[Federal Register Volume 60, Number 83 (Monday, May 1, 1995)]
[Notices]
[Pages 21246-21320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26217]




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Part II





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Secretary



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Statutorily Mandated Designation of Qualified Census Tracts and 
Difficult Development Areas for Section 42 of the Internal Revenue Code 
of 1986; Notice Republication

Federal Register / Vol. 60, No. 83 / Monday, May 1, 1995 / Notices
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[[Page 21246]] 


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Secretary
[Docket No. N-94-3821; FR-3796-N-01]


Statutorily Mandated Designation of Qualified Census Tracts and 
Difficult Development Areas for Section 42 of the Internal Revenue Code 
of 1986; Republication

    Editorial Note: FR Doc. 94-26217 was originally published at 59 
FR 53518 in the issue of Monday, October 24, 1994. In that 
publication numerous errors were made. The corrected document is 
republished below in its entirety.
AGENCY: Office of the Secretary, HUD.

ACTION: Notice.

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SUMMARY: This document provides revised designations of ``Qualified 
Census Tracts'' and ``Difficult Development Areas'' 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 based on 1990 census 
data. The new Difficult Development Areas are based on FY 1994 Fair 
Market Rents (``FMRs''), FY 1994 income limits and 1990 census 
population counts as explained below.

EFFECTIVE DATE: The lists of Qualified Census Tracts and Difficult 
Development Areas are effective for allocations of credit made after 
December 31, 1994. 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, 
1994.

FOR FURTHER INFORMATION CONTACT: Harold J. Gross, Senior Tax Attorney, 
Office of the General Counsel, Department of Housing and Urban 
Development, 451 Seventh Street, S.W., Washington, D.C. 20410, 
telephone (202) 708-3260, or 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, S.W., Washington, D.C. 20410, telephone (202) 708-0426. A 
telecommunications device for deaf persons (TDD) is available at (202) 
708-9300. (These are not toll-free telephone numbers.)

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 and Difficult Development Areas 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 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 would otherwise 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%. [[Page 21247]] 
    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.
    Section 42 defines a Difficult Development Area as any area 
designated by the Secretary of HUD as an area that has high 
construction, land, and utility costs relative to the AMGI. Again, 
limits apply. All designated Difficult Development Areas in MSAs/PMSAs 
may not contain more than 20% of the aggregate population of all MSAs/
PMSAs, and all designated areas not in metropolitan areas may not 
contain more than 20% of the aggregate population of the non-
metropolitan counties.
    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. Changes in MSA/PMSA definitions made after 
HUD's last designation of Qualified Census Tracts and Difficult 
Development Areas necessitate this notice.

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, 1993. 
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 1994 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. Difficult Development Areas

    In developing the list of Difficult Development Areas, HUD compared 
incomes with housing costs. HUD used 1990 Census data and the MSA/PMSA 
definitions established by the Office of Management and Budget that 
applied as of June 30, 1993. The basis for these comparisons was the 
HUD income limits and Fair Market Rents (``FMRs'') used for the section 
8 Housing Assistance Payments Program. The procedure used in making 
these calculations follows:
    1. For each MSA/PMSA and each non-metropolitan county, a ratio was 
calculated. This calculation used the FY 1994 two-bedroom FMR and the 
FY 1994 four-person income limit for Very Low Income households. The 
numerator of the ratio was the ratio of the area FMR to the FY 1994 
U.S. average FMR. The denominator of the ratio was the ratio of 60% of 
the AMGI to 60% of the FY 1994 U.S. average of area median gross 
incomes.
    2. The ratios of the FMR to the income limit were arrayed in 
descending order, separately, for MSAs/PMSAs and for non-metropolitan 
counties.
    3. The Difficult Development Areas are those with the highest 
ratios cumulative to 20% of the 1990 population of all metropolitan 
areas and of all non-metropolitan counties.
    4. The American Housing Survey data used to calculate the FMRs for 
New York City were adjusted by eliminating rent-controlled units. The 
FMRs were recalculated on the basis of the adjusted data. Because FMRs 
are based on recent mover rents, the FMRs generally reflect market 
rents rather than rent-controlled rents. In this case, the adjustment 
had no impact on the FMR.

C. Application of Caps to Qualified Census Tract and Difficult 
Development Area Determinations

    In identifying Qualified Census Tracts and Difficult Development 
Areas, 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. The cumulative population of metropolitan Difficult 
Development Areas cannot exceed 20% of the cumulative population of all 
metropolitan areas and the cumulative population of non-metropolitan 
Difficult Development Areas cannot exceed 20% of the cumulative 
population of all non-metropolitan counties.
    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. The approach 
to Qualified Census Tracts differs from the treatment of difficult 
development metropolitan areas because of an important difference in 
how caps affect each of them. Section 42(d)(5)(C)(ii)(I) of the Code 
sets a simple test for eligibility for Qualified [[Page 21248]] 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 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. By comparison, 
section (42)(d)(5)(C) does not specify under what conditions an area is 
automatically a Difficult Development Area. HUD did not attempt to 
establish a threshold for eligibility. Instead HUD used the 20% cap as 
a limit on eligibility.
    2. For both Qualified Census Tracts and Difficult Development 
Areas, 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

    Difficult Development Areas are designated annually as updated 
income and FMR data become available. Qualified Census Tracts will not 
be redesignated until year 2000 census data become available.

Other Matters

Environmental Review

    A finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
that implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The Finding of No Significant Impact is available for 
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
Office of the Rules Docket Clerk at the above address.

Impact on Small Entities

    In accordance with 5 U.S.C. 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'' 
and ``Qualified Census Tracts'' for use by political subdivisions of 
the States in allocating the LIHTC, as required by section 42 of the 
Internal Revenue 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 ``Difficult Development Areas'' and ``Qualified 
Census Tracts'' as required under section 42 of the Internal Revenue 
Code, as amended, for use by political subdivisions of the States in 
allocating the LIHTC. The notice also details the technical methodology 
used in making such designations.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this notice does not have 
potential for significant impact on family formation, maintenance, and 
general well-being, and is not subject to review under the Order. The 
notice only designates ``Difficult Development Areas'' and ``Qualified 
Census Tracts'' as required under section 42 of the Internal Revenue 
Code, as amended, for use by political subdivisions of the States in 
allocating the LIHTC. The notice also details the technical methodology 
used in making such designations.

    Dated: October 13, 1994.
Henry G. Cisneros,
Secretary.

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[FR Doc. 94-26217 Filed 10-21-94; 8:45 am]
BILLING CODE 1505-01-C