[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Rules and Regulations]
[Pages 26175-26181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10638]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9587]
RIN 1545-BD20
Section 42 Qualified Contract Provisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final Regulations.
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SUMMARY: This document contains final regulations that provide guidance
concerning taxpayers' (that is, owners') requests to housing credit
agencies to obtain a qualified contract (as defined in section
42(h)(6)(F) of the Internal Revenue Code) for the acquisition of a low-
income housing credit building. Section 42(h)(6)(F) requires the
Secretary to prescribe such regulations as may be necessary or
appropriate to carry out the provisions of section 42(h)(6)(F),
including regulations to prevent the manipulation of the qualified
contract amount. The regulations will affect owners requesting a
qualified contract, potential buyers, and low-income housing credit
agencies responsible for the administration of the low-income housing
credit program.
DATES: Effective Date: These regulations are effective May 3, 2012.
Applicability Date: For the applicability date, see Sec. 1.42-
18(e).
FOR FURTHER INFORMATION CONTACT: David Selig at (202) 622-3040 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has 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(d)) under control number 1545-2088. The collection of information
is required for an owner to provide a written request to a housing
credit agency to obtain a qualified contract (as defined in section
42(h)(6)(F) of the Internal Revenue Code) for the acquisition of a low-
income housing credit building. The collecting of information is
voluntary to obtain a benefit.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
[[Page 26176]]
Books or records relating to a collection of information must be
retained as long as their contents might 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
This document contains final regulations that amend the Income Tax
Regulations (26 CFR part 1) relating to the low-income housing credit
under section 42 of the Internal Revenue Code (Code). On June 19, 2007,
a notice of proposed rulemaking (REG-114084-04) and notice of public
hearing relating to the qualified contract provisions under section
42(h)(6)(F) was published in the Federal Register (72 FR 33706).
Written and electronic comments responding to the proposed regulations
were received and a public hearing was held on the proposed regulations
on October 15, 2007. After consideration of all the comments, the
proposed regulations are adopted as amended by this Treasury decision.
General Overview
Section 42 provides a tax credit for investment in low-income
housing buildings placed in service after December 31, 1986. The
section 42 credit is a general business credit subject to the
provisions of section 38.
Section 42(h)(6)(A) provides that no credit will be allowed with
respect to any building for the taxable year unless an extended low-
income housing commitment (commitment) (as defined in section
42(h)(6)(B)) is in effect as of the end of the taxable year.
Section 42(h)(6)(B) provides in part that the term commitment means
any agreement between the owner and the housing credit agency (Agency)
that requires that the applicable fraction (as defined in section
42(c)(1)(B)) for the building for each taxable year in the extended use
period will not be less than the applicable fraction specified in the
commitment. Section 42(h)(6)(E)(ii) prohibits the eviction or
termination of tenancy (other than for good cause) of an existing
tenant of any low-income unit or any increase in the gross rent with
respect to such unit not otherwise permitted under section 42 until
three years after the termination of such an agreement.
Section 42(h)(6)(D) defines the term extended use period as the
period beginning on the first day in the compliance period (as defined
in section 42(i)(1)) on which the building is part of a qualified low-
income housing project and ending on the later of: (1) The date
specified by the Agency in the commitment, or (2) the date which is 15
years after the close of the compliance period.
Section 42(h)(6)(E)(i)(II) provides for the termination of the
extended use period if the Agency is unable to present within a
specified period of time a qualified contract for the acquisition of
the low-income portion of the building by any person who will continue
to operate such portion as a qualified low-income building.
Section 42(h)(6)(F) defines the term qualified contract as a bona
fide contract to acquire (within a reasonable period of time after the
contract is entered into) the non low-income portion of the building
for fair market value and the low-income portion of the building for an
amount not less than the applicable fraction (specified in the
commitment) of the sum of: (I) The outstanding indebtedness secured by,
or with respect to the building, (II) the adjusted investor equity in
the building, plus (III) other capital contributions not reflected in
these amounts; reduced by cash distributions from (or available for
distribution from) the project.
