is reduced by the amount
allocated by the Agency to the taxpayer in the year the carryover
allocation is made. For a binding agreement to be a valid carryover
allocation, the requirements of paragraph (a)(1) of this section and
Sec. 1.42-6 must be met.
(3) Time and manner of making election. An election under section
42(b)(2)(A)(ii)(I) may be made either as part of the binding agreement
under paragraph (a)(1) of this section to allocate a specific housing
credit dollar amount or in a separate document that references the
binding agreement. In either case, the election must--
(i) Be in writing;
(ii) Reference section 42(b)(2)(A)(ii)(I);
(iii) Be signed by the taxpayer;
(iv) If it is in a separate document, reference the binding
agreement that meets the requirements of paragraph (a)(1) of this
section; and
(v) Be notarized by the 5th day following the end of the month in
which the binding agreement was made.
(4) Multiple agreements--(i) Rescinded agreements. A taxpayer may
not make an election under section 42(b)(2)(A)(ii)(I) for a building if
an election has previously been made for the building for a different
month. For example, assume a taxpayer entered into a binding agreement
for allocation of a specific housing credit dollar amount to a building
and made the election under section 42(b)(2)(A)(ii)(I) to apply the
appropriate percentage for the month of the binding agreement. If the
binding agreement subsequently is rescinded under state law, and the
taxpayer enters into a new binding agreement for allocation of a
specific housing credit dollar amount to the building, the taxpayer
must apply to the building the appropriate percentage for the elected
month of the rescinded binding agreement. However, if no prior election
was made with respect to the rescinded binding agreement, the taxpayer
may elect the appropriate percentage for the month of the new binding
agreement.
(ii) Increases in credit. The election under section
42(b)(2)(A)(ii)(I), once made, applies to any increase in the credit
amount allocated for a building, whether the increase occurs in the
same or in a subsequent year. However, in the case of a binding
agreement (or carryover allocation that is treated as a binding
agreement) to allocate a credit amount under section 42(e)(1) for
substantial rehabilitation treated as a separate new building, a
taxpayer may make the election under section 42(b)(2)(A)(ii)(I)
notwithstanding that a prior election under section 42(b)(2)(A)(ii)(I)
is in effect for a prior allocation of credit for a substantial
rehabilitation that was previously placed in service under section
42(e).
(5) Amount allocated. The housing credit dollar amount eventually
allocated to a building may be more or less than the amount specified
in the binding agreement. Depending on the Agency's determination
pursuant to section 42(m)(2) as to the financial feasibility of the
building (or project), the Agency may allocate a greater housing credit
dollar amount to the building (provided that the Agency has additional
housing credit dollar amounts available to allocate for the calendar
year of the allocation) or the Agency may allocate a lesser housing
credit dollar amount. Under section 42(h)(7)(D), in allocating a
housing credit dollar amount, the Agency must specify the applicable
percentage and maximum qualified basis of the building. The applicable
percentage may be less, but not greater than, the appropriate
percentage for the month the building is placed in service, or the
month elected by the taxpayer under section 42(b)(2)(A)(ii)(I). Whether
the appropriate percentage is the appropriate percentage for the 70-
percent present value credit or the 30-percent present value credit is
determined under section 42(i)(2) when the building is placed in
service.
(6) Procedures--(i) Taxpayer. The taxpayer must give the original
notarized election statement to the Agency before the close of the 5th
calendar day following the end of the month in which the binding
agreement is made. The taxpayer must retain a copy of the binding
agreement and the election statement and must file an additional copy
of each with the taxpayer's Form 8609, Low-Income Housing Credit
Allocation Certification, for the first taxable year in which credit is
claimed for the building.
(ii) Agency. The Agency must file with the Internal Revenue Service
the original of the binding agreement and the election statement with
the Agency's Form 8610, Annual Low-Income Housing Credit Agencies
Report, that accounts for the year the allocation is actually made. The
Agency must also retain a copy of the binding agreement and the
election statement.
(7) Examples. The following examples illustrate the provisions of
this section. In each example, X is the taxpayer, Agency is the state
housing credit agency, and the carryover allocations meet the
requirements of Sec. 1.42-6 and are otherwise valid.
