[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24283]


[[Page Unknown]]

[Federal Register: October 3, 1994]


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DEPARTMENT OF THE TREASURY
26 CFR Part 1 and 602

[TD 8563]
RIN 1545-AQ41

 

State Housing Credit Ceiling 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 rules relating to the order in which housing 
credit dollar amounts are allocated from each State's housing credit 
ceiling under section 42(h)(3)(C) and the determination of which States 
qualify to receive credit from a national pool of credit under section 
42(h)(3)(D). The regulations affect State and local housing credit 
agencies and taxpayers receiving credit allocations, and provide them 
with guidance for complying with section 42. The final regulations also 
amend Sec. 1.42-5 to provide a cross reference to section 42(g)(8)(B).

EFFECTIVE DATE: These regulations are effective January 1, 1994.

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 these final regulations 
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 1545-1423. The estimated annual 
burden per State or local government respondent varies from 2 hours to 
6 hours, with an estimated average of 4 hours. The estimated annual 
burden for all other respondents varies from .5 hours to 1.5 hours, 
with an estimated average of 1 hour.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the IRS, 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, 1993, the IRS published a notice of proposed 
rulemaking in the Federal Register (58 FR 68799) 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 
relating to determinations of the housing credit dollar amount 
available to housing credit agencies for allocation in any given year.
    Written comments responding to the notice of proposed rulemaking 
were received. A public hearing was scheduled for April 26, 1994, 
pursuant to a notice of public hearing published simultaneously with 
the notice of proposed rulemaking. The IRS received one request to 
speak at the public hearing. This request was withdrawn before the 
hearing date. On April 14, 1994, the IRS published a notice (59 FR 
17747) 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

