[Federal Register Volume 72, Number 117 (Tuesday, June 19, 2007)]
[Proposed Rules]
[Pages 33706-33711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11725]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114084-04]
RIN 1545-BD20


Section 42 Qualified Contract Provisions

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: Section 42(h)(6)(F) requires the Secretary to prescribe such 
regulations as may be necessary or appropriate to carry out the 
provisions of section 42(h)(6)(F), including regulations to prevent the 
manipulation of the qualified contract amount. This document contains 
proposed regulations that provide guidance concerning taxpayers' 
requests to housing credit agencies to obtain a qualified contract (as 
defined in section 42(h)(6)(F) of the Internal Revenue Code) for the 
acquisition of a low-income housing credit building. The regulations 
will affect taxpayers requesting a qualified contract, potential 
buyers, and low-income housing credit agencies responsible for the 
administration of the low-income housing credit program. This document 
also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by September 17, 
2007. Outlines of topics to be discussed at the public hearing 
scheduled for October 15, 2007, must be received by September 13, 2007.

ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR 
(REG-114084-04), room 5203, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
114084-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or may be sent electronically via the 
Federal eRulemaking Portal at: http://www.regulations.gov (IRS REG-
114084-04). The public hearing will be held in the auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jack Malgeri (202) 622-3040; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Kelly Banks, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by August 20, 2007.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.42-18(a)(1)(ii)(B). This information is required in order for a 
taxpayer to provide a written request to a housing credit agency to 
obtain a qualified contract (as defined in section 42(h)(6)(F) of the 
Internal Revenue Code) for the acquisition of a low-income housing 
credit building. The collection of information is voluntary to obtain a 
benefit. The likely respondents are business or other for-profit 
institutions.
    Estimated total annual reporting burden: 20,000 hours.
    Estimated average annual burden hours per respondent: 1 hour.
    Estimated number of respondents: 20,000.
    Estimated annual frequency of responses: One time.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 under section 42 
of the Internal Revenue Code (Code). Section 42 was amended by section 
7108(c)(1) of the Omnibus Budget Reconciliation Act

[[Page 33707]]

of 1989 (Pub. L. 101-239, 103 Stat. 2106) to add paragraph (h)(6). In 
general, section 42(h)(6)(A) provides that no credit will be allowed 
with respect to any building for the taxable year unless an extended 
low-income housing commitment (commitment) (as defined in section 
42(h)(6)(B)) is in effect as of the end of the taxable year.
    Section 42(h)(6)(B) provides in part that the term commitment means 
any agreement between the taxpayer and the low-income housing credit 
agency (Agency) that requires that the applicable fraction (as defined 
in section 42(c)(1)) for the building for each taxable year in the 
extended use period will not be less than the applicable fraction 
specified in the commitment, and that prohibits the eviction or 
termination of tenancy (other than for good cause) of an existing 
tenant of any low-income unit and any increase in the gross rent with 
respect to the unit not otherwise permitted under section 42.
    Section 42(h)(6)(D) defines the term extended use period as the 
period beginning on the first day in the compliance period under 
section 42(i)(1) on which the building is part of a qualified low-
income housing project and ending on the later of: (1) The date 
specified by the Agency in the commitment, or (2) the date which is 15 
years after the close of the compliance period.
    Section 42(h)(6)(E)(i)(II) provides for the termination of the 
extended use period if the Agency is unable to present within a 
specified period of time a qualified contract for the acquisition of 
the low-income portion of the building by any person who will continue 
to operate such portion as a low-income building.
    Section 42(h)(6)(F) defines the term qualified contract as a bona 
fide contract to acquire (within a reasonable period of time after the 
contract is entered into) the non low-income portion of the building 
for fair market value and the low-income portion of the building for an 
amount not less than the applicable fraction (specified in the 
commitment) of the sum of: (I) The outstanding indebtedness secured by, 
or with respect to the building, (II) the adjusted investor equity in 
the building, plus (III) other capital contributions not reflected in 
these amounts, reduced by cash distributions from (or available for 
distribution from) the project.
    Section 42(h)(6)(F) also provides that the Secretary shall 
prescribe regulations as may be necessary or appropriate to carry out 
that paragraph, including regulations to prevent the manipulation of 
the amount determined under section 42(h)(6)(F).
    Section 42(h)(6)(I) provides that the Agency must present the 
qualified contract within the 1-year period beginning on the date 
(after the 14th year of the compliance period) the taxpayer submits a 
written request to the Agency to find a person to acquire the 
taxpayer's interest in the low-income portion of the building.
    These proposed regulations provide guidance with respect to the 
application of the qualified contract provisions of section 42.

