[Federal Register Volume 69, Number 3 (Tuesday, January 6, 2004)]
[Rules and Regulations]
[Pages 502-506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32219]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9110]
RIN 1545-BA85


Section 42 Carryover and Stacking Rule Amendments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that amend several 
existing regulations concerning the low-income housing tax credit. The 
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.

DATES: Effective Date: These regulations are effective January 6, 2004.
    Applicability Dates: For dates of applicability of these 
regulations, see Sec. Sec.  1.42-12(a)(2) and (3), and 1.42-14(l)(2).

FOR FURTHER INFORMATION CONTACT: Lauren R. Taylor (202) 622-3040 or 
Christopher J. Wilson (808) 539-2874 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    On July 7, 2003, the IRS published a notice of proposed rulemaking 
in the Federal Register (68 FR 40218) proposing amendments to the 
Income Tax Regulations (26 CFR part 1) under section 42 of the Internal 
Revenue Code. These amendments provide guidance regarding changes to 
section 42 made by the Community Renewal Tax Relief Act of 2000 (Public 
Law 106-554) (2000 Act) and make certain changes to the regulations to 
help facilitate the electronic filing (E-filing) of income tax returns.
    One commentator submitted written comments in response to the 
notice of proposed rulemaking. A public hearing was scheduled for 
September 23, 2003, pursuant to a notice of public hearing published 
simultaneously with the notice of proposed rulemaking. The IRS received 
one request to speak at the public hearing. This request was withdrawn 
before the hearing date. On September 15, 2003, the IRS published a 
notice (68 FR 53926) canceling the public hearing on the proposed 
regulations. After consideration of the comments received, the proposed 
regulations are adopted as revised by this Treasury decision. The 
revisions are discussed below.

Explanation of Provisions

    Section 42 provides for a low-income housing tax 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. 
Section 42(h)(1)(F) provides rules for multi-building projects 
receiving project-based carryover allocations. Following the changes 
made by the 2000 Act, section 42(h)(1)(E)(ii) defines a qualified 
building as any building that is part of a project if the taxpayer's 
basis in the project (as of the later of the date which is 6 months 
after the date that the allocation was made or the close of the 
calendar year in which the allocation is made) 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).
    The commentator recommended revising Sec.  1.42-6(a)(2) of the 
proposed regulations to clarify that each building in a multi-building 
project receiving a project-based carryover allocation under section 
42(h)(1)(F) need not separately meet the 10 percent basis requirement. 
The commentator states that the proposed regulations appear to require 
that each building in a multi-building project that receives a project-
based carryover allocation must meet the 10 percent basis requirement 
separately. The proposed regulations do not require that each building 
in a multi-building project satisfy the 10 percent basis requirement 
separately for project-based carryover allocations made under section 
42(h)(1)(F). For allocations made under section 42(h)(1)(F), the 10 
percent basis requirement is only required to be met on a project 
basis. The final regulations clarify this issue.

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, 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. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking that preceded this Treasury decision 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 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.42-6 is amended by:

0
1. Revising paragraphs (a), (b)(4) Example 2, (c)(1), (c)(3), 
(d)(2)(viii), and (d)(4)(i).
0
2. Removing the word ``September'' from paragraph (b)(4) Example 1. and 
adding the word ``May'' in its place; removing the year ``1993'' each 
place it appears and by adding the year ``2003'' in its place; and 
removing the year ``1995'' and adding the year ``2005'' in its place.
0
3. Removing the language ``by the close of the calendar year of the 
allocation'' from the first and last sentences of

[[Page 503]]

paragraph (c)(2) 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.
0
4. Removing the language ``, ``Carryover Allocation of the Low-Income 
Housing Credit,'' from paragraph (d)(4)(ii).
0
5. Removing the language ``before the close of the calendar year of the 
allocation'' from the first sentence of paragraph (e)(2) 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 Sec.  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 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). In the case of a multi-building project 
that receives an allocation under section 42(h)(1)(F), the 10 percent 
basis requirement is satisfied by reference to the entire project.
    (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) * * *