    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 if the owner of a qualified low-
income building receives a housing credit allocation from a State or 
local housing credit agency (Agency) of the jurisdiction where the 
building is located.
    The aggregate housing credit dollar amount that an Agency may 
allocate for any calendar year is limited to the State housing credit 
ceiling apportioned to the Agency for that year. Under section 
42(h)(3)(C), the State housing credit ceiling of any State for any 
calendar year is an amount equal to the sum of: (a) $1.25 multiplied by 
the State population (the population component); (b) the unused State 
housing credit ceiling, if any, of the State for the preceding calendar 
year (the unused carryforward component); (c) the amount of State 
housing credit ceiling returned in the calendar year (the returned 
credit component); plus (d) the amount, if any, allocated to the State 
by the Secretary under section 42(h)(3)(D) from a national pool of 
unused credit (the national pool component).
    The final regulations set forth the rules governing the order in 
which credit is allocated from the various components of the State 
housing credit ceiling under section 42(h)(3)(C) (the stacking rules). 
In general, under the stacking rules, credit is allocated first from 
the sum of the population and returned credit components, then from the 
unused carryforward component, and finally from the national pool 
component. The final regulations also reflect the statutory rule that 
unallocated credit attributable to the national pool component cannot 
be carried forward, and, therefore, is not included in the carryforward 
component for the following year. In addition, the final regulations 
provide that no credit allocated prior to calendar year 1990, and no 
credit allowable under section 42(h)(4) (relating to the portion of 
credit attributable to eligible basis financed by certain tax-exempt 
obligations under section 103), may be returned for reallocation. Thus, 
this credit is not included in the returned credit component for any 
year.
    One commentator requested clarification of the rule in the proposed 
regulations that if the terms of the allocation violate any requirement 
of section 42, the allocation is not valid. Specifically, the 
commentator expressed concern that a misrepresentation by a taxpayer to 
an Agency would result in the allocation being treated as not valid and 
as if it had never been made and ineligible for treatment as a returned 
credit. The final regulations do not include this statement. First, the 
determination of whether an allocation is valid is not within the scope 
of these regulations. Second, given the general requirement that an 
allocation must be valid to qualify as a returned credit, it is 
unnecessary to include the additional statement that, if the terms of 
the allocation violate any requirement of section 42, the allocation is 
not valid and is treated as if it had not been made. However, for all 
purposes of section 42, including qualification as a returned credit, 
an allocation must be validly made. See, for example, Secs. 1.42-1T and 
1.42-6.
    The final regulations adopt the provision of the proposed 
regulations requiring that if a credit is returned within 180 days 
following the close of the first taxable year of a building's credit 
period and a Form 8609, Low-Income Housing Credit Allocation 
Certification, has been issued for the building, an Agency must notify 
the IRS that the credit has been returned. One commentator requested 
that the procedure for notifying the IRS be clarified. Accordingly, the 
final regulations clarify that if all of the credit is returned, the 
Agency must follow the procedures in Sec. 1.42-5(e)(3) for filing the 
Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance. 
In situations where the credit is only partially returned, the Agency 
must follow the procedures prescribed for filing an amended Form 8610, 
Annual Low-Income Housing Credit Agencies Report.
    The proposed regulations permit an Agency to treat credit returned 
from a project to the Agency after October 31 of any calendar year and 
not reallocated by the Agency by the close of the year as returned at 
the beginning of the succeeding calendar year (the two-month rule). One 
commentator suggested that the two-month rule of the proposed 
regulations be changed to allow more time to reallocate credits before 
the close of the calendar year. Accordingly, the final regulations 
provide that credit returned to the Agency after September 30 of any 
calendar year and not reallocated by the close of the year may be 
treated as returned at the beginning of the succeeding calendar year. 
In response to another comment, the final regulations clarify that an 
Agency, in its discretion, may treat a portion of a credit that is so 
returned and that is not reallocated before the close of the calendar 
year as returned in the next calendar year. However, to the extent any 
portion of a credit returned after September 30 of any calendar year is 
allocated by the close of the calendar year in which it is returned, 
that portion of the credit is included as part of the returned credit 
component of the State housing credit ceiling for the year in which the 
credit is returned.
    The proposed regulations provide that, if an allocation is 
cancelled by mutual consent, a signed and dated written agreement 
between the Agency and the allocation recipient (or its successor in 
interest) must indicate the amount of the allocation returned and the 
date on which the credit is returned. Commentators suggested that, if 
the terms of an allocation state that any unused amounts are 
automatically returned to the Agency by mutual agreement, the 
regulations should not require a signed and dated written agreement. If 
this suggestion were adopted, neither the IRS nor the Agency would know 
with enough precision the amount of credit returned and the date on 
which the credit is returned. This information is necessary to 
determine with certainty the returned credit component of the State 
housing credit ceiling and to avoid discrepancies in the amount of 
credit allocated to a particular project. Thus, the final regulations 
do not adopt this suggestion.
    Under section 42(h)(3)(D), States that have unused housing credit 
carryovers must assign them to the Secretary for inclusion in a 
national pool of unused housing credit carryovers (National Pool), and 
the Secretary must allocate National Pool credit among qualified 
States.
    In determining whether there is any unallocated credit within the 
State at the close of a calendar year, the housing credit dollar 
amounts apportioned to all Agencies within the State (including 
Agencies of constitutional home rule cities in the State) and the 
allocations of all Agencies within the State are considered. One 
commentator suggested that a constitutional home rule city be 
considered alone rather than in combination with other constitutional 
home rule cities or Agencies within a State in determining access to 
the National Pool. Section 42(h)(3)(E) does provide special rules for 
apportioning credits to constitutional home rule cities. Under these 
rules, however, credits are apportioned to these cities from the State 
housing credit ceiling. There is no provision in the Code that permits 
a constitutional home rule city to receive credit that is not 
apportioned from the State housing credit ceiling. Accordingly, the 
final regulations do not adopt this suggestion.
    In addition to a de minimis exception for States that have 1 
percent or less of unallocated credit remaining in their State housing 
credit ceiling at the close of a calendar year (de minimis rule), the 
proposed regulations provide that, in other circumstances where relief 
is deemed appropriate, the IRS may determine that a State is a 
qualified State eligible to participate in the National Pool. One 
commentator requested that States that cannot allocate their entire 
ceiling as a result of a natural disaster be allowed to participate in 
the National Pool. This type of relief exceeds the scope and intent 
behind the limited exception provided in the proposed regulations. 
Further, this type of relief would be inequitable to other States that 
qualify for the National Pool. Thus, the final regulations do not adopt 
this suggestion.
    Another commentator suggested that the de minimis rule provide an 
alternative fixed dollar amount measurement of de minimis amount to 
reflect unallocated amounts that are, as a practical matter, 
insufficient to provide an allocation to a project. Due to variations 
in construction and housing costs across the United States, this 
suggestion was not adopted. Similarly, a suggestion that the final 
regulations provide a separate de minimis rule for the set-aside for 
nonprofit organizations was not adopted. Under the regulations, 
however, these situations can be addressed by the IRS on a case-by-case 
basis. Moreover, if appropriate, additional safe harbors could be 
provided in the future (e.g., to respond to other common situations not 
addressed by the 1 percent rule).
    The final regulations also amend Sec. 1.42-5 to provide a cross 
reference to section 42(g)(8)(B), as added by section 13142(b)(3) of 
the Revenue Reconciliation Act of 1993. Section 42(g)(8)(B) provides 
that on application by the taxpayer, the Secretary may waive any annual 
recertification of tenant income (the Waiver) for purposes of section 
42(g), if the entire building is occupied by low-income tenants. 
Instructions on how to obtain the Waiver will be contained in a 
forthcoming revenue procedure.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has 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 proposed rulemaking preceding these regulations was submitted 
to the Small Business Administration for comment on its 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), IRS. 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 for part 1 is amended by adding an entry 
in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.42-14 also issued under 26 U.S.C. 42(n). * * *

