[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Proposed Rules]
[Pages 1143-1148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-174]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114664-97]
RIN 1545-AV44


Compliance Monitoring and Miscellaneous Issues Relating to the 
Low-Income Housing Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed amendments to various existing 
final regulations concerning the low-income housing tax credit 
including the procedures for compliance monitoring by state and local 
housing agencies (Agencies), the requirements for making carryover 
allocations, and the rules for Agencies' correction of administrative 
errors or omissions. In addition, regulations are being proposed 
involving the independent verification of information on sources and 
uses of funds submitted by taxpayers to Agencies. These amendments and 
proposed regulations affect owners of low-income housing projects who 
have claimed the credit and the Agencies who administer the credit. 
This document also provides notice of a public hearing on these 
proposed regulations.

DATES: Written and electronic comments must be received by May 6, 1999. 
Outlines of topics to be discussed at the public hearing scheduled for 
May 27, 1999, must be received by April 8, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-114664-97), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
114664-97), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Paul 
Handleman, (202) 622-3040; concerning submissions, the hearing, and/or 
to be placed on the building access list to attend the hearing, LaNita 
Van Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in Secs. 1.42-5 and 1.42-
13 previously have been reviewed and approved by the Office of 
Management and Budget for review under control numbers 1545-1291 and 
1545-1357, respectively; all of these paperwork requirements will be 
consolidated under control number 1545-1357. The new collections of 
information contained in this notice of proposed rulemaking have been 
submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)).
    Comments on the collections of information should be sent 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, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. 
Comments on the collections of information should be received by March 
9, 1999.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The requirement for the collections of information in this notice 
of proposed rulemaking is in Secs. 1.42-5, 1.42-13, and 1.42-17. The 
information is required by the IRS to verify compliance with the 
requirements of section 42. The collections of information are 
mandatory. The likely respondents/recordkeepers are individuals, state 
and local governments, businesses or other

[[Page 1144]]

for-profit institutions, nonprofit institutions, and small businesses 
or organizations.
    Estimated total annual reporting and recordkeeping burden for 
Sec. 1.42-5: 102,500 hours. For Sec. 1.42-5, the estimated annual 
burden per respondent varies from .5 hour to 3 hours for taxpayers and 
250 to 5,000 hours for Agencies, with an estimated average of 1 hour 
for taxpayers and 1,500 hours for Agencies.
    Estimated number of respondents for Sec. 1.42-5 : 20,000 taxpayers 
and 55 Agencies.
    Estimated total annual reporting and recordkeeping burden for 
Sec. 1.42-13: 289 hours. For Sec. 1.42-13, the estimated annual burden 
per respondent varies from .5 hour to 10 hours for taxpayers and 
Agencies, with an estimated average of 3.5 hours for taxpayers and 3 
hours for Agencies.
    Estimated number of respondents for Sec. 1.42-13: 43 taxpayers and 
43 Agencies.
    Estimated total annual reporting and recordkeeping burden for 
Sec. 1.42-17: 2,110 hours. For Sec. 1.42-17, the estimated annual 
burden per respondent varies from .5 hour to 2 hours for taxpayers and 
.5 hour to 5 hours for Agencies, with an estimated average of 1 hour 
for taxpayers and 2 hours for Agencies.
    Estimated number of respondents for Sec. 1.42-17: 2,000 taxpayers 
and 55 Agencies.
    Estimated annual frequency of responses: once a year.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information a valid control number 
assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On March 28, 1997, the General Accounting Office (GAO) submitted a 
report to Congress, ``Tax Credits: Opportunities to Improve Oversight 
of the Low-Income Housing Program,'' (GAO/GGD/RCED-97-55), recommending 
certain revisions to existing Agency procedures for compliance with the 
low-income housing credit and requirements under qualified allocation 
plans for verifying taxpayers' sources and uses of funds for low-income 
housing projects. Consistent with these proposals, the proposed 
regulations amend existing regulation Sec. 1.42-5 to require Agencies: 
(i) to report annually their compliance monitoring activities to the 
IRS; (ii) to conduct on-site habitability inspections of low-income 
housing projects; and (iii) to review local government reports on 
building code violations. In addition, the proposed regulations provide 
that qualified allocation plans require taxpayers to submit independent 
verification on sources and uses of funds for low-income projects.
    The proposed regulations also contain amendments to the Income Tax 
Regulations (26 CFR part 1) including Sec. 1.42-6 (carryover 
allocations), Sec. 1.42-11 (provision of services), Sec. 1.42-12 
(effective dates and transitional rules), and Sec. 1.42-13 (correction 
of administrative errors and omissions) that are issued under the 
authority granted by section 42(n).

