[Federal Register Volume 60, Number 83 (Monday, May 1, 1995)]
[Notices]
[Pages 21246-21320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26217]
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Part II
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Secretary
_______________________________________________________________________
Statutorily Mandated Designation of Qualified Census Tracts and
Difficult Development Areas for Section 42 of the Internal Revenue Code
of 1986; Notice Republication
Federal Register / Vol. 60, No. 83 / Monday, May 1, 1995 / Notices
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Secretary
[Docket No. N-94-3821; FR-3796-N-01]
Statutorily Mandated Designation of Qualified Census Tracts and
Difficult Development Areas for Section 42 of the Internal Revenue Code
of 1986; Republication
Editorial Note: FR Doc. 94-26217 was originally published at 59
FR 53518 in the issue of Monday, October 24, 1994. In that
publication numerous errors were made. The corrected document is
republished below in its entirety.
AGENCY: Office of the Secretary, HUD.
ACTION: Notice.
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SUMMARY: This document provides revised designations of ``Qualified
Census Tracts'' and ``Difficult Development Areas'' for purposes of the
Low-Income Housing Tax Credit (``LIHTC'') under section 42 of the
Internal Revenue Code of 1986, and provides the methodology used by the
United States Department of Housing and Urban Development (``HUD'').
The new Qualified Census Tract designations are based on 1990 census
data. The new Difficult Development Areas are based on FY 1994 Fair
Market Rents (``FMRs''), FY 1994 income limits and 1990 census
population counts as explained below.
EFFECTIVE DATE: The lists of Qualified Census Tracts and Difficult
Development Areas are effective for allocations of credit made after
December 31, 1994. In the case of a building described in Internal
Revenue Code section 42(h)(4)(B), the list is effective if the bonds
are issued and the building is placed in service after December 31,
1994.
FOR FURTHER INFORMATION CONTACT: Harold J. Gross, Senior Tax Attorney,
Office of the General Counsel, Department of Housing and Urban
Development, 451 Seventh Street, S.W., Washington, D.C. 20410,
telephone (202) 708-3260, or Kurt G. Usowski, Economist, Division of
Economic Development and Public Finance, Office of Policy Development
and Research, Department of Housing and Urban Development, 451 Seventh
Street, S.W., Washington, D.C. 20410, telephone (202) 708-0426. A
telecommunications device for deaf persons (TDD) is available at (202)
708-9300. (These are not toll-free telephone numbers.)
SUPPLEMENTARY INFORMATION:
Background
The U.S. Treasury Department and the Internal Revenue Service
thereof are authorized to interpret and enforce the provisions of the
Internal Revenue Code of 1986 (the ``Code''), including the Low-Income
Housing Tax Credit (``LIHTC'') found at section 42 of the Code, as
enacted by the Tax Reform Act of 1986 [Pub. L. 99-514], as amended by
the Technical and Miscellaneous Revenue Act of 1988 [Pub. L. 100-647],
as amended by the Omnibus Budget Reconciliation Act of 1989 [Pub. L.
101-239], as amended by the Omnibus Budget Reconciliation Act of 1990
[Pub. L. 101-508], as amended by the Tax Extension Act of 1991 [Pub. L.
102-227], and as amended and made permanent by the Omnibus Budget
Reconciliation Act of 1993 [Pub. L. 103-66]. The Secretary of HUD is
required to designate Qualified Census Tracts and Difficult Development
Areas by section 42(d)(5)(C) of the Code.
In order to assist in understanding HUD's mandated designation of
Qualified Census Tracts and Difficult Development Areas for use in
administering section 42 of the Code, a summary of section 42 is
provided. The following summary does not purport to bind the Treasury
or the IRS in any way, nor does it purport to bind HUD as HUD has no
authority to interpret or administer the Code, except in those
instances where it has a specific delegation.
Summary of Low Income Housing Tax Credit
The LIHTC is a tax incentive intended to increase the availability
of low income housing. Section 42 provides an income tax credit to
owners of newly constructed or substantially rehabilitated low-income
rental housing projects. The dollar amount of the LIHTC available for
allocation by each state (the ``credit ceiling'') is limited by
population. Each state is allocated credit based on $1.25 per resident.
