34748 Federal Register / Vol. 63, No. 122 /Thursday, June 25, 1998 / Notices

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.

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

KurtlG.lUsowski@hud.gov. 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

H.lJERRYlGROSS@hud.gov. 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

michael.mchale@sba.gov. 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 http://

www.huduser.org/ 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
Federal Register / Vol. 63, No. 122 /Thursday, June 25, 1998 / Notices 34749

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 nonmetropolitan 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 tractby-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
34750 Federal Register / Vol. 63, No. 122 /Thursday, June 25, 1998 / Notices

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.

BILLING CODE 4210–32–P
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[FR Doc. 98–16828 Filed 6–24–98; 8:45 am]

BILLING CODE 4210–32–C