Explanation of Provisions

Compliance Monitoring

    Section 42(m)(1)(B)(iii) provides that an allocation plan is not 
qualified unless it contains a procedure that the Agency (or an agent 
of, or private contractor hired by, the Agency) will follow in 
monitoring compliance with the provisions of section 42. The Agency is 
to notify the IRS of any noncompliance of which the Agency becomes 
aware.
    Section 42(m)(1)(B)(iii) is effective on January 1, 1992, and 
applies to all buildings for which the low-income housing credit 
determined under section 42 is, or has been, allowable at any time. 
Allocation plans must have complied with the requirements of Sec. 1.42-
5 by June 30, 1993. Section 42(m)(1)(B)(iii) and Sec. 1.42-5 do not 
require monitoring for whether a low-income housing project is in 
compliance with the requirements of section 42 prior to January 1, 
1992. However, if an Agency becomes aware of noncompliance that 
occurred prior to January 1, 1992, the Agency is required to notify the 
IRS of that noncompliance.
    The current compliance monitoring regulations require an Agency, at 
a minimum, to review tenant income certifications and rent charges of 
projects using one of the following three monitoring options: (1) 
Review the owners' annual income certifications, including the 
documentation supporting the certifications for at least 50 percent of 
the Agency's low-income projects, and tenant rent records in at least 
20 percent of the low-income units in these projects; (2) make annual 
on-site inspections of at least 20 percent of the projects, and review 
the low-income certification, the documentation supporting the 
certification, and rent record for each tenant in at least 20 percent 
of the low-income units in those projects; or (3) obtain from all 
project owners tenant income and rent records for each low-income unit 
and, for at least 20 percent of the projects, review the annual tenant 
income certification, backup income documentation, and rent record for 
each low-income tenant in at least 20 percent of the low-income units 
in those projects.
    The GAO report recommended that an Agency conduct regular on-site 
inspections of projects and obtain building code inspection reports 
performed by the local government unit. The GAO found that desk audits 
(monitoring options 1 and 3 above) failed to detect violations 
involving the physical condition of buildings. In addition, site visits 
allow an Agency to directly assess the compliance status of projects 
and the physical condition of buildings. Consistent with these 
proposals, the proposed regulations remove the three monitoring options 
and require, at least once every three (3) years, that each Agency 
conduct on-site inspections of all buildings in each low-income housing 
project and, for each tenant in at least 20 percent of the project's 
low-income units selected by the Agency, review the low-income 
certification, the documentation supporting such certification, and the 
rent record. The proposed regulations also require, at a minimum, by 
the end of the calendar year following the year the last building in a 
project is placed in service, that the Agency conduct on-site 
inspections of the projects and review the low-income certification, 
the documentation supporting such certification, and the rent record 
for each tenant in the project. As part of the inspection requirements, 
the proposed regulations also require the Agency to determine whether 
the project is suitable for occupancy, taking into account local 
health, safety, and building codes. Agencies may delegate this 
determination only to a state or local government unit responsible for 
making building code inspections. The three-year inspection requirement 
is proposed to be effective on the date the final regulations are 
published in the Federal Register. The placed-in-service year 
inspection requirement is proposed to be effective for buildings placed 
in service on or after the date the final regulations are published in 
the Federal Register.
    The current compliance monitoring regulations require the owner of 
a project, at a minimum, to certify annually that for the preceding 12-

