Carryover Allocations and Other Rules Relating to the Low-Income Housing Credit

DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 602

[TD 8520]

RIN 1545-AR15

Carryover Allocations and Other Rules Relating to the Low-Income

Housing Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the low-

income housing credit under section 42 of the Internal Revenue Code.

The regulations provide guidance with respect to: Eligibility for a

carryover allocation; procedures for electing an appropriate percentage

month; the general public use requirement; utility allowances to be

used in determining gross rent; and the inclusion of the cost of

certain services in gross rent. The regulations incorporate and expand

upon the guidance provided by Notice 89-1, 1989-1 C.B. 620, and Notice

89-6, 1989-1 C.B. 625. This information will assist State and local

housing credit agencies and taxpayers in complying with the

requirements of section 42. The regulations affect taxpayers that apply

for or claim the low-income housing tax credit and State and local

housing credit agencies.

DATES: These regulations are effective May 2, 1994.

For dates of applicability of these regulations, see Sec. 1.42-12.

FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson (202) 622-3040

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this final regulation

have been reviewed and approved by the Office of Management and Budget

in accordance with the requirements of the Paperwork Reduction Act (44

U.S.C. 3504(h)) under control number 1545-1102. The estimated annual

burden per State or local government respondent/recordkeeper varies

from 18.60 hours to 51.63 hours, with an estimated average of 39.61

hours. The estimated annual burden for all other respondent/

recordkeepers varies from 1.90 hours to 6.20 hours, with an estimated

average of 4.50 hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the Treasury, Office of Information

and Regulatory Affairs, Washington, DC 20503.

Background

On December 29, 1992, the IRS published a notice of proposed

rulemaking in the Federal Register (57 FR 61852) proposing amendments

to the Income Tax Regulations (26 CFR part 1) under section 42 of the

Internal Revenue Code of 1986, as amended. These amendments provide

guidance on several requirements of the low-income housing tax credit

and incorporate and expand upon the guidance provided by Notices 89-1

and 89-6.

Written comments responding to the notice of proposed rulemaking

were received. A public hearing was scheduled for February 16, 1993,

pursuant to a notice of public hearing published simultaneously with

the notice of proposed rulemaking. However, the IRS received no

requests to speak at the public hearing by the designated date. On

February 8, 1993, the IRS published a notice (58 FR 7497) cancelling

the public hearing on the proposed regulations. After consideration of

the comments received, the proposed regulations are adopted as revised

by this Treasury decision.

Explanation of Provisions

Carryover Allocations

Section 42 provides for a low-income housing credit that may be

claimed as part of the general business credit under section 38. In

general, the credit is allowable only to the extent that the owner of a

qualified low-income building receives a housing credit allocation from

a State or local housing credit agency (Agency).

Under section 42(h)(1)(E), an allocation may be made to a qualified

building that has not yet been placed in service, provided the building

is placed in service not later than the close of the second calendar

year following the calendar year of the allocation (a carryover

allocation). Section 42(h)(1)(E)(ii) defines a qualified building as

any building that is part of a project if the taxpayer's basis in the

project (as of the close of the calendar year of the allocation) is

more than 10 percent of the taxpayer's reasonably expected basis in the

project (as of the close of the second calendar year following the

calendar year of the allocation). For these purposes, the taxpayer's

basis equals the taxpayer's basis in land and depreciable property. See

2 H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. II-82 (1988), 1988-3

C.B. 572. A carryover allocation may also be made to a multiple-

building project under section 42(h)(1)(F).

Commentators requested clarification on when a carryover allocation

is treated as if it had never been made. The final regulations clarify

that only a failure to satisfy a requirement of section 42(h)(1) (E) or

(F) that must be satisfied by the close of the calendar year of

allocation will cause a carryover allocation to be treated as if it had

not been made.

The proposed regulations provide that a taxpayer does not have

carryover-allocation basis in a project unless, by the close of the

calendar year of allocation, the taxpayer is the owner, for federal

income tax purposes, of land or depreciable real property expected to

be part of the project. The final regulations do not explicitly contain

this requirement. After further consideration, the IRS believes that

satisfaction of the requirements of Sec. 1.42-6 is sufficient to ensure

that a taxpayer intends to complete a qualified low-income housing

project. For example, if a taxpayer has basis in land or depreciable

property that is reasonably expected to be part of a project and the

requirements of Sec. 1.42-6 are otherwise satisfied, the taxpayer has

carryover-allocation basis with respect to the land or depreciable

property. This basis includes all items that are properly capitalizable

with respect to the land or depreciable property. Thus, notwithstanding

the rule in Notice 89-1 to the contrary, a nonrefundable downpayment

for, or an amount paid to acquire an option to purchase, land or

depreciable property may be included in carryover-allocation basis if

properly capitalizable into the basis of land or depreciable property

that is reasonably expected to be part of a project.

Commentators objected to the exclusion of credit application fees

from carryover-allocation basis and requested that the final

regulations permit these fees to be included in carryover-allocation

basis. On further consideration, it appears that an absolute

prohibition against the inclusion of application fees (and compliance

monitoring fees, which were also not included) in carryover-allocation

basis is not warranted. Accordingly, the final regulations subject

credit application and compliance monitoring fees to the same standards

imposed upon other fees under the regulations. For example, if a fee is

properly capitalizable as part of the taxpayer's basis in land or

depreciable property that is reasonably expected to be part of a

project, the fee is included in carryover-allocation basis.

Verification of Basis

The proposed regulations provide verification requirements and

procedures that an Agency must follow to ensure that the minimum basis

requirement that is required to be met by the close of the year of

allocation is, in fact, met. A commentator suggested that the basis

verification requirements are too burdensome to Agencies and that

Agencies lack the expertise to verify the costs includible in basis.

