[Federal Register Volume 62, Number 187 (Friday, September 26, 1997)]
[Rules and Regulations]
[Pages 50502-50503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25490]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8731]
RIN 1545-AU92


Section 42(d)(5) Federal Grants

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations with respect to the 
low-income housing tax credit relating to the application of section 
42(d)(5) to certain rental assistance programs under section 
42(g)(2)(B)(i). The regulations clarify that certain types of federal 
rental assistance payments do not result in a reduction in the eligible 
basis of a low-income housing building.

DATES: These regulations are effective September 26, 1997.

FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson, (202) 622-3040 
(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    Temporary regulations (TD 8713) and a notice of proposed rulemaking 
cross-referencing the temporary regulations were published in the 
Federal Register for January 27, 1997 (62 FR 3792, 3848). Those 
regulations provide that certain federal rental assistance payments 
made to the owner of a building on behalf of low-income tenants are not 
federal grants with respect to a building or its operation that require 
a reduction in the building's eligible basis under section 42(d)(5) of 
the Internal Revenue Code (Code). These payments include rental 
assistance payments made under section 8 of the United States Housing 
Act of 1937 (Act) (42 U.S.C. 1437f), certain payments made under 
section 9 of the Act (42 U.S.C. 1437g), and payments made under such 
other programs or methods of rental assistance as may be designated in 
the Federal Register or the Internal Revenue Bulletin. The notice of 
proposed rulemaking indicated that comments would be considered on 
those areas addressed in the temporary regulations. Written comments 
responding to the notice of proposed rulemaking were received. There 
was no request for a public hearing, and no public hearing was held. 
After consideration of all the written comments, the proposed 
regulations have been adopted, without change, by this Treasury 
decision.

Summary of Comments

    One commenter suggested that the final regulations provide 
additional guidance for state agencies to use in determining whether 
similar programs beyond those described in the regulations should be 
considered grants that cause a reduction in a building's eligible basis 
under section 42(d)(5) of the Code. The final regulations do not adopt 
this suggestion. The scope of this regulation is limited to specified 
rental assistance payments that are not grants requiring a reduction in 
a building's eligible basis and any additional payments the Secretary 
may designate in the future.
    Another commenter suggested that Sec. 1.42-16(c)(3) should be 
deleted if it is intended to impose conditions beyond the restrictions 
under section 9 of the Act, because the Service is improperly 
infringing upon the Department of Housing and Urban Development's (HUD) 
authority to provide subsidies under section 9. The final regulations 
do not adopt this suggestion. Section 1.42-16 does not interpret HUD's 
authority for paying subsidies under section 9; it describes the extent 
to which section 9 payments may be made without a reduction in a 
building's eligible basis under section 42(d)(5) of the Code. The 
conditions imposed on section 9 payments in Sec. 1.42-16(c)(3) serve to 
differentiate section 9 assistance for operating expenses that function 
in a manner similar to rental assistance payments under section 8 of 
the Act from section 9 assistance that is applied to uses more closely 
associated with operational expenses requiring a reduction in a 
building's eligible basis under section 42(d)(5).
    This commenter also suggested that if Sec. 1.42-16(c)(3) were to be 
retained, it should be clarified to provide that actual operating costs 
be determined by HUD and/or the appropriate public housing agency. The 
commenter reasons that HUD is already making this determination in the 
context of deciding the proper amount of assistance to make

[[Page 50503]]

under section 9 of the Act, and that precedent already exists for 
allowing HUD to make certain interpretations relating to the section 42 
program. The final regulations do not adopt this suggestion. The IRS 
and Treasury believe they should retain the ability to determine what 
costs are appropriately characterized as operating costs that require a 
reduction in a building's eligible basis under section 42(d)(5) of the 
Code.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations and, because these regulations do 
not impose on small entities a collection of information requirement, 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Therefore, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Internal Revenue Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.
    Drafting Information: The principal author of these regulations is 
Christopher J. Wilson, Office of Assistant Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for Section 1.42-16T and adding an entry in 
numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
Section 1.42-16 also issued under 26 U.S.C. 42(n); * * *

    Par. 2. Section 1.42-16 is added to read as follows:


Sec. 1.42-16  Eligible basis reduced by federal grants.

    (a) In general. If, during any taxable year of the compliance 
period (described in section 42(i)(1)), a grant is made with respect to 
any building or the operation thereof and any portion of the grant is 
funded with federal funds (whether or not includible in gross income), 
the eligible basis of the building for the taxable year and all 
succeeding taxable years is reduced by the portion of the grant that is 
so funded.
    (b) Grants do not include certain rental assistance payments. A 
federal rental assistance payment made to a building owner on behalf or 
in respect of a tenant is not a grant made with respect to a building 
or its operation if the payment is made pursuant to--
    (1) Section 8 of the United States Housing Act of 1937 (42 U.S.C. 
1437f)
    (2) A qualifying program of rental assistance administered under 
section 9 of the United States Housing Act of 1937 (42 U.S.C. 1437g); 
or
    (3) A program or method of rental assistance as the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
    (c) Qualifying rental assistance program. For purposes of paragraph 
(b)(2) of this section, payments are made pursuant to a qualifying 
rental assistance program administered under section 9 of the United 
States Housing Act of 1937 to the extent that the payments--
    (1) Are made to a building owner pursuant to a contract with a 
public housing authority with respect to units the owner has agreed to 
maintain as public housing units (PH-units) in the building;
    (2) Are made with respect to units occupied by public housing 
tenants, provided that, for this purpose, units may be considered 
occupied during periods of short term vacancy (not to exceed 60 days); 
and
    (3) Do not exceed the difference between the rents received from a 
building's PH-unit tenants and a pro rata portion of the building's 
actual operating costs that are reasonably allocable to the PH-units 
(based on square footage, number of bedrooms, or similar objective 
criteria), and provided that, for this purpose, operating costs do not 
include any development costs of a building (including developer's 
fees) or the principal or interest of any debt incurred with respect to 
any part of the building.
    (d) Effective date. This section is effective September 26, 1997.


Sec. 1.42-16T  [Removed]

    Par. 3. Section 1.42-16T is removed.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.

    Approved: August 26, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-25490 Filed 9-25-97; 8:45 am]
BILLING CODE 4830-01-U