Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Rules and Regulations 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:

§ 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 § 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.

§ 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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8732]

RIN 1545–AT60

Available Unit Rule

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations concerning the treatment of

low-income housing units in a building

that is occupied by individuals whose

incomes increase above 140 percent of

the income limitation applicable under

section 42(g)(1). These regulations affect

owners of those buildings who claim the

low-income housing tax credit.

DATES: These regulations are effective

September 26, 1997.

For dates of applicability of these

regulations, see § 1.42–15(i).

FOR FURTHER INFORMATION CONTACT:

David Selig, (202) 622–3040 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

On May 30, 1996, the IRS published

a notice of proposed rulemaking in the

Federal Register (PS–29–95 at 61 FR

27036) proposing amendments to the

Income Tax Regulations (26 CFR part 1)

under section 42(g)(2)(D) of the Internal

Revenue Code. A public hearing was

scheduled for September 17, 1996,

pursuant to a notice of public hearing

published simultaneously with the

notice of proposed rulemaking.

However, the IRS received no requests

to speak at the public hearing, and no

public hearing was held. Written

comments responding to the notice were

received. After consideration of all the

comments, the proposed regulations are

adopted as revised by this Treasury

decision.

Explanation of Revisions and Summary

of Comments

The general rule in section

42(g)(2)(D)(i) provides that if the income
50504 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Rules and Regulations

of an occupant of a low-income unit

increases above the income limitation

applicable under section 42(g)(1), the

unit continues to be treated as a lowincome unit. This general rule only

applies if the occupant’s income

initially met the income limitation and

the unit continues to be rent-restricted.

Section 42(g)(2)(D)(ii), however,

provides an exception to the general

rule in section 42(g)(2)(D)(i). Under this

exception, the unit ceases being treated

as a low-income unit when two

conditions occur. The first condition is

that the occupant’s income increases

above 140 percent of the income

limitation applicable under section

42(g)(1), or above 170 percent for a deep

rent skewed project described in section

142(d)(4)(B) (applicable income

limitation). When this occurs, the unit

becomes an over-income unit. The

second condition is that a new

occupant, whose income exceeds the

applicable income limitation

(nonqualified resident), occupies any

residential unit in the building of a

comparable or smaller size (comparable

unit).

Rules and Definitions

One commentator suggested that the

available unit rule under the proposed

regulations did not clearly indicate

whether the aggregate income of all

occupants of a unit is taken into

account. Accordingly, the final

regulations clarify that an over-income

unit means a low-income unit in which

the aggregate income of the occupants of

the unit increases above 140 percent of

the applicable income limitation under

section 42(g)(1), or above 170 percent of

the applicable income limitation for

deep rent skewed projects described in

section 142(d)(4)(B).

Commentators requested that the final

regulations specify whether a

comparable unit is measured by floor

space or number of bedrooms. The final

regulations provide that a comparable

unit must be measured by the same

method the taxpayer used to determine

qualified basis for the credit year in

which the comparable unit became

available.

Some commentators stated that the

provision in the proposed regulations

that all available comparable units (not

just the ‘‘next available’’ unit) must be

rented to qualified residents to continue

treating an over-income unit as a lowincome unit is inconsistent with the

title of section 42(g)(2)(D)(ii). Although

the title of that provision uses the term

next available unit, the text of the rule

provides that if any available

comparable unit is occupied by a

nonqualified resident, the over-income

unit ceases to be treated as a lowincome unit. This means that if a

building has more than one over-income

unit, renting any available comparable

unit (a comparably sized or smaller

unit) to a qualified resident preserves

the status of all over-income units as

low-income units. Similarly, if any

available comparable unit is rented to a

nonqualified resident, all over-income

units for which the available unit was

a comparable unit lose their status as

low-income units; thus, comparably

sized or larger over-income units would

lose their status as low-income units. In

operation, this means that the owner

must continue to rent any available

comparable unit to a qualified resident

until the percentage of low-income units

in a building (excluding the overincome units) is equal to the percentage

of low-income units on which the credit

is based. At that point, failure to

maintain the over-income units as lowincome units has no immediate

significance. (However, the failure to

maintain an over-income unit as a lowincome unit may affect the owner’s

decision of whether or not to rent a

particular available unit at market rate

at a later time.) Consequently, the final

regulations provide that all available

comparable units in the building, not

only the next available comparable unit,

must be rented to qualified residents to

retain the low-income status of the overincome units.

Application of Rules on a Building by

Building Basis

The proposed regulations provide that

in a project containing more than one

low-income building, the available unit

rule applies separately to each building.

