[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