[Federal Register Volume 77, Number 152 (Tuesday, August 7, 2012)]
[Proposed Rules]
[Pages 46987-46990]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19179]



[[Page 46987]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-136491-09]
RIN 1545-BI91


Utility Allowances Submetering

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that amend the 
utility allowance regulations concerning the low-income housing tax 
credit. The proposed regulations update the utility allowance 
regulations to clarify that utility costs paid by a tenant based on 
actual consumption in a submetered rent-restricted unit are treated as 
paid by the tenant directly to the utility company. The proposed 
regulations affect owners of low-income housing projects that claim the 
credit, the tenants in those low-income housing projects, and the State 
and local housing credit agencies that administer the credit. This 
document also contains a notice of a public hearing on these proposed 
regulations.

DATES: Comments must be received by October 9, 2012. Outlines of topics 
to be discussed at the public hearing scheduled for Tuesday, November 
27, 2012, must be received by October 9, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136491-09), Room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136491-09), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-136491-09). The 
public hearing will be held in the Auditorium of the Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David Selig, at (202) 622-3040; concerning submissions of comments, the 
hearing, or to be placed on the building access list to attend the 
hearing, Oluwafunmilayo Taylor, at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) relating to the low-income housing credit 
under section 42 of the Internal Revenue Code. Section 42(a) provides 
that, for purposes of section 38, the amount of the low-income housing 
credit determined under section 42 for any taxable year in the credit 
period is an amount equal to the applicable percentage of the qualified 
basis of each qualified low-income building. A qualified low-income 
building is defined in section 42(c)(2) as any building that is part of 
a qualified low-income housing project at all times during a 
statutorily prescribed period.
    A qualified low-income housing project is defined in section 
42(g)(1) as any project for residential rental housing if the project 
meets one of the following tests elected by the taxpayer: (1) At least 
20 percent of the residential units in the project are rent-restricted 
and occupied by individuals whose income is 50 percent or less of area 
median gross income; or (2) at least 40 percent of the residential 
units in the project are rent-restricted and occupied by individuals 
whose income is 60 percent or less of area median gross income. If a 
taxpayer does not meet the elected test, the project is not eligible 
for the section 42 credit.
    To qualify as a rent-restricted unit within the meaning of section 
42(g), the gross rent for the unit must not exceed 30 percent of the 
applicable income limitation. If any utilities are paid directly by the 
tenant, section 42(g)(2)(B)(ii) requires the inclusion in gross rent of 
a utility allowance determined by the Secretary, after taking into 
account the procedures under section 8 of the United States Housing Act 
of 1937.
    On March 3, 1994, the Treasury Department and the IRS published in 
the Federal Register a Treasury Decision containing final regulations 
under section 42 (59 FR 10067). Among these regulations was Sec.  1.42-
10, which provided guidance regarding the proper role of utility 
allowances in determining gross rent under section 42(g)(2)(B)(i) for 
rent-restricted units. On July 29, 2008, the Treasury Department and 
the IRS published in the Federal Register amendments to Sec.  1.42-10 
(73 FR 43863).
    If gross rent includes a utility allowance, Sec.  1.42-10(b), as 
amended, provides rules for determining the applicable utility 
allowance depending upon whether (1) the building receives rental 
assistance from the Rural Housing Service (RHS) (``RHS-assisted 
building''), (2) the building has any tenant that receives RHS rental 
assistance payments (``RHS tenant assistance''), (3) the rents and 
utility allowances of the building are reviewed by the Department of 
Housing and Urban Development (HUD) (``HUD-regulated building''), or 
(4) the building is not described in (1), (2), or (3) (``other 
building''). For an RHS-assisted building and a building with RHS 
tenant assistance, Sec.  1.42-10(b)(1) and (b)(2) provides that the 
applicable utility allowance is the applicable RHS utility allowance. 
For a HUD-regulated building, Sec.  1.42-10(b)(3) provides that the 
applicable utility allowance is the applicable HUD utility allowance. 
In other buildings, for all rent-restricted units occupied by tenants 
receiving HUD tenant assistance, Sec.  1.42-10(b)(4)(i) provides that 
the applicable utility allowance is the applicable Public Housing 
Authority (PHA) utility allowance established for the Section 8 
Existing Housing Program. For all other tenants in rent-restricted 
units in other buildings, Sec.  1.42-10(b)(4)(ii) provides that the 
applicable utility allowance is the applicable PHA utility allowance 
under Sec.  1.42-10(b)(4)(ii)(A), a local utility company estimate 
under Sec.  1.42-10(b)(4)(ii)(B), an estimate from the State or local 
housing credit agency that has jurisdiction over the building under 
Sec.  1.42-10(b)(4)(ii)(C), the HUD Utility Schedule Model under Sec.  
1.42-10(b)(4)(ii)(D), or an energy consumption model under Sec.  1.42-
10(b)(4)(ii)(E).
    After the 2008 amendment of the 1994 final regulations, 
commentators requested clarification about how the regulations apply to 
submetering arrangements. Some buildings in qualified low-income 
housing projects are submetered. Submetering measures tenants' actual 
utility consumption, and tenants pay for the utilities they use. A 
submetering system typically includes a master meter, which is owned or 
controlled by the utility company, with overall utility consumption 
billed to the building owner. In a submetered system, building owners 
(or their agents) use unit-based meters to measure utility consumption 
and prepare a bill for each residential unit based on actual 
consumption. The building owners (or their agents) retain records of 
utility consumption in each unit, and tenants receive documentation of 
utility costs as specified in the lease.
    Notice 2009-44 (2009-21 IRB 1037) (see Sec.  601.601(d)(2)(ii)(b)) 
was issued to clarify that, for purposes of Sec.  1.42-10(a), utility 
costs paid by a tenant based on actual consumption in a submetered 
rent-restricted unit are treated as paid

