Amendments to the Low-Income Housing Credit Compliance-Monitoring Regulations, 9333-9338 [2016-04005]

Download as PDF Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations (h) Subject Joint Aircraft Service Component (JASC) Code: 6210 Main Rotor Blades. Issued in Fort Worth, Texas, on February 17, 2016. Lance T. Gant, Manager, Rotorcraft Directorate, Aircraft Certification Service. [FR Doc. 2016–03881 Filed 2–24–16; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9753] RIN 1545–BL84 Amendments to the Low-Income Housing Credit Compliance-Monitoring Regulations Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. AGENCY: This document contains final and temporary regulations relating to the compliance-monitoring duties of a State or local housing credit agency for purposes of the low-income housing credit. The final and temporary regulations revise and clarify the requirement to conduct physical inspections and review low-income certifications and other documentation. The final and temporary regulations will affect State or local housing credit agencies. The text of these temporary regulations also serves as the text of the proposed regulations (REG–150349–12) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register. DATES: Effective date: These regulations are effective on February 25, 2016. Applicability date: For dates of applicability, see § 1.42–5T(h)(2). FOR FURTHER INFORMATION CONTACT: Jian H. Grant, (202) 317–4137, and Martha M. Garcia, (202) 317–6853 (not toll-free numbers). SUPPLEMENTARY INFORMATION: SUMMARY: rmajette on DSK2TPTVN1PROD with RULES Background This document amends 26 CFR part 1 to revise and clarify rules relating to section 42 of the Internal Revenue Code (Code). On March 5, 2012, the Treasury Department and the IRS published Notice 2012–18, 2012–10 IRB 438. Notice 2012–18 informed State and VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 local housing credit agencies participating in a physical inspections pilot program of an alternative method for satisfying certain inspection and review responsibilities under § 1.42– 5(c)(2) for projects for which the Department of Housing and Urban Development (HUD) conducted physical inspections.1 Notice 2012–18 also requested comments on various issues relating to § 1.42–5. The Treasury Department and the IRS received written and electronic comments in response. After consideration of all of the comments received, the Treasury Department and the IRS are issuing these final and temporary regulations. This document also updates the authority citation of 26 CFR part 1. The Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101–239) re-designated section 42(m) of the Code as section 42(n). The updates in this document reflect that re-designation. General Overview Section 42 provides rules for determining the amount of the lowincome housing credit, which section 38 allows as a credit against income tax. Section 42(a) provides that the amount of the low-income housing credit 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. Section 42(c)(2) defines a qualified low-income building as any building that is part of a qualified low-income housing project at all times during the compliance period (the period of 15 taxable years beginning with the first taxable year of the credit period). Section 42(g)(1) defines a qualified low-income housing project as any project for residential rental property if the project meets one of the following tests, as elected by the taxpayer: (A) At least 20 percent of the residential units in the project are rentrestricted and occupied by individuals whose income is 50 percent or less of area median gross income; or (B) At least 40 percent of the residential units in the project are rentrestricted and occupied by individuals whose income is 60 percent or less of area median gross income. In general, under section 42(i)(3)(A), a low-income unit is a residential unit that is rent-restricted and the occupants of which meet the applicable income limit elected by the taxpayer as described in section 42(g)(1)(A) or (B). 1 Notice 2014–15, 2014–12 IRB 661, extended permission through December 31, 2014, for State and local housing credit agencies to use the alternative method in Notice 2012–18. PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 9333 Under section 42(i)(3)(B)(i), a unit is not treated as a low-income unit unless it is suitable for occupancy and used other than on a transient basis. Under section 42(i)(3)(B)(ii), the suitability of a unit for occupancy must be determined under regulations prescribed by the Secretary taking into account local health, safety, and building codes. Failure of one or more units to qualify as low-income units may result in a project’s ineligibility for the low-income housing credit, reduction in the amount of the credit, and/or recapture of previously allowed credits. Under section 42(m)(1), the owners of an otherwise-qualifying building are not entitled to low-income housing credits that are allocated to the building unless, among other requirements, the allocation is pursuant to a qualified allocation plan (QAP). A QAP provides standards by which a State or local housing credit agency or its Authorized Delegate within the meaning of § 1.42– 5(f)(1) (‘‘Agency’’) will make these allocations. A QAP also provides a procedure that an Agency must follow in monitoring for compliance with the provisions of section 42. A plan fails to be a QAP unless, in addition to other requirements, it— provides a procedure that the agency (or an agent or other private contractor of such agency) will follow in monitoring for noncompliance with the provisions of [section 42] and in notifying the Internal Revenue Service of such noncompliance which such agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits. Section 42(m)(1)(B)(iii). Section 1.42–5 (the compliancemonitoring regulations) describes some of the provisions that must be part of any QAP. As part of its compliancemonitoring responsibilities, an Agency must perform physical inspections and low-income certification review. The compliance-monitoring regulations specifically provide that, for each low-income housing project, an Agency must conduct on-site inspections of all buildings by the end of the second calendar year following the year the last building in the project is placed in service (the all-buildings requirement). In addition, prior to the amendments in this document, the regulations provided that, for at least 20 percent of the project’s low-income units (the 20-percent rule), the Agency must both inspect the units and review the low-income certifications, the documentation supporting the certifications, and the rent records for the tenants in those same units (the same-units requirement). The E:\FR\FM\25FER1.SGM 25FER1 9334 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations regulations provide that the Agency must also conduct on-site inspections and low-income certification review at least once every 3 years after the initial on-site inspection. Further, the regulations require the Agency to randomly select which low-income units and tenant records to inspect and review (the random-selection rule). The regulations also require the Agency to choose the low-income units and tenant records in a manner that will not give owners of low-income housing projects advance notice that a unit and tenant records for a particular year will or will not be inspected and reviewed (the nonotice rule). However, an Agency may give an owner reasonable notice that an inspection of the building and lowincome units or tenant record review will occur so that the owner may notify tenants of the inspection or assemble tenant records for review (for example, 30-day notice of inspection or review). rmajette on DSK2TPTVN1PROD with RULES Summary of Comments and Explanation of Provisions Use of the REAC Protocol, Physical Inspections, and Low-Income Certification Reviews Notice 2012–18 asked whether the 20percent rule for both physical inspections and low-income certification review is appropriate, including whether this percentage appropriately balances the IRS’s compliance concerns against the desirability of reducing the inspection burden on Agencies, tenants, and building owners; whether the percentage should vary depending on the type of inspection the Agencies are performing; and whether the percentage should vary with the number of units in a building. Notice 2012–18 also asked whether the regulations should provide an exception from the inspection provisions of § 1.42–5(d) for inspections done under the HUD Real Estate Assessment Center protocol (REAC protocol) similar to the exception under § 1.42–5(d)(3) for inspections performed by the Rural Housing Service under the section 515 program. Notice 2012–18 had permitted use of the REAC protocol by participants in an inter-Departmental physical inspections pilot program that sought to align the section 42 physical inspection requirements with the physical inspection requirements under HUD programs. Several commenters asserted that the 20-percent rule is appropriate. Others claimed that it is overly burdensome for larger properties (30 units or more). Several commenters suggested that the regulations permit an Agency to satisfy VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 the physical inspection requirement by using the REAC protocol. These commenters generally suggested that availability of the REAC protocol for physical inspections would promote flexibility and lessen burden. Allowing an Agency to use the REAC protocol for purposes of the section 42 physical inspection requirements would eliminate the need for multiple Federal inspections on the same property if the property also benefits from HUD programs. Additionally, for larger properties, the minimum number of low-income units that an Agency must inspect under the REAC protocol may be fewer than under the 20-percent rule. In response to the comments received, the final and temporary regulations authorize the IRS to specify in guidance published in the Internal Revenue Bulletin the minimum number of lowincome units for which an Agency must conduct physical inspections and lowincome certification review. Rev. Proc. 2016–15, which is being issued concurrently with these regulations, provides