[Federal Register Volume 65, Number 10 (Friday, January 14, 2000)]
[Rules and Regulations]
[Pages 2323-2329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-111]


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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8859]
RIN 1545-AV44


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

SUMMARY: This document contains final regulations regarding the 
procedures for compliance monitoring by state and local housing 
agencies (Agencies) with the requirements of the low-income housing 
credit; the requirements for making carryover allocations; the rules 
for Agencies' correction of administrative errors or omissions; and the 
independent verification of information on sources and uses of funds 
submitted by taxpayers to Agencies. These final regulations affect 
owners of low-income housing projects who claim the credit and the 
Agencies who administer the credit.

DATES: Effective Dates: These regulations are effective January 1, 
2001, except that the amendments made to Secs. 1.42-5(c)(5) and 
(e)(3)(i), and 1.42-13 are effective January 14, 2000, and the 
amendment made to Sec. 1.42-6(d)(4)(ii) is effective January 1, 2000.
    Applicability Dates: For dates of applicability of the amendments 
to Sec. 1.42-5, see Sec. 1.42-5(h). For date of applicability of the 
amendment made to Sec. 1.42-6, see Sec. 1.42-12(c). For date of 
applicability of the amendments made to Sec. 1.42-13, see Sec. 1.42-
13(d). For date of applicability of Sec. 1.42-17, see Sec. 1.42-17(b).

FOR FURTHER INFORMATION CONTACT: Paul Handleman, (202) 622-3040 (not a 
toll-free number).

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 Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1357. Responses to these collections of 
information are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    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. 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. 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.
    Comments concerning the accuracy of these burden estimates and 
suggestions for reducing these burdens should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS: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.
    Books or records relating to this 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 January 8, 1999, the IRS published proposed regulations (REG-
114664-97) in the Federal Register (64 FR 1143) inviting comments under 
section 42. A

[[Page 2324]]

public hearing was held May 27, 1999. Numerous comments have been 
received. After consideration of all the comments, the proposed 
regulations are adopted as revised by this Treasury Decision.

