Section 42 Utility Allowance Regulations Update, 43863-43868 [E8-17268]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 146 (Tuesday, July 29, 2008)]
[Rules and Regulations]
[Pages 43863-43868]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17268]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9420]
RIN 1545-BC22


Section 42 Utility Allowance Regulations Update

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that amend the 
utility allowances regulations concerning the low-income housing tax 
credit. The final regulations update the utility allowance regulations 
to provide new options for estimating tenant utility costs. The final 
regulations affect owners of low-income housing projects who claim the 
credit, the tenants in those low-income housing projects, and the State 
and local housing credit agencies that administer the credit.

DATES: Effective Date: These regulations are effective July 29, 2008. 
Applicability Date: For dates of applicability see Sec.  1.42-12(a)(4).

FOR FURTHER INFORMATION CONTACT: David Selig (202) 622-3040 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR Part 1) relating to the low-income housing credit under section 42 
of the Internal Revenue Code (Code). On June 19, 2007, the IRS and 
Treasury Department published in the Federal Register proposed 
regulations under section 42(g)(2)(B)(ii) (72 FR 33703). Written and 
electronic comments responding to the proposed regulations were 
received and a public hearing was held on the proposed regulations on 
October 9, 2007. After consideration of all the comments, the proposed 
regulations are adopted as amended by this Treasury decision.

[[Page 43864]]

General Overview

    Section 42(a) provides that, for purposes of section 38, the amount 
of the low-income housing credit determined under section 42 for any 
taxable year in the credit period is an amount equal to the applicable 
percentage of the qualified basis of each qualified low-income 
building. A qualified low-income building is defined in section 
42(c)(2) as any building that is part of a qualified low-income housing 
project.
    A qualified low-income housing project is defined in section 
42(g)(1) as any project for residential rental property if the project 
meets one of the following tests elected by the taxpayer: (1) At least 
20 percent of the residential units in the project are rent-restricted 
and occupied by individuals whose income is 50 percent or less of area 
median gross income; or (2) at least 40 percent of the residential 
units in the project are rent-restricted and occupied by individuals 
whose income is 60 percent or less of area median gross income. If a 
taxpayer does not meet the elected test, the project is not eligible 
for the section 42 credit.
    Under section 42(g)(4), section 142(d)(2)(B) applies when 
determining whether any project is a qualified low-income housing 
project under section 42(g)(1). Section 142(d)(2)(B) provides that the 
income of individuals and area median gross income is determined by the 
Secretary in a manner consistent with determinations of lower income 
families and area median gross income under section 8 of the United 
States Housing Act of 1937. Under Rev. Rul. 94-57 (1994-2 CB 5), 
taxpayers may rely on a list of income limits released by the 
Department of Housing and Urban Development (HUD) until 45 days after 
HUD releases a new list of income limits, or until HUD's effective date 
for the new list, whichever is later.
    In order to qualify as a rent-restricted unit within the meaning of 
section 42(g)(2), the gross rent for the unit must not exceed 30 
percent of the imputed income limitation applicable to the unit. 
Section 42(g)(2)(B)(ii) requires the inclusion in gross rent of a 
utility allowance determined by the Secretary after taking into account 
the determinations under section 8 of the United States Housing Act of 
1937.
    Section 1.42-10(a) provides that if utility costs (other than 
telephone) for a residential rental unit are paid directly by the 
tenant, then the gross rent for that unit includes the applicable 
utility allowance as determined under Sec.  1.42-10. Section 1.42-10(b) 
provides rules for calculating the appropriate utility allowance based 
upon whether (1) the building receives rental assistance from the 
Farmers Home Administration (FmHA), now known as the Rural Housing 
Service; (2) the building has any tenant that receives FmHA rental 
assistance; (3) the building is not described in (1) or (2) above and 
the building's rents and utility allowances are reviewed by HUD on an 
annual basis; or (4) the building is not described in (1), (2), or (3) 
above (other buildings).
    Currently, under Sec.  1.42-10(b)(4), other buildings generally use 
the applicable Public Housing Authority (PHA) utility allowance 
established for the Section 8 Existing Housing Program or use a local 
utility company estimate. The local utility company estimate may be 
obtained by any interested party (including a low-income tenant, a 
building owner, or a State or local housing credit agency (Agency)).
    The proposed regulations proposed two additional options for 
calculating utility allowances. The first option would permit a 
building owner to obtain a utility estimate for each unit in a building 
from the Agency that has jurisdiction over the building (the Agency 
estimate). The Agency estimate must take into account the local utility 
rates data, property type, climate variables by region in the State, 
taxes and fees on utility charges, and property building materials and 
mechanical systems. An Agency may also use actual utility company usage 
data and rates for the building. The second option would permit a 
building owner to calculate utility allowances using the ``HUD Utility 
Schedule Model'' found on the Low-Income Housing Tax Credits page at 
https://www.huduser.org/datasets/lihtc.html (or successor URL). The HUD 
Utility Schedule Model is based on data from the Residential Energy 
Consumption Survey (RECS) conducted by the Department of Energy. RECS 
data provides energy consumption by structure for heating, air 
conditioning, cooking, water heating, and other electric (lighting and 
refrigeration). The HUD Utility Schedule Model incorporates building 
location and climate.