The IRS does not expect Agencies to audit projects or make legal

determinations. Rather, the proposed regulations provide that an Agency

may verify the basis requirement by requiring the taxpayer to obtain a

certification from an attorney or certified public accountant that the

taxpayer has incurred the minimum required basis by the close of the

calendar year of allocation. Accordingly, the final regulations adopt

the basis verification requirement of the proposed regulations.

Requirements for Making Carryover Allocations

The proposed regulations provide guidance on the information needed

for carryover allocation documents. A commentator suggested that the

final regulations clarify whether a newly constructed building that

receives an allocation of credit in different calendar years must have

a separate Form 8609 for each allocation and, if so, whether the same

building identification number (B.I.N.) should be used.

The final regulations clarify that, in this and similar situations,

a separate Form 8609 is necessary for both allocations and that the

B.I.N. assigned to the building for the first allocation also is used

for the subsequent allocation.

Use by the General Public

The legislative history of section 42 provides that residential

rental units must be for use by the general public. Residential rental

units are not for use by the general public, for example, if the units

are provided only for members of a social organization or provided by

an employer for its employees. The proposed regulations provide an

exception for an employer-provided resident manager unit that is a

facility reasonably required by a project.

Commentators suggested that the exception for a resident manager

unit be expanded to include a unit occupied by a full-time maintenance

person. After further review, IRS the Service and the Treasury have

concluded that the reference to a resident manager unit in the proposed

regulations was inappropriate because the general public use

requirement only applies to residential rental units. A unit that is

occupied by a full-time resident manager or a full-time maintenance

person is not a residential rental unit but is a facility reasonably

required by a project. See Rev. Rul. 92-61, 1992-2 C.B. 7. Accordingly,

the final regulations remove the reference to a resident manager unit.

Utility Allowances

A commentator suggested that the final regulations provide that in

areas where there is a utility allowance increase without a

corresponding increase in area median gross income, an owner may adjust

the rent upwards so that rent receipts do not decrease below the

minimum rent floor of section 42(g)(2)(A). Because a change of this

nature requires an amendment to the statute, the final regulations do

not adopt this suggestion.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 12866. It

has also been determined that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act

(5 U.S.C. chapter 6) do not apply to these regulations, and, therefore,

a Regulatory Flexibility Analysis is not required. Pursuant to section

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

rulemaking for the regulations was submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small business.

Drafting Information

The principal author of these regulations is Christopher J. Wilson,

Office of the Assistant Chief Counsel (Passthroughs and Special

Industries), Internal Revenue Service. However, other personnel from

the IRS and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

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

Sections 1.42-6, 1.42-8, 1.42-9, 1.42-10, 1.42-11, and 1.42-12

also issued under 26 U.S.C. 42(n); * * *

Par. 2. Section 1.42-6 is added, Sec. 1.42-7 is added and reserved,

and Secs. 1.42-8 through 1.42-12 are added to read as follows:

Sec. 1.42-6 Buildings qualifying for carryover allocations.

(a) Carryover allocations. A carryover allocation is an allocation

that meets the requirements of section 42(h)(1) (E) or (F). If the

requirements of section 42(h)(1) (E) or (F) that are required to be

satisfied by the close of the calendar year are not satisfied, the

allocation is treated as if it had not been made. For example, if the

taxpayer's basis in the project as of the close of the calendar year of

allocation is not more than 10 percent of the taxpayer's reasonably

expected basis in the project as of the close of the second calendar

year following the year of allocation, the carryover allocation is not

valid and is treated as if it had not been made.

(b) Carryover-allocation basis--(1) In general. Subject to the

limitations of paragraph (b)(2) of this section, a taxpayer's basis in

a project for purposes of section 42(h)(1) (E)(ii) or (F) (carryover-

allocation basis) is the taxpayer's adjusted basis in land or

depreciable property that is reasonably expected to be part of the

project, whether or not these amounts are includible in eligible basis

under section 42(d). Thus, for example, if the project is to include

property that is not residential rental property, such as commercial

space, the basis attributable to the commercial space, although not

includible in eligible basis, is includible in carryover-allocation

basis. The adjusted basis of land and depreciable property is

determined under sections 1012 and 1016, and generally includes the

direct and indirect costs of acquiring, constructing, and

rehabilitating the property. Costs otherwise includible in carryover-

allocation basis are not excluded by reason of having been incurred

prior to the calendar year in which the carryover allocation is made.

(2) Limitations--For purposes of determining carryover-allocation

basis under paragraph (b)(1) of this section, the following limitations

apply.

(i) Taxpayer must have basis in land or depreciable property

related to the project. A taxpayer has carryover-allocation basis to

the extent that it has basis in land or depreciable property and the

land or depreciable property is reasonably expected to be part of the

project for which the carryover allocation is made. This basis includes

all items that are properly capitalizable with respect to the land or

depreciable property. For example, a nonrefundable downpayment for, or

an amount paid to acquire an option to purchase, land or depreciable

property may be included in carryover-allocation basis if properly

capitalizable into the basis of land or depreciable property that is

reasonably expected to be part of a project.

(ii) High cost areas. Any increase in eligible basis that may

result under section 42(d)(5)(C) from a building's location in a

qualified census tract or difficult development area is not taken into

account in determining carryover-allocation basis or reasonably

expected basis.

(iii) Amounts not treated as paid or incurred. An amount is not

includible in carryover-allocation basis unless it is treated as paid

or incurred under the method of accounting used by the taxpayer. For

example, a cash method taxpayer cannot include construction costs in

carryover-allocation basis unless the costs have been paid, and an

accrual method taxpayer cannot include construction costs in carryover-

allocation basis unless they have been properly accrued. See paragraph

(b)(2)(iv) of this section for a special rule for fees.