Public Comments

A. Compliance Monitoring

1. Inspection Requirement for New Buildings
    The proposed regulations require that, by the end of the calendar 
year following the year the last building in a project is placed in 
service, 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. Most 
commentators view the requirement for reviewing all tenant records for 
all buildings in a project as unnecessary and burdensome. Most 
commentators suggest limiting inspections for new buildings to 20 
percent of the project's low-income units.
    Commentators also suggest extending the time limit for inspecting 
new buildings to the end of the calendar year following the first year 
of the credit period or at least until a reasonable time after the 
Agency issues Form 8609, ``Low-Income Housing Credit Allocation 
Certification.'' This added flexibility would allow the Agency to 
combine a physical inspection with a file review of the first year of 
the credit period.
    In response to the comments, the final regulations reduce the 
inspection burden for new buildings by requiring the Agency to conduct 
on-site inspections of all new buildings in the project and, for at 
least 20 percent of the project's low-income units, to inspect the 
units and review the low-income certifications, the documentation 
supporting the certifications, and the rent records for the tenants in 
those units. To allow the Agency sufficient time to review the tenant 
files for the first year of the credit period, the final regulations 
extend the time limit for inspecting new buildings to the end of the 
second calendar year following the year the last building in the 
project is placed in service.
2. Three-year Inspection Requirement
    The proposed regulations require that, at least once every 3 years, 
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.
    Most commentators agree with requiring physical inspections of the 
buildings at least once every 3 years. However, commentators recommend 
reviewing tenant income and rent records once every 5 years, which is 
one of the options under the current compliance monitoring regulations 
(see Sec. 1.42-5(c)(2)(ii)(B) requiring an Agency to review tenant 
files for 20 percent of the low-income housing projects each year). 
Commentators also recommend reviewing tenant files either on-site or at 
other locations, including desk audits.
    Although the physical inspection and file review requirements for 
new buildings are relaxed in the final regulations, the final 
regulations retain the 3-year inspection cycle for existing buildings. 
The final regulations do not separate the physical inspection and file 
review cycles (every 3 years for physical inspections and every 5 years 
for file reviews) as suggested by commentators because it is 
administratively complete to do both during the same year. The tenant 
income and rent restrictions in section 42(g) are equally important as 
the habitability standards for a low-income unit in section 
42(i)(3)(B)(ii). The final regulations adopt the suggestion that the 
file review may be done wherever the tenant files are maintained.
    3. Health, Safety, and Building Code Inspections
    The proposed regulations require the Agency to determine whether 
the project is suitable for occupancy, taking into account local 
health, safety, and building codes.
    Many commentators object to this requirement as too costly and 
unadministerable because building codes vary considerably within 
states. Commentators also asked for guidelines as to what constitutes 
an ``inspection.'' Some commentators propose defining an inspection as 
looking at selected units in the building and common areas for visible 
problems or defects without applying the local health, safety, and 
building codes standards. One commentator suggests inspections based on 
a complaint from the local jurisdiction or from a tenant. Some 
commentators suggest using a uniform physical standard such as the 
uniform physical condition standards for public housing established by 
the Department of Housing and Urban Development (HUD) in 24 CFR 5.703.
    Section 42(i)(3)(B)(i) excludes from the definition of a ``low-
income unit'' a unit that is not suitable for occupancy. Under section 
42(i)(3)(B)(ii), suitability of a unit for occupancy shall be 
determined under regulations prescribed by the Secretary taking into 
account local health, safety, and building codes. Recognizing that 
these codes vary considerably within states, the final regulations 
require an Agency to determine whether a low-income housing project 
satisfies these codes, or satisfies the HUD uniform physical condition 
standards. The HUD standards are intended to ensure that housing is 
decent, safe, sanitary, and in good repair. Though it would be 
appropriate that an Agency use HUD's inspection protocol under 24 CFR 
5.705, the final regulations do not mandate use of HUD's inspection 
protocol because to do so could increase costs to the Agencies as well 
as limit their latitude in applying standards consistent with their own 
operating procedures and practices. The final regulations except a 
building from the inspection requirement if the building is financed by 
the Rural Housing Service (RHS) under the section 515 program, the RHS 
inspects the building (under 7 CFR part 1930(c)), and the RHS and 
Agency enter into a memorandum of understanding, or other similar 
arrangement, under which the RHS agrees to notify the Agency of the 
inspection results. Irrespective of the physical inspection standard 
selected by the Agency, a low-income housing project under section 42 
must continue to satisfy local health, safety, and building codes.
    The proposed regulations limit an Agency's delegation of the 
physical inspection of a project to only a state or local government 
unit responsible for making building code inspections. Commentators 
suggest expanding the delegation of inspections to professional firms. 
The final regulations remove the delegation limitation and Agencies may 
delegate the physical inspection requirement to state or local 
governmental agencies, HUD, or private contractors.
4. Local Reports of Building Code Violations
    The proposed regulations require the owner of a low-income housing 
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 is required 
to attach a copy of the report of the violation to the annual 
certification submitted to the Agency.
    A commentator noted that the number of violations attached to the 
annual owner certification would be considerable because even the 
highest

[[Page 2325]]

