Bulletin No. 2022–44

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2022–44

October 31, 2022

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.

ADMINISTRATIVE

T.D. 9966, page 380.

This guidance contains amendments to the regulations

relating to user fees for enrolled agents and enrolled

retirement plan agents. In accordance with the guidelines in OMB Circular A-25, the IRS has re-calculated

its cost of overseeing the enrollment and renewal program and determined that the full cost for overseeing

the renewal of enrolled retirement plan agents has

increased from $67 to $140. In addition, the cost for

overseeing both the enrollment and renewal of enrolled

agents has increased from $67 to $140. Therefore, the

regulations increase the renewal user fee for enrolled

retirement plan agents from $67 to $140. In addition,

the proposed regulations increase both the enrollment

and renewal user fee for enrolled agents from $67 to

$140.

INCOME TAX

REG-113068-22, page 405.

These proposed regulations provide recordkeeping and

reporting requirements for the average income test for

purposes of the low-income housing credit. If a building

Finding Lists begin on page ii.

is part of a residential rental project that satisfies this

test, the building may be eligible to earn low-income

housing credits. These proposed regulations affect

owners of low-income housing projects and State or

local housing credit agencies that monitor compliance

with the requirements for low-income housing credits.

Rev. Rul. 2022-19, page 379.

Fringe benefits aircraft valuation formula. For purposes

of section 1.61-21(g) of the Income Tax Regulations,

relating to the rule for valuing non-commercial flights on

employer-provided aircraft, the Standard Industry Fare

Level (SIFL) cents-per-mile rates and terminal charges

in effect for the second half of 2022 are set forth.

T.D. 9967, page 385.

These final and temporary regulations set forth guidance on the average income test under section 42(g)

(1)(C) of the Internal Revenue Code. If a building is part

of a residential rental project that satisfies this test, the

building may be eligible to earn low-income housing

credits. These final and temporary regulations affect

owners of low-income housing projects, tenants in

those projects, and State or local housing credit agencies that monitor compliance with the requirements for

low-income housing credits.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

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.

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.

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.

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 procedures 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.

Part II.—Treaties and Tax Legislation.

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

Tax Conventions and Other Related Items, 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).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

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

October 31, 2022 

Bulletin No. 2022–44

Part I

Rev. Rul. 2022-19

For purposes of the taxation of fringe

benefits under section 61 of the Internal

Revenue Code, section 1.61-21(g) of

the Income Tax Regulations provides a

rule for valuing noncommercial flights

on employer-provided aircraft. Section

1.61-21(g)(5) provides an aircraft valuation formula to determine the value

of such flights. The value of a flight is

determined under the base aircraft valuation formula (also known as the Standard

Industry Fare Level formula or SIFL)

by multiplying the SIFL cents-per-mile

rates applicable for the period during

which the flight was taken by the appropriate aircraft multiple provided in section 1.61-21(g)(7) and then adding the

applicable terminal charge. The SIFL

cents-per-mile rates in the formula and

the terminal charge are calculated by the

Department of Transportation (DOT) and

are reviewed semi-annually.

According to DOT, due to the effect of

the COVID-19 pandemic, airline industry

capacity (as measured by airline seat miles)

was reduced faster than airline industry

expenses were reduced. Generally, the

SIFL rate is the result of airline industry

expenses divided by airline seat miles.

Because airline seat miles were reduced

faster than airline industry expenses, the

SIFL rate for the 6-month Tax Period

Effective 1/1/2021 increased substantially.

Furthermore, in March 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted, directing the Treasury Department to allot up to $25 billion

for domestic carriers to cover payroll

expenses via grants and promissory notes,

known as the Payroll Support Program

(PSP). The PSP grants and PSP promissory

notes offset airline industry expenses.

Accordingly, DOT provided two alternatives to incorporate differing levels of the

PSP into the SIFL rate calculations to both

account for the PSP in the rate calculations

and to mitigate the pandemic impact on the

SIFL rate. One calculation adjusts the SIFL

rates to account for PSP grants only while

the other calculation adjusts the SIFL rates

to account for both the PSP grants and PSP

promissory notes.

This revenue ruling contains these

three SIFL rates: (1) the Unadjusted SIFL

Rate, (2) the SIFL Rate Adjusted for PSP

Grants, and (3) the SIFL Rate Adjusted

for PSP Grants and Promissory Notes.

Taxpayers may use any of the three rates

when determining the value on noncommercial flights of employer-provided aircraft under section 1.61-21(g).

The following charts set forth the terminal charges and SIFL mileage rates:

Unadjusted SIFL Rate

Period During Which

the Flight Is Taken

Terminal

Charge

SIFL Mileage

Rates

7/1/22 - 12/31/22

$44.18

Up to 500 miles

= $.2417 per mile

501-1500 miles

= $.1843 per mile

SIFL Rate Adjusted for PSP Grants

Over 1500 miles

= $.1771 per mile

7/1/22 - 12/31/22

$44.97

Up to 500 miles

= $.2460 per mile

501-1500 miles

= $.1875 per mile

SIFL Rate Adjusted for PSP Grants and Promissory Notes

Over 1500 miles

= $.1803 per mile

7/1/22 - 12/31/22

$46.83

Up to 500 miles

= $.2562 per mile

501-1500 miles

= $.1953 per mile

Over 1500 miles

= $.1878 per mile

Bulletin No. 2022–44

379

October 31, 2022

DRAFTING INFORMATION

The principal author of this revenue ruling is Kathleen Edmondson of the Office

of Associate Chief Counsel (Employee

Benefits, Exempt Organizations and

Employment Taxes). For further information regarding this revenue ruling, contact

Ms. Edmondson at (202) 317-6798 (not a

toll-free number).

26 CFR 300.0 (amended), 300.5 (amended), 300.6

(amended), and 300.10 (amended)

T.D. 9966

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 300

User Fees Relating to

Enrolled Agents and

Enrolled Retirement Plan

Agents

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: These final regulations

amend existing regulations relating to

user fees for enrolled agents and enrolled

retirement plan agents. The final regulations increase the renewal user fee for

enrolled retirement plan agents from $67

to $140. In addition, the final regulations

increase both the enrollment and renewal

of enrollment user fees for enrolled

agents from $67 to $140. These regulations affect individuals who are or apply

to become enrolled agents and individuals who are enrolled retirement plan

agents. The Independent Offices Appropriation Act of 1952 authorizes charging

user fees.

DATES: Effective date: These regulations

are effective October 31, 2022.

Applicability date: For the date of

applicability, see §§ 300.5(d), 300.6(d),

and 300.09(d).

October 31, 2022

FOR FURTHER INFORMATION CONTACT: Mark Shurtliff at (202) 317-6845

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the regulations in 26 CFR part 300 –

User Fees. On March 1, 2022, a notice of

proposed rulemaking (REG-114209-21)

and notice of public hearing was published in the Federal Register (87 FR

11366). The document proposed amending the regulations relating to the user fees

for enrolled agents and enrolled retirement plan agents. The document proposed

increasing the amount of the renewal user

fee for enrolled retirement plan agents

from $67 to $140. In addition, the document proposed increasing both the enrollment and renewal of enrollment user fees

for enrolled agents from $67 to $140. The

notice contains a detailed explanation of

the legal background and user fee calculations regarding the amendments to these

regulations.

Six comments responding to the notice

of proposed rulemaking were received,

including comments from the National

Association of Enrolled Agents (NAEA).

On May 3, 2022, representatives from the

NAEA, Department of the Treasury (Treasury Department), the IRS, and the Small

Business Administration (SBA), held a teleconference to listen to NAEA’s comments

about the proposed rulemaking. In addition,

two requests to speak at the scheduled public hearing were received. A public hearing

was held on May 11, 2022. After consideration of the written comments, teleconference comments, and testimony at the public

hearing, the Treasury Department and the

IRS have decided to adopt without modification the regulations proposed by the

notice of proposed rulemaking.

Summary of Comments

The six comments submitted in response

to the notice of proposed rulemaking and a

summary of the teleconference comments

are available at www.regulations.gov or

upon request. Some of the comments that

were submitted did not seek modification

or clarification of the user fee as set forth in

380

the proposed regulations. One commenter

expressed concern with how the special

enrollment examination for enrolled agents

(EA SEE) is being administered. The

commenter also recommended using the

user fees in these regulations to provide

resources for tax professionals that would

improve the service they provide to their

clients. The user fees in these regulations

are not used by the Treasury Department

or the IRS to administer the EA SEE, or to

provide resources for tax professionals that

improve the service they provide to their

clients. Therefore, comments regarding the

EA SEE and additional resources identified

by the commenter are outside the scope of

these regulations. Another commenter suggested that the IRS should raise the amount

of the user fee to apply for or renew a preparer tax identification number (PTIN)

in order to (1) lower the cost of user fees

relating to enrolled agents and (2) encourage more individuals to become enrolled

agents. These regulations do not relate to

the PTIN user fee or the PTIN program.

Therefore, comments regarding the PTIN

program and related user fees are outside

the scope of these regulations. Finally, one

commenter suggested that it is inconsistent

for the IRS to charge user fees in order to

administer the enrollment and renewal of

enrollment program but not charge user

fees for other programs (for example,

participation in the Annual Filing Season

Program). Again, comments regarding

programs other than the enrollment and

renewal of enrollment program are outside

the scope of these regulations. The summary of comments below addresses those

comments that make recommendations

concerning or seeking clarification of the

user fees set forth in the proposed regulations relating to the user fees for enrolled

agents and enrolled retirement plan agents.

A. Amount of User Fees

Four commenters expressed concern

with the overall amount of the proposed

enrollment and renewal of enrollment user

fees and requested information regarding

why the user fees are required.

The Independent Offices Appropriation Act of 1952 (IOAA) (31 U.S.C.

9701) authorizes each agency to promulgate regulations establishing the charge

for services provided by the agency. The

Bulletin No. 2022–44

IOAA states that the services provided by

an agency should be self-sustaining to the

extent possible. 31 U.S.C. 9701(a). The

IOAA provides that user fee regulations

are subject to policies prescribed by the

President, which are currently set forth

in the Office of Management and Budget

(OMB) Circular A-25 (OMB Circular), 58

FR 38142 (July 15, 1993).

Section 6a(1) of OMB Circular A-25

states that when a service offered by a

Federal agency provides special benefits

to identifiable recipients beyond those

accruing to the general public, the agency

should establish a user fee to recover

the full cost of providing the service. An

agency that seeks to impose a user fee

for government-provided services must

calculate the full cost of providing those

services.

In accordance with OMB Circular

A-25, the IRS Return Preparer Office

(RPO) completed its 2021 biennial review

of the enrollment and renewal of enrollment user fees associated with enrolled

agents and enrolled retirement plan agents.

As discussed in the notice of proposed

rulemaking, during its review the RPO

took into account the increase in labor,

benefits, and overhead costs incurred in

connection with providing enrollment

services to individuals who enroll or

renew enrollment as enrolled agents and

renew enrollment as enrolled retirement

plan agents since the user fee was last

increased in 2019. The proposed increase

took into account the additional staffing

that allows the RPO to provide a higher

quality of service to individuals seeking to

enroll or renew enrollment. The RPO also

took into account a reallocation of certain

labor costs in their methodology. The RPO

followed the generally accepted accounting principles established by the Federal

Accounting Standards Advisory Board.

The RPO determined that the full cost of

administering the program for enrolled

agents and enrolled retirement plan agents

has increased from $67 to $140 per application for enrollment or renewal of enrollment. That amounts to a $73 increase per

application for enrollment or renewal of

enrollment. The enrollment user fee is a

one-time cost, and renewal of enrollment

user fees are due once every three years,

so the increase amounts to an additional

$24.33 per year.

Bulletin No. 2022–44

B. OMB Circular A-25 Requirements

Two of the commenters stated that

the IRS did not fully comply with OMB

Circular A-25. Two of the commenters

questioned whether the service related to

the user fees in these regulations confers

a special benefit on enrolled agents and

enrolled retirement plan agents. One of the

commenters indicated that the service the

IRS provides under these regulations benefits the general public rather than a specific beneficiary (that is, enrolled agents

and enrolled retirement plan agents).

Finally, two of the commenters stated that

OMB Circular A-25 allows for an exception to the user fee requirement.

The Treasury Department and the IRS

disagree with the comments regarding

OMB Circular A-25. Section 6a(1) of

OMB Circular A-25 states that when a

service offered by a Federal agency provides special benefits to identifiable recipients beyond those accruing to the general

public, the agency should establish a user

fee to recover the full cost of providing the

service. An agency that seeks to impose a

user fee for government-provided services

must calculate the full cost of providing those services. Under OMB Circular

A-25, a user fee should be set at an amount

that recovers the full cost of providing a

service, unless the OMB grants an exception. The full cost of providing a service

includes both the direct and indirect costs

of providing the service.

The IRS provides enrollment and

renewal of enrollment services to specific,

identifiable recipients: enrolled agents

and enrolled retirement plan agents. An

individual who has been granted enrollment as an enrolled agent or an enrolled

retirement plan agent may practice before

the IRS, including representing taxpayers. The IRS confers benefits on individuals who are enrolled agents or enrolled

retirement plan agents beyond those that

accrue to the general public by allowing

them to practice before the IRS. Because

the ability to practice before the IRS is a

special benefit that does not accrue to the

general public, the IRS charges a user fee

to recover the full cost associated with

administering the enrollment and renewal

of enrollment program.

An agency is required to set the user

fee at an amount that recovers the full cost

381

of providing the service unless the agency

requests, and the OMB grants, an exception to the full-cost requirement. Under

section 6c(2) of OMB Circular A-25, the

OMB may grant exceptions when the cost

of collecting the fees would represent an

unduly large part of the fee for the activity

or when any other conditions exist that,

in the opinion of the agency head, justifies an exception. When the OMB grants

an exception, the agency does not collect

the full cost of providing the service and

must fund the remaining cost of providing

the service from other available funding

sources. Consequently, the agency subsidizes the cost of the service to the recipients of reduced-fee services even though

the service confers a special benefit on

those recipients who would otherwise be

required to pay the full cost of receiving

the benefit as provided by OMB Circular

A-25. The cost of collecting the user fees

in these regulations does not represent an

unduly large part of the fee. In addition,

the Treasury Department and the IRS have

not identified any conditions that exist that

would justify an exception to the full-cost

requirement. Therefore, it is appropriate for the IRS to recover the full cost it

incurs to provide enrollment and renewal

of enrollment services to individuals seeking to practice before the IRS as enrolled

agents or enrolled retirement plan agents.

C. Justification for Increasing the User

Fees

One of the commenters expressed concern with the amount by which the user

fees have increased since 2019. Specifically, user fees were increased from $30

to $67 in 2019, and the notice of proposed

rulemaking for these final regulations proposed to increase the user fees from $67 to

$140. The commenter questioned how the

RPO’s reallocation of labor costs could

account for the increases.

The amount of the user fee increases

can be explained, in part, by certain reallocations of labor costs and how other user

fees have affected the user fees relating to

the enrollment and renewal of enrollment

program for enrolled agents and enrolled

retirement plan agents. On September 30,

2010, the Treasury Department and the

IRS published two final regulations in the

Federal Register: (1) final regulations

October 31, 2022

(TD 9501, 75 FR 60309) that required

tax return preparers who prepare for

compensation all or substantially all of a

tax return or claim for refund to obtain a

PTIN and (2) final regulations (TD 9503,

75 FR 60316) that required a user fee to

apply for or renew a PTIN. Individuals

applying for, or renewing, a PTIN were

to be subject to Federal tax-compliance

and suitability checks and were required

to pay a $50 user fee (plus an additional

amount payable directly to a third-party

vendor) to obtain or renew a PTIN. All

enrolled agents and certain enrolled retirement plan agents were required to obtain

a PTIN as a condition of enrollment and

renewal of enrollment. TD 9527, 76 FR

32286; Notice 2011-91, 2011-47 I.R.B.