    Par. 2. Section 1.42-5 is amended by:
    1. Revising paragraph (b)(1)(vi).
    2. Adding a sentence after the first sentence in paragraph 
(b)(1)(vii).
    3. Revising paragraph (c)(1)(iii).
    4. The revisions and additions read as follows:


Sec. 1.42-5  Monitoring compliance with low-income housing credit 
requirements.

* * * * *
    (b) * * * (1) * * *
    (vi) The annual income certification of each low-income tenant per 
unit. For an exception to this requirement, see section 42(g)(8)(B) 
(which provides a special rule for a 100 percent low- income building);
    (vii) * * * For an exception to this requirement, see section 
42(g)(8)(B) (which provides a special rule for a 100 percent low-income 
building). * * *
* * * * *
    (c) * * * (1) * * *
    (iii) The owner has received an annual income certification from 
each low-income tenant, and documentation to support that 
certification; or, in the case of a tenant receiving Section 8 housing 
assistance payments, the statement from a public housing authority 
described in paragraph (b)(1)(vii) of this section. For an exception to 
this requirement, see section 42(g)(8)(B) (which provides a special 
rule for a 100 percent low-income building);
* * * * *
    Par. 3. Section 1.42-14 is added to read as follows:


Sec. 1.42-14  Allocation rules for post-1989 State housing credit 
ceiling amounts.

