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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8859] RIN 1545-
AV44

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations regarding the
procedures for compliance monitoring by state and local housing
agencies (Agencies) with the requirements of the low-income housing
credit; the requirements for making carryover allocations; the rules
for Agencies' correction of administrative errors or omissions; and
the independent verification of information on sources and uses of
funds submitted by taxpayers to Agencies. These final regulations
affect owners of low-income housing projects who claim the credit
and the Agencies who administer the credit.

DATES: Effective Dates: These regulations are effective January 1,
2001, except that the amendments made to ��1.42-5(c)(5) and (e)(3)
(i), and 1.42-13 are effective January 14, 2000, and the amendment
made to �1.42-6(d)(4)(ii) is effective January 1, 2000.

Applicability Dates: For dates of applicability of the amendments to
�1.42-5, see �1.42-5(h). For date of applicability of the amendment
made to �1.42-6, see �1.42-12(c). For date of applicability of the
amendments made to �1.42-13, see �1.42-13(d). For date of
applicability of �1.42-17, see �1.42-17(b).

FOR FURTHER INFORMATION CONTACT: Paul Handleman, (202) 622-3040 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507) under control number 1545- 1357. Responses to these
collections of information are mandatory.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.

For �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. For �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. For �1.42-17, the estimated annual burden per
respondent varies from 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.

Comments concerning the accuracy of these burden estimates and
suggestions for reducing these burdens should be sent to the
Internal Revenue Service , Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224, and 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.

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

On January 8, 1999, the IRS published proposed regulations
(REG-114664-97) in the Federal Register (64 FR 1143) inviting
comments under section 42. A public hearing was held May 27, 1999.
Numerous comments have been received. After consideration of all the
comments, the proposed regulations are adopted as revised by this
Treasury Decision.

Public Comments

A. Compliance Monitoring

1. Inspection Requirement for New Buildings.

The proposed regulations require that, by the end of the calendar
year following the year the last building in a project is placed in
service, 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. Most commentators view the requirement for reviewing all
tenant records for all buildings in a project as unnecessary and
burdensome. Most commentators suggest limiting inspections for new
buildings to 20 percent of the project's low-income units.

Commentators also suggest extending the time limit for inspecting
new buildings to the end of the calendar year following the first
year of the credit period or at least until a reasonable time after
the Agency issues Form 8609, "Low-Income Housing Credit Allocation
Certification." This added flexibility would allow the Agency to
combine a physical inspection with a file review of the first year
of the credit period.

In response to the comments, the final regulations reduce the
inspection burden for new buildings by requiring the Agency to
conduct on-site inspections of all new buildings in the project and,
for at least 20 percent of the project's low-income units, to
inspect the units and review the low-income certifications, the
documentation supporting the certifications, and the rent records
for the tenants in those units. To allow the Agency sufficient time
to review the tenant files for the first year of the credit period,
the final regulations extend the time limit for inspecting new
buildings to the end of the second calendar year following the year
the last building in the project is placed in service.

2. Three-year Inspection Requirement.

The proposed regulations require that, at least once every 3 years,
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.

Most commentators agree with requiring physical inspections of the
buildings at least once every 3 years. However, commentators
recommend reviewing tenant income and rent records once every 5
years, which is one of the options under the current compliance
monitoring regulations (see �1.42-5(c)(2)(ii)(B) requiring an Agency
to review tenant files for 20 percent of the low-income housing
projects each year).

Commentators also recommend reviewing tenant files either on-site or
at other locations, including desk audits.

Although the physical inspection and file review requirements for
new buildings are relaxed in the final regulations, the final
regulations retain the 3-year inspection cycle for existing
buildings. The final regulations do not separate the physical
inspection and file review cycles (every 3 years for physical
inspections and every 5 years for file reviews) as suggested by
commentators because it is administratively complete to do both
during the same year. The tenant income and rent restrictions in
section 42(g) are equally important as the habitability standards
for a low-income unit in section 42(i)(3)(B)(ii). The final
regulations adopt the suggestion that the file review may be done
wherever the tenant files are maintained.