Explanation of Provisions

Qualified Contract Formula

    Section 1.42-18(c)(1) of the proposed regulations defines the 
qualified contract formula used to compute the purchase price amount of 
the low-income housing building as: (1) The fair market value of the 
non low-income portion of the building, plus (2) the low-income portion 
of the building. Section 1.42-18(c)(2) of the proposed regulations 
defines the low-income portion of the building as an amount not less 
than the applicable fraction (as specified in the commitment) of the 
total of: (a) Outstanding indebtedness on the building, plus (b) the 
adjusted investor equity in the building, plus (c) other capital 
contributions not reflected in the amounts in described in (a) and (b), 
minus (d) cash distributions from (or available for distribution from) 
the project.
    Under Sec.  1.42-18(b)(3) of the proposed regulations, the fair 
market value of the non low-income portion of the building is its fair 
market value at the time of the Agency's offer of sale. Because the 
intent of the extended-long term commitment is the continued use of the 
low-income portion of the building as low-income housing, the Treasury 
Department and IRS believe that fair market value must reflect the 
restrictions on the use of the low-income portion of the building. 
Therefore, the proposed regulations provide that the valuation must 
take into account the existing and continuing requirements under the 
commitment for the building.
    Section 42(h)(6) does not discuss the appropriate treatment of land 
in the calculation of qualified contracts. Qualified contracts are 
defined by reference to the building, which for other purposes of 
section 42 generally does not include the underlying land. However, 
because the Treasury Department and the IRS anticipate that the sales 
of the building without the underlying land would be infrequent, the 
Treasury Department and the IRS believe that it is necessary to include 
the underlying land in the computation of the qualified contract 
formula. Therefore, the proposed regulations provide that the non low-
income portion also includes the fair market value of the land 
underlying the entire building, both the non low-income portion and the 
low-income portion, regardless of whether the building is entirely low-
income. Comments are requested on whether low-income buildings are ever 
sold without the underlying land, and if so, the appropriate treatment 
in those cases. In addition, comments are requested on the appropriate 
treatment of leased land and the prevalence of leased land in low-
income housing credit transactions.
    For purposes of determining the low-income portion of the building, 
Sec.  1.42-18(c)(3) defines the term outstanding indebtedness as the 
outstanding principal balance, at the time of the sale, of any 
indebtedness or loan that is secured by, or with respect to, the 
building, and that does not exceed the amount of qualifying building 
costs. Qualifying building costs are generally defined in Sec.  1.42-
18(b)(4) of the proposed regulations as those costs that would have 
been includible in eligible basis of a low-income housing building 
under section 42(d)(1), provided the amounts were expended for 
depreciable property that conveys under the contract with the building. 
Thus, for example, the outstanding mortgage on the building will 
generally be outstanding indebtedness for purposes of section 
42(h)(6)(F), even if the indebtedness is incurred after the first year 
of the credit period, but only up to the amount of costs included in 
original eligible basis established at the end of the first year of the 
credit period under section 42(f)(1), plus indebtedness for qualifying 
building costs incurred after the first year of the credit period of a 
type that could be includible in eligible basis under section 42(d)(1). 
Thus, any proceeds from refinancing indebtedness or additional 
mortgages in excess of such qualifying building costs are not 
outstanding indebtedness for purposes of section 42(h)(6)(F).
    Outstanding indebtedness with an interest rate below the applicable 
Federal rate (as determined under section 1274(d)) at the time of 
issuance must be discounted using a present-value calculation to obtain 
an imputed principal amount. This imputed principal amount constitutes 
the amount of indebtedness that must be utilized in calculating the 
amount of outstanding indebtedness under the qualified contract 
formula.