Section 42(h)(6)(F) also provides that the Secretary shall
prescribe regulations as may be necessary or appropriate to carry out
that paragraph, including regulations to prevent the manipulation of
the amount determined under section 42(h)(6)(F).
Section 42(h)(6)(I) provides that the Agency must present the
qualified contract within the 1-year period beginning on the date
(after the 14th year of the compliance period) the owner submits a
written request to the Agency to find a person to acquire the owner's
interest in the low-income portion of the building.
The proposed regulations addressed the application of the qualified
contract provisions of section 42. Section 1.42-18(c)(1) of the
proposed regulations defined the qualified contract formula used to
compute the purchase price amount of the low-income housing building
generally as: (1) The non low-income portion of the building for fair
market value; plus (2) the low-income portion of the building for the
low-income portion amount.
Section 1.42-18(c)(2) of the proposed regulations defined the low-
income portion amount as an amount not less than the applicable
fraction (as specified in the commitment) of the total of: (a)
Outstanding indebtedness secured by, or with respect to the building;
plus (b) the adjusted investor equity in the building; plus (c) other
capital contributions, not including amounts described in (a) and (b);
minus (d) cash distributions from (or available for distribution from)
the building.
Summary of Comments
Fair-Market-Value Cap
Prior to the issuance of the proposed regulations, comments were
received recommending the inclusion of a fair-market-value cap for the
low-income portion of the qualified contract amount as defined in
section 42(h)(6)(F). These comments noted that the qualified contract
price may, in some cases, exceed the fair market value of a project.
One reason given to explain why the qualified contract price might
exceed the fair market value of a project is the formula component for
adjusted investor equity, which includes the Consumer-Price-Index-based
cost of living adjustments. As explained in the preamble to the
proposed regulations, this recommendation was not adopted as a proposed
rule because section 42(h)(6)(F) defines a qualified contract, in part,
as a contract to acquire the low-income portion of the building for an
amount ``not less than'' the applicable fraction of the statutorily
provided formula. Similar comments were received after publication of
the proposed regulations. The IRS and the Treasury Department continue
to believe that they do not have the authority under section
42(h)(6)(F) to adopt a fair-market-value cap. Accordingly, the final
regulations do not provide a rule providing a fair-market-value cap
under section 42(h)(6)(F).
The IRS and the Treasury Department in the preamble to the proposed
regulations requested comments on the extent of Agency and State
authority to provide more stringent requirements than those contained
in section 42(h)(6)(F). The preamble referenced the flush language of
section 42(h)(6)(E)(i), which provides that the qualified contract
exception to the termination of an extended use period shall not apply
to the extent more stringent requirements are provided in the agreement
or in State law. Specifically, the IRS and the Treasury Department
requested comments on the authority of Agency or State regulators to
require in agreements a fair-market-value cap that would restrict any
qualified contract price to fair market value. In response, two
comments were received, both opining that an Agency did not possess
authority under section 42(h)(6)(E) to set a fair market value
limitation. The commentators reasoned that the language ``more
stringent requirements'' relates to the date the extended use period
will terminate, rather than to the qualified contract formula. The IRS
and
[[Page 26177]]
Treasury Department received no comment asserting the view that section
42(h)(6)(E)(i) authorizes an Agency or State regulators to require in
agreements a fair-market-value cap that would restrict a qualified
contract price to fair market value. The IRS and Treasury Department do
not believe that section 42(h)(6)(E)(i) was intended to authorize a
fair-market-value cap on the low-income portion of the building, and,
accordingly, the final regulations do not provide for such a cap.
Adjustments to Fair Market Value of the Non-Low-Income Portion of the
Building
Some commentators questioned the provision in the proposed
regulations that would allow Agencies to adjust the fair market value
of a building, if, after a reasonable period of time within the one-
year offer-of-sale period, no buyer has made an offer or market values
have adjusted downward. One commentator noted that, as a result of this
provision, in order to secure a more favorable price for the building,
prospective buyers might wait out the qualified contract process until
an Agency reduces the qualified contract price. Another commentator
noted the unfairness of granting Agencies the unilateral right to
reduce the fair market value of the non low-income portion of the
building, particularly when the proposed regulations provide no
limitation on how much the Agency may reduce the fair market value.