that, in a low-income housing project, the minimum number of lowincome units that must undergo physical inspection is the lesser of 20 percent of the low-income units in the project, rounded up to the nearest whole number of units, or the number of lowincome units set forth in the LowIncome Housing Credit Minimum Unit Sample Size Reference Chart in the revenue procedure. The revenue procedure applies the same rule to determine the minimum number of units that must undergo low-income certification review. An Agency is free to conduct physical inspections or lowincome certification review on a larger number of low-income units if it believes that to be appropriate. The Treasury Department and the IRS, however, are concerned about application of this 20 percent rule in some situations. For projects with a relatively smaller number of lowincome units, physical inspection or low-income certification review of a randomly chosen 20 percent of those units may not produce a sufficiently accurate estimate of the remaining units’ overall compliance with habitability or low-income requirements. Accordingly, not later than when these temporary regulations are finalized, the Treasury Department and the IRS intend to consider whether Rev. Proc. 2016–15 should be replaced with a revenue procedure that does not permit use of the 20 percent rule in those circumstances. In response to Notice 2012–18’s request for comments on whether the IRS should provide an exception from PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 the inspection provisions of § 1.42–5(d) for inspections done under the REAC protocol, commenters generally supported creating such an exception. The final and temporary regulations, however, do not fully adopt this suggestion. Instead, the regulations authorize the IRS to provide in guidance published in the Internal Revenue Bulletin exceptions from, or alternative means of satisfying, the inspection provisions of § 1.42–5(d). Rev. Proc. 2016–15 provides that the REAC protocol is among the inspection protocols that satisfy both § 1.42–5(d) and the physical inspection requirements of § 1.42–5T(c)(2)(ii) and (iii). The revenue procedure contains a rigorous definition of which inspection regimes it will treat as being the REAC protocol for this purpose. Comments are requested on all aspects of the provisions in the revenue procedure that define ‘‘performed under the REAC protocol’’ for purposes of satisfying §§ 1.42–5(d) and 1.42–5T(c)(2)(ii) and (iii). Because vacant low-income units contribute to a building’s qualified basis, both occupied and vacant lowincome units in a low-income housing project must be included in the population of units from which units are selected for inspection. This is the case even if the vacant unit or units may be temporarily unsuitable for occupancy as a result of work that is being done to repair or rehabilitate the unit or units. See § 1.42–5(e)(4). Potential inspection of vacant units is the rule for all compliance-monitoring inspections that do not use the REAC protocol, and Rev. Proc. 2016–15 therefore requires similar treatment when an Agency conducts a physical inspection under the REAC protocol. Some commenters recommended using a risk-based assessment model in place of the 20-percent rule. Such a model would determine the frequency of inspections and the number of lowincome units to inspect based on the probability of noncompliance of a lowincome housing project. The probability of noncompliance would be determined for this purpose by the degree of compliance of the project over one or more prior years. The final and temporary regulations do not adopt this approach. However, in response to the request for comments on these temporary regulations, commenters wishing to renew this suggestion should provide both greater detail regarding the suggested risk-based procedure and a thorough justification for that procedure, including why a multi-year approach fits within the compliance requirements of section 42. E:\FR\FM\25FER1.SGM 25FER1 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations Several commenters suggested modifying the 20-percent rule by requiring more units for the initial physical inspection than for the subsequent physical inspections on the ground that a comprehensive initial physical inspection establishes a baseline of compliance for a low-income housing project. By contrast, some commenters suggested requiring more units for the subsequent physical inspections, asserting that the quality of compliance of a low-income housing project often decreases after the initial physical inspection. These comments, however, did not provide sufficient analysis to justify increasing the number of units to be inspected in either the initial or a subsequent inspection. Without a reasonable basis for doing so, requiring more units for either the initial or subsequent inspections would unreasonably increase the administrative burden on Agencies, owners, and tenants of low-income housing projects. The final and temporary regulations, therefore, do not adopt these suggestions. Commenters wishing to renew either of these suggestions should provide both greater detail and a thorough justification for the suggestion. On the question of whether the required percentage of low-income units should vary depending on the type of compliance review (physical inspection or low-income certification review), one commenter recommended against a varying percentage, stating that there is no compelling reason for the required percentage to vary. A second commenter suggested that, in order to assess tenant eligibility, an Agency should review more than 20 percent of the low-income certifications because noncompliance relating to tenant eligibility may be harder to detect than noncompliance relating to habitability. The final and temporary regulations adopt the first commenter’s suggestion. Just as an Agency may always physically inspect more than the minimum number of units, if an Agency deems it appropriate, the Agency may always review more than the minimum number of low-income certifications in a project to assess tenant eligibility. Commenters wishing to renew comments on this issue should provide both greater detail and a thorough justification for their suggestion. Two commenters suggested that the regulations not impose an all-buildings requirement for physical inspection, but merely require an Agency to apply the physical inspection and low-income certification review requirements on a project-wide basis. According to these commenters, an all-buildings VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 requirement can make the inspection process overly burdensome, particularly in rural areas where projects often consist of small buildings such as single-unit buildings, duplexes, or triplexes. The final and temporary regulations do not fully adopt this suggestion. The regulations continue to require that Agencies comply with the all-buildings requirement unless guidance published in the Internal Revenue Bulletin pursuant to § 1.42– 5T(a)(iii) provides otherwise. Rev. Proc. 2016–15 does provide for such an exception. Under Rev. Proc. 2016–15, the all-buildings requirement does not apply to an Agency that uses the REAC protocol, under HUD oversight, to satisfy the physical inspection requirement (although the REAC protocol itself may require inspection of all buildings in certain cases). The rigor with which Rev. Proc. 2016–15 defines the REAC protocol justifies this exception. Among the requirements set forth in the revenue procedure is the requirement that a physical inspection performed under the REAC protocol utilize the standards adopted, and inspectors certified, by HUD. Inspections performed under the REAC protocol or by the Rural Housing Service under the section 515 program require federal agency oversight. Thus, such oversight substitutes for an allbuildings requirement for inspection. Similar to inspections performed by the Rural Housing Service under the section 515 program, inspections performed under the REAC protocol are not subject to an all-buildings requirement. A physical inspection that the revenue procedure treats as being performed under the REAC protocol also involves the use of the most recent REAC UPCS inspection software, which has a strong statistical basis. Therefore, under the revenue procedure, the REAC protocol is an acceptable method for satisfying both § 1.42–5(d) and the physical inspection requirement of § 1.42– 5T(c)(2)(ii) and (iii). If, in the future, the Treasury Department and the IRS become persuaded that there are one or more additional suitable alternatives to the all-buildings requirement, they may provide one or more additional exceptions to that requirement. A commenter suggested that the regulations permit an Agency to treat multiple buildings with a common owner and plan of financing as a single low-income housing project, regardless of whether the owner has elected this treatment under section 42(g)(3)(D). The final and temporary regulations do not adopt this suggestion. Section 42(c)(2)(A) defines a ‘‘qualified lowincome building’’ as, in part, any PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 9335 building that is part of a qualified lowincome housing project at all times throughout the compliance period. Section 42(g) defines a ‘‘qualified lowincome housing project’’ as any project for residential rental property if the project meets the requirements of section 42(g)(1)(A) or (B), whichever is elected by the taxpayer. The scope of the term ‘‘qualified low-income housing project’’ for purposes of physical inspections should be the same as for other purposes under section 42. Decoupling of the Physical Inspection and Low-Income Certification Review Requirements (Ending the Same-Units Requirement) Notice 2012–18 asked for comments on whether permitting physical inspection and low-income certification review of different low-income units (that is, ending the same-units requirement) would simplify the inspection process. The notice also asked for comments on whether ending the requirement would impair the value of the data obtained. One commenter asserted that the current rule of requiring physical inspection and lowincome certification review of the same low-income units is effective in finding