# Bulletin No. 2022–44

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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 fin

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A793a2187c3080267. Public record. Not legal advice.