[[Page 46988]]

by the tenant directly to the utility company, and not by or through 
the owner of the building. Notice 2009-44 provides that, for RHS-
assisted buildings under Sec.  1.42-10(b)(1), buildings with RHS tenant 
assistance under Sec.  1.42-10(b)(2), HUD-regulated buildings under 
Sec.  1.42-10(b)(3), and rent-restricted units in other buildings 
occupied by tenants receiving HUD rental assistance under Sec.  1.42-
10(b)(4)(i), the applicable RHS or HUD rules apply.
    For all other tenants in rent-restricted units in other buildings 
under Sec.  1.42-10(b)(4)(ii), Notice 2009-44 provides that the utility 
rates charged to tenants in each submetered rent-restricted unit must 
be limited to the utility company rates incurred by the building owners 
(or their agents). Notice 2009-44 also provides that, if building 
owners (or their agents) charge tenants a reasonable fee for the 
administrative costs of submetering, then the fee is not considered 
gross rent under section 42(g)(2). The fee must not exceed an aggregate 
amount per unit of 5 dollars per month unless State law provides 
otherwise. If the costs for sewerage are based on the tenants' actual 
water consumption determined with a submetering system and the sewerage 
costs are on a combined water and sewerage bill, then the tenants' 
sewerage costs are treated as paid directly by the tenants for purposes 
of the utility allowances regulations.
    Even though Notice 2009-44 provides that the fee for the 
administrative costs of submetering is not considered gross rent under 
section 42(g)(2), the fee must be included in the gross income of the 
building owner under section 61.
    Notice 2009-44 states that the utility allowance regulations would 
be amended to incorporate the guidance set forth in the notice and 
requested comments on the provisions of the notice and issues resulting 
from the notice. Comments were received in response to Notice 2009-44, 
and the comments were taken into consideration in developing these 
proposed regulations. The proposed regulations generally incorporate 
the guidance in Notice 2009-44 with additional modifications as 
explained in more detail below. Additional comments are invited on the 
issues discussed in this preamble or on other issues related to utility 
submetering. See Sec.  601.601(d)(2)(ii)(b).

