Compliance Monitoring and Miscellaneous Issues Relating to the Low-Income Housing Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114664-97]

RIN 1545-AV44

Compliance Monitoring and Miscellaneous Issues Relating to the

Low-Income Housing Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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

SUMMARY: This document contains proposed amendments to various existing

final regulations concerning the low-income housing tax credit

including the procedures for compliance monitoring by state and local

housing agencies (Agencies), the requirements for making carryover

allocations, and the rules for Agencies' correction of administrative

errors or omissions. In addition, regulations are being proposed

involving the independent verification of information on sources and

uses of funds submitted by taxpayers to Agencies. These amendments and

proposed regulations affect owners of low-income housing projects who

have claimed the credit and the Agencies who administer the credit.

This document also provides notice of a public hearing on these

proposed regulations.

DATES: Written and electronic comments must be received by May 6, 1999.

Outlines of topics to be discussed at the public hearing scheduled for

May 27, 1999, must be received by April 8, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-114664-97), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand-delivered Monday through

Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-

114664-97), Courier's Desk, Internal Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC. Alternatively, taxpayers may submit

comments electronically via the Internet by selecting the ``Tax Regs''

option on the IRS Home Page, or by submitting comments directly to the

IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html

a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-

114664-97), Courier's Desk, Internal Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC. Alternatively, taxpayers may submit

comments electronically via the Internet by selecting the ``Tax Regs''

option on the IRS Home Page, or by submitting comments directly to the

IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html. The public hearing will be held in room 2615, Internal

Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Paul

Handleman, (202) 622-3040; concerning submissions, the hearing, and/or

to be placed on the building access list to attend the hearing, LaNita

Van Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in Secs. 1.42-5 and 1.42-

13 previously have been reviewed and approved by the Office of

Management and Budget for review under control numbers 1545-1291 and

1545-1357, respectively; all of these paperwork requirements will be

consolidated under control number 1545-1357. The new collections of

information contained in this notice of proposed rulemaking have been

submitted to the Office of Management and Budget for review in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)).

Comments on the collections of information should be sent 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, with copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.

Comments on the collections of information should be received by March

9, 1999

lections of information should be sent 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, with copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.

Comments on the collections of information should be received by March

9, 1999.

Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the IRS, including whether the

information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

The requirement for the collections of information in this notice

of proposed rulemaking is in Secs. 1.42-5, 1.42-13, and 1.42-17. The

information is required by the IRS to verify compliance with the

requirements of section 42. The collections of information are

mandatory. The likely respondents/recordkeepers are individuals, state

and local governments, businesses or other

vide information.

The requirement for the collections of information in this notice

of proposed rulemaking is in Secs. 1.42-5, 1.42-13, and 1.42-17. The

information is required by the IRS to verify compliance with the

requirements of section 42. The collections of information are

mandatory. The likely respondents/recordkeepers are individuals, state

and local governments, businesses or other

for-profit institutions, nonprofit institutions, and small businesses

or organizations.

Estimated total annual reporting and recordkeeping burden for

Sec. 1.42-5: 102,500 hours. For Sec. 1.42-5, the estimated annual

burden per respondent varies from .5 hour to 3 hours for taxpayers and

250 to 5,000 hours for Agencies, with an estimated average of 1 hour

for taxpayers and 1,500 hours for Agencies.

Estimated number of respondents for Sec. 1.42-5 : 20,000 taxpayers

and 55 Agencies.

Estimated total annual reporting and recordkeeping burden for

Sec. 1.42-13: 289 hours. For Sec. 1.42-13, the estimated annual burden

per respondent varies from .5 hour to 10 hours for taxpayers and

Agencies, with an estimated average of 3.5 hours for taxpayers and 3

hours for Agencies.

Estimated number of respondents for Sec. 1.42-13: 43 taxpayers and

43 Agencies.

Estimated total annual reporting and recordkeeping burden for

Sec. 1.42-17: 2,110 hours. For Sec. 1.42-17, the estimated annual

burden per respondent varies from .5 hour to 2 hours for taxpayers and

.5 hour to 5 hours for Agencies, with an estimated average of 1 hour

for taxpayers and 2 hours for Agencies.

Estimated number of respondents for Sec. 1.42-17: 2,000 taxpayers

and 55 Agencies.

Estimated annual frequency of responses: once a year.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information a valid control number

assigned by the Office of Management and Budget

nds for low-income projects.

