[Federal Register Volume 68, Number 129 (Monday, July 7, 2003)]
[Proposed Rules]
[Pages 40218-40224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16941]


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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-131997-02]
RIN 1545-BA85


Section 42 Carryover and Stacking Rule Amendments

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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

SUMMARY: This document contains proposed regulations that amend several 
existing regulations concerning the low-income housing tax credit. 
These proposed regulations primarily reflect changes to the law made by 
the Community Renewal Tax Relief Act of 2000 and affect owners of low-
income housing projects who claim the credit and the State or local 
housing credit agencies who administer the credit. This document also 
contains a notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments, requests to speak, and outlines 
of topics to be discussed at the public hearing scheduled for September 
23, 2003, must be received by September 5, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-131997-02), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand-delivered Monday 
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:PA:RU 
(REG-131997-02), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically directly to the IRS Internet site at 
http://www.irs.gov/regs. 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, Lauren R. 
Taylor, (202) 622-3040, or Christopher J. Wilson, (808) 539-2874; 
concerning submission of comments, the hearing, or to be placed on the 
building access list to attend the hearing, Guy Traynor, (202) 622-7180 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    The Community Renewal Tax Relief Act of 2000 (Pub. L. 106-554) 
(2000 Act) amended various provisions in section 42 of the Internal 
Revenue Code (Code), including provisions relating to the time for 
meeting the 10 percent basis requirement for carryover allocations 
under section 42(h)(1)(E) and (F), and the order in which housing 
credit dollar amounts are allocated from the different components of a 
State's housing credit ceiling under section 42(h)(3)(C). To conform 
the existing regulations to these changes, the proposed regulations 
contain amendments to Sec.  1.42-6 (Buildings qualifying for carryover 
allocations) and Sec.  1.42-14 (Allocation rules for post-1989 State 
housing credit

[[Page 40219]]

ceiling amounts) of the Income Tax Regulations (26 CFR part 1).
    The proposed regulations also amend Sec.  1.42-6 and Sec.  1.42-8 
(Election of appropriate percentage month) by removing the requirements 
that certain documents (for example, carryover allocation documents, 
election statements, and binding agreements) be attached to a 
taxpayer's income tax return when it is filed. These amendments help to 
facilitate the electronic filing of income tax returns.

Explanation of Provisions

Buildings Qualifying for Carryover Allocations

    Section 42 provides for a low-income housing credit that may be 
claimed as part of the general business credit under section 38. In 
general, the credit is allowable only if the owner of a qualified low-
income building receives a housing credit allocation from a State or 
local housing credit agency (Agency) of the jurisdiction where the 
building is located.
    In general, an allocation must be made not later than the close of 
the calendar year in which the building is placed in service. Under 
section 42(h)(1)(E), an allocation (carryover allocation) may be made 
to a ``qualified building'' that has not yet been placed in service, 
provided the building is placed in service not later than the close of 
the second calendar year following the calendar year of the allocation. 
Prior to the 2000 Act changes, section 42(h)(1)(E)(ii) defined a 
qualified building as any building that is part of a project if the 
taxpayer's basis in the project (as of the close of the calendar year 
of the allocation) is more than 10 percent of the taxpayer's reasonably 
expected basis in the project (as of the close of the second calendar 
year following the calendar year of the allocation). If the taxpayer 
failed to meet this 10 percent basis requirement by the close of the 
calendar year of the allocation, the carryover allocation was not valid 
and was treated as if it had not been made.
    The 2000 Act amended the definition of a qualified building to 
provide that the 10 percent basis requirement must be met by the later 
of: (1) The date which is 6 months after the date that the allocation 
was made, or (2) the close of the calendar year in which the allocation 
is made. The proposed regulations amend the existing regulations to 
reflect this change. Thus, the proposed regulations provide that for 
carryover allocations made before July 1, a taxpayer must meet the 10 
percent basis requirement as of the close of the calendar year of 
allocation. For carryover allocations made after June 30, a taxpayer 
must meet the 10 percent basis requirement by the close of the date 
that is 6 months after the date the allocation is made. In addition, 
the proposed regulations provide that an allocation made before July 1 
will be invalid and will be treated as if it had not been made if the 
10 percent basis requirement is not met by the close of the calendar 
year of the allocation. An allocation made after June 30 will be 
treated as validly made in the calendar year of the allocation but 
returned to the Agency the following calendar year if the 10 percent 
basis requirement is not met by the close of the date that is 6 months 
after the date the allocation is made.
    The proposed regulations also facilitate the electronic filing of 
income tax returns by removing the requirement of Sec.  1.42-6(d)(4)(i) 
that a taxpayer file a copy of the carryover allocation with its income 
tax return for the first taxable year a credit is claimed.

