[Federal Register Volume 63, Number 122 (Thursday, June 25, 1998)]
[Notices]
[Pages 34748-34756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16828]



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Part III

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Department of Housing and Urban Development





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Statutorily Mandated Designation of Qualified Census Tracts for Section 
42 of the Internal Revenue Code of 1986; Supplemental Designation; 
Notice

Federal Register / Vol. 63, No. 122 / Thursday, June 25, 1998 / 
Notices

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4372-N-01]


Statutorily Mandated Designation of Qualified Census Tracts for 
Section 42 of the Internal Revenue Code of 1986; Supplemental 
Designation

AGENCY: Office of the Secretary, HUD.

ACTION: Notice.

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SUMMARY: This document provides revised and supplemental designations 
of ``Qualified Census Tracts'' for purposes of the Low-Income Housing 
Tax Credit (``LIHTC'') under section 42 of the Internal Revenue Code of 
1986, and provides the methodology used by the United States Department 
of Housing and Urban Development (``HUD''). The new Qualified Census 
Tract designations are for Puerto Rico and for the metropolitan areas 
and the nonmetropolitan areas of States affected by changes in 
metropolitan area definitions since the last designation of Qualified 
Census Tracts on May 1, 1995 (60 FR 21246). The designations are based 
on 1990 census data. For the metropolitan areas and the nonmetropolitan 
areas of States not listed in this Notice, the corrected designations 
of ``Qualified Census Tracts'' published May 1, 1995 (60 FR 21246) 
remain in effect. These revisions are made necessary by: the recently 
enacted ``HUBZones'' provisions of the Small Business Reauthorization 
Act of 1997, which incorporate section 42 Qualified Census Tracts by 
reference; the need for Qualified Census Tract designations in Puerto 
Rico; and changes in the definitions of metropolitan areas since the 
last designation of Qualified Census Tracts.

FOR FURTHER INFORMATION CONTACT: With questions on how tracts are 
designated and on geographic definitions, Kurt G. Usowski, Economist, 
Division of Economic Development and Public Finance, Office of Policy 
Development and Research, Department of Housing and Urban Development, 
451 Seventh Street, SW, Washington, DC 20410, telephone (202) 708-0426, 
e-mail Kurt__G.__U<a href="/cdn-cgi/l/email-protection#2e5d41595d45476e465b4a00494158"><span class="__cf_email__" data-cfemail="a1d2ced6d2cac8e1c9d4c58fc6ced7">[email protected]</span></a>. With specific legal questions 
pertaining to section 42 and this notice, Chris Wilson, Attorney, 
Office of the Chief Counsel, Pass Throughs and Special Industries 
Branch 5, Internal Revenue Service, 1111 Constitution Ave., NW, 
Washington, DC, 20244, telephone (202) 622-3040, fax (202) 622-4779; or 
Harold J. Gross, Senior Tax Attorney, Office of the General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410, telephone (202) 708-3260, e-mail 
<a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="521a7c0d0d181700000b0d0d15001d0101123a27367c353d247c">[email protected]</a> For questions about the ``HUBZones'' program, 
Michael P. McHale, Assistant Administrator for Procurement Policy, 
Office of Government Contracting, Suite 8800, Small Business 
Administration, 409 Third Street, SW, Washington, DC 20416, telephone 
(202) 205-6731, fax (202) 205-7324, e-mail <a href="/cdn-cgi/l/email-protection#325f5b515a53575e1c5f515a535e57724150531c555d44"><span class="__cf_email__" data-cfemail="462b2f252e27232a682b252e272a230635242768212930">[email protected]</span></a>. A 
telecommunications device for deaf persons (TTY) is available at (202) 
708-9300. (These are not toll-free telephone numbers.) Additional 
copies of this notice are available through HUDUSER at (800) 245-2691 
for a small fee to cover duplication and mailing costs.

COPIES AVAILABLE ELECTRONICALLY: This notice is available 
electronically on the Internet (World Wide Web) at <a href="http://
www.huduser.org/">http://
www.huduser.org/</a> under the heading ``Data Available from HUDUser.'' A 
complete revised list of all Qualified Census Tracts including the 
tracts designated by this Notice and the previously-designated tracts 
which continue to be in effect will be posted at this site.