(iv) Fees. A fee is includible in carryover-allocation basis only

to the extent the requirements of paragraph (b)(2)(iii) of this section

are met and--

(A) The fee is reasonable;

(B) The taxpayer is legally obligated to pay the fee;

(C) The fee is capitalizable as part of the taxpayer's basis in

land or depreciable property that is reasonably expected to be part of

the project;

(D) The fee is not paid (or to be paid) by the taxpayer to itself;

and

(E) If the fee is paid (or to be paid) by the taxpayer to a related

person, and the taxpayer uses the cash method of accounting, the

taxpayer could properly accrue the fee under the accrual method of

accounting (considering, for example, the rules of section 461(h)). A

person is a related person if the person bears a relationship to the

taxpayer specified in sections 267(b) or 707(b)(1), or if the person

and the taxpayer are engaged in trades or businesses under common

control (within the meaning of subsections (a) and (b) of section 52).

(3) Reasonably expected basis. Rules similar to the rules of

paragraphs (a) and (b) of this section apply in determining the

taxpayer's reasonably expected basis in a project (land and depreciable

basis) as of the close of the second calendar year following the

calendar year of the allocation.

(4) Examples. The following examples illustrate the rules of

paragraphs (a) and (b) of this section.

Example 1. (i) Facts. C, an accrual-method taxpayer, receives a

carryover allocation from Agency, the state housing credit agency,

in September of 1993. As of that date, C has not begun construction

of the low-income housing building C plans to build. However, C has

owned the land on which C plans to build the building since 1985.

C's basis in the land is $100,000. C reasonably expects that by the

end of 1995, C's basis in the project of which the building is to be

a part will be $2,000,000. C also expects that because the project

is located in a qualified census tract, C will be able to increase

its basis in the project to $2,600,000. Before the close of 1993, C

incurs $150,000 of costs for architects' fees and site preparation.

C properly accrues these costs under its method of accounting and

capitalizes the costs.

(ii) Determination of carryover-allocation basis. C's $100,000

basis in the land is includible in carryover-allocation basis even

though C has owned the land since 1985. The $150,000 of costs C has

incurred for architects' fees and site preparation are also

includible in carryover-allocation basis. The expected increase in

basis due to the project's location in a qualified census tract is

not taken into account in determining C's carryover-allocation

basis. Accordingly, C's carryover-allocation basis in the project of

which the building is a part is $250,000.

(iii) Determination of whether building is qualified. C's

reasonably expected basis in the project at the close of the second

calendar year following the calendar year of allocation is

$2,000,000. The expected increase in eligible basis due to the

project's location in a qualified census tract is not taken into

account in determining this amount. Because C's carryover-allocation

basis is more than 10 percent of C's reasonably expected basis in

the project of which the building is a part, the building for which

C received the carryover allocation is a qualified building for

purposes of section 42(h)(1)(E)(ii) and paragraph (a) of this

section.

Example 2. (i) Facts. D, an accrual-method taxpayer, receives a

carryover allocation from Agency, the state housing credit agency,

on September 11, 1993. As of that date, D has not begun construction

of the low-income housing building D plans to build and D does not

have basis in the land on which D plans to build the building. In

1993, D incurs some costs related to the planned building, including

architects' fees. However, at the close of 1993, these costs do not

exceed 10 percent of D's reasonably expected basis in the project.

(ii) Determination of whether building is qualified. Because D's

carryover-allocation basis is not more than 10 percent of D's

reasonably expected basis in the project of which the building is a

part, the building for which D received a carryover allocation is

not a qualified building for purposes of section 42(h)(1)(E)(ii) and

paragraph (a) of this section. The carryover allocation to D is not

valid, and is treated as if it had not been made.

(c) Verification of basis by Agency--(1) Verification requirement.

An Agency that makes a carryover allocation to a taxpayer must verify

that, as of the close of the calendar year of allocation, the taxpayer

has incurred more than 10 percent of the reasonably expected basis in

the project (land and depreciable basis).

(2) Manner of verification. An Agency may verify that a taxpayer

has incurred more than 10 percent of its reasonably expected basis in a

project by obtaining a certification from the taxpayer, in writing and

under penalty of perjury, that the taxpayer has incurred by the close

of the calendar year of the allocation more than 10 percent of the

reasonably expected basis in the project. The certification must be

accompanied by supporting documentation that the Agency must review.

Supporting documentation may include, for example, copies of checks or

other records of payments. Alternatively, an Agency may verify that the

taxpayer has incurred adequate basis by requiring that the taxpayer

obtain from an attorney or certified public accountant a written

certification to the Agency, that the attorney or accountant has

examined all eligible costs incurred with respect to the project and

that, based upon this examination, it is the attorney's or accountant's

belief that the taxpayer has incurred more than 10 percent of its

reasonably expected basis in the project by the close of the calendar

year of the allocation.

(3) Time of verification. An Agency may require that the basis

certification be submitted to or received by the Agency prior to the

close of the calendar year of allocation or within a reasonable time

after the close of the calendar year of allocation. The Agency will

need to verify basis in order to accurately complete the Form 8610,

Annual Low-Income Housing Credit Agencies Report, for the calendar

year. If certification is not timely made, or supporting documentation

is lacking, inadequate, or does not actually support the certification,

the Agency should notify the taxpayer and try to get adequate

documentation. If the Agency cannot verify before the Form 8610 is

filed that the taxpayer has satisfied the basis requirement for a

carryover allocation, the allocation is treated as if it had not been

made and the carryover allocation document should not be filed with the

Form 8610.

