[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Proposed Rules]
[Pages 27036-27038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13297]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-29-95]
RIN 1545-AT60


Available Unit Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations concerning the 
low-income housing credit. The proposed regulations provide rules for 
determining the treatment of low-income housing units in a building 
that are occupied by individuals whose incomes increase above 140 
percent of the income limitation applicable under section 42(g)(1). The 
proposed regulations affect owners of those buildings. This document 
also provides notice of public hearing on these proposed regulations.

DATES: Written comments and outlines of topics to be discussed at the 
public hearing scheduled for September 17, 1996, must be received by 
August 28, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-29-95), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (PS-29-95), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. The public hearing will be held in the NYU Classroom, 
room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David 
Selig, (202) 622-3040; concerning submissions and the hearing, 
Christina Vasquez, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR Part 1) under section 42. These amendments are 
proposed to provide guidance under section 42(g)(2)(D), as amended by 
section 7108(e)(1) of the Omnibus Budget and Reconciliation Act of 
1989, and section 11701(a)(3)(A) and (a)(4) of the Omnibus Budget and 
Reconciliation Act of 1990. Section 42(g)(2)(D) provides rules for 
determining the treatment of low-income housing units that are occupied 
by individuals whose incomes rise above the income limitation 
applicable under section 42(g)(1).
    The general rule in section 42(g)(2)(D)(i) provides that if the 
income of an occupant of a low-income unit increases above the income 
limitation applicable under section 42(g)(1), the unit continues to be 
treated as a low-income unit. This general rule only applies if the 
occupant's income initially met the income limitation and the unit 
continues to be rent-restricted. Section 42(g)(2)(D)(ii), however, 
provides an exception to the general rule in section 42(g)(2)(D)(i). 
The unit ceases being treated as a low-income unit when two conditions 
occur. The first condition is that the occupant's income increases 
above 140 percent of the income limitation applicable under section 
42(g)(1), or above 170 percent for a deep rent-skewed project described 
in section 142(d)(4)(B) (applicable income limitation). When this 
occurs, the unit becomes an over-income unit. The second condition is 
that a new resident, whose income exceeds the applicable income 
limitation (nonqualified resident), occupies any residential unit in 
the building of a comparable or smaller size (comparable unit).

Explanation of Provisions

All Available Units Must Be Rented to Qualified Residents

    The heading of section 42(g)(2)(D)(ii) indicates that the next 
available unit must be rented to a low-income tenant to maintain the 
low-income status of an over-income unit. Although the heading of 
section 42(g)(2)(D)(ii) refers to the next available unit, the body of 
section 42(g)(2)(D)(ii) clarifies that if any available comparable unit 
is occupied by a nonqualified resident, the over-income unit ceases to 
be treated as a low-income unit. Therefore, all available comparable 
units in the building, not only the next available unit, must be rented 
to qualified residents to maintain the low-income status of the over-
income unit.

A Current Resident May Move Within the Same Low-Income Building

    The proposed regulations define a qualified resident under the 
available unit rule as any person whose income does not exceed the 
applicable income limitation or any current resident, regardless of the 
income level of the current resident. Thus, a current resident may move 
to a different unit in the same low-income building without causing a 
violation of the available unit rule even if the current resident's 
income exceeds the applicable income limitation. When a current 
resident moves to a different unit within the same low-income building, 
the new unit adopts the status of the vacated unit.

Rule Applies to Each Building Separately

    The rules of section 42 generally apply on a building-by-building 
basis. For example, the amount of credit allowable under section 42(a) 
is determined for each building in a qualified low-income housing 
project. The recapture of credit under section 42(j) is determined by 
examining the qualified basis of each building. In addition, section 
42(g)(2)(D)(ii) uses the phrase ``any residential rental unit in the 
building'' to identify residential rental units that must be rented to 
qualified residents to preserve the low-income status of an over-income 
unit. The proposed regulations provide, therefore, that in a project 
containing more than one low-income building, the available unit rule 
applies separately to each building.