noncompliance on a particular unit. Most commenters, however, believed that decoupling of the physical inspection and low-income certification review requirements would reduce the administrative burden, better preserve the surprise element, and likely increase the coverage of compliance-monitoring. In response to these comments, the final and temporary regulations end the same-units requirement by decoupling the physical inspection and low-income certification review. Therefore, an Agency is no longer required to conduct physical inspection and low-income certification review on the same units. Because the units no longer need to be the same, an Agency may choose a different number of units for physical inspection and for low-income certification review, provided the Agency chooses at least the minimum number of low-income units in each case. If an Agency chooses to select different low-income units for physical inspections and low-income certification review, the Agency must select the units for physical inspection or low-income certification review separately and in a random manner. Further, because the units no longer need to be the same, an Agency may choose to conduct physical inspection and low-income certification review at different times. For example, if HUD requires a physical inspection only two years after a joint HUD/low-income E:\FR\FM\25FER1.SGM 25FER1 rmajette on DSK2TPTVN1PROD with RULES 9336 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations housing credit inspection, that second inspection may be used for both HUD and low-income housing credit purposes without accelerating the next low-income housing credit file review. (Thereafter, physical inspections performed every third year might take place a year before the every-three-year file reviews.) Also, an Agency may choose to conduct physical inspections in the summer but complete the lowincome certification review in the winter when physical inspections may be difficult to conduct due to weather conditions. The inspections and reviews, however, must satisfy the applicable timeliness requirements of § 1.42–5T(c)(2)(ii)(A)(1) and (2). In addition, to make meaningful the physical inspection and low-income certification review, the final and temporary regulations retain the random-selection rule and strengthen the no-notice rule. Accordingly, if an agency decides to decouple the physical inspection and low-income certification review, the Agency may not allow selection of a low-income unit for physical inspection (or low-income certification review) to influence the likelihood that the same unit will be selected (or will not be selected) for low-income certification review (or physical inspection). Whether or not an Agency is selecting the same units for inspection and for low-income certification review, the Agency may give an owner reasonable notice that an inspection of the building and low-income units or review of lowincome certifications will occur. This notice enables the owner to notify tenants of the inspection or to assemble low-income certifications for review. The regulations provide that reasonable notice is generally no more than 30 days, but they also provide a very limited extension for certain extraordinary circumstances beyond an Agency’s control such as natural disasters and severe weather conditions. Thus, under the final and temporary regulations, if an Agency chooses to select the same units for physical inspections and low-income certification review, the Agency may conduct physical inspections and lowincome certification review either at the same time or separately. However, once the Agency informs the owner of the identity of the units for which physical inspections or low-income certification review will occur, the Agency must conduct the physical inspections and low-income certification review within the reasonable-notice time frame described in the preceding paragraph. Comments are requested on these aspects of the regulations. For example, VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 comments are requested on whether the same maximum amount of notice is reasonable for physical inspections and low-income certification review. Comments are also requested on whether, for physical inspections, the reasonable-notice time frame should be shortened. For example, under the REAC protocol, an inspector provides a 15-day notice of an upcoming HUD inspection to the owner and/or manager of the building and same-day notice of which units are to be inspected. Possible Changes in the Minimum Size of Samples The Treasury Department and the IRS believe the methods in Rev. Proc. 2016– 15 reasonably balance the burden on Agencies, tenants, and building owners while adequately monitoring compliance. However, additional comments may be submitted on other possible methods, including stratified sampling procedures and estimation methodologies. To be useful, any such comments should include substantial detail regarding the procedures to be adopted and should provide thorough justification as to whether the suggested methods effectively reduce burden without negatively impacting the confidence that can be placed in the results obtained from the resulting samples. Revision to Frequency and Form of Certification The final and temporary regulations revise the rules currently in § 1.42– 5(c)(3) to clarify that a monitoring procedure must require that the owner certifications in § 1.42–5(c)(1) be made to and reviewed by the Agency at least annually covering each year of the 15year compliance period. Effective/Applicability Dates The temporary regulations apply on February 25, 2016 and expire on February 22, 2019. Agencies using the REAC protocol as part of the physical inspections pilot program may rely on the temporary regulations for on-site inspections and low-income certification review occurring between January 1, 2015 and February 25, 2016. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings notices, notices and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 visiting the IRS Web site at http:// www.irs.gov. Special Analyses Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Drafting Information The principal authors of these regulations are Jian H. Grant and Martha M. Garcia, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by removing the entries for §§ 1.42–1T and 1.42–2T and by adding and revising entries in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.42–1T also issued under 26 U.S.C. 42(n). Section 1.42–2 also issued under 26 U.S.C. 42(n). Section 1.42–5T also issued under 26 U.S.C. 42(n). Par. 2. Section 1.42–5 is amended by: 1. Adding paragraph (a)(2)(iii). 2. Revising paragraphs (c)(2)(ii) and (iii) and (c)(3). ■ 3. Revising the paragraph heading of paragraph (h), redesignating the text of paragraph (h) as paragraph (h)(1) and adding a paragraph (h)(1) heading, and adding paragraph (h)(2). ■ 4. Adding paragraph (i). The additions and revisions read as follows: ■ ■ ■ E:\FR\FM\25FER1.SGM 25FER1 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations § 1.42–5 Monitoring compliance with lowincome housing credit requirements. (a) * * * (2) * * * (iii) [Reserved]. For further guidance, see § 1.42–5T(a)(2)(iii). * * * * * (c) * * * (2) * * * (ii) [Reserved]. For further guidance, see § 1.42–5T(c)(2)(ii). (iii) [Reserved]. For further guidance, see § 1.42–5T(c)(2)(iii). (3) [Reserved]. For further guidance, see § 1.42–5T(c)(3). * * * * * (h) Effective/applicability dates—(1) In general.* * * (2) [Reserved]. For further guidance, see § 1.42–5T(h)(2). (i) [Reserved]. For further guidance, see § 1.42–5T(i). ■ Par. 3. Section 1.42–5T is added to read as follows: rmajette on DSK2TPTVN1PROD with RULES § 1.42–5T Monitoring compliance with lowincome housing credit requirements (temporary). (a)(1) through (a)(2)(ii) [Reserved]. For further guidance, see § 1.42–5(a)(1) through (a)(2)(ii). (iii) Effect of guidance published in the Internal Revenue Bulletin. Guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) may provide— (A) Exceptions to the requirements referred to in § 1.42–5(a)(2)(i) and the requirements described in this section; or (B) Alternative means of satisfying those requirements. (b) through (c)(2)(i) [Reserved]. For further guidance, see § 1.42–5(b) through (c)(2)(i). (ii) Require that, with respect to each low-income housing project, the Agency conduct on-site inspections and review low-income certifications (including in that term the documentation supporting the low-income certifications and the rent records for tenants). (iii) Require that the on-site inspections that the Agency must conduct satisfy both the requirements of § 1.42–5(d) and the requirements in paragraph (c)(2)(iii)(A) through (D) of this section, and require that the lowincome certification review that the Agency must perform satisfies the requirements in paragraphs (c)(2)(iii)(A) through (D) of this section. Paragraph (c)(2)(iii)(A) through (D) of this section provides rules determining how these on-site inspection requirements and how these low-income certification review requirements may be satisfied by an inspection or review, as the case may VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 be, that includes only a sample of the low-income units. (A) Timing. The Agency must conduct on-site inspections of all buildings in the low-income housing project and must review low-income certifications of the low-income housing project— (1) By the end of the second calendar year following the year the last building in the low-income housing project is placed in service; and (2) At least once every 3 years thereafter. (B) Number of low-income units. The Agency must conduct on-site inspections and low-income certification review of not fewer than the minimum number of low-income units required by guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter. (C) Selection of low-income units for inspection and low-income certifications for review—(1) Random selection. The Agency must select in a random manner the low-income units to be inspected and the units whose lowincome certifications are to be reviewed. The Agency is not required to select the same low-income units of a low-income housing project for on-site inspections and low-income certification review, and an Agency may choose a different