(d) Requirements for making carryover allocations--(1) In general.

Generally, an allocation is made when an Agency issues the Form 8609,

Low-Income Housing Credit Allocation Certification, for a building. See

Sec. 1.42-1T(d)(8)(ii). An Agency does not issue the Form 8609 for a

building until the building is placed in service. However, in cases

where allocations of credit are made pursuant to section 42(h)(1)(E)

(relating to carryover allocations for buildings) or section

42(h)(1)(F) (relating to carryover allocations for multiple-building

projects), Form 8609 is not used as the allocating document because the

buildings are not yet in service. When an allocation is made pursuant

to section 42(h)(1) (E) or (F), the allocating document is the document

meeting the requirements of paragraph (d)(2) of this section. In

addition, when an allocation is made pursuant to section 42(h)(1)(F),

the requirements of paragraph (d)(3) of this section must be met for

the allocation to be valid. An allocation pursuant to section 42(h)(1)

(E) or (F) reduces the state housing credit ceiling for the year in

which the allocation is made, whether or not the Form 8609 is also

issued in that year.

(2) Requirements for allocation. An allocation pursuant to section

42(h)(1) (E) or (F) is made when an allocation document containing the

following information is completed, signed, and dated by an authorized

official of the Agency--

(i) The address of each building in the project, or if none exists,

a specific description of the location of each building;

(ii) The name, address, and taxpayer identification number of the

taxpayer receiving the allocation;

(iii) The name and address of the Agency;

(iv) The taxpayer identification number of the Agency;

(v) The date of the allocation;

(vi) The housing credit dollar amount allocated to the building or

project, as applicable;

(vii) The taxpayer's reasonably expected basis in the project (land

and depreciable basis) as of the close of the second calendar year

following the calendar year in which the allocation is made;

(viii) The taxpayer's basis in the project (land and depreciable

basis) as of the close of the calendar year in which the allocation is

made and the percentage that basis bears to the reasonably expected

basis in the project (land and depreciable basis) as of the close of

the second following calendar year;

(ix) The date that each building in the project is expected to be

placed in service; and

(x) The Building Identification Number (B.I.N.) to be assigned to

each building in the project. The B.I.N. must reflect the year an

allocation is first made to the building, regardless of the year that

the building is placed in service. This B.I.N. must be used for all

allocations of credit for the building. For example, rehabilitation

expenditures treated as a separate new building under section 42(e)

should not have a separate B.I.N. if the building to which the

rehabilitation expenditures are made has a B.I.N. In this case, the

B.I.N. used for the rehabilitation expenditures shall be the B.I.N.

previously assigned to the building, although the rehabilitation

expenditures must have a separate Form 8609 for the allocation.

Similarly, a newly constructed building that receives an allocation of

credit in different calendar years must have a separate Form 8609 for

each allocation. The B.I.N. assigned to the building for the first

allocation must be used for the subsequent allocation.

(3) Special rules for project-based allocations--(i) In general. An

allocation pursuant to section 42(h)(1)(F) (a project-based allocation)

must meet the requirements of this section as well as the requirements

of section 42(h)(1)(F), including the minimum basis requirement of

section 42(h)(1)(E)(ii).

(ii) Requirement of section 42(h)(1)(F)(i)(III). An allocation

satisfies the requirement of section 42(h)(1)(F)(i)(III) if the Form

8609 that is issued for each building that is placed in service in the

project states the portion of the project-based allocation that is

applied to that building.

(4) Recordkeeping requirements--(i) Taxpayer. When an allocation is

made pursuant to section 42(h)(1) (E) or (F), the taxpayer must retain

a copy of the allocation document and file an additional copy with the

Form 8609 that is issued to the taxpayer for a building after the

building is placed in service. The taxpayer need only file a copy of

the allocation document with the Form 8609 for the building for the

first year the credit is claimed. However, the Form 8609 must be filed

for the first taxable year in which the credit is claimed and for each

taxable year thereafter throughout the compliance period, whether or

not a credit is claimed for the taxable year.

(ii) Agency. The Agency must retain a copy of the allocation

document and file the original with the Agency's Form 8610 that

accounts for the year the allocation is made. The Agency must also

retain a copy of the Form 8609 that is issued to the taxpayer and file

the original with the Agency's Form 8610 that reflects the year the

form is issued.

(5) Separate procedure for election of appropriate percentage

month. If a taxpayer receives an allocation under section 42(h)(1) (E)

or (F) and wishes to elect under section 42(b)(2)(A)(ii) to use the

appropriate percentage for a month other than the month in which a

building is placed in service, the requirements specified in Sec. 1.42-

8 must be met for the election to be effective.

(e) Special rules. The following rules apply for purposes of this

section.

(1) Treatment of partnerships and other flow-through entities. With

respect to taxpayers that own projects through partnerships or other

flow-through entities (e.g., S corporations, estates, or trusts),

carryover-allocation basis is determined at the entity level using the

rules provided by this section. In addition, the entity is responsible

for providing to the Agency the certification and documentation

required under the basis verification requirement in paragraph (c) of

this section.

(2) Transferees. If land or depreciable property that is expected

to be part of a project is transferred after a carryover allocation has

been made for a building that is reasonably expected to be part of the

project, but before the close of the calendar year of the allocation,

the transferee's carryover-allocation basis is determined under the

principles of this section and section 42(d)(7). See also Rev. Rul. 91-

38, 1991-2 C.B. 3 (see Sec. 601.601(d)(2)(ii)(b) of this chapter). In

addition, the transferee is treated as the taxpayer for purposes of the

basis verification requirement of this section, and therefore, is

responsible for providing to the Agency the required certifications and

documentation.