The proposed regulations also contain amendments to the Income Tax

Regulations (26 CFR part 1) including Sec. 1.42-6 (carryover

allocations), Sec. 1.42-11 (provision of services), Sec. 1.42-12

(effective dates and transitional rules), and Sec. 1.42-13 (correction

of administrative errors and omissions) that are issued under the

authority granted by section 42(n).

Explanation of Provisions

Compliance Monitoring

Section 42(m)(1)(B)(iii) provides that an allocation plan is not

qualified unless it contains a procedure that the Agency (or an agent

of, or private contractor hired by, the Agency) will follow in

monitoring compliance with the provisions of section 42. The Agency is

to notify the IRS of any noncompliance of which the Agency becomes

aware.

Section 42(m)(1)(B)(iii) is effective on January 1, 1992, and

applies to all buildings for which the low-income housing credit

determined under section 42 is, or has been, allowable at any time.

Allocation plans must have complied with the requirements of Sec. 1.42-

5 by June 30, 1993. Section 42(m)(1)(B)(iii) and Sec. 1.42-5 do not

require monitoring for whether a low-income housing project is in

compliance with the requirements of section 42 prior to January 1,

1992. However, if an Agency becomes aware of noncompliance that

occurred prior to January 1, 1992, the Agency is required to notify the

IRS of that noncompliance

h the requirements of Sec. 1.42-

5 by June 30, 1993. Section 42(m)(1)(B)(iii) and Sec. 1.42-5 do not

require monitoring for whether a low-income housing project is in

compliance with the requirements of section 42 prior to January 1,

1992. However, if an Agency becomes aware of noncompliance that

occurred prior to January 1, 1992, the Agency is required to notify the

IRS of that noncompliance.

The current compliance monitoring regulations require an Agency, at

a minimum, to review tenant income certifications and rent charges of

projects using one of the following three monitoring options: (1)

Review the owners' annual income certifications, including the

documentation supporting the certifications for at least 50 percent of

the Agency's low-income projects, and tenant rent records in at least

20 percent of the low-income units in these projects; (2) make annual

on-site inspections of at least 20 percent of the projects, and review

the low-income certification, the documentation supporting the

certification, and rent record for each tenant in at least 20 percent

of the low-income units in those projects; or (3) obtain from all

project owners tenant income and rent records for each low-income unit

and, for at least 20 percent of the projects, review the annual tenant

income certification, backup income documentation, and rent record for

each low-income tenant in at least 20 percent of the low-income units

in those projects.

The GAO report recommended that an Agency conduct regular on-site

inspections of projects and obtain building code inspection reports

performed by the local government unit. The GAO found that desk audits

(monitoring options 1 and 3 above) failed to detect violations

involving the physical condition of buildings. In addition, site visits

allow an Agency to directly assess the compliance status of projects

and the physical condition of buildings

lar on-site

inspections of projects and obtain building code inspection reports

performed by the local government unit. The GAO found that desk audits

(monitoring options 1 and 3 above) failed to detect violations

involving the physical condition of buildings. In addition, site visits

allow an Agency to directly assess the compliance status of projects

and the physical condition of buildings. Consistent with these

proposals, the proposed regulations remove the three monitoring options

and require, at least once every three (3) years, that each Agency

conduct on-site inspections of all buildings in each low-income housing

project and, for each tenant in at least 20 percent of the project's

low-income units selected by the Agency, review the low-income

certification, the documentation supporting such certification, and the

rent record. The proposed regulations also require, at a minimum, by

the end of the calendar year following the year the last building in a

project is placed in service, that the Agency conduct on-site

inspections of the projects and review the low-income certification,

the documentation supporting such certification, and the rent record

for each tenant in the project. As part of the inspection requirements,

the proposed regulations also require the Agency to determine whether

the project is suitable for occupancy, taking into account local

health, safety, and building codes. Agencies may delegate this

determination only to a state or local government unit responsible for

making building code inspections. The three-year inspection requirement

is proposed to be effective on the date the final regulations are

published in the Federal Register. The placed-in-service year

inspection requirement is proposed to be effective for buildings placed

in service on or after the date the final regulations are published in

the Federal Register

overnment unit responsible for

making building code inspections. The three-year inspection requirement

is proposed to be effective on the date the final regulations are

published in the Federal Register. The placed-in-service year

inspection requirement is proposed to be effective for buildings placed

in service on or after the date the final regulations are published in

the Federal Register.