3. Health, Safety, and Building Code Inspections.

The proposed regulations require the Agency to determine whether the
project is suitable for occupancy, taking into account local health,
safety, and building codes.

Many commentators object to this requirement as too costly and
unadministerable because building codes vary considerably within
states. Commentators also asked for guidelines as to what
constitutes an "inspection." Some commentators propose defining an
inspection as looking at selected units in the building and common
areas for visible problems or defects without applying the local
health, safety, and building codes standards. One commentator
suggests inspections based on a complaint from the local
jurisdiction or from a tenant. Some commentators suggest using a
uniform physical standard such as the uniform physical condition
standards for public housing established by the Department of
Housing and Urban Development (HUD) in 24 CFR 5.703.

Section 42(i)(3)(B)(i) excludes from the definition of a "low-income
unit" a unit that is not suitable for occupancy. Under section 42(i)
(3)(B)(ii), suitability of a unit for occupancy shall be determined
under regulations prescribed by the Secretary taking into account
local health, safety, and building codes. Recognizing that these
codes vary considerably within states, the final regulations require
an Agency to determine whether a low-income housing project
satisfies these codes, or satisfies the HUD uniform physical
condition standards. The HUD standards are intended to ensure that
housing is decent, safe, sanitary, and in good repair. Though it
would be appropriate that an Agency use HUD's inspection protocol
under 24 CFR 5.705, the final regulations do not mandate use of
HUD's inspection protocol because to do so could increase costs to
the Agencies as well as limit their latitude in applying standards
consistent with their own operating procedures and practices. The
final regulations except a building from the inspection requirement
if the building is financed by the Rural Housing Service (RHS) under
the section 515 program, the RHS inspects the building (under 7 CFR
part 1930(c)), and the RHS and Agency enter into a memorandum of
understanding, or other similar arrangement, under which the RHS
agrees to notify the Agency of the inspection results. Irrespective
of the physical inspection standard selected by the Agency, a low-
income housing project under section 42 must continue to satisfy
local health, safety, and building codes.

The proposed regulations limit an Agency's delegation of the
physical inspection of a project to only a state or local government
unit responsible for making building code inspections. Commentators
suggest expanding the delegation of inspections to professional
firms. The final regulations remove the delegation limitation and
Agencies may delegate the physical inspection requirement to state
or local governmental agencies, HUD, or private contractors.

4. Local Reports of Building Code Violations.

The proposed regulations require the owner of a low-income housing
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
is required to attach a copy of the report of the violation to the
annual certification submitted to the Agency.

A commentator noted that the number of violations attached to the
annual owner certification would be considerable because even the
highest quality rental housing operations do not have an inspection
without a report or notice of some violation. Two commentators
suggest attaching reports only for violations that have not been
corrected prior to filing the annual owner certification or
requiring that owners only attach reports for "major" violations.
The commentators suggest defining major violations as violations not
corrected within 90 days of the notice of violation or violations
where the cost to comply exceeds $2,500. A commentator suggests that
Agencies be allowed to distinguish between minor technical
violations and serious violations (i.e., lack of heat or hot water,
hazardous conditions, and security) in reporting noncompliance.

Though a minor violation will not lead to the disallowance or
recapture of section 42 credits, a series of minor violations may be
the equivalent of a major violation resulting in disallowance or
recapture of credits. Determining the difference between a major and
minor violation is subjective. The final regulations do not exclude
minor violations from the reporting and recordkeeping requirement.
However, to reduce the inspection violation paperwork, the final
regulations require that the owner must either attach a statement
summarizing the violations or a copy of each violation report to the
annual owner certification submitted to the Agency. The owner must
state on the certification whether the violation has been corrected.
In addition, the final regulations require that the owner retain the
original violation report for the Agency's physical inspection.
Retention of the original violation report is not required once the
Agency reviews the violation and completes its inspection, unless
the violation remains uncorrected. 5. Correction of Noncompliance or
Failure to Certify.