792. On April 19, 2011, the Treasury

Department and the IRS published in

the Federal Register (76 FR 21805) a

final regulation (TD 9523) that reduced

the amount of the user fees for the initial

enrollment and renewal of enrollment for

enrolled agents and enrolled retirement

plan agents from $125 to $30. The user fee

to enroll or renew enrollment was reduced

because certain procedures, including

Federal tax-compliance and suitability

checks, which were previously performed

as part of the enrolled agent and enrolled

retirement plan agent enrollment application process, were to be performed as part

of the required process to obtain a PTIN.

As required by the IOAA and OMB

Circular A-25, the RPO conducted a biennial review of the enrollment and renewal

of enrollment user fees associated with

enrolled agents and enrolled retirement

plan agents in 2017. During its review

the RPO took into account the increase

in labor, benefits, and overhead costs

incurred in connection with providing services to individuals who enroll or renew

enrollment as enrolled agents and enrolled

retirement plan agents since the user fee

was changed in 2011. In addition, the RPO

determined that costs associated with Federal tax-compliance checks and suitability

checks on applicants for enrollment and

renewal should be recovered as part of the

user fee for administering the enrollment

and renewal of enrollment programs (and

not the PTIN user fee). The 2017 biennial

review also took into account new costs

associated with administering the program

for enrolled agents and enrolled retirement

October 31, 2022

plan agents, including the costs of operating a dedicated toll-free helpline in the

RPO for enrollment and renewal of enrollment matters. The RPO determined that

the full cost of administering the program

for enrolled agents and enrolled retirement

plan agents had increased from $30 to $67

per application for enrollment or renewal

of enrollment. On May 13, 2019, the Treasury Department and the IRS published in

the Federal Register (84 FR 20801-01) a

final regulation (TD 9858) that established

the current $67 user fee per enrollment or

renewal of enrollment. The user fee complied with the directive in OMB Circular

A-25 to recover the full cost of providing

a service that confers special benefits on

identifiable recipients beyond those accruing to the general public.

The user fees for enrollment and

renewal of enrollment were $125 prior

to the RPO’s reallocation of certain labor

costs related to the PTIN user fee in 2011.

The proposed user fee of $140 recovers

many of the same costs associated with

the RPO’s administration of the enrollment and renewal of enrollment program

that were recovered in the enrollment and

renewal of enrollment user fees prior to

the reallocation of certain labor costs to

the PTIN user fee, as well as additional

staffing and services the RPO currently

provides associated with enrollment and

renewal of enrollment. Even though the

RPO has increased its staff to provide a

higher quality of service, and now provides additional services, the user fee for

enrollment and renewal of enrollment is

only $15 more than the enrollment and

renewal of enrollment fees in 2011.

One of the commenters expressed concern about the number of full-time equivalent (FTE) employees assigned to the

enrollment and renewal of enrollment program, FTE activities, and the ratio of managers to staff employees. The commenter

stated that there were 17 FTEs assigned to

the enrollment and renewal of enrollment

program, including three managers and

14 staff employees. The commenter questioned whether that number of managers

and FTEs was necessary to administer

the enrollment and renewal of enrollment

program.

The employment and management figures cited by the commenter are not accurate. There are 14 employees assigned

382

entirely to the enrollment and renewal of

enrollment program, including two managers that oversee the 12 other employees.

One of the managers is a director who

oversees five FTEs, but only two of those

FTEs are assigned fully to the enrollment

and renewal of enrollment program (and

whose salary, benefits, and associated

overhead are charged to the enrollment

and renewal of enrollment program).

Because the director oversees three FTEs

who are not fully assigned to the enrollment and renewal of enrollment program,

not all of the director’s salary is charged to

the enrollment and renewal of enrollment

program. The other manager is a frontline

manager who oversees 10 FTEs, all of

whom are dedicated entirely to the enrollment and renewal of enrollment program.

The IRS determines the cost of its

services and the activities involved in

producing them through a cost-accounting system that tracks costs to organizational units. The lowest organizational

unit in the IRS’s cost-accounting system

is called a cost center. There are two cost

centers related to the enrollment and

renewal of enrollment program: the Policy and Management Cost Center and

the Enrollment Cost Center. The Policy

and Management Cost Center includes

three FTEs: one director, one senior analyst, and one administrative assistant. The

director oversees the entire enrollment

and renewal of enrollment program. The

senior analyst manages inventory, handles system administrator duties for the

toll-free helpline, and is responsible for

reporting requirements for the enrollment

and renewal of enrollment program. The

administrative assistant provides administrative support to the director and staff,

processes mail (including applications,

checks, and general correspondence),

uploads mail to be distributed to legal

instrument examiners, and other administrative support duties (including managing

the director’s calendar and filing personnel documents).

The Enrollment Cost Center includes

one manager, one clerk, and nine legal

instrument examiners. The manager is

responsible for work assignments, work

reviews, employee evaluations, leave

approvals, and other managerial tasks.

The clerk processes mail, prints and mails

enrollment and renewal of enrollment

Bulletin No. 2022–44

certificates and cards, updates enrolled

agent and enrolled retirement plan agent

account information, makes electronic

copies of paper documents, and provides

clerical assistance with issuing notices to

enrolled agents and enrolled retirement

plan agents. The nine legal instrument

examiners process enrollment and renewal

of enrollment forms, make referrals to the

RPO’s suitability department for Federal

tax-compliance checks and criminal background checks (if necessary), document

findings and eligibility status in the RPO’s

case-tracking software, answer calls on the

toll-free helpline, and respond to emails

from enrolled agents and enrolled retirement plan agents. In addition, to improve

the level of service for processing, the

toll-free telephone operations staffing has

increased, quality review programs have

been implemented, and correspondence

backlogs have been eliminated.

The RPO has determined that these

managers and other employees are necessary to effectively administer the enrollment and renewal of enrollment program and provide high-quality service

to individuals seeking to enroll or renew

enrollment.

The same commenter also questioned

a reallocation of costs that partially

accounted for the proposed increased fee

for enrollment or renewal of enrollment.

This reallocation refers to a portion of

oversight and support costs that had previously been recovered through other funding sources. During the biennial review,

the RPO determined that these costs

were associated with the enrollment and

renewal of enrollment program and thus

were appropriately recovered through the

enrollment and renewal of enrollment user

fees.

disputes with the IRS. The four commenters expressed concern that the proposed

user fee increases may discourage individuals from enrolling as enrolled agents

or renewing their enrollment.

The Treasury Department and the IRS

recognize the valuable service enrolled

agents and enrolled retirement plan

agents provide to taxpayers as well as

the contributions they make to improving the Federal tax system. As discussed

in Section A of this preamble, despite

the service enrolled agents and enrolled

retirement plan agents provide to taxpayers, OMB Circular A-25 states that when

a service offered by a Federal agency

provides special benefits to identifiable

recipients beyond those accruing to the

general public, the agency should establish a user fee to recover the full cost of

providing the service (unless the agency

requests, and the OMB grants, an exception to the full-cost requirement). As discussed in Section B of this preamble, the

IRS confers benefits on individuals who

are enrolled agents and enrolled retirement plan agents beyond those that accrue

to the general public by allowing them to

practice before the IRS. The Treasury

Department and the IRS comply with

OMB Circular A-25 by charging user

fees to recover the full cost of overseeing

the enrollment and renewal of enrollment

program. The Treasury Department and

the IRS have not requested an exception

from the OMB because there is no data

that indicates that the user fee for enrollment or renewal of enrollment is cost

prohibitive or that any other condition

exists that justifies an exception.

D. Impact of User Fees on Enrollment

and Renewal of Enrollment of Enrolled

Agents and Enrolled Retirement Plan

Agents

One commenter stated that the Treasury Department and the IRS should have

conducted an initial regulatory flexibility

analysis pursuant to the RFA, based on

the assumption that these regulations will

have a significant economic impact on a

substantial number of small entities. The

commenter explained that it surveyed

the enrolled agent community and found

that 53 percent of enrolled agents are sole

practitioners and 46 percent work for a

firm. In the commenter’s view, sole proprietorships should be considered small

Four of the commenters opined that the

Treasury Department and the IRS should

take into account that enrolled agents

help improve the Federal tax system. For

example, enrolled agents are required to

take continuing education courses, which

enable them to accurately prepare tax

returns and efficiently resolve taxpayer

Bulletin No. 2022–44

E. Regulatory Flexibility Act (RFA)

Compliance

383

entities and the firms that employ enrolled

agents (which sometimes reimburse

enrolled agents for their user fees) are

generally small businesses. Therefore, the

commenter concluded that the user fees in

these regulations would have a significant

economic impact on a substantial number

of small entities.

The Treasury Department and the IRS

disagree that these regulations will have a

significant economic impact on a substantial number of small entities. As discussed

in the notice of proposed rulemaking,

only individuals, not businesses, can be

enrolled agents or enrolled retirement plan

agents. Accordingly, the user fee primarily affects individuals who are enrolled

agents, apply to become enrolled agents,

or are enrolled retirement plan agents.

Since individuals are not “small entities” for purpose of the RFA, any economic impact of the user fees on small

entities generally will occur only when an

enrolled agent or enrolled retirement plan

agent owns a small business or when a

small business employs enrolled agents or

enrolled retirement plan agents and reimburses them for their user fees.

Even if a substantial number of small

businesses are affected by reimbursing

enrolled agents or enrolled retirement

plan agents for their user fees, a regulatory

flexibility analysis would not be required

because the economic impact on small

entities is not significant. The economic

impact on any small entities affected

would be limited to paying, triennially, the

$73 difference in cost between the $140

user fee and the previous $67 user fee (for

each enrolled agent or enrolled retirement

plan agent who a small entity employs and

reimburses).

The RFA does not define the term

“significant economic impact;” however,

the SBA has provided guidance for government agencies on how to comply with

the RFA, including determining whether

a regulation will have a significant economic impact. The SBA’s guidance is

available at https://cdn.advocacy.sba.gov/

wp-content/uploads/2019/06/21110349/

How-to-Comply-with-the-RFA.pdf. The

SBA’s guidance explains that one measure

for determining the economic impact is

the percentage of revenue or percentage

of gross revenues affected. For example,

if the cost of implementing a particular

October 31, 2022

rule represents three percent of the profits

in a particular sector of the economy and

the profit margin in that industry is two

percent of gross revenues (an economic

structure that occurs in the food marketing

industry, where profits are often less than

two percent), the implementation of the

proposal would drive many businesses out

of business (all except the ones that beat

a three percent profit margin). According

to the SBA’s guidance, the regulation in

this example would have a significant economic impact.

The SBA’s guidance further explains

that the economic impact does not have

to completely erase profit margins to be

significant. For example, the implementation of a rule might reduce the ability of

the firm to make future capital investment,

thereby severely harming its competitive

ability, particularly against larger firms.

This scenario may occur in the telecommunications industry, where a regulatory

regime that harms the ability of small

companies to invest in needed capital will

not put them out of business immediately,

but over time may make it impossible for

them to compete against companies with

significantly larger capitalizations. The

impact of that rule would then be significant for smaller telecommunications

companies.

Finally, the SBA’s guidance explains

that other measures may be used. For

example, the impact could be significant

if the cost of the proposed regulation (a)

eliminates more than 10 percent of the

businesses’ profits; (b) exceeds one percent of the gross revenues of the entities

in a particular sector; or (c) exceeds five

percent of the labor costs of the entities in

the sector.

While data relevant to the SBA’s guidance is limited, the Treasury Department

and the IRS have carefully considered

public information related to the economic impact of the proposed user fees.

For example, Surgent, an organization

that provides preparation courses for the

EA SEE, states on its website at http://

www.surgent.com that the average salary for an enrolled agent as of December

2021 is $59,020. The triennial user fee for

enrolled agents and enrolled retirement

plan agents is $140, or approximately

$47 per year. Thus, the annualized cost

of enrollment as an EA is approximately

October 31, 2022

0.0008 percent of the average yearly salary of an enrolled agent. The triennial

user fee has increased from $67 to $140

per application for enrollment or renewal

of enrollment. That amounts to a $73

increase per application for enrollment

or renewal of enrollment. The increase

amounts to $24.33 per year, or 0.0004

percent of the average yearly salary of an

enrolled agent.

Based on the foregoing considerations, the Treasury Department and the

IRS conclude that the rule is not expected

to have a significant economic impact on

a substantial number of small entities,

and a regulatory flexibility analysis is not

required.

After consideration of the comments,

the proposed regulations are adopted

without change.

Special Analyses

I. Regulatory Planning and Review

These regulations are not significant

and are 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 OMB regarding review of tax

regulations.

II. Regulatory Flexibility Act

Pursuant to the RFA (5 U.S.C. chapter

6), it is hereby certified that these regulations will not have a significant economic

impact on a substantial number of small

entities. As discussed in Section E of this

preamble, the Treasury Department and

the IRS have determined that the rule is

not expected to have a significant economic impact on a substantial number of

small entities and a regulatory flexibility

analysis is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed

rulemaking was submitted to the Chief

Counsel of the Office of Advocacy of the

SBA for comment on its impact on small

business. The Chief Counsel for the Office

of Advocacy of the SBA did not provide

any written comments; however, they

reached out to the Treasury Department

and the IRS regarding comments they

received from the NAEA.

384

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires

that agencies assess anticipated costs and

benefits and take certain other actions

before issuing a final rule that includes

any Federal mandate that may result in

expenditures in any one year by a state,

local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for

inflation. This rule does not include any

Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of

that threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on state and local governments, and is not required by statute,

or preempts state law, unless the agency

meets the consultation and funding

requirements of section 6 of the Executive

order. These final regulations do not have

federalism implications and do not impose

substantial direct compliance costs on

state and local governments or preempt

state law within the meaning of the Executive order.

Drafting Information

The principal author of these regulations is Mark Shurtliff, Office of the

Associate Chief Counsel (Procedure and

Administration). Other personnel from

the Treasury Department and the IRS

participated in the development of the

regulations.

List of Subjects in 26 CFR Part 300

Reporting and recordkeeping requirements, User fees.

Adoption of Amendments to the

Regulations

Accordingly, the Treasury Department

and the IRS amend 26 CFR part 300 as

follows:

Bulletin No. 2022–44

PART 300 — USER FEES

Paragraph. 1. The authority citation for

part 300 continues to read as follows:

Authority: 31 U.S.C. 9701.

Par. 2. Section 300.5 is amended by

revising paragraphs (b) and (d) to read as

follows:

§300.5 Enrollment of enrolled agent fee.

*****

(b) Fee. The fee for initially enrolling

as an enrolled agent with the IRS is $140.

*****

(d) Applicability date. This section is

applicable beginning October 31, 2022.

Par. 3. Section 300.6 is amended by

revising paragraphs (b) and (d) to read as

follows:

(Filed by the Office of the Federal Register on September 27, 2022, 8:45 a.m., and published in the

issue of the Federal Register for September 29, 2022,

87 F.R. 58968)

26 CFR 1.42-15, 26 CFR 1.42-19

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

T.D. 9967

Section 42, Low-Income

Housing Credit Average

Income Test Regulations

§300.6 Renewal of enrollment of enrolled

agent fee.

AGENCY: Internal Revenue Service

(IRS), Treasury.

*****

(b) Fee. The fee for renewal of enrollment as an enrolled agent with the IRS is

$140.

*****

(d) Applicability date. This section is

applicable beginning October 31, 2022.

