[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Proposed Rules]
[Pages 27036-27038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13297]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[PS-29-95]
RIN 1545-AT60
Available Unit Rule
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations concerning the
low-income housing credit. The proposed regulations provide rules for
determining the treatment of low-income housing units in a building
that are occupied by individuals whose incomes increase above 140
percent of the income limitation applicable under section 42(g)(1). The
proposed regulations affect owners of those buildings. This document
also provides notice of public hearing on these proposed regulations.
DATES: Written comments and outlines of topics to be discussed at the
public hearing scheduled for September 17, 1996, must be received by
August 28, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-29-95), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (PS-29-95), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC. The public hearing will be held in the NYU Classroom,
room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David
Selig, (202) 622-3040; concerning submissions and the hearing,
Christina Vasquez, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under section 42. These amendments are
proposed to provide guidance under section 42(g)(2)(D), as amended by
section 7108(e)(1) of the Omnibus Budget and Reconciliation Act of
1989, and section 11701(a)(3)(A) and (a)(4) of the Omnibus Budget and
Reconciliation Act of 1990. Section 42(g)(2)(D) provides rules for
determining the treatment of low-income housing units that are occupied
by individuals whose incomes rise above the income limitation
applicable under section 42(g)(1).
The general rule in section 42(g)(2)(D)(i) provides that if the
income of an occupant of a low-income unit increases above the income
limitation applicable under section 42(g)(1), the unit continues to be
treated as a low-income unit. This general rule only applies if the
occupant's income initially met the income limitation and the unit
continues to be rent-restricted. Section 42(g)(2)(D)(ii), however,
provides an exception to the general rule in section 42(g)(2)(D)(i).
The unit ceases being treated as a low-income unit when two conditions
occur. The first condition is that the occupant's income increases
above 140 percent of the income limitation applicable under section
42(g)(1), or above 170 percent for a deep rent-skewed project described
in section 142(d)(4)(B) (applicable income limitation). When this
occurs, the unit becomes an over-income unit. The second condition is
that a new resident, whose income exceeds the applicable income
limitation (nonqualified resident), occupies any residential unit in
the building of a comparable or smaller size (comparable unit).
Explanation of Provisions
All Available Units Must Be Rented to Qualified Residents
The heading of section 42(g)(2)(D)(ii) indicates that the next
available unit must be rented to a low-income tenant to maintain the
low-income status of an over-income unit. Although the heading of
section 42(g)(2)(D)(ii) refers to the next available unit, the body of
section 42(g)(2)(D)(ii) clarifies that if any available comparable unit
is occupied by a nonqualified resident, the over-income unit ceases to
be treated as a low-income unit. Therefore, all available comparable
units in the building, not only the next available unit, must be rented
to qualified residents to maintain the low-income status of the over-
income unit.
A Current Resident May Move Within the Same Low-Income Building
The proposed regulations define a qualified resident under the
available unit rule as any person whose income does not exceed the
applicable income limitation or any current resident, regardless of the
income level of the current resident. Thus, a current resident may move
to a different unit in the same low-income building without causing a
violation of the available unit rule even if the current resident's
income exceeds the applicable income limitation. When a current
resident moves to a different unit within the same low-income building,
the new unit adopts the status of the vacated unit.
Rule Applies to Each Building Separately
The rules of section 42 generally apply on a building-by-building
basis. For example, the amount of credit allowable under section 42(a)
is determined for each building in a qualified low-income housing
project. The recapture of credit under section 42(j) is determined by
examining the qualified basis of each building. In addition, section
42(g)(2)(D)(ii) uses the phrase ``any residential rental unit in the
building'' to identify residential rental units that must be rented to
qualified residents to preserve the low-income status of an over-income
unit. The proposed regulations provide, therefore, that in a project
containing more than one low-income building, the available unit rule
applies separately to each building.
Effect of Violation of Available Unit Rule
The proposed regulations further provide that all over-income units
in the building lose their status as low-income units if an owner
violates the available unit rule. A violation of the rule occurs when a
building has one or more over-income units and the owner of the
building rents an available comparable unit in the building to a
nonqualified resident.
Over-Income Unit Counts Toward Minimum Set-Aside Requirement
The proposed regulations also clarify whether an over-income unit
counts towards satisfying the applicable minimum set-aside requirement
of section 42(g)(1). The available unit rule provides that an over-
income unit maintains its status as a low-income unit as long as the
owner does not rent an available comparable unit to a nonqualified
resident. Section 42(i)(3), which defines a low-income unit, and
section 42(g)(2)(D), which contains rules
[[Page 27037]]
for increases in the income of existing low-income tenants, work
together to treat an over-income unit as a low-income unit when
determining whether a project satisfies the applicable minimum set-
aside requirement. This treatment helps diminish any incentive a
project owner may have to evict from a rent-restricted unit those
tenants who originally qualified as low-income tenants. See 2 H.R.
Conf. Rep. No. 841, 99th Cong., 2d Sess. II-97 (1986), 1986-3 (Vol. 4)
C.B. 97. Therefore, the proposed regulations provide that an over-
income unit may continue to be included in the numerator and the
denominator of the ratio used to determine whether a project satisfies
the applicable minimum set-aside requirement of section 42(g)(1).
Relationship to Tax-Exempt Bond Provisions
Financing arrangements using obligations that purport to be exempt
facility bonds under section 142 must meet the requirements of sections
103 and 141 through 150 for interest on the obligations to be excluded
from gross income under section 103(a). The requirements under section
142(d) may differ from those under section 42. For example, section
142(d)(1) is applied on a project rather than on a building-by-building
basis. The rules set forth in these proposed regulations are not
intended as an interpretation of the applicable rules under section
142.
