Bulletin No. 1997–42

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October 20, 1997

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HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 97–43, page 00.

Announcement 97–104, page 00.

A list is provided of organizations now classified as private

foundations.

LIFO; price indexes; department stores. The August

1997 Bureau of Labor Statistics price indexes are accepted

for use by department stores employing the retail inventory

and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference to, August 31,

1997.

A list is provided of organizations that no longer qualify as

organizations for which contributions are deductible under

section 170 of the Code.

T.D. 8731, page 00.

EXCISE TAX

Final and temporary regulations under section 42 of the

Code relate to the application of the low-income housing tax

credit to certain federal rental assistance programs.

Rev. Proc. 97–46, page 00.

T.D. 8732, page 00.

Final regulations under section 42 of the Code provide rules

for determining the treatment of low-income housing units.

EXEMPT ORGANIZATIONS

REG–246250–96, page 00.

This proposed regulation relates to the public disclosure

requirements of section 6104(e) of the Code. A public hearing will be held on February 4, 1998.

Announcement 97–105, page 00.

Rural airports. This procedure contains a list of “rural airports,” as defined in section 4261(e)(1)(B) of the Code, for

purposes of computing the tax on air transportation. The

procedure also provides guidance on how to calculate the

tax where at least one segment of multiple segment domestic transportation does not begin or end at a rural airport.

ADMINISTRATIVE

Rev. Proc. 97–47, page 00.

This procedure sets forth the requirements of the Form 941

Electronic Filing (ELF) Program under which a taxpayer that

is a Reporting Agent may electronically file Form 941,

Employer’s Quarterly Federal Tax Return.

Finding Lists begin on page 00.

Announcement of Disbarments and Suspensions begins on page 00.

Department of the Tr e a s u r y

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely.Acitation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income

Housing Credit

Explanation of Revisions and Summary

of Comments

26 CFR 1.42–15: Available unit rule.

The general rule in section 42(g)(2)(D)(i) provides that if the income of an

occupant of a low-income unit increases

above the income limitation applicable

under section 42(g)(1), the unit continues

to be treated as a low-income unit. This

general rule only applies if the occupant’s

income initially met the income limitation

and the unit continues to be rent-restricted. Section 42(g)(2)(D)(ii), however, provides an exception to the general

rule in section 42(g)(2)(D)(i). Under this

exception, the unit ceases being treated as

a low-income unit when two conditions

occur. The first condition is that the occup a n t ’s income increases above 140 percent of the income limitation applicable

under section 42(g)(1), or above 170 percent for a deep rent skewed project described in section 142(d)(4)(B) (applicable income limitation). When this occurs,

the unit becomes an over-income unit.

The second condition is that a new occupant, whose income exceeds the applicable income limitation (nonqualified resident), occupies any residential unit in the

building of a comparable or smaller size

(comparable unit).

T.D. 8732

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Available Unit Rule

A G E N C Y: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

S U M M A RY: This document contains

final regulations concerning the treatment

of low-income housing units in a building

that are occupied by individuals whose incomes increase above 140 percent of the

income limitation applicable under section 42(g)(1). These regulations aff e c t

owners of those buildings who claim the

low-income housing tax credit.

D ATES: These regulations are eff e c t i v e

September 26, 1997.

For dates of applicability of these regulations, see §1.42–15(i).

FOR FURTHER INFORMATION CONTACT: David Selig, (202) 622-3040 (not

a toll-free number).

SUPPLEMENTARYINFORMATION:

Background

On May 30, 1996, the IRS published a

notice of proposed rulemaking in the Federal Register (PS–29–95 at 61 FR 27036

[1997–1 C.B. 862]) proposing amendments to the Income Tax Regulations (26

CFR part 1) under section 42(g)(2)(D) of

the Internal Revenue Code. A p u b l i c

hearing was scheduled for September 17,

1996, pursuant to a notice of public hearing published simultaneously with the notice of proposed rulemaking. However,

the IRS received no requests to speak at

the public hearing, and no public hearing

was held. Written comments responding

to the notice were received. After consideration of all the comments, the proposed

regulations are adopted as revised by this

Treasury decision.

October 20, 1997

Rules and Definitions

One commentator suggested that the

available unit rule under the proposed

regulations did not clearly indicate

whether the aggregate income of all occupants of a unit is taken into account. Accordingly, the final regulations clarify that

an over-income unit means a low-income

unit in which the aggregate income of the

occupants of the unit increases above 140

percent of the applicable income limitation under section 42(g)(1), or above 170

percent of the applicable income limitation for deep rent skewed projects described in section 142(d)(4)(B).