Par. 4. Section 300.9 is amended by

revising paragraphs (b) and (d) to read as

follows:

ACTION:

regulations.

§300.9 Renewal of enrollment of enrolled

retirement plan agent fee.

*****

(b) Fee. The fee for renewal of enrollment as an enrolled retirement plan agent

with the IRS is $140.

*****

(d) Applicability date. This section is

applicable beginning October 31, 2022.

Paul J. Mamo,

Assistant Deputy Commissioner for

Services and Enforcement.

Approved: September 20, 2022.

Lily L. Batchelder,

Assistant Secretary of the Treasury

(Tax Policy).

Bulletin No. 2022–44

Final

and

temporary

SUMMARY: This document contains final

and temporary regulations setting forth

guidance on the average income test for

purposes of the low-income housing credit.

If a building is part of a residential rental

project that satisfies this test, the building

may be eligible to earn low-income housing credits. These final and temporary regulations affect owners of low-income housing projects, tenants in those projects, and

State or local housing credit agencies that

monitor compliance with the requirements

for low-income housing credits.

DATES: Effective date: These regulations

are effective on October 12, 2022.

Applicability date: For the applicability date of the temporary regulations, see

§1.42-19T(f).

FOR FURTHER INFORMATION

CONTACT: Dillon Taylor at (202)

317-4137.

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the Income Tax Regulations (26 CFR

385

part 1) under section 42 of the Internal

Revenue Code (the Code).

The Tax Reform Act of 1986, Pub. L.

99-514, 100 Stat. 2085 (1986 Act), created

the low-income housing credit under section 42 of the Code.

Section 42(a) provides that the amount

of the low-income housing credit for any

taxable year in the credit period is an

amount equal to the applicable percentage (effectively, a credit rate) of the qualified basis of each qualified low-income

building.

Section 42(c)(1)(A) provides that the

qualified basis of any qualified low-income building for any taxable year is an

amount equal to (i) the applicable fraction

(determined as of the close of the taxable

year) of (ii) the eligible basis of the building (determined under section 42(d)).

Section 42(c)(1)(B) defines applicable

fraction as the smaller of the unit fraction

or floor space fraction. The unit fraction

is the number of low-income units in the

building over the number of residential

rental units (whether or not occupied) in

the building. The floor space fraction is

the total floor space of low-income units

in the building over the total floor space

of residential rental units (whether or not

occupied) in the building. Subject to certain exceptions set forth in section 42(i)(3)

(B), a low-income unit is defined in section 42(i)(3) as any unit in a building if the

unit is rent-restricted and the individuals

occupying the unit meet the income limitation under section 42(g)(1) that applies

to the project of which the building is a

part. Section 42(d)(1) and (2) define the

eligible basis of a new building or an

existing building, respectively.

Section 42(c)(2) defines a qualified

low-income building as any building

which is part of a qualified low-income

housing project at all times during the

compliance period (the period of 15 taxable years beginning with the first taxable

year of the credit period). To qualify as a

low-income housing project, one of the

section 42(g) minimum set-aside tests, as

elected by the taxpayer, must be satisfied.

Prior to the enactment of the Consolidated Appropriations Act of 2018, Pub. L.

115-141, 132 Stat. 348 (2018 Act), section

42(g) set forth two minimum set-aside

tests, known as the 20-50 test and the

40-60 test. If a taxpayer elects to apply the

October 31, 2022

20-50 test, at least 20 percent of the residential units in the project must be both

rent-restricted and occupied by tenants

whose gross income is 50 percent or less

of the area median gross income (AMGI).

If a taxpayer elects to apply the 40-60 test,

at least 40 percent of the residential units

in the project must be both rent-restricted

and occupied by tenants whose gross

income is 60 percent or less of AMGI.

The 2018 Act added section 42(g)(1)

(C), which contains a third minimum setaside test option—the average income

test. If a taxpayer elects to apply the average income test, a project meets the minimum requirements of the average income

test if 40 percent or more of the residential

units in the project are both rent-restricted

and occupied by tenants whose income

does not exceed the imputed income limitation designated by the taxpayer with

respect to the specific unit. (In the case of

a project described in section 142(d)(6),

“40 percent” in the preceding sentence is

replaced with 25 percent.) Section 42(g)

(1)(C)(ii)(I)-(III) provides special rules

relating to the income limitation for the

average income test. Specifically, unlike

the 20-50 and 40-60 tests, section 42(g)

(1)(C)(ii)(I) requires the taxpayer to designate each unit’s imputed income limitation that is taken into account for purposes of the average income test. Section

42(g)(1)(C)(ii)(II) requires the average

of the imputed income limitations designated under section 42(g)(1)(C)(ii)(I) not

to exceed 60 percent of AMGI. Finally,

section 42(g)(1)(C)(ii)(III) requires the

imputed income limitation designated for

any unit to be 20, 30, 40, 50, 60, 70, or 80

percent of AMGI.

Generally, under section 42(g)(2)(D)

(i), if the income for the occupant of a

low-income unit rises above the relevant

income limitation, the unit continues to be

treated as a low-income unit if the income

of the occupant had 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 the case of the 20-50 test or

the 40-60 test. Under this exception, the

unit ceases to be treated as a low-income

unit if two disqualifying conditions occur.

• The first condition is that the occupant’s income increases above 140

percent of the income limitation

October 31, 2022

applicable under section 42(g)(1)

(applicable income limitation).

• The second condition is that a new

occupant whose income exceeds the

applicable income limitation occupies any residential rental unit in the

building of a comparable or smaller

size.

In the case of a deep rent skewed project described in section 142(d)(4)(B) of

the Code “170 percent” is substituted for

“140 percent” in applying the applicable

income limitation under section 42(g)

(1), and the second condition is that any

low-income unit in the building is occupied by a new resident whose income

exceeds 40 percent of AMGI.

The exception contained in section

42(g)(2)(D)(ii) is referred to as the next

available unit rule. See also §1.42-15 of

the Income Tax Regulations.

The 2018 Act added a new next available unit rule in section 42(g)(2)(D)(iii),

(iv), and (v) for situations in which the

taxpayer has elected the average income

test. Under this new rule, a unit ceases to

be a low-income unit if two slightly different disqualifying conditions are met:

• First, the income of an occupant of a

low-income unit increases above 140

percent of the greater of (i) 60 percent

of AMGI, or (ii) the imputed income

limitation designated by the taxpayer

with respect to the unit; and

• Second, a new occupant whose

income exceeds the applicable

imputed income limitation occupies

any other residential rental unit in the

building that is of a comparable or

smaller size. The applicable imputed

income limitation for this purpose

depends upon whether the unit being

occupied was a low-income unit

before becoming vacant.

o If the new tenant occupies a unit

that was taken into account as a

low-income unit prior to becoming vacant, section 42(g)(2)(D)

(v)(I) provides that the applicable imputed income limitation

is the limitation designated with

respect to the unit.

o If the new tenant occupies a market-rate unit, section 42(g)(2)(D)

(v)(II) provides that the applicable imputed income limitation is

“the imputed income limitation

386

which would have to be designated with respect to such unit

under [section 42(g)(1)(C)(ii)(I)]

in order for the project to continue to meet the requirements

of [section 42(g)(1)(C)(ii)(II)].”

(Those requirements mandate

that the “average of the imputed

income limitations designated

under [section 42(g)(1)(C)(ii)(I)]

shall not exceed 60 percent of”

AMGI.)

Section 42(g)(2)(D)(iv) also provides

a next available unit rule for deep rent

skewed projects that elect the average

income test.

Under section 42(g), once a taxpayer

elects to use a particular set-aside test

for a project, that election is irrevocable.

Thus, if a taxpayer had previously elected

to use the 20-50 test or the 40-60 test, the

taxpayer may not subsequently elect to

use the average income test. Under section 42(g)(4), the rules of sections 142(d)

(2)(B) through (E), 142(d)(3) through (7),

and 6652(j) of the Code apply to determine whether any project is a qualified

low-income housing project and whether

any unit is a low-income unit.

Section 42(m)(1) provides that the

owners of an otherwise-qualifying building are not entitled to the housing credit

dollar amount that is allocated to the

building unless, among other requirements, the allocation is pursuant to a

qualified allocation plan (QAP). A QAP

provides standards by which a State or

local housing credit agency (Agency) is

to make these allocations. Under section

42(m)(1)(B)(iii), a QAP must contain a

procedure that the Agency or its agent will

follow in monitoring noncompliance with

low-income housing credit requirements

and in notifying the IRS of any such noncompliance. See §1.42-5 of the Income

Tax Regulations for rules implementing

this requirement.

On October 30, 2020, the Department

of Treasury (Treasury Department) and

the IRS published a notice of proposed

rulemaking (NPRM) (REG-119890-18)

in the Federal Register (85 FR 68816)

proposing regulations setting forth guidance on the average income test under

section 42(g)(1)(C). The Treasury Department and the IRS received 98 comments,

including requests to testify at a public

Bulletin No. 2022–44

hearing on the proposed regulations and

written testimony for the public hearing.

On March 24, 2021, the Treasury

Department and the IRS held a public

hearing on the proposed regulations. Fifteen taxpayers provided testimony at the

hearing.

After consideration of the comments

received and the testimony provided,

the proposed regulations are adopted as

modified by this Treasury Decision. The

major areas of comment and the revisions

to the proposed regulations are discussed

in the following Summary of Comments

and Explanation of Revisions. The comments are available for public inspection at www.regulations.gov or upon

request. Other minor, non-substantive

modifications that were made to the proposed regulations and adopted in these

final regulations are not discussed in the

Summary of Comments and Explanation

of Revisions. In addition, the Treasury

Department and the IRS are publishing

in this Treasury Decision temporary regulations containing recordkeeping and

reporting requirements that are needed

to facilitate administrability of, and compliance with, changes made in the final

regulations. Those changes were based on

comments received on the proposed rule.

These requirements are described in this

preamble along with the substantive rules

contained in the final regulations. The text

of these temporary regulations also serves

as the text of the proposed regulations

(REG–113068-22) set forth in the notice

of proposed rulemaking on this subject in

the Proposed Rules section of this issue of

the Federal Register.

Summary of Comments and

Explanation of Revisions

These final regulations and temporary

regulations set forth guidance on the average income test under section 42(g)(1)(C).

I. Section 1.42-15, Next Available Unit

Rule for the Average Income Test

The proposed regulations updated the

next available unit provisions in §1.4215 to reflect the new set-aside based on

the average income test and to take into

account section 42(g)(2)(D)(iii), (iv),

and (v). One commentator recommended

Bulletin No. 2022–44

that no changes be made to the proposed

regulations concerning the next available

unit rule when the proposed regulations

are finalized. No other comments were

received on the next available unit rule.

While no comments requested changes,

the final regulations for the next available

unit rule were revised to be consistent

with changes made to the provisions in

§1.42-19, which are described in section

II of this Summary of Comments and

Explanation of Revisions. The final regulations include revisions to the two limitations in §1.42-15(c)(2)(iv) related to the

imputed income designation of the next

available unit, which relate to the limitations described in section 42(g)(2)(D)(v).

The final regulations provide taxpayers

with administrable rules and objective

standards to apply when determining the

designation of the next available unit. The

first limitation in §1.42-15(c)(2)(iv)(A)

applies to units that met all of the requirements in §1.42-19(b)(1)(i) through (iii)

prior to becoming vacant. In other words,

the unit was rent-restricted, the occupants

satisfied the imputed income limitation

for the unit (or the unit’s low-income status continued under section 42(g)(2)(D)),

and no other provision in section 42 or the

regulations thereunder denied low-income

status to the unit. For those units, which

would have had a designated imputed

income limitation prior to vacancy, the

limitation is the unit’s designated imputed

income limitation. This rule is equivalent

to the rule in the proposed regulations,

which interpreted the definition of low-income unit as including only the requirements in §1.42-19(b)(1)(i) through (iii).

The second limitation in §1.42-15(c)(2)

(iv)(B) requires a taxpayer, in the case of

any other unit (such as a market-rate unit),

to limit the imputed income limitation

to a designation that will not cause the

average of all imputed income designations of residential units in the project to

exceed 60 percent of AMGI. This ensures

that the next available unit is designated

in such a way that maintains compliance

with the averaging requirement in section

42(g)(2)(C)(ii)(II). This revision to the

second limitation was necessary because

the proposed regulations relied on a reference to the mitigating action provisions,

which were removed from the final regulations as explained in section II.B. of this

387

Summary of Comments and Explanation

of Revisions.

Additionally, these final regulations

provide that, if multiple units are over-income at the same time in a project that

has elected the average income set-aside

(average income project) and that has

a mix of low-income and market-rate

units, then the taxpayer need not comply with the next available unit rule in a

specific order with respect to occupancy.

Instead, renting any available comparable

or smaller vacant unit to a qualified tenant

maintains all over-income units’ status as

low-income units until the next comparable or smaller unit becomes available (or,

in the case of a deep rent skewed project,

the next low-income unit becomes available). The final regulations include an

example illustrating the application of this

rule. Note, the order in which units are

designated, however, may affect the qualified group that is used for computing the

applicable fraction. See further discussion

in section II.B of this Summary of Comments and Explanation of Revisions.

II. §1.42-19, Average Income Test

A. Requirements to satisfy the average

income test

1. Proposed regulations approach to the

average income test

The proposed regulations provided

that a project for residential rental property meets the requirements of the average income test under section 42(g)(1)(C)

if (1) 40 percent or more (25 percent or

more in the case of a project described in

section 142(d)(6)) of the residential units

in the project are both rent-restricted and

occupied by tenants whose income does

not exceed the imputed income limitation

designated by the taxpayer with respect to

the respective unit; (2) the taxpayer designated the imputed income limitations in

the manner provided in §1.42-19(b) of the

proposed regulations; and (3) the average

of the designated imputed income limitations of the low-income units in the project does not exceed 60 percent of AMGI.

The proposed regulations would have

required taxpayers to complete, not later

than the close of the first taxable year of

the credit period, the initial designation of

October 31, 2022

imputed income limitations for all of the

units taken into account for the average

income test.

Under the proposed regulations, the 60

percent of AMGI limit on the average of

designated imputed income limitations

applied to all of the low-income units in

the project. The requirement as so interpreted did not take into account whether

fewer than all of those units could constitute a group of at least 40 percent of the

residential units in the project such that

the average of the limitations of the units

in that group averaged to no more than 60

percent of AMGI.

In some cases, this interpretation magnified the adverse consequences of a single

unit’s failure to maintain low-income status. For example, under the proposed regulations, a unit losing low-income status

would remove that unit’s imputed income

limitation from the computation of the

average, but not impact the low-income

status of any other units. If that unit’s limitation was less than 60 percent of AMGI,

the loss of the unit could cause the average of the remaining low-income units to

rise above 60 percent of AMGI. That noncompliant average would cause the entire

project to fail the average income test and

therefore fail to be a qualified low-income

housing project. In light of the potential

adverse consequences of the rule, the proposed regulations provided for mitigating

actions the taxpayer could take within 60

days of the close of the year for which the

average income test might be violated.

2. Comments on the proposed set-aside

rule

Many commenters disagreed with

the adequacy of the proposed mitigation

actions and with the correctness of the

underlying interpretation of the average

income test, which required testing of all

low-income units.

i. Inadequacy of the proposed mitigation

actions

Commenters noted that the mitigation

possibilities in the proposed regulations

depended on the taxpayer both appreciating that the entire project might be jeopardized by a problem with a particular unit

and knowing how to deploy the mitigation

October 31, 2022

actions. Commenters also suggested that

the mitigation proposal incorporated

such a rigid deadline that even alert and

well-advised taxpayers might be unable to

timely take mitigating actions to be eligible to receive credits for their projects.

ii. Invalidity of the underlying

interpretation

Commenters’ central concern was the

invalidity, as they saw it, of the underlying

interpretation of the average income test.

