[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Proposed Rules]
[Pages 40610-40612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14555]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 / 
Proposed Rules  

[[Page 40610]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-123027-19]
RIN 1545-BP59


Section 42, Low-Income Housing Credit Compliance-Monitoring 
Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
compliance-monitoring duties of State or local housing credit agencies 
(Agencies) for purposes of the low-income housing credit under section 
42 of the Internal Revenue Code (Code). These proposed regulations 
would relax the minimum compliance-monitoring sampling requirement for 
purposes of physical inspections and low-income certification review 
provided in the Amendments to the Low-Income Housing Credit Compliance-
Monitoring Regulations (T.D. 9848) published in the Federal Register 
(84 FR 6076). The proposed regulations will affect owners of low-income 
housing projects, tenants in those low-income housing projects, and 
Agencies that administer the credit.

DATES: Written or electronic comments and requests for a public hearing 
must be received by September 8, 2020.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-123027-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable on 
paper, to its public docket.
    Send paper submissions to: CC:PA:LPD:PR (REG-123027-19), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Dillon Taylor or Michael J. Torruella Costa at (202) 317-4137; 
concerning submissions of comments and/or requests for a public 
hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 42 of the Code.
    Section 42(m)(1) requires an Agency to allocate housing credit 
dollar amounts (the potential to earn low-income housing credits) among 
candidate proposed buildings/projects. The allocation must be pursuant 
to a qualified allocation plan (QAP) that has been approved by the 
governmental unit of which the Agency is a part. A QAP not only sets 
forth selection criteria by which an Agency makes these allocations but 
also provides a procedure that the Agency must follow in monitoring for 
noncompliance with the provisions of section 42, including monitoring 
for noncompliance with habitability standards through regular site 
visits.
    Section 1.42-5 of the Income Tax Regulations (the compliance-
monitoring regulations) provides the requirements of a monitoring 
procedure that must be part of any QAP. Among the requirements, an 
Agency must perform physical inspections and low-income certification 
review.
    The compliance-monitoring regulations, however, do not require that 
every low-income unit in a project be monitored for non-compliance. 
Instead, Agencies are permitted to satisfy their compliance-monitoring 
duties by physically inspecting, and performing low-income 
certification review, on only samples of those units. See T.D. 8430, 57 
FR 40118, 40121 (Sept. 2, 1992).\1\ For many years, starting in 2000, 
the minimum sample size for both file review and on-site inspections 
was 20 percent of the low-income units, regardless of the size of the 
total population of low-income units in a project. See TD 8859, 65 FR 
2323, 2327 (Jan. 14, 2000).
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    \1\ Initially, the requirements were that the Agency choose 
which units receive low-income certification review, that the owner 
receive no more than reasonable notice of the review, and that the 
Agency have the right to perform on-site inspection. See TD 8430 at 
40122-23. Subsequently, some on-site inspections were required, and 
samples for both review and inspection were required to be chosen 
randomly. See TD 8859, 65 FR 2323, 2327 (Jan. 14, 2000).
---------------------------------------------------------------------------

    On February 25, 2016, the Treasury Department and the IRS published 
temporary regulations (T.D. 9753) in the Federal Register (81 FR 9333), 
which amended Sec.  1.42-5 of the Income Tax Regulations and permitted 
the IRS to establish sample-size criteria in guidance published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2)(ii)(b) of 26 CFR 
Chapter 1.\2\ Concurrently with the issuance of the temporary 
regulations, Revenue Procedure 2016-15, 2016-11 I.R.B. 435, was 
published in the Internal Revenue Bulletin. This revenue procedure 
permitted an Agency to elect to use sample sizes of either a minimum of 
20 percent of the low-income units in a project (rounded up to the 
nearest whole number) or the number in a chart identifying minimum 
sample sizes depending on the number of low-income units in a project 
(the Low-Income Housing Credit Minimum Unit Sample Size Reference 
Chart). The minimum sample sizes in the chart correspond to the minimum 
sample sizes required by the Department of Housing and Urban 
Development's (HUD's) Real Estate Assessment Center for inspections 
under HUD programs (the REAC numbers). HUD designed this table of 
sample sizes to produce a statistically consistent level of confidence 
in the results of physical inspections across a broad range of project 
sizes.
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    \2\ Also in the same issue of the Federal Register, the Treasury 
Department and the IRS published a notice of proposed rulemaking 
(REG-150349-12, 81 FR 9379) (proposed regulations). The text of the 
proposed regulations incorporated by cross-reference the text of the 
temporary regulations.