[[Page 1145]]

month period each building in the project was suitable for occupancy, 
taking into account local health, safety, and building codes. Based on 
the GAO recommendation, the proposed regulations revise this 
certification by also requiring the owner of the project to certify 
that for the preceding 12-month period the state or local government 
unit responsible for making building code inspections did not issue a 
report of a violation for the project. If the governmental unit issued 
a report of a violation, the owner will be required to attach a copy of 
the report of the violation to the annual certification submitted to 
the Agency.
    The proposed regulations also adopt the GAO recommendation that 
Agencies report annually to the IRS on compliance monitoring 
activities. It is anticipated Form 8610, ``Annual Low-Income Housing 
Credit Agencies Report,'' will be revised to require an Agency to 
confirm annually that it has satisfied the new compliance monitoring 
requirements involving: (1) the once every three-year on-site 
inspections and review of the low-income certification, the 
documentation supporting such certification, and the rent record for 
each tenant in at least 20 percent of the low-income units selected by 
the Agency; and (2) the on-site inspections relating to the placed-in-
service year and review of the low-income certification, the 
documentation supporting such certification, and the rent record for 
each low-income tenant in the project.
    The current compliance monitoring regulations require Agencies to 
report a correction of noncompliance or failure to certify if the 
correction occurs within the correction period defined in Sec. 1.42-
5(e)(4). The proposed regulations clarify that the Agency is required 
to file Form 8823, ``Low-Income Housing Credit Agencies Report of 
Noncompliance,'' with the IRS reporting the correction of the 
noncompliance or failure to certify regardless of when the correction 
occurs during the compliance period. This requirement is proposed to be 
effective on the date the final regulations are published in the 
Federal Register.

Sources and Uses of Funds

    The GAO report recommended that IRS regulations be amended to 
establish clear requirements to ensure independent verification of 
taxpayer's key information on sources and uses of funds submitted to an 
Agency. Without assurance of reliable and complete cost and financing 
information, Agencies are vulnerable to providing more (or fewer) tax 
credits to projects than are actually needed. Under section 
42(m)(2)(A), the housing credit dollar amount allocated to a project 
should not exceed the amount the Agency determines is necessary for the 
financial feasibility of the project and its viability as a qualified 
low-income housing project throughout the credit period. In making this 
determination, section 42(m)(2)(B) requires that the Agency must 
consider: (i) the sources and uses of funds and the total financing 
planned for the project, (ii) any proceeds or receipts expected to be 
generated by reason of tax benefits, (iii) the percentage of the 
housing credit dollar amount used for project costs other than the 
costs of intermediaries, and (iv) the reasonableness of the 
developmental and operational costs of the project. The requirement in 
section 42(m)(2)(B)(iii) is not to be applied so as to impede the 
development of projects in hard-to-develop areas.
    In its report, the GAO determined that an Agency must make three 
critical judgments in awarding credits: (1) The reasonableness of 
developer costs because the Agency is to award no more credits to a 
project than a specified percentage of certain Agency-approved project 
development costs; (2) the reasonableness of the financing arrangements 
for the project because the Agency is required to base an award of 
credit on the financial need of a project subject to the limit computed 
on Agency-approved development costs; and (3) criteria for pricing the 
credit (for example, use of an appropriate rate to convert credits into 
an equity investment amount).
    So that an Agency may more accurately determine the amount of 
credits to be awarded, the GAO proposed three alternative 
recommendations: (1) an examination or audit, which would provide a 
reasonable basis for an independent public accountant to issue an 
opinion on the overall reliability of a project's financial information 
taken as a whole; (2) a review, which would consist of inquiries and 
application of analytical procedures that might bring to the 
accountant's attention significant matters affecting a project's 
financial information but would not provide assurance that the 
accountant would become aware of all significant matters that would be 
disclosed in an audit; or (3) agreed-upon procedures, which would 
provide an accountant with a basis to issue a report of findings based 
on the specified procedures but not a basis to issue an opinion on the 
reliability of the financial information.
    Because the first alternative provides the most reliable 
independent verification on sources and uses of funds, the proposed 
regulations require that a taxpayer must obtain an opinion by a 
certified public accountant, based upon the accountant's audit or 
examination, on the financial determinations and certifications 
provided by the taxpayer to the Agency, including the costs that may 
qualify for inclusion in eligible basis under section 42(d) and the 
amount of the credit under section 42. This opinion must be submitted 
to the Agency before the Agency issues the Form 8609, ``Low-Income 
Housing Credit Allocation Certification.'' This requirement is proposed 
to be effective on the date the final regulations are published in the 
Federal Register.

