[Federal Register Volume 84, Number 42 (Monday, March 4, 2019)]
[Rules and Regulations]
[Pages 7283-7285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03827]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9850]
RIN 1545-BM28
Utility Allowance Submetering
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations that amend the
utility allowance regulations concerning the low-income housing credit
under section 42 of the Internal Revenue Code (Code). These final
regulations extend the principles of the current submetering rules. The
current rules address situations in which a building owner purchases a
utility from a utility company and then separately charges the tenants
for the utility. In those situations, if the utility costs paid by a
tenant are based on actual consumption in the tenant's submetered,
rent-restricted unit and if certain other requirements are satisfied,
then the charges for the utility are treated as paid by the tenant
directly to the utility company, even though the payment passes through
the building owner. The final regulations extend these principles and
apply to situations in which a building owner sells to tenants energy
that is produced from a renewable source and that the owner did not
purchase from or through a local utility company. The final regulations
affect owners of low-income housing projects that claim the credit, the
tenants in those low-income housing projects, and the State and local
housing credit agencies that administer the credit.
DATES:
Effective date: These final regulations are effective on March 4,
2019.
Applicability date: For dates of applicability, see Sec. 1.42-
12(a)(5).
FOR FURTHER INFORMATION CONTACT: Dillon Taylor, (202) 317-4137 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 3, 2016, the Department of the Treasury (Treasury
Department) and the IRS published in the Federal Register (81 FR 11104)
final and temporary regulations (TD 9755) that amended Sec. 1.42-10 of
the Income Tax Regulations. The final regulations in TD 9755 clarified
the circumstances in which utility costs paid by a tenant based on
actual consumption in a submetered, rent-restricted unit are treated as
paid by the tenant directly to the utility company and not to the
building owner. In such a case, for purposes of section 42, the
tenant's payments to the owner for the utilities are not treated as
payments of gross rent, and the rent that the owner might otherwise
have collected for the unit is reduced by an amount that is called a
``utility allowance.'' The temporary regulations extended the
principles of those final regulations to situations in which a building
owner sold to tenants energy that was produced from a renewable source
and that the owner had not purchased from or through a local utility
company.
In the same issue of the Federal Register (81 FR 11160), the
Treasury Department and the IRS published a notice of proposed
rulemaking (REG-123867-14) (the proposed regulations). The text of the
proposed regulations incorporated by cross-reference the text of the
temporary regulations. The Treasury Department and the IRS received
written and electronic comments responding to the proposed regulations.
No requests for a public hearing were made, and no public hearing was
held.
After consideration of all the comments, the proposed regulations
are adopted as amended by this Treasury Decision.
Summary of Comments and Explanation of Provisions
The temporary regulations in TD 9755 applied the submetering
principles to energy that the building owner sold to tenants if the
energy was ``produced from a renewable source'' and if the owner had
acquired it from the renewable source without the intervention of a
local utility company. Qualification for this submetering treatment,
however, depended on the charges to the tenants for this energy being
comparable to local utility rates. That is, under the temporary
regulations, to the extent that tenants consumed this energy, the rate
charged by the building owner could not exceed the rate at which the
local utility company would have charged the tenants if they had
instead acquired the energy from that company.
A commenter requested that the final regulations clarify how a
building
[[Page 7284]]
owner may demonstrate that the rate that the owner charges tenants for
renewable energy satisfies this requirement (the evidentiary issue). In
addition, if there are multiple local utility rates that the tenants
might have been charged (possibly from multiple utility companies), the
commenter asked for clarification as to which rate or rates should be
taken into account in determining whether the owner's charges to the
tenants qualify (the reference-rate issue).
The final regulations resolve both of these issues. Addressing the
reference-rate issue, the final regulations require that the rate that
the owner charges must not exceed the highest rate at which the tenants
might have obtained energy from a local utility company. This criterion
has several advantages over alternatives. For example, it is easily
administrable (as compared, for example, with a requirement that the
owner's rate not exceed the ``most typical rate'' in the community).
Also, the criterion protects an owner's qualifying rate from being
disqualified by the introduction of new rates in the community (as
might be the case, for example, if the reference for the criterion were
the average or median of local rates).
Regarding the evidentiary issue, in determining the acceptability
of the rate that a building owner charges tenants, the owner may rely
on the rates published by local utility companies.
The temporary regulations in TD 9755 provide that, for purposes of
qualifying for submetering treatment, energy is ``produced from a
renewable source'' if it is energy that is produced from energy
property described in section 48; energy that is produced from a
facility described in section 45(d)(1), (2), (3), (4), (6), (9), or
(11); or energy that is described in guidance published for this
purpose in the Internal Revenue Bulletin. Sections 45 and 48 of the
Code determine whether a taxpayer is entitled to certain energy-related
credits. A commenter requested that the final regulations clarify the
extent to which these cross-references to ``energy property'' and
``facility'' incorporate the various requirements for earning those
credits.
The final regulations clarify that the building owner need not own
the source from which the utility is produced and need not qualify for,
or receive, any credit under section 45 or 48 associated with the
source. Indeed, energy may qualify as ``produced from a renewable
resource'' even if potential entitlement to credits under these Code
sections has expired. Thus, the final regulations clarify that they
refer to ``energy property'' and ``facility'' as a means of describing
certain types of production of renewable energy but that they do not
also incorporate any other criteria from those Code sections.