Example 1. (i) In August 1993, X and Agency enter into an
agreement that Agency will allocate $100,000 of housing credit
dollar amount for the low-income housing building X is constructing.
The agreement is binding and meets all the requirements of paragraph
(a)(1) of this section. The agreement is a reservation of credit,
not an allocation, and therefore, has no effect on the state housing
credit ceiling. On or before September 5, 1993, X signs and has
notarized a written election statement that meets the requirements
of paragraph (a)(3) of this section. The applicable percentage for
the building is the appropriate percentage for the month of August
1993.
(ii) Agency makes a carryover allocation of $100,000 of housing
credit dollar amount for the building on October 2, 1993. The
carryover allocation reduces Agency's state housing credit ceiling
for 1993. Due to unexpectedly high construction costs, when X places
the building in service in July 1994, the product of the building's
qualified basis and the applicable percentage for the building (the
appropriate percentage for the month of August 1993) is $150,000,
rather than $100,000. Notwithstanding that only $100,000 of credit
was allocated for the building in 1993, Agency may allocate an
additional $50,000 of housing credit dollar amount for the building
from its state housing credit ceiling for 1994. The appropriate
percentage for the month of August 1993 is the applicable percentage
for the building for the entire $150,000 of credit allocated for the
building, even though separate allocations were made in 1993 and
1994. Because allocations were made for the building in two separate
calendar years, Agency must issue two Forms 8609 to X. One Form 8609
must reflect the $100,000 allocation made in 1993, and the other
Form 8609 must reflect the $50,000 allocation made in 1994.
(iii) X gives the original notarized statement to Agency on or
before September 5, 1993, and retains a copy of the binding
agreement, election statement, and carryover allocation document. X
files a copy of the binding agreement, election statement, and
carryover allocation document with X's Form 8609 for the first
taxable year in which X claims credit for the building.
(iv) Agency files the original of the binding agreement,
election statement, and 1993 carryover allocation document with its
1993 Form 8610. Agency retains a copy of the binding agreement,
election statement, and carryover allocation document. After the
building is placed in service in 1994, Agency issues to X a copy of
the Form 8609 reflecting the 1993 carryover allocation of $100,000
and files the original of that form with its 1994 Form 8610. Agency
also files the original of the 1994 Form 8609 reflecting the $50,000
allocation with its 1994 Form 8610 and issues to X a copy of the
1994 Form 8609. Agency retains copies of the Forms 8609 that are
issued to X.
Example 2. (i) In September 1993, X and Agency enter into an
agreement that Agency will allocate $70,000 of housing credit dollar
amount for rehabilitation expenditures that X is incurring and that
X will treat as a new low-income housing building under section
42(e)(1). The agreement is binding and meets all the requirements of
paragraph (a)(1) of this section. The agreement is a reservation of
credit, not an allocation, and therefore, has no effect on Agency's
state housing credit ceiling. On or before October 5, 1993, X signs
and has notarized a written election statement that meets the
requirements of paragraph (a)(3) of this section. The applicable
percentage for the building is the appropriate percentage for the
month of September 1993. Agency makes a carryover allocation of
$70,000 of housing credit dollar amount for the building on November
15, 1993. The carryover allocation reduces by $70,000 Agency's state
housing credit ceiling for 1993.
(ii) In October 1994, X and Agency enter into another binding
agreement meeting the requirements of paragraph (a)(1) of this
section. Under the agreement, Agency will allocate $50,000 of
housing credit dollar amount for additional rehabilitation
expenditures by X that qualify as a second separate new building
under section 42(e)(1). On or before November 5, 1994, X signs and
has notarized a written election statement meeting the requirements
of paragraph (a)(3) of this section. On December 1, 1994, X receives
a carryover allocation under section 42(h)(1)(E) for $50,000. The
carryover allocation reduces by $50,000 Agency's state housing
credit ceiling for 1994. The applicable percentage for the
rehabilitation expenditures treated as the second separate new
building is the appropriate percentage for the month of October
1994, not September 1993. The appropriate percentage for the month
of September 1993 still applies to the allocation of $70,000 for the
rehabilitation expenditures treated as the first separate new
building. Because allocations were made for the building in two
separate calendar years, Agency must issue two Forms 8609 to X. One
Form 8609 must reflect the $70,000 allocation made in 1993, and the
other Form 8609 must reflect the $50,000 allocation made in 1994.