Also, states may carry forward unused or returned credit for one year;
if not used by then, credit goes into a national pool to be allocated
to states as additional credit. State and local housing agencies
allocate the state's credit ceiling among low income housing building
owners applying for the credit.
The credit is based on the cost of units placed in service as low-
income units under certain minimum occupancy and maximum rent criteria.
In general, a building must meet one of two thresholds to be eligible
for the LIHTC: either 20% of units must be rent-restricted and occupied
by tenants with incomes no higher than 50% of the Area Median Gross
Income (``AMGI''), or 40% of units must be rent restricted and occupied
by tenants with incomes no higher than 60% of AMGI. The term ``rent-
restricted'' means that gross rent, including an allowance for
utilities, cannot exceed 30% of the tenant's imputed income limitation
(i.e., 50% or 60% of AMGI). The rental restrictions remain in effect
for at least 15 years, and building owners are required to enter into
agreements to maintain the low income character of the building for an
additional 15 years.
The LIHTC reduces income tax liability dollar for dollar. It is
taken annually for a term of ten years and is intended to yield a
present value of either (1) 70 percent of the ``qualified basis'' for
new construction or substantial rehabilitation expenditures that are
not federally subsidized or financed with tax-exempt bonds, or (2) 30
percent of the qualified basis for the acquisition of existing projects
or projects involving federal subsidies or financing with tax-exempt
bonds. The actual credit rates were fixed at 9 percent (70 percent
present value) and 4 percent (30 percent present value) for 1987, and
are adjusted monthly for projects placed in service after 1987 under
procedures specified in section 42. Individuals can use the credit up
to a deduction equivalent of $25,000. This equals $9,900 at the 39.6%
maximum marginal tax rate. Individuals cannot use the credit against
the alternative minimum tax. Corporations, other than S or professional
service corporations, can use the credit against ordinary income tax.
They cannot use the credit against the alternative minimum tax. These
corporations can also use the losses from the project.
The qualified basis represents a fraction of the ``eligible
basis,'' based on the number of low income units in the building as a
percentage of the total number of units, or based on the floor space of
low income units as a percentage of the total floor space in the
building. The eligible basis is the adjusted basis attributable to
acquisition cost plus the amounts chargeable to capital account
incurred prior to the end of the first taxable year in which the
qualified low income building is placed in service. In the case of
buildings located in designated Qualified Census Tracts or designated
Difficult Development Areas, eligible basis is increased to 130% of
what it would otherwise be. This means that the available credit will
also be increased by 30%; if the 70% credit is available, it will
effectively be increased to 91%. [[Page 21247]]
Under section 42(d)(5)(C) of the Code, a Qualified Census Tract is
any census tract (or equivalent geographic area defined by the Bureau
of the Census) in which at least 50% of households have an income less
than 60% of the AMGI. There is a limit on the amount of Qualified
Census Tracts in any Metropolitan Statistical Area (``MSA'') or Primary
Metropolitan Statistical Area (``PMSA'') that may be designated to
receive an increase in eligible basis: all of the designated census
tracts within a given MSA/PMSA may not together contain more than 20%
of the total population of the MSA/PMSA. For purposes of this rule, all
non-metropolitan areas in a state are treated as if they constituted a
single metropolitan area.
Section 42 defines a Difficult Development Area as any area
designated by the Secretary of HUD as an area that has high
construction, land, and utility costs relative to the AMGI. Again,
limits apply. All designated Difficult Development Areas in MSAs/PMSAs
may not contain more than 20% of the aggregate population of all MSAs/
PMSAs, and all designated areas not in metropolitan areas may not
contain more than 20% of the aggregate population of the non-
metropolitan counties.
An amendment to section 42 made by section 11701(a)(2) of the
Omnibus Budget Reconciliation Act of 1990 specifies that the income
test for designation of Qualified Census Tracts should be based on the
most recent census data. Changes in MSA/PMSA definitions made after
HUD's last designation of Qualified Census Tracts and Difficult
Development Areas necessitate this notice.
Explanation of HUD Designation Methodology
A. Qualified Census Tracts
In developing this revised list of LIHTC Qualified Census Tracts,
HUD used 1990 Census data and the MSA/PMSA definitions established by
the Office of Management and Budget that applied as of June 30, 1993.