    (a) In general. The State housing credit ceiling for a State for 
any calendar year after 1989 is comprised of four components. The four 
components are--
    (1) $1.25 multiplied by the State population (the population 
component);
    (2) The unused State housing credit ceiling, if any, of the State 
for the preceding calendar year (the unused carryforward component);
    (3) The amount of State housing credit ceiling returned in the 
calendar year (the returned credit component); plus
    (4) The amount, if any, allocated to the State by the Secretary 
under section 42(h)(3)(D) from a national pool of unused credit (the 
national pool component).
    (b) The population component. The population component of the State 
housing credit ceiling of a State for any calendar year is determined 
pursuant to section 146(j). Thus, a State's population for any calendar 
year is determined by reference to the most recent census estimate, 
whether final or provisional, of the resident population of the State 
released by the Bureau of the Census before the beginning of the 
calendar year for which the State's housing credit ceiling is set. 
Unless otherwise prescribed by applicable revenue procedure, 
determinations of population are based on the most recent estimates of 
population contained in the Bureau of the Census publication, Current 
Population Report, Series P-25; Population Estimates and Projections, 
Estimates of the Population of States. For convenience, the Internal 
Revenue Service publishes the population estimates annually in the 
Internal Revenue Bulletin. (See Sec. 601.601(d)(2)(ii)(b)).
    (c) The unused carryforward component. The unused carryforward 
component of the State housing credit ceiling for any calendar year is 
the excess, if any, of the sum of the population and returned credit 
components, over the aggregate housing credit dollar amount allocated 
for the year. Any credit amounts attributable to the national pool 
component of the State housing credit ceiling that remain unallocated 
at the close of a calendar year are not carried forward to the 
succeeding calendar year; instead, the credit expires and cannot be 
reallocated by any Agency.
    (d) The returned credit component--(1) In general. The returned 
credit component of the State housing credit ceiling for any calendar 
year equals the housing credit dollar amount returned during the 
calendar year that was validly allocated within the State in a prior 
calendar year to any project that does not become a qualified low-
income housing project within the period required by section 42, or as 
required by the terms of the allocation. The returned credit component 
also includes credit allocated in a prior calendar year that is 
returned as a result of the cancellation of an allocation by mutual 
consent or by an Agency's determination that the amount allocated is 
not necessary for the financial feasibility of the project. For 
purposes of this section, credit is allocated within a State if it is 
allocated from the State's housing credit ceiling by an Agency of the 
State or of a constitutional home rule city in the State.
    (2) Limitations and special rules. The following limitations and 
special rules apply for purposes of this paragraph (d).
    (i) General limitations. Notwithstanding any other provision of 
this paragraph (d), returned credit does not include any credit that 
was--
    (A) Allocated prior to calendar year 1990;
    (B) Allowable under section 42(h)(4) (relating to the portion of 
credit attributable to eligible basis financed by certain tax-exempt 
bonds under section 103); or
    (C) Allocated during the same calendar year that it is received 
back by the Agency.
    (ii) Credit period limitation. Notwithstanding any other provision 
of this paragraph (d), an allocation of credit may not be returned any 
later than 180 days following the close of the first taxable year of 
the credit period for the building that received the allocation. After 
this date, credit that might otherwise be returned expires, and cannot 
be returned to or reallocated by any Agency.
    (iii) Three-month rule for returned credit. An Agency may, in its 
discretion, treat any portion of credit that is returned from a project 
after September 30 of a calendar year and that is not reallocated by 
the close of the calendar year as returned on January 1 of the 
succeeding calendar year. In this case, the returned credit becomes 
part of the returned credit component of the State housing credit 
ceiling for the succeeding calendar year. Any portion of credit that is 
returned from a project after September 30 of a calendar year that is 
reallocated by the close of the calendar year is treated as part of the 
returned credit component of the State housing credit ceiling for the 
calendar year that the credit was returned.
    (iv) Returns of credit. Subject to the limitations of paragraphs 
(d)(2) (i) and (ii) of this section, credit is returned to the Agency 
in the following instances in the manner described in paragraph (d)(3) 
of this section.
    (A) Building not qualified within required time period. If a 
building is not a qualified building within the time period required by 
section 42, it loses its credit allocation and the credit is returned. 
For example, a building is not qualified within the required time 
period if it is not placed in service within the period required by 
section 42 or if the project of which the building is a part fails to 