Commentators requested that the final

regulations specify whether a comparable

unit is measured by floor space or number

of bedrooms. The final regulations provide that a comparable unit must be measured by the same method the taxpayer

used to determine qualified basis for the

credit year in which the comparable unit

became available.

Some commentators stated that the provision in the proposed regulations that all

available comparable units (not just the

“next available” unit) must be rented to

qualified residents to continue treating an

over-income unit as a low-income unit is

inconsistent with the title of section

42(g)(2)(D)(ii). Although the title of that

provision uses the term next available

unit, the text of the rule provides that if

any available comparable unit is occupied

by a nonqualified resident, the over- i ncome unit ceases to be treated as a low-income unit. This means that if a building

has more than one over-income unit, renting any available comparable unit (a comparably sized or smaller unit) to a qualified resident preserves the status of all

o v e r-income units as low-income units.

S i m i l a r l y, if any available comparable

unit is rented to a nonqualified resident,

all over-income units for which the available unit was a comparable unit lose their

status as low-income units; thus, comparably sized or larger over-income units

would lose their status as low-income

units. In operation, this means that the

owner must continue to rent any available

comparable unit to a qualified resident

until the percentage of low-income units

in a building (excluding the over-income

units) is equal to the percentage of low-income units on which the credit is based.

At that point, failure to maintain the overincome units as low-income units has no

immediate significance. (However, the

failure to maintain an over-income unit as

a low-income unit may affect the owner’s

decision of whether or not to rent a particular available unit at market rate at a later

time.) Consequently, the final regulations

provide that all available comparable

units in the building, not only the next

available comparable unit, must be rented

to qualified residents to retain the low-income status of the over-income units.

Application of Rules on a Building by

Building Basis

The proposed regulations provide that

in a project containing more than one

low-income building, the available unit

rule applies separately to each building.

Some commentators suggested that the

regulations should permit residents of

o v e r-income units to move to available

1997–42 I.R.B.

units in different buildings within the

same low-income housing project without

violating the available unit rule. However, because the requirements under section 42 must be satisfied on a building by

building basis, the final regulations provide that the available unit rule only permits a current resident to move to another

unit within the same building of a low-income housing project.

In addition, in response to requests

from several commentators, the final regulations make clear that when a current

resident moves to a different unit within

the same low-income building, the units

exchange status. (See example 2 of

§1.42–15(g) of the proposed regulations

and §1.42–15(h) of the final regulations.)

Thus, the newly occupied unit adopts the

status of the vacated unit, and the vacated

unit assumes the status the newly occupied unit had immediately prior to its occupancy by the qualifying residents.

Timing Issues

The methods of committing rental units

to tenants varies in different jurisdictions.

H o w e v e r, it is a common rental practice

to have some form of preliminary reservation for a unit prior to the date on which a

lease is signed or the unit is occupied.

Thus, several commentators have requested clarification that once a unit is reserved for a prospective tenant, it is no

longer treated as available for purposes of

the available unit rule. A c c o r d i n g l y, the

final regulations provide that a unit is not

available for purposes of the available

unit rule when the unit is no longer available for rent due to a reservation that is

binding under local law.

F i n a l l y, financing arrangements using

obligations that purport to be exempt facility bonds under section 142 must meet

the requirements of sections 103 and 141

through 150 for interest on the obligations

to be excluded from gross income under

section 103(a). The requirements under

section 142(d) may differ from those

under section 42. A c c o r d i n g l y, the final

regulations provide that the rules under

the final regulations are not intended as an

interpretation of the applicable rules

under section 142.

Special Analyses

It has been determined that this Tr e asury decision is not a significant regula-

1997–42 I.R.B.

tory action as defined in EO 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

these regulations do not impose on small

entities a collection of information requirement, the Regulatory Flexibility Act

(5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy of

the Small Business Administration for

comment on its impact on small business.

Drafting Information

The principal author of these regulations

is David Selig, Office of the A s s i s t a n t

Chief Counsel (Passthroughs and Special

Industries), IRS. However, other personnel from the IRS and Treasury Department

participated in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

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

Section 1.42-15 is also issued under 26

U.S.C. 42(n); * * *

Par. 2. Section 1.42-15 is added to read

as follows:

§1.42–15 Available unit rule.

