[Federal Register Volume 62, Number 17 (Monday, January 27, 1997)]
[Rules and Regulations]
[Pages 3792-3793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1790]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8713]
RIN 1545-AU93


Section 42(d)(5) Federal Grants

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations with respect to 
the low-income housing tax credit relating to the application of 
section 42(d)(5) to certain rental assistance programs under section 
42(g)(2)(B)(i). The regulations clarify that certain types of federal 
rental assistance payments do not result in a reduction in the eligible 
basis of a low-income housing building. The text of these regulations 
also serves as the text of the proposed regulations set forth in the 
notice of proposed rulemaking on this subject in the Proposed Rules 
section of this issue of the Federal Register.

EFFECTIVE DATE: These regulations are effective January 27, 1997.

FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson (202) 622-3040 
(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    Under section 42(d)(1), the eligible basis used to compute the low-
income housing tax credit of a new low-income building is the adjusted 
basis of the building as of the close of the first taxable year of the 
credit period. Section 42(d)(5) provides that if, during a taxable year 
in the compliance period (as defined in section 42(i)(1)), a federal 
grant is made with respect to a low-income building or the operation 
thereof, the eligible basis of the building for the taxable year and 
all succeeding taxable years is reduced to the extent of the federal 
grant. Questions have arisen whether rental assistance payments under 
section 8 of the United States Housing Act of 1937 (Act) (42 U.S.C. 
Sec. 1437f) and certain rental assistance payments under section 9 of 
the Act (42 U.S.C. 1437g) are federal grants requiring a reduction in 
eligible basis.
    The legislative history of section 42 indicates that section 
42(d)(5) was enacted to prevent a taxpayer from ``double-dipping'' in 
federal benefits. S. Rep. No. 313, 99th Cong., 2d Sess. II-767 (1986), 
1986-3 (Vol 3) C.B. 767. This would occur, for example, if the owner of 
a building received both the low-income housing credit and a federal-
interest subsidy or federal grant with respect to the building. The 
legislative history further indicates, however, that Congress did not 
intend to treat federal rental assistance payments as grants for this 
purpose. Thus, the legislative history indicates that no basis 
reduction is required for rental assistance payments provided by the 
Department of Housing and Urban Development (HUD) under section 8 of 
the Act. (In contrast to this treatment of section 8 rental assistance 
payments, section 42(c)(2) generally denies the low-income housing tax 
credit to buildings that receive ``moderate rehabilitation assistance'' 
under section 8(e)(2) of the Act).
    HUD recently was granted the authority to assist mixed-finance 
projects under section 9 of the Act. Under this new initiative, public 
housing authorities receiving HUD assistance are permitted to disburse 
that assistance to private owners as reimbursement for the operating 
expenses of units the owner has agreed to maintain for public-housing 
tenants. This section 9 assistance for operating expenses functions in 
a manner similar to rental assistance payments under section 8 of the 
Act. The section 8 rental assistance payments are designed to 
compensate the unit owner for all or part of the difference between the 
rent a low-income tenant is able to pay and a fair market rent standard 
as set by HUD. Similarly, the section 9 payments are designed to cover 
an allocable share of operating costs of the units rented to low-income 
tenants, thus, in effect, supplementing the rents that these tenants 
are required to pay.

Explanation of Provisions

    These temporary regulations provide that certain federal rental 
assistance payments made to the owner of a building on behalf of low-
income tenants are not federal grants with respect to a building or its 
operation that require a reduction in the building's eligible basis 
under section 42(d)(5). These payments include rental assistance 
payments made under section 8 of the Act, certain payments made under 
section 9 of the Act, and payments made under such other programs or 
methods of rental assistance as may be designated in the Federal 
Register or the Internal Revenue Bulletin.

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) 
does not apply to these regulations and, because these regulations do 
not impose on small entities a collection of information requirement, 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Therefore, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Internal Revenue Code, this temporary 
regulation will be submitted to the Chief Counsel for Advocacy of 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 Assistant Chief Counsel (Passthroughs and Special 
Industries). 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.

[[Page 3793]]

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.42-16T also issued under 26 U.S.C. 42(n); * * *

    Par. 2. Section 1.42-16T is added to read as follows:


Sec. 1.42-16T  Eligible basis reduced by federal grants (temporary).

    (a) In general. If, during any taxable year of the compliance 
period (described in section 42(i)(1)), a grant is made with respect to 
any building or the operation thereof and any portion of the grant is 
funded with federal funds (whether or not includible in gross income), 
the eligible basis of the building for the taxable year and all 
succeeding taxable years is reduced by the portion of the grant that is 
so funded.
    (b) Grants do not include certain rental assistance payments. A 
federal rental assistance payment made to a building owner on behalf or 
in respect of a tenant is not a grant made with respect to a building 
or its operation if the payment is made pursuant to--
    (1) Section 8 of the United States Housing Act of 1937;
    (2) A qualifying program of rental assistance administered under 
section 9 of the United States Housing Act of 1937; or
    (3) A program or method of rental assistance as the Secretary may 
designate through the Federal Register or in the Internal Revenue 
Bulletin (see Sec. 601.601(d)(2) of this chapter).
    (c) Qualifying rental assistance program. For purposes of paragraph 
(b)(2) of this section, payments are made pursuant to a qualifying 
rental assistance program administered under section 9 of the United 
State Housing Act of 1937 to the extent that the payments--
    (1) Are made to a building owner pursuant to a contract with a 
public housing authority with respect to units the owner has agreed to 
maintain as public housing units (PH-units) in the building;
    (2) Are made with respect to units occupied by public housing 
tenants, provided that, for this purpose, units may be considered 
occupied during periods of short term vacancy (not to exceed 60 days); 
and
    (3) Do not exceed the difference between the rents received from a 
building's PH-unit tenants and a pro rata portion of the building's 
actual operating costs that are reasonably allocable to the PH-units 
(based on square footage, number of bedrooms, or similar objective 
criteria), and provided that, for this purpose, operating costs do not 
include any development costs of a building (including developer's 
fees) or the principal or interest of any debt incurred with respect to 
any part of the building.
    (d) Effective date. This section is effective January 27, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: January 8, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-1790 Filed 1-24-97; 8:45 am]
BILLING CODE 4830-01-U