Under the interpretation in the proposed

regulations, a single unit’s falling out of

compliance could result in the complete

loss of tax credits for the entire project, or

at least loss of credits for an entire year.

Commenters noted that this result flowing

from the interpretation in the proposed

regulations suggested the invalidity of

the interpretation. Several commenters

observed that the proposed regulations

imposed on projects electing the average

income test a higher standard than that

required for satisfying the other set-aside

elections. Under the 20-50 test and 40-60

test, one noncompliant unit could not

cause an entire project to fail the set-aside

test if, without taking the noncompliant

unit into account, there remained a sufficient number of compliant units to meet

the statutory minimum percentage of all

residential units. The commenters, therefore, concluded that the interpretation in

the proposed regulations regarding the

average income test could not have been

the intent of Congress.

Most commenters recommended that

the average income test be satisfied if any

group of 40 percent of the units in the

project have designations whose average

does not exceed 60 percent of AMGI.

In general, these commenters correctly

asserted that the average income test is a

minimum set-aside test, and, therefore, a

project should meet the test if the minimum requirements of the test are satisfied,

even if low-income units not necessary for

the minimum are noncompliant.

Other commenters noted that even

though the project should additionally

meet an overall average test of no more

than 60 percent of AMGI across all

low-income units (as required by the proposed regulations), relief should nevertheless be built into the requirement. Thus,

388

if a unit is out of compliance, causing the

project-wide average to go above 60 percent of AMGI, the failure should be considered noncompliance for that unit only,

and only that non-compliant unit should

be subject to credit adjustment and recapture. They urged that this noncompliance

should not be a violation of the minimum

set-aside, provided that at least 40 percent

of the units’ designations still meet the 60

percent average.

This suggested approach, however,

could create problems similar to those

in the proposed regulations because one

unit’s noncompliance could cause the

overall average of the remaining low-income units to rise above 60 percent of

AMGI. For this reason, the comment was

not adopted, but it was considered in connection with developing the final regulations’ rules for determining low-income

units and a building’s applicable fraction,

as is discussed later.

Some commenters believed that the

average income test is satisfied as long as

the original imputed income limitations

of designated low-income units average

to 60 percent, and 40 percent or more of

those units continue to be rent-restricted

and meet their respective imputed income

limitations. Thus, the average must be met

initially, but subsequently, the requirement is permanently satisfied, regardless

of any changes in circumstances related to

occupancy. Commenters suggested that a

general anti-abuse rule could be adopted

to allow the IRS to disregard designations

made in bad faith.

The Treasury Department and the IRS

do not agree that the averaging requirement of section 42(g)(1)(C)(ii)(II) is

concerned only with the original designations. Like the other minimum setaside tests, the average income test is

an ongoing requirement for a project to

maintain its status as a qualified low-income housing project. A project failing to

maintain an average of 60 percent or less

of AMGI across at least 40 percent of its

residential units that qualify as low-income units violates the requirement. This

is consistent with a plain reading of the

statute, as the imputed income limitations

of the units taken into account (meaning, counted for purposes of meeting the

average income test) must not exceed 60

percent of AMGI. Section 42(g)(1)(C)

Bulletin No. 2022–44

(ii)(I) and (II). The rejected suggestion

would allow an original imputed income

limit designation of a subsequently disqualified unit to satisfy compliance with

the minimum set-aside test throughout the

entire compliance period. Treating such a

situation as compliant would effectively

waive the rule that a project consistently

maintain its level of affordability—a

central requirement of the low-income

housing credit. Moreover, adoption of a

general anti-abuse rule would miss many

non-compliant situations, would increase

administrative complexity for the IRS and

the Agencies and would potentially create

uncertainty for taxpayers.

A separate comment recommended

that an out-of-compliance unit should

maintain its designation if the owner can

demonstrate due diligence when completing the initial income certification. The

Treasury Department and the IRS disagree

with the suggestion that an out-of-compliance unit should not lose its designation if

the owner can demonstrate due diligence

when completing the initial income certification. Demonstrating due diligence

upon initial income certification is not

sufficient to satisfy ongoing compliance

requirements. Further, similar to a general anti-abuse rule proposed by another

commenter, this approach would increase

administrative complexity for the IRS

and Agencies and could potentially create

uncertainty for taxpayers.

3. The final regulations’ interpretation of

the average income test

In response to the comments received,

the Treasury Department and the IRS have

revised their interpretation of the set-aside

rule and incorporated the revised interpretation in the final regulations. In making

these revisions, the Treasury Department

and the IRS considered the plain language

of section 42(g)(1)(C) as well as the definition of low-income unit for projects

electing the average income test. When

section 42(g)(1)(C)(i) and the special

rules in section 42(g)(1)(C)(ii)(I) and (II)

are read together, the taxpayer satisfies the

average income test if at least 40 percent

of the building’s residential units are eligible to be low-income units and have designated imputed income limitations that

collectively average 60 percent or less of

Bulletin No. 2022–44

AMGI. A project satisfying this minimum

requirement satisfies the average income

test. Thus, the final regulations have been

revised so that it is no longer necessary to

consider all low-income units in a project

for residential rental property when determining whether the average income test is

met.

While making this change, the Treasury Department and the IRS also considered the definition of “low-income unit” in

a project electing the average income test,

and the final regulations provide a clarifying definition of this term. As the final

regulations no longer require a taxpayer

to consider all of the low-income units in

a project in order to satisfy the minimum

set-aside requirement, the issue for consideration is whether a project’s election

of the average income test has any impact

on whether a unit that is rent-restricted

and whose occupants satisfy the imputed

income limitation designated for the unit

qualifies as a low-income unit as that

term is defined in section 42(i)(3). This

determination is relevant for the average

income test as well as for purposes of the

other provisions of the low-income housing credit, including a building’s applicable fraction as explained later.

In defining the term “low-income

unit,” section 42(i)(3)(A)(ii) requires that

the individuals occupying the unit meet

the income limitation applicable under

section 42(g)(1) to the project of which

the building is a part. With respect to the

20-50 and the 40-60 minimum set-asides,

there is no difficulty in applying this language to specific units. Every unit in the

project has an identical income limitation,

namely the income limitation embodied in

the set-aside test that the taxpayer elected

for that project. If the taxpayer elects the

20-50 test, then the income limitation for

each unit is 50% of AMGI. If the taxpayer

elects the 40-60 test, the income limitation

for each unit is 60% of AMGI.

For a project electing the average

income test, however, the reference to

“the income limitation applicable … to the

project” poses a challenge because income

limitations will typically vary among the

units in the project. In addition, pursuant

to section 42(g)(1)(C)(ii)(II), the average

of the designated imputed income limitations for the units taken into account for

meeting the minimum set-side test must

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not exceed 60% of AMGI. As a result, for

purposes of the average income test, the

fact that the occupants of a unit satisfy the

imputed income limitation designated for

that unit does not by itself establish that

the unit satisfies the requirements in section 42(i)(3)(A).

The Treasury Department and the IRS

considered interpreting the language in

section 42(i)(3)(A)(ii) as referring only

to the income limitation designated for a

specific unit. Such an interpretation would

be consistent with the approach under

the 20-50 and 40-60 tests where a single

unit’s noncompliance does not impact the

low-income status of any other low-income units in the project. It would also be

in accord with many comments that argue

the low-income status of one unit should

not impact the status of other units if those

other units meet their respective income

limitations.

In a project electing the average income

test, however, it is insufficient to read “the

income limitation applicable under [section 42(g)(1)] to the project” as referring

only to the designated imputed income

limitation applicable to a unit. Under the

average income test, a unit’s status as a

low-income unit for purposes of the setaside and the applicable fraction depends

not only on its own attributes but also on

the income limitations of other units that

are taken into account for these purposes.

In contrast, under the historic set-asides,

knowing that a unit satisfies the income

limitation applicable to the unit is sufficient to know that the unit meets the project’s income limitation for purposes of the

minimum set-aside test and a building’s

applicable fraction.

This interpretation means that to qualify as a low-income unit in a project electing the average income test, a residential unit, in addition to meeting the other

requirements to be a low-income unit

under section 42(i)(3), must be part of a

group of units such that the average of the

imputed income limitations of the units

in the group does not exceed 60 percent

of AMGI. Thus, to provide clarity on the

definition of low-income unit for a project

electing the average income test, the final

regulations include a definition of low-income unit that takes into account whether

the unit is a member of a group of units

with a compliant average limitation.

October 31, 2022

This definition of low-income unit in

the final regulations is in accord with the

definition of low-income unit as originally

described in the Conference Report for

the Tax Reform Act of 1986 (1986 Conference Report):

A low-income unit includes any unit in

a qualified low-income building if the

individuals occupying such unit meet

the income limitation elected for the

project for purposes of the minimum

set-aside requirement and if the unit

meets the gross rent requirement, as

well as all other requirements applicable to units satisfying the minimum setaside requirement.

2 H.R. Conf. Rep. 99-841, 99th Cong., 2d

Sess., II-94-95.

In that explanation, it is required that a

low-income unit meet “all other requirements applicable to units satisfying the

minimum set-aside test.” Although the

average income test was not in existence

at the time of the 1986 Conference Report,

it is apparent that Congress wanted to

avoid creating one standard for low-income units that qualified their projects

as part of the 20-50 and 40-60 minimum

set-asides and a different standard for any

other low-income units that played some

other role in the same project. Thus, it is

consistent with how low-income units are

defined under the 20-50 and 40-60 minimum set-aside tests for these final regulations to require all low-income units in an

average income project to satisfy a consistent and equal set of standards—standards

that, in the average income context, incorporate the average income limitations of

the group of which the units are a part.

Accordingly, under the final regulations, a project for residential rental property meets the requirements of the average

income test if the taxpayer’s project contains a qualified group of units that constitutes 40 percent or more (25 percent or

more in the case of a project described in

section 142(d)(6)) of the residential units

in the project. Section 1.42-19(b)(2)(i)

requires the units in a qualified group to,

first, individually satisfy the criteria that

would qualify each unit as a low-income

unit under the 20-50 or 40-60 set-asides.

Specifically, the rules in §1.42-19(b)(1)

(i) through (iii) require that each unit be

rent-restricted, occupants of the unit meet

the income limitation for the unit, and no

October 31, 2022

other provision in section 42 or the regulations thereunder denies low-income

status to the unit (including section 42(i)

(3)(B)-(E)). In addition, §1.42-19(b)(2)

(ii) requires that the average of the designated imputed income limitations of the

units in the group not exceed 60 percent of

AMGI. The group of units must be identified as required in §1.42-19(b)(3)(i). A

taxpayer identifies the units in the group

by recording the units in the taxpayer’s

books and records, and the taxpayer must

communicate that annual identification

to the applicable Agency as required in

§§1.42-19(b)(3)(iii) and 1.42-19T(c)(1) of

the associated temporary regulations. See

further description in section II.C of this

Summary of Comments and Explanation

of Revisions.

These revisions provide more flexibility for meeting the average income test

than had been available under the proposed regulations. Most importantly, the

revised rules limit the impact of one unit’s

noncompliance on the ability of a project

to satisfy the average income test. The

status of additional units beyond the minimum number of units needed to satisfy

the test does not impair satisfaction of the

average income test as discussed in section II.B of this Summary of Comments

and Explanation of Revisions. By removing the proposed requirement applicable

to all low-income units and thus allowing

a project to satisfy the average income test

if it contains a qualified group of units

meeting the minimum requirements, the

final regulations generally avoid the outsized impact that one unit’s loss of low-income status could have under the proposed regulations. The interpretation of

the average income set-aside in the final

regulations is consistent with the majority

of comments on this issue.

In addition, this interpretation creates more parallels between the average

income test and the 20-50 and 40-60 tests.

Under either of those latter tests, when

there are more than the minimum number

of low-income units, one unit going out of

compliance would not cause a project to

fail the minimum set-aside test. Similarly,

under the final regulations, one unit’s loss

of low-income status will not jeopardize

the entire project’s status as a qualified

low-income housing project subject to the

average income test if there are a sufficient

390

number of remaining units that comprise

a qualified group of units that satisfy the

minimum set-aside.

B. Determining qualified groups of

units for use in applicable fraction

determinations

1. Role of the applicable fraction under

section 42

As mentioned earlier, the amount of

low-income housing credits earned by a

building in a taxable year depends on a

computation that includes a number called

the building’s “applicable fraction” for

that year. This fraction is based on the

number and size of the low-income and

non-low-income units in the building and

can be thought of as an indicator of the

extent to which the building is dedicated

to affordable housing. Thus, the applicable fraction plays a role both in determining credits during the credit period and

in demonstrating continued dedication to

affordable housing during the extended

use period. See section 42(h)(6)(B)(i).

2. The proposed regulations’ resolution

of issues posed by computation of the

applicable fraction in an average income

project

The proposed regulations provided

an approach to addressing continuous

compliance with the average income

requirement by using the same group

of low-income units for both satisfying

the minimum set-aside requirement and

determining the applicable fraction. The

proposed regulations also provided for a

removed unit, which was a low-income

unit identified by the taxpayer that was

not taken into account for purposes of the

set-aside test or the applicable fraction but

was taken into account for purposes of

reducing recapture. As described earlier

in this Summary of Comments and Explanation of Revisions, taxpayers strongly

criticized the set-aside rule. In response,

the final regulations both allow the minimum set-aside test to be satisfied by any

qualified group of units that is no smaller

than the statutory minimum (40 percent)

and also add a clarifying definition of

“low-income unit” for projects electing

the average income test. To implement the

Bulletin No. 2022–44

statutory requirement regarding the average of the imputed income limitations of

residential units in a project, this clarifying definition is sensitive to the imputed

income limitations of the other residential

units in the same group.

The approach in the final regulations

for the average income test differs from

the other two set-asides in that the final

regulations allow for a distinction between

the group of low-income units taken into

account for satisfying the minimum setaside and the (usually larger) group of

units taken into account for computing

credits. However, under the final regulations, the units included in both groups are

subject to the same standards.

Congress acknowledged the absence of

such a distinction in the 20-50 and 40-60

tests in its discussion of the low-income

housing credit in the 1986 Conference

Report:

Qualified residential rental projects must remain as rental property

and must satisfy the minimum setaside requirement, described above,

throughout a prescribed compliance

period. Low-income units comprising

the qualified basis on which additional

credits are based are required to comply continuously with all requirements

in the same manner as units satisfying

the minimum set-aside requirements.

Units in addition to those meeting the

minimum set-aside requirement on

which a credit is allowable also must

continuously comply with the income

requirement.

2 H.R. Conf. Rep. 99-841, 99th Cong., 2d

Sess., II-95.

Thus, under the 20-50 and 40-60

tests, units included in qualified basis in

addition to those needed to satisfy the

minimum set-aside must meet the same

requirements as the units used to satisfy

the minimum set-aside. This application under the 20-50 and 40-60 tests is

straightforward, however, because all

low-income units have to be at or less

than a single elected AMGI standard,

either 50 percent or 60 percent of AMGI

(assuming other requirements are met).

Under either test, the minimum set-aside

units and any additional low-income

units are effectively interchangeable, so

there was no need to clarify treatment

between the groups.

Bulletin No. 2022–44

For the average income test, however,

units are not interchangeable because they

have a range of imputed income limitations and cannot be evaluated in isolation

because there is an income averaging

requirement in section 42(g)(1)(C)(ii)(II).