(a) Definitions. The following definitions apply to this section:

Applicable income limitation means the

limitation applicable under section

42(g)(1) or, for deep rent skewed projects

described in section 142(d)(4)(B), 40 percent of area median gross income.

Available unit ru l e means the rule in

section 42(g)(2)(D)(ii).

Comparable unit means a residential

unit in a low-income building that is comparably sized or smaller than an over-in-

come unit or, for deep rent skewed projects described in section 142(d)(4)(B),

any low-income unit. For purposes of determining whether a residential unit is

comparably sized, a comparable unit must

be measured by the same method used to

determine qualified basis for the credit

year in which the comparable unit became

available.

Current resident means a person who is

living in the low-income building.

Low-income unit is defined by section

42(i)(3)(A).

Nonqualified resident means a new occupant or occupants whose aggregate income exceeds the applicable income limitation.

Over-income unit means a low-income

unit in which the aggregate income of the

occupants of the unit increases above 140

percent of the applicable income limitation under section 42(g)(1), or above 170

percent of the applicable income limitation for deep rent skewed projects described in section 142(d)(4)(B).

Qualified re s i d e n t means an occupant

either whose aggregate income (combined with the income of all other occupants of the unit) does not exceed the applicable income limitation and who is

otherwise a low-income resident under

section 42, or who is a current resident.

(b) General section 42(g)(2)(D)(i) rule.

Except as provided in paragraph (c) of

this section, notwithstanding an increase

in the income of the occupants of a lowincome unit above the applicable income

limitation, if the income of the occupants

initially met the applicable income limitation, and the unit continues to be rentrestricted—

(1) The unit continues to be treated as a

low-income unit; and

(2) The unit continues to be included in

the numerator and the denominator of the

ratio used to determine whether a project

satisfies the applicable minimum setaside requirement of section 42(g)(1).

treated as a low-income unit if it becomes

an over-income unit and a nonqualified

resident occupies any comparable unit

that is available or that subsequently becomes available in the same low-income

building. In other words, the owner of a

low-income building must rent to qualified residents all comparable units that are

available or that subsequently become

October 20, 1997

available in the same building to continue

(h) Examples. The following examples

treating the over-income unit as a low-in- illustrate this section:

come unit. Once the percentage of lowExample 1. This example illustrates noncompliincome units in a building (excluding the ance with the available unit rule in a low-income

over-income units) equals the percentage building containing three over-income units. On

of low-income units on which the credit is January 1, 1998, a qualified low-income housing

based, failure to maintain the over-income project, consisting of one building containing ten

units as low-income units has no immedi- identically sized residential units, received a housing credit dollar amount allocation from a state

ate significance. The failure to maintain housing credit agency for five low-income units.

the over-income units as low-income By the close of 1998, the first year of the credit peunits, however, may affect the decision of riod, the project satisfied the minimum set-aside rewhether or not to rent a particular avail- quirement of section 42(g)(1)(B). Units 1, 2, 3, 4,

able unit at market rate at a later time. A and 5 were occupied by individuals whose incomes

did not exceed the income limitation applicable

unit is not available for purposes of the under section 42(g)(1) and were otherwise low-inavailable unit rule when the unit is no come residents under section 42. Units 6, 7, 8, and

longer available for rent due to contrac- 9 were occupied by market-rate tenants. Unit 10

tual arrangements that are binding under was vacant. To avoid recapture of credit, the prolocal law (for example, a unit is not avail- ject owner must maintain five of the units as low-income units. On November 1, 1999, the certificates

able if it is subject to a preliminary reser- of annual income state that annual incomes of the

vation that is binding on the owner under individuals in Units 1, 2, and 3 increased above 140

local law prior to the date a lease is signed percent of the income limitation applicable under

section 42(g)(1), causing those units to become

or the unit is occupied).

(d) Effect of current resident moving o v e r-income units. On November 30, 1999, Units 8

9 became vacant. On December 1, 1999, the

within building. When a current resident and

project owner rented Units 8 and 9 to qualified resimoves to a different unit within the build- dents who were not current residents at rates meeting, the newly occupied unit adopts the ing the rent restriction requirements of section

status of the vacated unit. Thus, if a cur- 42(g)(2). On December 31, 1999, the project owner

rent resident, whose income exceeds the rented Unit 10 to a market-rate tenant. Because

applicable income limitation, moves from Unit 10, an available comparable unit, was leased to

a market-rate tenant, Units 1, 2, and 3 ceased to be

an over-income unit to a vacant unit in the treated as low-income units. On that date, Units 4,

same building, the newly occupied unit is 5, 8, and 9 were the only remaining low-income

treated as an over-income unit. The va- units. Because the project owner did not maintain

cated unit assumes the status the newly five of the residential units as low-income units, the

occupied unit had immediately before it qualified basis in the building is reduced, and credit

must be recaptured. If the project owner had rented

was occupied by the current resident.