    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

[[Page 504]]

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.
* * * * *

0
Par. 3. Section 1.42-8 is amended by:

0
1. Revising the second sentence of paragraph (a)(6)(i), paragraph 
(a)(6)(ii), the sixth sentence of paragraph (a)(7) Example 1. (ii), 
(a)(7) Example 1. (iv), (a)(7) Example 2 (iv), and (b)(4)(ii).
0
2. Removing the year ``1993'' each place it appears in paragraph 
(a)(7), Example 1 and Example 2 and adding the year ``2003'' in its 
place; removing the year ``1994'' each place it appears in paragraph 
(a)(7) and adding the year ``2004'' in its place.
0
3. Removing the second sentence of paragraph (a)(7) Example 1. (iii), 
the third sentence of paragraph (a)(7) Example 2 (iii), and third 
sentence of paragraph (b)(4)(i).
    The revisions read as follows:


Sec.  1.42-8  Election of appropriate percentage month.

    (a) * * *
    (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 files the original of 
this Form 8609 with the Form 8610, ``Annual Low-Income Housing 
Credit Agencies Report,'' that it files for the 2004 calendar year. 
Agency also issues to X a copy of the Form 8609 reflecting the 2004 
allocation of $50,000 and files the original of this Form 8609 with 
the Form 8610 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 files the original of each Form 8609 with 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.

0
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 applicable on 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-(i) In general. 
Section 1.42-6 (a), (b)(4)(iii) Example 1 and Example 2, (c), 
(d)(2)(viii), and (e)(2) are applicable for housing credit dollar 
amounts allocated after January 6, 2004. However, the rules in Sec.  
1.42-6 (a), (b)(4)(iii) Example 1 and Example 2, (c), (d)(2)(viii), and 
(e)(2) may be applied by Agencies and taxpayers for housing credit 
dollar amounts allocated after December 31, 2000, and on or before 
January 6, 2004. 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 January 6, 2004 
are contained in Sec.  1.42-6 in effect on and before January 6, 2004 
(see 26 CFR part 1 revised as of April 1, 2003).
    (3) Electronic filing simplification changes. Sections 1.42-6(d)(4) 
and 1.42-8(a)(6)(i), (a)(6)(ii), (a)(7) Example 1 and Example 2, 
(b)(4)(i), and (b)(4)(ii) are applicable for forms filed after January 
6, 2004.
    The rules that apply for forms filed on or before January 6, 2004 
are contained in Sec.  1.42-6 and Sec.  1.42-8 in effect on and before 
January 6, 2004 (see 26 CFR part 1 revised as of April 1, 2003).
* * * * *

0
Par. 5. Section 1.42-14 is amended by:
0
1. Revising the section heading and paragraphs (a), (g), (i)(2), (k) 
and (l).
0
2. Removing paragraph (c) and the second to last sentence of paragraph 
(e).
0
3. Redesignating paragraph (b) as paragraph (c).
0
4. Adding a new paragraph (b).
0
5. Adding a new sentence at the end of paragraph (d)(2)(iv)(A).
    The revisions and additions 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

[[Page 505]]

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.
    (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) Example. (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 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

[[Page 506]]

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 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) of this section, the rules set forth in Sec.  1.42-14 
are applicable on 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 applicable for 
housing credit dollar amounts allocated after January 6, 2004. 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 January 6, 2004. 
Otherwise, subject to the applicable applicability dates of the 
corresponding statutory provisions, the rules that apply for housing 
credit dollar amounts allocated on or before January 6, 2004 are 
contained in this section in effect on and before January 6, 2004 (see 
26 CFR part 1 revised as of April 1, 2003).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: December 19, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-32219 Filed 12-31-03; 11:59 am]
BILLING CODE 4830-01-P