[Federal Register Volume 63, Number 122 (Thursday, June 25, 1998)]
[Notices]
[Pages 34748-34756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16828]
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Part III
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Department of Housing and Urban Development
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Statutorily Mandated Designation of Qualified Census Tracts for Section
42 of the Internal Revenue Code of 1986; Supplemental Designation;
Notice
Federal Register / Vol. 63, No. 122 / Thursday, June 25, 1998 /
Notices
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4372-N-01]
Statutorily Mandated Designation of Qualified Census Tracts for
Section 42 of the Internal Revenue Code of 1986; Supplemental
Designation
AGENCY: Office of the Secretary, HUD.
ACTION: Notice.
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SUMMARY: This document provides revised and supplemental designations
of ``Qualified Census Tracts'' 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 for Puerto Rico and for the metropolitan areas
and the nonmetropolitan areas of States affected by changes in
metropolitan area definitions since the last designation of Qualified
Census Tracts on May 1, 1995 (60 FR 21246). The designations are based
on 1990 census data. For the metropolitan areas and the nonmetropolitan
areas of States not listed in this Notice, the corrected designations
of ``Qualified Census Tracts'' published May 1, 1995 (60 FR 21246)
remain in effect. These revisions are made necessary by: the recently
enacted ``HUBZones'' provisions of the Small Business Reauthorization
Act of 1997, which incorporate section 42 Qualified Census Tracts by
reference; the need for Qualified Census Tract designations in Puerto
Rico; and changes in the definitions of metropolitan areas since the
last designation of Qualified Census Tracts.
FOR FURTHER INFORMATION CONTACT: With questions on how tracts are
designated and on geographic definitions, 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, SW, Washington, DC 20410, telephone (202) 708-0426,
e-mail Kurt__G.__Usowski@hud.gov. With specific legal questions
pertaining to section 42 and this notice, Chris Wilson, Attorney,
Office of the Chief Counsel, Pass Throughs and Special Industries
Branch 5, Internal Revenue Service, 1111 Constitution Ave., NW,
Washington, DC, 20244, telephone (202) 622-3040, fax (202) 622-4779; or
Harold J. Gross, Senior Tax Attorney, Office of the General Counsel,
Department of Housing and Urban Development, 451 Seventh Street, SW,
Washington, DC 20410, telephone (202) 708-3260, e-mail
[email protected] For questions about the ``HUBZones'' program,
Michael P. McHale, Assistant Administrator for Procurement Policy,
Office of Government Contracting, Suite 8800, Small Business
Administration, 409 Third Street, SW, Washington, DC 20416, telephone
(202) 205-6731, fax (202) 205-7324, e-mail michael.mchale@sba.gov. A
telecommunications device for deaf persons (TTY) is available at (202)
708-9300. (These are not toll-free telephone numbers.) Additional
copies of this notice are available through HUDUSER at (800) 245-2691
for a small fee to cover duplication and mailing costs.
COPIES AVAILABLE ELECTRONICALLY: This notice is available
electronically on the Internet (World Wide Web) at http://
www.huduser.org/ under the heading ``Data Available from HUDUser.'' A
complete revised list of all Qualified Census Tracts including the
tracts designated by this Notice and the previously-designated tracts
which continue to be in effect will be posted at this site.
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 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
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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 otherwise would 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%.
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. 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.
In the last designation of Qualified Census Tracts published May 1,
1995 (60 FR 21246), no tract designations were made in Puerto Rico
because the entire island was designated a ``Difficult Development
Area'' under section 42 of the Internal Revenue Code making the
designation of Qualified Census Tracts superfluous. Because the current
designation of section 42 Difficult Development Areas, published
October 21, 1997 (62 FR 54732), no longer names all of Puerto Rico a
Difficult Development Area, updated designations of Qualified Census
Tracts are required. The following changes in MSA/PMSA definitions were
made after HUD's last designation of Qualified Census Tracts.
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New MSA (MSA No.) Component counties
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Flagstaff, AZ-UT MSA (2620)............... Coconino County, AZ.
Kane County, UT.
Grand Junction, CO MSA (2995)............. Mesa County, CO.
Hattiesburg, MS MSA (3285)................ Forrest County, MS.
Lamar County, MS.
Jonesboro, AR MSA (3700).................. Craighead County, AR.
Pocatello, ID MSA (6340).................. Bannock County, ID.
------------------------------------------------------------------------
In addition, Chester County, Tennessee was added to the Jackson, TN
MSA (3580). With this addition, the MSA now comprises Chester and
Madison Counties, Tennessee.
Finally, the recently enacted ``HUBZones'' provisions of the Small
Business Reauthorization Act of 1997 [Pub.L. 105-135] incorporate
section 42 Qualified Census Tracts by reference making necessary these
revisions to ensure legal compliance with this new program.
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, 1996.
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 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. Application of Caps to Qualified Census Tract Determinations
In identifying Qualified Census Tracts, 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.
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. Section
42(d)(5)(C)(ii)(I) of the Code sets a simple test for eligibility for
Qualified 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
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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.
2. Anomalous results. For Qualified Census Tracts, 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
Qualified Census Tracts will not be redesignated until year 2000
census data become available unless further changes in metropolitan
area definitions occur.
Effective Date
The revisions to the list of Qualified Census Tracts are effective
for allocations of credit made after December 31, 1998. 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, 1998. The corrected designations of
``Qualified Census Tracts'' under section 42 of the Internal Revenue
Code published May 1, 1995 (60 FR 21246) for the metropolitan areas and
nonmetropolitan parts of States not listed in this Notice remain in
effect. The list of Difficult Development Areas published October 21,
1997 (62 FR 54732) remains in effect. Effective dates with respect to
the HUBZones program will be established separately by the Small
Business Administration.
Other Matters
Environmental Impact
In accordance with 40 CFR 1508.4 of the CEQ regulations and 24 CFR
50.19(c)(6) of the HUD regulations, the policies and procedures
contained in this notice provide for the establishment of fiscal
requirements or procedures which do not constitute a development
decision that affects the physical condition of specific project areas
or building sites and therefore, are categorically excluded from the
requirements of the National Environmental Policy Act, except for
extraordinary circumstances, and no FONSI is required.
Regulatory Flexibility Act
In accordance with 5 U.S.C. Section 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'' for use by political subdivisions of the States in
allocating the LIHTC, as required by section 42 of the 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 ``Qualified Census Tracts'' for the use by political
subdivisions of the States in allocating the LIHTC, as required under
section 42 of the Internal Revenue Code, as amended. The notice also
details the technical methodology used in making such designations.
Dated: June 18, 1998.
Andrew Cuomo,
Secretary.
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[FR Doc. 98-16828 Filed 6-24-98; 8:45 am]
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