Summary of Comments and Explanation of Changes

Exclusions From Utility Allowance

    Prior to these final regulations, Sec.  1.42-10(a) provided for the 
exclusion of telephone costs in determining the amount of the utility 
allowance to be included in gross rent. The proposed regulations 
excluded cable television costs as well as telephone costs. The final 
regulations retain the exclusions for cable television and telephone 
costs and also exclude Internet costs. The IRS and Treasury Department 
believe it is appropriate to exclude cable television and Internet 
costs as comparable to telephone costs.

Additional Option for Determining Utility Allowances

    Commentators stated that the Agency estimate in the proposed 
regulations may be administratively burdensome for some Agencies. As an 
alternative, commentators suggested adding an option that would allow 
utility estimates to be calculated by a state-certified engineer or 
other qualified professional. The commentators specified that, under 
this option, computer software could be developed that would estimate 
the energy or water and sanitary sewer service cost for each type of 
unit in a building. The estimates would be determined based on the 
applicable current local utility billing rate schedule and would be 
applied to all comparable units in the building using specific 
information about the design, materials, equipment, and location of the 
building.
    A computer software model that incorporates specific information 
about the design and location of the building for which the utility 
allowances are being developed, and that can be updated with actual 
consumption data and with consumption estimates as new efficiency 
measures and improvements are undertaken, would provide more accurate 
estimates of utility consumption. Therefore, the final regulations also 
include a new option allowing building owners to retain the services of 
a qualified professional to calculate utility allowances based on an 
energy consumption model.
    The use of this new option is subject to several special rules. 
First, the energy consumption model must, at a minimum, take into 
account specific factors including, but not limited to, unit size, 
building orientation, design and materials, mechanical systems, 
appliances, and characteristics of the building location. Second, the 
utility estimates must be calculated by either (1) a properly licensed 
engineer or (2) a qualified professional approved by the Agency that 
has jurisdiction over the building (together, qualified professional). 
The qualified professional and the building owner must not be related 
within the meaning of section 267(b) or 707(b). Third, the building 
owner must furnish a copy of the estimates derived from the energy 
consumption model to the Agency and make copies of the estimates 
available to

[[Page 43865]]

all tenants in the building. Finally, the building owner must pay for 
all costs incurred in obtaining the utility estimates from the 
qualified professional and providing the estimates to the Agency and 
tenants.

Default Option/Option Ordering

    One commentator suggested that the final regulations should provide 
a default option because, in the absence of a definitive standard for 
determining utility allowances, building owners would use the option 
that yields the lowest utility estimates. Commentators further 
requested clarification as to which option should be used when multiple 
options are available, whether building owners may use different 
options for different utilities, and whether owners may change the 
options used for calculating utilities from time to time.
    An energy consumption model developed by a qualified professional 
that takes into account specific information about the design and 
location of the building for which the utility allowances are being 
developed should produce the most accurate utility estimates. It is 
expected that this more accurate model will be the model most commonly 
used by most building owners, particularly those with buildings that 
are not very old. However, if a building owner selects an option that 
yields higher utility allowances, the building owner should be free to 
accept a lower amount of rent from tenants. Therefore, there is no need 
for a stated default option or option ordering rule. Further, the final 
regulations neither prohibit using different options for different 
utilities nor prohibit changing the options used for calculating 
utilities. If an Agency determines that a building owner has 
understated the utility allowances for the building under the 
particular option chosen by the owner for calculating the utility 
allowance, and the building's units are not rent-restricted units under 
section 42(g)(2) as a result, the Agency must report the noncompliance 
on Form 8823, Low-Income Housing Credit Agencies Report of 
Noncompliance or Building Disposition.