quality rental housing operations do not have an inspection without a 
report or notice of some violation. Two commentators suggest attaching 
reports only for violations that have not been corrected prior to 
filing the annual owner certification or requiring that owners only 
attach reports for ``major'' violations. The commentators suggest 
defining major violations as violations not corrected within 90 days of 
the notice of violation or violations where the cost to comply exceeds 
$2,500. A commentator suggests that Agencies be allowed to distinguish 
between minor technical violations and serious violations (i.e., lack 
of heat or hot water, hazardous conditions, and security) in reporting 
noncompliance.
    Though a minor violation will not lead to the disallowance or 
recapture of section 42 credits, a series of minor violations may be 
the equivalent of a major violation resulting in disallowance or 
recapture of credits. Determining the difference between a major and 
minor violation is subjective. The final regulations do not exclude 
minor violations from the reporting and recordkeeping requirement. 
However, to reduce the inspection violation paperwork, the final 
regulations require that the owner must either attach a statement 
summarizing the violations or a copy of each violation report to the 
annual owner certification submitted to the Agency. The owner must 
state on the certification whether the violation has been corrected. In 
addition, the final regulations require that the owner retain the 
original violation report for the Agency's physical inspection. 
Retention of the original violation report is not required once the 
Agency reviews the violation and completes its inspection, unless the 
violation remains uncorrected.
5. Correction of Noncompliance or Failure to Certify
    The final regulations adopt commentators' suggestion to limit to a 
3-year period after the end of the correction period in Sec. 1.42-
5(e)(4) the requirement that Agencies file Form 8823, ``Low-Income 
Housing Credit Agencies Report of Noncompliance,'' with the IRS 
reporting the correction of the noncompliance or failure to certify.
6. Compliance Monitoring Effective Dates
    Commentators suggest an effective date of at least one year after 
the final regulations are published in the Federal Register. 
Commentators also recommend on-site inspections apply only to new 
buildings allocated section 42 credits after the effective date of the 
final regulations.
    Because the amendments to the compliance monitoring regulations 
will require amendments to qualified allocation plans, the final 
regulations relating to compliance generally contain a January 1, 2001, 
effective date. Thus, the requirements to attach local health, safety, 
or building code violations to the annual owner certification and to 
inspect buildings and review tenant files for existing projects are 
effective January 1, 2001. The inspection requirement and tenant file 
review for new buildings is effective for buildings placed in service 
on or after January 1, 2001.
7. Section 8 and Federal Civil Rights Laws
    Two commentators state that insufficient controls are in place to 
ensure that low-income housing projects adhere to the requirement in 
section 42(h)(6)(B)(iv) of nondiscrimination against Section 8 voucher 
or certificate holders. The commentators suggest that the IRS could 
help compensate for lack of controls by working with HUD to ensure that 
Section 8 voucher or certificate holders are aware of, and have access 
to, low-income housing projects. The commentators also suggest that 
Agencies provide regional HUD offices a list of low-income housing 
projects in that state, with information that would be helpful for 
prospective tenants. One commentator suggests that the prohibition on 
discrimination based on Section 8 status be clarified to exclude 
policies that bar Section 8 tenants but have no substantial business 
justification. For example, low-income housing projects should not be 
permitted to exclude Section 8 voucher or certificate holders through a 
rule that requires every applicant to have income equal to at least 
three times the total rent.
    The commentators also suggest that the Agencies should be required 
to develop a plan for educating applicants and owners of projects of 
the prohibition against discrimination on the basis of Section 8 
voucher or certificate status. They recommend that the Agencies should 
be required to have a procedure for accepting and processing complaints 
about discrimination against Section 8 voucher or certificate holders. 
They also recommend that IRS and HUD should work together to study the 
circumstances under which Section 8 voucher or certificate holders are, 
or are not, accessing projects.
    Section 42(h)(6)(A) provides that no credit shall be allowed by 
reason of section 42 with respect to any building for the taxable year 
unless an extended low-income housing commitment is in effect as of the 
end of such taxable year. Section 42(h)(6)(B)(iv) defines the term 
``extended low-income housing commitment'' to include any agreement 
between the taxpayer and the housing credit agency that prohibits the 
refusal to lease to a holder of a voucher or certificate of eligibility 
under section 8 of the United States Housing Act of 1937 because of the 
status of the prospective tenant as such a holder. To help monitor 
compliance with section 42(h)(6)(B)(iv), the final regulations amend 
the annual owner certification relating to the extended low-income 
housing commitment under Sec. 1.42-5(c)(1)(xi) to require owners to 
certify that the owner has not refused to lease a unit in the project 
to a Section 8 applicant because the applicant holds a Section 8 
voucher or certificate.
    The IRS has informed HUD of the comments received about preventing 
discrimination based on Section 8 status. Agencies should provide HUD 
with publicly available information on section 42 low-income housing 
projects if HUD requests it.
    A commentator also suggests that the compliance monitoring 
regulations be amended to acknowledge the authority of Title VIII of 
the 1968 Civil Rights Act, as well as HUD's Title VIII regulations; 
specify the civil rights obligations of the Agencies; and specify what 
developers and owners of projects must do to satisfy their civil rights 
obligations.
    To monitor for compliance with the Fair Housing Act, the final 
regulations amend the annual owner certification relating to the 
general public use requirement in Sec. 1.42-5(c)(1)(v) to require 
owners to certify that no finding of discrimination under the Fair 
Housing Act has occurred for the project (a finding of discrimination 
includes an adverse final decision by HUD, an adverse final decision by 
a substantially equivalent state or local fair housing agency, or an 
adverse judgment from a Federal court).