number of units for on-site inspections and for low-income certification review, provided the Agency chooses at least the minimum number of low-income units in each case. If the Agency chooses to select different low-income units for on-site inspections and lowincome certification review, the Agency must select the units for on-site inspections or low-income certification review separately and in a random manner. (2) Advance notification limited to reasonable notice. The Agency must select the low-income units to inspect and low-income certifications to review in a manner that will not give advance notice that a particular low-income unit (or low-income certifications for a particular low-income unit) for a particular year will or will not be inspected (or reviewed). However, the Agency may give an owner reasonable notice that an inspection of the building and low-income units or review of lowincome certifications will occur. The notice is to enable the owner to notify tenants of the inspection or to assemble low-income certifications for review. (3) Meaning of reasonable notice. For purposes of paragraph (c)(2)(iii)(C)(ii) of this section, reasonable notice is generally no more than 30 days. The notice period begins on the date the Agency informs the owner of the identity of the units for which on-site PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 9337 inspections or low-income certification review will or will not occur. Notice of more than 30 days, however, may be reasonable in extraordinary circumstances that are beyond an Agency’s control and that prevent an Agency from carrying out within 30 days an on-site inspection or lowincome certification review. Extraordinary circumstances include, but are not limited to, natural disasters and severe weather conditions. In the event of extraordinary circumstances that result in a reasonable-notice period longer than 30 days, an Agency must conduct the on-site inspection or lowincome certification review as soon as practicable. (4) Applicability of reasonable notice limitation when the same units are chosen for inspection and file review. If the Agency chooses to select the same units for on-site inspections and lowincome certification review, the Agency may conduct on-site inspections and low-income certification review either at the same time or separately. The Agency, however, must conduct both the inspections and review within the reasonable-notice period described in paragraph (c)(2)(iii)(C)(2) and (3) of this section. (D) Method of low-income certification review. The Agency may review the low-income certifications wherever the owner maintains or stores the records (either on-site or off-site). (3) Frequency and form of certification. A monitoring procedure must require that the certifications and reviews of § 1.42–5(c)(1) and (c)(2)(i) be made at least annually covering each year of the 15-year compliance period under section 42(i)(1). The certifications must be made under penalty of perjury. A monitoring procedure may require certifications and reviews more frequently than every 12 months, provided that all months within each 12-month period are subject to certification. (c)(4) through (h)(1) [Reserved]. For further guidance, see § 1.42–5(c)(4) through (h)(1). (2) Effective/applicability dates of the REAC inspection protocol. The requirements in paragraphs (a)(2)(iii), (c)(2)(ii) and (iii), and (c)(3) of this section apply beginning on February 25, 2016. Agencies using the REAC inspection protocol of the Department of Housing and Urban Development as part of the Physical Inspections Pilot Program may rely on these provisions for on-site inspections and low-income certification review occurring between January 1, 2015 and February 25, 2016. Otherwise, for the rules that apply before February 25, 2016, see § 1.42–5 as E:\FR\FM\25FER1.SGM 25FER1 9338 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations contained in 26 CFR part 1 revised as of April 1, 2015. (i) Expiration date. The applicability of this section expires on February 22, 2019. John Dalrymple. Deputy Commissioner for Services and Enforcement. Approved: January 29, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016–04005 Filed 2–23–16; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 117 [Docket No. USCG–2016–0112] Drawbridge Operation Regulation; Chester River, Chestertown, MD Coast Guard, DHS. Notice of deviation from drawbridge regulation. AGENCY: ACTION: The Coast Guard has issued a temporary deviation from the operating schedule that governs the S213 (MD213) Bridge across the Chester River, mile 26.8, at Chestertown, MD. This deviation is necessary to perform bridge maintenance and repairs. This deviation allows the bridge to remain in the closed-to-navigation position. DATES: This deviation is effective without actual notice from February 25, 2016 through 6 p.m. on June 1, 2016. For the purposes of enforcement, actual notice will be used from February 22, 2016 at 9 a.m., until February 25, 2016. ADDRESSES: The docket for this deviation, [USCG–2016–0112] is available at http://www.regulations.gov. Type the docket number in the ‘‘SEARCH’’ box and click ‘‘SEARCH’’. Click on Open Docket Folder on the line associated with this deviation. FOR FURTHER INFORMATION CONTACT: If you have questions on this temporary deviation, call or email Mr. Hal R. Pitts, Bridge Administration Branch Fifth District, Coast Guard, telephone 757– 398–6222, email Hal.R.Pitts@uscg.mil. SUPPLEMENTARY INFORMATION: The Maryland Department of Transportation State Highway Administration, that owns and operates the S213 (MD213) Bridge, has requested a temporary deviation from the current operating regulations to perform a bridge stringer replacement project. The bridge is a rmajette on DSK2TPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 13:23 Feb 24, 2016 Jkt 238001 bascule draw bridge and has a vertical clearance in the closed position of 12 feet above mean high water. The current operating schedule is open on signal if at least six hours notice is given as set out in 33 CFR 117.551. Under this temporary deviation, the bridge will remain in the closed-to-navigation position from 6 a.m. on February 22, 2016 to 6 p.m. on June 1, 2016. The Chester River is used by a variety of vessels including small U.S. government and public vessels, small commercial vessels, and recreational vessels. The Coast Guard has carefully considered the nature and volume of vessel traffic on the waterway in publishing this temporary deviation. During the closure times there will be limited opportunity for vessels able to safely pass through the bridge in the closed position to do so. Vessels able to safely pass through the bridge in the closed position may do so, after receiving confirmation from the bridge tender that it is safe to transit through the bridge. The bridge will be able to open for emergencies if at least six hours notice is given and there is no immediate alternate route for vessels to pass. The Coast Guard will also inform the users of the waterways through our Local and Broadcast Notices to Mariners of the change in operating schedule for the bridge so that vessel operators can arrange their transit to minimize any impact caused by the temporary deviation. In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the effective period of this temporary deviation. This deviation from the operating regulations is authorized under 33 CFR 117.35. Dated: February 22, 2016. Hal R. Pitts, Bridge Program Manager, Fifth Coast Guard District. [FR Doc. 2016–04006 Filed 2–24–16; 8:45 am] BILLING CODE 9110–04–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 117 [Docket No. USCG–2016–0114] Drawbridge Operation Regulation; Mantua Creek, Paulsboro, NJ Coast Guard, DHS. Notice of deviation from drawbridge regulation. AGENCY: ACTION: PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 The Coast Guard has issued a temporary deviation from the operating schedule that governs the CONRAIL Railroad Bridge across the Mantua Creek, mile 1.4, at Paulsboro, NJ. This deviation is necessary to complete bridge construction. This deviation allows the bridge to remain in the closed-to-navigation position. DATES: This deviation is effective from midnight on March 1, 2016 to midnight on April 1, 2016. ADDRESSES: The docket for this deviation, [USCG–2016–0114] is available at http://www.regulations.gov. Type the docket number in the ‘‘SEARCH’’ box and click ‘‘SEARCH’’. Click on Open Docket Folder on the line associated with this deviation. FOR FURTHER INFORMATION CONTACT: If you have questions on this temporary deviation, call or email Mr. Hal R. Pitts, Bridge Administration Branch Fifth District, Coast Guard, telephone 757– 398–6222, email Hal.R.Pitts@uscg.mil. SUPPLEMENTARY INFORMATION: CONRAIL, that owns and operates the CONRAIL Railroad Bridge, has requested a temporary deviation from the current operating regulations to complete construction of the new bridge and the remote operating system. The bridge is a vertical lift drawbridge and has a vertical clearance in the closed position of 2.5 feet above mean high water. The current operating schedule is set out in 33 CFR 117.729(a). Under this temporary deviation, the bridge will remain in the closed-to-navigation position from midnight on March 1, 2016 to midnight on April 1, 2016 and will open on signal if at least four hours notice is given by telephone at (856) 231–2282. The Mantua Creek is used by a variety of vessels including small U. S. government and public vessels, small commercial vessels, tug and barge traffic and recreational vessels. The Coast Guard has carefully considered the nature and volume of vessel traffic on the waterway in publishing this temporary deviation. Vessels able to safely pass through the bridge in the closed position may do so at any time. The bridge will be able to open for emergencies if at least four hours notice is given by telephone at (856) 231–2282 and there is no immediate alternate route for vessels to pass. The Coast Guard will also inform the users of the waterways through our Local and Broadcast Notices to Mariners of the change in operating schedule for the bridge so that vessel operators can arrange their transit to minimize any impact caused by the temporary deviation. SUMMARY: E:\FR\FM\25FER1.SGM 25FER1