Application of Newly Calculated Utility Allowances

    Under current Sec.  1.42-10(c) of the regulations, if the 
applicable utility allowance for units changes, the new utility 
allowance must be used to compute gross rent of rent-restricted units 
due 90 days after the change (the 90-day period). The proposed 
regulations limited the effective date of any new utility allowances to 
the earlier of the date the building has achieved 90 percent occupancy 
for a period of 90 consecutive days or the end of the first year of the 
credit period. The proposed regulations also modified Sec.  1.42-10(c) 
by requiring that a building owner must review at least annually the 
basis on which utility allowances have been established and must update 
the applicable utility allowance. The review must take into account any 
changes to the building such as any energy conservation measures that 
affect energy consumption and changes in utility rates.
    Commentators suggested that building owners should be obligated to 
adjust utility allowances when utility rates increase by a stated 
percentage, for example, 10 percent, which is the rule for revising 
utility allowance schedules for PHAs under 24 CFR 982.517(c). This HUD 
rule provides that a PHA must review its schedule of utility allowances 
each year and revise its allowance for a utility category if the 
utility rate has changed by 10 percent or more since the utility 
allowance schedule was last revised. The commentators did not address 
decreases in utility rates. A commentator also suggested that the final 
regulations should require an Agency to review or have owners review 
local utility rates quarterly to determine if rates have increased 
sufficiently to require an adjustment. A different commentator 
suggested limiting reviews to no more than once per year.
    The IRS and Treasury Department do not believe that fluctuations in 
utility rates within a given year should trigger recalculations of 
utility allowances more than once a year. The IRS and Treasury 
Department do not believe that the additional burden of updating the 
utility allowances more than once a year is warranted at this time. 
Utility rates generally do not change more than once a year, and yearly 
updated utility allowances would reflect average rates applicable to 
all tenants in a building from year to year. Therefore, the final 
regulations require building owners to calculate new utility allowances 
once during the calendar year regardless of any percentage change in 
utility rates. Building owners may choose, however, to calculate new 
utility allowances more frequently than once during the calendar year 
provided the owner complies with the requirements of these regulations, 
including the notification requirements to the Agency and tenants.
    Another commentator suggested that new utility allowances should be 
implemented within 90 days after HUD publishes its annual income limits 
(which are used in determining section 42 rents), but in no case later 
than June 30 of any year. Section 42 rents under section 42(g)(2) may 
or may not increase depending on HUD's calculation of area median gross 
income. Therefore, the IRS and Treasury Department do not believe that 
the rules should require that the effective date of any new utility 
allowance coincide with the section 42 effective date of HUD's income 
lists. Building owners, however, may choose to implement any new 
utility allowances on the section 42 effective date of HUD's income 
lists.
    To bring financial stability to a project during the beginning of 
its operations, the final regulations clarify that the building owner 
is not required to review the utility allowances, or implement new 
utility allowances, until the earlier of the date the building has 
achieved 90 percent occupancy for a period of 90 consecutive days or 
the end of the first year of the credit period.

Procedural Safeguards for Tenants

    One commentator made several recommendations regarding procedural 
safeguards for tenants including: Owners should be required to give 
tenants 30 days notice before the effective date of any utility 
allowance; tenants should be provided with all information used in 
calculating the utility allowances; tenants should be given the 
opportunity to comment on the proposed allowances; and owners should be 
required to review those comments prior to the utility allowances 
becoming effective. The commentator believed that the new options for 
determining utility allowances should be available only after one full 
year of occupancy and one full year after the building is placed in 
service. A commentator also recommended that a building owner should be 
allowed to use the new options only if the owner provides all data to 
the Agency no later than February 15 and the Agency informs the owner 
whether the proposed utility allowances are approved by March 31.
    To provide tenants with the opportunity to comment on proposed 
utility allowances to the Agency and building owner, the final 
regulations apply the existing disclosure requirement under current 
Sec.  1.42-10(b)(4)(ii)(B) (regarding the utility company estimate) to 
an owner using a utility company estimate, the HUD Utility Schedule 
Model, or an energy consumption model. Therefore, an owner must submit 
copies of the proposed utility allowances to the Agency and make the 
proposed utility allowances available to all tenants in the building at 
the beginning of the 90-day period before the utility allowances are