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[[Page 40611]]

    The revenue procedure had the effect of reducing the minimum sample 
sizes for large low-income housing projects (those with more than 110 
low-income units). Because of the choice between using the REAC number 
and 20 percent of the low-income units, the revenue procedure did not 
impact projects with fewer than 111 low-income units.
    The same sample-size provisions applied to independently selected 
samples on which the Agency must perform low-income certification 
review. The revenue procedure provided only minimum sample sizes, 
permitting Agencies to monitor compliance in more units, if desired.
    In the preamble to the temporary regulations, the Treasury 
Department and the IRS expressed concern that, in smaller projects, 
physical inspection or low-income certification review of only 20 
percent of the units might fail to produce sufficiently accurate 
estimates of the remaining units' overall compliance with habitability 
and low-income certification. To address this concern, the preamble 
added that ``the Treasury Department and the IRS intend to consider 
whether Rev. Proc. 2016-15 should be replaced with a revenue procedure 
that does not permit use of the 20 percent rule in those 
circumstances.'' 81 FR at 9334. The removal of the 20 percent option 
would generally increase the number of units that needed to be 
inspected in smaller projects. The public comments on the temporary 
regulations directed very little attention to this potential increase.
    In addition, the preamble invited fundamental suggestions to make 
inspections less burdensome:

    The Treasury Department and the IRS believe the methods in Rev. 
Proc. 2016-15 reasonably balance the burden on Agencies, tenants, 
and building owners while adequately monitoring compliance. However, 
additional comments may be submitted on other possible methods, 
including stratified sampling procedures and estimation 
methodologies. To be useful, any such comments should include 
substantial detail regarding the procedures to be adopted and should 
provide thorough justification as to whether the suggested methods 
effectively reduce burden without negatively impacting the 
confidence that can be placed in the results obtained from the 
resulting samples.

Id. at 9336. The public submitted no comment letters specifically 
responsive to this request.
    On February 26, 2019, the Treasury Department and IRS published 
regulations (T.D. 9848) in the Federal Register (84 FR 6076), 
finalizing the temporary regulations. Because these final regulations 
contain provisions directly addressing all issues previously addressed 
in Revenue Procedure 2016-15, the preamble of the final regulations 
declares that revenue procedure obsolete with respect to an Agency as 
of the date on which the Agency's QAP is amended to reflect the final 
regulations and, in all cases, after December 31, 2020. See 84 FR at 
6078. Among other provisions, the final regulations require Agencies to 
inspect no fewer units than the number specified for projects of the 
relevant size in the REAC numbers. This requirement has the effect of 
increasing the sample sizes for smaller projects. The Treasury 
Department and the IRS determined that the REAC numbers produce a 
statistically valid sampling of units and that using them yielded a 
consistent level of confidence in the compliance-monitoring results for 
projects of various sizes. The final regulations allow Agencies a 
reasonable period of time to amend their QAPs for this purpose, but 
require QAPs to be amended no later than December 31, 2020.
    Since the publication of the final regulations, the Treasury 
Department and the IRS have received numerous oral and written comments 
from Agencies, stakeholders, and trade groups representing Agencies. In 
particular, these comments expressed concern that the final regulations 
ended Agencies' ability to use samples of 20 percent of the low-income 
units in a project when the applicable REAC number is larger. 
Consistent with the comments and letters, the trade groups' comment 
letters expressed concern about the situations in which the REAC 
numbers would increase the number of units that Agencies must examine, 
thereby increasing Agencies' costs for additional staff and other 
related expenditures and burdens. One trade group further explained 
that many Agencies would encounter difficulty in addressing increased 
staffing needs and other new costs due to overall State budget 
constraints. The trade group observed that cost increases are also 
likely to cause Agencies to increase the compliance-monitoring fees 
that they charge to building owners. If fees are not increased enough 
to cover the increased costs, Agencies will have to divert resources 
from other affordable housing priorities to fund their compliance-
monitoring activities. The trade group noted that terminating the 
ability to use the 20 percent samples will have its most significant 
impact on States with numerous small projects, predominantly in rural 
areas, and that some States with only small projects may even 
experience a 100 percent increase in burden.

