Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for Section 42 of the Internal Revenue Code of 1986: Revision of Definition of Effective Date, 9961-9963 [E7-3894]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 72, Number 43 (Tuesday, March 6, 2007)]
[Notices]
[Pages 9961-9963]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-3894]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4889-N-09]


Statutorily Mandated Designation of Difficult Development Areas 
and Qualified Census Tracts for Section 42 of the Internal Revenue Code 
of 1986: Revision of Definition of Effective Date

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, HUD.

ACTION: Notice.

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SUMMARY: This notice revises the definition of ``effective date'' in a 
notice published in the Federal Register on September 28, 2006, 
designating ``Difficult Development Areas'' (DDAs) and ``Qualified 
Census Tracts'' (QCTs) for purposes of the Low-Income Housing Tax 
Credit (LIHTC) under section 42 of the Internal Revenue Code of 1986 
(the Code) (26 U.S.C. 42). HUD is responsible for designating DDAs and 
QCTs annually. The September 28, 2006, notice provided a definition of 
``effective date'' that is revised by this notice to define 
``multiphase'' LIHTC projects and to specify how such projects are to 
be treated when DDA or QCT designations change between phases.

FOR FURTHER INFORMATION CONTACT: For questions on how areas are 
designated, on geographic definitions, and on the new provisions for 
multiphase projects, contact Michael K. Hollar, Economist, Economic 
Development and Public Finance Division, Office of Policy Development 
and Research, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410-6000, telephone (202) 402-5878, or 
send an e-mail to Michael--K.--Hollar@hud.gov. For specific legal 
questions pertaining to Section 42, contact Branch 5, Office of the 
Associate Chief Counsel, Passthroughs and Special Industries, Internal 
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224, 
telephone (202) 622-3040. For questions about the ``HUB Zones'' 
program, contact Michael P. McHale, Assistant Administrator for 
Procurement Policy, Office of Government Contracting, Small Business 
Administration, 409 Third Street, SW., Suite 8800, Washington, DC 
20416, telephone (202) 205-8885, fax (202) 205-7167, or send an e-mail 
to hubzone@sba.gov. A text telephone is available for persons with 
hearing or speech impairments at (202) 708-9300. (These are not toll-
free telephone numbers.) Additional copies of this notice are available 
through HUD User at (800) 245-2691 for a small fee to cover duplication 
and mailing costs.
    Copies Available Electronically: This notice and additional 
information about DDAs and QCTs are available electronically on the 
Internet at https://www.huduser.org/datasets/qct.html.

SUPPLEMENTARY INFORMATION: 

This Document

    This notice revises the definition of ``effective date'' in a 
notice published in the Federal Register on September 28, 2006 (71 FR 
57234). That notice designated DDAs and QCTs for purposes of the LIHTC, 
as governed by section 42 of the Code (Section 42). HUD is responsible 
for designating DDAs and QCTs annually, and, at this time, is revising 
the definition of ``effective date'' provided in the September 28, 
2006, notice (see 71 FR 57238) to define ``multiphase'' LIHTC projects 
and specify how such projects are to be treated when DDA or QCT 
designations change between phases. In addition, this notice clarifies 
what is meant by ``certified in writing'' for purposes of demonstrating 
compliance with effective dates for DDA and QCT designations. This 
notice does not change the designations of DDAs and QCTs in the 
September 28, 2006, notice.

Background

    The U.S. Department of the Treasury (Treasury) and its Internal 
Revenue Service (IRS) are authorized to interpret and enforce the 
provisions of the Internal Revenue Code (the Code), including the LIHTC 
found at Section 42 of the Code. The requirement for HUD to designate 
DDAs and QCTs is found in Section 42(d)(5)(C) of the Code. State and 
local LIHTC-allocating agencies are responsible for allocating LIHTC to 
eligible projects according to approved Qualified Allocation Plans 
(QAPs). Most LIHTC-allocating agencies include in their QAPs a 
limitation on the amount of LIHTC that may be awarded to a particular 
applicant, project, and/or location in any year. When applicants plan 
LIHTC-financed developments that would require amounts of LIHTC in 
excess of the individual allocation limits defined in the applicable 
QAP (or in smaller states, that are larger than the annual per capital 
credit allocation authority), they are forced to divide their 
developments, and their LIHTC applications, into phases over 2 or more 
years in order to obtain all the tax credits needed to complete the 
project. If such developments are located in DDAs or QCTs, there is a 
possibility that the location of the development may lose its DDA/QCT 
status after the first phase has been allocated LIHTC, but before 
subsequent phases have received their allocation or applied for LIHTC. 
As the financing for developments in these situations is generally 
predicated on the additional LIHTC available because of the 
developments' location in DDAs/QCTs, the subsequent phases may become 
infeasible.
    HUD's intent in revising designations of DDAs and QCTs is to direct 
scarce public resources, in the form of additional LIHTC subsidy, to 
projects in those locations with the greatest need for this additional 
subsidy as defined by statute. However, HUD does not intend for these 
changes in designations to ultimately prevent the development of 
affordable housing, particularly in cases where developments have been 
required to be done in phases by LIHTC-allocating agency limits on 
annual allocation amounts to individual applicants.
    HUD, therefore, is establishing in this notice a definition of 
``multiphase projects'' and specifying how effective dates in its 
notices designating DDAs and QCTs are to be applied to such projects. 
In addition, HUD is clarifying what is meant by ``certified in 
writing'' for purposes of demonstrating compliance with effective dates 
for DDA and QCT designations.