Summary of Comments on Notice 2009-44 and Explanation of Provisions

    A commentator requested that ratio utility billing systems 
(commonly known as RUBS) be treated like submetering. Unlike 
submetering, RUBS use a formula that allocates a property's utility 
bill among its units based on the units' relative floor space, number 
of occupants, or some other quantitative measure, but not actual use by 
the unit. The IRS and the Treasury Department believe it is appropriate 
to treat a tenant's payment of a utility through a building owner (or 
its agent) as a direct payment to the utility only to the extent the 
tenant's utility cost is based on the unit's actual consumption. 
Therefore, the proposed regulations do not permit utility allowances 
for RUBS.
    A commentator recommended that the regulations exclude or restrict 
``quasi-usage'' allocation systems in buildings with a master chiller 
or boiler where the tenant's use of utilities is partly determined on 
an assumption not relating to actual use (such as the number of times a 
tenant turns on the system). Under Notice 2009-44 and these proposed 
regulations, if a submetering arrangement is not based on a unit's 
actual consumption of a utility, then the gross rent for that unit 
cannot include a utility allowance for that particular utility.
    A commentator inquired as to the format and length of time records 
of resident utility consumption should be maintained. Existing rules 
address record retention. Section 1.42-10(d) provides that the building 
owner must retain any utility consumption estimates and supporting data 
as part of the taxpayer's records for purposes of Sec.  1.6001-1(a).
    A commentator suggested that the regulations should limit use of a 
PHA utility allowance for non-Section 8 units that are submetered. The 
commentator reasoned that the PHA utility allowance does not reflect 
actual utility consumption in the building, resulting in a low 
allowance in some cases. In the past, other commentators have stated 
that PHA utility allowances generally are too high because they are 
based on older buildings with higher utility costs compared to newly 
constructed or renovated low-income housing projects. The IRS and the 
Treasury Department have determined that, if building owners do not 
wish to expend resources to obtain utility allowances under one of the 
methods in Sec.  1.42-10(b)(4)(ii)(B), (b)(4)(ii)(C), (b)(4)(ii)(D), or 
(b)(4)(ii)(E), it is reasonable that they be permitted to use PHA 
utility allowances for units not subject to Sec.  1.42-10(b)(1), 
(b)(2), (b)(3), or (b)(4)(i).
    Commentators also requested clarification on other rules contained 
in the Sec.  1.42-10 final regulations. A commentator asked whether 
State housing agencies are allowed to disapprove of certain methods for 
determining utility allowances listed in Sec.  1.42-10(b)(4)(ii). 
Existing rules address the role of State housing agencies in 
determining utility allowances. Thus, depending on the particular 
method under Sec.  1.42-10(b)(4)(ii), State housing agencies may 
require certain information before a method can be used, or they may 
disapprove use of a method. For example, Sec.  1.42-10(b)(4)(ii)(C) 
provides that a building owner may obtain a utility estimate for each 
unit in the building from the agency that has jurisdiction over the 
building ``provided the Agency agrees to provide the estimate.'' That 
is, State housing agencies are not required to provide a utility 
estimate under Sec.  1.42-10(b)(4)(ii)(C). Also, Sec.  1.42-
10(b)(4)(ii)(E) provides that, under the energy consumption model, 
utility consumption estimates must be calculated by ``either a properly 
licensed engineer or a qualified professional approved by the Agency 
that has jurisdiction over the building.'' Thus, State housing agencies 
are not required to provide the approval described in Sec.  1.42-
10(b)(4)(ii)(E). Comments are requested on whether approval by the 
agency with jurisdiction over the building should be necessary for both 
properly licensed engineers and qualified professionals or only for 
qualified professionals that are not properly licensed engineers.
    A commentator asserted that there is confusion concerning mixed-
financed properties, which may be subject to multiple Federal programs 
using different utility allowances. The commentator requested 
clarification on which methods may be used in buildings with multiple 
programs. If a building receives assistance from RHS or if any tenant 
in a building receives RHS rental assistance payments, then the 
applicable utility allowance for all rent-restricted units in the 
building is the utility allowance determined under the method 
prescribed by the RHS for the building (whether or not the building or 
its tenants receive other state or federal assistance). If neither a 
building nor any tenant in the building receives RHS housing assistance 
and the building is a HUD-regulated building, then the applicable 
utility allowance for all rent-restricted units in the building is the 
applicable HUD utility allowance. If a building is neither an RHS-
assisted nor a HUD-regulated building, no tenant in the building 
receives RHS tenant assistance, and tenants in a rent-restricted unit 
in the building receive HUD rental assistance payments, then