[[Page 33708]]

    Section 1.42-18(c)(4) of the proposed regulations provides that 
adjusted investor equity includes only those cash investments by owners 
of the low-income building used for qualifying building costs. Investor 
equity is adjusted by a cost of living adjustment not to exceed five 
percent. The cost-of-living adjustment is determined under section 
1(f)(3), substituting the language in section 1(f)(3)(B) with ``the CPI 
for the base calendar year.'' The base calendar year is the calendar 
year with or within which the first taxable year of the credit period 
ends. Thus, the cost-of-living adjustment is the percent by which the 
Consumer Price Index (CPI) for the year preceding the written request 
to find a person to acquire the project exceeds the CPI for the base 
calendar year.
    Under Sec.  1.42-18(c)(5) of the proposed regulations, other 
capital contributions are defined as contributions for qualifying 
building costs other than amounts included in the calculation of 
outstanding indebtedness or adjusted investor equity as defined in this 
section. An example of other capital contributions includes an amount 
expended to replace a furnace after the first year of the credit 
period, provided any loan taken to finance the furnace was not secured 
by the furnace or the building. In this example, the loan would be 
outstanding indebtedness on the building.
    Qualifying building costs are defined under Sec.  1.42-18(b)(4)(i) 
and (ii) of the proposed regulations. Under Sec.  1.42-18(b)(4)(i) of 
the proposed regulations, a qualifying building is a cost included in 
eligible basis under section 42(d)(1). A cost is included in eligible 
basis under section 42(d)(1) only if the cost is (1) included in the 
adjusted basis of depreciable property subject to section 168 and the 
property qualifies as residential rental property under section 142(d) 
and Sec.  1.103-8(b)(4)(iii), or (2) included in the adjusted basis of 
depreciable property subject to section 168 that is used in a common 
area or provided as a comparable amenity to all residential rental 
units in the building, but only if the property conveys under the 
contract with the building. A qualifying building cost also includes 
costs incurred after the first year of the credit period (as defined in 
section 42(f)) of the type included in eligible basis under section 
42(d)(1). See Sec.  1.42-18(b)(4)(ii) of the proposed regulations.
    Under the qualified contract formula, the sum of the outstanding 
indebtedness, adjusted investor equity, and other capital contributions 
is reduced by cash distributions from or available for distribution 
from the project. Section 1.42-18(c)(6) of the proposed regulations 
defines cash distributions as including all distributions to owners or 
related parties within the meaning of section 267(b) or 707(b) (for 
example, cash distributions to owners from the proceeds of refinancings 
and second mortgages in excess of existing mortgages), and all cash and 
cash equivalents including reserve funds (for example, replacement and 
operating reserves) generated by cash flow from the project. To the 
extent an owner contributed his or her own funds to a reserve fund for 
replacement and improvements, such amounts are evaluated as either 
adjusted investor equity or other capital contributions. The Treasury 
Department and the IRS request comments and examples of forms of cash 
distributions from or available for distribution from the project that 
should or should not be included in the regulatory definition. 
Additionally, comments are requested whether low-income housing is 
owned by other than a corporation or partnership, for example, a sole 
proprietor, estate, or trust, and if so, what rules should apply for 
determining the amount of cash distributions from the project.

Administrative Discretion and Responsibilities of Agency

    Under Sec.  1.42-18(d)(1) of the proposed regulations, the Agency 
may exercise administrative discretion in evaluating and acting upon an 
owner's request to find a buyer to acquire the building. For example, 
the Agency may determine that an owner's request to find a buyer for 
the project lacks essential information and it may suspend the one-year 
period for finding a buyer until essential information is submitted.