Some commentators suggested that the

regulations should permit residents of

over-income units to move to available

units in different buildings within the

same low-income housing project

without violating the available unit rule.

However, because the requirements

under section 42 must be satisfied on a

building by building basis, the final

regulations provide that the available

unit rule only permits a current resident

to move to another unit within the same

building of a low-income housing

project.

In addition, in response to requests

from several commentators, the final

regulations make clear that when a

current resident moves to a different

unit within the same low-income

building, the units exchange status. (See

example 2 of § 1.42–15(g) of the

proposed regulations and § 1.42–15(h)

of the final regulations.) Thus, the

newly occupied unit adopts the status of

the vacated unit, and the vacated unit

assumes the status the newly occupied

unit had immediately prior to its

occupancy by the qualifying residents.

Timing Issues

The methods of committing rental

units to tenants varies in different

jurisdictions. However, it is a common

rental practice to have some form of

preliminary reservation for a unit prior

to the date on which a lease is signed

or the unit is occupied. Thus, several

commentators have requested

clarification that once a unit is reserved

for a prospective tenant, it is no longer

treated as available for purposes of the

available unit rule. Accordingly, the

final regulations provide that a unit is

not available for purposes of the

available unit rule when the unit is no

longer available for rent due to a

reservation that is binding under local

law.

Finally, financing arrangements using

obligations that purport to be exempt

facility bonds under section 142 must

meet the requirements of sections 103

and 141 through 150 for interest on the

obligations to be excluded from gross

income under section 103(a). The

requirements under section 142(d) may

differ from those under section 42.

Accordingly, the final regulations

provide that the rules under the final

regulations are not intended as an

interpretation of the applicable rules

under section 142.

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 David

Selig, Office of the Assistant Chief

Counsel (Passthroughs and Special

Industries), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Rules and Regulations 50505

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 adding an entry

in numerical order to read as follows:

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

Section 1.42–15 is also issued under 26

U.S.C. 42(n); * * *

Par. 2. Section 1.42–15 is added to

read as follows:

§ 1.42–15 Available unit rule.

(a) Definitions. The following

definitions apply to this section:

Applicable income limitation means

the limitation applicable under section

42(g)(1) or, for deep rent skewed

projects described in section

142(d)(4)(B), 40 percent of area median

gross income.

Available unit rule means the rule in

section 42(g)(2)(D)(ii).

Comparable unit means a residential

unit in a low-income building that is

comparably sized or smaller than an

over-income unit or, for deep rent

skewed projects described in section

142(d)(4)(B), any low-income unit. For

purposes of determining whether a

residential unit is comparably sized, a

comparable unit must be measured by

the same method used to determine

qualified basis for the credit year in

which the comparable unit became

available.

Current resident means a person who

is living in the low-income building.

Low-income unit is defined by section

42(i)(3)(A).

Nonqualified resident means a new

occupant or occupants whose aggregate

income exceeds the applicable income

limitation.

Over-income unit means a lowincome unit in which the aggregate

income of the occupants of the unit

increases above 140 percent of the

applicable income limitation under

section 42(g)(1), or above 170 percent of

the applicable income limitation for

deep rent skewed projects described in

section 142(d)(4)(B).

Qualified resident means an occupant

either whose aggregate income

(combined with the income of all other

occupants of the unit) does not exceed

the applicable income limitation and

who is otherwise a low-income resident

under section 42, or who is a current

resident.

(b) General section 42(g)(2)(D)(i) rule.

Except as provided in paragraph (c) of

this section, notwithstanding an

increase in the income of the occupants

of a low-income unit above the

applicable income limitation, if the

income of the occupants initially met

the applicable income limitation, and

the unit continues to be rent-restricted—

(1) The unit continues to be treated as

a low-income unit; and

(2) The unit continues to be included

in the numerator and the denominator

of the ratio used to determine whether

a project satisfies the applicable

minimum set-aside requirement of

section 42(g)(1).

(c) Exception. A unit ceases to be

treated as a low-income unit if it

becomes an over-income unit and a

nonqualified resident occupies any

comparable unit that is available or that

subsequently becomes available in the

same low-income building. In other

words, the owner of a low-income

building must rent to qualified residents

all comparable units that are available

or that subsequently become available

in the same building to continue

treating the over-income unit as a lowincome unit. Once the percentage of

low-income units in a building

(excluding the over-income units)

equals the percentage of low-income

units on which the credit is based,

failure to maintain the over-income

units as low-income units has no

immediate significance. The failure to

maintain the over-income units as lowincome units, however, may affect the

decision of whether or not to rent a

particular available unit at market rate

at a later time. A unit is not available

for purposes of the available unit rule

when the unit is no longer available for

rent due to contractual arrangements

that are binding under local law (for

example, a unit is not available if it is

subject to a preliminary reservation that

is binding on the owner under local law

prior to the date a lease is signed or the

unit is occupied).