Agencies

[Federal Register Volume 81, Number 37 (Thursday, February 25, 2016)]
[Rules and Regulations]
[Pages 9333-9338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04005]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9753]
RIN 1545-BL84


Amendments to the Low-Income Housing Credit Compliance-Monitoring 
Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the compliance-monitoring duties of a State or local 
housing credit agency for purposes of the low-income housing credit. 
The final and temporary regulations revise and clarify the requirement 
to conduct physical inspections and review low-income certifications 
and other documentation. The final and temporary regulations will 
affect State or local housing credit agencies. The text of these 
temporary regulations also serves as the text of the proposed 
regulations (REG-150349-12) set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section in this issue 
of the Federal Register.

DATES: 
    Effective date: These regulations are effective on February 25, 
2016.
    Applicability date: For dates of applicability, see Sec.  1.42-
5T(h)(2).

FOR FURTHER INFORMATION CONTACT: Jian H. Grant, (202) 317-4137, and 
Martha M. Garcia, (202) 317-6853 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document amends 26 CFR part 1 to revise and clarify rules 
relating to section 42 of the Internal Revenue Code (Code). On March 5, 
2012, the Treasury Department and the IRS published Notice 2012-18, 
2012-10 IRB 438. Notice 2012-18 informed State and local housing credit 
agencies participating in a physical inspections pilot program of an 
alternative method for satisfying certain inspection and review 
responsibilities under Sec.  1.42-5(c)(2) for projects for which the 
Department of Housing and Urban Development (HUD) conducted physical 
inspections.\1\ Notice 2012-18 also requested comments on various 
issues relating to Sec.  1.42-5. The Treasury Department and the IRS 
received written and electronic comments in response. After 
consideration of all of the comments received, the Treasury Department 
and the IRS are issuing these final and temporary regulations.
---------------------------------------------------------------------------

    \1\ Notice 2014-15, 2014-12 IRB 661, extended permission through 
December 31, 2014, for State and local housing credit agencies to 
use the alternative method in Notice 2012-18.
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    This document also updates the authority citation of 26 CFR part 1. 
The Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239) re-
designated section 42(m) of the Code as section 42(n). The updates in 
this document reflect that re-designation.

General Overview

    Section 42 provides rules for determining the amount of the low-
income housing credit, which section 38 allows as a credit against 
income tax. Section 42(a) provides that the amount of the low-income 
housing credit 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. Section 42(c)(2) defines a qualified 
low-income building as any building that is part of a qualified low-
income housing project at all times during the compliance period (the 
period of 15 taxable years beginning with the first taxable year of the 
credit period).
    Section 42(g)(1) defines a qualified low-income housing project as 
any project for residential rental property if the project meets one of 
the following tests, as elected by the taxpayer:
    (A) 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
    (B) 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.
    In general, under section 42(i)(3)(A), a low-income unit is a 
residential unit that is rent-restricted and the occupants of which 
meet the applicable income limit elected by the taxpayer as described 
in section 42(g)(1)(A) or (B).
    Under section 42(i)(3)(B)(i), a unit is not treated as a low-income 
unit unless it is suitable for occupancy and used other than on a 
transient basis. Under section 42(i)(3)(B)(ii), the suitability of a 
unit for occupancy must be determined under regulations prescribed by 
the Secretary taking into account local health, safety, and building 
codes. Failure of one or more units to qualify as low-income units may 
result in a project's ineligibility for the low-income housing credit, 
reduction in the amount of the credit, and/or recapture of previously 
allowed credits.
    Under section 42(m)(1), the owners of an otherwise-qualifying 
building are not entitled to low-income housing credits that are 
allocated to the building unless, among other requirements, the 
allocation is pursuant to a qualified allocation plan (QAP). A QAP 
provides standards by which a State or local housing credit agency or 
its Authorized Delegate within the meaning of Sec.  1.42-5(f)(1) 
(``Agency'') will make these allocations. A QAP also provides a 
procedure that an Agency must follow in monitoring for compliance with 
the provisions of section 42. A plan fails to be a QAP unless, in 
addition to other requirements, it--

provides a procedure that the agency (or an agent or other private 
contractor of such agency) will follow in monitoring for 
noncompliance with the provisions of [section 42] and in notifying 
the Internal Revenue Service of such noncompliance which such agency 
becomes aware of and in monitoring for noncompliance with 
habitability standards through regular site visits.

Section 42(m)(1)(B)(iii).

    Section 1.42-5 (the compliance-monitoring regulations) describes 
some of the provisions that must be part of any QAP. As part of its 
compliance-monitoring responsibilities, an Agency must perform physical 
inspections and low-income certification review.
    The compliance-monitoring regulations specifically provide that, 
for each low-income housing project, an Agency must conduct on-site 
inspections of all buildings by the end of the second calendar year 
following the year the last building in the project is placed in 
service (the all-buildings requirement). In addition, prior to the 
amendments in this document, the regulations provided that, for at 
least 20 percent of the project's low-income units (the 20-percent 
rule), the Agency must both inspect the units and review the low-income 
certifications, the documentation supporting the certifications, and 
the rent records for the tenants in those same units (the same-units 
requirement). The

[[Page 9334]]

regulations provide that the Agency must also conduct on-site 
inspections and low-income certification review at least once every 3 
years after the initial on-site inspection. Further, the regulations 
require the Agency to randomly select which low-income units and tenant 
records to inspect and review (the random-selection rule). The 
regulations also require the Agency to choose the low-income units and 
tenant records in a manner that will not give owners of low-income 
housing projects advance notice that a unit and tenant records for a 
particular year will or will not be inspected and reviewed (the no-
notice rule). However, an Agency may give an owner reasonable notice 
that an inspection of the building and low-income units or tenant 
record review will occur so that the owner may notify tenants of the 
inspection or assemble tenant records for review (for example, 30-day 
notice of inspection or review).