B. Sources and Uses of Funds

    Section 42(m)(2)(A) requires Agencies to limit the housing credit 
dollar amount allocated to a project to only the amount necessary for 
the financial feasibility of a project and its viability as a qualified 
low-income project through the credit period. The proposed regulations 
require an Agency to evaluate the housing credit dollar amount at four 
times: (1) at application for the housing credit dollar amount, (2) the 
allocation of the housing credit dollar amount, (3) the date the 
building

[[Page 2326]]

is placed in service, and (4) after the building is placed in service, 
but before the Agency issues the Form 8609. Commentators recommend 
elimination of the evaluation at the placed-in-service date. In 
practice, Agencies currently evaluate the credit amount at the three 
other times. The final regulations adopt the recommendation by deleting 
the fourth time requirement and clarifying that the placed-in-service 
evaluation may occur not later than the date the Agency issues the Form 
8609.
    Commentators are concerned that the opinion by a certified public 
accountant, based upon the accountant's audit or examination, on the 
financial determinations and certifications required in the proposed 
regulations, could have significant cost implications, particularly for 
smaller developers. Commentators suggest limiting the requirement to 
projects with 25 or more units, or projects with total development 
costs of $5 million or more.
    The third-party validation on financial information was recommended 
in the report by the General Accounting Office (GAO), ``Tax Credits: 
Opportunities to Improve Oversight of the Low-Income Housing Program,'' 
(GAO/GGD/RCED-97-55), dated March 28, 1997. The GAO report states on 
page 93 that an accounting firm with a tax credit speciality would 
charge in the $5,000 to $7,500 range per engagement for tax credit 
certifications (opinion on total costs, eligible basis, and tax credit 
amount) prepared on the basis of an audit done in accordance with AICPA 
audit standards even for projects costing upwards of $5 million to $10 
million. As a percentage of development costs, the CPA tax credit 
certifications represent a minimal cost for validating financial 
information. However, in recognition that the cost may be burdensome 
for smaller developers, the final regulations limit the requirement for 
an audited schedule of costs for projects with more than 10 units.
    Two commentators were concerned that the meaning of the term 
``financial determinations and certifications'' is unclear. A CPA would 
not be able to evaluate what needs to be audited and whether there are 
relevant and reliable criteria against which the information can be 
evaluated. To conduct an audit or attestation engagement, CPAs require 
that the subject matter be defined and that such subject matter be 
capable of evaluation against reasonable criteria. Reasonable criteria 
are essential so that CPAs using the same criteria will be able to 
arrive at similar conclusions.
    Another concern expressed by commentators involved uncertainty as 
to whether the CPA is being asked to report on financial information 
that is only historical or whether the CPA is also being asked to 
examine prospective financial information. CPAs can compile or examine 
and report on certain types of prospective financial information. 
However, such engagements generally are more costly than audits of 
historical information because of minimum presentation guidelines 
required by professional standards as well as increased risk associated 
with future-oriented information. The commentators believe that if an 
Agency were to require CPAs to be associated with prospective financial 
information, the related costs to the taxpayer may far exceed any 
perceived benefits to the Agency. Accordingly, the final regulations 
have been revised to specify that the CPA's opinion only relates to 
historical project costs.

