Amendments to the Low-Income Housing Credit Compliance-Monitoring Regulations, 9333-9338 [2016-04005]
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Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Rules and Regulations
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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:
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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
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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.
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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
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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).
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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
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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
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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.
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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
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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
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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
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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,
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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
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visiting the IRS Web site at https://
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:
■
■
■
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§ 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:
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§ 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
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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
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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 https://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 https://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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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 https://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