The final regulations adopt commentators' suggestion to limit to a
3-year period after the end of the correction period in �1.42-5(e)
(4) the requirement that Agencies file Form 8823, "Low-Income
Housing Credit Agencies Report of Noncompliance," with the IRS
reporting the correction of the noncompliance or failure to certify.

6. Compliance Monitoring Effective Dates.

Commentators suggest an effective date of at least one year after
the final regulations are published in the Federal Register.
Commentators also recommend on-site inspections apply only to new
buildings allocated section 42 credits after the effective date of
the final regulations.

Because the amendments to the compliance monitoring regulations will
require amendments to qualified allocation plans, the final
regulations relating to compliance generally contain a January 1,
2001, effective date. Thus, the requirements to attach local health,
safety, or building code violations to the annual owner
certification and to inspect buildings and review tenant files for
existing projects are effective January 1, 2001. The inspection
requirement and tenant file review for new buildings is effective
for buildings placed in service on or after January 1, 2001.

7. Section 8 and Federal Civil Rights Laws.

Two commentators state that insufficient controls are in place to
ensure that low-income housing projects adhere to the requirement in
section 42(h)(6)(B)(iv) of nondiscrimination against Section 8
voucher or certificate holders. The commentators suggest that the
IRS could help compensate for lack of controls by working with HUD
to ensure that Section 8 voucher or certificate holders are aware
of, and have access to, low-income housing projects. The
commentators also suggest that Agencies provide regional HUD offices
a list of low-income housing projects in that state, with
information that would be helpful for prospective tenants. One
commentator suggests that the prohibition on discrimination based on
Section 8 status be clarified to exclude policies that bar Section 8
tenants but have no substantial business justification. For example,
low-income housing projects should not be permitted to exclude
Section 8 voucher or certificate holders through a rule that
requires every applicant to have income equal to at least three
times the total rent.

The commentators also suggest that the Agencies should be required
to develop a plan for educating applicants and owners of projects of
the prohibition against discrimination on the basis of Section 8
voucher or certificate status. They recommend that the Agencies
should be required to have a procedure for accepting and processing
complaints about discrimination against Section 8 voucher or
certificate holders. They also recommend that IRS and HUD should
work together to study the circumstances under which Section 8
voucher or certificate holders are, or are not, accessing projects.

Section 42(h)(6)(A) provides that no credit shall be allowed by
reason of section 42 with respect to any building for the taxable
year unless an extended low-income housing commitment is in effect
as of the end of such taxable year.

Section 42(h)(6)(B)(iv) defines the term "extended low-income
housing commitment" to include any agreement between the taxpayer
and the housing credit agency that prohibits the refusal to lease to
a holder of a voucher or certificate of eligibility under section 8
of the United States Housing Act of 1937 because of the status of
the prospective tenant as such a holder. To help monitor compliance
with section 42(h)(6)(B)(iv), the final regulations amend the annual
owner certification relating to the extended low-income housing
commitment under �1.42-5(c)(1)(xi) to require owners to certify that
the owner has not refused to lease a unit in the project to a
Section 8 applicant because the applicant holds a Section 8 voucher
or certificate.

The IRS has informed HUD of the comments received about preventing
discrimination based on Section 8 status. Agencies should provide
HUD with publicly available information on section 42 low-income
housing projects if HUD requests it.

A commentator also suggests that the compliance monitoring
regulations be amended to acknowledge the authority of Title VIII of
the 1968 Civil Rights Act, as well as HUD's Title VIII regulations;
specify the civil rights obligations of the Agencies; and specify
what developers and owners of projects must do to satisfy their
civil rights obligations.

To monitor for compliance with the Fair Housing Act, the final
regulations amend the annual owner certification relating to the
general public use requirement in �1.42-5(c)(1)(v) to require owners
to certify that no finding of discrimination under the Fair Housing
Act has occurred for the project (a finding of discrimination
includes an adverse final decision by HUD, an adverse final decision
by a substantially equivalent state or local fair housing agency, or
an adverse judgment from a Federal court).