[[Page 43866]]

used in determining the gross rents of rent-restricted units. 
Similarly, the final regulations require that any utility estimates 
obtained under the Agency estimate option must be made available to all 
tenants in the building at the beginning of the 90-day period. An 
Agency may continue to require additional information from the owner 
during the 90-day period.
    Commentators suggested that the final regulations should limit the 
use of the HUD Utility Schedule Model to data for a twelve-month period 
ending in the most recent calendar year and require the owner to 
certify the accuracy of the data and the calculations of the utility 
allowances. However, the HUD Utility Schedule Model already 
incorporates consumption data derived from RECS data. Thus, building 
owners using this option need not be required to use consumption data 
for any particular twelve-month period. These final regulations, 
however, provide that the use of the energy consumption model is 
limited to consumption data for a twelve-month period ending no earlier 
than 60 days prior to the beginning of the 90-day period. In the case 
of newly constructed or renovated buildings with less than twelve 
months of consumption data, the energy consumption model allows a 
qualified professional to use consumption data for the twelve-month 
period of units of similar size and construction in the geographic area 
in which the building containing the units is located. Further, the 
final regulations require that utility rates used for the HUD Utility 
Schedule Model, the Agency estimate option, and the energy consumption 
model must be no older than the rates in place 60 days prior to the 
beginning of the 90-day period.
    In addition to these safeguards, if an Agency determines that a 
building owner has understated the utility allowances for the owner's 
building under the particular option chosen, and, therefore, some or 
all of the units in the building are not rent-restricted units under 
section 42(g)(2), then the Agency must report the noncompliance to the 
Service on Form 8823, Low-Income Housing Credit Agencies Report of 
Noncompliance or Building Disposition.
    Commentators requested that building owners should be required to 
certify the estimate and the accuracy of the data used under the new 
options. Because Agencies may request additional information at any 
time during their mandatory review of proposed utility allowances, and 
must report any noncompliance to the Service, the final regulations do 
not require building owners to provide such certification.

Utility Allowances for Tenants With Special Needs

    One commentator suggested that the calculation of utility 
allowances should take into account any special needs tenants such as 
people with disabilities who require high energy consumption equipment. 
Section 42 does not require that the owner's calculation of utility 
allowances be based on a tenant's particular use of utility services. 
If such a requirement were imposed, owners and Agencies would have to 
determine the utility allowance for the tenants in each unit, as 
opposed to allowances based on the size of the unit, which would 
greatly increase burden. Additionally, it is unclear whether it is 
appropriate to implement rules that might encourage tenants to be 
indifferent to their energy consumption. Such indifference could lead 
to cost overruns by owners, and the viability of low-income housing 
could be jeopardized. Therefore, the final regulations do not require 
the calculation of utility allowances based on consumption by 
particular tenants.

Calculation of Utility Company Estimate Option for Deregulated 
Utilities

    Section 1.42-10(b)(4)(ii)(B) currently provides that any interested 
party (including an owner, low-income tenant, or Agency) may obtain a 
local utility company estimate for a unit. The estimate is obtained 
when the interested party receives, in writing, information from a 
local utility company providing the estimated cost of that utility for 
a unit of similar size and construction for the geographic area in 
which the building containing the units is located. In light of utility 
services deregulation, the proposed regulations proposed to amend this 
option by requiring the interested party to obtain cost estimates from 
the local utility company that include combined rate charges from 
multiple utility companies.
    Commentators thought this proposed amendment would require the 
interested party to obtain utility consumption estimates from every 
utility company providing the same utility service and stated that this 
would present an unworkable administrative burden in deregulated 
jurisdictions with multiple utility providers. In some jurisdictions, 
many utility providers may be available for a given building. The 
proposed amendment was not intended to require the interested party to 
obtain utility consumption estimates from every utility company 
providing the same utility service. The amendment was proposed to 
address deregulation by requiring the interested party to obtain 
estimates for all the components of the utility service if the service 
is divided between two or more types of service providers (for example, 
electric generation and electric transmission). The final regulations 
clarify that, in the case of deregulated utility services, the 
interested party is required to obtain an estimate from only one 
utility company even if multiple companies can provide the same utility 
service to a unit. However, the utility company furnishing the estimate 
must offer utility services to the building in order for that utility 
company's rates to be used in calculating utility allowances. The 
estimate should include all component charges for providing the utility 
service.