Sec. 1.42-7 Substantially bond-financed buildings. [Reserved]

Sec. 1.42-8 Election of appropriate percentage month.

(a) Election under section 42(b)(2)(A)(ii)(I) to use the

appropriate percentage for the month of a binding agreement--(1) In

general. For purposes of section 42(b)(2)(A)(ii)(I), an agreement

between a taxpayer and an Agency as to the housing credit dollar amount

to be allocated to a building is considered binding if it--

(i) Is in writing;

(ii) Is binding under state law on the Agency, the taxpayer, and

all successors in interest;

(iii) Specifies the type(s) of building(s) to which the housing

credit dollar amount applies (i.e., a newly constructed or existing

building, or substantial rehabilitation treated as a separate new

building under section 42(e));

(iv) Specifies the housing credit dollar amount to be allocated to

the building(s); and

(v) Is dated and signed by the taxpayer and the Agency during the

month in which the requirements of paragraphs (a)(1) (i) through (iv)

of this section are met.

(2) Effect on state housing credit ceiling. Generally, a binding

agreement described in paragraph (a)(1) of this section is an agreement

by the Agency to allocate credit to the taxpayer at a future date. The

binding agreement may include a reservation of credit or a binding

commitment (under section 42(h)(1)(C)) to allocate credit in a future

taxable year. A reservation or a binding commitment to allocate credit

in a future year has no effect on the state housing credit ceiling

until the year the Agency actually makes an allocation. However, if the

binding agreement is also a carryover allocation under section 42(h)(1)

(E) or (F), the state housing credit ceiling is reduced by the amount

allocated by the Agency to the taxpayer in the year the carryover

allocation is made. For a binding agreement to be a valid carryover

allocation, the requirements of paragraph (a)(1) of this section and

Sec. 1.42-6 must be met.

(3) Time and manner of making election. An election under section

42(b)(2)(A)(ii)(I) may be made either as part of the binding agreement

under paragraph (a)(1) of this section to allocate a specific housing

credit dollar amount or in a separate document that references the

binding agreement. In either case, the election must--

(i) Be in writing;

(ii) Reference section 42(b)(2)(A)(ii)(I);

(iii) Be signed by the taxpayer;

(iv) If it is in a separate document, reference the binding

agreement that meets the requirements of paragraph (a)(1) of this

section; and

(v) Be notarized by the 5th day following the end of the month in

which the binding agreement was made.

(4) Multiple agreements--(i) Rescinded agreements. A taxpayer may

not make an election under section 42(b)(2)(A)(ii)(I) for a building if

an election has previously been made for the building for a different

month. For example, assume a taxpayer entered into a binding agreement

for allocation of a specific housing credit dollar amount to a building

and made the election under section 42(b)(2)(A)(ii)(I) to apply the

appropriate percentage for the month of the binding agreement. If the

binding agreement subsequently is rescinded under state law, and the

taxpayer enters into a new binding agreement for allocation of a

specific housing credit dollar amount to the building, the taxpayer

must apply to the building the appropriate percentage for the elected

month of the rescinded binding agreement. However, if no prior election

was made with respect to the rescinded binding agreement, the taxpayer

may elect the appropriate percentage for the month of the new binding

agreement.

(ii) Increases in credit. The election under section

42(b)(2)(A)(ii)(I), once made, applies to any increase in the credit

amount allocated for a building, whether the increase occurs in the

same or in a subsequent year. However, in the case of a binding

agreement (or carryover allocation that is treated as a binding

agreement) to allocate a credit amount under section 42(e)(1) for

substantial rehabilitation treated as a separate new building, a

taxpayer may make the election under section 42(b)(2)(A)(ii)(I)

notwithstanding that a prior election under section 42(b)(2)(A)(ii)(I)

is in effect for a prior allocation of credit for a substantial

rehabilitation that was previously placed in service under section

42(e).

(5) Amount allocated. The housing credit dollar amount eventually

allocated to a building may be more or less than the amount specified

in the binding agreement. Depending on the Agency's determination

pursuant to section 42(m)(2) as to the financial feasibility of the

building (or project), the Agency may allocate a greater housing credit

dollar amount to the building (provided that the Agency has additional

housing credit dollar amounts available to allocate for the calendar

year of the allocation) or the Agency may allocate a lesser housing

credit dollar amount. Under section 42(h)(7)(D), in allocating a

housing credit dollar amount, the Agency must specify the applicable

percentage and maximum qualified basis of the building. The applicable

percentage may be less, but not greater than, the appropriate

percentage for the month the building is placed in service, or the

month elected by the taxpayer under section 42(b)(2)(A)(ii)(I). Whether

the appropriate percentage is the appropriate percentage for the 70-

percent present value credit or the 30-percent present value credit is

determined under section 42(i)(2) when the building is placed in

service.

(6) Procedures--(i) Taxpayer. The taxpayer must give the original

notarized election statement to the Agency before the close of the 5th

calendar day following the end of the month in which the binding

agreement is made. The taxpayer must retain a copy of the binding

agreement and the election statement and must file an additional copy

of each with the taxpayer's Form 8609, Low-Income Housing Credit

Allocation Certification, for the first taxable year in which credit is

claimed for the building.

(ii) Agency. The Agency must file with the Internal Revenue Service

the original of the binding agreement and the election statement with

the Agency's Form 8610, Annual Low-Income Housing Credit Agencies

Report, that accounts for the year the allocation is actually made. The

Agency must also retain a copy of the binding agreement and the

election statement.

(7) Examples. The following examples illustrate the provisions of

this section. In each example, X is the taxpayer, Agency is the state

housing credit agency, and the carryover allocations meet the

requirements of Sec. 1.42-6 and are otherwise valid.

