Rules To Carry Out the Purposes of Section 42 and for Correcting Administrative Errors and Omissions

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8521]

RIN 1545-AQ98

Rules To Carry Out the Purposes of Section 42 and for Correcting

Administrative Errors and Omissions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the

Secretary's authority to provide guidance necessary or appropriate to

carry out the purposes of section 42, the low-income housing credit.

This document also contains final regulations allowing State and local

housing credit agencies to correct administrative errors and omissions

made in connection with allocations of low-income housing credit dollar

amounts and recordkeeping within a reasonable period after their

discovery. The final regulations affect State and local housing credit

agencies, owners of buildings or projects for which the low-income

housing credit is allocated, and taxpayers claiming the low-income

housing credit.

DATES: These final regulations are effective Febuary 24, 1994.

For applicability of these regulations, see Sec. 1.42-13(d) of

these regulations.

FOR FURTHER INFORMATION CONTACT: Jeffrey A. Erickson, 202-622-3040 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this final regulation

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

in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))

under control number 1545-1357. The estimated annual burden per

respondent varies from 1 hour to 2 hours, depending on individual

circumstances, with an estimated average of 1.5 hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be directed to the Internal

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

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

Attention: Desk Officer for the Department of the Treasury, Office of

Information and Regulatory Affairs, Washington, DC 20503.

Background

On January 4, 1993, a notice of proposed rulemaking (PS-50-92) was

published in the Federal Register (58 FR 44) proposing amendments to

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

Internal Revenue Code.

Written comments responding to the notice were received, and a

public hearing was held on April 5, 1993. After consideration of all

written and oral comments regarding the proposed amendments, those

amendments are adopted as revised by this Treasury decision.

Explanation of Provisions

Changes Made by the Final Regulations

The proposed regulations generally describe an administrative error

and omission and include illustrative examples. Commentators have

requested that the final regulations include an ``accounting error'' as

an administrative error or omission. The Service and the Treasury

Department are concerned that the term ``accounting error'' is too

vague. However, in order to address the commentators' concerns, the

final regulations clarify that an administrative error or omission

includes an error in tracking the housing credit dollar amount an

Agency has allocated (or that remains to be allocated) in a calendar

year. For example, assume an Agency, believing that it has $100 of

credit remaining in its credit ceiling for the current calendar year,

allocates $100 to a project and agrees to allocate an additional $30

from the next calendar year's credit ceiling. Later, in the current

calendar year, the Agency discovers that it failed to include in its

credit ceiling for the current calendar year $50 of credits that were

returned in the current calendar year. The error in tracking the $50 of

credits that were returned is an administrative error or omission.

One commentator asked for clarification of the correction procedure

an Agency should use when correcting a document without the Secretary's

prior approval. Under the final regulations, a document that corrects a

document containing an error or omission that has not yet been filed

with the Internal Revenue Service should be filed as the original. If a

document containing an error has already been filed with the Internal

Revenue Service, the Agency should refile a copy of the document

containing the error that prominently and clearly notes the correction.

The Agency should indicate at the top of the document(s) that the

correction is being made under Sec. 1.42-13 of the Income Tax

Regulations.

The proposed regulations require that an Agency obtain the prior

approval of the Secretary to correct an administrative error or

omission if (1) the correction is not made before the close of the

calendar year of the error or omission, and (2) the correction is a

numerical change to the housing credit dollar amount allocated for the

building or project. One commentator suggested that an Agency should

have until February 28, the date by which an Agency must file its Form

8610, to correct an administrative error or omission that changes the

housing credit dollar amount allocated to a building or project without

obtaining the Secretary's prior approval. Another commentator made a

similar suggestion solely for credits returned in the same year in

which they were allocated. These suggestions have not been adopted.

Section 42(h)(1) requires that an allocation for a certain calendar

year be made by the close of that calendar year. Consistent with that

approach, these regulations do not permit an Agency to make a post-year

allocation without the Secretary's prior approval. Of course, for a

correction of an administrative error or omission that an Agency cannot

correct on its own, an Agency, or the Agency and the affected taxpayer,

may seek the Secretary's prior approval.