meet the minimum set-aside requirements of section 42(g)(1) by the 
close of the first year of the credit period.
    (B) Noncompliance with terms of the allocation. If a building does 
not comply with the terms of its allocation, it loses the credit 
allocation and the credit is returned. The terms of an allocation are 
the written conditions agreed to by the Agency and the allocation 
recipient in the allocation document.
    (C) Mutual consent. If the Agency and the allocation recipient 
cancel an allocation of an amount of credit by mutual consent, that 
amount of credit is returned.
    (D) Amount not necessary for financial feasibility. If an Agency 
determines under section 42(m)(2) that an amount of credit allocated to 
a project is not necessary for the financial feasibility of the project 
and its viability as a qualified low-income housing project throughout 
the credit period, that amount of credit is returned.
    (3) Manner of returning credit--(i) Taxpayer notification. After an 
Agency determines that a building or project no longer qualifies under 
paragraph (d)(2)(iv)(A), (B), or (D) of this section for all or part of 
the allocation it received, the Agency must provide written 
notification to the allocation recipient, or its successor in interest, 
that all or part of the allocation is no longer valid. The notification 
must also state the amount of the allocation that is no longer valid. 
The date of the notification is the date the credit is returned to the 
Agency. If an allocation is cancelled by mutual consent under paragraph 
(d)(2)(iv)(C) of this section, there must be a written agreement signed 
by the Agency, and the allocation recipient, or its successor in 
interest, indicating the amount of the allocation that is returned to 
the Agency. The effective date of the agreement is the date the credit 
is returned to the Agency.
    (ii) Internal Revenue Service notification. If a credit is returned 
within 180 days following the close of the first taxable year of a 
building's credit period as provided in paragraph (d)(2)(ii) of this 
section, and a Form 8609, Low-Income Housing Credit Allocation 
Certification, has been issued for the building, the Agency must notify 
the Internal Revenue Service that the credit has been returned. If only 
part of the credit has been returned, this notification requirement is 
satisfied when the Agency attaches to an amended Form 8610, Annual Low- 
Income Housing Credit Agencies Report, the original of an amended Form 
8609 reflecting the correct amount of credit attributed to the building 
together with an explanation for the filing of the amended Forms. The 
Agency must send a copy of the amended Form 8609 to the taxpayer that 
owns the building. If the building is not issued an amended Form 8609 
because all of the credit allocated to the building is returned, 
notification to the Internal Revenue Service is satisfied by following 
the requirements prescribed in Sec. 1.42-5(e)(3) for filing a Form 
8823, Low-Income Housing Credit Agencies Report of Noncompliance.
    (e) The national pool component. The national pool component of the 
State housing credit ceiling of a State for any calendar year is the 
portion of the National Pool allocated to the State by the Secretary 
for the calendar year. The national pool component for any calendar 
year is zero unless a State is a qualified State. (See paragraph (i) of 
this section for rules regarding the National Pool and the description 
of a qualified State.) Credit from the national pool component of a 
State housing credit ceiling must be allocated prior to the close of 
the calendar year or the credit expires and cannot be reallocated by 
any Agency. A national pool component credit that is allocated during a 
calendar year and returned after the close of the calendar year may 
qualify as part of the returned credit component of the State housing 
credit ceiling for the calendar year that the credit is returned.
    (f) When the State housing credit ceiling is determined. For 
purposes of accounting for the State housing credit ceiling on Form 
8610 and for purposes of determining the set-aside apportionment for 
projects involving qualified nonprofit organizations described in 
section 42(h)(5) and Sec. 1.42-1T(c)(5), the State housing credit 
ceiling for any calendar year is determined at the close of the 
calendar year.
    (g) Stacking order. Under section 42(h)(3)(C), credit is treated as 
allocated from the various components of the State housing credit 
ceiling in the following order. The first credit allocated for any 
calendar year is treated as credit from the sum of the population and 
returned credit components of the State housing credit ceiling. Once 
all of the credit in these components has been allocated, the next 
credit allocated is treated as credit from the unused carryforward 
component of the State housing credit ceiling. Finally, after all of 
the credit from the population component, returned credit component, 
and unused carryforward component has been allocated, any further 
credit allocated is treated as credit from the national pool component.
    (h) Nonprofit set-aside--(1) Determination of set-aside. Under 
section 42(h)(5) and Sec. 1.42-1T(c)(5), at least 10 percent of a State 
housing credit ceiling in any calendar year must be set aside 
exclusively for projects involving qualified nonprofit organizations 
(the nonprofit set-aside). However, credit allocated from the nonprofit 