SUPPLEMENTARY INFORMATION:

Background

    The U.S. Treasury Department and the Internal Revenue Service 
thereof are authorized to interpret and enforce the provisions of the 
Internal Revenue Code of 1986 (the ``Code''), including the Low-Income 
Housing Tax Credit (``LIHTC'') found at section 42 of the Code, as 
enacted by the Tax Reform Act of 1986 [Pub.L. 99-514], as amended by 
the Technical and Miscellaneous Revenue Act of 1988 [Pub.L. 100-647], 
as amended by the Omnibus Budget Reconciliation Act of 1989 [Pub.L. 
101-239], as amended by the Omnibus Budget Reconciliation Act of 1990 
[Pub.L. 101-508], as amended by the Tax Extension Act of 1991 [Pub.L. 
102-227], and as amended and made permanent by the Omnibus Budget 
Reconciliation Act of 1993 [Pub.L. 103-66]. The Secretary of HUD is 
required to designate Qualified Census Tracts and Difficult Development 
Areas by section 42(d)(5)(C) of the Code.
    In order to assist in understanding HUD's mandated designation of 
Qualified Census Tracts for use in administering section 42 of the 
Code, a summary of section 42 is provided. The following summary does 
not purport to bind the Treasury or the IRS in any way, nor does it 
purport to bind HUD as HUD has no authority to interpret or administer 
the Code, except in those instances where it has a specific delegation.

Summary of Low Income Housing Tax Credit

    The LIHTC is a tax incentive intended to increase the availability 
of low income housing. Section 42 provides an income tax credit to 
owners of newly constructed or substantially rehabilitated low-income 
rental housing projects. The dollar amount of the LIHTC available for 
allocation by each state (the ``credit ceiling'') is limited by 
population. Each state is allocated credit based on $1.25 per resident. 
Also, states may carry forward unused or returned credit for one year; 
if not used by then, credit goes into a national pool to be allocated 
to states as additional credit. State and local housing agencies 
allocate the state's credit ceiling among low income housing building 
owners applying for the credit.
    The credit is based on the cost of units placed in service as low-
income units under certain minimum occupancy and maximum rent criteria. 
In general, a building must meet one of two thresholds to be eligible 
for the LIHTC: either 20% of units must be rent-restricted and occupied 
by tenants with incomes no higher than 50% of the Area Median Gross 
Income (``AMGI''), or 40% of units must be rent restricted and occupied 
by tenants with incomes no higher than 60% of AMGI. The term ``rent-
restricted'' means that gross rent, including an allowance for 
utilities, cannot exceed 30% of the tenant's imputed income limitation 
(i.e., 50% or 60% of AMGI). The rental restrictions remain in effect 
for at least 15 years, and building owners are required to enter into 
agreements to maintain the low income character of the building for an 
additional 15 years.
    The LIHTC reduces income tax liability dollar for dollar. It is 
taken annually for a term of ten years and is intended to yield a 
present value of either (1) 70 percent of the ``qualified basis'' for 
new construction or substantial rehabilitation expenditures that are 
not federally subsidized or financed with tax-exempt bonds, or (2) 30 
percent of the qualified basis for the acquisition of existing projects 
or projects involving federal subsidies or financing with tax-exempt 
bonds. The actual credit rates were fixed at 9 percent (70 percent 
present value) and 4 percent (30 percent present value) for 1987, and 
are adjusted monthly for projects placed in service after 1987 under 
procedures specified in section 42. Individuals can use the credit up 
to a deduction equivalent of $25,000. This equals $9,900 at the 39.6% 
maximum

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marginal tax rate. Individuals cannot use the credit against the 
alternative minimum tax. Corporations, other than S or professional 
service corporations, can use the credit against ordinary income tax. 
They cannot use the credit against the alternative minimum tax. These 
corporations can also use the losses from the project.
    The qualified basis represents a fraction of the ``eligible 
basis,'' based on the number of low income units in the building as a 
percentage of the total number of units, or based on the floor space of 
low income units as a percentage of the total floor space in the 
building. The eligible basis is the adjusted basis attributable to 
acquisition cost plus the amounts chargeable to capital account 
incurred prior to the end of the first taxable year in which the 
qualified low income building is placed in service. In the case of 
buildings located in designated Qualified Census Tracts or designated 
Difficult Development Areas, eligible basis is increased to 130% of 
what it otherwise would be. This means that the available credit will 
also be increased by 30%; if the 70% credit is available, it will 
effectively be increased to 91%.
    Under section 42(d)(5)(C) of the Code, a Qualified Census Tract is 
any census tract (or equivalent geographic area defined by the Bureau 
of the Census) in which at least 50% of households have an income less 
than 60% of the AMGI. There is a limit on the amount of Qualified 
Census Tracts in any Metropolitan Statistical Area (``MSA'') or Primary 
Metropolitan Statistical Area (``PMSA'') that may be designated to 
receive an increase in eligible basis: all of the designated census 
tracts within a given MSA/PMSA may not together contain more than 20% 
of the total population of the MSA/PMSA. For purposes of this rule, all 
non-metropolitan areas in a state are treated as if they constituted a 
single metropolitan area. An amendment to section 42 made by section 
11701(a)(2) of the Omnibus Budget Reconciliation Act of 1990 specifies 
that the income test for designation of Qualified Census Tracts should 
be based on the most recent census data.
    In the last designation of Qualified Census Tracts published May 1, 
1995 (60 FR 21246), no tract designations were made in Puerto Rico 
because the entire island was designated a ``Difficult Development 
Area'' under section 42 of the Internal Revenue Code making the 
designation of Qualified Census Tracts superfluous. Because the current 
designation of section 42 Difficult Development Areas, published 
October 21, 1997 (62 FR 54732), no longer names all of Puerto Rico a 
Difficult Development Area, updated designations of Qualified Census 
Tracts are required. The following changes in MSA/PMSA definitions were 
made after HUD's last designation of Qualified Census Tracts.