Buildings Qualifying for Carryover Allocations

    The proposed regulations amend the carryover allocation regulations 
by requiring the Agency to file a form (to be prescribed by the IRS) 
that summarizes the carryover allocation document described in 
Sec. 1.42-6(d)(2) with the Agency's Form 8610 for the year the 
allocation is made. The new form will be filed with the Form 8610 in 
lieu of the original carryover allocation document. Taxpayers must 
continue to file a copy of the carryover allocation document with the 
Form 8609 for the building for the first year the credit is claimed.

Correction of Administrative Errors and Omissions

    Housing credit agencies may correct administrative errors and 
omissions with respect to allocations and recordkeeping if the 
correction occurs within a reasonable period of time after discovery of 
the error or omission. The current administrative error and omission 
regulations define an administrative error or omission as a mistake 
that results in a document that inaccurately reflects the intent of the 
Agency at the time the document is originally completed or, if the 
mistake affects a taxpayer, a document that inaccurately reflects the 
intent of the Agency and the affected taxpayer at the time the document 
is originally completed. However, an administrative error or omission 
does not include a misinterpretation of the applicable rules and 
regulations under section 42. Agencies must obtain prior approval from 
the Secretary to correct an administrative error or omission if the 
correction is not made before the close of the calendar year of the 
error or omission and the correction: (1) is a numerical change to the 
housing credit dollar amount allocated for the building or project; (2) 
affects the determination of any component of the state's housing

[[Page 1146]]

credit ceiling under section 42(h)(3)(C); or (3) affects the state's 
unused housing credit carryover that is assigned to the Secretary under 
section 42(h)(3)(D).
    The proposed regulations would provide automatic approval for 
correcting an administrative error or omission in an allocation 
document (a Form 8609, or a carryover allocation document under the 
requirements of section 42(h)(1)(E) or (F) and Sec. 1.42-6(d)(2)) that 
either did not accurately reflect the number of buildings constructed 
by the affected taxpayer, or transposed the information for one or more 
buildings with other buildings in a project.
    If the automatic approval provision applies to the administrative 
error or omission, the proposed regulations require the Agency to amend 
the allocation document. If correcting the administrative error or 
omission requires adding a Building Identification Number (B.I.N.) to 
the amended allocation document, the proposed regulations require that 
the Agency must include any B.I.N.(s) already existing for the 
buildings in the document and, if possible, number the additional 
B.I.N.(s) sequentially from the existing B.I.N.(s). In addition, the 
Agency must file the amended allocation document with an amended Form 
8610. This provision is proposed to be effective on the date the 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) does not apply to these regulations. It is hereby certified 
that the collections of information in these regulations will not have 
a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that any burden on 
taxpayers is minimal. Furthermore, an Agency is not a ``small entity'' 
for purposes of the Regulatory Flexibility Act (5 U.S.C. chapter 6). 
Accordingly, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act 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. The IRS and 
Treasury specifically request comments on the clarity of the proposed 
rule and how it may be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for Thursday, May 27, 1999, at 
10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington DC. Due to building security procedures, 
visitors must enter at the 10th Street entrance, located between 
Constitution and Pennsylvania Avenues, NW. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 15 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    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 and electronic comments and an outline of the topics to 
be discussed and the time to be devoted to each topic (signed original 
and eight (8) copies) by April 8, 1999.
    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 
Paul F. Handleman, 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 continues to read in 
part as follows:

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

    Section 1.42-17 also issued under 26 U.S.C. 42(n); * * *

    Par. 2. Section 1.42-5 is amended by:
    1. Revising paragraphs (c)(1)(v), (c)(1)(vi) and (c)(2)(ii).
    2. Removing the language ``If a monitoring procedure includes the 
review provision described in paragraph (c)(2)(ii)(B) of this section, 
the'' from the second sentence in paragraph (c)(2)(iii) and adding 
``The'' in its place.
    3. Removing the language ``paragraph (c)(2)(ii)(A), (B), and (C) of 
this section'' from the first sentence in paragraph (c)(4)(i) and 
adding ``paragraph (c)(2)(ii) of this section'' in its place.
    4. Removing the language ``An Agency chooses the review requirement 
of paragraph (c)(2)(ii)(A) of this section and some of the buildings 
selected for review are'' from the first sentence in the example in 
paragraph (c)(4)(iii) and adding ``An Agency selects for review'' in 
its place.
    5. Adding paragraph (c)(5).
    6. Revising the last sentence in paragraph (d).
    7. Removing the language ``(c)(2)(ii)(A), (B), or (C) of this 
section (whichever is applicable)'' from paragraph (e)(2) and adding 
the language ``(c)(2)(ii) of this section'' in its place.
    8. Adding a sentence at the end of paragraph (e)(3)(i).
    9. Removing the language ``paragraph (e)(3) of this section'' in 
the third sentence in paragraph (f)(1)(i) and adding ``paragraphs 
(c)(5) and (e)(3) of this section'' in its place.
    10. Adding two sentences at the end of paragraph (h).
    The revisions and additions read as follows:


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

* * * * *
    (c) * * *
    (1) * * *
    (v) All units in the project were for use by the general public (as 
defined in Sec. 1.42-9) and used on a nontransient basis (except for 
transitional housing for the homeless provided under section 
42(i)(3)(B)(iii) or single-room-occupancy units rented on a month-by-
month basis under section 42(i)(3)(B)(iv));
    (vi) Each building in the project was suitable for occupancy, 
taking into account local health, safety, and building codes, and the 
State or local government unit responsible for making

[[Page 1147]]

building code inspections did not issue a report of a violation for any 
building in the project. If a report of a violation was issued by the 
governmental unit, the owner must attach a copy of the report of the 
violation to the annual certification submitted to the Agency under 
paragraph (c)(1) of this section;
    (2) * * *
    (ii) Require that with respect to each low-income housing project--
    (A) The Agency conduct on-site inspections of all buildings in the 
project by the end of the calendar year following the year the last 
building in the project is placed in service and review the low-income 
certification, the documentation supporting such certification, and the 
rent record for each low-income tenant; and
    (B) At least once every three (3) years, the Agency conduct on-site 
inspections of all buildings in the project, and, for each tenant in at 
least 20 percent of the project's low-income units selected by the 
Agency, review the low-income certification, the documentation 
supporting such certification, and the rent record; and
* * * * *
    (5) Agency reports of compliance monitoring activities. The Agency 
must report its compliance monitoring activities annually on Form 8610, 
``Annual Low-Income Housing Credit Agencies Report.''
    (d) * * * In addition, in connection with the on-site inspections 
required by paragraph (c)(2)(ii) of this section, the Agency must 
determine whether the project is suitable for occupancy, taking into 
account local health, safety, and building codes. Notwithstanding 
paragraph (f) of this section, this determination may be delegated only 
to a State or local government unit responsible for making building 
code inspections.
    (e) * * *
    (3) * * *
    (i) * * * For noncompliance or failure to certify that is corrected 
after the end of the correction period, the Agency is required to file 
Form 8823 with the Service reporting the correction of the 
noncompliance or failure to certify regardless of when the correction 
occurs during the 15-year compliance period under section 42(i)(1).
* * * * *
    (h) * * * In addition, the requirement in paragraph (c)(2)(ii)(A) 
of this section (involving on-site inspections relating to the placed-
in-service year and review of the low-income certifications, the 
documentation supporting such certifications, and the rent records) is 
effective for buildings placed in service on or after the date the 
final regulations are published in the Federal Register. The 
requirements in paragraph (c)(1)(vi) of this section (involving whether 
a State or local government unit responsible for making building code 
inspections issued a report or a violation for the project), paragraph 
(c)(2)(ii)(B) of this section (the low-income certifications, the 
documentation supporting such certifications, and the rent records), 
paragraph (c)(5) of this section (involving the requirement to report 
the Agency's compliance monitoring activities to the Service), 
paragraph (d) of this section (involving habitability requirements), 
and paragraph (e)(3) of this section (involving the requirement to 
report corrected noncompliance or failure to certify after the end of 
the correction period) are effective on the date the final regulations 
are published in the Federal Register.
    Par. 3. Section 1.42-6 is amended by removing the first sentence in 
paragraph (d)(4)(ii) and adding two sentences in its place to read as 
follows:


Sec. 1.42-6  Buildings qualifying for carryover allocations.