The IRS and the Treasury Department believe these concerns are
valid. Accordingly, the final regulations revise this provision to
provide that the Agency may adjust the fair market value of the non
low-income portion of the building after the Agency's offer of sale of
the building to the general public and before the close of the one-year
offer of sale period only with the consent of the owner. If no
agreement between the Agency and owner is reached, the fair market
value of the non low-income portion of the building determined at the
time of the Agency's offer of sale of the building to the general
public remains unchanged.
Land
The proposed regulations provide that the fair market value of the
non low-income portion of a building is determined at the time of an
Agency's offer of sale of the building to the general public. This
valuation must take into account the existing and continuing
requirements contained in the commitment for the building. The non low-
income portion also includes the fair market value of the land
underlying the entire building, including the land underlying the low-
income portion of the building.
Commentators questioned the statutory authority of the IRS under
section 42(h)(6)(F) to include land value in the qualified contract
amount. Specifically, commentators noted that the language under
section 42(h)(6)(F) refers to the fair market value of the non low-
income portion of the building without addressing the issue of land
valuation. Other commentators asserted that adopting a fair market
value approach for land underlying the entire building may decrease the
likelihood of finding a qualified buyer willing to pay the qualified
contract price while continuing to operate the building as a low income
building.
The IRS and the Treasury Department believe that land is inherently
part of the cost underlying the acquisition or construction of a
building and should not be ignored in determining the qualified
contract amount. Applying fair market value to land is consistent with
industry practice regarding land valuation and provides an equitable
means for arriving at a contract price between buyers and owners. By
valuing land underlying the entire building at fair market value,
taking into account the existing and continuing requirements contained
in the commitment for the building, the proposed regulations provided
an approach that maintains industry practice for valuing land and
provided an objective and equitable solution that favors neither the
buyer nor the owner. Accordingly, the final regulations provide that
the land underlying the entire building (both low-income and non low-
income units) is valued at fair market value subject to the existing
and continuing restrictions contained in the commitment for the
building.
Responsibility To Adjust the Qualified Contract Price To Reflect the
Changing Amount of Outstanding Indebtedness
One commentator expressed concern that the proposed regulations
would impose too much burden on Agencies by requiring them to adjust
the qualified contract amount between the date on which the sales price
under a qualified contract is first determined and the sale's actual
closing date. (For example, an adjustment is needed to reflect mortgage
payments that reduce outstanding indebtedness.) The IRS and the
Treasury Department concur with this comment, and the final regulations
provide that the buyer and owner, and not the Agency, must adjust the
amount of the low-income portion of the qualified contract formula to
reflect changes in the components of the qualified contract formula,
such as mortgage payments that reduce outstanding indebtedness between
the time the Agency first offers the property for sale and the actual
sale closing date.
Cash Distributions
One commentator recommended that the final regulations clarify that
the rule in the proposed regulations providing that cash available for
distribution includes reserve funds should apply only to the extent
that the reserve funds are not legally required to remain with the
project after the sale. Other commentators noted the potential for
double-counting if cash available for distribution includes the
proceeds from refinancing indebtedness or additional mortgages, while
simultaneously any refinancing indebtedness or additional mortgages in
excess of qualifying building costs are not outstanding indebtedness
for purposes of section 42(h)(6)(F).
The IRS and the Treasury Department agree with these comments.
Accordingly, the final regulations provide that cash available for
distribution includes reserve funds that are not legally required by
mortgage restrictions, regulatory agreements, or third party
contractual agreements to remain with the building following the sale
of the building. The final regulations further provide that proceeds
from refinancing indebtedness or additional mortgages that are in
excess of qualifying building costs are not considered cash available
for distribution. The text of the final regulations also adopts the
rule discussed in the preamble to the proposed regulations, but not
stated in the text of the proposed regulations, that any refinancing
indebtedness or additional mortgages in excess of qualifying building
costs do not qualify as outstanding indebtedness for purposes of
section 42(h)(6)(F).