Explanation of Provisions

    The final regulations reflected the belief of the Treasury 
Department and the IRS that a higher compliance-monitoring burden on 
Agencies was justified by the increased statistical confidence that 
results from the use of the REAC numbers to determine sample sizes for 
smaller projects. The comments on the final regulations, however, have 
demonstrated the magnitude of the increased costs and burdens that this 
requirement imposes on Agencies. As a result of these comments, the 
Treasury Department and the IRS have greater awareness of the many 
practical challenges Agencies experience in using samples greater than 
20 percent while carrying out their compliance-monitoring 
responsibilities. Furthermore, the comments noted that many Agencies 
typically evaluate each project to determine if circumstances warrant 
the inspection and review of more units than the required minimum. 
Complying with the REAC numbers when an Agency believes that smaller 
samples would be sufficient may have the effect of depriving the Agency 
of the resources that it requires to engage in additional compliance-
monitoring activities on projects that manifest the need for inspection 
and review of more than the minimum sample of units.
    Although there is value in providing a level of confidence that is 
more consistent over a broad range of project sizes, that increased 
consistency is outweighed in this context by concerns over Agencies' 
compliance-monitoring burdens. One goal of the compliance-monitoring 
regulations is to increase flexibility and reduce burden, so that 
Agencies may fulfill their compliance-monitoring responsibilities in an 
efficient and cost-effective manner. Accordingly, the Treasury 
Department and the IRS propose returning to the sample-size 
requirements that applied under the temporary regulations. Thus, under 
these proposed regulations, the minimum number of low-income units that 
must be included in the random samples on which an Agency conducts 
physical inspections or low-income certification review is the lesser 
of the applicable REAC number or 20 percent of the low-income units in 
the project, rounded up to the next whole number.

Proposed Applicability Date

    These regulations are proposed to apply beginning after the date 
these regulations are published as final regulations in the Federal 
Register. However, an Agency may rely on these proposed regulations 
beginning on February 26, 2019, until December 31 of

[[Page 40612]]

the calendar year following the year that contains the date these 
regulations are published as final regulations in the Federal Register.

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 Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6) it is hereby certified that these regulations will not impose a 
significant economic impact on a substantial number of small entities. 
These regulations reinstate the minimum compliance-monitoring sampling 
requirement for purposes of physical inspections and low-income 
certification review previously provided under the temporary 
regulations (T.D. 9753) published in the Federal Register (81 FR 9333) 
on February 25, 2016. These previously provided requirements had been 
and continue to be relied upon by Agencies since 2016.
    Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. Any electronic comments 
submitted, and to the extent practicable any paper comments submitted, 
will be made available at www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Drafting Information

    The principal authors of these regulations are Dillon Taylor and 
Michael J. Torruella Costa, Office of the Associate Chief Counsel 
(Passthroughs and Special Industries). However, other personnel from 
the Treasury Department and the IRS 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

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. Amend Sec.  1.42-5 by revising paragraphs (c)(2)(iii)(B) and 
(h) to read as follows:


Sec.  1.42-5   Monitoring compliance with low-income housing credit 
requirements.

* * * * *
    (c) * * *
    (2) * * *
    (iii) * * *
    (B) Number of low-income units. The minimum number of low-income 
units for which the Agency must conduct on-site inspections and low-
income certification review is the lesser of--
    (1) 20 percent of the low-income units in the low-income housing 
project, rounded up to the nearest whole number of units; or
    (2) the Minimum Unit Sample Size set forth in the following Low-
Income Housing Credit Minimum Unit Sample Size Reference Chart:

                    Table 1 to Paragraph (c)(2)(iii)
------------------------------------------------------------------------
                                                         Number of low-
                                                          income units
                                                          selected for
                                                          inspection or
 Number of low-income units in the low-income housing    for low-income
                        project                           certification
                                                        review  (minimum
                                                           unit sample
                                                              size)
------------------------------------------------------------------------
1.....................................................                 1
2.....................................................                 2
3.....................................................                 3
4.....................................................                 4
5-6...................................................                 5
7.....................................................                 6
8-9...................................................                 7
10-11.................................................                 8
12-13.................................................                 9
14-16.................................................                10
17-18.................................................                11
19-21.................................................                12
22-25.................................................                13
26-29.................................................                14
30-34.................................................                15
35-40.................................................                16
41-47.................................................                17
48-56.................................................                18
57-67.................................................                19
68-81.................................................                20
82-101................................................                21
102-130...............................................                22
131-175...............................................                23
176-257...............................................                24
258-449...............................................                25
450-1,461.............................................                26
1,462-9,999...........................................                27
------------------------------------------------------------------------

* * * * *
    (h) Applicability dates. The requirements in paragraph 
(c)(2)(iii)(B) of this section apply beginning after the date final 
regulations are published in the Federal Register.

Douglas W. O'Donnell,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-14555 Filed 7-2-20; 4:15 pm]
BILLING CODE 4830-01-P