[Federal Register Volume 72, Number 117 (Tuesday, June 19, 2007)]
[Proposed Rules]
[Pages 33703-33706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11731]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-128274-03]
RIN 1545-BC22


Section 42 Utility Allowance Regulations Update

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations that amend the 
utility allowances regulations concerning the low-income housing tax 
credit. The proposed regulations update the utility allowances 
regulations to provide new options for estimating tenant utility costs. 
The proposed regulations affect owners of low-income housing projects 
who claim the credit, the tenants in those low-income housing projects, 
and the state and local housing credit agencies who administer the 
credit. 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 9, 2007, must be received by September 18, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-128274-03), room 
5203, Internal Revenue Service, P.O. 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-
128274-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-128274-03). 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, 
David Selig, at (202) 622-3040; concerning submissions of comments, the 
hearing, or to be placed on the building access list to attend the 
hearing, Richard Hurst, at [email protected] or 
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking in Sec.  1.42-10(b)(4)(ii) have previously been 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.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) relating to the low-income housing credit 
under section 42 of the Internal Revenue Code. Section 42(a) provides 
that, for purposes of section 38, the amount of the low-income housing 
credit determined under section 42 for any taxable year in the credit 
period is an amount equal to the applicable percentage of the qualified 
basis of each qualified low-income building. A qualified low-income 
building is defined in section 42(c)(2) as any building that is part of 
a qualified low-income housing project.
    A qualified low-income housing project is defined in section 
42(g)(1) as any project for residential rental housing if the project 
meets one of the following tests elected by the taxpayer: (1) At least 
20 percent of the residential units in the project are rent-restricted 
and occupied by individuals whose income is 50 percent or less of area 
median gross income; or (2) at least 40 percent of the residential 
units in the project are rent-restricted and occupied by individuals 
whose income is 60 percent or less of area median gross income. If a 
taxpayer does not meet the elected test, the project is not eligible 
for the section 42 credit.
    In order to qualify as a rent-restricted unit within the meaning of 
section 42(g), the gross rent for the unit must not exceed 30 percent 
of the applicable income limitation. If any utilities are paid directly 
by the tenant, section 42(g)(2)(B)(ii) requires the inclusion in gross 
rent of a utility allowance determined by the Secretary, after taking 
into account the procedures under section 8 of the United States 
Housing Act of 1937.

[[Page 33704]]

    Section 1.42-10(b) provides rules for calculating the appropriate 
utility allowance based upon whether (1) the building receives rental 
assistance from the Farmers Home Administration (FmHA), now known as 
the Rural Housing Service; (2) the building has any tenant that 
receives FmHA rental assistance; (3) the building's rents and utility 
allowances are reviewed by the Department of Housing and Urban Renewal 
(HUD) on an annual basis; or (4) the building is not described in (1), 
(2), or (3) above (other buildings).
    Under Sec.  1.42-10(b)(4), other buildings generally use the 
applicable Public Housing Authority (PHA) utility allowance established 
for the Section 8 Existing Housing Program or use a local utility 
company estimate. The local utility company estimate may be obtained by 
any interested party (including a low-income tenant, a building owner, 
or a State or local housing credit agency (Agency)).