B. Sources and Uses of Funds Section 42(m)(2)(A) requires Agencies
to limit the housing credit dollar amount allocated to a project to
only the amount necessary for the financial feasibility of a project
and its viability as a qualified low-income project through the
credit period. The proposed regulations require an Agency to
evaluate the housing credit dollar amount at four times: (1) at
application for the housing credit dollar amount, (2) the allocation
of the housing credit dollar amount, (3) the date the building is
placed in service, and (4) after the building is placed in service,
but before the Agency issues the Form 8609.

Commentators recommend elimination of the evaluation at the placed-
in-service date.

In practice, Agencies currently evaluate the credit amount at the
three other times. The final regulations adopt the recommendation by
deleting the fourth time requirement and clarifying that the placed-
in-service evaluation may occur not later than the date the Agency
issues the Form 8609.

Commentators are concerned that the opinion by a certified public
accountant, based upon the accountant's audit or examination, on the
financial determinations and certifications required in the proposed
regulations, could have significant cost implications, particularly
for smaller developers. Commentators suggest limiting the
requirement to projects with 25 or more units, or projects with
total development costs of $5 million or more.

The third-party validation on financial information was recommended
in the report by the General Accounting Office (GAO), "Tax Credits:
Opportunities to Improve Oversight of the Low-Income Housing
Program," (GAO/GGD/RCED-97-55), dated March 28, 1997. The GAO report
states on page 93 that an accounting firm with a tax credit
speciality would charge in the $5,000 to $7,500 range per engagement
for tax credit certifications (opinion on total costs, eligible
basis, and tax credit amount) prepared on the basis of an audit done
in accordance with AICPA audit standards even for projects costing
upwards of $5 million to $10 million. As a percentage of development
costs, the CPA tax credit certifications represent a minimal cost
for validating financial information. However, in recognition that
the cost may be burdensome for smaller developers, the final
regulations limit the requirement for an audited schedule of costs
for projects with more than 10 units.

Two commentators were concerned that the meaning of the term
"financial determinations and certifications" is unclear. A CPA
would not be able to evaluate what needs to be audited and whether
there are relevant and reliable criteria against which the
information can be evaluated. To conduct an audit or attestation
engagement, CPAs require that the subject matter be defined and that
such subject matter be capable of evaluation against reasonable
criteria. Reasonable criteria are essential so that CPAs using the
same criteria will be able to arrive at similar conclusions.

Another concern expressed by commentators involved uncertainty as to
whether the CPA is being asked to report on financial information
that is only historical or whether the CPA is also being asked to
examine prospective financial information.

CPAs can compile or examine and report on certain types of
prospective financial information. However, such engagements
generally are more costly than audits of historical information
because of minimum presentation guidelines required by professional
standards as well as increased risk associated with future-oriented
information. The commentators believe that if an Agency were to
require CPAs to be associated with prospective financial
information, the related costs to the taxpayer may far exceed any
perceived benefits to the Agency. Accordingly, the final regulations
have been revised to specify that the CPA's opinion only relates to
historical project costs.

C. Correction of Administrative Errors and Omissions

Commentators recommend filing the corrected allocation document with
the current year's Form 8610, "Annual Low-Income Housing Credit
Agencies Report," instead of amending the Form 8610 for the year the
allocation was made. Because the administrative errors covered by
the automatic approval provision will not have an effect on the
total amount of credit the Agency allocated to the building(s) or
project, commentators view an amended Form 8610 as unnecessary.
Agency recordkeeping would be simplified if all corrected allocation
documents could be submitted with the current year's Form 8610. The
final regulations adopt this recommendation.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 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 the burden on taxpayers is minimal and the burden
on small entity Agencies is not significant. Accordingly, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act
is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations
was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is 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

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order 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. Removing the word "Revenue" in paragraph (b)(1)(iv) and adding
"Omnibus Budget" in its place.