Discounting Indebtedness Removed
Some commentators questioned the rationale for the requirement in
the proposed regulations that would discount outstanding indebtedness
having an interest rate below the applicable Federal rate (AFR) under
section 1274 of the Code. In response, the final regulations remove the
provision of discounting indebtedness altogether. Instead, the final
regulations define outstanding indebtedness to include only those
amounts secured by, or with respect to, the building that (1) do not
exceed qualifying building costs, (2) are indebtedness under general
principles of Federal income tax law, and (3) upon the sale of the
building, are
[[Page 26178]]
actually paid to the lender or are assumed by the buyer as part of the
sale.
Appraiser Standards
Several commentators noted the absence of any uniform standards for
appraisal methodology and qualifications for appraisers. Rather than
adopt appraisal standards, the final regulations provide that Agencies
shall not utilize any individual or organization as an appraiser if
that individual or organization is currently on any list for active
suspension or revocation for performing appraisals in any State or is
listed on the Excluded Parties Lists System (EPLS) maintained by the
General Services Administration for the United States Government. The
final regulations also provide the Agencies with the discretion to
select the appraisers involved in the qualified contract process and to
require all appraisers to be State-certified general appraisers.
Actual Offer of Sale
The proposed regulations provide that in order to satisfy the
qualified contract requirements under section 42(h)(6)(F), the Agency
must offer the building for sale to the general public at the
determined qualified contract price upon receipt of a written request
by the owner to find a buyer to acquire the building. In addressing the
issue of how Agencies should advertise the availability of a building
to the general public, the final regulations provide a reasonable
efforts standard for guiding Agencies in their efforts to find a
qualified buyer during the one year offer period. If the determined
qualified contract price is not a multiple of $1,000, the final
regulations permit the Agency to round up the offering price of the
building to the next highest multiple of $1,000.
Definition of Bona Fide Contract and Resolution of Disputes
Some commentators suggested the inclusion of a specific definition
of a bona fide contract under section 42(h)(6)(F), addressing issues
such as whether the terms and conditions of any offered contract are
unreasonable or impractical. Further, commentators suggested the
creation of a mechanism for resolving disputes among the parties
concerning the meaning of a bona fide contract. The IRS and the
Treasury Department believe that because of variations under State laws
concerning the terms of a bona fide contract and methods for resolving
disputes, the final regulations should not explicitly address these
issues. Instead, the final regulations provide that an Agency has the
administrative discretion to specify other conditions applicable to the
qualified contract consistent with section 42 of the Code and the final
regulations.
Adjusted Investor Equity
To avoid ambiguity in the determination of the qualified contract
amount, the final regulations require adjusted investor equity to be
calculated in a manner that is consistent with inflation adjustments
made under section 1(f). Thus, as was required in the proposed
regulations, the calculations must use not seasonally adjusted values
of the Consumer Price Index for all urban consumers (the data series
that the Bureau of Labor Statistics refers to as ``CPI-U''). The final
regulations provide a computational process that is mathematically
equivalent to the process described in the proposed regulations but
that will be simpler to implement. Because of the uncertainty that can
be introduced when one number is divided by another and because
different people might choose to retain in the answer different numbers
of digits, the regulations require the quotient in this process to be
carried out to 10 decimal places. (If standard, off-the-shelf
spreadsheet software is used to compute the adjusted investor equity,
the computations will generally have at least this degree of accuracy
by default.) In addition, the example in the final regulations has been
updated to use more recent data. Finally, the final regulations make it
possible for the Commissioner to reduce the computational burden by,
for example, providing the possible adjustment factors in annual
publications or creating a calculator on the IRS Web site.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. 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
collection of information in these regulations will not have a
significant economic impact on a substantial number of small entities.
The information required to be provided by a taxpayer (that is, by the
owner of a low-income building) to a State agency to determine the
qualified contract amount is already maintained by the taxpayer for
other purposes of the low-income tax credit under section 42. Because
only a minimal amount of additional time is required for a taxpayer to
access and provide the information, this collection of information does
not impose a significant burden on the taxpayer. Accordingly, a
Regulatory Flexibility Analysis under the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice of proposed regulations
preceding these final regulations was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on their
impact on small business, and no comments were received.