Agency Costs/Administrative Burden

    One commentator requested that specific language be added to 
address when Agencies may charge a reasonable fee for making a 
determination pursuant to the Agency estimate option, and who bears the 
fee when a particular option is used. The proposed regulations provided 
that costs incurred in obtaining an Agency estimate are borne by the 
building owner. The final regulations adopt this provision, and further 
require building owners to pay for all costs incurred in obtaining the 
estimates under the HUD Utility Schedule Model and the energy 
consumption model and in providing estimates to Agencies and tenants.

Effective/Applicability Date

    The proposed regulations were proposed to be effective for taxable 
years beginning on or after the date of publication of the final 
regulations in the Federal Register. A commentator suggested that the 
final regulations be effective earlier on the basis that if they are 
published after 2007, they would not be effective until 2009 for 
calendar year taxpayers. The IRS and Treasury Department believe that 
the burden associated with an earlier effective date is not warranted. 
Therefore, the final regulations do not adopt this suggestion. However, 
in order to allow a building owner to implement the utility allowances 
as of the first day of the owner's taxable year beginning on or after 
July 29, 2008, the final regulations provide that taxpayers may rely on 
the rules for determining utility allowances before the first day of 
the owner's taxable year beginning on or after July 29, 2008 provided 
that any utility allowances so calculated are effective no earlier than 
the first day of the owner's taxable year beginning on or after July 
29, 2008.

[[Page 43867]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the information 
has previously been reviewed and approved under OMB control number 
1545-1102, and that the information required by these final regulations 
adds no new burden to the existing requirements. Accordingly, a 
Regulatory Flexibility Analysis under the provisions of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the notice of proposed rulemaking 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 Associate Chief Counsel (Passthroughs and Special Industries), IRS. 
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

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.42-10 is amended by:
0
1. Revising the first sentence of paragraph (a).
0
2. Revising paragraphs (b)(1), (b)(2), and (b)(3), and the introductory 
text of paragraph (b)(4).
0
3. Adding two sentences at the end of paragraph (b)(4)(ii)(A).
0
4. Adding three sentences after the second sentence in paragraph 
(b)(4)(ii)(B).
0
5. Adding paragraphs (b)(4)(ii)(C), (b)(4)(ii)(D), and (b)(4)(ii)(E).
0
6. Revising paragraph (c).
0
7. Adding paragraph (d).
    The additions and revisions read as follows:


Sec.  1.42-10  Utility allowances.