2. Adding paragraph (b)(3).

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

4. Removing the word "project" in paragraph (c)(1)(x) and adding
"building" in its place.

5. Removing the word "and" at the end of paragraph (c)(1)(x).

6. Adding paragraph (c)(1)(xii).

7. 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.

8. Removing the language "Farmers Home Administration (FmHA)" in the
first sentence in paragraph (c)(4)(i) and adding "Rural Housing
Service (RHS), formerly known as Farmers Home Administration," in
its place.

9. Removing the language "FmHA" in paragraph (c)(4)(ii) and adding
"RHS" in its place in each place it appears.

10. 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.

11. Removing the language "FmHA" in paragraph (c)(4)(iii) Example
and adding "RHS" in its place in each place it appears.

12. Adding paragraph (c)(5).

13. Revising paragraph (d).

14. 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.

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

16. 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.

17. Adding three sentences at the end of paragraph (h).

The revisions and additions read as follows: �1.42-5 Monitoring
compliance with low-income housing credit requirements.

* * * * *

(b) * * *

(3) Inspection record retention provision. Under the inspection
record retention provision, the owner of a low-income housing
project must be required to retain the original local health,
safety, or building code violation reports or notices that were
issued by the State or local government unit (as described in
paragraph (c)(1)(vi) of this section) for the Agency's inspection
under paragraph (d) of this section. Retention of the original
violation reports or notices is not required once the Agency reviews
the violation reports or notices and completes its inspection,
unless the violation remains uncorrected.

(c) * * * (1) * * *

(v) All units in the project were for use by the general public (as
defined in �1.42-9), including the requirement that no finding of
discrimination under the Fair Housing Act, 42 U.S.C. 3601 - 3619,
occurred for the project. A finding of discrimination includes an
adverse final decision by the Secretary of the Department of Housing
and Urban Development (HUD), 24 CFR 180.680, an adverse final
decision by a substantially equivalent state or local fair housing
agency, 42 U.S.C. 3616a(a)(1), or an adverse judgment from a federal
court;

(vi) The buildings and low-income units in the project were suitable
for occupancy, taking into account local health, safety, and
building codes (or other habitability standards), and the State or
local government unit responsible for making local health, safety,
or building code inspections did not issue a violation report for
any building or low-income unit in the project. If a violation
report or notice was issued by the governmental unit, the owner must
attach a statement summarizing the violation report or notice or a
copy of the violation report or notice to the annual certification
submitted to the Agency under paragraph (c)(1) of this section. In
addition, the owner must state whether the violation has been
corrected;

* * * * *

(xi) An extended low-income housing commitment as described in
section 42(h)(6) was in effect (for buildings subject to section
7108(c)(1) of the Omnibus Budget Reconciliation Act of 1989, 103
Stat. 2106, 2308 - 2311 (1989)), including the requirement under
section 42(h)(6)(B)(iv) that an owner cannot refuse to lease a unit
in the project to an applicant because the applicant holds a voucher
or certificate of eligibility under section 8 of the United States
Housing Act of 1937, 42 U.S.C. 1437f (for buildings subject to
section 13142(b)(4) of the Omnibus Budget Reconciliation Act of
1993, 107 Stat. 312, 438 - 439 (1993)); and

(xii) All low-income units in the project were 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)).

(2) * * *

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

(A) The Agency must conduct on-site inspections of all buildings in
the project by the end of the second calendar year following the
year the last building in the project is placed in service and, for
at least 20 percent of the project's low-income units, inspect the
units and review the low-income certifications, the documentation
supporting the certifications, and the rent records for the tenants
in those units; and

(B) At least once every 3 years, the Agency must conduct on-site
inspections of all buildings in the project and, for at least 20
percent of the project's low-income units, inspect the units and
review the low-income certifications, the documentation supporting
the certifications, and the rent records for the tenants in those
units; and

(iii) Require that the Agency randomly select which low-income units
and tenant records are to be inspected and reviewed by the Agency.
The review of tenant records may be undertaken wherever the owner
maintains or stores the records (either on-site or off-site). The
units and tenant records to be inspected and reviewed must be chosen
in a manner that will not give owners of low-income housing projects
advance notice that a unit and tenant records for a particular year
will or will not be inspected and reviewed. However, an Agency may
give an owner reasonable notice that an inspection of the building
and low-income units or tenant record review will occur so that the
owner may notify tenants of the inspection or assemble tenant
records for review (for example, 30 days notice of inspection or
review).