Actual Offer of Sale

    Section 1.42-18(d)(2) of the proposed regulations provides that in 
order to satisfy the qualified contract requirements under section 
42(h)(6), the Agency must offer the building for sale to the general 
public at the determined qualified contract price upon receipt of a 
written request by the owner to find a buyer to acquire the building.

Fair Market Value Cap

    Commentators suggested the inclusion of a fair market value cap on 
the low-income portion of the qualified contract amount as defined in 
section 42(h)(6)(F) noting that the qualified contract price may exceed 
the fair market value of a project. Commentators noted one reason for 
the qualified contract price exceeding fair market value is the formula 
for adjusted investor equity, which includes the CPI-based cost of 
living adjustments. The statute defines a qualified contract, in part, 
as a contract to acquire the low-income portion of the building for an 
amount ``not less than'' the applicable fraction of the statutorily 
provided formula. Therefore, the proposed regulations do not adopt this 
comment. However, the flush language of section 42(h)(6)(E) provides 
that the qualified contract exception to the termination of the 
extended use period of a commitment shall not apply to the extent more 
stringent requirements are provided in the commitment or in state law. 
The Treasury Department and the IRS request comments on the extent of 
Agency and state authority in providing more stringent requirements 
than the provisions contained in section 42(h)(6)(F), and specifically, 
the authority of Agency or state regulators to require in agreements a 
fair market value cap that would restrict any qualified contract price 
to fair market value.

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. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the collection 
of information described under the heading ``Paperwork Reduction Act'' 
imposes virtually no incremental burden in time or expense and is 
voluntary for the taxpayer to obtain a benefit. Therefore, a regulatory 
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, this regulation has been 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 (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed

[[Page 33709]]

rules and how they can be made easier to understand. All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for October 15, 2007, beginning 
at 10 a.m. in the auditorium of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.
    Due to building security procedures, visitors must enter at the 
Constitution Avenue entrance. In addition, all visitors must present 
photo identification to enter the building. Because of access 
restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 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 who 
wish to present oral comments at the hearing must submit electronic or 
written comments on September 17, 2007 and an outline of the topics to 
be discussed and the time to be devoted to each topic (signed original 
and eight (8) copies) by September 13, 2007. A period of 10 minutes 
will be allotted to each person for making comments. An agenda showing 
the scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Jack Malgeri, 
Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 is amended by adding 
an entry in numerical order as follows:

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

    Section 1.42-18 also issued under 26 U.S.C. 42(h)(6)(F) and 
42(h)(6)(K); * * *
    Par. 2. Section 1.42-18 is added to read as follows:


Sec.  1.42-18  Qualified contracts.