Election of Appropriate Percentage Month

    Section 42(a) provides that the amount of the low-income housing 
credit for any taxable year in the 10-year credit period is the 
applicable percentage of the qualified basis of each qualified low-
income building. Section 42(b)(2)(A) provides that, for any qualified 
low-income building placed in service by the taxpayer after 1987, the 
applicable percentage is the appropriate percentage prescribed by the 
Secretary for the month the building is placed in service, unless the 
taxpayer otherwise elects.
    The taxpayer may elect to use the appropriate percentage for the 
month in which the taxpayer and the Agency enter into an agreement with 
respect to the building (which is binding on the Agency, the taxpayer, 
and all successors in interest) as to the housing credit dollar amount 
to be allocated to the building. In the case of a substantially bond-
financed building (as described in section 42(h)(4)(B)), the taxpayer 
may elect to use the appropriate percentage for the month in which the 
tax-exempt obligations are issued. In either case, the election must be 
made no later than the 5th day after the close of the month elected by 
the taxpayer. An election, once made, is irrevocable.
    The proposed regulations facilitate the electronic filing of income 
tax returns by removing the requirements of Sec.  1.42-8(a)(6)(i) and 
Sec.  1.42-8(b)(4)(i) that a taxpayer file a copy of the election 
statement (and, in the case of Sec.  1.42-8(a)(6)(i), the binding 
agreement) with its income tax return for the first taxable year that 
credit is claimed.

Allocation Rules for Post-1989 State Housing Credit Ceiling Amounts

    Under section 42(h), the aggregate housing credit dollar amount 
that an Agency may allocate for any calendar year is limited to the 
State housing credit ceiling (Credit Ceiling) apportioned to the Agency 
for that calendar year. Prior to the 2000 Act changes, section 
42(h)(3)(C) provided that the Credit Ceiling of any State for any 
calendar year was an amount equal to the sum of: (a) $1.25 multiplied 
by the State population (the population component); (b) the unused 
Credit Ceiling, if any, of the State for the preceding calendar year 
(the unused carryforward component); (c) the amount of Credit Ceiling 
returned in the calendar year (the returned credit component); plus (d) 
the amount, if any, allocated to the State by the Secretary under 
section 42(h)(3)(D) from a national pool of unused credit (the national 
pool component).
    Read together, sections 42(h)(3)(C) and 42(h)(3)(D)(ii) provide 
rules governing the order in which credit is allocated from the various 
components of the Credit Ceiling (the stacking rule). Prior to the 2000 
Act changes the stacking rule provided that credit was allocated first 
from the sum of the population and returned credit components, then 
from the unused carryforward component, and finally, from the national 
pool component. In addition, unlike unallocated credit attributable to 
the population and returned credit components, unallocated credit 
attributable to the national pool component could not be carried 
forward, and therefore, was not included in the unused carryforward 
component of the following calendar year's Credit Ceiling.
    The 2000 Act increased the size of the population component to the 
greater of (1) $1.75 ($1.50 for 2001) multiplied by the State 
population, or (2) $2,000,000, with these amounts being increased by a 
cost-of-living adjustment for calendar years after 2002. The proposed 
regulations amend the existing regulations to reflect this change.
    The 2000 Act also amended the returned credit component of a Credit 
Ceiling for any calendar year to include credits from a carryover 
allocation made in the prior calendar year where a taxpayer fails to 
satisfy the 10 percent basis requirement by a date after the close of 
the calendar year of the allocation. The proposed regulations amend the 
final regulations to reflect this change.

[[Page 40220]]

    Finally, the 2000 Act amended the stacking rule to provide that 
credit is allocated first from the unused carryforward component, then 
from the sum of the population, returned credit, and national pool 
components. The 2000 Act also amended the computation of the unused 
carryforward component. The proposed regulations amend the existing 
regulations to reflect these changes and clarify that under the 2000 
Act changes, amounts remaining unallocated from the national pool 
component in a calendar year are included as part of the unused 
carryforward component of the following calendar year's Credit Ceiling.