* * * * *

(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)
Inspection provision--(1) In general. Under the inspection
provision, the

Agency must have the right to perform an on-site inspection of any
low-income housing project at least through the end of the
compliance period of the buildings in the project.

The inspection provision of this paragraph (d) is a separate
requirement from any tenant file review under paragraph (c)(2)(ii)
of this section.

(2) Inspection standard. For the on-site inspections of buildings
and low-income units required by paragraph (c)(2)(ii) of this
section, the Agency must review any local health, safety, or
building code violations reports or notices retained by the owner
under paragraph (b)(3) of this section and must determine--

(i) Whether the buildings and units are suitable for occupancy,
taking into account local health, safety, and building codes (or
other habitability standards); or

(ii) Whether the buildings and units satisfy, as determined by the
Agency, the uniform physical condition standards for public housing
established by HUD (24 CFR 5.703). The HUD physical condition
standards do not supersede or preempt local health, safety, and
building codes. A low-income housing project under section 42 must
continue to satisfy these codes and, if the Agency becomes aware of
any violation of these codes, the Agency must report the violation
to the Service. However, provided the Agency determines by
inspection that the HUD standards are met, the Agency is not
required under this paragraph (d)(2)(ii) to determine by inspection
whether the project meets local health, safety, and building codes.

(3) Exception from inspection provision. An Agency is not required
to inspect a building under this paragraph (d) if the building is
financed by the RHS under the section 515 program, the RHS inspects
the building (under 7 CFR part 1930), and the RHS and Agency enter
into a memorandum of understanding, or other similar arrangement,
under which the RHS agrees to notify the Agency of the inspection
results.

(4) Delegation. An Agency may delegate inspection under this
paragraph (d) to an Authorized Delegate retained under paragraph (f)
of this section. Such Authorized Delegate, which may include HUD or
a HUD-approved inspector, must notify the Agency of the inspection
results.

(e) * * *

(3) * * *

(i) * * * If the noncompliance or failure to certify is corrected
within 3 years 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.

* * * * *

(h) * * * In addition, the requirements in paragraphs (b)(3) and (c)
(1)(v), (vi), and (xi) of this section (involving recordkeeping and
annual owner certifications) and paragraphs (c)(2)(ii)(B), (c)(2)
(iii), and (d) of this section (involving tenant file reviews and
physical inspections of existing projects, and the physical
inspection standard) are applicable January 1, 2001. The requirement
in paragraph (c)(2)(ii)(A) of this section (involving tenant file
reviews and physical inspections of new projects) is applicable for
buildings placed in service on or after January 1, 2001. The
requirements in paragraph (c)(5) of this section (involving Agency
reporting of compliance monitoring activities to the Service) and
paragraph (e)(3)(i) of this section (involving Agency reporting of
corrected noncompliance or failure to certify within 3 years after
the end of the correction period) are applicable January 14, 2000.

Par. 3. Section 1.42-6 is amended by:

1. In paragraph (c)(3), second sentence, remove the language "Annual
Low-Income Housing Credit Agencies Report," and add the language "
'Annual Low-Income Housing Credit Agencies Report,' " in its place.

2. In paragraph (d)(1), first sentence, remove the language "Low-
Income Housing Credit Allocation Certification," and add the
language " 'Low-Income Housing Credit Allocation Certification,' "
in its place.

3. Revising the first sentence in paragraph (d)(4)(ii).

�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 Schedule A (Form 8610), "Carryover Allocation of the Low-Income
Housing Credit," with the Agency's Form 8610 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: �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: �1.42-12 Effective dates and transitional rules.