[[Page 46989]]

the applicable utility allowance for that unit is the applicable PHA 
utility allowance. For all other rent-restricted units not subject to 
any of the methods in Sec.  1.42-10(b)(1), (b)(2), (b)(3), or 
(b)(4)(i), the building owner may use the applicable PHA utility 
allowance or one of the building methods in Sec.  1.42-10(b)(4)(ii)(B), 
(b)(4)(ii)(C), (b)(4)(ii)(D), or (b)(4)(ii)(E) for calculating utility 
allowances for all rent-restricted units in the building.
    The proposed regulations modify the requirements in Notice 2009-44 
in the following manner: First, if two or more utilities such as 
electricity and water are treated as submetered under the proposed 
regulations, then the building owner (or its agent or other party 
acting on behalf of the building owner) must separately state the 
amount billed to the tenants for each submetered utility.
    Second, if a building owner imposes an administrative fee on a 
unit's tenants for the costs of administering a submetering 
arrangement, then the fee generally is not included in gross rent for 
purposes of section 42(g)(2). The exclusion from gross rent does not 
apply to any amount by which the aggregate monthly fee for all of a 
unit's utilities under one or more submetering arrangements exceeds the 
lesser of the following: (A) Five dollars per month or (B) The owner's 
actual monthly costs paid or incurred for administering the arrangement 
(whether internal costs or amounts paid to third parties).
    For this purpose, the owner's actual costs include internal costs 
(such as amounts paid to employees) and external costs (such as amounts 
paid to third-party service providers) for administering the 
submetering arrangement, as well as that month's portion of costs that 
relate to the submetering equipment and that are not included in the 
building's eligible basis under section 42(d). The goal of these 
restrictions is to disallow any exclusion from gross rent beyond the 
extent to which a fee represents a reasonable reimbursement to the 
owner for the owner's otherwise unreimbursed actual costs for 
administering the submetering arrangement. The IRS and the Treasury 
Department request comments on whether or not rules are needed to 
address the building owner's determination of actual costs when a 
utility company administers a submetering arrangement on behalf of the 
building owner and includes in the utility rate an amount for its 
services that is not separately stated.
    Third, the proposed regulations remove the requirement in Notice 
2009-44 that the administrative fee must not exceed an aggregate amount 
per unit of 5 dollars per month (unless State law provides otherwise). 
Instead of that prohibition, the proposed regulations merely require 
inclusion in gross rent for any amounts charged in excess of the lesser 
of five dollars or actual administrative costs.
    The proposed regulations also amend Sec.  1.42-10(b)(4)(ii)(A). 
Section 1.42-10(b)(4)(i) provides rules for determining the utility 
allowance of rent-restricted units occupied by tenants receiving HUD 
rental assistance. Section 1.42-10(b)(4)(ii)(A) provides that, if none 
of the rules of Sec.  1.42-10(b)(1), (b)(2), (b)(3), and (b)(4)(i) 
apply to any rent-restricted units in a building, then the utility 
allowance for the units may be determined under Sec.  1.42-
10(b)(4)(ii)(B), (b)(4)(ii)(C), (b)(4)(ii)(D), or (b)(4)(ii)(E). Some 
commentators have interpreted Sec.  1.42-10(b)(4)(ii)(A) to mean that, 
if a tenant receiving HUD rental assistance occupies a rent-restricted 
unit in a building, then the methods described in Sec.  1.42-
10(b)(4)(ii)(B), (b)(4)(ii)(C), (b)(4)(ii)(D), and (b)(4)(ii)(E) are 
not available for determining utility allowances for any other rent-
restricted units in the same building. This result was not intended. 
The proposed regulations amend Sec.  1.42-10(b)(4)(ii)(A) to clarify 
that for all rent-restricted units not subject to the rules of Sec.  
1.42-10(b)(1), (b)(2), (b)(3), and (b)(4)(i) for determining the 
appropriate utility allowance for a rent-restricted unit, the owner may 
choose one of the options under Sec.  1.42-10(b)(4)(ii)(B), 
(b)(4)(ii)(C), (b)(4)(ii)(D), and (b)(4)(ii)(E) or the applicable PHA 
utility allowance for determining the utility allowance for those rent-
restricted units.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 this regulation, and because the regulation does not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Internal Revenue Code, this regulation has been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS prescribed in this preamble under the ADDRESSES heading. The 
IRS and the Treasury Department request comments on all aspects of the 
proposed rules. All comments will be available at www.regulations.gov 
or upon request.
    A public hearing has been scheduled for Tuesday, November 27, 2012, 
at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic (signed original and eight (8) copies) 
by October 9, 2012. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these regulations is David Selig, Office of 
the Associate Chief Counsel (Passthroughs and Special Industries), IRS. 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