Proposed Effective Date

    The proposed regulations that reflect the changes made by the 2000 
Act will be effective for housing credit dollar amounts allocated after 
the date these regulations are published as final regulations in the 
Federal Register. However, the proposed regulations that reflect the 
changes made by the 2000 Act may be applied by Agencies and taxpayers 
for housing credit dollar amounts allocated after December 31, 2000, 
and before the effective date of the final regulations. The proposed 
regulations that facilitate the electronic filing of income tax returns 
will be effective for forms filed after the date these regulations are 
published as final regulations 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 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, and because 
the regulations do not impose a new collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. The collection of information contained in this notice of 
proposed rulemaking has been previously reviewed and approved by the 
Office of Management and Budget in accordance with the Paperwork 
Reduction Act (44 U.S.C. 3507) under control number 1545-1102. 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 (preferably a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. Comments are requested on all aspects of the proposed regulations. 
In addition, comments are specifically requested on the clarity of the 
proposed regulations and how they can be revised to be more easily 
understood. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for September 23, 2003, at 10 
a.m. in room 4718, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. All visitors must present photo identification to 
enter the building. Because of access restrictions, visitors will not 
be admitted beyond the immediate entrance area at the Constitution 
Avenue entrance more than 30 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 comments and an outline of the topics to be discussed 
(with the time to be devoted to each topic) by September 5, 2003.
    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 authors of these regulations are Christopher J. 
Wilson and Lauren R. Taylor, Office of the Associate 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 * * *

    Par. 2. Section 1.42-6 is amended by:
    1. Revising paragraph (a).
    2. Amending Example 1. of paragraph (b)(4) by removing the word 
``September'' and by adding the word ``May'' in its place; by removing 
the date ``1993'' each place it appears and by adding the date ``2003'' 
in its place; and by removing the date ``1995'' and adding the date 
``2005'' in its place.
    3. Revising Example 2. of paragraph (b)(4).
    4. Revising paragraph (c)(1).
    5. Amending the first and last sentences of paragraph (c)(2) by 
removing the language ``by the close of the calendar year of the 
allocation'' and adding the language ``by the close of the calendar 
year of the allocation (for allocations made before July 1) or by the 
close of the date that is 6 months after the date the allocation is 
made (for allocations made after June 30)'' in its place.
    6. Revising paragraph (c)(3).
    7. Revising paragraph (d)(2)(viii).
    8. Revising paragraph (d)(4)(i).
    9. Amending paragraph (d)(4)(ii) by removing the language ``, 
`Carryover Allocation of the Low-Income Housing Credit,' ''.
    10. Amending the first sentence of paragraph (e)(2) by removing the 
language ``before the close of the calendar year of the allocation'' 
and adding the language ``by the close of the calendar year of the 
allocation (for allocations made before July 1) or by the close of the 
date that is 6 months after the date the allocation is made (for 
allocations made after June 30)'' in its place.
    The revisions read as follows:


Sec.  1.42-6.  Buildings qualifying for carryover allocations.

    (a) Carryover allocations--(1) In general. A carryover allocation 
is an allocation that meets the requirements of section 42(h)(1)(E) or 
(F). If the requirements of section 42(h)(1)(E) or (F) that are 
required to be satisfied by the close of a calendar year are not 
satisfied, the allocation is not valid and is treated as if it had not 
been made for that calendar year. For example, if a carryover 
allocation fails to satisfy a requirement in Sec.  1.42-6(d) for making 
an allocation, such as failing to be signed or dated by an authorized 
official of an allocating agency by the close of a calendar year, the 
allocation is not

[[Page 40221]]

valid and is treated as if it had not been made for that calendar year.
    (2) 10 percent basis requirement. A carryover allocation may only 
be made with respect to a qualified building. A qualified building is 
any building which is part of a project if, by the date specified under 
paragraph (a)(2)(i) or (ii) of this section, a taxpayer's basis in the 
project is more than 10 percent of the taxpayer's reasonably expected 
basis in the project as of the close of the second calendar year 
following the calendar year the allocation is made. For purposes of 
meeting the 10 percent basis requirement, the determination of whether 
a building is part of a single-building project or multi-building 
project is based on whether the carryover allocation is made under 
section 42(h)(1)(E) (building-based allocation) or section 42(h)(1)(F) 
(project-based allocation).
    (i) Allocation made before July 1. If a carryover allocation is 
made before July 1 of a calendar year, a taxpayer must meet the 10 
percent basis requirement by the close of that calendar year. If a 
taxpayer does not meet the 10 percent basis requirement by the close of 
the calendar year, the carryover allocation is not valid and is treated 
as if it had not been made.
    (ii) Allocation made after June 30. If a carryover allocation is 
made after June 30 of a calendar year, a taxpayer must meet the 10 
percent basis requirement by the close of the date that is 6 months 
after the date the allocation was made. If a taxpayer does not meet the 
10 percent basis requirement by the close of the required date, the 
carryover allocation must be returned to the Agency. Unlike a carryover 
allocation made before July 1, if a taxpayer does not meet the 10 
percent basis requirement by the close of the required date, the 
carryover allocation is treated as a valid allocation for the calendar 
year of allocation, but is included in the ``returned credit 
component'' for purposes of determining the State housing credit 
ceiling under section 42(h)(3)(C) for the calendar year following the 
calendar year of the allocation. See Sec.  1.42-14(d)(1).
    (b) * * *
    (4) * * *
    (iii) * * *