The current compliance monitoring regulations require the owner of

a project, at a minimum, to certify annually that for the preceding 12-

month period each building in the project was suitable for occupancy,

taking into account local health, safety, and building codes. Based on

the GAO recommendation, the proposed regulations revise this

certification by also requiring the owner of the project to certify

that for the preceding 12-month period the state or local government

unit responsible for making building code inspections did not issue a

report of a violation for the project. If the governmental unit issued

a report of a violation, the owner will be required to attach a copy of

the report of the violation to the annual certification submitted to

the Agency.

The proposed regulations also adopt the GAO recommendation that

Agencies report annually to the IRS on compliance monitoring

activities. It is anticipated Form 8610, ``Annual Low-Income Housing

Credit Agencies Report,'' will be revised to require an Agency to

confirm annually that it has satisfied the new compliance monitoring

requirements involving: (1) the once every three-year on-site

inspections and review of the low-income certification, the

documentation supporting such certification, and the rent record for

each tenant in at least 20 percent of the low-income units selected by

the Agency; and (2) the on-site inspections relating to the placed-in-

service year and review of the low-income certification, the

documentation supporting such certification, and the rent record for

each low-income tenant in the project

rtification, the

documentation supporting such certification, and the rent record for

each tenant in at least 20 percent of the low-income units selected by

the Agency; and (2) the on-site inspections relating to the placed-in-

service year and review of the low-income certification, the

documentation supporting such certification, and the rent record for

each low-income tenant in the project.

The current compliance monitoring regulations require Agencies to

report a correction of noncompliance or failure to certify if the

correction occurs within the correction period defined in Sec. 1.42-

5(e)(4). The proposed regulations clarify that the Agency is required

to file Form 8823, ``Low-Income Housing Credit Agencies Report of

Noncompliance,'' with the IRS reporting the correction of the

noncompliance or failure to certify regardless of when the correction

occurs during the compliance period. This requirement is proposed to be

effective on the date the final regulations are published in the

Federal Register.

Sources and Uses of Funds

The GAO report recommended that IRS regulations be amended to

establish clear requirements to ensure independent verification of

taxpayer's key information on sources and uses of funds submitted to an

Agency. Without assurance of reliable and complete cost and financing

information, Agencies are vulnerable to providing more (or fewer) tax

credits to projects than are actually needed. Under section

42(m)(2)(A), the housing credit dollar amount allocated to a project

should not exceed the amount the Agency determines is necessary for the

financial feasibility of the project and its viability as a qualified

low-income housing project throughout the credit period

nformation, Agencies are vulnerable to providing more (or fewer) tax

credits to projects than are actually needed. Under section

42(m)(2)(A), the housing credit dollar amount allocated to a project

should not exceed the amount the Agency determines is necessary for the

financial feasibility of the project and its viability as a qualified

low-income housing project throughout the credit period. In making this

determination, section 42(m)(2)(B) requires that the Agency must

consider: (i) the sources and uses of funds and the total financing

planned for the project, (ii) any proceeds or receipts expected to be

generated by reason of tax benefits, (iii) the percentage of the

housing credit dollar amount used for project costs other than the

costs of intermediaries, and (iv) the reasonableness of the

developmental and operational costs of the project. The requirement in

section 42(m)(2)(B)(iii) is not to be applied so as to impede the

development of projects in hard-to-develop areas.

In its report, the GAO determined that an Agency must make three

critical judgments in awarding credits: (1) The reasonableness of

developer costs because the Agency is to award no more credits to a

project than a specified percentage of certain Agency-approved project

development costs; (2) the reasonableness of the financing arrangements

for the project because the Agency is required to base an award of

credit on the financial need of a project subject to the limit computed

on Agency-approved development costs; and (3) criteria for pricing the

credit (for example, use of an appropriate rate to convert credits into

an equity investment amount)

ved project

development costs; (2) the reasonableness of the financing arrangements

for the project because the Agency is required to base an award of

credit on the financial need of a project subject to the limit computed

on Agency-approved development costs; and (3) criteria for pricing the

credit (for example, use of an appropriate rate to convert credits into

an equity investment amount).

So that an Agency may more accurately determine the amount of

credits to be awarded, the GAO proposed three alternative

recommendations: (1) an examination or audit, which would provide a

reasonable basis for an independent public accountant to issue an

opinion on the overall reliability of a project's financial information

taken as a whole; (2) a review, which would consist of inquiries and

application of analytical procedures that might bring to the

accountant's attention significant matters affecting a project's

financial information but would not provide assurance that the

accountant would become aware of all significant matters that would be

disclosed in an audit; or (3) agreed-upon procedures, which would

provide an accountant with a basis to issue a report of findings based

on the specified procedures but not a basis to issue an opinion on the

reliability of the financial information.