(iii) X gives the first original notarized statement to Agency
on or before October 5, 1993, and retains a copy of the first
binding agreement, election statement, and carryover allocation
document issued in 1993. X gives the second original notarized
statement to Agency on or before November 5, 1994, and retains a
copy of the second binding agreement, election statement, and
carryover allocation document issued in 1994. X files a copy of the
binding agreements, election statements, and carryover allocation
documents with X's Forms 8609 for the first taxable year in which X
claims credit for the buildings.
(iv) Agency retains a copy of the binding agreements, election
statements, and carryover allocation documents. Agency files the
original of the first binding agreement, election statement, and
1993 carryover allocation document with its 1993 Form 8610. Agency
files the original of the second binding agreement, election
statement, and 1994 carryover allocation document with its 1994 Form
8610. After X notifies Agency of the date each building is placed in
service, the Agency will issue copies of the respective Forms 8609
to X, and file the originals of those forms with the Agency's Form
8610 that reflects the year each form is issued. The Agency also
retains copies of the Forms 8609.
(b) Election under section 42(b)(2)(A)(ii)(II) to use the
appropriate percentage for the month tax-exempt bonds are issued--(1)
Time and manner of making election. In the case of any building to
which section 42(h)(4)(B) applies, an election under section
42(b)(2)(A)(ii)(II) to use the appropriate percentage for the month
tax-exempt bonds are issued must--
(i) Be in writing;
(ii) Reference section 42(b)(2)(A)(ii)(II);
(iii) Specify the percentage of the aggregate basis of the building
and the land on which the building is located that is financed with the
proceeds of obligations described in section 42(h)(4)(A) (tax-exempt
bonds);
(iv) State the month in which the tax-exempt bonds are issued;
(v) State that the month in which the tax-exempt bonds are issued
is the month elected for the appropriate percentage to be used for the
building;
(vi) Be signed by the taxpayer; and
(vii) Be notarized by the 5th day following the end of the month in
which the bonds are issued.
(2) Bonds issued in more than one month. If a building described in
section 42(h)(4)(B) (substantially bond-financed building) is financed
with tax-exempt bonds issued in more than one month, the taxpayer may
elect the appropriate percentage for any month in which the bonds are
issued. Once the election is made, the appropriate percentage elected
applies for the building even if all bonds are not issued in that
month. The requirements of this paragraph (b), including the time
limitation contained in paragraph (b)(1)(vii) of this section, must
also be met.
(3) Limitations on appropriate percentage. Under section
42(m)(2)(D), the credit allowable for a substantially bond- financed
building is limited to the amount necessary to assure the project's
feasibility. Accordingly, in making the determination under section
42(m)(2), an Agency may use an applicable percentage that is less, but
not greater than, the appropriate percentage for the month the building
is placed in service, or the month elected by the taxpayer under
section 42(b)(2)(A)(ii)(II).
(4) Procedures--(i) Taxpayer. The taxpayer must provide the
original notarized election statement to the Agency before the close of
the 5th calendar day following the end of the month in which the bonds
are issued. If an authority other than the Agency issues the tax-exempt
bonds, the taxpayer must also give the Agency a signed statement from
the issuing authority that certifies the information described in
paragraphs (b)(1)(iii) and (iv) of this section. The taxpayer must file
a copy of the election statement with the taxpayer's Form 8609 for the
first taxable year in which credit is claimed for the building. The
taxpayer must also retain a copy of the election statement.
(ii) Agency. The Agency must file with the Internal Revenue Service
the original of the election statement and the corresponding Form 8609
for the building with the Agency's Form 8610 that reflects the year the
Form 8609 is issued. The Agency must also retain a copy of the election
statement and the Form 8609.
Sec. 1.42-9 For use by the general public.
(a) General rule. If a residential rental unit in a building is not
for use by the general public, the unit is not eligible for a section
42 credit. A residential rental unit is for use by the general public
if the unit is rented in a manner consistent with housing policy
governing non-discrimination, as evidenced by rules or regulations of
the Department of Housing and Urban Development (HUD) (24 CFR subtitle
A and chapters I through XX). See HUD Handbook 4350.3 (or its
successor). A copy of HUD Handbook 4350.3 may be requested by writing
to: HUD, Directives Distribution Section, room B-100, 451 7th Street,
SW., Washington, DC 20410.