Under section 42(g)(1) and (2), a residential unit may qualify as a
low-income unit only if it is ``rent-restricted.'' The amount that
qualifies as restricted rent is determined based on the assumption that
most utilities are generally covered by that rent. See H.R. Conf. Rep.
99-841, at II-94 (1986). For that reason, if the tenant pays for a
utility directly, the rent that the owner may require from the tenant
is reduced. The amount of this reduction is called a ``utility
allowance.'' See section 42(g)(2)(B)(ii) and Sec. 1.42-10(a). Language
in the preamble of TD 9755 states that utility costs paid by a tenant
based on actual consumption in a submetered, rent-restricted unit are
treated as paid by the tenant directly to the utility and thus do not
count against the maximum rent that the building owner can charge.
Referencing this language, one commenter requested that the final
regulations clarify whether a building owner of a submetered building
is required to reduce its maximum gross rents by the amount of a
utility allowance. Because Sec. 1.42-10(e) treats a tenant in a
submetered, rent-restricted unit as having paid for a utility directly
and not by or through the owner of the building, the proper treatment
of the tenant's submetered utility payments is the same as if the
tenant had made those payments directly to the utility company--(1)
Although the payments pass through the building owner, they are not
treated for purposes of the rent restriction as if they were payments
of rent; and (2) The amount of rent that the owner might otherwise have
demanded from the tenant is reduced by the amount of an applicable
utility allowance.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Therefore, a
regulatory impact assessment is not required. It has also been
determined that the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply because the regulations do not impose a collection of
information on small entities. Pursuant to section 7805(f) of the
Internal Revenue Code, this proposed rule preceding these final
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business and no comments were received.
Drafting Information
The principal author of this regulation is James W. Rider, formerly
of the Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in its development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for Sec. 1.42-10T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.42-6, 1.42-8, 1.42-9, 1.42-10, 1.42-11, and 1.42-12,
also issued under 26 U.S.C. 42(n).
Sec. 1.42-0T [Amended]
0
Par. 2. Section 1.42-0T is amended by removing the entries for Sec.
1.42-10T.
0
Par. 3. Section 1.42-10 is amended by:
0
1. Revising paragraph (e)(1)(i) introductory text.
0
2. Revising paragraph (e)(1)(i)(B).
0
3. Adding paragraphs (e)(1)(i)(C) and (D).
0
4. Revising paragraph (e)(1)(iv)(B).
The revisions and additions read as follows:
Sec. 1.42-10 Utility allowances.
* * * * *
(e) * * *
(1) * * *
(i) The utility consumed in the unit is described in paragraph
(e)(1)(i)(A) or (e)(1)(i)(B) of this section;
* * * * *
(B) The utility is not purchased from or through a local utility
company and is produced from a renewable source (within the meaning of
paragraph (e)(1)(i)(C) of this section).
(C) For purposes of paragraph (e)(1)(i)(B) of this section, a
utility is produced from a renewable source if--
(1) It is energy that is produced from energy property described in
section 48;
(2) It is energy that is produced from a facility described in
section 45(d)(1), (2), (3), (4), (6), (9), or (11); or
[[Page 7285]]
(3) It is a utility that is described in guidance published for
this purpose in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii) of this chapter).
(D) Determinations under paragraphs (e)(1)(i)(C)(1) and (2) of this
section take into account only the manner in which the energy is
produced and not who owns the energy property or the facility or
whether the applicability of relevant portions of sections 45 and 48
has expired.
* * * * *
(iv) * * *
(B) To the extent that the utility consumed is described in
paragraph (e)(1)(i)(B) of this section, the utility rate charged to the
tenants of the unit does not exceed the highest rate that the tenants
would have paid if they had obtained the utility from a local utility
company. In determining whether a rate satisfies the preceding
sentence, a building owner may rely on the rates published by local
utility companies.
* * * * *
Sec. 1.42-10T [Removed]
0
Par. 5. Section 1.42-10T is removed.
0
Par. 6. Section 1.42-12 is amended by:
0
1. Revising paragraph (a)(5)(i)(E).
0
2. Revising paragraph (a)(5)(ii).
0
3. Adding paragraph (a)(5)(iii).
The revisions and addition read as follows:
Sec. 1.42-12 Effective dates and transitional rules.
(a) * * *
(5) * * *
(i) * * *
(E) Section 1.42-10(e), except as provided in paragraph (a)(5)(iii)
of this section.
(ii) Except as provided in paragraph (a)(5)(iii) of this section, a
building owner may apply the provisions described in paragraphs
(a)(5)(i)(A) through (E) of this section to the building owner's
taxable years beginning before March 3, 2016. Otherwise, the utility
allowance provisions that apply to those taxable years are contained in
Sec. 1.42-10, as contained in 26 CFR part 1, revised as of April 1,
2015.
(iii) The provisions in Sec. 1.42-10(e)(1)(i) introductory text,
(e)(1)(i)(B) through (D), and (e)(1)(iv)(B) apply to a building owner's
taxable years beginning on or after March 4, 2019. A building owner,
however, may apply these provisions to earlier taxable years.
Otherwise, the submetering provisions that apply to taxable years
beginning after March 3, 2016, and before March 4, 2019, are contained
in Sec. 1.42-10 and Sec. 1.42-10T as contained in 26 CFR part 1
revised as of April 1, 2016. In addition, a building owner may apply
those submetering provisions to taxable years beginning before March 3,
2016.
* * * * *
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: February 26, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-03827 Filed 2-27-19; 4:15 pm]
BILLING CODE 4830-01-P