Definition of ``Multiphase Projects'' and Applicability of Effective 
Date

    For purposes of this notice, a ``multiphase project'' is defined as 
a set of buildings to be constructed or rehabilitated under the rules 
of the LIHTC and meeting the following criteria as certified in writing 
by the applicable LIHTC-allocating agency:
    (1) In the first application for tax credit, the applicant must 
include an indication of the multiphase nature of the project (i.e., 
the applicant's intent to make future applications for LIHTC because of 
QAP limitations, or agency allocation authority ceilings, for buildings 
located on a site, as defined

[[Page 9962]]

below). For purposes of applications made in calendar year 2007 only, 
the preceding sentence will be met if an applicant who previously 
submitted a complete application for an earlier phase of a multiphase 
project (when such earlier phase was in a QCT or DDA), but failed to 
properly identify all phases of the multiphase project in the earlier 
application, submits a complete application for the present phase of 
the same project and all phases of the project occur on a contiguous 
parcel of land;
    (2) At the time credits are allocated to the first phase of the 
project, there must be common control (ownership, leasehold, or option 
to buy or lease) of all land where the buildings shall be constructed 
or rehabilitated (the site);
    (3) The aggregate amount of LIHTC applied for on behalf of, or that 
would eventually be allocated to, the buildings on the site exceeds the 
one-year limitation on credits per applicant, as defined in the QAP of 
the LIHTC-allocating agency, or the annual per capita credit authority 
of the LIHTC-allocating agency, and is the reason the applicant must 
request multiple allocations over 2 or more years; and
    (4) All applications for LIHTC for buildings on the site are made 
in immediately consecutive years.
    In the case of a multiphase project, the applicable DDA or QCT 
status of the site of the project for all phases of the project is that 
which was applicable when the project received its first allocation of 
LIHTC, as certified in writing by the LIHTC-allocating agency. For 
purposes of Section 42(h)(4)(B) of the Internal Revenue Code, the 
applicable DDA or QCT status of the site of the project for all phases 
of the project is that which was applicable when the building(s) in the 
first phase were placed in service or when the bonds were issued as 
certified in writing by the LIHTC-allocating agency.
    For purposes of demonstrating that the effective date provisions in 
HUD DDA and QCT notices are met, ``certified in writing'' means that 
the LIHTC-allocating agency has provided a signed letter to the 
applicant stating that the LIHTC-allocating agency has found that the 
applicant meets the conditions set forth in HUD's notice.
    Under this definition and application of effective date, a 
multiphase project located in a DDA or QCT when the first allocation of 
credit is made would be treated as if in a DDA or QCT throughout all 
phases of the project even if the DDA or QCT designation were 
subsequently changed. Under clause one of the definition, the 
applicant's first application notice must include the multiphase nature 
of the project. If the applicant failed to identify all phases of the 
multiphase development in the first application, then solely for 
purposes of applications made in 2007, a project that otherwise meets 
clauses 2 through 4 will qualify if all phases of the development occur 
on a contiguous parcel of land. Applications made by a different 
applicant after the DDA or QCT status of the site has been removed 
would not be eligible even if the applicants had obtained control of 
part of a site that would otherwise be eligible under the definition. 
Under clause 2 of the definition of a multiphase project, any buildings 
on land where control was obtained after the allocation of credit to 
the first phase of the project would not be eligible for treatment as 
in a DDA or QCT. Under clause 3 of the definition, if a project is 
built in phases to accommodate the capacity of the developer or some 
other reason, and not because the aggregate amount of credit required 
to fund the development exceeds annual limitations specified in the QAP 
(or the annual per capita credit authority of the LIHTC-allocating 
agency), the project is not eligible for continued treatment as in a 
DDA or QCT. Under clause 4, if an intervening year passes between 
application phases, the subsequent phase(s) of the project is (are) not 
eligible for continued treatment as in a DDA or QCT.