C. Correction of Administrative Errors and Omissions

    Commentators recommend filing the corrected allocation document 
with the current year's Form 8610, ``Annual Low-Income Housing Credit 
Agencies Report,'' instead of amending the Form 8610 for the year the 
allocation was made. Because the administrative errors covered by the 
automatic approval provision will not have an effect on the total 
amount of credit the Agency allocated to the building(s) or project, 
commentators view an amended Form 8610 as unnecessary. Agency 
recordkeeping would be simplified if all corrected allocation documents 
could be submitted with the current year's Form 8610. The final 
regulations adopt this recommendation.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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 the burden on 
taxpayers is minimal and the burden on small entity Agencies is not 
significant. Accordingly, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act 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 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 
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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read 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. Removing the word ``Revenue'' in paragraph (b)(1)(iv) and adding 
``Omnibus Budget'' in its place.
    2. Adding paragraph (b)(3).
    3. Revising paragraphs (c)(1)(v), (c)(1)(vi), (c)(1)(xi), 
(c)(2)(ii), and (c)(2)(iii).
    4. Removing the word ``project'' in paragraph (c)(1)(x) and adding 
``building'' in its place.
    5. Removing the word ``and'' at the end of paragraph (c)(1)(x).
    6. Adding paragraph (c)(1)(xii).
    7. 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.
    8. Removing the language ``Farmers Home Administration (FmHA)'' in 
the first sentence in paragraph (c)(4)(i) and adding ``Rural Housing 
Service (RHS), formerly known as Farmers Home Administration,'' in its 
place.
    9. Removing the language ``FmHA'' in paragraph (c)(4)(ii) and 
adding ``RHS'' in its place in each place it appears.
    10. 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

[[Page 2327]]

the example in paragraph (c)(4)(iii) and adding ``An Agency selects for 
review'' in its place.
    11. Removing the language ``FmHA'' in paragraph (c)(4)(iii) Example 
and adding ``RHS'' in its place in each place it appears.
    12. Adding paragraph (c)(5).
    13. Revising paragraph (d).
    14. 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.
    15. Adding a sentence at the end of paragraph (e)(3)(i).
    16. 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.
    17. Adding three 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.

* * * * *
    (b) * * *
    (3) Inspection record retention provision. Under the inspection 
record retention provision, the owner of a low-income housing project 
must be required to retain the original local health, safety, or 
building code violation reports or notices that were issued by the 
State or local government unit (as described in paragraph (c)(1)(vi) of 
this section) for the Agency's inspection under paragraph (d) of this 
section. Retention of the original violation reports or notices is not 
required once the Agency reviews the violation reports or notices and 
completes its inspection, unless the violation remains uncorrected.
    (c) * * * (1) * * *
    (v) All units in the project were for use by the general public (as 
defined in Sec. 1.42-9), including the requirement that no finding of 
discrimination under the Fair Housing Act, 42 U.S.C. 3601-3619, 
occurred for the project. A finding of discrimination includes an 
adverse final decision by the Secretary of the Department of Housing 
and Urban Development (HUD), 24 CFR 180.680, an adverse final decision 
by a substantially equivalent state or local fair housing agency, 42 
U.S.C. 3616a(a)(1), or an adverse judgment from a federal court;
    (vi) The buildings and low-income units in the project were 
suitable for occupancy, taking into account local health, safety, and 
building codes (or other habitability standards), and the State or 
local government unit responsible for making local health, safety, or 
building code inspections did not issue a violation report for any 
building or low-income unit in the project. If a violation report or 
notice was issued by the governmental unit, the owner must attach a 
statement summarizing the violation report or notice or a copy of the 
violation report or notice to the annual certification submitted to the 
Agency under paragraph (c)(1) of this section. In addition, the owner 
must state whether the violation has been corrected;
* * * * *
    (xi) An extended low-income housing commitment as described in 
section 42(h)(6) was in effect (for buildings subject to section 
7108(c)(1) of the Omnibus Budget Reconciliation Act of 1989, 103 Stat. 
2106, 2308-2311), including the requirement under section 
42(h)(6)(B)(iv) that an owner cannot refuse to lease a unit in the 
project to an applicant because the applicant holds a voucher or 
certificate of eligibility under section 8 of the United States Housing 
Act of 1937, 42 U.S.C. 1437s (for buildings subject to section 
13142(b)(4) of the Omnibus Budget Reconciliation Act of 1993, 107 Stat. 
312, 438-439); and
    (xii) All low-income units in the project were 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)).
    (2) * * *
    (ii) Require that with respect to each low-income housing project--
    (A) The Agency must conduct on-site inspections of all buildings in 
the project by the end of the second calendar year following the year 
the last building in the project is placed in service and, for at least 
20 percent of the project's low-income units, inspect the units and 
review the low-income certifications, the documentation supporting the 
certifications, and the rent records for the tenants in those units; 
and
    (B) At least once every 3 years, the Agency must conduct on-site 
inspections of all buildings in the project and, for at least 20 
percent of the project's low-income units, inspect the units and review 
the low-income certifications, the documentation supporting the 
certifications, and the rent records for the tenants in those units; 
and
    (iii) Require that the Agency randomly select which low-income 
units and tenant records are to be inspected and reviewed by the 
Agency. The review of tenant records may be undertaken wherever the 
owner maintains or stores the records (either on-site or off-site). The 
units and tenant records to be inspected and reviewed must be chosen in 
a manner that will not give owners of low-income housing projects 
advance notice that a unit and tenant records for a particular year 
will or will not be inspected and reviewed. However, an Agency may give 
an owner reasonable notice that an inspection of the building and low-
income units or tenant record review will occur so that the owner may 
notify tenants of the inspection or assemble tenant records for review 
(for example, 30 days notice of inspection or review).
* * * * *
    (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) Inspection provision--(1) In general. Under the inspection 
provision, the Agency must have the right to perform an on-site 
inspection of any low-income housing project at least through the end 
of the compliance period of the buildings in the project. The 
inspection provision of this paragraph (d) is a separate requirement 
from any tenant file review under paragraph (c)(2)(ii) of this section.
    (2) Inspection standard. For the on-site inspections of buildings 
and low-income units required by paragraph (c)(2)(ii) of this section, 
the Agency must review any local health, safety, or building code 
violations reports or notices retained by the owner under paragraph 
(b)(3) of this section and must determine--
    (i) Whether the buildings and units are suitable for occupancy, 
taking into account local health, safety, and building codes (or other 
habitability standards); or
    (ii) Whether the buildings and units satisfy, as determined by the 
Agency, the uniform physical condition standards for public housing 
established by HUD (24 CFR 5.703). The HUD physical condition standards 
do not supersede or preempt local health, safety, and building codes. A 
low-income housing project under section 42 must continue to satisfy 
these codes and, if the Agency becomes aware of any violation of these 
codes, the Agency must report the violation to the Service. However, 
provided the Agency determines by inspection that the HUD standards are 
met, the Agency is not required under this paragraph (d)(2)(ii)