By stating that additional units beyond

those meeting the minimum set-aside

test must continuously comply with the

income requirement, the 1986 Conference

Report identified the necessity of developing a common standard for all residential units in projects electing the 20-50

and 40-60 tests. As discussed in section

II.A.3 of this Summary of Comments and

Explanation of Revisions, this principle is

reflected in the final regulations’ definition

of low-income units, and it impacts the

treatment of units that may be taken into

account for computing a building’s applicable fraction.

3. Comments on determining the

applicable fraction

In the context of the 20-50 or 40-60

minimum set-asides, commenters noted,

non-compliance by one or more units

(for example, not being suitable for occupancy) reduces a building’s applicable

fraction only with respect to the units

that are non-compliant as of the taxpayer’s year end. These commenters recommended similar treatment in the average

income context. They advocated evaluating eligibility of units for inclusion in the

applicable fraction on a unit-by-unit basis

(that is, taking into account only facts

about the particular unit, without taking into account the designated imputed

income limitation of other units).

In the context of removed units, some

comments argued that the proposed applicable fraction treatment of these units

amounted to “double counting.” Not only

did the proposed regulations exclude the

noncompliant unit from the computation

of the applicable fraction of the building

containing the unit, but by taking into

account the average of the group’s income

limitations, they could force a taxpayer to

exclude one or more compliant units from

the applicable fraction(s) of the building(s) containing the compliant unit(s).

The Treasury Department and the IRS

considered the proposal to include units

in applicable fraction computations on a

391

unit-by-unit basis but did not adopt it. To

be sure, that proposal would preserve the

requirement that units satisfying the setaside requirement must have income limitations whose average does not exceed 60

percent of AMGI. The proposal, however,

would not apply this average requirement

to the units that are taken into account

for the project’s applicable fractions. The

proposed approach would thus be inconsistent with the language of section 42(c)

(1)(C)(i), which provides that the numerator of the applicable fraction is number

of “low-income units” in the building.

As explained earlier in the discussion of

the average income test, the definition of

low-income unit for a project electing the

average income test necessarily includes

the requirement that the average of the

designated income limitations of the

units taken into account as low-income

units includes that the average designated

income limitations of the units not exceed

60% of AMGI.

In addition, the failure to apply the

average income limitation in determining

the applicable fraction would allow a taxpayer to include units in the qualified basis

even if they are a majority of the units in a

project and their average limitation greatly

exceeds 60 percent of AMGI. If accepted,

the proposal would have allowed a taxpayer to give appropriate income limitations to 40 percent of a project’s units but

to designate limitations of 80 percent of

AMGI for all the remaining low-income

units in the project and receive credits for

all of these units.

In the context of determining what

units to include in the applicable fraction,

another commenter recommended revising the proposed regulations to include an

exception for units that are not habitable

due to a casualty loss, such as from a fire

in the unit. The commenter asserted that

because the noncompliance was not the

fault of taxpayer, the regulations should

not require the taxpayer to remove another

unit from an applicable fraction to offset

the noncompliance associated with the

casualty loss. The Treasury Department

and the IRS did not adopt this suggestion. An approach that requires a determination of fault would create additional

complexity for taxpayers, Agencies, and

the IRS. In addition, while the 20-50 and

40-60 set-asides do not have the same

October 31, 2022

issue, adopting rules allowing for special

treatment in the case of casualties would

necessitate a broader section 42 regulatory

project.

4. Determination of the applicable

fraction in the final regulations

Under the final regulations, the determination of a group of units to be taken

into account in the applicable fractions

for the buildings in a project follows the

same approach as determining a group

of units to be taken into account for purposes of the set-aside test. Essentially, a

taxpayer can determine this group of units

by including the low-income units identified for the average income test, and any

other residential units that can qualify

as low-income units if they are part of a

group of units such that the average of

the imputed income limitations of all of

the units in the group does not exceed 60

percent of AMGI. If the average exceeds

60 percent of AMGI, then the group is not

a qualified group. For example, if a unit

was designated at 80 percent of AMGI

and if including that unit in an otherwise

qualified group of units causes the average

of the imputed income limitations of the

group to exceed 60 percent of AMGI, then

the taxpayer cannot include the 80 percent

unit in the otherwise qualified group. Only

the otherwise qualified group of units,

without the 80 percent unit, is a qualified

group of units used to determine the project’s buildings’ applicable fractions.

Once a qualified group of units in a

project has been identified for a taxable

year, the applicable fraction for each

building in the project is computed using

the units that are in both the qualified

group and the building at issue. (Although

the qualified group of units for a project

must have an average limitation no greater

than 60 percent of AMGI, this is not true

of the average limitation of the units used

to compute the applicable fraction of

individual buildings in the project.) This

method of determining a building’s applicable fraction applies both for ascertaining low-income housing credits earned for

a year in the credit period and for complying with the extended use requirement in

section 42(h)(6)(B)(i).

The Treasury Department and the

IRS determined that the approach to

October 31, 2022

determining the applicable fraction in the

final regulations better aligns with the

20-50 and 40-60 set-aside tests than the

approach in the proposed regulations in

that it creates parallel requirements for

both “minimum set-aside units” and any

“additional units” that may contribute to

earning low-income housing credits. This

rule in the final regulations is also consistent with the description of the low-income

units and the principle regarding set-aside

units and additional units in the other setaside tests that is described in the 1986

Conference Report discussion quoted earlier. The rule is also consistent with comments stating that the low-income units in

a project should have an overall average

that does not exceed 60 percent of AMGI.

The potential downside of this

approach to an owner is that if one unit

loses low-income status, then it is possible

that other units’ status as low-income units

may be impacted. Specifically, an owner

may have to exclude one or more otherwise qualifying units from the qualified

group of units for use in applicable fraction determinations for the group to retain

an average income limitation that does not

exceed 60% of AMGI. This, however, will

not always be the case. For example, if a

unit designated at 60, 70, or 80 percent

of AMGI loses low-income status and no

other changes occurred, then the owner

could maintain the required average limitation of the qualified group of units without excluding any of the other units from

the qualified group of units that had been

taken into account in the previous year.

Also, as is discussed later, in some cases

a unit may be included in the qualified

group of units after its income limitation

has been designated or redesignated to a

lower income limitation.

5. Proposed regulations’ special rule for

determining the applicable fraction for

purposes of recapture

The proposed regulations, in some

cases, would have caused a compliant low-income unit with a relatively

high-income limitation not to have been

taken into account in computing low-income housing credits earned for a year

in the credit period. The mechanisms for

achieving this result were called “mitigating actions” and “removed units”. To

392

minimize recapture, the proposed regulations would have included these units in

the computations underlying section 42(j)

so that the units’ inclusion avoided having their absence contribute to recapture

of credits. As described in section II.B.6.

of this Summary of Comments and Explanation of Revisions, however, the Treasury Department and the IRS deleted the

mitigating actions concept from the final

regulations. For this reason, the final regulations do not include the proposed regulations’ rule related to recapture.

6. Deletion of Mitigating Actions from

Final Regulations

As described previously, the proposed

regulations would have created a risk

that, in some situations, one unit losing its

low-income status could have caused an

entire project to fail the average income

test. To reduce that risk, the proposed regulations described two possible mitigating

actions that a taxpayer could have taken to

avoid disqualifying the project. Because

the final regulations differ from the proposed regulations in a way that avoids

that risk, there is no longer a need for mitigating actions. For this reason, the final

regulations do not include rules related to

mitigating actions.

C. Recordkeeping and Reporting

Requirements

In response to comments on the proposed rule, the final rule provides significant flexibility regarding the qualified

group of units used to satisfy the average

income set-aside and the qualified group

of units used for purposes of computing

the applicable fraction. Providing the

requested flexibility necessitates that the

taxpayer have the discretion and responsibility to make these identifications and

that the contemporary identification of the

units be unambiguous.

Specifically, to implement the changes

made in response to the comments on the

proposed rule, §1.42-19(b)(3) of the final

regulations provides that a taxpayer separately identifies (i) units in the qualified

group of units used for satisfying the average income set-aside and (ii) units in the

qualified group for purposes of the applicable fractions. Section 1.42-19T(c)(1) of

Bulletin No. 2022–44

the temporary regulations requires that

this be done by recording these identifications in the taxpayer’s books and records

(where the identification must be retained

for a period not shorter than the record

retention requirement under §1.42-5(b)

(2)) and by communicating that identification annually to the applicable Agency.

These rules promote certainty and administrability. The rules, in conjunction with

the other procedures provided in §1.4219T(c)(3), will allow taxpayers, Agencies, and the IRS to more easily verify

the status, including the average imputed

income limitation, of the qualified group

of units used for purposes of satisfying the

average income set-aside and the qualified

group of units used for purposes of determining the applicable fraction(s).

In addition, taxpayers are required to

report specified information to Agencies

and to maintain records in sufficient detail

to establish the accuracy of the project’s

applicable fractions, the satisfaction of the

average income set-aside, and compliance

with requirements in section 42 and the

applicable regulations. Section 1.6001-1

requires the keeping of records “sufficient to establish the amount of gross

income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.” See §§ 1.6001-1 and 1.42-5.

D. Designation of Imputed Income

Limitations and Identification of Units

Section 42(g)(1)(C)(ii) contains substantive requirements for income limitations applicable in the average income

test. Specifically, the taxpayer must designate the imputed income limitation for

each unit taken into account under the

average income test; the average of those

imputed income limitations cannot exceed

60 percent of AMGI; and the designated

imputed income limitation of any unit must

be 20, 30, 40, 50, 60, 70, or 80 percent of

AMGI. That statutory provision, however,

does not contain procedural requirements

to specify the manner in which taxpayers

must designate the imputed income limitation of units.

Filling this gap, the proposed regulations added procedural requirements that

a taxpayer must designate each imputed

income limitation in accordance with: (1)

Bulletin No. 2022–44

any procedures established by the IRS in

forms, instructions, or publications or in

other guidance published in the Internal

Revenue Bulletin pursuant to §601.601(d)

(2)(ii)(b); and (2) any procedures established by the Agency that has jurisdiction

over the low-income housing project that

contains the units to be designated, to the

extent that those Agency procedures are

consistent with IRS guidance and the governing regulations.

No negative comments were submitted

regarding these provisions, but, on review,

and in conjunction with other revisions

made based on comments received, the

Treasury Department and the IRS determined that more detailed designation rules

were needed to promote certainty and

administrability. Section 1.42-19T(c)(3)

(iv) of the temporary regulations provides

that a taxpayer designates a unit’s imputed

income limitation by recording the limitation in its books and records, where it

must be retained for a period not shorter

than the record retention requirement

under §1.42-5(b)(2). The final regulations

require the initial designation of a unit to

be made no later than when a unit is first

occupied as a low-income unit. See §1.4219(c)(3)(i). Under §1.42-19T(c)(3)(iv) of

the temporary regulations, the designation

must also be communicated annually to

the applicable Agency, and the applicable

Agency may establish the time and manner in which information is provided to it.

See §1.42-19T(c)(2)(i).

In the context of the final regulations’

provision of significant flexibility with

respect to satisfying the average income

test and identifying a qualified group of

units, these designation and identification

rules will facilitate taxpayer access to this

additional flexibility. Providing a specific

method of designation will give taxpayers more certainty than the proposed regulations as to how to meet the statutory

requirement of designation. The rule will

also benefit administration by ensuring a

contemporaneous record of designation,

without creating a significant burden

on taxpayers. The final regulations also

revise timing of the designation so that

it is no longer required by the end of the

first year of the credit period, and instead

is based on when a unit is first occupied as

a low-income unit. This rule better aligns

the timing of designation with the rental

393

of low-income units and should allow a

taxpayer to make designations after having a chance to evaluate the market for a

particular unit. Finally, requiring annual

communication of the information to the

applicable Agency will help the Agency

determine whether a project is in compliance with the requirements of section 42.

The temporary regulations give flexibility

to Agencies to determine the best time and

manner for taxpayers to communicate the

information so each Agency can ensure

the system best serves that particular

Agency with minimal burden.

Importantly, the temporary regulations

also provide Agencies with the discretion,

on a case-by-case basis, to waive in writing

any failure to comply with the temporary

regulations’ recordkeeping and reporting

requirements. See § 1.42-19T(c)(4). The

waiver may be done up to 180 days after

discovery of the failure, whether by taxpayer or Agency. At the discretion of the

applicable Agency, this waiver may treat

the relevant requirements as having been

satisfied.

In providing Agencies with the ability

to waive and the timeline for waiving, the

Treasury Department and the IRS considered comments made in response to

the proposed regulations regarding the

rules for “removed units” and the timing for completing “mitigating actions.”

In response to the proposed regulations’

rules on removed units, Agencies commented that they do not have authority to

determine the tax consequences of noncompliance with respect to the requirements of section 42, and, instead, Agencies are only responsible for determining

the existence of noncompliance itself. The

ability of Agencies to waive the failure to

comply with the procedural requirements

provided by the final regulations is not

inconsistent with the scope of Agency

responsibility, and the IRS itself will ultimately determine the tax consequences of

noncompliance.

With respect to timing, many commenters suggested that a 60-day period

in which to take mitigating actions beginning on the first day after the year of

noncompliance was too short and began

before the noncompliance may be known.

Commenters recommended various time

periods, and also suggested that the time

period run from the time of discovery of

October 31, 2022

the noncompliance. Although the Agency

waiver rule in the temporary regulations

involves a different situation, commenters’ recommendations provide valuable

information regarding Agencies’ need

for a sufficient period of time to consider

whether to grant the waiver and that this

time period should begin when the failure

to comply is discovered. Thus, the temporary regulations provide that the period

to provide a waiver is the 180-day period

after discovery of the failure to comply by

taxpayer or Agency.

E. Timing of designation of income

limitations

One commenter expressed concern

that, in some situations, a multiple-building project claims the section 42 credit

beginning in two different years depending on when the different buildings in the

project are fully leased, and thus, the credit

period for one building in the project may

begin in one taxable year and the credit

period for a second building in the same

project may begin during the subsequent

taxable year. In such a situation, the commenter requested, the regulations should

permit the taxpayer to make unit designations at the end of the respective taxable

years in which the credit period begins for

each building in the same project.

The final regulations require a designation of the imputed income limitation for

a unit by the time the unit is first occupied

as a low-income unit, which could take

place in different taxable years for different units. This rule also allows conversion

of a market-rate unit to low-income status,

with designation of an income limitation

occurring any time before it is first occupied as a low-income unit. Thus, the final

regulations provide the flexibility that may

be needed by multiple-building projects.

In addition, as described later, the final

regulations permit the changing of a unit’s

imputed income limitation in certain circumstances. For an unoccupied unit that

is subject to a change in imputed income

limitation, the final regulations provide

that the taxpayer must designate the unit’s

changed imputed income limitation prior

to occupancy of that unit. For an occupied

unit that is subject to a change in imputed

income limitation, the taxpayer must designate the unit’s changed imputed income

October 31, 2022

limitation prior to the end of the taxable

year in which the change occurs.

F. Changing a Unit’s Imputed Income

Designation

1. The proposed regulations on changes

to income designations

In general, the proposed regulations

did not allow income limitations to be

changed after they had been designated.

The preamble to the proposed regulations, however, requested comments

on an alternative mitigating approach

for situations in which a unit losing status as a low-income unit had caused the

average of unit limitations to rise above

60 percent of AMGI as of the close of a

taxable year. The mitigating approach

would have allowed the taxpayer to redesignate the imputed income limitation of a

low-income unit to return the average of

unit limitations to 60 percent of AMGI or

lower.

2. Comments seeking ability to change

designations

Numerous commenters disagreed with

the proposed regulations’ disallowance of

modifying the designated imputed income

limitation of a unit. In general, these commenters stressed that greater flexibility to

change unit designations would align with

what multiple Agencies had been pursuing to implement existing State and local

policies. Some commentators observed

that the proposed regulations may conflict with other Federal or State laws or

programs that, in certain cases, require

rental housing to accommodate a tenant’s

need to move to another unit. Additionally, some commentators noted that after

enactment of section 42(g)(1)(C), some

Agencies adopted their own guidance

with which the subsequently published

proposed regulations were in conflict.