Drafting Information
The principal author of these regulations is David Selig of the
Office of Associate Chief Counsel (Passthroughs and Special
Industries). 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
0
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 1.42-18 also issued under 26 U.S.C. 42(h)(6)(F) and
42(h)(6)(K); * * *
0
Par. 2. Section 1.42-18 is added to read as follows:
Sec. 1.42-18 Qualified contracts.
(a) Extended low-income housing commitment--(1) In general. No
credit under section 42(a) is allowed by reason of section 42 with
respect to any building for the taxable year unless an extended low-
income housing commitment (commitment) (as defined in section
42(h)(6)(B)) is in effect as of the end of such taxable year. A
commitment must be in effect for the extended use period (as defined in
paragraph (a)(1)(i) of this section).
[[Page 26179]]
(i) Extended use period. The term extended use period means the
period beginning on the first day in the compliance period (as defined
in section 42(i)(1)) on which the building is part of a qualified low-
income housing project (as defined in section 42(g)(1)) and ending on
the later of--
(A) The date specified by the low-income housing credit agency
(Agency) in the commitment; or
(B) The date that is 15 years after the close of the compliance
period.
(ii) Termination of extended use period. The extended use period
for any building will terminate--
(A) On the date the building is acquired by foreclosure (or
instrument in lieu of foreclosure) unless the Commissioner determines
that such acquisition is part of an arrangement with the taxpayer
(``the owner'') a purpose of which is to terminate such period; or
(B) On the last day of the one-year period beginning on the date
(after the 14th year of the compliance period) on which the owner
submits a written request to the Agency to find a person to acquire the
owner's interest in the low-income portion of the building if the
Agency is unable to present during such period a qualified contract for
the acquisition of the low-income portion of the building by any person
who will continue to operate such portion as a qualified low-income
building (as defined in section 42(c)(2)).
(iii) Owner non-acceptance. If the Agency provides a qualified
contract within the one-year period and the owner rejects or fails to
act upon the contract, the building remains subject to the existing
commitment.
(iv) Eviction, gross rent increase concerning existing low-income
tenants not permitted. Prior to the close of the three year period
following the termination of a commitment, no owner shall be permitted
to evict or terminate the tenancy (other than for good cause) of an
existing tenant of any low-income unit, or increase the gross rent for
such unit in a manner or amount not otherwise permitted by section 42.
(2) Exception. Paragraph (a)(1)(ii)(B) of this section shall not
apply to the extent more stringent requirements are provided in the
commitment or under State law.
(b) Definitions. For purposes of this section, the following terms
are defined:
(1) As provided by section 42(h)(6)(G)(iii), base calendar year
means the calendar year with or within which the first taxable year of
the credit period ends.
(2) The low-income portion of a building is the portion of the
building equal to the applicable fraction (as defined in section
42(c)(1)(B)) specified in the commitment for the building.
(3) The fair market value of the non-low-income portion of the
building is determined at the time of the Agency's offer of sale of the
building to the general public. The fair market value of the non-low-
income portion also includes the fair market value of the land
underlying the entire building (both the non-low-income portion and the
low-income portion). This valuation must take into account the existing
and continuing requirements contained in the commitment for the
building. The fair market value of the non-low-income portion also
includes the fair market value of items of personal property not
included in eligible basis under section 42(d) that convey under the
contract with the building.
(4) Qualifying building costs include--
(i) Costs that are included in eligible basis of a low-income
housing building under section 42(d) and that are included in the
adjusted basis of depreciable property that is subject to section 168
and that is residential rental property for purposes of section 142(d)
and Sec. 1.103-8(b);
(ii) Costs that are included in eligible basis of a low-income
housing building under section 42(d) and that are included in the
adjusted basis of depreciable property that is subject to section 168
and that is used in a common area or is provided as a comparable
amenity to all residential rental units in the building; and
(iii) Costs of the type described in paragraph (b)(4)(i) and (ii)
of this section incurred after the first year of the low-income housing
building's credit period under section 42(f).