    Example 2. (i) Facts. D, an accrual-method taxpayer, received a 
carryover allocation from Agency, the state housing credit agency of 
State X, on September 12, 2003. As of that date, D has not begun 
construction of the low-income housing building D plans to build and 
D does not have basis in the land on which D plans to build the 
building. From September 12, 2003, to the close of March 12, 2004, D 
incurs some costs related to the planned building, including 
architects' fees. As of the close of March 12, 2004, these costs do 
not exceed 10 percent of D's reasonably expected basis in the 
single-building project as of the close of 2005.
    (ii) Determination of whether building is qualified. Because D's 
carryover-allocation basis as of the close of March 12, 2004, is not 
more than 10 percent of D's reasonably expected basis in the single-
building project, the building is not a qualified building for 
purposes of section 42(h)(1)(E)(ii) and paragraph (a) of this 
section. Accordingly, the carryover allocation to D must be returned 
to the Agency. The allocation is valid for purposes of determining 
the amount of credit allocated by Agency from State X's 2003 State 
housing credit ceiling, but is included in the returned credit 
component of State X's 2004 housing credit ceiling.

    (c) Verification of basis by Agency--(1) Verification requirement. 
An Agency that makes a carryover allocation to a taxpayer must verify 
that the taxpayer has met the 10 percent basis requirement of paragraph 
(a)(2) of this section.
    (2) * * *
    (3) Time of verification.--(i) Allocations made before July 1. For 
a carryover allocation made before July 1, an Agency may require that 
the basis certification be submitted to or received by the Agency prior 
to the close of the calendar year of allocation or within a reasonable 
time following the close of the calendar year of allocation. The Agency 
will need to verify basis as provided in paragraph (c)(2) of this 
section to accurately complete the Form 8610, ``Annual Low-Income 
Housing Credit Agencies Report,'' and the Schedule A (Form 8610), 
``Carryover Allocation of Low-Income Housing Credit,'' for the calendar 
year of the allocation. If the basis certification is not timely made, 
or supporting documentation is lacking, inadequate, or does not 
actually support the certification, the Agency should notify the 
taxpayer and try to get adequate documentation. If the Agency cannot 
verify before the Form 8610 is filed that the taxpayer has satisfied 
the 10 percent basis requirement for a carryover allocation made before 
July 1, the allocation is not valid and is treated as if it had not 
been made and the carryover allocation should not be reported on the 
Schedule A (Form 8610).
    (ii) Allocations made after June 30. An Agency may require that the 
basis certification be submitted to or received by the Agency prior to 
the close of the date that is 6 months after the date the allocation 
was made or within a reasonable period of time following the close of 
the date that is 6 months after the date the allocation was made. The 
Agency will need to verify basis as provided in paragraph (c)(2) of 
this section. If the basis certification is not timely made, or 
supporting documentation is lacking, inadequate, or does not actually 
support the certification, the Agency should notify the taxpayer and 
try to get adequate documentation. If the Agency cannot verify that the 
taxpayer has satisfied the 10 percent basis requirement for a carryover 
allocation made after June 30, the allocation must be returned to the 
Agency. The carryover allocation is a valid allocation for the calendar 
year of the allocation, but is included in the returned credit 
component of the State housing credit ceiling for the calendar year 
following the calendar year of the allocation .
    (d) * * *
    (2) * * *
    (viii) For carryover allocations made before July 1, the taxpayer's 
basis in the project (land and depreciable basis) as of the close of 
the calendar year of the allocation and the percentage that basis bears 
to the reasonably expected basis in the project (land and depreciable 
basis) as of the close of the second calendar year following the 
calendar year of allocation;
* * * * *
    (4) Recordkeeping requirements--(i) Taxpayer. When an allocation is 
made pursuant to section 42(h)(1)(E) or (F), the taxpayer must retain a 
copy of the allocation document. The Form 8609 that reflects the 
allocation must be filed for the first taxable year that the credit is 
claimed and for each taxable year thereafter throughout the compliance 
period, whether or not a credit is claimed for the taxable year.
* * * * *
    Par. 3. Section 1.42-8 is amended by:
    1. Revising the second sentence of paragraph (a)(6)(i).
    2. Revising paragraph (a)(6)(ii).
    3. Redesignating the year ``1993'' as ``2003'' and the year 
``1994'' as ``2004'' each place it appears in paragraph (a)(7), Example 
1 and Example 2.