Effect of Violation of Available Unit Rule

    The proposed regulations further provide that all over-income units 
in the building lose their status as low-income units if an owner 
violates the available unit rule. A violation of the rule occurs when a 
building has one or more over-income units and the owner of the 
building rents an available comparable unit in the building to a 
nonqualified resident.

Over-Income Unit Counts Toward Minimum Set-Aside Requirement

    The proposed regulations also clarify whether an over-income unit 
counts towards satisfying the applicable minimum set-aside requirement 
of section 42(g)(1). The available unit rule provides that an over-
income unit maintains its status as a low-income unit as long as the 
owner does not rent an available comparable unit to a nonqualified 
resident. Section 42(i)(3), which defines a low-income unit, and 
section 42(g)(2)(D), which contains rules

[[Page 27037]]

for increases in the income of existing low-income tenants, work 
together to treat an over-income unit as a low-income unit when 
determining whether a project satisfies the applicable minimum set-
aside requirement. This treatment helps diminish any incentive a 
project owner may have to evict from a rent-restricted unit those 
tenants who originally qualified as low-income tenants. See 2 H.R. 
Conf. Rep. No. 841, 99th Cong., 2d Sess. II-97 (1986), 1986-3 (Vol. 4) 
C.B. 97. Therefore, the proposed regulations provide that an over-
income unit may continue to be included in the numerator and the 
denominator of the ratio used to determine whether a project satisfies 
the applicable minimum set-aside requirement of section 42(g)(1).

Relationship to Tax-Exempt Bond Provisions

    Financing arrangements using obligations that purport to be exempt 
facility bonds under section 142 must meet the requirements of sections 
103 and 141 through 150 for interest on the obligations to be excluded 
from gross income under section 103(a). The requirements under section 
142(d) may differ from those under section 42. For example, section 
142(d)(1) is applied on a project rather than on a building-by-building 
basis. The rules set forth in these proposed regulations are not 
intended as an interpretation of the applicable rules under section 
142.
    The rules contained in the proposed regulations are proposed to be 
effective on the date final regulations are published in the Federal 
Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for September 17, 1996, at 10 
a.m. in the NYU Classroom, room 2615, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Because of access 
restrictions, visitors will not be admitted beyond the Internal Revenue 
Building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and outlines of topics to be discussed and the 
time devoted to each topic (signed original and eight (8) copies by 
August 28, 1996.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

    Drafting Information: The principal author of these regulations 
is David Selig, Office of the Assistant Chief Counsel (Passthroughs 
and Special Industries), IRS. However, other personnel from the IRS 
and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
a new citation in numerical order to read as follows:

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

    Section 1.42-15 is also issued under 26 U.S.C. 42(n). * * *
    Par. 2. Section 1.42-15 is added to read as follows:


Sec. 1.42-15  Available unit rule.

    (a) Definitions. The following definitions apply to this section:
    Applicable income limitation means the limitation applicable under 
section 42(g)(1) or, for deep rent-skewed projects described in section 
142(d)(4)(B), 40 percent of area median gross income.
    Available unit rule means the rule in section 42(g)(2)(D)(ii).
    Comparable unit means a residential unit in a low-income building 
that is comparably sized or smaller than an over-income unit or, for 
deep rent-skewed projects described in section 142(d)(4)(B), any low-
income unit.
    Low-income resident means a person whose income does not exceed the 
applicable income limitation.
    Low-income unit is defined by section 42(i)(3)(A).
    New resident means a person who currently is not living in the low-
income building.
    Nonqualified resident means a new resident whose income exceeds the 
applicable income limitation.
    Over-income unit means a low-income unit in which the income of the 
occupants of the unit increases above 140 percent of the applicable 
income limitation under section 42(g)(1), or above 170 percent of the 
applicable income limitation for deep rent-skewed projects described in 
section 142(d)(4)(B).
    Qualified resident means a low-income resident or a current 
resident.
    (b) General section 42(g)(2)(D)(i) rule. Except as provided in 
paragraph (c) of this section, notwithstanding an increase in the 
income of the occupants of a low-income unit above the applicable 
income limitation, if the income of the occupants initially met the 
applicable income limitation, and the unit continues to be rent-
restricted----
    (1) The unit continues to be treated as a low-income unit; and
    (2) The unit continues to be included in the numerator and the 
denominator of the ratio used to determine whether a project satisfies 
the applicable minimum set-aside requirement of section 42(g)(1).
    (c) Exception. A unit ceases to be treated as a low-income unit if 
it becomes an over-income unit and a nonqualified resident occupies any 
comparable unit that is available or that subsequently becomes 
available in the same low-income building. Thus, to continue treating 
the over-income unit as a low-income unit, the owner of a low-income 
building must rent to qualified residents all comparable units that are 
available or that subsequently become available in the same building.
    (d) Effect of current resident moving within building. When a 
current resident moves to a different unit within the building, the 
newly occupied unit adopts the status of the vacated unit. Thus, if a 
current resident, whose income exceeds the applicable income 
limitation, moves from an over-income unit to a vacant unit in the same 
building, the newly occupied unit is treated as an over-income unit.