Revisions to the September 28, 2006, Notice

    The section entitled ``Effective Date'' of the notice designating 
DDAs and QCTs for 2007 published in the Federal Register on September 
28, 2006 (71 FR 57234), is hereby revised to read as follows:
    For DDAs designated by reason of being in areas determined by the 
President to warrant individual or individual and public assistance 
from the federal government under the Stafford Act by reason of 
Hurricanes Katrina, Rita, or Wilma (the GO Zone Designation), the 
designation is effective:
    (1) For housing credit dollar amounts allocated and buildings 
placed in service during the period beginning on January 1, 2006, and 
ending on December 31, 2008; or
    (2) for purposes of Section 42(h)(4)(B) of the Internal Revenue 
Code, for buildings placed in service during the period beginning on 
January 1, 2006, and ending on December 31, 2008, but only with respect 
to bonds issued after December 31, 2005.
    The 2007 lists of QCTs and the 2007 lists of DDAs that are not part 
of the GO Zone Designation are effective:
    (1) For allocations of credit after December 31, 2006; or
    (2) for purposes of Section 42(h)(4)(B) of the Code, if the bonds 
are issued and the building is placed in service after December 31, 
2006.
    If an area is not on a subsequent list of DDAs or QCTs, the 2007 
lists are effective for the area if:
    (1) The allocation of credit to an applicant is made no later than 
the end of the 365-day period after the submission to the credit-
allocating agency of a complete application by the applicant, and the 
submission is made before the effective date of the subsequent lists; 
or
    (2) for purposes of Section 42(h)(4)(B) of the Code, if:
    (a) The bonds are issued or the building is placed in service no 
later than the end of the 365-day period after the applicant submits a 
complete application to the bond-issuing agency, and
    (b) the submission is made before the effective date of the 
subsequent lists, provided that both the issuance of the bonds and the 
placement in service of the building occur after the application is 
submitted.
    An application is deemed to be submitted on the date it is filed if 
the application is determined to be complete as certified in writing by 
the credit-allocating or bond-issuing agency. A ``complete 
application'' means that no more than de minimis clarification of the 
application is required for the agency to make a decision about the 
allocation of tax credits or issuance of bonds requested in the 
application.
    In the case of a ``multiphase project,'' the DDA or QCT status of 
the site of the project that applies for all phases of the project is 
that which applied when the project received its first allocation of 
LIHTC as certified in writing by the LIHTC-allocating agency. For 
purposes of Section 42(h)(4)(B) of the Internal Revenue Code, the DDA 
or QCT status of the site of the project that applies for all phases of 
the project is that which applied when the first of the following 
occurred as certified in writing by the LIHTC-allocating agency: (a) 
The building(s) in the first phase were placed in service or (b) the 
bonds were issued.
    For purposes of this notice, a ``multiphase project'' is defined as 
a set of buildings to be constructed or rehabilitated under the rules 
of the LIHTC and meeting the following criteria as certified in writing 
by the applicable LIHTC-allocating agency:

[[Page 9963]]