Unit 10 to a qualified resident who was not a cur(e) Available unit rule applies sepa - rent resident, eight of the units would be low-inrately to each building in a project. In a come units. At that time, Units 1, 2, and 3, the overproject containing more than one low-in- income units, could be rented to market-rate tenants

come building, the available unit rule ap- because the building would still contain five low-income units.

plies separately to each building.

Example 2. This example illustrates the provi(f) Result of noncompliance with avail - sions of paragraph (d) of this section. A low-inable unit rule. If any comparable unit that come project consists of one six-floor building.

is available or that subsequently becomes The residential units in the building are identically

available is rented to a nonqualified resi- sized. The building contains two over-income units

on the sixth floor and two vacant units on the first

dent, all over-income units for which the f l o o r. The project owner, desiring to maintain the

available unit was a comparable unit o v e r-income units as low-income units, wants to

within the same building lose their status rent the available units to qualified residents. J, a

as low-income units; thus, comparably resident of one of the over-income units, wishes to

sized or larger over-income units would occupy a unit on the first floor. J’s income has recently increased above the applicable income limilose their status as low-income units.

tation. The project owner permits J to move into

(g) Relationship to tax-exempt bond one of the units on the first floor. Despite J’s inprovisions. Financing arrangements that come exceeding the applicable income limitation, J

purport to be exempt-facility bonds under is a qualified resident under the available unit rule

section 142 must meet the requirements because J is a current resident of the building. T h e

unit newly occupied by J becomes an over- i n c o m e

of sections 103 and 141 through 150 for unit

under the available unit rule. The unit vacated

interest on the obligations to be excluded by J assumes the status the newly occupied unit had

from gross income under section 103(a). immediately before J occupied the unit. The overThis section is not intended as an interpre- income units in the building continue to be treated

as low-income units.

tation under section 142.

October 20, 1997

(i) Effective date. This section applies

to leases entered into or renewed on and

after September 26, 1997.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on September 25, 1997, 8:45 a.m., and published in the

issue of the Federal Register for September 26,

1997, 62 F.R. 50503)

26 CFR 1.42–16: Eligible basis reduced by federal

grants.

T.D. 8731

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Section 42(d)(5) Federal Grants

A G E N C Y: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

S U M M A RY: This document contains

final regulations with respect to the lowincome housing tax credit relating to the

application of section 42(d)(5) to certain

rental assistance programs under section

42(g)(2)(B)(i). The regulations clarify

that certain types of federal rental assistance payments do not result in a reduction in the eligible basis of a low-income

housing building. DATES: These regulations are effective September 26, 1997.

For date of applicability for these regulations, see §1.42–16(d).

FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson, (202) 6223040 (not a toll-free call).

SUPPLEMENTARYINFORMATION:

Background

Temporary regulations (TD 8713

[1997–14 I.R.B. 4]) and a notice of proposed rulemaking cross-referencing the

1997–42 I.R.B.

temporary regulations were published in

the Federal Register for January 27,

1997 (62 FR 3792, 3848 [REG–254394–

96 I.R.B. 14]). Those regulations provide

that certain federal rental assistance payments made to the owner of a building on

behalf of low-income tenants are not federal grants with respect to a building or its

operation that require a reduction in the

b u i l d i n g ’s eligible basis under section

42(d)(5) of the Internal Revenue Code

(Code). These payments include rental

assistance payments made under section 8

of the United States Housing Act of 1937

(Act) (42 U.S.C. 1437f), certain payments

made under section 9 of the Act, and payments made under such other programs or

methods of rental assistance as may be

designated in the Federal Register or the

Internal Revenue Bulletin. The notice of

proposed rulemaking indicated that comments would be considered on those areas

addressed in the temporary regulations.

Written comments responding to the notice of proposed rulemaking were received. There was no request for a public

hearing, and no public hearing was held.

After consideration of all the written comments, the proposed regulations have

been adopted, without change, by this

Treasury decision.