Summary of Comments and Explanation of Provisions

Use of the REAC Protocol, Physical Inspections, and Low-Income 
Certification Reviews

    Notice 2012-18 asked whether the 20-percent rule for both physical 
inspections and low-income certification review is appropriate, 
including whether this percentage appropriately balances the IRS's 
compliance concerns against the desirability of reducing the inspection 
burden on Agencies, tenants, and building owners; whether the 
percentage should vary depending on the type of inspection the Agencies 
are performing; and whether the percentage should vary with the number 
of units in a building.
    Notice 2012-18 also asked whether the regulations should provide an 
exception from the inspection provisions of Sec.  1.42-5(d) for 
inspections done under the HUD Real Estate Assessment Center protocol 
(REAC protocol) similar to the exception under Sec.  1.42-5(d)(3) for 
inspections performed by the Rural Housing Service under the section 
515 program. Notice 2012-18 had permitted use of the REAC protocol by 
participants in an inter-Departmental physical inspections pilot 
program that sought to align the section 42 physical inspection 
requirements with the physical inspection requirements under HUD 
programs.
    Several commenters asserted that the 20-percent rule is 
appropriate. Others claimed that it is overly burdensome for larger 
properties (30 units or more). Several commenters suggested that the 
regulations permit an Agency to satisfy the physical inspection 
requirement by using the REAC protocol. These commenters generally 
suggested that availability of the REAC protocol for physical 
inspections would promote flexibility and lessen burden. Allowing an 
Agency to use the REAC protocol for purposes of the section 42 physical 
inspection requirements would eliminate the need for multiple Federal 
inspections on the same property if the property also benefits from HUD 
programs. Additionally, for larger properties, the minimum number of 
low-income units that an Agency must inspect under the REAC protocol 
may be fewer than under the 20-percent rule.
    In response to the comments received, the final and temporary 
regulations authorize the IRS to specify in guidance published in the 
Internal Revenue Bulletin the minimum number of low-income units for 
which an Agency must conduct physical inspections and low-income 
certification review. Rev. Proc. 2016-15, which is being issued 
concurrently with these regulations, provides that, in a low-income 
housing project, the minimum number of low-income units that must 
undergo physical inspection is the lesser of 20 percent of the low-
income units in the project, rounded up to the nearest whole number of 
units, or the number of low-income units set forth in the Low-Income 
Housing Credit Minimum Unit Sample Size Reference Chart in the revenue 
procedure. The revenue procedure applies the same rule to determine the 
minimum number of units that must undergo low-income certification 
review. An Agency is free to conduct physical inspections or low-income 
certification review on a larger number of low-income units if it 
believes that to be appropriate.
    The Treasury Department and the IRS, however, are concerned about 
application of this 20 percent rule in some situations. For projects 
with a relatively smaller number of low-income units, physical 
inspection or low-income certification review of a randomly chosen 20 
percent of those units may not produce a sufficiently accurate estimate 
of the remaining units' overall compliance with habitability or low-
income requirements. Accordingly, not later than when these temporary 
regulations are finalized, the Treasury Department and the IRS intend 
to consider whether Rev. Proc. 2016-15 should be replaced with a 
revenue procedure that does not permit use of the 20 percent rule in 
those circumstances.
    In response to Notice 2012-18's request for comments on whether the 
IRS should provide an exception from the inspection provisions of Sec.  
1.42-5(d) for inspections done under the REAC protocol, commenters 
generally supported creating such an exception. The final and temporary 
regulations, however, do not fully adopt this suggestion. Instead, the 
regulations authorize the IRS to provide in guidance published in the 
Internal Revenue Bulletin exceptions from, or alternative means of 
satisfying, the inspection provisions of Sec.  1.42-5(d). Rev. Proc. 
2016-15 provides that the REAC protocol is among the inspection 
protocols that satisfy both Sec.  1.42-5(d) and the physical inspection 
requirements of Sec.  1.42-5T(c)(2)(ii) and (iii). The revenue 
procedure contains a rigorous definition of which inspection regimes it 
will treat as being the REAC protocol for this purpose. Comments are 
requested on all aspects of the provisions in the revenue procedure 
that define ``performed under the REAC protocol'' for purposes of 
satisfying Sec. Sec.  1.42-5(d) and 1.42-5T(c)(2)(ii) and (iii).
    Because vacant low-income units contribute to a building's 
qualified basis, both occupied and vacant low-income units in a low-
income housing project must be included in the population of units from 
which units are selected for inspection. This is the case even if the 
vacant unit or units may be temporarily unsuitable for occupancy as a 
result of work that is being done to repair or rehabilitate the unit or 
units. See Sec.  1.42-5(e)(4). Potential inspection of vacant units is 
the rule for all compliance-monitoring inspections that do not use the 
REAC protocol, and Rev. Proc. 2016-15 therefore requires similar 
treatment when an Agency conducts a physical inspection under the REAC 
protocol.
    Some commenters recommended using a risk-based assessment model in 
place of the 20-percent rule. Such a model would determine the 
frequency of inspections and the number of low-income units to inspect 
based on the probability of noncompliance of a low-income housing 
project. The probability of noncompliance would be determined for this 
purpose by the degree of compliance of the project over one or more 
prior years. The final and temporary regulations do not adopt this 
approach. However, in response to the request for comments on these 
temporary regulations, commenters wishing to renew this suggestion 
should provide both greater detail regarding the suggested risk-based 
procedure and a thorough justification for that procedure, including 
why a multi-year approach fits within the compliance requirements of 
section 42.

[[Page 9335]]