    (a) Extended low-income housing commitment--(1) In general. No 
credit under section 42(a) is allowed by reason of section 42 and this 
section with respect to any building for the taxable year unless an 
extended low-income housing commitment (commitment) (as defined in 
section 42(h)(6)(B)) is in effect as of the end of such taxable year. A 
commitment must be in effect for the extended use period (as defined in 
paragraph (a)(1)(i) of this section).
    (i) Extended use period. The term extended use period means the 
period beginning on the first day in the compliance period (as defined 
in section 42(i)(1)) on which the building is part of a qualified low-
income housing project (as defined in section 42(g)(1)) and ending on 
the later of--
    (A) The date specified by the low-income housing credit agency 
(Agency) in the commitment; or
    (B) The date that is 15 years after the close of the compliance 
period.
    (ii) Termination of extended use period. The extended use period 
under paragraph (a)(1)(i) of this section for any building will 
terminate--
    (A) On the date the building is acquired by foreclosure (or 
instrument in lieu of foreclosure) unless the Secretary determines that 
such acquisition is part of an arrangement with the taxpayer a purpose 
of which is to terminate such period; or
    (B) On the last day of the one-year period beginning on the date 
(after the 14th year of the compliance period) the owner submits a 
written request to the Agency to find a person to acquire the owner's 
interest in the low-income portion of the building and the Agency is 
unable to present during such period a qualified contract for the 
acquisition of the low-income portion of the building by any person who 
will continue to operate such portion as a qualified low-income 
building (as defined in section 42(c)(2)). This paragraph (a)(1)(ii)(B) 
shall not apply to the extent more stringent requirements are provided 
in the commitment or under state law. If the Agency provides a 
qualified contract within the one-year period and the owner rejects or 
fails to act upon the contract, the building remains subject to the 
existing commitment.
    (iii) Eviction, gross-rent increase concerning existing low-income 
tenants not permitted. During the three-year period following the 
termination of a commitment, no owner shall be permitted to evict or 
terminate the tenancy (other than for good cause) of an existing tenant 
of any low-income unit, or increase the gross rent for such unit in a 
manner or amount not otherwise permitted by section 42.
    (2) [Reserved]
    (b) Special rules. For purposes of this section, the following 
terms are defined:
    (1) Base calendar year means the calendar year with or within which 
the first taxable year of the credit period ends.
    (2) The low-income portion of a building is the portion of the 
building equal to the applicable fraction (as defined in section 
42(c)(1)) specified in the commitment for the building.
    (3) The fair market value of the non low-income portion of the 
building is determined at the time of the Agency's offer of sale of the 
project to the general public. This valuation must take into account 
the existing and continuing requirements contained in the commitment 
for the building. The non low-income portion also includes the fair 
market value of the land underlying the entire building, both the non 
low-income portion and the low-income portion regardless of whether the 
project is entirely low-income. The non low-income portion also 
includes the fair market value of items of personal property not 
included in eligible basis under section 42(d)(1) that convey under the 
contract with the building.
    (4) A qualifying building cost is--
    (i) A cost that is included in eligible basis of a low-income 
housing building under section 42(d)(1) which is--
    (A) Included in the adjusted basis of depreciable property subject 
to section 168 and the property qualifies as residential rental 
property under section 142(d) and Sec.  1.103-8(b)(4)(iii); or
    (B) Included in the adjusted basis of depreciable property subject 
to section 168 that is used in a common area or provided as a 
comparable amenity to all residential rental units in the building; and
    (ii) Of the type described in paragraph (b)(4)(i) of this section 
incurred after the first year of the low-income building's credit 
period under section 42(f).
    (c) Qualified contract purchase price formula--(1) In general. For 
purposes of this section, the term qualified contract means a bona fide 
contract to acquire (within a reasonable period after the contract is 
entered into) the non low-income portion of the building for fair 
market value (as defined in paragraph (b)(3) of this section) and the 
low-income portion of the building (as defined in paragraph (b)(2) of 
this section) for the low-income portion amount as calculated in 
paragraph (c)(2) of this section. The qualified contract amount is 
determined at the time of the Agency's offer of sale of the project to 
the general public. An Agency must,

[[Page 33710]]