Multiple commenters recommended

that the final regulations allow taxpayers to modify unit designations if the

Agency with jurisdiction over the project at issue allows for that in its policies

and the Agency consents to the change.

A different commenter suggested that

the final regulations should allow taxpayers to adjust imputed income limitation

394

designations over time, provided that the

taxpayer’s adjusted designations continue

to satisfy the requirements of the average

income test (that is, at all times 40 percent of the units remain rent-restricted and

occupied by tenants whose income does

not exceed the imputed income limitation

designated by the owner, and the average

of the imputed income limitation designations does not exceed 60 percent of AMGI

in any given year).

3. Final regulations on changing

designations of income limitations

The Treasury Department and the IRS

agree with taxpayers that the final regulations should allow greater flexibility

in changes in unit designations than the

proposed regulations did. Because not all

Agencies may want the exact same standards for permitting redesignations, the

final regulations address these taxpayer

concerns by providing Agencies significant flexibility in determining procedures.

Under the final regulations, a taxpayer

may change the imputed income limitation designation of a previously designated low-income unit in any of the following circumstances:

(1) In accordance with any procedures

established by the IRS in forms, instructions, or guidance published in the Internal

Revenue Bulletin pursuant to §601.601(d)

(2)(ii)(b) of this chapter.

(2) In accordance with an Agency’s

publicly available written procedures, if

those procedures are available to all of the

Agency’s projects that have elected the

average income test.

(3) To enhance protections set forth in

the Americans With Disabilities Act of

1990 (ADA), Pub. L. 101-336, 104 Stat.

328; the Fair Housing Amendments Act

of 1988, Pub. L. 100-430, 102 Stat.1619;

the Violence Against Women Act of 1994,

Pub. L. 103-322, 108 Stat. 1902; the Rehabilitation Act of 1973, Pub. L. 93-112, 87

Stat. 394; or any other State, Federal, or

local law or program that protects tenants and that is identified by the IRS or an

Agency in a manner described in (1) or (2)

above. The tenant protections that apply to

an average-income project and that redesignation may enhance do not necessarily

have any specific connection to section

42. For example, the protections may be

Bulletin No. 2022–44

ones that apply to all multifamily rental

housing, or they may apply to the project at issue because some congressionally

authorized spending supported the project

with Federal financial assistance. Even if

a tenant protection does not legally apply

to a particular average-income project

but does apply to analogous multifamily

rental housing, the owner of the project

may redesignate income limitations to

implement the protection for the project’s

residents.

(4) To enable a current income-qualified tenant to move to a different unit

within a project keeping the same income

limitation (and thus the same maximum

gross rent), with the newly occupied unit

and the vacated unit exchanging income

limitations.

(5) To restore the required average

income limitation for purposes of identifying a qualified group of units either for

purposes of satisfying the average income

set-aside or for purposes of identifying

the units to be used in computing applicable fraction(s). This rule is limited to

newly designated, or redesignated, units

that are vacant or are occupied by a tenant

that would satisfy the new, lower imputed

income limitation.

Also, the temporary regulations provide that a taxpayer effects a change

in a unit’s imputed income limitation

by recording the limitation in its books

and records, where it must be retained

for a period not shorter than the record

retention requirement under §1.42-5(b)

(2). See §1.42-19T(d)(2). The new designation must also be communicated

to the applicable Agency in the time

and manner required by the applicable

Agency and must become part of the

annual report to the Agency of income

designations. As part of its discretion to

specify the manner of communicating

the new designation, the Agency may,

if it wishes, require identification of

the justification for the redesignation.

The prior designation must be retained

in the books and records for the period

specified in §1.42-19T(c)(3)(iv). These

requirements for redesignations are consistent with those for initial designation

of a unit’s imputed income limitation

and, similarly, are intended to increase

both certainty and administrability with

respect to redesignations.

Bulletin No. 2022–44

G. Applicability Dates

Three commenters recommended that

the final regulations should provide relief

for projects that have elected the average

income minimum set-aside prior to the

publication of the final rule. These commenters suggested that taxpayers that

elected the average income test before

the finalization of the regulations did so

based on a set of expectations that may be

in conflict with how the final regulations

actually work. For example, one commenter stated that the final regulations

should provide taxpayers the opportunity

to choose a different minimum set-aside.

Section 42 provides that an election

of a minimum set-aside is irrevocable.

Therefore, these final regulations do not

permit taxpayers to change a minimum

set-aside election.

In general, the final regulations apply

to taxable years beginning after December

31, 2022. Section 1.42-19(f)(2) provides

rules for residential units in projects that

were already occupied prior to the applicability date of the regulations. The final

regulations in both §§1.42-15(i)(2) and

1.42-19(f)(3) also contain provisions that

make them more broadly available for

taxpayers that desire their application. For

taxable years prior to the first taxable year

to which these regulations apply, taxpayers may rely on a reasonable interpretation

of the statute in implementing the average

income test for taxable years to which

these regulations do not apply.

H. Good Cause

For the reasons discussed above, the

Treasury Department and the IRS consider the recordkeeping and reporting

requirements contained in the temporary

regulations to be a logical outgrowth of

the proposed rule. In any event, the Treasury Department and the IRS determine

that there would be good cause to issue

the temporary regulations contained in

this Treasury Decision without additional

notice and the opportunity for public comment. This action may be taken pursuant

to section 553(b)(3)(B) of the Administrative Procedure Act, which provides

that advance notice and the opportunity

for public comment are not required with

respect to a rulemaking when an “agency

395

for good cause finds (and incorporates the

finding and a brief statement of reasons

therefor in the rules issued) that notice and

public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” Under the “public interest”

prong of 5 U.S.C. 553(b)(3)(B), the good

cause exception appropriately applies

where notice-and-comment would harm,

defeat, or frustrate the public interest,

rather than serving it.

It would frustrate the public interest to

delay the applicability date of the regulations until the recordkeeping and reporting requirements have received additional

notice and comment. Taxpayers are seeking to rely on the substantive final regulations as soon as possible, and taxpayers

cannot do so prior to the applicability date

of the requirements in the temporary regulations. In general, these substantive final

regulations provide significant flexibility with respect to satisfying the average

income test, identifying a qualified group

of units for use in the average income setaside test and applicable fraction determinations, and changing the imputed

income limitation designations of residential units. This increased flexibility was

in response to taxpayer comments on the

proposed regulations, including taxpayer

complaints about burdens in the proposed

regulations. The increased regulatory flexibility, in turn, necessitates these recordkeeping and reporting requirements to

enhance administrability and certainty for

the taxpayers and Agencies that will be

taking advantage of the flexibility. In addition, these requirements are minimally

burdensome. The recordkeeping requirements are similar to existing recordkeeping requirements for low-income housing

projects, and Agencies may specify the

time and manner of communication of

regulatorily required information and may

waive any failure to comply.

There is also good cause to find notice

is “unnecessary” within the meaning

of 5 U.S.C. 553(b)(3)(B). The Treasury

Department and the IRS are responding

to commenters by providing the flexibility they sought, which requires enhanced

tracking to prevent abuse. The recordkeeping additions do not alter the substance of the basic rule provisions, which

are a logical outgrowth of the NPRM. And

because the recordkeeping requirements

October 31, 2022

provide what is minimally necessary to

ensure compliance and oversight, soliciting further comment would not alter these

minimal recordkeeping requirements.

Accordingly, the Treasury Department

and the IRS have determined that notice

is unnecessary and that it is in the public

interest to allow expedited reliance on the

recordkeeping and reporting requirements

contained in the temporary regulations. At

the same time, as set forth above, the Treasury Department and the IRS are soliciting

comments on the recordkeeping and reporting requirements in the notice of proposed

rulemaking published contemporaneously

with this final rule. At the time of publication, the Office of Management and Budget

(OMB) has considered and approved these

recordkeeping and reporting requirements

under the Paperwork Reduction Act so that

taxpayers can rapidly access the flexibility

provided in these final regulations regarding the average income test.

Special Analyses

Regulatory Planning and Review –

Economic Analysis

Executive Orders 12866 and 13563

direct agencies to assess costs and benefits of available regulatory alternatives

and, if regulation is necessary, to select

regulatory approaches that maximize net

benefits (including potential economic,

environmental, public health and safety

effects, distributive impacts, and equity).

Executive Order 13563 emphasizes the

importance of quantifying both costs and

benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018)

(MOA) between the Treasury Department

and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and

Regulatory Affairs has designated these

final regulations as significant under section 1(b) of the MOA.

A. Background

The Tax Reform Act of 1986, Pub.

L. 99-514, 100 Stat. 2085, created the

October 31, 2022

low-income housing credit under section

42 of the Code. Section 42(a) provides

that the credit amount earned by a qualified low-income building depends on

the number of low-income units in the

building, among other factors. Among

other requirements, a low-income unit as

defined in section 42(i)(3) must be rent-restricted, and the individuals occupying

the unit must meet the income limitation

applicable to the project of which the

building is a part.

To qualify as a low-income housing

project, one of the section 42(g) minimum

set-aside tests, as elected by the taxpayer,

must be satisfied. Prior to the enactment

of the Consolidated Appropriations Act

of 2018, Pub. L. 115-141, 132 Stat. 348

(2018 Act), section 42(g) set forth two

minimum set-aside tests, known as the

20-50 test and the 40-60 test. Under the

20-50 test, at least 20 percent of the residential units in the project must be both

rent-restricted and occupied by tenants

whose gross income is 50 percent or less

of AMGI. Under the 40-60 test, at least

40 percent of the residential units in the

project must be both rent-restricted and

occupied by tenants whose gross income

is 60 percent or less of AMGI. To be rent

restricted, a unit must have maximum

gross rent no more than 30 percent of the

unit’s income limitation.

The 2018 Act added section 42(g)(1)

(C), which contains a third minimum setaside test—the average income test. A

project meets the minimum requirements

of the average income test if 40 percent or

more of the residential units in the project are both rent-restricted and occupied

by tenants whose income does not exceed

the imputed income limitation designated

by the taxpayer with respect to the specific

unit. (In the case of a project described in

section 142(d)(6), 40 percent in the preceding sentence is replaced by 25 percent.)

For a project to meet the average income

test, among other criteria, the average of

the imputed income limitations must not

exceed 60 percent of AMGI.

B. Baseline

The Treasury Department and the IRS

have assessed the benefits and costs of

these final regulations relative to a no-action baseline reflecting anticipated Federal

396

income tax-related behavior in the absence

of these regulations.

C. Economic Analysis

These final regulations provide guidance on the average income test under

section 42(g)(1)(C). Despite the absence

of this guidance, between 2018 and 2022

approximately 200 taxpayers elected the

average income test for projects containing, in the aggregate, just over 2,000

buildings. With the benefit of this guidance, we project that an additional 100

taxpayers will elect the average income

test annually, for around 1,000 buildings

in aggregate, relative to a baseline scenario of no guidance.

These final regulations are expected to

increase election of the average income

test because the regulations will reduce

uncertainty regarding the interpretation

of 42(g)(1)(C). Absent these regulations,

some taxpayers might shy away from the

average income test, fearing adverse tax

consequences if their interpretation of the

statute is determined to be incorrect as

well as lost time and expense for litigation, even if their interpretation is eventually confirmed. Instead, these or other

taxpayers would elect either the 20-50 test

or the 40-60 test.

Projects electing the average income

test may be more financially stable and

more likely to be mixed income than if

they had to rely on the 20-50 or 40-60

tests; however, in aggregate, the final regulations are expected to have essentially

no immediate effect on the number of

affordable housing units produced. The

pool of potential low-income housing

credits allocated by state housing agencies is capped annually and is generally

oversubscribed. Thus any increase in allocated credits flowing to projects electing

the average income test is expected to be

offset by a concomitant reduction in credits flowing to projects electing one of the

other two set-aside tests.

Despite having no measurable impact

on the stock of affordable housing, these

final regulations will likely have some

economic effect. First, there will likely be

a minor efficiency gain to taxpayers electing the average income set-aside compared to the situation of taxpayers that,

in the absence of this guidance, would

Bulletin No. 2022–44

experience uncertainty interpreting section

42(g)(1)(C). These taxpayers may save on

consulting fees or hours of effort. Second,

there may be a minor efficiency gain from

avoiding time spent in litigation regarding the interpretation of section 42(g)(1)

(C). These are unambiguous benefits of

providing the final regulations, even if

quantitatively small. Third, there may be

costs associated with the record-keeping

requirements of these final regulations. In

Section II of these Special Analyses, we

estimate that the annual paperwork burden

for this regulation is $676,712 in aggregate. These costs fall upon low-income

housing tax credit (LIHTC) building owners who choose to incur them when electing the average income test.

Less directly, the final regulations

will likely result in a marginal geographic redistribution in the location of

LIHTC-supported housing, away from

densely populated areas and towards more

sparsely populated ones. Absent an option

to elect the average income test, property owners seeking LIHTCs must rely

on either the 20-50 or 40-60 tests. These

tests set a single income standard for all

LIHTC-generating units in a building. For

a building to be financially feasible, its

owners must be confident that there is a

sufficiently large pool of potential renters

having incomes in these relatively narrow ranges (just under 50 or 60 percent of

AMGI). These conditions are more easily

met in densely populated areas.

In contrast, with income averaging,

developers have leeway to establish a

variety of income limitations in a building.

Thus, in a sparsely populated area where

there are not enough people in the relatively narrow required range of incomes

to support a 20–50 or 40–60 building, an

average income building may be financially feasible. Despite the low population

density, the wider range of potential tenant

incomes may enable the building owner to

fill the low-income units with qualifying

tenants from that vicinity. That ability

could make the difference in whether or

not the project is feasible.

To be sure, most of the effect of the

average income test on the geographic

distribution of affordable housing is a

direct consequence of statutory amendments to section 42 made by the 2018 Act,

independent of this regulatory guidance.

Bulletin No. 2022–44

However, to the extent that the final regulations encourage some taxpayers to use

the average income test who otherwise

would not, the regulations reinforce the

statutory effect. The end result is a marginal transfer of economic well-being

from renters and LIHTC property developers in densely populated areas towards

renters and LIHTC property developers in

sparsely populated areas.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(44 U.S.C. 3501-3520) (PRA) requires

that a Federal agency obtain the approval

of OMB before collecting information

from the public, whether such collection

of information is mandatory, voluntary,

or required to obtain or retain a benefit.

The collections of information contained

in these regulations has been approved by

OMB under control number 1545-0988.

The collections of information that are

needed for certainty and administrability of the final regulations are included

in §1.42-19T of the temporary regulations. Section 1.42-19T(c)(1) provides

recordkeeping and reporting requirements

related to the identification of a qualified

group of units for each of (i) satisfaction

of the average income set-aside test and

(ii) applicable fraction determinations.

Section 1.42-19T(c)(2) provides reporting

requirements to the Agency with jurisdiction over a project. Section 1.42-19T(c)(3)

(iv) provides recordkeeping and reporting

requirements related to designations of the

imputed income limitations for residential

units. Section 1.42-19T(d)(2) provides

recordkeeping and reporting requirements

related to changing a unit’s designated

imputed income limitation.

This information in the collections of

information will generally be used by the

IRS and Agencies for tax compliance purposes and by taxpayers to facilitate proper

reporting and compliance. Specifically, the

collections of information in §1.42-19T

apply to taxpayer owners of projects that

receive the low-income housing credit and

elect the average income set-aside. With

respect to the recordkeeping requirements

in §1.42-19T(c)(3)(iv) and (d)(2) and section 42(g)(1)(C)(ii)(I) requires that the

taxpayer designate the imputed income

limitations of the units taken into account

397

for purposes of the average income test.