Example 1. (i) In August 1993, X and Agency enter into an

agreement that Agency will allocate $100,000 of housing credit

dollar amount for the low-income housing building X is constructing.

The agreement is binding and meets all the requirements of paragraph

(a)(1) of this section. The agreement is a reservation of credit,

not an allocation, and therefore, has no effect on the state housing

credit ceiling. On or before September 5, 1993, X signs and has

notarized a written election statement that meets the requirements

of paragraph (a)(3) of this section. The applicable percentage for

the building is the appropriate percentage for the month of August

1993.

(ii) Agency makes a carryover allocation of $100,000 of housing

credit dollar amount for the building on October 2, 1993. The

carryover allocation reduces Agency's state housing credit ceiling

for 1993. Due to unexpectedly high construction costs, when X places

the building in service in July 1994, the product of the building's

qualified basis and the applicable percentage for the building (the

appropriate percentage for the month of August 1993) is $150,000,

rather than $100,000. Notwithstanding that only $100,000 of credit

was allocated for the building in 1993, Agency may allocate an

additional $50,000 of housing credit dollar amount for the building

from its state housing credit ceiling for 1994. The appropriate

percentage for the month of August 1993 is the applicable percentage

for the building for the entire $150,000 of credit allocated for the

building, even though separate allocations were made in 1993 and

1994. Because allocations were made for the building in two separate

calendar years, Agency must issue two Forms 8609 to X. One Form 8609

must reflect the $100,000 allocation made in 1993, and the other

Form 8609 must reflect the $50,000 allocation made in 1994.

(iii) X gives the original notarized statement to Agency on or

before September 5, 1993, and retains a copy of the binding

agreement, election statement, and carryover allocation document. X

files a copy of the binding agreement, election statement, and

carryover allocation document with X's Form 8609 for the first

taxable year in which X claims credit for the building.

(iv) Agency files the original of the binding agreement,

election statement, and 1993 carryover allocation document with its

1993 Form 8610. Agency retains a copy of the binding agreement,

election statement, and carryover allocation document. After the

building is placed in service in 1994, Agency issues to X a copy of

the Form 8609 reflecting the 1993 carryover allocation of $100,000

and files the original of that form with its 1994 Form 8610. Agency

also files the original of the 1994 Form 8609 reflecting the $50,000

allocation with its 1994 Form 8610 and issues to X a copy of the

1994 Form 8609. Agency retains copies of the Forms 8609 that are

issued to X.

Example 2. (i) In September 1993, X and Agency enter into an

agreement that Agency will allocate $70,000 of housing credit dollar

amount for rehabilitation expenditures that X is incurring and that

X will treat as a new low-income housing building under section

42(e)(1). The agreement is binding and meets all the requirements of

paragraph (a)(1) of this section. The agreement is a reservation of

credit, not an allocation, and therefore, has no effect on Agency's

state housing credit ceiling. On or before October 5, 1993, X signs

and has notarized a written election statement that meets the

requirements of paragraph (a)(3) of this section. The applicable

percentage for the building is the appropriate percentage for the

month of September 1993. Agency makes a carryover allocation of

$70,000 of housing credit dollar amount for the building on November

15, 1993. The carryover allocation reduces by $70,000 Agency's state

housing credit ceiling for 1993.

(ii) In October 1994, X and Agency enter into another binding

agreement meeting the requirements of paragraph (a)(1) of this

section. Under the agreement, Agency will allocate $50,000 of

housing credit dollar amount for additional rehabilitation

expenditures by X that qualify as a second separate new building

under section 42(e)(1). On or before November 5, 1994, X signs and

has notarized a written election statement meeting the requirements

of paragraph (a)(3) of this section. On December 1, 1994, X receives

a carryover allocation under section 42(h)(1)(E) for $50,000. The

carryover allocation reduces by $50,000 Agency's state housing

credit ceiling for 1994. The applicable percentage for the

rehabilitation expenditures treated as the second separate new

building is the appropriate percentage for the month of October

1994, not September 1993. The appropriate percentage for the month

of September 1993 still applies to the allocation of $70,000 for the

rehabilitation expenditures treated as the first separate new

building. Because allocations were made for the building in two

separate calendar years, Agency must issue two Forms 8609 to X. One

Form 8609 must reflect the $70,000 allocation made in 1993, and the

other Form 8609 must reflect the $50,000 allocation made in 1994.

(iii) X gives the first original notarized statement to Agency

on or before October 5, 1993, and retains a copy of the first

binding agreement, election statement, and carryover allocation

document issued in 1993. X gives the second original notarized

statement to Agency on or before November 5, 1994, and retains a

copy of the second binding agreement, election statement, and

carryover allocation document issued in 1994. X files a copy of the

binding agreements, election statements, and carryover allocation

documents with X's Forms 8609 for the first taxable year in which X

claims credit for the buildings.

(iv) Agency retains a copy of the binding agreements, election

statements, and carryover allocation documents. Agency files the

original of the first binding agreement, election statement, and

1993 carryover allocation document with its 1993 Form 8610. Agency

files the original of the second binding agreement, election

statement, and 1994 carryover allocation document with its 1994 Form

8610. After X notifies Agency of the date each building is placed in

service, the Agency will issue copies of the respective Forms 8609

to X, and file the originals of those forms with the Agency's Form

8610 that reflects the year each form is issued. The Agency also

retains copies of the Forms 8609.