Summary of Comments

One commenter suggested that the final

regulations provide additional guidance

for state agencies to use in determining

whether similar programs beyond those

described in the regulations should be

considered grants that cause a reduction

in a building’s eligible basis under section

42(d)(5) of the Code. The final regulations do not adopt this suggestion. T h e

scope of this regulation is limited to specified rental assistance payments that are

not grants requiring a reduction in a buildi n g ’s eligible basis and any additional

payments the Secretary may designate in

the future.

Another commenter suggested that

§1.42–16(c)(3) should be deleted if it is

intended to impose conditions beyond the

restrictions under section 9 of the Act, because the IRS is improperly infringing

upon the Department of Housing and

Urban Development’s (HUD) authority to

provide subsidies under section 9. T h e

final regulations do not adopt this suggestion. Section 1.42–16 does not interpret

1997–42 I.R.B.

H U D ’s authority for paying subsidies

under section 9; it describes the extent to

which section 9 payments may be made

without a reduction in a building’s eligible

basis under section 42(d)(5) of the Code.

The conditions imposed on section 9 payments in §1.42–16(c)(3) serve to diff e r e ntiate section 9 assistance for operating expenses that function in a manner similar to

rental assistance payments under section 8

of the Act from section 9 assistance that is

applied to uses more closely associated

with operational expenses requiring a reduction in a building’s eligible basis under

section 42(d)(5).

This commenter also suggested that if

§1.42–16(c)(3) were to be retained, it

should be clarified to provide that actual

operating costs be determined by HUD

and/or the appropriate public housing

a g e n c y. The commenter reasons that

HUD is already making this determination

in the context of deciding the proper

amount of assistance to make under section 9 of the Act, and that precedent already exists for allowing HUD to make

certain interpretations relating to the section 42 program. The final regulations do

not adopt this suggestion. The IRS and

Treasury believe they should retain the

ability to determine what costs are appropriately characterized as operating costs

that require a reduction in a building’s eligible basis under section 42(d)(5) of the

Code.

Special Analyses

It has been determined that this Tr e asury decision is not a significant regulatory action as defined in EO 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

these regulations do not impose on small

entities a collection of information requirement, the Regulatory Flexibility Act

(5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy of

the Small Business Administration for

comment on its impact on small business.

Drafting Information

The principal author of these regulations

is Christopher J. Wilson, Office of A s s i s tant Chief Counsel (Passthroughs and Special Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by removing the entry

for §1.42–16T and adding an entry in numerical order to read as follows:

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

Section 1.42–16 also issued under 26

U.S.C. 42(n); * * *

P a r. 2. Section 1.42–16 is added to

read as follows:

§1.42–16 Eligible basis reduced by

federal grants.

(a) In general. If, during any taxable

year of the compliance period (described

in section 42(i)(1)), a grant is made with

respect to any building or the operation

thereof and any portion of the grant is

funded with federal funds (whether or not

includible in gross income), the eligible

basis of the building for the taxable year

and all succeeding taxable years is reduced by the portion of the grant that is so

funded.

(b) Grants do not include certain rental

assistance payments. A federal rental assistance payment made to a building

owner on behalf or in respect of a tenant

is not a grant made with respect to a

building or its operation if the payment is

made pursuant to—

(1) Section 8 of the United States

Housing Act of 1937;

(2) A qualifying program of rental assistance administered under section 9 of

the United States Housing Act of 1937; or

(3) A program or method of rental assistance as the Secretary may designate

by publication in the Federal Register or

in the Internal Revenue Bulletin (see

§601.601(d)(2) of this chapter).

October 20, 1997

gram. For purposes of paragraph (b)(2)

of this section, payments are made pursuant to a qualifying rental assistance program administered under section 9 of the

United States Housing Act of 1937 to the

extent that the payments—

(1) Are made to a building owner pursuant to a contract with a public housing

authority with respect to units the owner

has agreed to maintain as public housing

units (PH-units) in the building;

(2) Are made with respect to units occupied by public housing tenants, provided that, for this purpose, units may be

considered occupied during periods of

short term vacancy (not to exceed 60

days); and

(3) Do not exceed the difference between the rents received from a building’s

PH-unit tenants and a pro rata portion of

the building’s actual operating costs that

are reasonably allocable to the PH-units

(based on square footage, number of bedrooms, or similar objective criteria), and

provided that, for this purpose, operating

costs do not include any development

costs of a building (including developer’s

fees) or the principal or interest of any

debt incurred with respect to any part of

the building.

(d) Effective date. This section is effective September 26, 1997.