[[Page 2328]]

to determine by inspection whether the project meets local health, 
safety, and building codes.
    (3) Exception from inspection provision. An Agency is not required 
to inspect a building under this paragraph (d) if the building is 
financed by the RHS under the section 515 program, the RHS inspects the 
building (under 7 CFR part 1930), and the RHS and Agency enter into a 
memorandum of understanding, or other similar arrangement, under which 
the RHS agrees to notify the Agency of the inspection results.
    (4) Delegation. An Agency may delegate inspection under this 
paragraph (d) to an Authorized Delegate retained under paragraph (f) of 
this section. Such Authorized Delegate, which may include HUD or a HUD-
approved inspector, must notify the Agency of the inspection results.
    (e) * * *
    (3) * * *
    (i) * * * If the noncompliance or failure to certify is corrected 
within 3 years 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.
* * * * *
    (h) * * * In addition, the requirements in paragraphs (b)(3) and 
(c)(1)(v), (vi), and (xi) of this section (involving recordkeeping and 
annual owner certifications) and paragraphs (c)(2)(ii)(B), (c)(2)(iii), 
and (d) of this section (involving tenant file reviews and physical 
inspections of existing projects, and the physical inspection standard) 
are applicable January 1, 2001. The requirement in paragraph 
(c)(2)(ii)(A) of this section (involving tenant file reviews and 
physical inspections of new projects) is applicable for buildings 
placed in service on or after January 1, 2001. The requirements in 
paragraph (c)(5) of this section (involving Agency reporting of 
compliance monitoring activities to the Service) and paragraph 
(e)(3)(i) of this section (involving Agency reporting of corrected 
noncompliance or failure to certify within 3 years after the end of the 
correction period) are applicable January 14, 2000.
    Par. 3. Section 1.42-6 is amended by:
    1. In paragraph (c)(3), second sentence, remove the language 
``Annual Low-Income Housing Credit Agencies Report'' and add the 
language `` `Annual Low-Income Housing Credit Agencies Report' '' in 
its place.
    2. In paragraph (d)(1), first sentence, remove the language ``Low-
Income Housing Credit Allocation Certification,'' and add the language 
`` `Low-Income Housing Credit Allocation Certification,' '' in its 
place.
    3. Revising the first sentence in paragraph (d)(4)(ii).