(b) Election under section 42(b)(2)(A)(ii)(II) to use the

appropriate percentage for the month tax-exempt bonds are issued--(1)

Time and manner of making election. In the case of any building to

which section 42(h)(4)(B) applies, an election under section

42(b)(2)(A)(ii)(II) to use the appropriate percentage for the month

tax-exempt bonds are issued must--

(i) Be in writing;

(ii) Reference section 42(b)(2)(A)(ii)(II);

(iii) Specify the percentage of the aggregate basis of the building

and the land on which the building is located that is financed with the

proceeds of obligations described in section 42(h)(4)(A) (tax-exempt

bonds);

(iv) State the month in which the tax-exempt bonds are issued;

(v) State that the month in which the tax-exempt bonds are issued

is the month elected for the appropriate percentage to be used for the

building;

(vi) Be signed by the taxpayer; and

(vii) Be notarized by the 5th day following the end of the month in

which the bonds are issued.

(2) Bonds issued in more than one month. If a building described in

section 42(h)(4)(B) (substantially bond-financed building) is financed

with tax-exempt bonds issued in more than one month, the taxpayer may

elect the appropriate percentage for any month in which the bonds are

issued. Once the election is made, the appropriate percentage elected

applies for the building even if all bonds are not issued in that

month. The requirements of this paragraph (b), including the time

limitation contained in paragraph (b)(1)(vii) of this section, must

also be met.

(3) Limitations on appropriate percentage. Under section

42(m)(2)(D), the credit allowable for a substantially bond- financed

building is limited to the amount necessary to assure the project's

feasibility. Accordingly, in making the determination under section

42(m)(2), an Agency may use an applicable percentage that is less, but

not greater than, the appropriate percentage for the month the building

is placed in service, or the month elected by the taxpayer under

section 42(b)(2)(A)(ii)(II).

(4) Procedures--(i) Taxpayer. The taxpayer must provide the

original notarized election statement to the Agency before the close of

the 5th calendar day following the end of the month in which the bonds

are issued. If an authority other than the Agency issues the tax-exempt

bonds, the taxpayer must also give the Agency a signed statement from

the issuing authority that certifies the information described in

paragraphs (b)(1)(iii) and (iv) of this section. The taxpayer must file

a copy of the election statement with the taxpayer's Form 8609 for the

first taxable year in which credit is claimed for the building. The

taxpayer must also retain a copy of the election statement.

(ii) Agency. The Agency must file with the Internal Revenue Service

the original of the election statement and the corresponding Form 8609

for the building with the Agency's Form 8610 that reflects the year the

Form 8609 is issued. The Agency must also retain a copy of the election

statement and the Form 8609.

Sec. 1.42-9 For use by the general public.

(a) General rule. If a residential rental unit in a building is not

for use by the general public, the unit is not eligible for a section

42 credit. A residential rental unit is for use by the general public

if the unit is rented in a manner consistent with housing policy

governing non-discrimination, as evidenced by rules or regulations of

the Department of Housing and Urban Development (HUD) (24 CFR subtitle

A and chapters I through XX). See HUD Handbook 4350.3 (or its

successor). A copy of HUD Handbook 4350.3 may be requested by writing

to: HUD, Directives Distribution Section, room B-100, 451 7th Street,

SW., Washington, DC 20410.

(b) Limitations. Notwithstanding paragraph (a) of this section, if

a residential rental unit is provided only for a member of a social

organization or provided by an employer for its employees, the unit is

not for use by the general public and is not eligible for credit under

section 42. In addition, any residential rental unit that is part of a

hospital, nursing home, sanitarium, lifecare facility, trailer park, or

intermediate care facility for the mentally and physically handicapped

is not for use by the general public and is not eligible for credit

under section 42.

(c) Treatment of units not for use by the general public. The costs

attributable to a residential rental unit that is not for use by the

general public are not excludable from eligible basis by reason of the

unit's ineligibility for the credit under this section. However, in

calculating the applicable fraction, the unit is treated as a

residential rental unit that is not a low-income unit.

Sec. 1.42-10 Utility allowances.

(a) Inclusion of utility allowances in gross rent. If the cost of

any utilities (other than telephone) for a residential rental unit are

paid directly by the tenant(s), the gross rent for that unit includes

the applicable utility allowance determined under this section. This

section only applies for purposes of determining gross rent under

section 42(g)(2)(B)(ii) as to rent-restricted units.

(b) Applicable utility allowances--(1) FmHA-assisted buildings. If

a building receives assistance from the Farmers Home Administration

(FmHA-assisted building), the applicable utility allowance for all

rent-restricted units in the building is the utility allowance

determined under the method prescribed by the Farmers Home

Administration (FmHA) for the building. For example, if a building

receives assistance under FmHA's section 515 program (whether or not

the building or its tenants also receive other state or federal

assistance), the applicable utility allowance for all rent-restricted

units in the building is determined using Exhibit A-6 of 7 CFR part

1944, subpart E (or a successor method of determining utility

allowances).

(2) Buildings with FmHA assisted tenants. If any tenant in a

building receives FmHA rental assistance payments (FmHA tenant

assistance), the applicable utility allowance for all rent-restricted

units in the building (including any units occupied by tenants

receiving HUD rental assistance payments) is the applicable FmHA

utility allowance.

(3) HUD-regulated buildings. If neither a building nor any tenant

in the building receives FmHA housing assistance, and the rents and

utility allowances of the building are reviewed by HUD on an annual

basis (HUD-regulated building), the applicable utility allowance for

all rent-restricted units in the building is the applicable HUD utility

allowance.

(4) Other buildings. If a building is neither an FmHA-assisted nor

a HUD-regulated building, and no tenant in the building receives FmHA

tenant assistance, the applicable utility allowance for rent-restricted

units in the building is determined under the following methods.

