Section 42(d)(5) Federal Grants

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8731]

RIN 1545-AU92

Section 42(d)(5) Federal Grants

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations with respect to the

low-income housing tax credit relating to the application of section

42(d)(5) to certain rental assistance programs under section

42(g)(2)(B)(i). The regulations clarify that certain types of federal

rental assistance payments do not result in a reduction in the eligible

basis of a low-income housing building.

DATES: These regulations are effective September 26, 1997.

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

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations (TD 8713) and a notice of proposed rulemaking

cross-referencing the temporary regulations were published in the

Federal Register for January 27, 1997 (62 FR 3792, 3848). Those

regulations provide that certain federal rental assistance payments

made to the owner of a building on behalf of low-income tenants are not

federal grants with respect to a building or its operation that require

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

the Internal Revenue Code (Code). These payments include rental

assistance payments made under section 8 of the United States Housing

Act of 1937 (Act) (42 U.S.C. 1437f), certain payments made under

section 9 of the Act (42 U.S.C. 1437g), and payments made under such

other programs or methods of rental assistance as may be designated in

the Federal Register or the Internal Revenue Bulletin. The notice of

proposed rulemaking indicated that comments would be considered on

those areas addressed in the temporary regulations. Written comments

responding to the notice of proposed rulemaking were received. There

was no request for a public hearing, and no public hearing was held.

After consideration of all the written comments, the proposed

regulations have been adopted, without change, by this Treasury

decision.

Summary of Comments

One commenter suggested that the final regulations provide

additional guidance for state agencies to use in determining whether

similar programs beyond those described in the regulations should be

considered grants that cause a reduction in a building's eligible basis

under section 42(d)(5) of the Code. The final regulations do not adopt

this suggestion. The scope of this regulation is limited to specified

rental assistance payments that are not grants requiring a reduction in

a building's eligible basis and any additional payments the Secretary

may designate in the future.

Another commenter suggested that Sec. 1.42-16(c)(3) should be

deleted if it is intended to impose conditions beyond the restrictions

under section 9 of the Act, because the Service is improperly

infringing upon the Department of Housing and Urban Development's (HUD)

authority to provide subsidies under section 9. The final regulations

do not adopt this suggestion. Section 1.42-16 does not interpret HUD's

authority for paying subsidies under section 9; it describes the extent

to which section 9 payments may be made without a reduction in a

building's eligible basis under section 42(d)(5) of the Code. The

conditions imposed on section 9 payments in Sec. 1.42-16(c)(3) serve to

differentiate section 9 assistance for operating expenses that function

in a manner similar to rental assistance payments under section 8 of

the Act from section 9 assistance that is applied to uses more closely

associated with operational expenses requiring a reduction in a

building's eligible basis under section 42(d)(5).

This commenter also suggested that if Sec. 1.42-16(c)(3) were to be

retained, it should be clarified to provide that actual operating costs

be determined by HUD and/or the appropriate public housing agency. The

commenter reasons that HUD is already making this determination in the

context of deciding the proper amount of assistance to make

[[Page 50503]]

under section 9 of the Act, and that precedent already exists for

allowing HUD to make certain interpretations relating to the section 42

program. The final regulations do not adopt this suggestion. The IRS

and Treasury believe they should retain the ability to determine what

costs are appropriately characterized as operating costs that require a

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

Code.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations and, because these regulations do

not impose on small entities a collection of information requirement,

the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility Analysis is not required. Pursuant

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

rulemaking preceding these regulations was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on its impact on small business.

Drafting Information: The principal author of these regulations is

Christopher J. Wilson, Office of Assistant Chief Counsel (Passthroughs

and Special Industries). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

removing the entry for Section 1.42-16T and adding an entry in

numerical order to read as follows:

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

Section 1.42-16 also issued under 26 U.S.C. 42(n); * * *

Par. 2. Section 1.42-16 is added to read as follows:

Sec. 1.42-16 Eligible basis reduced by federal grants.

(a) In general. If, during any taxable year of the compliance

period (described in section 42(i)(1)), a grant is made with respect to

any building or the operation thereof and any portion of the grant is

funded with federal funds (whether or not includible in gross income),

the eligible basis of the building for the taxable year and all

succeeding taxable years is reduced by the portion of the grant that is

so funded.

(b) Grants do not include certain rental assistance payments. A

federal rental assistance payment made to a building owner on behalf or

in respect of a tenant is not a grant made with respect to a building

or its operation if the payment is made pursuant to--

(1) Section 8 of the United States Housing Act of 1937 (42 U.S.C.

1437f)

(2) A qualifying program of rental assistance administered under

section 9 of the United States Housing Act of 1937 (42 U.S.C. 1437g);

or

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

designate by publication in the Federal Register or in the Internal

Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).

(c) Qualifying rental assistance program. For purposes of paragraph

(b)(2) of this section, payments are made pursuant to a qualifying

rental assistance program administered under section 9 of the United

States Housing Act of 1937 to the extent that the payments--

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

public housing authority with respect to units the owner has agreed to

maintain as public housing units (PH-units) in the building;

(2) Are made with respect to units occupied by public housing

tenants, provided that, for this purpose, units may be considered

occupied during periods of short term vacancy (not to exceed 60 days);

and

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

building's PH-unit tenants and a pro rata portion of the building's

actual operating costs that are reasonably allocable to the PH-units

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

criteria), and provided that, for this purpose, operating costs do not

include any development costs of a building (including developer's

fees) or the principal or interest of any debt incurred with respect to

any part of the building.

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

Sec. 1.42-16T [Removed]

Par. 3. Section 1.42-16T is removed.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 26, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-25490 Filed 9-25-97; 8:45 am]

BILLING CODE 4830-01-U