    (a) * * * If the cost of any utility (other than telephone, cable 
television, or Internet) for a residential rental unit is paid directly 
by the tenant(s), and not by or through the owner of the building, the 
gross rent for that unit includes the applicable utility allowance 
determined under this section. * * *
    (b) Applicable utility allowances--(1) Buildings assisted by the 
Rural Housing Service. If a building receives assistance from the Rural 
Housing Service (RHS-assisted building), the applicable utility 
allowance for all rent-restricted units in the building is the utility 
allowance determined under the method prescribed by the Rural Housing 
Service (RHS) for the building (whether or not the building or its 
tenants also receive other state or federal assistance).
    (2) Buildings with Rural Housing Service assisted tenants. If any 
tenant in a building receives RHS rental assistance payments (RHS 
tenant assistance), the applicable utility allowance for all rent-
restricted units in the building (including any units occupied by 
tenants receiving rental assistance payments from the Department of 
Housing and Urban Development (HUD)) is the applicable RHS utility 
allowance.
    (3) Buildings regulated by the Department of Housing and Urban 
Development. If neither a building nor any tenant in the building 
receives RHS housing assistance, and the rents and utility allowances 
of the building are reviewed by HUD on an annual basis (HUD-regulated 
building), the applicable utility allowance for all rent-restricted 
units in the building is the applicable HUD utility allowance.
    (4) Other buildings. If a building is neither an RHS-assisted nor a 
HUD-regulated building, and no tenant in the building receives RHS 
tenant assistance, the applicable utility allowance for rent-restricted 
units in the building is determined under the following methods.
* * * * *
    (ii) * * * (A) * * * However, if a local utility company estimate 
is obtained for any unit in the building under paragraph (b)(4)(ii)(B) 
of this section, a State or local housing credit agency (Agency) 
provides a building owner with an estimate for any unit in a building 
under paragraph (b)(4)(ii)(C) of this section, a cost estimate is 
calculated using the HUD Utility Schedule Model under paragraph 
(b)(4)(ii)(D) of this section, or a cost estimate is calculated by an 
energy consumption model under paragraph (b)(4)(ii)(E) of this section, 
then the estimate under paragraph (b)(4)(ii)(B), (C), (D), or (E) 
becomes the applicable utility allowance for all rent-restricted units 
of similar size and construction in the building. Paragraphs 
(b)(4)(ii)(B), (C), (D), and (E) of this section do not apply to units 
to which the rules of paragraphs (b)(1), (2), (3), or (4)(i) of this 
section apply.
    (B) * * * In the case of deregulated utility services, the 
interested party is required to obtain an estimate only from one 
utility company even if multiple companies can provide the same utility 
service to a unit. However, the utility company must offer utility 
services to the building in order for that utility company's rates to 
be used in calculating utility allowances. The estimate should include 
all component deregulated charges for providing the utility service. * 
* *
    (C) Agency estimate. A building owner may obtain a utility estimate 
for each unit in the building from the Agency that has jurisdiction 
over the building provided the Agency agrees to provide the estimate. 
The estimate is obtained when the building owner receives, in writing, 
information from the Agency providing the estimated per-unit cost of 
the utilities for units of similar size and construction for the 
geographic area in which the building containing the units is located. 
The Agency estimate may be obtained by a building owner at any time 
during the building's extended use period (see section 42(h)(6)(D)). 
Costs incurred in obtaining the estimate are borne by the building 
owner. In establishing an accurate utility allowance estimate for a 
particular building, an Agency (or an agent or other private contractor 
of the Agency that is a qualified professional within the meaning of 
paragraph (b)(4)(ii)(E) of this section) must take into account, among 
other things, local utility rates, property type, climate and degree-
day variables by region in the State, taxes and fees on utility 
charges, building materials, and mechanical systems. If the Agency uses 
an agent or other private contractor to calculate the utility 
estimates, the agent or contractor and the owner must not be related 
within the meaning of section 267(b) or 707(b). An Agency may also use 
actual utility company usage data and rates for the building. However, 
use of the Agency estimate is limited to the building's consumption 
data for the twelve-month period ending no earlier than 60 days prior 
to the beginning of the 90-day period under paragraph (c)(1)

[[Page 43868]]