Beginning with the 1990 census, tract-level data are available for the
entire country. Generally, in metropolitan areas these geographic
divisions are called census tracts while in most non-metropolitan areas
the equivalent nomenclature is Block Numbering Area (``BNA''). BNAs are
treated as census tracts for the purposes of this Notice.
The LIHTC Qualified Census Tracts were determined as follows:
1. A census tract must have 50% of its households with incomes
below 60% of the AMGI to be eligible. HUD has defined 60% of AMGI
income as 120% of HUD's Very Low Income Limits, that are based on 50%
of area median family income, adjusted for high cost and low income
areas. The 1994 income estimates were then deflated to 1989 dollars, so
they would match the 1990 Census income data.
2. For each census tract, the percentage of households below the
60% income standard was determined by (a) calculating the average
household size of the census tract, (b) applying the income standard
after adjusting it to match the average household size, and (c)
calculating the number of households with incomes below the income
standard.
3. Qualified Census Tracts are those in which 50% or more of the
households are income eligible and the population of all census tracts
that satisfy this criterion does not exceed 20% of the total population
of the respective area.
4. In areas where more than 20% of the population qualifies, census
tracts are ordered from the highest percentage of eligible households
to the lowest. Starting with the highest percentage, census tracts are
included until the 20% limit is exceeded. If a census tract is excluded
because it raises the percentage above 20%, then subsequent census
tracts are considered to determine if a census tract with a smaller
population could be included without exceeding the 20% limit.
B. Difficult Development Areas
In developing the list of Difficult Development Areas, HUD compared
incomes with housing costs. HUD used 1990 Census data and the MSA/PMSA
definitions established by the Office of Management and Budget that
applied as of June 30, 1993. The basis for these comparisons was the
HUD income limits and Fair Market Rents (``FMRs'') used for the section
8 Housing Assistance Payments Program. The procedure used in making
these calculations follows:
1. For each MSA/PMSA and each non-metropolitan county, a ratio was
calculated. This calculation used the FY 1994 two-bedroom FMR and the
FY 1994 four-person income limit for Very Low Income households. The
numerator of the ratio was the ratio of the area FMR to the FY 1994
U.S. average FMR. The denominator of the ratio was the ratio of 60% of
the AMGI to 60% of the FY 1994 U.S. average of area median gross
incomes.
2. The ratios of the FMR to the income limit were arrayed in
descending order, separately, for MSAs/PMSAs and for non-metropolitan
counties.
3. The Difficult Development Areas are those with the highest
ratios cumulative to 20% of the 1990 population of all metropolitan
areas and of all non-metropolitan counties.
4. The American Housing Survey data used to calculate the FMRs for
New York City were adjusted by eliminating rent-controlled units. The
FMRs were recalculated on the basis of the adjusted data. Because FMRs
are based on recent mover rents, the FMRs generally reflect market
rents rather than rent-controlled rents. In this case, the adjustment
had no impact on the FMR.
C. Application of Caps to Qualified Census Tract and Difficult
Development Area Determinations
In identifying Qualified Census Tracts and Difficult Development
Areas, HUD applied various caps, or limitations, as noted above. For
Qualified Census Tracts, section 42(d)(5)(C)(ii)(II) of the Code
specifies that the population of eligible census tracts within a
metropolitan area cannot exceed 20% of the population of that
metropolitan area. Similarly, for census tracts/BNAs located outside
metropolitan areas, the population of eligible census tracts/BNAs
cannot exceed 20% of the population of the non-metropolitan counties in
a State. The cumulative population of metropolitan Difficult
Development Areas cannot exceed 20% of the cumulative population of all
metropolitan areas and the cumulative population of non-metropolitan
Difficult Development Areas cannot exceed 20% of the cumulative
population of all non-metropolitan counties.
In applying these caps, HUD established procedures to deal with two
issues: (1) How to proceed when the next logical choice for inclusion
causes the cumulative area population to exceed the cap, and (2) how to
treat small overruns of the caps. The remainder of this section
explains the procedures.