(d) Effect of current resident moving

within building. When a current

resident moves to a different unit within

the building, the newly occupied unit

adopts the status of the vacated unit.

Thus, if a current resident, whose

income exceeds the applicable income

limitation, moves from an over-income

unit to a vacant unit in the same

building, the newly occupied unit is

treated as an over-income unit. The

vacated unit assumes the status the

newly occupied unit had immediately

before it was occupied by the current

resident.

(e) Available unit rule applies

separately to each building in a project.

In a project containing more than one

low-income building, the available unit

rule applies separately to each building.

(f) Result of noncompliance with

available unit rule. If any comparable

unit that is available or that

subsequently becomes available is

rented to a nonqualified resident, all

over-income units for which the

available unit was a comparable unit

within the same building lose their

status as low-income units; thus,

comparably sized or larger over-income

units would lose their status as lowincome units.

(g) Relationship to tax-exempt bond

provisions. Financing arrangements that

purport to be exempt-facility bonds

under section 142 must meet the

requirements of sections 103 and 141

through 150 for interest on the

obligations to be excluded from gross

income under section 103(a). This

section is not intended as an

interpretation under section 142.

(h) Examples. The following examples

illustrate this section:

Example 1. This example illustrates

noncompliance with the available unit rule

in a low-income building containing three

over-income units. On January 1, 1998, a

qualified low-income housing project,

consisting of one building containing ten

identically sized residential units, received a

housing credit dollar amount allocation from

a state housing credit agency for five lowincome units. By the close of 1998, the first

year of the credit period, the project satisfied

the minimum set-aside requirement of

section 42(g)(1)(B). Units 1, 2, 3, 4, and 5

were occupied by individuals whose incomes

did not exceed the income limitation

applicable under section 42(g)(1) and were

otherwise low-income residents under

section 42. Units 6, 7, 8, and 9 were occupied

by market-rate tenants. Unit 10 was vacant.

To avoid recapture of credit, the project

owner must maintain five of the units as lowincome units. On November 1, 1999, the

certificates of annual income state that

annual incomes of the individuals in Units

1, 2, and 3 increased above 140 percent of the

income limitation applicable under section

42(g)(1), causing those units to become overincome units. On November 30, 1999, Units

8 and 9 became vacant. On December 1,

1999, the project owner rented Units 8 and

9 to qualified residents who were not current

residents at rates meeting the rent restriction

requirements of section 42(g)(2). On

December 31, 1999, the project owner rented

Unit 10 to a market-rate tenant. Because Unit

10, an available comparable unit, was leased

to a market-rate tenant, Units 1, 2, and 3

ceased to be treated as low-income units. On

that date, Units 4, 5, 8, and 9 were the only

remaining low-income units. Because the

project owner did not maintain five of the

residential units as low-income units, the

qualified basis in the building is reduced,

and credit must be recaptured. If the project

owner had rented Unit 10 to a qualified

resident who was not a current resident,
50506 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Rules and Regulations

eight of the units would be low-income units.

At that time, Units 1, 2, and 3, the overincome units, could be rented to market-rate

tenants because the building would still

contain five low-income units.

Example 2. This example illustrates the

provisions of paragraph (d) of this section. A

low-income project consists of one six-floor

building. The residential units in the

building are identically sized. The building

contains two over-income units on the sixth

floor and two vacant units on the first floor.

The project owner, desiring to maintain the

over-income units as low-income units,

wants to rent the available units to qualified

residents. J, a resident of one of the overincome units, wishes to occupy a unit on the

first floor. J’s income has recently increased

above the applicable income limitation. The

project owner permits J to move into one of

the units on the first floor. Despite J’s income

exceeding the applicable income limitation,

J is a qualified resident under the available

unit rule because J is a current resident of the

building. The unit newly occupied by J

becomes an over-income unit under the

available unit rule. The unit vacated by J

assumes the status the newly occupied unit

had immediately before J occupied the unit.

The over-income units in the building

continue to be treated as low-income units.

(i) Effective date. This section applies

to leases entered into or renewed on and

after September 26, 1997.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 26, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–25493 Filed 9–25–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 100

[CGD8–97–038]

RIN 2115–AE46

Special Local Regulations; 1997

Galveston Offshore Powerboat

Festival, Galveston, TX

AGENCY: Coast Guard, DOT.

ACTION: Temporary final rule.