set-aside in a calendar year and returned in a subsequent calendar year 
does not retain its nonprofit set-aside character. The credit becomes 
part of the returned credit component of the State housing credit 
ceiling for the calendar year that the credit is returned and must be 
included in determining the nonprofit set-aside of the State housing 
credit ceiling for that calendar year. Similarly, credit amounts that 
are not allocated from the nonprofit set-aside in a calendar year and 
are returned in a subsequent calendar year become part of the returned 
credit component of the State housing credit ceiling for that year and 
are also included in determining the set-aside for that year.
    (2) Allocation rules. An Agency may allocate credit from any 
component of the State housing credit ceiling as part of the nonprofit 
set-aside and need not reserve 10 percent of each component for the 
nonprofit set-aside. Thus, an Agency may satisfy the nonprofit set-
aside requirement of section 42(h)(5) and Sec. 1.42-1T(c)(5) in any 
calendar year by setting aside for allocation an amount equal to at 
least 10 percent of the total State housing credit ceiling for the 
calendar year.
    (i) National Pool--(1) In general. The unused housing credit 
carryover of a State for any calendar year is assigned to the Secretary 
for inclusion in a national pool of unused housing credit carryovers 
(National Pool) that is reallocated among qualified States the 
succeeding calendar year. The assignment to the Secretary is made on 
Form 8610.
    (2) Unused housing credit carryover. The unused housing credit 
carryover of a State for any calendar year is the excess, if any, of 
the unused carryforward component of the State housing credit ceiling 
for the calendar year over the excess, if any, of--
    (i) The total housing credit dollar amount allocated for the year; 
over
    (ii) The sum of the population and returned credit components of 
the State housing credit ceiling for the year.
    (3) Qualified State--(i) In general. The term qualified State 
means, with respect to any calendar year, any State that has allocated 
its entire State housing credit ceiling for the preceding calendar year 
and for which a request is made by the State, not later than May 1 of 
the calendar year, to receive an allocation of credit from the National 
Pool for that calendar year. Except as provided in paragraph (i)(3)(ii) 
of this section, a State is not a qualified State in a calendar year if 
there remains any unallocated credit in its State housing credit 
ceiling at the close of the preceding calendar year that was 
apportioned to any Agency within the State for the calendar year.
    (ii) Exceptions--(A) De minimis amount. If the amount remaining 
unallocated at the close of a calendar year is only a de minimis amount 
of credit, the State is a qualified State eligible to participate in 
the National Pool. For that purpose, a credit amount is de minimis if 
it does not exceed 1 percent of the aggregate State housing credit 
ceiling of the State for the calendar year.
    (B) Other circumstances. Pursuant to the authority under section 
42(n), the Internal Revenue Service may determine that a State is a 
qualified State eligible to participate in the National Pool even 
though the State's unallocated credit is in excess of the 1 percent 
safe harbor set forth in paragraph (A) of this section. The Internal 
Revenue Service will make this determination based on all the facts and 
circumstances, weighing heavily the interests of the States who would 
otherwise qualify for the National Pool. The Internal Revenue Service 
will generally grant relief under this paragraph only where a State's 
unallocated credit is not substantial.
    (iii) Time and manner for making request. For further guidance as 
to the time and manner for making a request of housing credit dollar 
amounts from the National Pool by a qualified State, see Rev. Proc. 92-
31, 1992-1 C.B. 775. (See 601.601(d)(2)(ii)(b)).
    (4) Formula for determining the National Pool. The amount allocated 
to a qualified State in any calendar year is an amount that bears the 
same ratio to the aggregate unused housing credit carryovers of all 
States for the preceding calendar year as that State's population for 
the calendar year bears to the population of all qualified States for 
the calendar year.
    (j) Coordination between Agencies. The Agency responsible for 
filing Form 8610 on behalf of all Agencies within a State and making 
any request on behalf of the State for credit from the National Pool 
(the Filing Agency) must coordinate with each Agency within the State 
to ensure that the various requirements of this section are complied 
with. For example, the Filing Agency of a State must ensure that all 
Agencies within the State that were apportioned a credit amount for the 
calendar year have allocated all of their respective credit amounts for 
the calendar year before the Filing Agency can make a request on behalf 
of the State for a distribution of credit from the National Pool.
    (k) Examples. (1) The operation of the rules of this section may be 
illustrated by the following examples. Unless otherwise stated in an 
example, Agency A is the sole Agency authorized to make allocations of 
housing credit dollar amounts in State M, all of Agency A's allocations 
are valid, and for calendar year 1994 Agency A has available for 
allocation a State housing credit ceiling consisting of the following 
housing credit dollar amounts: 

