[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Rules and Regulations]
[Pages 26175-26181]
From the Federal Register Online via the Government Printing 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