Because the first alternative provides the most reliable

independent verification on sources and uses of funds, the proposed

regulations require that a taxpayer must obtain an opinion by a

certified public accountant, based upon the accountant's audit or

examination, on the financial determinations and certifications

provided by the taxpayer to the Agency, including the costs that may

qualify for inclusion in eligible basis under section 42(d) and the

amount of the credit under section 42

es of funds, the proposed

regulations require that a taxpayer must obtain an opinion by a

certified public accountant, based upon the accountant's audit or

examination, on the financial determinations and certifications

provided by the taxpayer to the Agency, including the costs that may

qualify for inclusion in eligible basis under section 42(d) and the

amount of the credit under section 42. This opinion must be submitted

to the Agency before the Agency issues the Form 8609, ``Low-Income

Housing Credit Allocation Certification.'' This requirement is proposed

to be effective on the date the final regulations are published in the

Federal Register.

Buildings Qualifying for Carryover Allocations

The proposed regulations amend the carryover allocation regulations

by requiring the Agency to file a form (to be prescribed by the IRS)

that summarizes the carryover allocation document described in

Sec. 1.42-6(d)(2) with the Agency's Form 8610 for the year the

allocation is made. The new form will be filed with the Form 8610 in

lieu of the original carryover allocation document. Taxpayers must

continue to file a copy of the carryover allocation document with the

Form 8609 for the building for the first year the credit is claimed.

Correction of Administrative Errors and Omissions

Housing credit agencies may correct administrative errors and

omissions with respect to allocations and recordkeeping if the

correction occurs within a reasonable period of time after discovery of

the error or omission. The current administrative error and omission

regulations define an administrative error or omission as 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

ve error and omission

regulations define an administrative error or omission as 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. However, an administrative error or omission

does not include a misinterpretation of the applicable rules and

regulations under section 42. Agencies must obtain prior approval from

the Secretary to correct an administrative error or omission if the

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

error or omission and the correction: (1) is a numerical change to the

housing credit dollar amount allocated for the building or project; (2)

affects the determination of any component of the state's housing

credit ceiling under section 42(h)(3)(C); or (3) affects the state's

unused housing credit carryover that is assigned to the Secretary under

section 42(h)(3)(D).

The proposed regulations would provide automatic approval for

correcting an administrative error or omission in an allocation

document (a Form 8609, or a carryover allocation document under the

requirements of section 42(h)(1)(E) or (F) and Sec. 1.42-6(d)(2)) that

either did not accurately reflect the number of buildings constructed

by the affected taxpayer, or transposed the information for one or more

buildings with other buildings in a project.

If the automatic approval provision applies to the administrative

error or omission, the proposed regulations require the Agency to amend

the allocation document

2(h)(1)(E) or (F) and Sec. 1.42-6(d)(2)) that

either did not accurately reflect the number of buildings constructed

by the affected taxpayer, or transposed the information for one or more

buildings with other buildings in a project.

If the automatic approval provision applies to the administrative

error or omission, the proposed regulations require the Agency to amend

the allocation document. If correcting the administrative error or

omission requires adding a Building Identification Number (B.I.N.) to

the amended allocation document, the proposed regulations require that

the Agency must include any B.I.N.(s) already existing for the

buildings in the document and, if possible, number the additional

B.I.N.(s) sequentially from the existing B.I.N.(s). In addition, the

Agency must file the amended allocation document with an amended Form

8610. This provision is proposed to be effective on the date the final

regulations are published in the Federal Register.

Special Analyses

It has been determined that this notice of proposed rulemaking 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. It is hereby certified

that the collections of information in these regulations will not have

a significant economic impact on a substantial number of small

entities. This certification is based upon the fact that any burden on

taxpayers is minimal. Furthermore, an Agency is not a ``small entity''

for purposes of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

Accordingly, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act is not required. Pursuant to section 7805(f) of the

Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

or purposes of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

Accordingly, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act is not required. Pursuant to section 7805(f) of the

Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. The IRS and

Treasury specifically request comments on the clarity of the proposed

rule and how it may be made easier to understand. All comments will be

available for public inspection and copying.