    4. In Example 1. of paragraph (a)(7), revising the second to the 
last sentence of (ii), removing the second sentence of (iii), and 
revising (iv).
    5. In Example 2. of paragraph (a)(7), removing the third sentence 
of (iii) and revising (iv).
    6. Removing the third sentence of paragraph (b)(4)(i).
    7. Revising paragraph (b)(4)(ii).
    The revisions read as follows:


Sec.  1.42-8  Election of appropriate percentage month.

    (a) * * *

[[Page 40222]]

    (6) Procedures--(i) Taxpayer. * * * The taxpayer must retain a copy 
of the binding agreement and the election statement.
    (ii) Agency. The Agency must retain the original of the binding 
agreement and election statement and, to the extent required by 
Schedule A (Form 8610), ``Carryover Allocation of Low-Income Housing 
Credit,'' account for the binding agreement and election statement on 
that schedule.

    (7) * * *

    Example 1. * * *
    (ii) * * * Because allocations were made for the building in two 
separate calendar years, Agency must issue two Forms 8609, ``Low-
Income Housing Credit Allocation Certification,'' to X. * * *
* * * * *
    (iv) Agency retains the original of the binding agreement, 
election statement, and 2003 carryover allocation document. Agency 
accounts for the binding agreement, election statement, and 2003 
carryover allocation on the Schedule A (Form 8610) that it files for 
the 2003 calendar year. After the building is placed in service in 
2004, and assuming other necessary requirements for issuing a Form 
8609 are met (for example, taxpayer has certified all sources and 
uses of funds and development costs for the building under Sec.  
1.42-17), Agency issues to X a copy of the Form 8609 reflecting the 
2003 carryover allocation of $100,000. Agency accounts for the Form 
8609 on the first Form 8610 that it files following the date the 
Form 8609 is issued to X. Agency also issues to X a copy of the Form 
8609 reflecting the $50,000 allocation made in 2004 and accounts for 
the 2004 allocation on the Form 8610, ``Annual Low-Income Housing 
Credit Agencies Report,'' that it files for the 2004 calendar year. 
Agency retains copies of the Forms 8609 that are issued to X.

    Example 2. * * *
* * * * *
    (iv) Agency retains the original of the binding agreements, 
election statements, and carryover allocation documents. Agency 
accounts for the binding agreement, election statement, and 2003 
carryover allocation on the Schedule A (Form 8610) that it files for 
the 2003 calendar year. Agency also accounts for the binding 
agreement, election statement, and 2004 carryover allocation on the 
Schedule A (Form 8610) that it files for the 2004 calendar year. 
After each separate new building is placed in service, and assuming 
other necessary requirements for issuing a Form 8609 are met (for 
example, taxpayer has certified all sources and uses of funds and 
development costs for the building under Sec.  1.42-17), the Agency 
will issue to X a copy of the Form 8609 reflecting the 2003 
carryover allocation of $70,000 and a copy of the Form 8609 
reflecting the 2004 carryover allocation of $50,000, respectively. 
Agency accounts for each Form 8609 on the Form 8610 that reflects 
the calendar year each Form 8609 is issued. Agency retains copies of 
the Forms 8609 that are issued to X.

    (b) * * *
    (4) * * *
    (ii) Agency. The Agency must retain the original of the election 
statement and a copy of the Form 8609 that reflects the election 
statement. The Agency must file an additional copy of the Form 8609 
with the Agency's Form 8610 that reflects the calendar year the Form 
8609 is issued.
    Par. 4. Section 1.42-12 is amended by revising paragraph (a) to 
read as follows:


Sec.  1.42-12  Effective dates and transitional rules.