* * * * *

(c) Carryover allocations. The rule set forth in �1.42-6(d)(4)(ii)
relating to the requirement that state and local housing agencies
file Schedule A (Form 8610), "Carryover Allocation of the Low-Income
Housing Credit," is applicable for carryover allocations made after
December 31, 1999.

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: �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 �1.42-6(d)(2)) that either did not
accurately reflect the number of buildings in a project (for
example, an allocation document for a 10-building project only
references 8 buildings instead of 10 buildings), or the correct
information (other than the amount of credit allocated on the
allocation document);

(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; and

(D) 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 �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 buildings in the project. If
possible, the additional B.I.N.(s) should be sequentially numbered
from the existing B.I.N.(s);

(B) Amending, if applicable, the Schedule A (Form 8610), "Carryover
Allocation of the Low-Income Housing Credit," and attaching a copy
of this schedule to Form 8610, "Annual Low-Income Housing Credit
Agencies Report," for the year the correction is made. The Agency
will indicate on the schedule that it is making the "correction
under �1.42-13(b)(3)(vii)." For a carryover allocation made before
January 1, 2000, the Agency must complete Schedule A (Form 8610),
and indicate on the schedule that it is making the "correction under
�1.42-13(b)(3)(vii)";

(C) Amending, if applicable, the Form 8609 and attaching the
original of this amended form to Form 8610 for the year the
correction is made. The Agency will indicate on the Form 8609 that
it is making the "correction under �1.42-13(b)(3)(vii)"; and

(D) Mailing or otherwise delivering 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 �601.601(d)(2) of
this chapter).

* * * * *

(d) * * * Paragraphs (b)(3)(vi), (vii), and (viii) of this section
are effective January 14, 2000.

Par. 7. Section 1.42-17 is added to read as follows: �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 is not to 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 make up 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's 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, and
developer fees;

(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--(i) In general. The financial
determinations and certifications required under paragraph (a)(3) of
this section must be made as of the following times--

(A) The time of the application for the housing credit dollar
amount;

(B) The time of the allocation of the housing credit dollar amount;
and

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

(ii) Time limit for placed-in-service evaluation. For purposes of
paragraph (a)(4)(i)(C) of this section, the evaluation for when a
building is placed in service must be made not later than the date
the Agency issues the Form 8609, "Low-Income Housing Credit
Allocation Certification." The Agency must evaluate all sources and
uses of funds under paragraph (a)(3)(i) of this section paid,
incurred, or committed by the taxpayer for the project up until date
the Agency issues the Form 8609.

(5) Special rule for final determinations and certifications. For
the Agency's evaluation under paragraph (a)(4)(i)(C) of this
section, the taxpayer must submit a schedule of project costs. Such
schedule is to be prepared on the method of accounting used by the
taxpayer for federal income tax purposes, and must detail the
project's total costs as well as those costs that may qualify for
inclusion in eligible basis under section 42(d). For projects with
more than 10 units, the schedule of project costs must be
accompanied by a Certified Public Accountant's audit report on the
schedule (an Agency may require an audited schedule of project costs
for projects with fewer than 11 units). The CPA's audit must be
conducted in accordance with generally accepted auditing standards.
The auditor's report must be unqualified.

(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 January 1, 2001.

Part 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 8. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

Par. 9. In �602.101, paragraph (b) is amended by revising the entry
for 1.42-5 and adding an entry for 1.42-17 to the table in numerical
order to read as follows: �602.101 OMB Control numbers.

* * * * *

(b) * * *

__________________________________________________________________

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.42-5 .................................................1545-1357

* * * * *

1.42-17 ................................................1545-1357

* * * * *

__________________________________________________________________

Robert E. Wenzel
Acting Commissioner of Internal Revenue
Approved: December 28, 1999
Jonathan Talisman
Acting Assistant Secretary of the Treasury

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

2000 Regulations Main | IRS Regulations Main | Home