Special Analyses

It has been determined that this Treasury Decision is not a

significant regulatory action as defined in Executive Order 12866. It

also has 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, a copy of the proposed

regulations was submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information

The principal author of these regulations is Jeffrey A. Erickson,

Office of Assistant Chief Counsel (Passthroughs and Special

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

the IRS and 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 * * *.

Section 1.42-13 also issued under 26 U.S.C. 42(n); * * *.

Par. 2. Section 1.42-13 is added to read as follows:

Sec. 1.42-13 Rules necessary and appropriate; housing credit agencies'

correction of administrative errors and omissions.

(a) Publication of guidance. Under section 42(n), the Secretary has

authority to prescribe regulations as may be necessary or appropriate

to carry out the purposes of section 42. The Secretary may also provide

guidance through various publications in the Internal Revenue Bulletin.

(See Sec. 601.601(d)(2)(ii)(b) of this chapter.)

(b) Correcting administrative errors and omissions--(1) In general.

An Agency may correct an administrative error or omission with respect

to allocations and recordkeeping, as described in paragraph (b)(2) of

this section, within a reasonable period after the Agency discovers the

administrative error or omission. Whether a correction is made within a

reasonable period depends on the facts and circumstances of each

situation. Except as provided in paragraph (b)(3)(iii) of this section,

an Agency need not obtain the prior approval of the Secretary to

correct an administrative error or omission, if the correction is made

in accordance with paragraph (b)(3)(i) of this section. The

administrative errors and omissions to which this paragraph (b) applies

are strictly limited to those described in paragraph (b)(2) of this

section, and, thus, do not include, for example, any misinterpretation

of the applicable rules and regulations under section 42. Accordingly,

an Agency's allocation of a particular calendar year's low-income

housing credit dollar amount made after the close of that calendar

year, or the use of an incorrect population amount in calculating a

State's housing credit ceiling for a calendar year are not

administrative errors that can be corrected under this paragraph (b).

(2) Administrative errors and omissions described. An

administrative error or omission is a mistake that results in a

document that inaccurately reflects the intent of the Agency at the

time the document is originally completed or, if the mistake affects a

taxpayer, a document that inaccurately reflects the intent of the

Agency and the affected taxpayer at the time the document is originally

completed. Administrative errors and omissions described in this

paragraph (b)(2) include the following--

(i) A mathematical error;

(ii) An entry on a document that is inconsistent with another entry

on the same or another document regarding the same property, or

taxpayer;

(iii) A failure in tracking the housing credit dollar amount an

Agency has allocated (or that remains to be allocated) in the current

calendar year (e.g., a failure to include in its State housing credit

ceiling a previously allocated credit dollar amount that has been

returned by a taxpayer);

(iv) An omission of information that is required on a document; and

(v) Any other type of error or omission identified by guidance

published in the Internal Revenue Bulletin (see

Sec. 601.601(d)(2)(ii)(b) of this chapter) as an administrative error

or omission covered by this paragraph (b).

(3) Procedures for correcting administrative errors or omissions--

(i) In general. An Agency's correction of an administrative error or

omission, as described in paragraph (b)(2) of this section, must amend

the document so that the corrected document reflects the original

intent of the Agency, or the Agency and the affected taxpayer, and

complies with applicable rules and regulations under section 42.

(ii) Specific procedures. If a document corrects a document

containing an administrative error or omission that has not yet been

filed with the Internal Revenue Service, the Agency, or the Agency and

the affected taxpayer, should complete and file the corrected document

as the original. When a document containing an administrative error or

omission has already been filed with the Service, the Agency, or the

Agency and the affected taxpayer, should refile a copy of the document

containing the administrative error or omission, and prominently and

clearly note the correction thereon or on an attached new document. The

Agency should indicate at the top of the document(s) that the

correction is being made under Sec. 1.42-13 of the Income Tax

Regulations.

(iii) Secretary's prior approval required. An Agency must obtain

the Secretary's prior approval to correct an administrative error or

omission, as described in paragraph (b)(2) of this section, if the

correction is not made before the close of the calendar year of the

error or omission and the correction--

(A) Is a numerical change to the housing credit dollar amount

allocated for the building or project;

(B) Affects the determination of any component of the State's

housing credit ceiling under section 42(h)(3)(C); or

(C) Affects the State's unused housing credit carryover that is

assigned to the Secretary under section 42(h)(3)(D).