    (a) Effective dates--(1) In general. Except as provided in 
paragraphs (a)(2) and (a)(3) of this section, the rules set forth in 
Sec. Sec.  1.42-6 and 1.42-8 through 1.42-12 are effective May 2, 1994. 
However, binding agreements, election statements, and carryover 
allocation documents entered into before May 2, 1994, that follow the 
guidance set forth in Notice 89-1, 1989-1 C.B. 620 (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) need not be changed to conform to 
the rules set forth in Sec. Sec.  1.42-6 and 1.42-8 through 1.42-12.
    (2) Community Renewal Tax Relief Act of 2000--In general. 
Paragraphs (a), (b)(4)(iii) Example 1 and Example 2, (c), (d)(2)(viii), 
and (e)(2) of Sec.  1.42-6 are effective for housing credit dollar 
amounts allocated after the date these regulations are published as 
final regulations in the Federal Register. However, the rules in 
paragraphs (a), (b)(4)(iii) Example 1 and Example 2, (c), (d)(2)(viii), 
and (e)(2) of Sec.  1.42-6 may be applied by Agencies and taxpayers for 
housing credit dollar amounts allocated after December 31, 2000, and on 
or before the date these regulations are published as final regulations 
in the Federal Register. Otherwise, subject to the applicable effective 
dates of the corresponding statutory provisions, the rules that apply 
for housing credit dollar amounts allocated on or before the date these 
regulations are published as final regulations in the Federal Register 
are contained in Sec.  1.42-6 in effect on and before these regulations 
are published as final regulations in the Federal Register (see 26 CFR 
part 1 revised as of April 1, 2003).
    (3) Electronic filing simplification changes. Section 1.42-6(d)(4) 
and Sec.  1.42-8(a)(6)(i), (a)(6)(ii), (a)(7) Example 1 and Example 2, 
(b)(4)(i), and (b)(4)(ii) are effective for forms filed after the date 
these regulations are published as final regulations in the Federal 
Register. The rules that apply for forms filed on or before the date 
these regulations are published as final regulations in the Federal 
Register are contained in Sec.  1.42-6 and 1.42-8 in effect on and 
before these regulations are published as final regulations in the 
Federal Register (see 26 CFR part 1 revised as of April 1, 2003).
* * * * *
    Par. 5. Section 1.42-14 is amended by:
    1. Revising the section heading and paragraph (a).
    2. Removing paragraph (c).
    3. Redesignating paragraph (b) as paragraph (c).
    4. Adding a new paragraph (b).
    5. Adding a new sentence at the end of paragraph (d)(2)(iv)(A).
    6. Removing the second to the last sentence of paragraph (e).
    7. Revising paragraph (g).
    8. Revising paragraph (i)(2).
    9. Revising paragraph (k).
    10. Revising paragraph (l).
    The revisions and addition read as follows:


Sec.  1.42-14.  Allocation rules for post-2000 State housing credit 
ceiling amount.

    (a) State housing credit ceiling--(1) In general. The State housing 
credit ceiling for a State for any calendar year after 2000 is 
comprised of four components. The four components are--
    (i) The unused State housing credit ceiling, if any, of the State 
for the preceding calendar year (the unused carryforward component);
    (ii) The greater of--
    (A) $1.75 ($1.50 for calendar year 2001) multiplied by the State 
population, or
    (B) $2,000,000 (the population component);
    (iii) The amount of State housing credit ceiling returned in the 
calendar year (the returned credit component); plus
    (iv) The amount, if any, allocated to the State by the Secretary 
under section 42(h)(3)(D) from a national pool of unused credit (the 
national pool component).
    (2) Cost of Living Adjustment--(i) General rule. For any calendar 
year after 2002, the $2,000,000 and $1.75 amounts in paragraph 
(a)(1)(ii) of this section are each increased by an amount equal to--
    (A) The dollar amount, multiplied by
    (B) The cost-of-living adjustment determined under section 1(f)(3) 
for the calendar year by substituting ``calendar year 2001'' for 
``calendar year 1992'' in section 1(f)(3)(B).
    (ii) Rounding. Any increase resulting from the application of 
paragraph (a)(2)(i) of this section which, in the case of the 
$2,000,000 amount, is not a multiple of $5,000, is rounded to the next 
lowest multiple of $5,000, and which, in the case of the $1.75 amount, 
is not a multiple of 5 cents, is rounded to the next lowest multiple of 
5 cents.