SUMMARY: Special local regulations are

being adopted for the Galveston

Offshore Powerboat Festival. This event

will be held on October 11, 1997 from

11 a.m. to 5 p.m. in the Galveston Ship

Channel and on October 12, 1997 from

10 a.m. to 6 p.m. offshore of Galveston

Island at Galveston, Texas. These

regulations are needed to provide for the

safety of life on the navigable waters

during the event.

DATES: These regulations become

effective on October 11, 1997 at 10:30

a.m. until 5:30 p.m. and on October 12,

1997 at 9:30 a.m. until 6:30 p.m.

FOR FURTHER INFORMATION CONTACT:

LT Harry Schmidt, Operations Officer,

U.S. Coast Guard Group Galveston. Tel:

(409) 766–5603.

SUPPLEMENTARY INFORMATION:

Regulatory History

In accordance with 5 U.S.C. 553, a

notice of proposed rule making for these

regulations has not been published, and

good cause exists for making them

effective in less than 30 days from the

date of publication. Following normal

rule making procedures would be

impracticable. The details of the event

were not finalized in sufficient time to

publish proposed rules in advance of

the event or to provide for a delayed

effective date.

Background and Purpose

The marine event requiring this

regulation is a power boat race called

the ‘‘1997 Galveston Offshore Powerboat

Festival’’. This event is sponsored by

Texas Gulf Coast Racing, Inc. It will

consist of an inshore powerboat race in

the Galveston Ship Channel on October

11, 1997 and an offshore race on

October 12, 1997. Approximately 60

offshore V-hull and catamaran-hull

outboard and inboard race boats from 22

to 50 feet in length operating at high

speeds are expected to participate in the

races. The courses to be followed by the

races will be marked by patrol vessels

positioned at various points along each

route. Fifty to two hundred spectator

boats are expected for this event.

While viewing the event at any point

outside the regulated area is not

prohibited spectators will be

encouraged to congregate within areas

designated by the sponsor. Nonparticipating vessels will be permitted

to transit the area every hour on the

hour at No Wake Speed with the

permission of the patrol commander.

Regulatory Evaluation

This rule is not a significant

regulatory action under section 3(f) of

Executive Order 12866 and does not

require an assessment of potential costs

and benefits under section 6(a)(3) of the

order. It has not been reviewed by the

Office of Management and Budget under

that order. It is not significant under the

regulatory policies and procedures of

the Department of Transportation (DOT)

(44 FR 11040; February 26, 1979). The

Coast Guard expects the economic

impact of this rule to be so minimal that

a full Regulatory Evaluation under

paragraph 10e of the regulatory policies

and procedures of DOT is unnecessary

because of the event’s short duration.

Small Entities

The Coast Guard finds that the impact

on small entities, if any, is not

substantial. Therefore, the Coast Guard

certifies under section 605(b) of the

Regulatory Flexibility Act (5 U.S.C. 601

et seq) that this temporary rule will not

have a significant economic impact on

a substantial number of small entities

because of the event’s short duration.

Collection of Information

This rule contains no information

collection requirements under the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.)

Federalism Assessment

The Coast Guard has analyzed this

action in accordance with the principles

and criteria of Executive Order 12612

and has determined that this rule does

not raise sufficient federalism

implications to warrant the preparation

of a Federalism Assessment.

Environmental Assessment

The Coast Guard considered the

environmental impact of this rule and

concluded that under section 2.B.2.e

(34) (h) of Commandant Instruction

M16475.1B, (as revised by 61 FR 13563;

March 27, 1996) this rule is excluded

from further environmental

documentation.

List of Subjects In 33 CFR Part 100

Mine safety, Navigation (water),

Reporting and recordkeeping

requirements, Waterways

Temporary Regulations

In consideration of the foregoing, Part

100 of Title 33, Code of Federal

Regulations, is amended as follows:

1. The authority citation for part 100

continues to read as follows:

Authority: 33 U.S.C. 1233, 49 CFR 1.46 and

33 CFR 100.35.

2. A temporary § 100.35–T08–038 is

added to read as follows:

§ 100.35–T08–038 Galveston, TX.

(a) Regulated Area: The Galveston

Ship Channel from the Pelican Island

Bridge to Pier 9 on October 11, 1997 and

The Gulf of Mexico within the area

bounded by a point on the shoreline at

29–18.7N, 094–45.5W southeast to 29–

18.2N, 094–45.0W thence southwest to

29–16.0N, 094–46.4W thence west to

29–14.8.0N, 094–49.6W thence

northwest to the shoreline at 29–15.7N,

094–52.0W on October 12, 1997.

(b) Special Local Regulation: All

persons and vessels not registered with

the sponsors as participants or official

patrol vessels are considered spectators.