(b) Limitations. Notwithstanding paragraph (a) of this section, if
a residential rental unit is provided only for a member of a social
organization or provided by an employer for its employees, the unit is
not for use by the general public and is not eligible for credit under
section 42. In addition, any residential rental unit that is part of a
hospital, nursing home, sanitarium, lifecare facility, trailer park, or
intermediate care facility for the mentally and physically handicapped
is not for use by the general public and is not eligible for credit
under section 42.
(c) Treatment of units not for use by the general public. The costs
attributable to a residential rental unit that is not for use by the
general public are not excludable from eligible basis by reason of the
unit's ineligibility for the credit under this section. However, in
calculating the applicable fraction, the unit is treated as a
residential rental unit that is not a low-income unit.
Sec. 1.42-10 Utility allowances.
(a) Inclusion of utility allowances in gross rent. If the cost of
any utilities (other than telephone) for a residential rental unit are
paid directly by the tenant(s), the gross rent for that unit includes
the applicable utility allowance determined under this section. This
section only applies for purposes of determining gross rent under
section 42(g)(2)(B)(ii) as to rent-restricted units.
(b) Applicable utility allowances--(1) FmHA-assisted buildings. If
a building receives assistance from the Farmers Home Administration
(FmHA-assisted building), the applicable utility allowance for all
rent-restricted units in the building is the utility allowance
determined under the method prescribed by the Farmers Home
Administration (FmHA) for the building. For example, if a building
receives assistance under FmHA's section 515 program (whether or not
the building or its tenants also receive other state or federal
assistance), the applicable utility allowance for all rent-restricted
units in the building is determined using Exhibit A-6 of 7 CFR part
1944, subpart E (or a successor method of determining utility
allowances).
(2) Buildings with FmHA assisted tenants. If any tenant in a
building receives FmHA rental assistance payments (FmHA tenant
assistance), the applicable utility allowance for all rent-restricted
units in the building (including any units occupied by tenants
receiving HUD rental assistance payments) is the applicable FmHA
utility allowance.
(3) HUD-regulated buildings. If neither a building nor any tenant
in the building receives FmHA housing assistance, and the rents and
utility allowances of the building are reviewed by HUD on an annual
basis (HUD-regulated building), the applicable utility allowance for
all rent-restricted units in the building is the applicable HUD utility
allowance.
(4) Other buildings. If a building is neither an FmHA-assisted nor
a HUD-regulated building, and no tenant in the building receives FmHA
tenant assistance, the applicable utility allowance for rent-restricted
units in the building is determined under the following methods.
(i) Tenants receiving HUD rental assistance. The applicable utility
allowance for any rent-restricted units occupied by tenants receiving
HUD rental assistance payments (HUD tenant assistance) is the
applicable Public Housing Authority (PHA) utility allowance established
for the Section 8 Existing Housing Program.
(ii) Other tenants--(A) General rule. If none of the rules of
paragraphs (b)(1), (2), (3), and (4)(i) of this section apply to any
rent-restricted units in a building, the appropriate utility allowance
for the units is the applicable PHA utility allowance. However, if a
local utility company estimate is obtained for any unit in the building
in accordance with paragraph (b)(4)(ii)(B) of this section, that
estimate becomes the appropriate utility allowance for all rent-
restricted units of similar size and construction in the building. This
local utility company estimate procedure is not available for and does
not apply to units to which the rules of paragraphs (b) (1), (2), (3),
or (4)(i) of this section apply.
(B) Utility company estimate. Any interested party (including a
low-income tenant, a building owner, or an Agency) may obtain a local
utility company estimate for a unit. The estimate is obtained when the
interested party receives, in writing, information from a local utility
company providing the estimated cost of that utility for a unit of
similar size and construction for the geographic area in which the
building containing the unit is located. The local utility company
estimate may be obtained by an interested party at any time during the
building's extended use period (see section 42(h)(6)(D)) or, if the
building does not have an extended use period, during the building's
compliance period (see section 42(i)(1)). Unless the parties agree
otherwise, costs incurred in obtaining the estimate are borne by the
initiating party. The interested party that obtains the local utility
company estimate (the initiating party) must retain the original of the
utility company estimate and must furnish a copy of the local utility
company estimate to the owner of the building (where the initiating
party is not the owner), and the Agency that allocated credit to the
building (where the initiating party is not the Agency). The owner of
the building must make available copies of the utility company estimate
to the tenants in the building.