Thus, the recordkeeping requirements that

are provided allow for a process of designation that will result in a reliable record

of both the original designations of the

imputed income limitations of low-income units and any redesignations of

units’ limitations within a project.

The recordkeeping rules in §1.4219T(c)(1) with respect to a qualified

group of units are similarly needed to

ensure there is a reliable record to show

that the units used for purposes of the

average income set-aside test, and for

determining a building’s applicable fraction were part of a group of units within

the project whose average designated

imputed income limitations do not exceed

60 percent of AMGI. This limitation is

consistent with the requirement in section

42(g)(1)(C)(ii)(II). The annual reporting

requirements in §1.42-19T(c)(1) and (3)

and (d)(2) are also similar in substance

to other annual certifications required of

taxpayers. For example, minimum certifications by taxpayers are required in qualified allocation plans as provided in §1.425(c). The reporting requirements in these

final regulations also provide added flexibility by allowing the applicable Agency

to determine the time and manner that the

reporting is made under §1.42-19T(c)(2)

(i). Also, §1.42-19T(c)(4) gives Agencies

the ability to waive any failure of reporting on a case-by-case basis.

A summary of paperwork burden estimates follows:

Estimated number of respondents:

Approximately 200 taxpayers elected the

average income test for just over 2,000

buildings between 2018 and 2022. When

viewed annually, we project that approximately 100 additional taxpayers will have

eligible buildings and 1,000 additional

buildings will be eligible under the average income test.

Estimated burden per response: We

estimate that identifying which units are

for use in the average income set-aside

test and applicable fraction determinations and designating a unit’s imputed

income limitation takes an average of 15

minutes per unit. Based on an estimated

average of 15 units per building and an

average 15 minutes of time per unit, an

impacted taxpayer will incur an average

of 225 minutes per building to record the

October 31, 2022

additional designations due to the flexibility under the regulations for the average

income test. Total average annual burden

for recording the designations per building is 11,250 hours (15 units x 15 minutes

x 3,000 buildings).

Taxpayers are also required to report

redesignation of units, and why they are

required to redesignate units during the

year. For purposes of this analysis, we

assume that an average of 4 units per

building will be redesignated annually. We

estimate each redesignation will take an

average of 10 minutes. Thus, we estimate

the average number of minutes per year

to record redesignations for an impacted

taxpayer to be 40 minutes per building

for a total average annual burden of 2,000

hours (40 minutes x 3,000 buildings).

In addition, we estimate an annual

reporting burden related to the expanded

flexibility rules to average 20 minutes per

impacted taxpayer for a total burden of

100 hours (20 minutes x 300 taxpayers).

Estimated frequency of response:

Annual.

Estimated total burden hours: The

annual burden hours for this regulation

is estimated to be 13,350 hours. Using

a monetization rate of $50.69 per hour

(2020 dollars), the burden for this regulation is $676,712 for impacted taxpayers.

A Federal agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information displays a valid control number.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility

Act (RFA) (5 U.S.C. chapter 6), it is hereby

certified that this final regulation will not

have a significant economic impact on a

substantial number of small entities. This

certification is based on the fact that, prior

to the publication of this final regulation

and before the enactment of the 2018

Act, taxpayers were already required to

satisfy either the 20-50 test or the 40-60

test, as elected by the taxpayer, in order to

qualify as a low-income housing project.

The 2018 Act added a third minimum setaside test (the average income test) that

taxpayers may elect. This final regulation

sets forth requirements for the average

income test, and the costs associated with

October 31, 2022

the average income test are similar to the

costs associated with the 20-50 test and

40-60 test. In addition, affected taxpayers,

including some who end up not electing

the average income test will incur minimal costs in reading and understanding the

regulations. The Treasury Department and

the IRS estimate that the burden involved

in reading and understanding the regulations will be approximately 3 to 5 hours

and largely will be borne by advisors and

trade media. A portion of the cost to such

advisors and trade media will be passed on

to taxpayers.

As described in more detail in the

Paperwork Reduction Act section of this

preamble, approximately 200 taxpayers

elected the average income test between

2018 and 2022. When that figure is

viewed annually, the Treasury Department and the IRS project that approximately 100 additional taxpayers will

elect the average income test due to the

final regulations. For the 300 taxpayers

affected, the annual burden hours for this

regulation is estimated in the Paperwork

Reduction Act analysis to be 13,350

hours. Thus, the average annual burden

hours amount to 44.5 hours per affected

small entity. This estimate reflects all

recordkeeping and reporting requirements associated with the final regulations, including (i) identifying which

units are for use in the average income

set-aside test, (ii) identifying which units

are for use in applicable fraction determinations, (iii) designating a unit’s imputed

income limitation, (iv) reporting redesignation of units, (v) reporting reasons

why units are redesignated, and (vi) the

reporting burden related to the expanded

flexibility rules.

Monetized at $50.69 per hour (2020

dollars), the average annual burden hours

represent a cost of $2,256 per affected

small entity. This amount is likely quite

small relative to the entity’s revenue. A

precise estimate of typical revenue is not

possible with the data available to the

Treasury Department and the IRS. However, the Treasury Department and the IRS

estimate that the typical annual LIHTC

allocation to an affected entity is between

$125,000 and $1,450,000. Relative to

these sums, the $2,256 annual cost of the

regulations is not a significant economic

impact.

398

Accordingly, it is hereby certified that

these regulations will not have a significant economic impact on a substantial

number of small entities within the meaning of section 601(6) of the RFA.

For the applicability of the RFA to the

temporary regulations, refer to the Special

Analyses section of the preamble to the

notice of proposed rulemaking published

in the Proposed Rules section in this issue

of the Federal Register.

IV. Section 7805(f)

Pursuant to section 7805(f), the proposed regulation 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. The Treasury

Department and the IRS also requested

comments from the public.

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires that

agencies assess anticipated costs and benefits and take certain other actions before

issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or

tribal government, in the aggregate, or by

the private sector, of $100 million in 1995

dollars, updated annually for inflation. This

final rule does not include any Federal

mandate that may result in expenditures by

State, local, or tribal governments, or by the

private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on State and local governments, and is not required by statute,

or preempts State law, unless the agency

meets the consultation and funding

requirements of section 6 of the Executive order. These regulations do not have

federalism implications and do not impose

substantial direct compliance costs on

State and local governments or preempt

State law within the meaning of the Executive order.

Bulletin No. 2022–44

VII. Congressional Review Act

Pursuant to the Congressional Review

Act (5 U.S.C. 801 et seq.), the Office of

Information and Regulatory Affairs designated this rule as not a “major rule,” as

defined by 5 U.S.C 804(2).

Drafting Information

The principal authors of these regulations are Dillon Taylor, Office of the

Associate Chief Counsel (Passthroughs

and Special Industries), and Michael J.

Torruella Costa, formerly at 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.

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 in numerical order entries for §§ 1.42-19 and 1.4219T to read, in part, as follows:

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

Section 1.42-15 also issued under 26

U.S.C. 42(n);

*****

Section 1.42-19 also issued under 26

U.S.C. 42(n);

Section 1.42-19T also issued under 26

U.S.C. 42(n);

*****

Par. 2. Section 1.42-0 is amended by:

1. In the introductory text, removing

“1.42-18” and adding “1.42-19” in its

place.

2. In §1.42-15:

i. Revising paragraph (c).

ii. Adding paragraphs (c)(1) and (2)

and (c)(2)(i) through (iv).

iii. Revising paragraph (i).

iv. Adding paragraphs (i)(1) and (2).

Bulletin No. 2022–44

3. Adding a heading and entries for

§1.42-19.

The additions and revisions read as

follows:

§1.42-0 Table of contents.

*****

§1.42-15 Available unit rule.

*****

(c) Exceptions.

(1) In general.

(2) Rental of next available unit in case

of the average income test.

(i) Basic rule.

(ii) No requirement to comply with the

next available unit rule in a specific order.

(iii) Deep rent skewed projects.

(iv) Limitation.

*****

(i) Applicability dates.

(1) In general.

(2) Applicability dates under the average income test.

*****

§1.42-19 Average income test.

(a) Average income set-aside.

(b) Definition of low-income unit and

qualified group of units.

(1) Definition of low-income unit.

(2) Definition of qualified group of

units.

(3) Identification of qualified groups of

units.

(i) Average income set-aside test.

(ii) Applicable fraction determinations.

(iii) Identification of units.

(c) Procedures.

(1) [Reserved]

(2) [Reserved]

(3) Designation of imputed income

limitations.

(i) Timing of designation.

(ii) 10-percent increments.

(iii) Continuity.

(iv) [Reserved]

(4) [Reserved]

(d) Changing a unit’s designated

imputed income limitation.

(1) Permitted changes.

(i) Federally permitted changes.

(ii) Housing credit agency (Agency)-permitted changes.

399

(iii) Certain laws.

(iv) Tenant movement.

(v) Restoring compliance with average

income requirements.

(2) [Reserved]

(e) Examples.

(f) Applicability dates.

(1) General rule.

(2) Designations of occupied units.

(3) Applicability of this section to taxable years beginning before January 1,

2023.

Par. 3. Section 1.42-15 is amended by:

1. Revising the definition of Over-income unit in paragraph (a).

2. In paragraph (c):

i. Revising the heading.

ii. Designating the text as paragraph (c)

(1) and adding a heading for newly designated paragraph (c)(1).

3. Adding paragraph (c)(2).

4. In paragraph (i):

i. Revising the heading.

ii. Designating the text as paragraph (i)

(1).

5. In newly designated paragraph (i)

(1):

i. Adding a heading.

ii. Removing “This section” and adding “Except for paragraph (c)(2) of this

section, this section” in its place.

6. Adding paragraph (i)(2).

The revisions and additions read as

follows:

§1.42-15 Available unit rule.

(a) * * *

Over-income unit means, in the case

of a project with respect to which the

taxpayer elects the requirements of section 42(g)(1)(A) or (B) (that is, the 20–50

or 40–60 tests), 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)(A) and (B),

or above 170 percent of the applicable

income limitation for deep rent skewed

projects described in section 142(d)(4)

(B). In the case of a project with respect

to which the taxpayer elects the requirements of section 42(g)(1)(C) (that is, the

average income test), over-income unit

means a residential unit described in

§1.42-19(b)(1)(i) through (iii) in which

the aggregate income of the occupants of

October 31, 2022

the unit increases above 140 percent (170

percent in case of deep rent skewed projects described in section 142(d)(4)(B)) of

the greater of 60 percent of area median

gross income or the imputed income limitation designated with respect to the unit

under §1.42-19(b).

*****

(c) Exceptions—(1) In general. * * *

(2) Rental of next available unit in

case of the average income test—(i) Basic

rule. In the case of a project with respect

to which the taxpayer elects the average

income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases

to be described in §1.42-19(b)(1)(ii) if—

(A) Any residential rental unit (of a

size comparable to, or smaller than, the

over-income unit) is available, or subsequently becomes available, in the same

low-income building; and

(B) That available unit is occupied by

a new resident whose income exceeds the

limitation described in paragraph (c)(2)

(iv) of this section.

(ii) No requirement to comply with the

next available unit rule in a specific order.

Where multiple units in a building are

over-income units at the same time—

(A) The order in which available units

are occupied makes no difference for

purposes of complying with the rules

in this section (next available unit

rule); and

(B) In making imputed income limitation

designations, the taxpayer must take

into account the limitations described

in paragraphs (c)(2)(iii) and (iv) of

this section.

(iii) Deep rent skewed projects. In

the case of a project described in section

142(d)(4)(B) with respect to which the

taxpayer elects the average income test, if

a unit becomes an over-income unit within

the meaning of paragraph (a) of this section, that unit ceases to be a unit described

in §1.42-19(b)(1)(ii) if—

(A) Any residential unit described in

§1.42-19(b)(1)(i) through (iii) is available,

or subsequently becomes available, in the

same low-income building; and

(B) That unit is occupied by a new resident whose income exceeds the lesser of

40 percent of area median gross income or

the imputed income limitation designated

with respect to that unit.

October 31, 2022

(iv) Limitation. The limitation

described in this paragraph (c)(2)(iv) is—

(A) In the case of a unit that was

described in §1.42-19(b)(1)(i) through

(iii) prior to becoming vacant, the imputed

income limitation designated with respect

to the available unit for the average

income test under §1.42-19(b); and

(B) In the case of any other unit, the

highest imputed income limitation that

could be designated (consistent with section 42(g)(1)(C)(ii)(III)) for that available

unit under §1.42-19(c) such that the average of all imputed income designations

of residential units in the project does not

exceed 60 percent of area median gross

income (AMGI).

(v) Example. The operation of paragraph (c)(2) of this section (that is, the

next available unit rule for the average

income test) is illustrated by the following

example.

(A) Facts. (1) A single-building housing project received an allocation of housing credit dollar

amount for 10 low-income units. The taxpayer who

owns the project constructs the building with 10

identically sized units and elects the average income

test. In the first year, the taxpayer intended to have

8 units that will qualify as low-income units (within

the meaning of §1.42-19(b)(1)), and 2 units that are

market-rate units. The taxpayer properly and timely

designates the imputed income limitations for the 8

units as follows: 4 units at 80 percent of AMGI; and

4 units at 40 percent of AMGI.

Table 1 to Paragraph (c)(2)(v)(A)(1)

those designations, Unit #10 was occupied by a new

income-qualified tenant, and then later, Unit #5 was

occupied by a new income-qualified resident.

(B) Analysis. Taxpayer sought to maintain the

status of the over-income units (Unit #1 and Unit #6)

as units described in §1.42-19(b)(1)(ii). As the

then-market rate units (Units ##5 and 10) became

available to rent, Taxpayer designated imputed

income limitations for them at 40 percent and 80 percent of AMGI, respectively. Immediately after each

designation, the average of the designations in the

project does not exceed 60 percent AMGI. Pursuant to the rule in paragraph (c)(2)(ii) of this section,

when there are multiple over-income units, Taxpayer

is not required to rent the next-available units in a

specific order, even though they may have different

imputed income limitations. Thus, Taxpayer complied with the rules of the next available unit rule,

and Unit #1 and Unit #6 maintain status as units

described in §1.42-19(b)(1)(ii).

*****

(i) Applicability dates—(1) In general.

***

(2) Applicability dates under the average income test. The requirements of

the second sentence of the definition of

over-income unit in paragraph (a) of this

section and paragraph (c)(2) of this section apply to taxable years beginning

after December 31, 2022. A taxpayer may

choose to apply this section to a taxable

year beginning after October 12, 2022,

and before January 1, 2023, provided that

the taxpayer chooses to apply §1.42-19 to

the same taxable year.

Par. 4. Section 1.42-19 is added to read

as follows:

Imputed Income Limitation of

the Unit

§1.42-19 Average income test.

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

Market Rate

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

Market Rate

(a) Average income set-aside. A project

for residential rental property satisfies the

average income test in section 42(g)(1)(C)

for a taxable year if the project contains a

qualified group of units (within the meaning of paragraph (b)(2) of this section) that

constitutes 40 percent or more of the residential units in the project. (In the case

of a project described in section 142(d)(6),

“40 percent” in the preceding sentence is

replaced with “25 percent.”)

(b) Definition of low-income unit and

qualified group of units—(1) Definition

of low-income unit. For purposes of this

section, a residential unit is a low-income

unit if and only if–

(i) Such unit is rent-restricted (as

defined in section 42(g)(2));

(ii) The individuals occupying such

unit satisfy the imputed income limitation

Unit Number

(2) In the first taxable year of the credit period

(Year 1), the project is fully leased and occupied by

income-qualified residents in Units ##1-4 and 6-9.