[[Page 40223]]

    (b) The unused carryforward component. The unused carryforward 
component of the State housing credit ceiling for any calendar year is 
the unused State housing credit ceiling, if any, of the State for the 
preceding calendar year. The unused State housing credit ceiling for 
any calendar year is the excess, if any, of--
    (1) The sum of the population, returned credit, and national pool 
components for the calendar year, over
    (2) The aggregate housing credit dollar amount allocated for the 
calendar year reduced by the housing credit dollar amounts allocated 
from the unused carryforward component for the calendar year.
* * * * *
    (d) * * *
    (2) * * *
    (iv) * * *
    (A) Building not qualified within required time period. * * * Also, 
a building that has received a post-June 30 carryover allocation is not 
qualified within the required time period if the taxpayer does not meet 
the 10 percent basis requirement by the date that is 6 months after the 
date the allocation was made (as described in Sec.  1.42-6(a)(2)(ii)).
* * * * *
    (g) Stacking order. Credit is treated as allocated from the various 
components of the State housing credit ceiling in the following order. 
The first credit allocated for any calendar year is treated as credit 
from the unused carryforward component of the State housing credit 
ceiling for the calendar year. After all of the credit in the unused 
carryforward component has been allocated, any credit allocated is 
treated as allocated from the sum of the population, returned credit, 
and national pool components of the State housing credit ceiling.
* * * * *
    (i) * * *
    (2) Unused housing credit carryover. The unused housing credit 
carryover of a State for any calendar year is the excess, if any, of--
    (i) The unused carryforward component of the State housing credit 
ceiling for the calendar year, over
    (ii) The total housing credit dollar amount allocated for the 
calendar year.
* * * * *
    (k) Examples.--(1) The operation of the rules of this section is 
illustrated by the following examples. Unless otherwise stated in an 
example, Agency A is the sole Agency authorized to make allocations of 
housing credit dollar amounts in State M, all of Agency A's allocations 
are valid, and for calendar year 2003, Agency A has available for 
allocation a State housing credit ceiling consisting of the following 
housing credit dollar amounts:

A. Unused carryforward component..............................       $50
B. Population component.......................................       110
C. Returned credit component..................................        10
D. National pool component....................................         0
                                                               ---------
      Total...................................................       170
 

    (2) In addition, the $10 of returned credit component was returned 
before October 1, 2003.

    Example 1-- (i) Additional facts. By the close of 2003, Agency A 
had allocated $80 of the State M housing credit ceiling. Of the $80 
allocated, $17 was allocated to projects involving qualified 
nonprofit organizations.
    (ii) Application of stacking rules. The $80 of allocated credit 
is first treated as allocated from the unused carryforward component 
of the State housing credit ceiling. The $80 of allocated credit 
exceeds the $50 attributable to the unused carryforward component by 
$30. Because the unused carryforward component is fully utilized no 
credit will be forfeited by State M to the 2004 National Pool. The 
remaining $30 of allocated credit will next be treated as allocated 
from the $120 in credit determined by aggregating the population, 
returned credit, and national pool components ($110 + 10 + 0 = 
$120). The $90 of unallocated credit remaining in State M's 2003 
State housing credit ceiling ($120 - 30 = $90) represents the unused 
carryforward component of State M's 2004 State housing credit 
ceiling. Under paragraph (i)(3) of this section, State M does not 
qualify for credit from the 2004 National Pool.
    (iii) Nonprofit set-aside. Agency A allocated exactly the amount 
of credit to projects involving qualified nonprofit organizations as 
necessary to meet the nonprofit set-aside requirement ($17, 10% of 
the $170 ceiling).

    Example 2-- (i) Additional facts. By the close of 2003, Agency A 
had allocated $40 of the State M housing credit ceiling. Of the $40 
allocated, $20 was allocated to projects involving qualified 
nonprofit organizations.
    (ii) Application of stacking rules. The $40 of allocated credit 
is first treated as allocated from the unused carryforward component 
of the State housing credit ceiling. Because the $40 of allocated 
credit does not exceed the $50 attributable to the unused 
carryforward component, the remaining components of the State 
housing credit ceiling are unaffected. The $10 remaining in the 
unused carryforward component is assigned to the Secretary for 
inclusion in the 2004 National Pool. The $120 in credit determined 
by the aggregating the population, returned credit, and national 
pool components becomes the unused carryforward component of State 
M's 2004 State housing credit ceiling. Under paragraph (i)(3) of 
this section, State M does not qualify for credit from the 2004 
National Pool.
    (iii) Nonprofit set-aside. Agency A allocated $3 more credit to 
projects involving qualified nonprofit organizations than necessary 
to meet the nonprofit set-aside requirement. This does not reduce 
the application of the 10% nonprofit set-aside requirement to the 
State M housing credit ceiling for calendar year 2004.