Explanation of Provisions

    The IRS and Treasury Department have received comments from 
organizations representing tenants, non-profit housing organizations, 
housing credit agencies, building owners, building management 
companies, developers, and others noting that the existing methods in 
Sec.  1.42-10 that provide rules for calculating utility expenses often 
result in flawed information being used for calculating rent 
adjustments and need updating. These organizations assert that PHA 
utility schedules referenced by the existing regulations do not 
represent the proper usage of utilities for low-income housing tax 
credit units. This is primarily because PHA utility schedules are 
designed for Section 8 properties, which generally are older buildings 
with higher utility costs, whereas low-income housing projects require 
measurements that are appropriate for new construction. Further, a 
number of project developers, owners, and building managers have 
indicated that they are unable to obtain local utility estimates due to 
a lack of data or an unwillingness on the part of utility companies to 
provide the information. Even if a utility company is willing to 
provide an initial estimate, annual updates are often difficult to 
obtain. Therefore, these commentators have recommended that Sec.  1.42-
10 be amended to provide more viable and accurate options for 
estimating tenant utility costs.
    In response to these concerns, Sec.  1.42-10(b)(4)(ii) is amended 
by these proposed regulations to provide additional options for 
accurately calculating utility allowances. Section 1.42-
10(b)(4)(ii)(B), which permits any interested party to obtain a local 
utility company estimate for a unit, is revised to accommodate multiple 
utility services to a property. When charges for electricity 
transmission and distribution are paid to more than one company, cost 
estimates must be obtained from each of the utilities when computing 
the utility allowance.
    Section 1.42-10(b)(4)(ii) is amended to permit a building owner to 
obtain a utility estimate for each unit in a building from the Agency 
that has jurisdiction over the building. The Agency's estimate must 
take into account the local utility rate data, property type, climate 
variables by region in the State, taxes and fees on utility charges, 
and property building materials and mechanical systems. An Agency may 
also use actual utility company usage data and rates for the building.
    Further, the regulations are proposed to be amended to permit a 
building owner to calculate utility allowances using the ``HUD Utility 
Schedule Model'' that can be found on the Low-Income Housing Tax 
Credits page at http://www.huduser.org/datasets/lihtc.html. The HUD 
Utility Schedule Model is based on data from the Residential Energy 
Consumption Survey (RECS) conducted by the Department of Energy. RECS 
data provides energy consumption by structure for heating, air 
conditioning, cooking, water heating, and other electric (lighting and 
refrigeration). The HUD Utility Schedule Model incorporates building 
location and climate. A building owner who chooses to use the HUD 
Utility Schedule Model must furnish a copy of the calculations using 
the HUD Utility Schedule Model to the Agency that has jurisdiction over 
the building. A building owner also must make available copies of the 
calculations to the tenants in the building.
    Section 1.42-10(c) provides that if the applicable utility 
allowance for a unit in a building changes, the new utility allowance 
must be used to compute gross rent of rent-restricted units due 90 days 
after the change. Commentators requested that this rule be modified to 
restrict changes to the building's utility allowance until after the 
building has achieved 90 percent occupancy for a period of 90 
consecutive days, or by the end of the first year of the credit period, 
whichever is earlier. The proposed regulations adopt this comment. 
Section 1.42-10(c) also is modified to require that a building owner 
must review at least annually the basis on which utility allowances 
have been established and must update the applicable utility allowance. 
The review must take into account any changes to the building such as 
any energy conservation measures that affect energy consumption and 
changes in utility rates.
    The IRS and Treasury Department request comments on whether other 
methods should be used for calculating utility allowances such as 
energy or water and sewer services using a software model run by a 
State-certified engineer who is approved by the Agency that has 
jurisdiction over the building.

Proposed Effective Date

    The regulations are proposed to apply to taxable years beginning on 
or after the date of publication of the Treasury decision adopting 
these rules 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 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, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. Comments are requested on all aspects of the proposed 
regulations. In addition, the IRS and Treasury Department specifically 
request comments on the clarity of the proposed 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 9, 2007, at 10 a.m. 
in the auditorium of the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Because of access restrictions, visitors 
will not be admitted beyond the Internal Revenue Building lobby more 
than 30 minutes before the hearing starts. Due to

[[Page 33705]]

building security procedures, visitors must enter at the Constitution 
Avenue entrance. In addition, all visitors must present photo 
identification to enter the building. 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 by September 17, 2007 and submit 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 18, 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 regulations is David Selig, 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 1.42-10 is amended by:
    1. Revising the first sentence of paragraph (a).
    2. Revising paragraphs (b)(1), (b)(2), (b)(3), (b)(4) introductory 
text and (c).
    3. Removing the language ``HUD rental assistance'' from the first 
place that it appears in paragraph (b)(4)(i) and adding the language 
``rental assistance from the Department of Housing and Urban 
Development'' in its place.
    4. Adding two sentences at the end of paragraph (b)(4)(ii)(A).
    5. Revising the second sentence in paragraph (b)(4)(ii)(B).
    6. Adding new paragraphs (b)(4)(ii)(C) and (b)(4)(ii)(D).
    The additions and revisions read as follows:


Sec.  1.42-10  Utility allowances.