A. Population component........................................     $100
B. Unused carryforward component...............................       50
C. Returned credit component...................................       10
D. National pool component.....................................        0
                                                                --------
      Total....................................................      160
                                                                        

    (2) In addition, the $10 of returned credit component was returned 
before October 1, 1994.

    Example 1--(i) Additional facts. By the close of 1994, Agency A 
had allocated $80 of the State M housing credit ceiling. Of the $80 
allocated, $16 was allocated to projects involving qualified 
nonprofit organizations.
    (ii) Application of stacking rules. The first credit allocated 
is treated as allocated from the population and returned credit 
components of the State housing credit ceiling, to the extent of 
those components. In this case, the $80 of credit allocated is less 
than the sum of the population and returned credit components. The 
excess of the sum of the population and returned credit components 
over the total amount allocated for the calendar year ($110-80=$30) 
becomes the unused carryforward component of State M's 1995 State 
housing credit ceiling. Because Agency A did not allocate credit in 
excess of the sum of the population and returned credit components, 
no credit is treated as allocated from State M's $50 unused 
carryforward component in 1994. Because none of this component may 
be carried forward, all $50 is assigned to the Secretary for 
inclusion in the National Pool. Under paragraph (i)(3) of this 
section, State M does not qualify for credit from the National Pool 
for the 1995 calendar year.
    (iii) Nonprofit set-aside. Agency A allocated exactly the amount 
of credit to projects involving qualified nonprofit organizations as 
necessary to meet the nonprofit set-aside requirement ($16, 10% of 
the $160 ceiling).
    Example 2--(i) Additional facts. By the close of 1994, Agency A 
had allocated $130 of the State M housing credit ceiling. Of the 
$130 allocated, $20 was allocated to projects involving qualified 
nonprofit organizations.
    (ii) Application of stacking rules. The first $110 of credit 
allocated is treated as allocated from the population and returned 
credit components. In this case, because all of the population and 
returned credit components are allocated, no amount is included in 
State M's 1995 State housing credit ceiling as an unused 
carryforward component. The next $20 of credit allocated is treated 
as allocated from the $50 unused carryforward component. The $30 
remaining in the unused carryforward component is assigned to the 
Secretary for inclusion in the National Pool for the 1995 calendar 
year. Under paragraph (i)(3) of this section, State M does not 
qualify for credit from the National Pool for the 1995 calendar 
year.
    (iii) Nonprofit set-aside. Agency A allocated $4 more credit to 
projects involving qualified nonprofit organizations than necessary 
to meet the nonprofit set-aside requirement. This does not reduce 
the application of the 10% nonprofit set-aside requirement to the 
State M housing credit ceiling for the succeeding year.
    Example 3--(i) Additional fact. None of the applications for 
credit that Agency A received for 1994 are for projects involving 
qualified nonprofit organizations.
    (ii) Nonprofit set-aside. Because at least 10% of the State 
housing credit ceiling must be set aside for projects involving a 
qualified nonprofit organization, Agency A can allocate only $144 of 
the $160 State housing credit ceiling for calendar year 1994 
($160-16=$144). If Agency A allocates $144 of credit, the credit is 
treated as allocated $110 from the population and returned credit 
components and $34 from the unused carryforward component. The $16 
of unallocated credit that is set aside for projects involving 
qualified nonprofit organizations is treated as the balance of the 
unused carryforward component, and is assigned to the Secretary for 
inclusion in the National Pool. Under paragraph (i)(3) of this 
section, State M does not qualify for credit from the National Pool 
for the 1995 calendar year.
    Example 4--(i) Additional facts. The $10 of returned credit 
component was returned prior to October 1, 1994. However, a $40 
credit that had been allocated in calendar year 1993 to a project 
involving a qualified nonprofit organization was returned to the 
Agency by a mutual consent agreement dated November 15, 1994. By the 
close of 1994, Agency A had allocated $160 of the State M housing 
credit ceiling, including $16 of credit to projects involving 
qualified nonprofit organizations.
    (ii) Effect of three-month rule. Under the three-month rule of 
paragraph (d)(2)(iii) of this section, Agency A may treat all or 
part of the $40 of previously allocated credit as returned on 
January 1, 1995. If Agency A treats all of the $40 amount as having 
been returned in calendar year 1995, the State M housing credit 
ceiling for 1994 is $160. This entire amount, including the $16 
nonprofit set-aside, has been allocated in 1994. Under paragraph 
(i)(3) of this section, State M qualifies for the National Pool for 
the 1995 calendar year.
    (iii) If three-month rule not used. If Agency A treats all of 
the $40 of previously allocated credit as returned in calendar year 
1994, the State housing credit ceiling for the 1994 calendar year 
will be $200 of which $50 will be attributable to the returned 
credit component ($10+$40=$50). Because credit amounts allocated in 
a prior calendar year that are returned in a subsequent calendar 
year do not retain their nonprofit character, the nonprofit set-
aside for calendar year 1994 is $20 (10% of $200). The $160 that 
Agency A allocated during 1994 is first treated as from the 
population and returned credit components, which total $150. The 
next $10 of credit allocated is treated as from the unused 
carryforward component. The $40 of unallocated credit from the 
unused carryforward component includes the $4 of unallocated 
nonprofit set-aside. The entire $40 of credit from the carryforward 
component is assigned to the Secretary for inclusion in the National 
Pool for the 1995 calendar year. State M does not qualify for credit 
from the National Pool for the 1995 calendar year.
    Example 5--(i) (A) Additional facts. For calendar year 1994, 
Agency A has a State housing credit ceiling that consists of the 
following housing credit dollar amounts: 