§1.42–16T [Removed]

Par. 3. Section 1.42–16T is removed.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved August 26, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on September 25, 1997, 8:45 a.m., and published in the

issue of the Federal Register for September 26,

1997, 62 F.R. 50502)

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472-1: Last-in, first-out inventories.

LIFO; price indexes; depart m e n t

stores. The August 1997 Bureau of Labor

Statistics price indexes are accepted for

use by department stores employing the

retail inventory and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference

to, August 31, 1997.

Rev. Rul. 97–43

The following Department Store Inventory Price Indexes for August 1997 were

issued by the Bureau of Labor Statistics

on September 16, 1997. The indexes are

accepted by the Internal Revenue Service,

under § 1.472-1(k) of the Income Ta x

Regulations and Rev. Proc. 86-46, 1986-2

C.B. 739, for appropriate application to

inventories of department stores employing the retail inventory and last-in, firstout inventory methods for tax years ended

on, or with reference to, August 31, 1997.

The Department Store Inventory

Price Indexes are prepared on a national

basis and include (a) 23 major groups of

departments, (b) three special combinations of the major groups - soft goods,

durable goods, and miscellaneous goods,

and (c) a store total, which covers all departments, including some not listed separ a t e l y, except for the following: candy,

foods, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORYPRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Aug.

1996

Aug.

1997

Percent Change

from Aug. 1996

to Aug. 19971

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .524.3

2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .642.6

3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . .640.3

4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .895.9

5. Infants’Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .610.3

6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .525.8

7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .287.5

8. Women’s and Girls’Accessories . . . . . . . . . . . . . . . . . . . . . . . .546.2

9. Women’s Outerwear and Girls’Wear . . . . . . . . . . . . . . . . . . . . .381.2

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .611.7

11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .567.9

12. Boys’Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . .485.4

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1023.8

14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .770.0

15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .885.1

16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .669.2

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .588.7

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .810.6

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .244.8

20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78.8

509.3

652.8

644.1

895.6

621.2

548.8

301.6

539.7

397.4

621.2

584.8

492.2

1008.6

793.8

904.7

661.0

598.8

806.1

242.8

75.4

–2.9

1.6

0.6

0.0

1.8

4.4

4.9

–1.2

4.2

1.6

3.0

1.4

–1.5

3.1

2.2

–1.2

1.7

–0.6

–0.8

–4.3

Groups

October 20, 1997

1997–42 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORYPRICE INDEXES BYDEPARTMENT GROUPS—Continued

(January 1941 = 100, unless otherwise noted)

Aug.

1996

Aug.

1997

Percent Change

from Aug. 1996

to Aug. 19971

21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112.1

Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.9

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.2

110.1

132.3

108.4

–1.822.

5.1

1.1

Groups 1 – 15: Soft Goods- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .582.9

594.5

2.0

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . .469.2

463.1

–1.3

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113.1

112.6

–0.4

Store Total3- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .544.0

549.3

1.0

Groups

Absence of a minus sign before percentage change in this column signifies price increase.

Indexes on a January 1986=100 base.

The store total index covers all departments, including some not listed separately, except for the following: candy, foods, liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Michaels on (202) 622-4970 (not a tollfree call).

Section 3504.—Acts To Be

Performed by Agents

26 CFR 31.3504–1: Acts to be performed by agents.

Requirements of the Form 941 Electronic Filing

(ELF) Program are provided. See Rev. Proc. 97–47,

page 00.

Section 4261.—Imposition of

Tax

26 CFR 49.4261–1: Imposition of Tax; in general.

1997–42 I.R.B.

This revenue procedure provides a list of “rural

airports” as that term is defined in § 4261(e)(1)(B)

of the Internal Revenue Code, for purposes of computing the tax on air transportation. The revenue

procedure also provides guidance on how to calculate the tax where at least one segment of multiple

segment domestic transportation does not begin or

end at a rural airport. See Rev. Proc. 97–46, page 00.

(ELF) Program are provided. See Rev. Proc. 97–47,

page 00.

26 CFR 301.6061–1: Signing of returns and other

documents.

Requirements of the Form 941 Electronic Filing

(ELF) Program are provided. See Rev. Proc. 97–47,

page 00.

Section 6011.—General

Requirements of Return,

Statement, or List

Section 6071.—Time for Filing

Returns and Other Documents

26 CFR 31.6011(a)–7: Execution of returns.

26 CFR 31.6071(a)(1): Time for filing returns and