(5) The qualified contract amount is the sum of the fair market
value of the non-low-income portion of the building (within the meaning
of section 42(h)(6)(F) and paragraph (b)(3) of this section) and the
price for the low-income portion of the building (within the meaning of
section 42(h)(6)(F) and paragraph (b)(2) of this section) as calculated
in paragraph (c)(2) of this section. If this sum is not a multiple of
$1,000, then when the Agency offers the building for sale to the
general public, the Agency may round up the offering price to the next
highest multiple of $1,000.
(c) Qualified contract purchase price formula--(1) In general. For
purposes of this section, qualified contract means a bona fide contract
to acquire the building (within a reasonable period after the contract
is entered into) for the qualified contract amount.
(i) Initial determination. The qualified contract amount is
determined at the time of the Agency's offer of sale of the building to
the general public.
(ii) Mandatory adjustment by the buyer and owner. The buyer and
owner under a qualified contract must adjust the amount of the low-
income portion of the qualified contract formula to reflect changes in
the components of the qualified contract formula such as mortgage
payments that reduce outstanding indebtedness between the time of the
Agency's offer of sale to the general public and the building's actual
sale closing date.
(iii) Optional adjustment by the Agency and owner. The Agency and
owner may agree to adjust the fair market value of the non low-income
portion of the building after the Agency's offer of sale of the
building to the general public and before the close of the one-year
period described in paragraph (a)(1)(ii)(B) of this section. If no
agreement between the Agency and owner is reached, the fair market
value of the non-low-income portion of the building determined at the
time of the Agency's offer of sale of the building to the general
public remains unchanged.
(2) Low-income portion amount. The low-income portion amount is an
amount not less than the applicable fraction specified in the
commitment, as defined in section 42(h)(6)(B)(i), multiplied by the
total of--
(i) The outstanding indebtedness for the building (as defined in
paragraph (c)(3) of this section); plus
(ii) The adjusted investor equity in the building for the calendar
year (as defined in paragraph (c)(4) of this section); plus
(iii) Other capital contributions (as defined in paragraph (c)(5)
of this section), not including any amounts described in paragraphs
(c)(2)(i) and (ii) of this section; minus
(iv) Cash distributions from (or available for distribution from)
the building (as defined in paragraph (c)(6) of this section).
(3) Outstanding indebtedness. For purposes of paragraph (c)(2)(i)
of this section, outstanding indebtedness means the remaining stated
principal balance (which is initially determined at the time of the
Agency's offer of sale of the building to the general public) of any
indebtedness secured by, or with respect to, the building that does not
exceed the amount of qualifying building costs described in paragraph
(b)(4) of this section. Thus, any refinancing indebtedness or
additional mortgages in excess of such qualifying building costs are
not outstanding indebtedness for purposes of section
[[Page 26180]]
42(h)(6)(F) and this section. Examples of outstanding indebtedness
include certain mortgages and developer fee notes (excluding developer
service costs not included in eligible basis). Outstanding indebtedness
does not include debt used to finance nondepreciable land costs,
syndication costs, legal and accounting costs, and operating deficit
payments. Outstanding indebtedness includes only obligations that are
indebtedness under general principles of Federal income tax law and
that are actually paid to the lender upon the sale of the building or
are assumed by the buyer as part of the sale of the building.
(4) Adjusted investor equity--(i) Application of cost-of-living
factor. For purposes of paragraph (c)(2)(ii) of this section, the
adjusted investor equity for any calendar year equals the unadjusted
investor equity, as described in paragraph (c)(4)(ii) of this section,
multiplied by the qualified-contract cost-of-living adjustment for that
year, as defined in paragraph (c)(4)(iii) of this section.
(ii) Unadjusted investor equity. For purposes of this paragraph
(c)(4), unadjusted investor equity means the aggregate amount of cash
invested by owners for qualifying building costs described in paragraph
(b)(4)(i) and (ii) of this section. Thus, equity paid for land, credit
adjuster payments, Agency low-income housing credit application and
allocation fees, operating deficit contributions, and legal,
syndication, and accounting costs all are examples of cost payments
that do not qualify as unadjusted investor equity. Unadjusted investor
equity takes an amount into account only to the extent that, as of the
beginning of the low-income building's credit period (as defined in
section 42(f)(1)), there existed an obligation to invest the amount.