A. Population component........................................     $100
B. Unused carryforward component...............................        0
C. Returned credit component...................................       20
D. National pool component.....................................       10
                                                                --------
      Total....................................................      130
Minimum nonprofit set-aside....................................       13
Ceiling amount not set-aside...................................     117 
                                                                        

    In addition, the $20 of returned credit component was returned 
before October 1, 1994. By the close of 1994, Agency A had allocated 
$100 of the State housing credit ceiling.
    (ii) Application of stacking rules. The $20 excess of the sum of 
the population component and the returned credit component over the 
total amount allocated for the calendar year ($120-100=$20) becomes 
the unused carryforward component of the State housing credit 
ceiling for the 1995 calendar year. The $10 of unallocated credit 
from the national pool component expires and cannot be reallocated. 
This amount is neither carried over to 1995 by State M nor assigned 
to the Secretary for inclusion in the National Pool. Under paragraph 
(i)(3) of this section, State M does not qualify for credit from the 
National Pool for the 1995 calendar year.

    (l) Effective date. The rules set forth in Sec. 1.42-14 are 
effective January 1, 1994.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec. 602.101(c)  [Amended]

    Par. 5. Section 602.101(c) is amended by adding the entry ``1.42-
14....1545-1423'' in numerical order to the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: September 9, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-24283 Filed 9-30-94; 8:45 am]
BILLING CODE 4830-01-P