The rules contained in the proposed regulations are proposed to be
effective on the date 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) 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, 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. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for September 17, 1996, at 10
a.m. in the NYU Classroom, room 2615, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the Internal Revenue
Building lobby more than 15 minutes before the hearing starts.
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 comments and outlines of topics to be discussed and the
time devoted to each topic (signed original and eight (8) copies by
August 28, 1996.
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 David Selig, 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 is amended by adding
a new citation in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42-15 is also issued under 26 U.S.C. 42(n). * * *
Par. 2. Section 1.42-15 is added to read as follows:
Sec. 1.42-15 Available unit rule.
(a) Definitions. The following definitions apply to this section:
Applicable income limitation means the limitation applicable under
section 42(g)(1) or, for deep rent-skewed projects described in section
142(d)(4)(B), 40 percent of area median gross income.
Available unit rule means the rule in section 42(g)(2)(D)(ii).
Comparable unit means a residential unit in a low-income building
that is comparably sized or smaller than an over-income unit or, for
deep rent-skewed projects described in section 142(d)(4)(B), any low-
income unit.
Low-income resident means a person whose income does not exceed the
applicable income limitation.
Low-income unit is defined by section 42(i)(3)(A).
New resident means a person who currently is not living in the low-
income building.
Nonqualified resident means a new resident whose income exceeds the
applicable income limitation.
Over-income unit means a low-income unit in which the income of the
occupants of the unit increases above 140 percent of the applicable
income limitation under section 42(g)(1), or above 170 percent of the
applicable income limitation for deep rent-skewed projects described in
section 142(d)(4)(B).
Qualified resident means a low-income resident or a current
resident.
(b) General section 42(g)(2)(D)(i) rule. Except as provided in
paragraph (c) of this section, notwithstanding an increase in the
income of the occupants of a low-income unit above the applicable
income limitation, if the income of the occupants initially met the
applicable income limitation, and the unit continues to be rent-
restricted----
(1) The unit continues to be treated as a low-income unit; and
(2) The unit continues to be included in the numerator and the
denominator of the ratio used to determine whether a project satisfies
the applicable minimum set-aside requirement of section 42(g)(1).
(c) Exception. A unit ceases to be treated as a low-income unit if
it becomes an over-income unit and a nonqualified resident occupies any
comparable unit that is available or that subsequently becomes
available in the same low-income building. Thus, to continue treating
the over-income unit as a low-income unit, the owner of a low-income
building must rent to qualified residents all comparable units that are
available or that subsequently become available in the same building.
(d) Effect of current resident moving within building. When a
current resident moves to a different unit within the building, the
newly occupied unit adopts the status of the vacated unit. Thus, if a
current resident, whose income exceeds the applicable income
limitation, moves from an over-income unit to a vacant unit in the same
building, the newly occupied unit is treated as an over-income unit.
[[Page 27038]]
(e) Buildings accounted for separately. In a project containing
more than one low-income building, the available unit rule applies
separately to each building.
(f) Result of violation of available unit rule. If any comparable
unit that subsequently becomes available is rented to a nonqualified
resident, all over-income units within the same building lose their
status as low-income units.
(g) Examples. The following examples illustrate this section.
Example 1. This example illustrates a violation of the available
unit rule in a low-income building containing three over-income
units. On January 1, 1997, a qualified low-income housing project,
consisting of one building containing ten identically sized
residential units, received a housing credit dollar amount
allocation from a state housing credit agency for five low-income
units. To avoid recapture of credit, the Project owner must maintain
five of the units as low-income units. The project satisfied the
minimum set-aside requirement of section 42(g)(1)(B). Units 1, 2, 3,
4, and 5 were occupied by individuals whose incomes did not exceed
the income limitation applicable under section 42(g)(1) (low-income
residents). Units 6, 7, 8, and 9 were occupied by market-rate
tenants. Unit 10 was vacant. On November 21, 1997, the annual
incomes of the individuals in Units 1, 2, and 3 increased above 140
percent of the income limitation applicable under section 42(g)(1),
causing those units to become over-income units. On November 30,
1997, Units 8 and 9 became vacant. On December 1, 1997, the project
owner rented Units 8 and 9 to qualified residents at rates meeting
the rent restriction requirements of section 42(g)(2). On December
31, 1997, the Project owner rented Unit 10 to a market-rate tenant.
Because Unit 10, an available comparable unit, was leased to a
market-rate tenant, Units 1, 2, and 3 ceased to be treated as low-
income units. On that date, Units 4, 5, 8, and 9 were the only
remaining low-income units. Because the Project owner did not
maintain five of the residential units as low-income units, the
qualified basis in the building is reduced, and credit must be
recaptured. If the project owner had rented Unit 10 to a qualified
resident, eight of the units would be low-income units. Units 1, 2,
and 3, the over-income units, could then be rented to market-rate
tenants because the building would still contain five low-income
units.
Example 2. This example illustrates the provisions of paragraph
(d) of this section. A low-income project consists of one six-floor
building. The residential units in the building are identically
sized. The building contains two over-income units on the sixth
floor and two vacant units on the first floor. The project owner,
desiring to maintain the over-income units as low-income units,
wants to rent the available units to qualified residents. J, a
resident of one of the over-income units, wishes to occupy a unit on
the first floor. J's income has recently increased above the
applicable income limitation. The project owner permits J to move
into one of the units on the first floor. Despite the increase in
J's income, J is a qualified resident under the available unit rule
because J is a current resident of the building. The unit occupied
by J becomes an over-income unit under the available unit rule. The
over-income units in the building continue to be treated as low-
income units.
(h) Effective date. This section is effective on the date final
regulations are published in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-13297 Filed 5-29-96; 8:45 am]
BILLING CODE [4830-01-U]