1. Next choice causes cumulative population to exceed the cap. In
applying the 20% cap to Qualified Census Tracts, HUD did not attempt to
break a borderline census tract into smaller areas. Instead HUD looked
tract-by-tract down the ranking beyond the excluded tract to see if a
smaller tract could be included without exceeding the cap. The approach
to Qualified Census Tracts differs from the treatment of difficult
development metropolitan areas because of an important difference in
how caps affect each of them. Section 42(d)(5)(C)(ii)(I) of the Code
sets a simple test for eligibility for Qualified [[Page 21248]] Census
Tracts. If a tract's low income population exceeds 50% of its total
population, then the tract is eligible unless it becomes necessary to
eliminate the tract to satisfy the cap. There are many metropolitan
areas and States in which the population of eligible areas falls short
of 20%. When HUD had to eliminate tracts to satisfy the 20% cap, it was
choosing among tracts that were otherwise eligible. By comparison,
section (42)(d)(5)(C) does not specify under what conditions an area is
automatically a Difficult Development Area. HUD did not attempt to
establish a threshold for eligibility. Instead HUD used the 20% cap as
a limit on eligibility.
2. For both Qualified Census Tracts and Difficult Development
Areas, HUD applied the caps strictly unless a strict application
produced an anomalous result. Specifically, HUD stopped selecting areas
when it was impossible to choose another area without exceeding the
applicable cap. The only exception to this policy was when an excluded
area contained either a large absolute population or a large percentage
of the total population and its inclusion resulted in only a minor
overrun of the cap. There were some cases where the inclusion of an
area would result in a minimal overrun of the cap; but, in all of these
cases, the exclusion of the area resulted in neither a large absolute
loss of population nor a large short-fall below 20%. HUD believes the
designation of these areas is consistent with the intent of the
legislation. Some latitude is justifiable because it is impossible to
really determine whether the 20% cap has been exceeded, as long as the
apparent excess is small, due to measurement error. Despite the care
and effort involved in a decennial census, it is recognized by the
Census Bureau, and all users of the data, that the population counts
for a given area and for the entire country are not precise. The extent
of the measurement error is unknown. Thus, there can be errors in both
the numerator and denominator of the ratio of populations used in
applying a 20% cap. In circumstances where a strict application of a
20% cap results in an anomalous situation, recognition of the
unavoidable imprecision in the census data justifies accepting small
variances above the 20% limit.
Future Designations
Difficult Development Areas are designated annually as updated
income and FMR data become available. Qualified Census Tracts will not
be redesignated until year 2000 census data become available.
Other Matters
Environmental Review
A finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
that implement section 102(2)(C) of the National Environmental Policy
Act of 1969. The Finding of No Significant Impact is available for
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the
Office of the Rules Docket Clerk at the above address.
Impact on Small Entities
In accordance with 5 U.S.C. 605(b) (the Regulatory Flexibility
Act), the undersigned hereby certifies that this notice does not have a
significant economic impact on a substantial number of small entities.
The notice involves the designation of ``Difficult Development Areas''
and ``Qualified Census Tracts'' for use by political subdivisions of
the States in allocating the LIHTC, as required by section 42 of the
Internal Revenue Code, as amended. This notice places no new
requirements on the States, their political subdivisions, or the
applicants for the credit. This notice also details the technical
methodology used in making such designations.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this notice will not have any substantial direct effects
on States or their political subdivisions, or the relationship between
the Federal government and the States, or on the distribution of power
and responsibilities among the various levels of government. As a
result, the notice is not subject to review under the order. The notice
merely designates ``Difficult Development Areas'' and ``Qualified
Census Tracts'' as required under section 42 of the Internal Revenue
Code, as amended, for use by political subdivisions of the States in
allocating the LIHTC. The notice also details the technical methodology
used in making such designations.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this notice does not have
potential for significant impact on family formation, maintenance, and
general well-being, and is not subject to review under the Order. The
notice only designates ``Difficult Development Areas'' and ``Qualified
Census Tracts'' as required under section 42 of the Internal Revenue
Code, as amended, for use by political subdivisions of the States in
allocating the LIHTC. The notice also details the technical methodology
used in making such designations.
Dated: October 13, 1994.
Henry G. Cisneros,
Secretary.
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[FR Doc. 94-26217 Filed 10-21-94; 8:45 am]
BILLING CODE 1505-01-C