* * * * *
    (d) * * *
    (4) * * *
    (ii) Agency. The Agency must retain the original carryover 
allocation document made under paragraph (d)(2) of this section and 
file the form (to be prescribed by the IRS) that summarizes the 
carryover allocation document. This form is filed with the Agency's 
Form 8610 that accounts for the year the allocation is made. * * *
* * * * *
    Par. 4. Section 1.42-11 is amended by revising the last sentence in 
paragraph (b)(3)(ii)(A) to read as follows:


Sec. 1.42-11  Provision of services.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * * (A) * * * For a building described in section 
42(i)(3)(B)(iii) (relating to transitional housing for the homeless) or 
section 42(i)(3)(B)(iv) (relating to single room occupancy), a 
supportive service includes any service provided to assist tenants in 
locating and retaining permanent housing.
* * * * *
    Par. 5. Section 1.42-12 is amended by adding paragraph (c) to read 
as follows:


Sec. 1.42-12  Effective dates and transitional rules.

* * * * *
    (c) The rule set forth in Sec. 1.42-6(d)(4)(ii) relating to the 
requirement that state and local housing agencies file the form to be 
prescribed by the Internal Revenue Service that summarizes the 
carryover allocation document is effective for forms the due date of 
which are on or after the date that is 60 days after the date final 
regulations are published in the Federal Register.
    Par. 6. Section 1.42-13 is amended by:
    1. Revising the introductory text of paragraph (b)(3)(iii).
    2. Adding paragraphs (b)(3)(vi), (b)(3)(vii), and (b)(3)(viii).
    3. Adding a sentence at the end of paragraph (d).
    The revisions and additions read as follows:


Sec. 1.42-13  Rules necessary and appropriate; housing credit agencies' 
correction of administrative errors and omissions.

* * * * *
    (b) * * *
    (3) * * *
    (iii) Secretary's prior approval required. Except as provided in 
paragraph (b)(3)(vi) of this section, an Agency must obtain the 
Secretary's prior approval to correct an administrative error or 
omission, as described in paragraph (b)(2) of this section, if the 
correction is not made before the close of the calendar year of the 
error or omission and the correction--
* * * * *
    (vi) Secretary's automatic approval. The Secretary grants automatic 
approval to correct an administrative error or omission described in 
paragraph (b)(2) of this section if--
    (A) The correction is not made before the close of the calendar 
year of the error or omission and the correction is a numerical change 
to the housing credit dollar amount allocated for the building or 
multiple-building project;
    (B) The administrative error or omission resulted in an allocation 
document (the Form 8609, ``Low-Income Housing Credit Allocation 
Certification,'' or the allocation document under the requirements of 
section 42(h)(1)(E) or (F) and Sec. 1.42-6(d)(2)) that either did not 
accurately reflect the number of buildings constructed by the affected 
taxpayer (for example, the affected taxpayer built 10 buildings instead 
of 8 buildings having the same total number of units), or transposed 
the information for one or more buildings with other buildings in the 
multiple-building project;
    (C) The administrative error or omission does not affect the 
Agency's ranking of the building(s) or project and the total amount of 
credit the Agency allocated to the building(s) or project;

[[Page 1148]]

    (D) The Agency corrects the administrative error or omission no 
later than one year after the building(s) were placed in service by the 
affected taxpayer; and
    (E) The Agency corrects the administrative error or omission by 
following the procedures described in paragraph (b)(3)(vii) of this 
section.
    (vii) How Agency corrects errors or omissions subject to automatic 
approval. An Agency corrects an administrative error or omission 
described in paragraph (b)(3)(vi) of this section by--
    (A) Amending the allocation document described in paragraph 
(b)(3)(vi)(B) of this section to correct the administrative error or 
omission. The Agency will indicate on the amended allocation document 
that it is making the ``correction under Sec. 1.42-13(b)(3)(vii)''. If 
correcting the allocation document requires including any additional 
B.I.N.(s) in the document, the document must include any B.I.N.(s) 
already existing for the buildings. If possible, the additional 
B.I.N.(s) should be sequentially numbered from the existing B.I.N.(s);
    (B) Amending, if applicable, the form to be prescribed by the 
Service that summarizes the allocation document (see Sec. 1.42-6 
(d)(4)(ii)) and attaching a copy of this form to an amended Form 8610, 
``Annual Low-Income Housing Credit Agencies Report,'' for the year the 
allocation was made. The Agency will indicate on the forms that it is 
making the ``correction under Sec. 1.42-13(b)(3)(vii)'';
    (C) Amending, if applicable, the Form 8609 and attaching the 
original of this amended form to an amended Form 8610 for either the 
year the allocation was made or the year the building was placed in 
service by the affected taxpayer. The Agency will indicate on the forms 
that it is making the ``correction under Sec. 1.42-13(b)(3)(vii)'';
    (D) Filing the amended Form 8610 with the Service. When completing 
the amended Form 8610, the Agency should follow the specific 
instructions for the Form 8610 under the heading ``Amended Report''; 
and
    (E) Mailing a copy of any amended allocation document and any 
amended Form 8609 to the affected taxpayer.
    (viii) Other approval procedures. The Secretary may grant automatic 
approval to correct other administrative errors or omissions as 
designated in one or more documents published either in the Federal 
Register or in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of 
this chapter).
* * * * *
    (d) * * * Paragraphs (b)(3)(vi), (vii), and (viii) of this section 
are effective on the date the final regulations are published in the 
Federal Register.
    Par. 7. Section 1.42-17 is added to read as follows:


Sec. 1.42-17  Qualified Allocation Plan.

    (a) Requirements--(1) In general. [Reserved]
    (2) Selection criteria. [Reserved]
    (3) Agency evaluation. Section 42(m)(2)(A) requires that the 
housing credit dollar amount allocated to a project should not exceed 
the amount the Agency determines is necessary for the financial 
feasibility of the project and its viability as a qualified low-income 
housing project throughout the credit period. In making this 
determination, the Agency must consider--
    (i) The sources and uses of funds and the total financing planned 
for the project. The taxpayer must certify to the Agency the full 
extent of all federal, state, and local subsidies that apply (or which 
the taxpayer expects to apply) to the project. The taxpayer must also 
certify to the Agency all other sources of funds and all development 
costs for the project. The taxpayer's certification should be 
sufficiently detailed to enable the Agency to ascertain the nature of 
the costs that will comprise the total financing package, including 
subsidies and the anticipated syndication or placement proceeds to be 
raised. Development cost information, whether or not includible in 
eligible basis under section 42(d), that should be provided to the 
Agency includes, but is not limited to, site acquisition costs, 
construction contingency, general contractor's overhead and profit, 
architect and engineer's fees, permit and survey fees, insurance 
premiums, real estate taxes during construction, title and recording 
fees, construction period interest, financing fees, organizational 
costs, rent-up and marketing costs, accounting and auditing costs, 
working capital and operating deficit reserves, syndication and legal 
fees, developer fees, and other costs;
    (ii) Any proceeds or receipts expected to be generated by reason of 
tax benefits;
    (iii) The percentage of the housing credit dollar amount used for 
project costs other than the costs of intermediaries. This requirement 
should not be applied so as to impede the development of projects in 
hard-to-develop areas under section 42(d)(5)(C); and
    (iv) The reasonableness of the developmental and operational costs 
of the project.
    (4) Timing of Agency evaluation. The financial determinations and 
certifications required under paragraph (a)(3) of this section must be 
made at each of the following times:
    (i) The time of the application for the housing credit dollar 
amount.
    (ii) The time of the allocation of the housing credit dollar 
amount.
    (iii) The date the building is placed in service.
    (iv) After the building is placed in service, and before the Agency 
issues the Form 8609, ``Low-Income Housing Credit Allocation 
Certification.''
    (5) Special rule for final determinations and certifications. For 
the Agency's evaluation under paragraph (a)(4)(iv) of this section, the 
taxpayer must obtain an opinion by a certified public accountant, based 
upon the accountant's audit or examination, on the financial 
determinations and certifications in paragraphs (a)(3)(i) through (iii) 
of this section, including the costs that may qualify for inclusion in 
eligible basis under section 42(d) and amount of the credit under 
section 42.
    (6) Bond financed projects. A project qualifying under section 
42(h)(4) is not entitled to any credit unless the governmental unit 
that issued the bonds (or on behalf of which the bonds were issued), or 
the Agency responsible for issuing the Form(s) 8609 to the project, 
makes determinations under rules similar to the rules in paragraphs 
(a)(3), (4), and (5) of this section.
    (b) Effective date. This section is effective on the date final 
regulations are published in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-174 Filed 1-7-99; 8:45 am]
BILLING CODE 4830-01-U