------------------------------------------------------------------------
             New MSA (MSA No.)                   Component counties     
------------------------------------------------------------------------
Flagstaff, AZ-UT MSA (2620)...............  Coconino County, AZ.        
                                            Kane County, UT.            
Grand Junction, CO MSA (2995).............  Mesa County, CO.            
Hattiesburg, MS MSA (3285)................  Forrest County, MS.         
                                            Lamar County, MS.           
Jonesboro, AR MSA (3700)..................  Craighead County, AR.       
Pocatello, ID MSA (6340)..................  Bannock County, ID.         
------------------------------------------------------------------------

    In addition, Chester County, Tennessee was added to the Jackson, TN 
MSA (3580). With this addition, the MSA now comprises Chester and 
Madison Counties, Tennessee.
    Finally, the recently enacted ``HUBZones'' provisions of the Small 
Business Reauthorization Act of 1997 [Pub.L. 105-135] incorporate 
section 42 Qualified Census Tracts by reference making necessary these 
revisions to ensure legal compliance with this new program.

Explanation of HUD Designation Methodology

A. Qualified Census Tracts

    In developing this revised list of LIHTC Qualified Census Tracts, 
HUD used 1990 Census data and the MSA/PMSA definitions established by 
the Office of Management and Budget that applied as of June 30, 1996. 
Beginning with the 1990 census, tract-level data are available for the 
entire country. Generally, in metropolitan areas these geographic 
divisions are called census tracts while in most non-metropolitan areas 
the equivalent nomenclature is Block Numbering Area (``BNA''). BNAs are 
treated as census tracts for the purposes of this Notice.
    The LIHTC Qualified Census Tracts were determined as follows:
    1. A census tract must have 50% of its households with incomes 
below 60% of the AMGI to be eligible. HUD has defined 60% of AMGI 
income as 120% of HUD's Very Low Income Limits, that are based on 50% 
of area median family income, adjusted for high cost and low income 
areas. The income estimates were then deflated to 1989 dollars, so they 
would match the 1990 Census income data.
    2. For each census tract, the percentage of households below the 
60% income standard was determined by (a) calculating the average 
household size of the census tract, (b) applying the income standard 
after adjusting it to match the average household size, and (c) 
calculating the number of households with incomes below the income 
standard.
    3. Qualified Census Tracts are those in which 50% or more of the 
households are income eligible and the population of all census tracts 
that satisfy this criterion does not exceed 20% of the total population 
of the respective area.
    4. In areas where more than 20% of the population qualifies, census 
tracts are ordered from the highest percentage of eligible households 
to the lowest. Starting with the highest percentage, census tracts are 
included until the 20% limit is exceeded. If a census tract is excluded 
because it raises the percentage above 20%, then subsequent census 
tracts are considered to determine if a census tract with a smaller 
population could be included without exceeding the 20% limit.

B. Application of Caps to Qualified Census Tract Determinations

    In identifying Qualified Census Tracts, HUD applied various caps, 
or limitations, as noted above. For Qualified Census Tracts, section 
42(d)(5)(C)(ii)(II) of the Code specifies that the population of 
eligible census tracts within a metropolitan area cannot exceed 20% of 
the population of that metropolitan area. Similarly, for census tracts/
BNAs located outside metropolitan areas, the population of eligible 
census tracts/BNAs cannot exceed 20% of the population of the non-
metropolitan counties in a State.
    In applying these caps, HUD established procedures to deal with two 
issues: (1) how to proceed when the next logical choice for inclusion 
causes the cumulative area population to exceed the cap, and (2) how to 
treat small overruns of the caps. The remainder of this section 
explains the procedures.
    1. Next choice causes cumulative population to exceed the cap. In 
applying the 20% cap to Qualified Census Tracts, HUD did not attempt to 
break a borderline census tract into smaller areas. Instead HUD looked 
tract-by-tract down the ranking beyond the excluded tract to see if a 
smaller tract could be included without exceeding the cap. Section 
42(d)(5)(C)(ii)(I) of the Code sets a simple test for eligibility for 
Qualified Census Tracts. If a tract's low income population exceeds 50% 
of its total population, then the tract is eligible unless it becomes 
necessary to eliminate the tract to satisfy the cap. There are many 
metropolitan areas and