(i) Tenants receiving HUD rental assistance. The applicable utility

allowance for any rent-restricted units occupied by tenants receiving

HUD rental assistance payments (HUD tenant assistance) is the

applicable Public Housing Authority (PHA) utility allowance established

for the Section 8 Existing Housing Program.

(ii) Other tenants--(A) General rule. If none of the rules of

paragraphs (b)(1), (2), (3), and (4)(i) of this section apply to any

rent-restricted units in a building, the appropriate utility allowance

for the units is the applicable PHA utility allowance. However, if a

local utility company estimate is obtained for any unit in the building

in accordance with paragraph (b)(4)(ii)(B) of this section, that

estimate becomes the appropriate utility allowance for all rent-

restricted units of similar size and construction in the building. This

local utility company estimate procedure is not available for and does

not apply to units to which the rules of paragraphs (b) (1), (2), (3),

or (4)(i) of this section apply.

(B) Utility company estimate. Any interested party (including a

low-income tenant, a building owner, or an Agency) may obtain a local

utility company estimate for a unit. The estimate is obtained when the

interested party receives, in writing, information from a local utility

company providing the estimated cost of that utility for a unit of

similar size and construction for the geographic area in which the

building containing the unit is located. The local utility company

estimate may be obtained by an interested party at any time during the

building's extended use period (see section 42(h)(6)(D)) or, if the

building does not have an extended use period, during the building's

compliance period (see section 42(i)(1)). Unless the parties agree

otherwise, costs incurred in obtaining the estimate are borne by the

initiating party. The interested party that obtains the local utility

company estimate (the initiating party) must retain the original of the

utility company estimate and must furnish a copy of the local utility

company estimate to the owner of the building (where the initiating

party is not the owner), and the Agency that allocated credit to the

building (where the initiating party is not the Agency). The owner of

the building must make available copies of the utility company estimate

to the tenants in the building.

(c) Changes in applicable utility allowance. If at any time during

the building's extended use period (or, if the building does not have

an extended use period, the building's compliance period), the

applicable utility allowance for a unit changes, the new utility

allowance must be used to compute gross rents of rent-restricted units

due 90 days after the change. For example, if rent must be lowered

because a local utility company estimate is obtained that shows a

higher utility cost than the otherwise applicable PHA utility

allowance, the lower rent must be in effect for rent due more than 90

days after the date of the local utility company estimate.

Sec. 1.42-11 Provision of services.

(a) General rule. The furnishing to tenants of services other than

housing (whether or not the services are significant) does not prevent

the units occupied by the tenants from qualifying as residential rental

property eligible for credit under section 42. However, any charges to

low-income tenants for services that are not optional generally must be

included in gross rent for purposes of section 42(g).

(b) Services that are optional--(1) General rule. A service is

optional if payment for the service is not required as a condition of

occupancy. For example, for a qualified low-income building with a

common dining facility, the cost of meals is not included in gross rent

for purposes of section 42(g)(2)(A) if payment for the meals in the

facility is not required as a condition of occupancy and a practical

alternative exists for tenants to obtain meals other than from the

dining facility.

(2) Continual or frequent services. If continual or frequent

nursing, medical, or psychiatric services are provided, it is presumed

that the services are not optional and the building is ineligible for

the credit, as is the case with a hospital, nursing home, sanitarium,

lifecare facility, or intermediate care facility for the mentally and

physically handicapped. See also Sec. 1.42-9(b).

(3) Required services--(i) General rule. The cost of services that

are required as a condition of occupancy must be included in gross rent

even if federal or state law requires that the services be offered to

tenants by building owners.

(ii) Exceptions--(A) Supportive services. Section 42(g)(2)(B)(iii)

provides an exception for certain fees paid for supportive services.

For purposes of section 42(g)(2)(B)(iii), a supportive service is any

service provided under a planned program of services designed to enable

residents of a residential rental property to remain independent and

avoid placement in a hospital, nursing home, or intermediate care

facility for the mentally or physically handicapped. For a building

described in section 42(i)(3)(B)(iii) (relating to transitional housing

for the homeless), a supportive service includes any service provided

to assist tenants in locating and retaining permanent housing.

(B) Specific project exception. Gross rent does not include the

cost of mandatory meals in any federally-assisted project for the

elderly and handicapped (in existence on or before January 9, 1989)

that is authorized by 24 CFR 278 to provide a mandatory meals program.

Sec. 1.42-12 Effective dates and transitional rules.

(a) Effective date. The rules set forth in Secs. 1.42-6 and 1.42-8

through 1.42-12 are effective May 2, 1994. However, binding agreements,

election statements, and carryover allocation documents entered into

before May 2, 1994 that follow the guidance set forth in Notice 89-1,

1989-1 C.B. 620 (see Sec. 601.601(d)(2)(ii)(b) of this chapter) need

not be changed to conform to the rules set forth in Secs. 1.42-6 and

1.42-9 through 1.42-12.

(b) Prior periods. Notice 89-1, 1989-1 C.B. 620 and Notice 89-6,

1989-1 C.B. 625 (see Sec. 601.601(d)(2)(ii)(b) of this chapter) may be

applied for periods prior to May 2, 1994.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. Part 602 is amended as follows:

1. The authority citation continues to read as follows:

Authority: 26 U.S.C. 7805.

2. Section 602.101(c) is amended by adding entries in numerical

order to the table to read as follows:

Sec. 602.101 OMB control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control no.

------------------------------------------------------------------------

*****

1.42-6..................................................... 1545-1102

1.42-8..................................................... 1545-1102

1.42-10.................................................... 1545-1102

*****

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: January 25, 1994.

Samuel Y. Sessions,

Acting Assistant Secretary of the Treasury.

[FR Doc. 94-3515 Filed 3-2-94; 8:45 am]

BILLING CODE 4830-01-U