A public hearing has been scheduled for Thursday, May 27, 1999, at

10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution

Avenue, NW., Washington DC. Due to building security procedures,

visitors must enter at the 10th Street entrance, located between

Constitution and Pennsylvania Avenues, NW. In addition, all visitors

must present photo identification to enter the building. Because of

access restrictions, visitors will not be admitted beyond the immediate

entrance area more than 15 minutes before the hearing starts. For

information about having your name placed on the building access list

to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section

of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written and electronic comments and an outline of the topics to

be discussed and the time to be devoted to each topic (signed original

and eight (8) copies) by April 8, 1999.

A period of 10 minutes will be allotted to each person for making

comments

of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written and electronic comments and an outline of the topics to

be discussed and the time to be devoted to each topic (signed original

and eight (8) copies) by April 8, 1999.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting information. The principal author of these regulations is

Paul F. Handleman, Office of the Assistant Chief Counsel (Passthroughs

and Special Industries), IRS. 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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

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

Section 1.42-17 also issued under 26 U.S.C. 42(n); * * *

Par. 2. Section 1.42-5 is amended by:

1. Revising paragraphs (c)(1)(v), (c)(1)(vi) and (c)(2)(ii).

2. Removing the language ``If a monitoring procedure includes the

review provision described in paragraph (c)(2)(ii)(B) of this section,

the'' from the second sentence in paragraph (c)(2)(iii) and adding

``The'' in its place.

3. Removing the language ``paragraph (c)(2)(ii)(A), (B), and (C) of

this section'' from the first sentence in paragraph (c)(4)(i) and

adding ``paragraph (c)(2)(ii) of this section'' in its place.

4

a monitoring procedure includes the

review provision described in paragraph (c)(2)(ii)(B) of this section,

the'' from the second sentence in paragraph (c)(2)(iii) and adding

``The'' in its place.

3. Removing the language ``paragraph (c)(2)(ii)(A), (B), and (C) of

this section'' from the first sentence in paragraph (c)(4)(i) and

adding ``paragraph (c)(2)(ii) of this section'' in its place.

4. Removing the language ``An Agency chooses the review requirement

of paragraph (c)(2)(ii)(A) of this section and some of the buildings

selected for review are'' from the first sentence in the example in

paragraph (c)(4)(iii) and adding ``An Agency selects for review'' in

its place.

5. Adding paragraph (c)(5).

6. Revising the last sentence in paragraph (d).

7. Removing the language ``(c)(2)(ii)(A), (B), or (C) of this

section (whichever is applicable)'' from paragraph (e)(2) and adding

the language ``(c)(2)(ii) of this section'' in its place.

8. Adding a sentence at the end of paragraph (e)(3)(i).

9. Removing the language ``paragraph (e)(3) of this section'' in

the third sentence in paragraph (f)(1)(i) and adding ``paragraphs

(c)(5) and (e)(3) of this section'' in its place.

10. Adding two sentences at the end of paragraph (h).

The revisions and additions read as follows:

Sec. 1.42-5 Monitoring compliance with low-income housing credit

requirements.

* * * * *

(c) * * *

(1) * * *

(v) All units in the project were for use by the general public (as

defined in Sec. 1.42-9) and used on a nontransient basis (except for

transitional housing for the homeless provided under section

42(i)(3)(B)(iii) or single-room-occupancy units rented on a month-by-

month basis under section 42(i)(3)(B)(iv));

iance with low-income housing credit

requirements.

* * * * *

(c) * * *

(1) * * *

(v) All units in the project were for use by the general public (as

defined in Sec. 1.42-9) and used on a nontransient basis (except for

transitional housing for the homeless provided under section

42(i)(3)(B)(iii) or single-room-occupancy units rented on a month-by-

month basis under section 42(i)(3)(B)(iv));

(vi) Each building in the project was suitable for occupancy,

taking into account local health, safety, and building codes, and the

State or local government unit responsible for making

building code inspections did not issue a report of a violation for any

building in the project. If a report of a violation was issued by the

governmental unit, the owner must attach a copy of the report of the

violation to the annual certification submitted to the Agency under

paragraph (c)(1) of this section;

(2) * * *

(ii) Require that with respect to each low-income housing project--

(A) The Agency conduct on-site inspections of all buildings in the

project by the end of the calendar year following the year the last

building in the project is placed in service and review the low-income

certification, the documentation supporting such certification, and the

rent record for each low-income tenant; and

(B) At least once every three (3) years, the Agency conduct on-site

inspections of all buildings in the project, and, for each tenant in at

least 20 percent of the project's low-income units selected by the

Agency, review the low-income certification, the documentation

supporting such certification, and the rent record; and

* * * * *

(5) Agency reports of compliance monitoring activities. The Agency

must report its compliance monitoring activities annually on Form 8610,

``Annual Low-Income Housing Credit Agencies Report.''