[[Page 34750]]

States in which the population of eligible areas falls short of 20%. 
When HUD had to eliminate tracts to satisfy the 20% cap, it was 
choosing among tracts that were otherwise eligible.
    2. Anomalous results. For Qualified Census Tracts, HUD applied the 
caps strictly unless a strict application produced an anomalous result. 
Specifically, HUD stopped selecting areas when it was impossible to 
choose another area without exceeding the applicable cap. The only 
exception to this policy was when an excluded area contained either a 
large absolute population or a large percentage of the total population 
and its inclusion resulted in only a minor overrun of the cap. There 
were some cases where the inclusion of an area would result in a 
minimal overrun of the cap; but, in all of these cases, the exclusion 
of the area resulted in neither a large absolute loss of population nor 
a large short-fall below 20%. HUD believes the designation of these 
areas is consistent with the intent of the legislation. Some latitude 
is justifiable because it is impossible to really determine whether the 
20% cap has been exceeded, as long as the apparent excess is small, due 
to measurement error. Despite the care and effort involved in a 
decennial census, it is recognized by the Census Bureau, and all users 
of the data, that the population counts for a given area and for the 
entire country are not precise. The extent of the measurement error is 
unknown. Thus, there can be errors in both the numerator and 
denominator of the ratio of populations used in applying a 20% cap. In 
circumstances where a strict application of a 20% cap results in an 
anomalous situation, recognition of the unavoidable imprecision in the 
census data justifies accepting small variances above the 20% limit.

Future Designations

    Qualified Census Tracts will not be redesignated until year 2000 
census data become available unless further changes in metropolitan 
area definitions occur.

Effective Date

    The revisions to the list of Qualified Census Tracts are effective 
for allocations of credit made after December 31, 1998. In the case of 
a building described in Internal Revenue Code section 42(h)(4)(B), the 
list is effective if the bonds are issued and the building is placed in 
service after December 31, 1998. The corrected designations of 
``Qualified Census Tracts'' under section 42 of the Internal Revenue 
Code published May 1, 1995 (60 FR 21246) for the metropolitan areas and 
nonmetropolitan parts of States not listed in this Notice remain in 
effect. The list of Difficult Development Areas published October 21, 
1997 (62 FR 54732) remains in effect. Effective dates with respect to 
the HUBZones program will be established separately by the Small 
Business Administration.

Other Matters

Environmental Impact

    In accordance with 40 CFR 1508.4 of the CEQ regulations and 24 CFR 
50.19(c)(6) of the HUD regulations, the policies and procedures 
contained in this notice provide for the establishment of fiscal 
requirements or procedures which do not constitute a development 
decision that affects the physical condition of specific project areas 
or building sites and therefore, are categorically excluded from the 
requirements of the National Environmental Policy Act, except for 
extraordinary circumstances, and no FONSI is required.

Regulatory Flexibility Act

    In accordance with 5 U.S.C. Section 605(b) (the Regulatory 
Flexibility Act), the undersigned hereby certifies that this notice 
does not have a significant economic impact on a substantial number of 
small entities. The notice involves the designation of ``Difficult 
Development Areas'' for use by political subdivisions of the States in 
allocating the LIHTC, as required by section 42 of the Code, as 
amended. This notice places no new requirements on the States, their 
political subdivisions, or the applicants for the credit. This notice 
also details the technical methodology used in making such 
designations.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this notice will not have any substantial direct effects 
on States or their political subdivisions, or the relationship between 
the Federal government and the States, or on the distribution of power 
and responsibilities among the various levels of government. As a 
result, the notice is not subject to review under the order. The notice 
merely designates ``Qualified Census Tracts'' for the use by political 
subdivisions of the States in allocating the LIHTC, as required under 
section 42 of the Internal Revenue Code, as amended. The notice also 
details the technical methodology used in making such designations.

    Dated: June 18, 1998.
Andrew Cuomo,
Secretary.

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[FR Doc. 98-16828 Filed 6-24-98; 8:45 am]
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