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 Schedule A (Form 8610), ``Carryover Allocation of the Low-Income 
Housing Credit,'' with the Agency's Form 8610 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) Carryover allocations. The rule set forth in Sec. 1.42-
6(d)(4)(ii) relating to the requirement that state and local housing 
agencies file Schedule A (Form 8610), ``Carryover Allocation of the 
Low-Income Housing Credit,'' is applicable for carryover allocations 
made after December 31, 1999.
    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 in a project (for example, 
an allocation document for a 10-building project only references 8 
buildings instead of 10 buildings), or the correct information (other 
than the amount of credit allocated on the allocation document);
    (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; and
    (D) 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 buildings in the project. If possible, the 
additional B.I.N.(s) should be sequentially numbered from the existing 
B.I.N.(s);
    (B) Amending, if applicable, the Schedule A (Form 8610), 
``Carryover

[[Page 2329]]

Allocation of the Low-Income Housing Credit,'' and attaching a copy of 
this schedule to Form 8610, ``Annual Low-Income Housing Credit Agencies 
Report,'' for the year the correction is made. The Agency will indicate 
on the schedule that it is making the ``correction under Sec. 1.42-
13(b)(3)(vii).'' For a carryover allocation made before January 1, 
2000, the Agency must complete Schedule A (Form 8610), and indicate on 
the schedule 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 Form 8610 for the year the correction 
is made. The Agency will indicate on the Form 8609 that it is making 
the ``correction under Sec. 1.42-13(b)(3)(vii)''; and
    (D) Mailing or otherwise delivering 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 January 14, 2000.
    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 is not to 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 make up 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's 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, and developer fees;
    (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--(i) In general. The financial 
determinations and certifications required under paragraph (a)(3) of 
this section must be made as of the following times--
    (A) The time of the application for the housing credit dollar 
amount;
    (B) The time of the allocation of the housing credit dollar amount; 
and
    (C) The date the building is placed in service.
    (ii) Time limit for placed-in-service evaluation. For purposes of 
paragraph (a)(4)(i)(C) of this section, the evaluation for when a 
building is placed in service must be made not later than the date the 
Agency issues the Form 8609, ``Low-Income Housing Credit Allocation 
Certification.'' The Agency must evaluate all sources and uses of funds 
under paragraph (a)(3)(i) of this section paid, incurred, or committed 
by the taxpayer for the project up until date the Agency issues the 
Form 8609.
    (5) Special rule for final determinations and certifications. For 
the Agency's evaluation under paragraph (a)(4)(i)(C) of this section, 
the taxpayer must submit a schedule of project costs. Such schedule is 
to be prepared on the method of accounting used by the taxpayer for 
federal income tax purposes, and must detail the project's total costs 
as well as those costs that may qualify for inclusion in eligible basis 
under section 42(d). For projects with more than 10 units, the schedule 
of project costs must be accompanied by a Certified Public Accountant's 
audit report on the schedule (an Agency may require an audited schedule 
of project costs for projects with fewer than 11 units). The CPA's 
audit must be conducted in accordance with generally accepted auditing 
standards. The auditor's report must be unqualified.
    (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 January 1, 2001.

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

    Par. 8. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 9. In Sec. 602.101, paragraph (b) is amended by revising the 
entry for 1.42-5 and adding an entry for 1.42-17 to the table in 
numerical order to read as follows:


Sec. 602.101  OMB control numbers.

* * * * *
    (b) * * *

 
------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.42-5..................................................       1545-1357
 
                  *        *        *        *        *
1.42-17.................................................       1545-1357
 
                  *        *        *        *        *
------------------------------------------------------------------------

Robert E. Wenzel,
Acting Commissioner of Internal Revenue.
    Approved: December 28, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-111 Filed 1-13-00; 8:45 am]
BILLING CODE 4830-01-P