in at

least 20 percent of the project's low-income units selected by the

Agency, review the low-income certification, the documentation

supporting such certification, and the rent record; and

* * * * *

(5) Agency reports of compliance monitoring activities. The Agency

must report its compliance monitoring activities annually on Form 8610,

``Annual Low-Income Housing Credit Agencies Report.''

(d) * * * In addition, in connection with the on-site inspections

required by paragraph (c)(2)(ii) of this section, the Agency must

determine whether the project is suitable for occupancy, taking into

account local health, safety, and building codes. Notwithstanding

paragraph (f) of this section, this determination may be delegated only

to a State or local government unit responsible for making building

code inspections.

(e) * * *

(3) * * *

(i) * * * For noncompliance or failure to certify that is corrected

after the end of the correction period, the Agency is required to file

Form 8823 with the Service reporting the correction of the

noncompliance or failure to certify regardless of when the correction

occurs during the 15-year compliance period under section 42(i)(1).

* * * * *

(h) * * * In addition, the requirement in paragraph (c)(2)(ii)(A)

of this section (involving on-site inspections relating to the placed-

in-service year and review of the low-income certifications, the

documentation supporting such certifications, and the rent records) is

effective for buildings placed in service on or after the date the

final regulations are published in the Federal Register. The

requirements in paragraph (c)(1)(vi) of this section (involving whether

a State or local government unit responsible for making building code

inspections issued a report or a violation for the project), paragraph

porting such certifications, and the rent records) is

effective for buildings placed in service on or after the date the

final regulations are published in the Federal Register. The

requirements in paragraph (c)(1)(vi) of this section (involving whether

a State or local government unit responsible for making building code

inspections issued a report or a violation for the project), paragraph

(c)(2)(ii)(B) of this section (the low-income certifications, the

documentation supporting such certifications, and the rent records),

paragraph (c)(5) of this section (involving the requirement to report

the Agency's compliance monitoring activities to the Service),

paragraph (d) of this section (involving habitability requirements),

and paragraph (e)(3) of this section (involving the requirement to

report corrected noncompliance or failure to certify after the end of

the correction period) are effective on the date the final regulations

are published in the Federal Register.

Par. 3. Section 1.42-6 is amended by removing the first sentence in

paragraph (d)(4)(ii) and adding two sentences in its place to read as

follows:

Sec. 1.42-6 Buildings qualifying for carryover allocations.

* * * * *

(d) * * *

(4) * * *

(ii) Agency. The Agency must retain the original carryover

allocation document made under paragraph (d)(2) of this section and

file the form (to be prescribed by the IRS) that summarizes the

carryover allocation document. This form is filed with the Agency's

Form 8610 that accounts for the year the allocation is made. * * *

* * * * *

Par. 4. Section 1.42-11 is amended by revising the last sentence in

paragraph (b)(3)(ii)(A) to read as follows:

Sec. 1.42-11 Provision of services.

* * * * *

(d)(2) of this section and

file the form (to be prescribed by the IRS) that summarizes the

carryover allocation document. This form is filed with the Agency's

Form 8610 that accounts for the year the allocation is made. * * *

* * * * *

Par. 4. Section 1.42-11 is amended by revising the last sentence in

paragraph (b)(3)(ii)(A) to read as follows:

Sec. 1.42-11 Provision of services.

* * * * *

(b) * * *

(3) * * *

(ii) * * * (A) * * * For a building described in section

42(i)(3)(B)(iii) (relating to transitional housing for the homeless) or

section 42(i)(3)(B)(iv) (relating to single room occupancy), a

supportive service includes any service provided to assist tenants in

locating and retaining permanent housing.

* * * * *

Par. 5. Section 1.42-12 is amended by adding paragraph (c) to read

as follows:

Sec. 1.42-12 Effective dates and transitional rules.

* * * * *

(c) The rule set forth in Sec. 1.42-6(d)(4)(ii) relating to the

requirement that state and local housing agencies file the form to be

prescribed by the Internal Revenue Service that summarizes the

carryover allocation document is effective for forms the due date of

which are on or after the date that is 60 days after the date final

regulations are published in the Federal Register.