Unadjusted investor equity does not include amounts included in the
calculation of outstanding indebtedness as defined in paragraph (c)(3)
of this section.
(iii) Qualified-contract cost-of-living adjustment. For purposes of
this paragraph (c)(4), the qualified-contract cost-of-living adjustment
for a calendar year is the number that is computed under the general
rule in paragraph (c)(4)(iv) of this section or a number that may be
provided by the Commissioner as described in paragraph (c)(4)(v) of
this section.
(iv) General rule. Except as provided in paragraph (c)(4)(v) of
this section, the qualified-contract cost-of-living adjustment is the
quotient of--
(A) The sum of the 12 monthly Consumer Price Index (CPI) values
whose average is the CPI for the calendar year that precedes the
calendar year in which the Agency offers the building for sale to the
general public (The term ``CPI for a calendar year'' has the meaning
given to it by section 1(f)(4) for purposes of computing annual
inflation adjustments to the rate brackets.); divided by
(B) The sum of the 12 monthly CPI values whose average is the CPI
for the base calendar year (within the meaning of section 1(f)(4)),
unless that sum has been increased under paragraph (c)(4)(iii)(D) of
this section.
(v) Provision by the Commissioner of the qualified-contract cost-
of-living adjustment. The Commissioner may publish in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) a process
pursuant to which the Internal Revenue Service will compute the
qualified-contract cost-of-living adjustment for a calendar year and
make available the results of that computation.
(vi) Methodology. The calculations in paragraph (c)(4)(iv) of this
section are to be made in the following manner:
(A) The CPI data to be used for purposes of this paragraph (c)(4)
are the not seasonally adjusted values of the CPI for all urban
consumers. (The U.S. Department of Labor's Bureau of Labor Statistics
(BLS) sometimes refers to these values as ``CPI-U.'') The BLS publishes
the CPI data on-line (including a History Table that contains monthly
CPI-U values for all years back to 1913). See www.BLS.gov/data.
(B) The quotient is to be carried out to 10 decimal places.
(C) The Agency may round adjusted investor equity to the nearest
dollar.
(D) If the CPI for any calendar year (within the meaning of section
1(f)(4)) during the extended use period after the base calendar year
exceeds by more than 5 percent the CPI for the preceding calendar year
(within the meaning of section 1(f)(4)), then the sum described in
paragraph (c)(4)(i)(B) is to be increased so that the excess is never
taken into account under this paragraph (c)(4).
(vii) Example. The following example illustrates the calculations
described in this paragraph (c)(4):
Example. (i) Facts. Owner contributed $20,000,000 in equity to a
building in 1997, which was the first year of the credit period for
the building. In 2011, Owner requested Agency to find a buyer to
purchase the building, and Agency offered the building for sale to
the general public during 2011. The CPI for 1997 (within the meaning
of section 1(f)(4)) is the average of the Consumer Price Index as of
the close of the 12-month period ending on August 31, 1997. The sum
of the CPI values for the twelve months from September 1996 through
August 1997 is 1913.9. The CPI for 2010 (within the meaning of
section 1(f)(4)) is the average of the Consumer Price Index as of
the close of the 12-month period ending August 31, 2010. The sum of
the CPI values for the twelve months from September 2009 through
August 2010 is 2605.959. At no time during this period (after the
base calendar year) did the CPI for any calendar year exceed the CPI
for the preceding calendar year by more than 5 percent.
(ii) Determination of adjusted investor equity. The qualified-
contract cost-of-living adjustment is 1.3615962171 (the quotient of
2605.959, divided by 1913.9). Owner's adjusted investor equity,
therefore, is $27,231,924, which is $20,000,000, multiplied by
1.3615962171, rounded to the nearest dollar.