    (a) * * * If the cost of any utility (other than telephone or cable 
television) for a residential rental unit is paid directly by the 
tenant(s), the gross rent for that unit includes the applicable utility 
allowance determined under this section. * * *
    (b) Applicable utility allowances--(1) Buildings assisted by the 
Rural Housing Service. If a building receives assistance from the Rural 
Housing Service (RHS-assisted building) the applicable utility 
allowance for all rent-restricted units in the building is the utility 
allowance determined under the method prescribed by the Rural Housing 
Service (RHS) for the building.
    (2) Buildings with Rural Housing Service assisted tenants. If any 
tenant in a building receives RHS rental assistance payments (RHS 
tenant assistance), the applicable utility allowance for all rent-
restricted units in the building (including any units occupied by 
tenants receiving rental assistance payments from the Department of 
Housing and Urban Development (HUD)) is the applicable RHS utility 
allowance.
    (3) Buildings regulated by the Department of Housing and Urban 
Development. If neither a building nor any tenant in the building 
receives RHS housing assistance, and the rents and utility allowances 
of the building are reviewed by HUD on an annual basis (HUD-regulated 
building), the applicable utility allowance for all rent-restricted 
units in the building is the applicable HUD utility allowance.
    (4) Other buildings. If a building is neither an RHS-assisted nor a 
HUD-regulated building, and no tenant in the building receives RHS 
tenant assistance, the applicable utility allowance for rent-restricted 
units in the building is determined under the following methods.
    (i) * * *
    (ii) * * * (A) * * * However, if a local utility company estimate 
is obtained for any unit in the building under paragraph (b)(4)(ii)(B) 
of this section, a State or local housing credit agency (Agency) 
provides a building owner with an estimate for any unit in a building 
under paragraph (b)(4)(ii)(C) of this section, or a cost estimate is 
calculated using the HUD Utility Schedule Model under paragraph 
(b)(4)(ii)(D) of this section, then the estimate under paragraph 
(b)(4)(ii)(B), (C), or (D) of this section becomes the applicable 
utility allowance for all rent-restricted units of similar size and 
construction in the building. Paragraphs (b)(4)(ii)(B), (C), and (D) of 
this section do not apply to units to which the rules of paragraphs 
(b)(1), (2), (3), or (4)(i) of this section apply.
    (B) * * * The estimate is obtained when the interested party 
receives, in writing, information from a local utility company 
(including combined rate charges from multiple utility companies) 
providing the estimated cost of the utilities provided by that company 
for a unit of similar size and construction for the geographic area in 
which the building containing the unit is located.
    (C) Agency estimate. A building owner may obtain a utility estimate 
for each unit in the building from the Agency that has jurisdiction 
over the building provided the Agency agrees to provide the estimate. 
The estimate is obtained when the building owner receives, in writing, 
information from the Agency providing the estimated per-unit cost of 
the utilities for units of similar size and construction for the 
geographic area in which the building containing the units is located. 
The Agency estimate may be obtained by a building owner at any time 
during the building's extended use period (see section 42(h)(6)(D)). 
Costs incurred in obtaining the estimate are borne by the building 
owner. In establishing an accurate utility allowance estimate for a 
particular building, an Agency (or an agent or other private contractor 
of the Agency) must take into account, among other things, local 
utility rate data, property type, climate and degree-day variables by 
region in the state, taxes and fees on utility charges, building 
materials, and mechanical systems. An Agency may also use actual 
utility company usage data and rates for the building.
    (D) HUD Utility Schedule Model. A building owner may calculate a 
utility estimate using the ``HUD Utility Schedule Model'' that can 
found on the Low-Income Housing Tax Credits page at http://www.huduser.org/datasets/lihtc.html. A building owner who chooses this 
method must furnish a copy of the calculations using the HUD Utility 
Schedule Model to the Agency that has jurisdiction over the building. A 
building owner also must make available copies of the calculations to 
the tenants in the building.
    (c) Changes in applicable utility allowance--(1) In general. If at 
any time during the building's extended use period, the applicable 
utility allowance for a unit changes, the new utility allowance must be 
used to compute gross rents of rent-restricted units due 90 days after 
the change. For example, if rent must be lowered because a local 
utility company estimate is obtained that shows a higher utility cost 
than the

[[Page 33706]]

otherwise applicable PHA utility allowance, the lower rent must be in 
effect for rent due more than 90 days after the date of the local 
utility company estimate. This paragraph (c)(1) does not apply until 
the building has achieved 90 percent occupancy for a period of 90 
consecutive days or by the end of the first year of the credit period, 
whichever is earlier.
    (2) Annual review. A building owner must review at least annually 
the basis on which utility allowances have been established and must 
update the applicable utility allowance in accordance with paragraph 
(c)(1) of this section. The review must take into account any changes 
to the building such as any energy conservation measures that affect 
energy consumption and changes in utility rates.
    Par. 3. Section 1.42-12 is amended by adding paragraph (a)(4) to 
read as follows:


Sec.  1.42-12  Effective dates and transitional rules.

    (a) * * *
    (4) Utility allowances. Section 1.42-10 is applicable to taxable 
years beginning on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
* * * * *

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-11731 Filed 6-18-07; 8:45 am]
BILLING CODE 4830-01-P