In Year 2, Unit #1 and Unit #6 become over-income.

The tenant residing in Unit #5 vacated that unit.

Taxpayer then designated an imputed income limitation of 40 percent of AMGI for Unit #5. Later in

Year 2, the tenant residing in Unit #10 vacated that

unit. Taxpayer designated an imputed income limitation of 80 percent of AMGI for Unit #10. After

400

Bulletin No. 2022–44

of that unit designated by the taxpayer in

accordance with paragraphs (c)(3) and (d)

of this section and with §1.42-19T(c) and

(d), or the unit meets the requirements

under section 42(g)(2)(D);

(iii) No provision in section 42 (including section 42(i)(3)(B)-(E)) or in the regulations under section 42 denies low-income status to that unit; and

(iv) The unit is part of a qualified group

of units under paragraph (b)(2) of this

section.

(2) Definition of qualified group of

units. A group of residential units is a

qualified group of units for a taxable year

if and only if—

(i) Each unit in the group satisfies

the requirements of paragraphs (b)(1)(i)

through (iii) of this section; and

(ii) The average of the imputed income

limitations of all of the units in the group

does not exceed 60 percent of area median

gross income (AMGI).

(3) Identification of qualified groups

of units—(i) Average income set-aside

test. For each taxable year in the extended

use period, the taxpayer must identify a

qualified group of units that constitute 40

percent or more of the residential units in

the project. The requirements in paragraph

(b)(3)(iii) of this section apply to these

identifications.

(ii) Applicable fraction determinations.

For each taxable year in the extended use

period, the taxpayer must identify a qualified group of units to be used in determining the applicable fractions for the buildings in the project.

(A) Identification of the units in the

qualified group of units used for determining applicable fractions. The residential units that are identified for purposes

of this paragraph (b)(3)(ii) include the

units that, under paragraph (b)(3)(i) of

this section, are included in the qualified

group of units identified for purposes of

the set-aside qualification of the project.

The taxpayer may identify additional units

for inclusion in the group of units used in

determining the applicable fractions for

buildings in the project provided that the

resulting group is a qualified group of

units within the meaning of paragraph (b)

(2) of this section.

(B) Computing applicable fractions of

buildings. For a taxable year, the applicable fraction of a building in a project is

Bulletin No. 2022–44

computed using the units that are in the

particular building and that are also in

the qualified group of units for the project

identified for purposes of this paragraph

(b)(3)(ii). The units included in the applicable fraction of a building do not have

to be a qualified group of units on their

own. See Example 4 of paragraph (e) of

this section.

(iii) Identification of units. The recordkeeping and reporting requirements in

§1.42-19T(c)(1) apply both to the identification of units that is required by paragraph (b)(3)(i) of this section and the

identification of units that is described in

paragraph (b)(3)(ii) of this section.

(c) Procedures. (1) - (2) [Reserved]

(3) Designation of imputed income limitations—(i) Timing of designation. (A)

Before a unit is first occupied as a low-income unit, or, except as provided in paragraph (c)(3)(i)(B) of this section, is first

occupied under a changed income limit,

the taxpayer must designate the unit’s

imputed income limitation or changed

imputed income limitation.

(B) For an occupied unit that is subject

to a change in imputed income limitation

pursuant to paragraph (d) of this section,

the taxpayer must designate the unit’s

changed imputed income limitation not

later than the end of the taxable year in

which the change occurs.

(ii) 10-percent increments. Under section 42(g)(1)(C)(ii)(III), a designation is

valid only if it is one of the following: 20

percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent

of AMGI.

(iii) Continuity. Except as provided in

paragraph (d) of this section, the imputed

income limitation of a residential unit

does not change.

(iv) [Reserved]

(4) [Reserved]

(d) Changing a unit’s designated

imputed income limitation—(1) Permitted

changes. Notwithstanding paragraph (c)

(3)(iii) of this section, the taxpayer may

change the imputed income limitation of

a unit in the following circumstances subject to the timing of designation requirement in paragraph (c)(3)(i)(B) of this

section.

(i) Federally permitted changes. Permission for the change is contained in IRS

forms, instructions, or guidance published

401

in the Internal Revenue Bulletin pursuant

to §601.601(d)(2)(ii)(b) of this chapter.

(ii) Housing credit agency (Agency)-permitted changes. The Agency with

jurisdiction of the project has issued public

written guidance that provides conditions

for a permitted change and that applies to

all average income test projects under the

jurisdiction of the Agency.

(iii) Certain laws. The change in designation is required or appropriate to

enhance protections contained in the following, as amended—

(A) The Americans with Disabilities

Act of 1990 (ADA), Pub. L. 101-336, 104

Stat. 328, 42 U.S.C. 12101, et seq.;

(B) The Fair Housing Amendments Act

of 1988, Pub. L. 100-430, 102 Stat.1619,

42 U.S.C. 3601, et seq.;

(C) The Violence Against Women Act

of 1994, Pub. L. 103-322, 108 Stat. 1902,

34 U.S.C. 12291, et seq.;

(D) The Rehabilitation Act of 1973,

Pub. L. 93-112, 87 Stat. 394, 29 U.S.C.

701, et seq.; or

(E) Any other State, Federal, or local

law or program that protects tenants and

that is identified pursuant to paragraph (d)

(1)(i) or (ii) of this section.

(iv) Tenant movement. If a current

income-qualified tenant moves to a different unit in the project –

(A) The unit to which the tenant moves

has its imputed income designation, if any,

changed to the limitation of the unit from

which the tenant is moving; and

(B) The vacated unit takes on the prior

limitation, if any, of the tenant’s new unit.

(v) Restoring compliance with average income requirements. If one or more

units lose low-income status or if there is

a change in the imputed income limitation

of some unit and if either event would

cause a previously qualifying group of

units to cease to be described in paragraph

(b)(2)(ii) of this section, then the taxpayer

may designate an imputed income limitation for a market-rate unit or may reduce

the existing imputed income limitations

of one or more other units in the project

in order to restore compliance with the

average income requirement. The rule in

this paragraph (d)(1)(v) may be applied to

market-rate, vacant, or low-income units,

but, in the case of occupied units, the current tenants must qualify under the new,

lower imputed income limitation.

October 31, 2022

(2) [Reserved]

(e) Examples. The operation of this

section is illustrated by the following

examples.

(1) Example 1—(i) Facts. (A) A single-building

housing project received an allocation of housing

credit dollar amount. The taxpayer who owns the

project elects the average income test, intending for

the 10-unit building to have 100 percent low-income

occupancy. The taxpayer properly and timely designates the imputed income limitations for the 10 units

as follows: 5 units at 80 percent of AMGI; and 5

units at 40 percent of AMGI. Also, for the first credit

year, the taxpayer follows proper procedure in identifying 4 units as the qualified group of units that are

to be used for qualifying under the average income

set-aside (Units ##1, 2, 6, and 7). Additionally, for

the first credit year, the taxpayer follows proper

procedure in identifying all 10 units as the qualified

group of units that are to be used for the applicable

fraction determination. All of the units in the project

are described in paragraphs (b)(1)(i) through (iii) of

this section.

Table 1 to Paragraph (e)(1)(i)(A)

Unit

Number

Imputed Income Limitation of

the Unit

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

80 percent of AMGI

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

40 percent of AMGI

(B) In the first taxable year of the credit period

(Year 1), the project is fully leased and occupied.

(ii) Analysis. The identified groups are qualified

groups under paragraph (b)(2) of this section. All

units in both of the groups are described in paragraphs (b)(1)(i) through (iii) of this section, and the

averages of the imputed income limitations of both

the 4-unit group (Units ##1, 2, 6, and 7) and the

10-unit group do not exceed 60 percent of AMGI.

(A) Average income set-aside. The project qualifies under the average income set-aside because the

identified group of 4 units (Units ##1, 2, 6, and 7) is

a qualified group of units that comprise at least 40%

of the residential units in the project.

(B) Qualified basis. All 10 units in the identified

qualified group of units are used in the applicable

fraction determination when calculating qualified

basis for purposes of determining the annual credit

amount under section 42(a).

(2) Example 2—(i) Facts. Assume the same

facts as Example 1 of paragraph (e)(1) of this section. In Year 2, Unit #6 (which has a designated

imputed income limitation of 40 percent of AMGI)

becomes uninhabitable. Repair work on Unit #6 is

completed in Year 3. For Year 2, Taxpayer identifies

October 31, 2022

the following as a qualified group of units that are to

be used for both the set-aside requirement and the

applicable fraction determination: Units ##1–4 and

7–10. For Year 3, Taxpayer identifies all 10 units as

the qualified group of units that are to be used for

the set-aside requirement and the applicable fraction

determination.

(ii) Analysis. For Year 2, the identified group is

a qualified group under paragraph (b)(2) of this section. All 8 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the

average of the imputed income limitations of the 8

units in the group of units does not exceed 60 percent

of AMGI.

(A) Average income set-aside. For Year 2, the

project qualifies for the average income set-aside

because the project contains a qualified group of

units that comprises at least 40% of the residential

units in the project.

(B) Qualified basis. To determine qualified basis

in Year 2, the 8 units in the identified qualified group

of units are used in the applicable fraction determination when calculating qualified basis for purposes

of determining the annual credit amount under section 42(a). Unit #6 could not have been identified in

the qualified group of units for use in the applicable

fraction determination because its lack of habitability prevents it from being a low-income unit. Further,

Taxpayer could not have identified all 9 of the habitable units to be used in the qualified group of units

for the applicable fraction determination because the

average of imputed income limitations of those 9

exceeds 60 percent of AMGI. Taxpayer had a choice

of which of Units ##1–5 it was going to not identify for use in the applicable fraction determination.

Omitting any one of them reduces the average limitation of the remaining group of 8 units to an amount

that does not exceed 60 percent of AMGI. Given

taxpayer’s decision to leave out Unit #5, Units ##1,

2, 3, 4, 7, 8, 9, and 10 are taken into account in the

applicable fraction.

(C) Recapture. At the close of Year 2, Unit #6’s

unsuitability for occupancy precludes it from being

described in paragraph (b)(1)(iii) of this section.

Unit #6’s resulting failure to be a low-income unit

prevents it from being in a qualified group for purposes of computing the applicable fraction. The

decline in the applicable fraction yields a decline

in qualified basis, which results in credit recapture

under section 42(j) for Year 2. Additionally, Unit #5

is not a low-income unit because the taxpayer did not

include it in the qualified group of units identified

for determining the building’s applicable fraction.

The exclusion of Unit #5 from the qualified group of

units further reduces the applicable fraction for Year

2 and so reduces qualified basis for that year as well.

Thus, this exclusion increases the credit recapture

amount under section 42(j).

(D) Restoration of habitability and of qualified

basis. As described in the facts in paragraph (e)(2)

(i) of this section, in Year 3, after repair work is complete, the formerly uninhabitable Unit #6 is again

occupied by a qualified tenant at the same imputed

income limitation, and the Taxpayer identifies all 10

units as the qualified group of units that are to be used

for the set-aside requirement and the applicable fraction determination. The identified group is a qualified group under paragraph (b)(2) of this section. All

402

10 units in the group are described in paragraphs (b)

(1)(i) through (iii) of this section, and the average of

the imputed income limitations of the 10 units in the

group of units does not exceed 60 percent of AMGI.

For Year 3, all 10 units are included in the qualified

group of units for purposes of the average income

set-aside test and are a qualified group of units for the

applicable fraction determination.

(3) Example 3—(i) Facts. Assume the same

facts as Example 2 of paragraph (e)(2) of this section, except that the income for the tenant residing

in Unit #5 has declined so that tenant’s income does

not exceed 60 percent of AMGI. For Year 2, taxpayer

timely redesignates Unit #5 pursuant to the rule in

paragraph (d)(1)(v) of this section so that the imputed

income limitation is 60 percent of AMGI instead of

80 percent of AMGI. Taxpayer also makes revisions

so that Unit #5 is rent-restricted under the redesignated imputed income limitation. Taxpayer identifies

9 units (Units ##1–5 and 7–10) as the qualified group

of units that are to be used for the set-aside requirement and the applicable fraction determination.

Table 2 to Paragraph (e)(3)(i)

Unit Number

Imputed Income Limitation

of the Unit

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

60 percent of AMGI

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

40 percent of AMGI

(ii) Analysis. For Year 2, the identified group is

a qualified group under paragraph (b)(2) of this section. All 9 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the

average of the imputed income limitations of the 9

units in the group of units does not exceed 60 percent

of AMGI.

(A) Average income set-aside. For Year 2, project

contains a qualified group of units that comprises at

least 40% of the residential units in the project.

(B) Qualified basis. To determine qualified

basis, all 9 units in the identified qualified group of

units are used in the applicable fraction determination when calculating qualified basis for purposes

of determining the annual credit amount under

section 42(a). Unit #6 could not have been identified in the qualified group of units for use in the

applicable fraction determination because its lack

of habitability prevents it from being a low-income

unit. Thus, Units ##1, 2, 3, 4, 5, 7, 8, 9, and 10

are taken into account in the applicable fraction

determination.

(C) Recapture. At the close of Year 2, the amount

of the qualified basis is less than the amount of

the qualified basis at the close of Year 1, because

Unit #6’s unsuitability for occupancy prohibits

Bulletin No. 2022–44

it from being a low-income unit. Unit #6’s failure

to be a low-income unit results in a credit recapture amount under section 42(j) for Year 2 related

to Unit #6. Because Units ##1–5 and 7–10 are all

included in the qualified group of units for use in the

applicable fraction determination, Units ##1–5 and

7–10 are included in qualified basis for Year 2 when

determining the recapture amount.

(4) Example 4—(i) Facts. (A) A multiple-building housing project consisting of two buildings

received an allocation of housing credit dollar

amount, and the taxpayer who owns the project

elects the average income test. The taxpayer intends

for the buildings (each containing 5 units) to have

100 percent low-income occupancy. The taxpayer

properly and timely designates the imputed income

limitations for the 10 units in Buildings 1 and 2 as

follows: Building A contains 2 units at 80 percent of

AMGI and 3 units at 40 percent of AMGI; and Building B contains 2 units at 40 percent of AMGI and 3

units at 80 percent of AMGI.

Table 3 to Paragraph (e)(4)(i)(A)

Building A,

Unit Number

Imputed Income

Limitation of the Unit

A1

80 percent of AMGI

A2

80 percent of AMGI

A3

40 percent of AMGI

A4

40 percent of AMGI

A5

40 percent of AMGI

Building B,

Unit Number

B1

40 percent of AMGI

B2

40 percent of AMGI

B3

80 percent of AMGI

B4

80 percent of AMGI

B5

80 percent of AMGI

(B) In the first taxable year of the credit period

(Year 1), the project is fully leased and occupied.

Also, for the first credit year, the taxpayer follows

proper procedure in identifying all 10 units as a qualified group of units for the minimum set-aside and

the applicable fraction determination.

(ii) Analysis. For Year 1, the identified group is

a qualified group under paragraph (b)(2) of this section. All 10 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the

average of the imputed income limitations of the 10

units in the group of units does not exceed 60 percent

of AMGI.

(A) Average income test. The multiple-building

project meets the average income test as the project

contains a qualified group of units that comprises

at least 40% of the residential units in the project.

The fact that the average of the income limitations of

the units in Building B exceeds 60 percent of AMGI

does not impact this result.

(B) Qualified basis. To determine qualified

basis, all 10 units in the identified qualified group of

units across Building A and Building B are used in

the applicable fraction determination when calculating qualified basis of each building for purposes

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