(5) Other capital contributions. For purposes of paragraph
(c)(2)(iii) of this section, other capital contributions to a low-
income building are qualifying building costs described in paragraph
(b)(4)(ii) of this section paid or incurred by the owner of the low-
income building other than amounts included in the calculation of
outstanding indebtedness or adjusted investor equity as defined in this
section. For example, other capital contributions may include amounts
incurred to replace a furnace after the first year of a low-income
housing credit building's credit period under section 42(f), provided
any loan used to finance the replacement of the furnace is not secured
by the furnace or the building. Other capital contributions do not
include expenditures for land costs, operating deficit payments, credit
adjuster payments, and payments for legal, syndication, and accounting
costs.
(6) Cash distributions--(i) In general. For purposes of paragraph
(c)(2)(iv) of this section, the term cash distributions from (or
available for distribution from) the building include--
(A) All distributions from the building to the owners or to persons
whose relationship to the owner is described in section 267(b) or
section 707(b)(1)), including distributions under section 301 (relating
to distributions by a corporation), section 731 (relating to
distributions by a partnership), or section 1368 (relating to
distributions by an S corporation); and
(B) All cash and cash equivalents available for distribution at, or
before, the time of sale, including, for example, reserve funds whether
operating or replacement reserves, unless the reserve funds are legally
required by mortgage restrictions, regulatory agreements, or third
party contractual agreements to remain with the building following the
sale.
(ii) Excess proceeds. For purposes of paragraph (c)(6)(i) of this
section,
[[Page 26181]]
proceeds from the refinancing of indebtedness or additional mortgages
that are in excess of qualifying building costs are not considered cash
available for distribution.
(iii) Anti-abuse rule. The Commissioner will interpret and apply
the rules in this paragraph (c)(6) as necessary and appropriate to
prevent manipulation of the qualified contract amount. For example,
cash distributions include payments to owners or persons whose relation
to owners is described in section 267(b) or section 707(b) for any
operating expenses in excess of amounts reasonable under the
circumstances.
(d) Administrative discretion and responsibilities of the Agency--
(1) In general. An Agency may exercise administrative discretion in
evaluating and acting upon an owner's request to find a buyer to
acquire the building. An Agency may establish reasonable requirements
for written requests and may determine whether failure to follow one or
more applicable requirements automatically prevents a purported written
request from beginning the one-year period described in section
42(h)(6)(I). If the one-year-period has already begun, the Agency may
determine whether failure to follow one or more requirements suspends
the running of that period. Examples of Agency administrative
discretion include, but are not limited to, the following:
(i) Concluding that the owner's request lacks essential information
and denying the request until such information is provided.
(ii) Refusing to consider an owner's representations without
substantiating documentation verified with the Agency's records.
(iii) Determining how many, if any, subsequent requests to find a
buyer may be submitted if the owner has previously submitted a request
for a qualified contract and then rejected or failed to act upon a
qualified contract presented by the Agency.
(iv) Assessing and charging the owner certain administrative fees
for the performance of services in obtaining a qualified contract (for
example, real estate appraiser costs).
(v) Requiring all appraisers involved in the qualified contract
process to be State certified general appraisers that are acceptable to
the Agency.
(vi) Specifying other conditions applicable to the qualified
contract consistent with section 42 and this section.
(2) Actual offer. Upon receipt of a written request from the owner
to find a person to acquire the building, the Agency must offer the
building for sale to the general public, based on reasonable efforts,
at the determined qualified contract amount in order for the qualified
contract to satisfy the requirements of this section unless the Agency
has already identified a willing buyer who submitted a qualified
contract to purchase the project.
(3) Debarment of certain appraisers. Agencies shall not utilize any
individual or organization as an appraiser if that individual or
organization is currently on any list for active suspension or
revocation for performing appraisals in any State or is listed on the
Excluded Parties Lists System (EPLS) maintained by the General Services
Administration for the United States Government found at www.epls.gov.
(e) Effective date/applicability date. These regulations are
applicable to owner requests to housing credit agencies on or after May
3, 2012 to obtain a qualified contract for the acquisition of a low-
income housing credit building.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 4. In Sec. 602.101, paragraph (b) is amended by adding an entry
to the table in numerical order to read, in part, as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.42-18................................................. 1545-2088
* * * * *
------------------------------------------------------------------------
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: April 24, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-10638 Filed 5-2-12; 8:45 am]
BILLING CODE 4830-01-P