    (1) In the first application for tax credit, the applicant must 
include an indication of the multiphase nature of the project (i.e., 
the applicant's intent to make future applications for LIHTC because of 
Qualified Allocation Plan (QAP) limitations, or agency allocation 
authority ceilings, for buildings located on a site as defined below). 
For purposes of applications made in 2007 only, the preceding sentence 
will be met if an applicant who previously submitted a complete 
application for an earlier phase of a multiphase project (when such 
earlier phase was in a QCT or DDA), but failed to properly identify all 
phases of the multiphase project in the earlier application, submits a 
complete application for a present phase of the same project and all 
phases of the project occur on a contiguous parcel of land;
    (2) At the time credits are allocated to the first phase of the 
project, there must be common control (ownership, leasehold, or option 
to buy or lease) of all land where the buildings shall be constructed 
or rehabilitated (the site);
    (3) The aggregate amount of LIHTC applied for on behalf of, or that 
would eventually be allocated to, the buildings on the site exceeds the 
one-year limitation on credits per applicant as defined in the QAP of 
the LIHTC-allocating agency, or the annual per capita credit authority 
of the LIHTC allocating agency, and is the reason the applicant must 
request multiple allocations over 2 or more years; and
    (4) All applications for LIHTC for buildings on the site are made 
in immediately consecutive years.
    For purposes of demonstrating compliance with the effective date 
provisions of this notice, ``certified in writing'' means that the 
LIHTC-allocating agency has provided a signed letter to the applicant 
stating that the LIHTC-allocating agency has found that the applicant 
meets the conditions set forth in this notice.
    The designations of QCTs under Section 42 of the Internal Revenue 
Code published on December 12, 2002 (67 FR 76451) for the U.S. Virgin 
Islands, and on December 19, 2003 (68 FR 70982) for American Samoa, 
Guam, and the Northern Mariana Islands, remain in effect.
    Members of the public are hereby reminded that the Secretary of 
Housing and Urban Development, or the Secretary's designee, has sole 
legal authority to designate DDAs and QCTs by publishing lists of 
geographic entities as defined by, in the case of DDAs, the several 
states and the governments of the insular areas of the United States 
and, in the case of QCTs, by the Census Bureau; and to establish the 
effective dates of these lists. The Secretary of the Treasury, through 
the IRS thereof, has sole legal authority to interpret, and to 
determine and enforce compliance with, the Internal Revenue Code and 
associated regulations including Federal Register notices published by 
HUD for purposes of designating DDAs and QCTs. Representations made by 
any other entity as to the content of HUD notices designating DDAs and 
QCTs that do not precisely match the language published by HUD should 
not be relied upon by taxpayers in determining what actions are 
necessary to comply with HUD notices.
    In addition, the section entitled ``Interpretive Examples of 
Effective Date'' of the notice designating DDAs and QCTs for 2007 
published on September 28, 2006 (71 FR 57234) is hereby amended with 
the addition of the following (in each case the description applied to 
a DDA is equally applicable to a QCT):
    (Case G) Project G is a multiphase project located in a 2006 
regular DDA that is NOT a designated regular DDA in 2007. The first 
phase of Project G received an allocation of credits in 2006 pursuant 
to an application filed March 15, 2006. An application for tax credits 
for the second phase Project G is filed with the allocating agency by 
the same entity on March 15, 2007. The second phase of Project G is 
located on a contiguous site controlled by the applicant at the time 
credits were allocated to the first phase. Credits are allocated to the 
second phase of Project G on October 30, 2007. The aggregate amount of 
credits allocated to the two phases of Project G exceeds the amount of 
credits that may be allocated to an applicant in one year under the 
allocating agency's QAP and is the reason that the application contains 
multiple phases. The second phase of Project G is therefore eligible 
for the increase in basis accorded a project in a 2006 regular DDA 
because it meets all of the conditions to be a part of a multiphase 
project.(Case H) Project H is a multiphase project located in a 2006 
regular DDA that is NOT a designated regular DDA in 2007. The first 
phase of Project H received an allocation of credits in 2006 pursuant 
to an application filed March 15, 2006. An application for tax credits 
for the second phase Project H is filed with the allocating agency by 
the same entity on March 15, 2008. The second phase of Project H is 
located on a site that was not controlled by the applicant at the time 
credits were allocated to the first phase. Credits are allocated to the 
second phase of Project H on October 30, 2008. The aggregate amount of 
credits allocated to the two phases of Project H exceeds the amount of 
credits that may be allocated to an applicant in one year under the 
allocating agency's QAP. The second phase of Project H is therefore NOT 
eligible for the increase in basis accorded a project in a 2006 regular 
DDA because it does not meet all of the conditions for a multiphase 
project as defined in this notice. Project H is not on land controlled 
by the applicant at the time credits were allocated to the first phase. 
Also, the application for credits for the second phase of Project H was 
not made in the year immediately following the first phase application 
year.

Findings and Certifications

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.19(c)(6) of HUD's regulations, 
the policies and procedures contained in this notice provide for the 
establishment of fiscal requirements or procedures that do not 
constitute a development decision affecting 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 Finding of No Significant Impact is required.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any policy document that has federalism implications if 
the document either imposes substantial direct compliance costs on 
state and local governments and is not required by statute, or the 
document preempts state law, unless the agency meets the consultation 
and funding requirements of section 6 of the executive order. This 
notice merely modifies the content of a previous notice designating 
DDAs and QCTs as required under Section 42 of the Internal Revenue 
Code, as amended, for the use by political subdivisions of the states 
in allocating the LIHTC. As a result, this notice is not subject to 
review under the order.

    Dated: March 1, 2007.
Darlene F. Williams,
Assistant Secretary for Policy, Development and Research.
[FR Doc. E7-3894 Filed 3-5-07; 8:45 am]
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