(iv) Requesting the Secretary's approval. To obtain the Secretary's

approval under paragraph (b)(3)(iii) of this section, an Agency must

submit a request for the Secretary's approval within a reasonable

period after discovering the administrative error or omission, and must

agree to any conditions that may be required by the Secretary under

paragraph (b)(3)(v) of this section. When requesting the Secretary's

approval, the Agency, or the Agency and the affected taxpayer, must

file an application that complies with the requirements of this

paragraph (b)(3)(iv). For further information on the application

procedure see Rev. Proc. 93-1, 1993-1 I.R.B. 10 (or any subsequent

applicable revenue procedure). (See Sec. 601.601(d)(2)(ii)(b) of this

chapter.) The application requesting the Secretary's approval must

contain the following information--

(A) The name, address, and identification number of each affected

taxpayer;

(B) The Building Identification Number (B.I.N.) and address of each

building or project affected by the administrative error or omission;

(C) A statement explaining the administrative error or omission and

the intent of the Agency, or of the Agency and the affected taxpayer,

when the document was originally completed;

(D) Copies of any supporting documentation;

(E) A statement explaining the effect, if any, that a correction of

the administrative error or omission would have on the housing credit

dollar amount allocated for any building or project; and

(F) A statement explaining the effect, if any, that a correction of

the administrative error or omission would have on the determination of

the components of the State's housing credit ceiling under section

42(h)(3)(C) or on the State's unused housing credit carryover that is

assigned to the Secretary under section 42(h)(3)(D).

(v) Agreement to conditions. To obtain the Secretary's approval

under paragraph (b)(3)(iii) of this section, an Agency, or the Agency

and the affected taxpayer, must agree to the conditions the Secretary

considers appropriate.

(c) Examples. The following examples illustrate the scope of this

section:

Example 1. Individual B applied to Agency X for a reservation of

a low-income housing credit dollar amount for a building that is

part of a low-income housing project. When applying for the low-

income housing credit dollar amount, B informed Agency X that B

intended to form Partnership Y to finance the project. After

receiving the reservation letter and prior to receiving an

allocation, B formed Partnership Y and sold partnership interests to

a number of limited partners. B contributed the low-income housing

project to Partnership Y in exchange for a partnership interest. B

and Partnership Y informed Agency X of the ownership change. When

actually allocating the housing credit dollar amount, Agency X sent

Partnership Y a document listing B, rather than Partnership Y, as

the building's owner. Partnership Y promptly notified Agency X of

the error. After reviewing related documents, Agency X determined

that it had incorrectly listed B as the building's owner on the

allocation document. Since the parties originally intended that

Partnership Y would receive the allocation as the owner of the

building, Agency X may correct the error without obtaining the

Secretary's approval, and insert Partnership Y as the building's

owner on the allocation document.

Example 2. Agency Y allocated a lower low-income housing credit

dollar amount for a low-income housing building than Agency Y

originally intended. After the close of the calendar year of the

allocation, B, the building's owner, discovered the error and

promptly notified Agency Y. Agency Y reviewed relevant documents and

agreed that an error had occurred. Agency Y and B must apply, as

provided in paragraph (b)(3)(iv) of this section, for the

Secretary's approval before Agency Y may correct the error.

(d) Effective date. This section is effective February 24, 1994.

However, an Agency may elect to apply these regulations to

administrative errors or omissions that occurred before the publication

of these regulations. Any reasonable method used by a State or local

housing credit agency to correct an administrative error or omission

prior to February 24, 1994, will be considered proper, provided that

the method is consistent with the rules of section 42.

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

Par. 3. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Sec. 602.101 [Amended]

Par. 4. Section 602.101(c) is amended by adding in numerical order

the entry ``1.42-13......1545-1357'' to the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: January 25, 1994.

Samuel Y. Sessions,

Acting Assistant Secretary of the Treasury.

[FR Doc. 94-3946 Filed 2-23-94; 8:45 am]

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