Par. 6. Section 1.42-13 is amended by:

1. Revising the introductory text of paragraph (b)(3)(iii).

2. Adding paragraphs (b)(3)(vi), (b)(3)(vii), and (b)(3)(viii).

3. Adding a sentence at the end of paragraph (d).

The revisions and additions read as follows:

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

correction of administrative errors and omissions.

* * * * *

r.

Par. 6. Section 1.42-13 is amended by:

1. Revising the introductory text of paragraph (b)(3)(iii).

2. Adding paragraphs (b)(3)(vi), (b)(3)(vii), and (b)(3)(viii).

3. Adding a sentence at the end of paragraph (d).

The revisions and additions read as follows:

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

correction of administrative errors and omissions.

* * * * *

(b) * * *

(3) * * *

(iii) Secretary's prior approval required. Except as provided in

paragraph (b)(3)(vi) of this section, 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--

* * * * *

(vi) Secretary's automatic approval. The Secretary grants automatic

approval to correct an administrative error or omission described in

paragraph (b)(2) of this section if--

(A) The correction is not made before the close of the calendar

year of the error or omission and the correction is a numerical change

to the housing credit dollar amount allocated for the building or

multiple-building project;

(B) The administrative error or omission resulted in an allocation

document (the Form 8609, ``Low-Income Housing Credit Allocation

Certification,'' or the allocation document under the requirements of

section 42(h)(1)(E) or (F) and Sec. 1.42-6(d)(2)) that either did not

accurately reflect the number of buildings constructed by the affected

taxpayer (for example, the affected taxpayer built 10 buildings instead

of 8 buildings having the same total number of units), or transposed

the information for one or more buildings with other buildings in the

multiple-building project;

(C) The administrative error or omission does not affect the

Agency's ranking of the building(s) or project and the total amount of

credit the Agency allocated to the building(s) or project;

d taxpayer built 10 buildings instead

of 8 buildings having the same total number of units), or transposed

the information for one or more buildings with other buildings in the

multiple-building project;

(C) The administrative error or omission does not affect the

Agency's ranking of the building(s) or project and the total amount of

credit the Agency allocated to the building(s) or project;

(D) The Agency corrects the administrative error or omission no

later than one year after the building(s) were placed in service by the

affected taxpayer; and

(E) The Agency corrects the administrative error or omission by

following the procedures described in paragraph (b)(3)(vii) of this

section.

(vii) How Agency corrects errors or omissions subject to automatic

approval. An Agency corrects an administrative error or omission

described in paragraph (b)(3)(vi) of this section by--

(A) Amending the allocation document described in paragraph

(b)(3)(vi)(B) of this section to correct the administrative error or

omission. The Agency will indicate on the amended allocation document

that it is making the ``correction under Sec. 1.42-13(b)(3)(vii)''. If

correcting the allocation document requires including any additional

B.I.N.(s) in the document, the document must include any B.I.N.(s)

already existing for the buildings. If possible, the additional

B.I.N.(s) should be sequentially numbered from the existing B.I.N.(s);

(B) Amending, if applicable, the form to be prescribed by the

Service that summarizes the allocation document (see Sec. 1.42-6

recting the allocation document requires including any additional

B.I.N.(s) in the document, the document must include any B.I.N.(s)

already existing for the buildings. If possible, the additional

B.I.N.(s) should be sequentially numbered from the existing B.I.N.(s);

(B) Amending, if applicable, the form to be prescribed by the

Service that summarizes the allocation document (see Sec. 1.42-6

(d)(4)(ii)) and attaching a copy of this form to an amended Form 8610,

``Annual Low-Income Housing Credit Agencies Report,'' for the year the

allocation was made. The Agency will indicate on the forms that it is

making the ``correction under Sec. 1.42-13(b)(3)(vii)'';

(C) Amending, if applicable, the Form 8609 and attaching the

original of this amended form to an amended Form 8610 for either the

year the allocation was made or the year the building was placed in

service by the affected taxpayer. The Agency will indicate on the forms

that it is making the ``correction under Sec. 1.42-13(b)(3)(vii)'';

(D) Filing the amended Form 8610 with the Service. When completing

the amended Form 8610, the Agency should follow the specific

instructions for the Form 8610 under the heading ``Amended Report'';

and

(E) Mailing a copy of any amended allocation document and any

amended Form 8609 to the affected taxpayer.