(c) Changes in applicable utility allowance. If at any time during
the building's extended use period (or, if the building does not have
an extended use period, the building's compliance period), the
applicable utility allowance for a unit changes, the new utility
allowance must be used to compute gross rents of rent-restricted units
due 90 days after the change. For example, if rent must be lowered
because a local utility company estimate is obtained that shows a
higher utility cost than the otherwise applicable PHA utility
allowance, the lower rent must be in effect for rent due more than 90
days after the date of the local utility company estimate.
Sec. 1.42-11 Provision of services.
(a) General rule. The furnishing to tenants of services other than
housing (whether or not the services are significant) does not prevent
the units occupied by the tenants from qualifying as residential rental
property eligible for credit under section 42. However, any charges to
low-income tenants for services that are not optional generally must be
included in gross rent for purposes of section 42(g).
(b) Services that are optional--(1) General rule. A service is
optional if payment for the service is not required as a condition of
occupancy. For example, for a qualified low-income building with a
common dining facility, the cost of meals is not included in gross rent
for purposes of section 42(g)(2)(A) if payment for the meals in the
facility is not required as a condition of occupancy and a practical
alternative exists for tenants to obtain meals other than from the
dining facility.
(2) Continual or frequent services. If continual or frequent
nursing, medical, or psychiatric services are provided, it is presumed
that the services are not optional and the building is ineligible for
the credit, as is the case with a hospital, nursing home, sanitarium,
lifecare facility, or intermediate care facility for the mentally and
physically handicapped. See also Sec. 1.42-9(b).
(3) Required services--(i) General rule. The cost of services that
are required as a condition of occupancy must be included in gross rent
even if federal or state law requires that the services be offered to
tenants by building owners.
(ii) Exceptions--(A) Supportive services. Section 42(g)(2)(B)(iii)
provides an exception for certain fees paid for supportive services.
For purposes of section 42(g)(2)(B)(iii), a supportive service is any
service provided under a planned program of services designed to enable
residents of a residential rental property to remain independent and
avoid placement in a hospital, nursing home, or intermediate care
facility for the mentally or physically handicapped. For a building
described in section 42(i)(3)(B)(iii) (relating to transitional housing
for the homeless), a supportive service includes any service provided
to assist tenants in locating and retaining permanent housing.
(B) Specific project exception. Gross rent does not include the
cost of mandatory meals in any federally-assisted project for the
elderly and handicapped (in existence on or before January 9, 1989)
that is authorized by 24 CFR 278 to provide a mandatory meals program.
Sec. 1.42-12 Effective dates and transitional rules.
(a) Effective date. The rules set forth in Secs. 1.42-6 and 1.42-8
through 1.42-12 are effective May 2, 1994. However, binding agreements,
election statements, and carryover allocation documents entered into
before May 2, 1994 that follow the guidance set forth in Notice 89-1,
1989-1 C.B. 620 (see Sec. 601.601(d)(2)(ii)(b) of this chapter) need
not be changed to conform to the rules set forth in Secs. 1.42-6 and
1.42-9 through 1.42-12.
(b) Prior periods. Notice 89-1, 1989-1 C.B. 620 and Notice 89-6,
1989-1 C.B. 625 (see Sec. 601.601(d)(2)(ii)(b) of this chapter) may be
applied for periods prior to May 2, 1994.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. Part 602 is amended as follows:
1. The authority citation continues to read as follows:
Authority: 26 U.S.C. 7805.
2. Section 602.101(c) is amended by adding entries in numerical
order to the table to read as follows:
Sec. 602.101 OMB control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control no.
------------------------------------------------------------------------
*****
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
*****
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: January 25, 1994.
Samuel Y. Sessions,
Acting Assistant Secretary of the Treasury.
[FR Doc. 94-3515 Filed 3-2-94; 8:45 am]
BILLING CODE 4830-01-U