    Several commenters suggested modifying the 20-percent rule by 
requiring more units for the initial physical inspection than for the 
subsequent physical inspections on the ground that a comprehensive 
initial physical inspection establishes a baseline of compliance for a 
low-income housing project. By contrast, some commenters suggested 
requiring more units for the subsequent physical inspections, asserting 
that the quality of compliance of a low-income housing project often 
decreases after the initial physical inspection. These comments, 
however, did not provide sufficient analysis to justify increasing the 
number of units to be inspected in either the initial or a subsequent 
inspection. Without a reasonable basis for doing so, requiring more 
units for either the initial or subsequent inspections would 
unreasonably increase the administrative burden on Agencies, owners, 
and tenants of low-income housing projects. The final and temporary 
regulations, therefore, do not adopt these suggestions. Commenters 
wishing to renew either of these suggestions should provide both 
greater detail and a thorough justification for the suggestion.
    On the question of whether the required percentage of low-income 
units should vary depending on the type of compliance review (physical 
inspection or low-income certification review), one commenter 
recommended against a varying percentage, stating that there is no 
compelling reason for the required percentage to vary. A second 
commenter suggested that, in order to assess tenant eligibility, an 
Agency should review more than 20 percent of the low-income 
certifications because noncompliance relating to tenant eligibility may 
be harder to detect than noncompliance relating to habitability. The 
final and temporary regulations adopt the first commenter's suggestion. 
Just as an Agency may always physically inspect more than the minimum 
number of units, if an Agency deems it appropriate, the Agency may 
always review more than the minimum number of low-income certifications 
in a project to assess tenant eligibility. Commenters wishing to renew 
comments on this issue should provide both greater detail and a 
thorough justification for their suggestion.
    Two commenters suggested that the regulations not impose an all-
buildings requirement for physical inspection, but merely require an 
Agency to apply the physical inspection and low-income certification 
review requirements on a project-wide basis. According to these 
commenters, an all-buildings requirement can make the inspection 
process overly burdensome, particularly in rural areas where projects 
often consist of small buildings such as single-unit buildings, 
duplexes, or triplexes. The final and temporary regulations do not 
fully adopt this suggestion. The regulations continue to require that 
Agencies comply with the all-buildings requirement unless guidance 
published in the Internal Revenue Bulletin pursuant to Sec.  1.42-
5T(a)(iii) provides otherwise.
    Rev. Proc. 2016-15 does provide for such an exception. Under Rev. 
Proc. 2016-15, the all-buildings requirement does not apply to an 
Agency that uses the REAC protocol, under HUD oversight, to satisfy the 
physical inspection requirement (although the REAC protocol itself may 
require inspection of all buildings in certain cases). The rigor with 
which Rev. Proc. 2016-15 defines the REAC protocol justifies this 
exception. Among the requirements set forth in the revenue procedure is 
the requirement that a physical inspection performed under the REAC 
protocol utilize the standards adopted, and inspectors certified, by 
HUD. Inspections performed under the REAC protocol or by the Rural 
Housing Service under the section 515 program require federal agency 
oversight. Thus, such oversight substitutes for an all-buildings 
requirement for inspection. Similar to inspections performed by the 
Rural Housing Service under the section 515 program, inspections 
performed under the REAC protocol are not subject to an all-buildings 
requirement. A physical inspection that the revenue procedure treats as 
being performed under the REAC protocol also involves the use of the 
most recent REAC UPCS inspection software, which has a strong 
statistical basis. Therefore, under the revenue procedure, the REAC 
protocol is an acceptable method for satisfying both Sec.  1.42-5(d) 
and the physical inspection requirement of Sec.  1.42-5T(c)(2)(ii) and 
(iii). If, in the future, the Treasury Department and the IRS become 
persuaded that there are one or more additional suitable alternatives 
to the all-buildings requirement, they may provide one or more 
additional exceptions to that requirement.
    A commenter suggested that the regulations permit an Agency to 
treat multiple buildings with a common owner and plan of financing as a 
single low-income housing project, regardless of whether the owner has 
elected this treatment under section 42(g)(3)(D). The final and 
temporary regulations do not adopt this suggestion. Section 42(c)(2)(A) 
defines a ``qualified low-income building'' as, in part, any building 
that is part of a qualified low-income housing project at all times 
throughout the compliance period. Section 42(g) defines a ``qualified 
low-income housing project'' as any project for residential rental 
property if the project meets the requirements of section 42(g)(1)(A) 
or (B), whichever is elected by the taxpayer. The scope of the term 
``qualified low-income housing project'' for purposes of physical 
inspections should be the same as for other purposes under section 42.

Decoupling of the Physical Inspection and Low-Income Certification 
Review Requirements (Ending the Same-Units Requirement)

    Notice 2012-18 asked for comments on whether permitting physical 
inspection and low-income certification review of different low-income 
units (that is, ending the same-units requirement) would simplify the 
inspection process. The notice also asked for comments on whether 
ending the requirement would impair the value of the data obtained. One 
commenter asserted that the current rule of requiring physical 
inspection and low-income certification review of the same low-income 
units is effective in finding noncompliance on a particular unit. Most 
commenters, however, believed that decoupling of the physical 
inspection and low-income certification review requirements would 
reduce the administrative burden, better preserve the surprise element, 
and likely increase the coverage of compliance-monitoring.
    In response to these comments, the final and temporary regulations 
end the same-units requirement by decoupling the physical inspection 
and low-income certification review. Therefore, an Agency is no longer 
required to conduct physical inspection and low-income certification 
review on the same units. Because the units no longer need to be the 
same, an Agency may choose a different number of units for physical 
inspection and for low-income certification review, provided the Agency 
chooses at least the minimum number of low-income units in each case. 
If an Agency chooses to select different low-income units for physical 
inspections and low-income certification review, the Agency must select 
the units for physical inspection or low-income certification review 
separately and in a random manner.
    Further, because the units no longer need to be the same, an Agency 
may choose to conduct physical inspection and low-income certification 
review at different times. For example, if HUD requires a physical 
inspection only two years after a joint HUD/low-income

[[Page 9336]]

housing credit inspection, that second inspection may be used for both 
HUD and low-income housing credit purposes without accelerating the 
next low-income housing credit file review. (Thereafter, physical 
inspections performed every third year might take place a year before 
the every-three-year file reviews.) Also, an Agency may choose to 
conduct physical inspections in the summer but complete the low-income 
certification review in the winter when physical inspections may be 
difficult to conduct due to weather conditions. The inspections and 
reviews, however, must satisfy the applicable timeliness requirements 
of Sec.  1.42-5T(c)(2)(ii)(A)(1) and (2).
    In addition, to make meaningful the physical inspection and low-
income certification review, the final and temporary regulations retain 
the random-selection rule and strengthen the no-notice rule. 
Accordingly, if an agency decides to decouple the physical inspection 
and low-income certification review, the Agency may not allow selection 
of a low-income unit for physical inspection (or low-income 
certification review) to influence the likelihood that the same unit 
will be selected (or will not be selected) for low-income certification 
review (or physical inspection).
    Whether or not an Agency is selecting the same units for inspection 
and for low-income certification review, the Agency may give an owner 
reasonable notice that an inspection of the building and low-income 
units or review of low-income certifications will occur. This notice 
enables the owner to notify tenants of the inspection or to assemble 
low-income certifications for review. The regulations provide that 
reasonable notice is generally no more than 30 days, but they also 
provide a very limited extension for certain extraordinary 
circumstances beyond an Agency's control such as natural disasters and 
severe weather conditions.
    Thus, under the final and temporary regulations, if an Agency 
chooses to select the same units for physical inspections and low-
income certification review, the Agency may conduct physical 
inspections and low-income certification review either at the same time 
or separately. However, once the Agency informs the owner of the 
identity of the units for which physical inspections or low-income 
certification review will occur, the Agency must conduct the physical 
inspections and low-income certification review within the reasonable-
notice time frame described in the preceding paragraph.
    Comments are requested on these aspects of the regulations. For 
example, comments are requested on whether the same maximum amount of 
notice is reasonable for physical inspections and low-income 
certification review. Comments are also requested on whether, for 
physical inspections, the reasonable-notice time frame should be 
shortened. For example, under the REAC protocol, an inspector provides 
a 15-day notice of an upcoming HUD inspection to the owner and/or 
manager of the building and same-day notice of which units are to be 
inspected.

Possible Changes in the Minimum Size of Samples

    The Treasury Department and the IRS believe the methods in Rev. 
Proc. 2016-15 reasonably balance the burden on Agencies, tenants, and 
building owners while adequately monitoring compliance. However, 
additional comments may be submitted on other possible methods, 
including stratified sampling procedures and estimation methodologies. 
To be useful, any such comments should include substantial detail 
regarding the procedures to be adopted and should provide thorough 
justification as to whether the suggested methods effectively reduce 
burden without negatively impacting the confidence that can be placed 
in the results obtained from the resulting samples.

Revision to Frequency and Form of Certification

    The final and temporary regulations revise the rules currently in 
Sec.  1.42-5(c)(3) to clarify that a monitoring procedure must require 
that the owner certifications in Sec.  1.42-5(c)(1) be made to and 
reviewed by the Agency at least annually covering each year of the 15-
year compliance period.