(viii) Other approval procedures. The Secretary may grant automatic

approval to correct other administrative errors or omissions as

designated in one or more documents published either in the Federal

Register or in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of

this chapter).

* * * * *

(d) * * * Paragraphs (b)(3)(vi), (vii), and (viii) of this section

are effective on the date the final regulations are published in the

Federal Register.

Par. 7. Section 1.42-17 is added to read as follows:

Sec. 1.42-17 Qualified Allocation Plan.

or more documents published either in the Federal

Register or in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of

this chapter).

* * * * *

(d) * * * Paragraphs (b)(3)(vi), (vii), and (viii) of this section

are effective on the date the final regulations are published in the

Federal Register.

Par. 7. Section 1.42-17 is added to read as follows:

Sec. 1.42-17 Qualified Allocation Plan.

(a) Requirements--(1) In general. [Reserved]

(2) Selection criteria. [Reserved]

(3) Agency evaluation. Section 42(m)(2)(A) requires that the

housing credit dollar amount allocated to a project should not exceed

the amount the Agency determines is necessary for the financial

feasibility of the project and its viability as a qualified low-income

housing project throughout the credit period. In making this

determination, the Agency must consider--

(i) The sources and uses of funds and the total financing planned

for the project. The taxpayer must certify to the Agency the full

extent of all federal, state, and local subsidies that apply (or which

the taxpayer expects to apply) to the project. The taxpayer must also

certify to the Agency all other sources of funds and all development

costs for the project. The taxpayer's certification should be

sufficiently detailed to enable the Agency to ascertain the nature of

the costs that will comprise the total financing package, including

subsidies and the anticipated syndication or placement proceeds to be

raised

to apply) to the project. The taxpayer must also

certify to the Agency all other sources of funds and all development

costs for the project. The taxpayer's certification should be

sufficiently detailed to enable the Agency to ascertain the nature of

the costs that will comprise the total financing package, including

subsidies and the anticipated syndication or placement proceeds to be

raised. Development cost information, whether or not includible in

eligible basis under section 42(d), that should be provided to the

Agency includes, but is not limited to, site acquisition costs,

construction contingency, general contractor's overhead and profit,

architect and engineer's fees, permit and survey fees, insurance

premiums, real estate taxes during construction, title and recording

fees, construction period interest, financing fees, organizational

costs, rent-up and marketing costs, accounting and auditing costs,

working capital and operating deficit reserves, syndication and legal

fees, developer fees, and other costs;

(ii) Any proceeds or receipts expected to be generated by reason of

tax benefits;

(iii) The percentage of the housing credit dollar amount used for

project costs other than the costs of intermediaries. This requirement

should not be applied so as to impede the development of projects in

hard-to-develop areas under section 42(d)(5)(C); and

(iv) The reasonableness of the developmental and operational costs

of the project.

(4) Timing of Agency evaluation. The financial determinations and

certifications required under paragraph (a)(3) of this section must be

made at each of the following times:

is requirement

should not be applied so as to impede the development of projects in

hard-to-develop areas under section 42(d)(5)(C); and

(iv) The reasonableness of the developmental and operational costs

of the project.

(4) Timing of Agency evaluation. The financial determinations and

certifications required under paragraph (a)(3) of this section must be

made at each of the following times:

(i) The time of the application for the housing credit dollar

amount.

(ii) The time of the allocation of the housing credit dollar

amount.

(iii) The date the building is placed in service.

(iv) After the building is placed in service, and before the Agency

issues the Form 8609, ``Low-Income Housing Credit Allocation

Certification.''

(5) Special rule for final determinations and certifications. For

the Agency's evaluation under paragraph (a)(4)(iv) of this section, the

taxpayer must obtain an opinion by a certified public accountant, based

upon the accountant's audit or examination, on the financial

determinations and certifications in paragraphs (a)(3)(i) through (iii)

of this section, including the costs that may qualify for inclusion in

eligible basis under section 42(d) and amount of the credit under

section 42.

(6) Bond financed projects. A project qualifying under section

42(h)(4) is not entitled to any credit unless the governmental unit

that issued the bonds (or on behalf of which the bonds were issued), or

the Agency responsible for issuing the Form(s) 8609 to the project,

makes determinations under rules similar to the rules in paragraphs

(a)(3), (4), and (5) of this section.

(b) Effective date. This section is effective on the date final

regulations are published in the Federal Register.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 99-174 Filed 1-7-99; 8:45 am]

BILLING CODE 4830-01-U