however, adjust the amount of the low-income portion of the qualified 
contract formula to reflect changes in the components of the qualified 
contract formula such as mortgage payments which reduce outstanding 
indebtedness between the time of the seller's request to the Agency to 
obtain a buyer and the project's actual sale closing date. In addition, 
the Agency may adjust the fair market value of the building if, after a 
reasonable period of time within the one-year offer of sale period, no 
buyer has made an offer or market values have adjusted downward.
    (2) Low-income portion amount. The low-income portion amount is an 
amount not less than the applicable fraction specified in the 
commitment, as defined in section 42(h)(6)(B)(i), multiplied by the 
total of--
    (i) The outstanding indebtedness for the building (as defined in 
paragraph (c)(3) of this section); plus
    (ii) The adjusted investor equity in the building (as defined in 
paragraph (c)(4) of this section); plus
    (iii) Other capital contributions (as defined in paragraph (c)(5) 
of this section), not including any amounts described in paragraphs 
(c)(2)(i) and (ii) of this section; minus
    (iv) Cash distributions from (or available for distribution from) 
the building (as defined in paragraph (c)(6) of this section).
    (3) Outstanding indebtedness. (i) For purposes of paragraph 
(c)(2)(i) of this section, except as provided in paragraph (c)(3)(ii) 
of this section, the term outstanding indebtedness for the building 
means the remaining stated principal balance, at the time of the 
Agency's offer of sale of the project to the general public, of any 
indebtedness secured by, or with respect to, the building that does not 
exceed the amount of qualifying building costs described in paragraph 
(b)(4) of this section. Examples of such indebtedness include certain 
mortgages and developer fee notes (excluding developer service costs 
not included in eligible basis). Outstanding indebtedness does not 
include debt used to finance nondepreciable land costs, syndication 
costs, legal and accounting costs, and operating deficit payments. The 
term outstanding indebtedness for the building only includes 
obligations that are indebtedness under general principles of Federal 
income tax law.
    (ii) For purposes of paragraph (c)(2)(i) of this section, if the 
indebtedness had a yield to maturity below the applicable Federal rate 
(as determined under section 1274(d)) at the time of issuance, the term 
outstanding indebtedness for the building is the imputed principal 
amount of the indebtedness, secured by, or with respect to, the 
building, at the time of the Agency's offer of sale of the project to 
the general public, that does not exceed the amount of qualifying 
building costs described in paragraph (b)(4) of this section. The 
imputed principal amount of the indebtedness is the sum of the present 
values, as of the Agency's offer of sale of the project to the general 
public, of all the remaining payments of principal and interest payable 
on the indebtedness after the Agency's offer of sale of the project to 
the general public. The present value of each payment is determined by 
using a discount rate equal to the applicable Federal rate (as 
determined under section 1274(d)) at the time of issuance of the 
indebtedness. In the case of a variable rate debt instrument, rules 
similar to those in Sec.  1.1274-2(f) are used to determine the 
instrument's imputed principal amount.
    (4) Adjusted investor equity. (i) For purposes of paragraph 
(c)(2)(ii) of this section, the term adjusted investor equity for any 
calendar year means the aggregate amount of cash invested by owners for 
qualifying building costs described in paragraph (b)(4)(i) of this 
section. Thus, equity paid for land, credit adjuster payments, Agency 
low-income housing credit application and allocation fees, operating 
deficit contributions, and legal, syndication, and accounting costs all 
are examples of cost payments that do not qualify as adjusted investor 
equity under this section.
    (ii) The adjusted investor equity as determined under paragraph 
(c)(4)(i) of this section is increased by an amount equal to the 
adjusted investor equity multiplied by the cost-of-living adjustment 
for such calendar year, determined under section 1(f)(3) by 
substituting for the language in section 1(f)(3)(B), the Consumer Price 
Index for all urban consumers (CPI) (not seasonally adjusted, U.S. City 
Average) as specified in paragraph (c)(4)(v) of this section for the 
base calendar year (as defined in paragraph (b)(1) of this section).
    (iii) Adjusted investor equity is taken into account under this 
section only to the extent there existed an obligation to invest the 
amount as of the beginning of the low-income building's credit period 
(as defined in section 42(f)(1)).
    (iv) Adjusted investor equity does not include amounts included in 
the calculation of outstanding indebtedness as defined in paragraph 
(c)(3) of this section.
    (v) The cost-of-living adjustment is based on the CPI as of the 
close of the 12-month period ending on August 31 of the calendar year. 
The cost-of-living adjustment is the percent by which the CPI for the 
year preceding the written request to find a person to acquire the 
taxpayer's project (CPIp) exceeds the CPI for the base 
calendar year (CPIb). If the CPI for any calendar year 
during this period (after the base calendar year) exceeds the CPI for 
the preceding calendar year by more than 5 percent, the CPI for the 
base calendar year shall be increased such that such excess shall never 
be taken into account under paragraph (c)(4) of this section. The 
adjusted investor equity equals the aggregate amount of cash invested 
by the taxpayer in the building multiplied by the ratio of 
CPIp to CPIb.
    (vi) Example. The following example illustrates the CPI 
calculation:

    Example. Owner contributed $600,000 in equity to a building in 
1991, which was the first year of the credit period for the project. 
In year 2005, owner requests Agency to find a buyer to purchase the 
building. The CPIb (at the close of the 12-month period 
ending on August 31, 1991) is 136.6. The CPIp for the 
close of the 12-month period ending August 31, 2004, is 189.5. At no 
time during this period (after the base calendar year) did the CPI 
for any calendar year exceed the CPI for the preceding calendar year 
by more than 5 percent. The owner's adjusted investor equity is 
$600,000 multiplied by 189.5/136.6, or $832,357.

    (5) Other capital contributions. For purposes of paragraph 
(c)(2)(iii) of this section, other capital contributions to a low-
income building are qualifying building costs described in paragraph 
(b)(4)(ii) of this section paid or incurred by the owner of the low-
income building other than amounts included in the calculation of 
outstanding indebtedness or adjusted investor equity as defined in this 
section. For example, other capital contributions may include amounts 
incurred to replace a furnace after the first year of a low-income 
housing credit building's credit period under section 42(f), provided 
any loan used to finance the replacement of the furnace is not secured 
by the furnace or the building. Other capital contributions do not 
include expenditures for land costs, operating deficit payments, credit 
adjuster payments, and payments for legal, syndication, and accounting 
costs.
    (6) Cash distribution--(i) In general. For purposes of paragraph 
(c)(2)(iv) of this section, the term cash distributions from (or 
available for distribution from) the project include--
    (A) All distributions from the project to the owners or to related 
parties within the meaning of section 267(b) or section 707(b)), 
including distributions under section 301 (relating to distributions by 
a corporation), section

[[Page 33711]]

731 (relating to distributions by a partnership), or section 1368 
(relating to distributions by a S corporation); and
    (B) All cash and cash equivalents available for distribution at the 
time of sale, including for example, reserve funds whether operating or 
replacement reserves.
    (ii) Anti-abuse rule. The Commissioner will interpret and apply the 
rules in this paragraph (c)(6) as necessary and appropriate to prevent 
manipulation of the qualified contract amount. For example, cash 
distributions include payments to owners or related parties within the 
meaning of section 267(b) or section 707(b) for any operating expenses 
in excess of amounts reasonable under the circumstances.
    (d) Administrative responsibilities of the Agency--(1) In general. 
An Agency may exercise administrative discretion in evaluating and 
acting upon an owner's request to find a buyer to acquire the building. 
Examples of administrative discretion may include but are not limited 
to the following:
    (i) Concluding that the owner's request lacks essential information 
and denying the request until such information is provided.
    (ii) Refusing to consider an owner's representations without 
substantiating documentation verified with the Agency's records.
    (iii) Suspending the one-year period for finding a buyer until the 
owner provides requested information.
    (iv) Determining how many subsequent requests to find a buyer, if 
any, may be submitted if the owner has previously submitted a request 
for a qualified contract and then rejects or fails to act upon the 
qualified contract furnished by the Agency.
    (v) Assessing and charging the seller certain administrative fees 
for the performance of services in obtaining a qualified contract (for 
example, real estate appraiser costs).
    (vi) Requiring other conditions applicable to the qualified 
contract consistent with this section.
    (2) Actual offer. Upon receipt of a written request from the owner 
to find a person to acquire the building, the Agency must offer the 
building for sale at the determined qualified contract amount to the 
general public in order for the qualified contract to satisfy the 
requirements of this section unless the Agency has already identified a 
willing buyer who submitted a contract to purchase the building.
    (e) Effective/applicability date. This section is applicable on the 
date the final regulations are published in the Federal Register.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E7-11725 Filed 6-18-07; 8:45 am]
BILLING CODE 4830-01-P