Effective/Applicability Dates

    The temporary regulations apply on February 25, 2016 and expire on 
February 22, 2019. Agencies using the REAC protocol as part of the 
physical inspections pilot program may rely on the temporary 
regulations for on-site inspections and low-income certification review 
occurring between January 1, 2015 and February 25, 2016.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings notices, notices and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact 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, and because these regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, these regulations have been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal authors of these regulations are Jian H. Grant and 
Martha M. Garcia, Office of the Associate Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entries for Sec. Sec.  1.42-1T and 1.42-2T and by adding 
and revising entries in numerical order to read as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.42-1T also issued under 26 U.S.C. 42(n).
    Section 1.42-2 also issued under 26 U.S.C. 42(n).
    Section 1.42-5T also issued under 26 U.S.C. 42(n).


0
Par. 2. Section 1.42-5 is amended by:
0
1. Adding paragraph (a)(2)(iii).
0
2. Revising paragraphs (c)(2)(ii) and (iii) and (c)(3).
0
3. Revising the paragraph heading of paragraph (h), redesignating the 
text of paragraph (h) as paragraph (h)(1) and adding a paragraph (h)(1) 
heading, and adding paragraph (h)(2).
0
4. Adding paragraph (i).
    The additions and revisions read as follows:

[[Page 9337]]

Sec.  1.42-5  Monitoring compliance with low-income housing credit 
requirements.

    (a) * * *
    (2) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.42-
5T(a)(2)(iii).
* * * * *
    (c) * * *
    (2) * * *
    (ii) [Reserved]. For further guidance, see Sec.  1.42-5T(c)(2)(ii).
    (iii) [Reserved]. For further guidance, see Sec.  1.42-
5T(c)(2)(iii).
    (3) [Reserved]. For further guidance, see Sec.  1.42-5T(c)(3).
* * * * *
    (h) Effective/applicability dates--(1) In general.* * *
    (2) [Reserved]. For further guidance, see Sec.  1.42-5T(h)(2).
    (i) [Reserved]. For further guidance, see Sec.  1.42-5T(i).

0
Par. 3. Section 1.42-5T is added to read as follows:


Sec.  1.42-5T  Monitoring compliance with low-income housing credit 
requirements (temporary).

    (a)(1) through (a)(2)(ii) [Reserved]. For further guidance, see 
Sec.  1.42-5(a)(1) through (a)(2)(ii).
    (iii) Effect of guidance published in the Internal Revenue 
Bulletin. Guidance published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter) may provide--
    (A) Exceptions to the requirements referred to in Sec.  1.42-
5(a)(2)(i) and the requirements described in this section; or
    (B) Alternative means of satisfying those requirements.
    (b) through (c)(2)(i) [Reserved]. For further guidance, see Sec.  
1.42-5(b) through (c)(2)(i).
    (ii) Require that, with respect to each low-income housing project, 
the Agency conduct on-site inspections and review low-income 
certifications (including in that term the documentation supporting the 
low-income certifications and the rent records for tenants).
    (iii) Require that the on-site inspections that the Agency must 
conduct satisfy both the requirements of Sec.  1.42-5(d) and the 
requirements in paragraph (c)(2)(iii)(A) through (D) of this section, 
and require that the low-income certification review that the Agency 
must perform satisfies the requirements in paragraphs (c)(2)(iii)(A) 
through (D) of this section. Paragraph (c)(2)(iii)(A) through (D) of 
this section provides rules determining how these on-site inspection 
requirements and how these low-income certification review requirements 
may be satisfied by an inspection or review, as the case may be, that 
includes only a sample of the low-income units.
    (A) Timing. The Agency must conduct on-site inspections of all 
buildings in the low-income housing project and must review low-income 
certifications of the low-income housing project--
    (1) By the end of the second calendar year following the year the 
last building in the low-income housing project is placed in service; 
and
    (2) At least once every 3 years thereafter.
    (B) Number of low-income units. The Agency must conduct on-site 
inspections and low-income certification review of not fewer than the 
minimum number of low-income units required by guidance published in 
the Internal Revenue Bulletin. See Sec.  601.601(d)(2)(ii)(b) of this 
chapter.
    (C) Selection of low-income units for inspection and low-income 
certifications for review--(1) Random selection. The Agency must select 
in a random manner the low-income units to be inspected and the units 
whose low-income certifications are to be reviewed. The Agency is not 
required to select the same low-income units of a low-income housing 
project for on-site inspections and low-income certification review, 
and an Agency may choose a different number of units for on-site 
inspections and for low-income certification review, provided the 
Agency chooses at least the minimum number of low-income units in each 
case. If the Agency chooses to select different low-income units for 
on-site inspections and low-income certification review, the Agency 
must select the units for on-site inspections or low-income 
certification review separately and in a random manner.
    (2) Advance notification limited to reasonable notice. The Agency 
must select the low-income units to inspect and low-income 
certifications to review in a manner that will not give advance notice 
that a particular low-income unit (or low-income certifications for a 
particular low-income unit) for a particular year will or will not be 
inspected (or reviewed). However, the Agency may give an owner 
reasonable notice that an inspection of the building and low-income 
units or review of low-income certifications will occur. The notice is 
to enable the owner to notify tenants of the inspection or to assemble 
low-income certifications for review.
    (3) Meaning of reasonable notice. For purposes of paragraph 
(c)(2)(iii)(C)(ii) of this section, reasonable notice is generally no 
more than 30 days. The notice period begins on the date the Agency 
informs the owner of the identity of the units for which on-site 
inspections or low-income certification review will or will not occur. 
Notice of more than 30 days, however, may be reasonable in 
extraordinary circumstances that are beyond an Agency's control and 
that prevent an Agency from carrying out within 30 days an on-site 
inspection or low-income certification review. Extraordinary 
circumstances include, but are not limited to, natural disasters and 
severe weather conditions. In the event of extraordinary circumstances 
that result in a reasonable-notice period longer than 30 days, an 
Agency must conduct the on-site inspection or low-income certification 
review as soon as practicable.
    (4) Applicability of reasonable notice limitation when the same 
units are chosen for inspection and file review. If the Agency chooses 
to select the same units for on-site inspections and low-income 
certification review, the Agency may conduct on-site inspections and 
low-income certification review either at the same time or separately. 
The Agency, however, must conduct both the inspections and review 
within the reasonable-notice period described in paragraph 
(c)(2)(iii)(C)(2) and (3) of this section.
    (D) Method of low-income certification review. The Agency may 
review the low-income certifications wherever the owner maintains or 
stores the records (either on-site or off-site).
    (3) Frequency and form of certification. A monitoring procedure 
must require that the certifications and reviews of Sec.  1.42-5(c)(1) 
and (c)(2)(i) be made at least annually covering each year of the 15-
year compliance period under section 42(i)(1). The certifications must 
be made under penalty of perjury. A monitoring procedure may require 
certifications and reviews more frequently than every 12 months, 
provided that all months within each 12-month period are subject to 
certification.
    (c)(4) through (h)(1) [Reserved]. For further guidance, see Sec.  
1.42-5(c)(4) through (h)(1).
    (2) Effective/applicability dates of the REAC inspection protocol. 
The requirements in paragraphs (a)(2)(iii), (c)(2)(ii) and (iii), and 
(c)(3) of this section apply beginning on February 25, 2016. Agencies 
using the REAC inspection protocol of the Department of Housing and 
Urban Development as part of the Physical Inspections Pilot Program may 
rely on these provisions for on-site inspections and low-income 
certification review occurring between January 1, 2015 and February 25, 
2016. Otherwise, for the rules that apply before February 25, 2016, see 
Sec.  1.42-5 as

[[Page 9338]]

contained in 26 CFR part 1 revised as of April 1, 2015.
    (i) Expiration date. The applicability of this section expires on 
February 22, 2019.

John Dalrymple.
Deputy Commissioner for Services and Enforcement.
    Approved: January 29, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-04005 Filed 2-23-16; 4:15 pm]
 BILLING CODE 4830-01-P