[[Page 27038]]

    (e) Buildings accounted for separately. In a project containing 
more than one low-income building, the available unit rule applies 
separately to each building.
    (f) Result of violation of available unit rule. If any comparable 
unit that subsequently becomes available is rented to a nonqualified 
resident, all over-income units within the same building lose their 
status as low-income units.
    (g) Examples. The following examples illustrate this section.

    Example 1. This example illustrates a violation of the available 
unit rule in a low-income building containing three over-income 
units. On January 1, 1997, a qualified low-income housing project, 
consisting of one building containing ten identically sized 
residential units, received a housing credit dollar amount 
allocation from a state housing credit agency for five low-income 
units. To avoid recapture of credit, the Project owner must maintain 
five of the units as low-income units. The project satisfied the 
minimum set-aside requirement of section 42(g)(1)(B). Units 1, 2, 3, 
4, and 5 were occupied by individuals whose incomes did not exceed 
the income limitation applicable under section 42(g)(1) (low-income 
residents). Units 6, 7, 8, and 9 were occupied by market-rate 
tenants. Unit 10 was vacant. On November 21, 1997, the annual 
incomes of the individuals in Units 1, 2, and 3 increased above 140 
percent of the income limitation applicable under section 42(g)(1), 
causing those units to become over-income units. On November 30, 
1997, Units 8 and 9 became vacant. On December 1, 1997, the project 
owner rented Units 8 and 9 to qualified residents at rates meeting 
the rent restriction requirements of section 42(g)(2). On December 
31, 1997, the Project owner rented Unit 10 to a market-rate tenant. 
Because Unit 10, an available comparable unit, was leased to a 
market-rate tenant, Units 1, 2, and 3 ceased to be treated as low-
income units. On that date, Units 4, 5, 8, and 9 were the only 
remaining low-income units. Because the Project owner did not 
maintain five of the residential units as low-income units, the 
qualified basis in the building is reduced, and credit must be 
recaptured. If the project owner had rented Unit 10 to a qualified 
resident, eight of the units would be low-income units. Units 1, 2, 
and 3, the over-income units, could then be rented to market-rate 
tenants because the building would still contain five low-income 
units.
    Example 2. This example illustrates the provisions of paragraph 
(d) of this section. A low-income project consists of one six-floor 
building. The residential units in the building are identically 
sized. The building contains two over-income units on the sixth 
floor and two vacant units on the first floor. The project owner, 
desiring to maintain the over-income units as low-income units, 
wants to rent the available units to qualified residents. J, a 
resident of one of the over-income units, wishes to occupy a unit on 
the first floor. J's income has recently increased above the 
applicable income limitation. The project owner permits J to move 
into one of the units on the first floor. Despite the increase in 
J's income, J is a qualified resident under the available unit rule 
because J is a current resident of the building. The unit occupied 
by J becomes an over-income unit under the available unit rule. The 
over-income units in the building continue to be treated as low-
income units.

    (h) Effective date. This section is effective on the date final 
regulations are published in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-13297 Filed 5-29-96; 8:45 am]
BILLING CODE [4830-01-U]