of this section and utility rates used for the Agency estimate must be 
no older than the rates in place 60 days prior to the beginning of the 
90-day period under paragraph (c)(1) of this section. In the case of 
newly constructed or renovated buildings with less than 12 months of 
consumption data, the Agency (or an agent or other private contractor 
of the Agency that is a qualified professional within the meaning of 
paragraph (b)(4)(ii)(E) of this section) may use consumption data for 
the 12-month period of units of similar size and construction in the 
geographic area in which the building containing the units is located.
    (D) HUD Utility Schedule Model. A building owner may calculate a 
utility estimate using the ``HUD Utility Schedule Model'' that can be 
found on the Low-Income Housing Tax Credits page at https://
www.huduser.org/datasets/lihtc.html (or successor URL). Utility rates 
used for the HUD Utility Schedule Model must be no older than the rates 
in place 60 days prior to the beginning of the 90-day period under 
paragraph (c)(1) of this section.
    (E) Energy consumption model. A building owner may calculate 
utility estimates using an energy and water and sewage consumption and 
analysis model (energy consumption model). The energy consumption model 
must, at a minimum, take into account specific factors including, but 
not limited to, unit size, building orientation, design and materials, 
mechanical systems, appliances, and characteristics of the building 
location. The utility consumption estimates must be calculated by 
either a properly licensed engineer or a qualified professional 
approved by the Agency that has jurisdiction over the building 
(together, qualified professional), and the qualified professional and 
the building owner must not be related within the meaning of section 
267(b) or 707(b). Use of the energy consumption model is limited to the 
building's consumption data for the twelve-month period ending no 
earlier than 60 days prior to the beginning of the 90-day period under 
paragraph (c)(1) of this section, and utility rates used for the energy 
consumption model must be no older than the rates in place 60 days 
prior to the beginning of the 90-day period under paragraph (c)(1) of 
this section. In the case of newly constructed or renovated buildings 
with less than 12 months of consumption data, the qualified 
professional may use consumption data for the 12-month period of units 
of similar size and construction in the geographic area in which the 
building containing the units is located.
    (c) Changes in applicable utility allowance--(1) In general. If, at 
any time during the building's extended use period (as defined in 
section 42(h)(6)(D)), the applicable utility allowance for units 
changes, the new utility allowance must be used to compute gross rents 
of the units due 90 days after the change (the 90-day period). For 
example, if rent must be lowered because a local utility company 
estimate is obtained that shows a higher utility cost than the 
otherwise applicable PHA utility allowance, the lower rent must be in 
effect for rent due at the end of the 90-day period. A building owner 
using a utility company estimate under paragraph (b)(4)(ii)(B) of this 
section, the HUD Utility Schedule Model under paragraph (b)(4)(ii)(D) 
of this section, or an energy consumption model under paragraph 
(b)(4)(ii)(E) of this section must submit copies of the utility 
estimates to the Agency that has jurisdiction over the building and 
make the estimates available to all tenants in the building at the 
beginning of the 90-day period before the utility allowances can be 
used in determining the gross rent of rent-restricted units. An Agency 
may require additional information from the owner during the 90-day 
period. Any utility estimates obtained under the Agency estimate under 
paragraph (b)(4)(ii)(C) of this section must also be made available to 
all tenants in the building at the beginning of the 90-day period. The 
building owner must pay for all costs incurred in obtaining the 
estimates under paragraphs (b)(4)(ii)(B), (C), (D), and (E) of this 
section and providing the estimates to the Agency and the tenants. The 
building owner is not required to review the utility allowances, or 
implement new utility allowances, until the building has achieved 90 
percent occupancy for a period of 90 consecutive days or the end of the 
first year of the credit period, whichever is earlier.
    (2) Annual review. A building owner must review at least once 
during each calendar year the basis on which utility allowances have 
been established and must update the applicable utility allowance in 
accordance with paragraph (c)(1) of this section. The review must take 
into account any changes to the building such as any energy 
conservation measures that affect energy consumption and changes in 
utility rates.
    (d) Record retention. The building owner must retain any utility 
consumption estimates and supporting data as part of the taxpayer's 
records for purposes of Sec.  1.6001-1(a).

0
Par. 3. Section 1.42-12 is amended by adding paragraph (a)(4) to read 
as follows:


Sec.  1.42-12  Effective dates and transitional rules.

    (a) * * *
    (4) Utility allowances. The first sentence in Sec.  1.42-10(a), 
Sec.  1.42-10(b)(1), (2), (3), and (4), the last two sentences in Sec.  
1.42-10(b)(4)(ii)(A), the third, fourth, and fifth sentences in Sec.  
1.42-10(b)(4)(ii)(B), Sec.  1.42-10(b)(4)(ii)(C), (D), and (E), and 
Sec.  1.42-10(c) and (d) are applicable to a building owner's taxable 
years beginning on or after July 29, 2008. Taxpayers may rely on these 
provisions before the beginning of the building owner's taxable year 
beginning on or after July 29, 2008 provided that any utility 
allowances calculated under these provisions are effective no earlier 
than the first day of the building owner's taxable year beginning on or 
after July 29, 2008. The utility allowances provisions that apply to 
taxable years beginning before July 29, 2008 are contained in Sec.  
1.42-10 (see 26 CFR part 1 revised as of April 1, 2008).

 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: July 20, 2008.
 Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-17268 Filed 7-28-08; 8:45 am]
BILLING CODE 4830-01-P