    Example 3-- (i) Additional fact. None of the applications for 
credit that Agency A received for 2003 are for projects involving 
qualified nonprofit organizations.
    (ii) Nonprofit set-aside. Because at least 10% of the State 
housing credit ceiling must be set aside for projects involving a 
qualified nonprofit organization, Agency A can allocate only $153 of 
the $170 State housing credit ceiling for calendar year 2003 ($170-
17 = $153). If Agency A allocates $153 of credit, the credit is 
treated as allocated $50 from the unused carryforward component and 
$103 from the sum of the population, returned credit, and national 
pool components. The $17 of unallocated credit that is set aside for 
projects involving qualified nonprofit organizations becomes the 
unused carryforward component of State M's 2004 State housing credit 
ceiling. Under paragraph (i)(3) of this section, State M does not 
qualify for credit from the 2004 National Pool.

    Example 4-- (i) Additional facts. The $10 of returned credit 
component was returned prior to October 1, 2003. However, a $40 
credit that had been allocated in calendar year 2002 to a project 
involving a qualified nonprofit organization was returned to the 
Agency by a mutual consent agreement dated November 15, 2003. By the 
close of 2003, Agency A had allocated $170 of the State M's housing 
credit ceiling, including $17 of credit to projects involving 
qualified nonprofit organizations.
    (ii) Effect of three-month rule. Under the three-month rule of 
paragraph (d)(2)(iii) of this section, Agency A may treat all or 
part of the $40 of previously allocated credit as returned on 
January 1, 2004. If Agency A treats all of the $40 amount as having 
been returned in calendar year 2004, the State M housing credit 
ceiling for 2003 is $170. This entire amount, including the $17 
nonprofit set-aside, has been allocated in 2003. Under paragraph 
(i)(3) of this section, State M qualifies for the 2004 National 
Pool.
    (iii) If three-month rule not used. If Agency A treats all of 
the $40 of previously allocated credit as returned in calendar year 
2003, the State housing credit ceiling for the 2003

[[Page 40224]]

calendar year will be $210 of which $50 will be attributable to the 
returned credit component ($10 + $40 = $50). Because credit amounts 
allocated to a qualified nonprofit organization in a prior calendar 
year that are returned in a subsequent calendar year do not retain 
their nonprofit character, the nonprofit set-aside for calendar year 
2003 is $21 (10% of the $210 State housing credit ceiling). The $170 
that Agency A allocated during 2003 is first treated as allocated 
from the unused carryforward component of the State housing credit 
ceiling. The $170 of allocated credit exceeds the $50 attributable 
to the unused carryforward component by $120. Because the unused 
carryforward component is fully utilized no credit will be forfeited 
by State M to the 2004 National Pool. The remaining $120 of 
allocated credit will next be treated as allocated from the $160 in 
credit determined by aggregating the population, returned credit, 
and national pool components ($110 + 50 + 0 = $160). The $40 of 
unallocated credit (which includes $4 of unallocated credit from the 
$21 nonprofit set-aside) remaining in State M's 2003 housing credit 
ceiling ($160 - 120 = $40) represents the unused carryforward 
component of State M's 2004 housing credit ceiling. Under paragraph 
(i)(3) of this section, State M does not qualify for credit from the 
2004 National Pool.

    (l) Effective dates--(1) In general. Except as provided in 
paragraph (l)(2), the rules set forth in this section are effective 
January 1, 1994.
    (2) Community Renewal Tax Relief Act of 2000 changes. Paragraphs 
(a), (b), (c), (e), (i)(2) and (k) of this section are effective for 
housing credit dollar amounts allocated after the date these 
regulations are published as final regulations in the Federal Register. 
However, paragraphs (a), (b), (c), (e), (i)(2) and (k) of this section 
may be applied by Agencies and taxpayers for housing credit dollar 
amounts allocated after December 31, 2000, and on or before the date 
these regulations are published as final regulations in the Federal 
Register. Otherwise, subject to the applicable effective dates of the 
corresponding statutory provisions, the rules that apply for housing 
credit dollar amounts allocated on or before the date these regulations 
are published as final regulations in the Federal Register are 
contained in this section in effect on and before these regulations are 
published as final regulations in the Federal Register (see 26 CFR part 
1 revised as of April 1, 2003).

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-16941 Filed 7-3-03; 8:45 am]
BILLING CODE 4830-01-P