[[Page 46990]]


    Par. 2. Section 1.42-10 is amended by:
    1. Adding a sentence after the first sentence of paragraph (a).
    2. Revising the first sentence of paragraph (b)(4)(ii)(A).
    3. Adding paragraph (e).
    The additions and revision read as follows:


Sec.  1.42-10  Utility allowances.

    (a) * * * For purposes of the preceding sentence, if the cost of a 
particular utility for a residential unit is paid pursuant to an 
actual-consumption submetering arrangement within the meaning of 
paragraph (e)(1) of this section, then that cost is treated as being 
paid directly by the tenant(s) and not by or through the owner of the 
building. * * *
* * * * *
    (b) * * *
    (4) * * *
    (ii) * * *
    (A) * * * If none of the rules of paragraphs (b)(1), (b)(2), 
(b)(3), and (b)(4)(i) of this section apply to determine the 
appropriate utility allowance for a rent-restricted unit, then the 
appropriate utility allowance for the unit is the applicable PHA 
utility allowance. * * *
* * * * *
    (e) Actual-consumption submetering arrangements--(1) Definition. 
For purposes of this section, an actual-consumption submetering 
arrangement for a utility in a residential unit possesses all of the 
following attributes:
    (i) The building owner (or its agent or other party acting on 
behalf of the building owner) pays the utility provider for the 
particular utility consumed by the tenants in the unit;
    (ii) The tenants in the unit are billed for, and pay the building 
owner (or its agent or other party acting on behalf of the building 
owner) for, the unit's consumption of the particular utility;
    (iii) The billed amount reflects the unit's actual consumption of 
the particular utility. In the case of sewerage charges, however, if 
the unit's sewerage charges are combined on the bill with water charges 
and the sewerage charges are determined based on the actual water 
consumption of the unit, then the bill is treated as reflecting the 
actual sewerage consumption of the unit; and
    (iv) The utility rate charged to the tenants of the unit does not 
exceed the utility company rate incurred by the building owner for that 
particular utility.
    (2) Special rules--(i) Fees. If the owner charges a unit's tenants 
an administrative fee for the owner's actual monthly costs of 
administering an actual-consumption submetering arrangement, then the 
fee is not considered gross rent for purposes of section 42(g)(2). The 
preceding sentence, however, does not apply unless the fee is computed 
in the same manner for every unit receiving the same submetered utility 
service, nor does it apply to any amount by which the aggregate monthly 
fee or fees for all of the unit's utilities under one or more actual-
consumption submetering arrangements exceed the lesser of--
    (A) Five dollars per month; or
    (B) The owner's actual monthly costs paid or incurred for 
administering the arrangement.
    (ii) Actual costs. For purposes of paragraph (e)(2)(i)(B) of this 
section, the owner's actual costs of administering an actual-
consumption submetering arrangement include amounts paid to employees, 
independent contractors, and service providers for administering the 
submetering arrangement and allocable costs that relate to submetering 
equipment and that are not included in the building's eligible basis 
under section 42(d).
    Par. 3. Section 1.42-12 is amended by adding paragraph (a)(5) to 
read as follows:


Sec.  1.42-12  Effective dates and transitional rules.

    (a) * * *
    (5) Submetered buildings. The second sentence in Sec.  1.42-10(a), 
the first sentence in Sec.  1.42-10(b)(4)(ii)(A), and Sec.  1.42-10(e) 
apply to utility allowances determined on or after the date the final 
regulations are published in the Federal Register. Until the date the 
final regulations are published in the Federal Register, taxpayers may 
rely on Notice 2009-44 (2009-21 IRB 1037; May 26, 2009) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for taxable years beginning on or 
after July 29, 2008.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-19179 Filed 8-6-12; 8:45 am]
BILLING CODE 4830-01-P