News | Comments on the AIT Temporary Reg Submitted Today

Costello submitted comments on the temporary portion of the new AIT regulation today, the due date for comments. We developed these in consultation with attorneys, the Novogradac LIHTC Working Group, NCSHA, and others. Below were our recommendations and surrounding comments. We believe that, although the new AIT regulations are very workable, the comments lay out and address the remaining significant concerns.

December 12, 2022

RE: REG-113068-22 | Section 42 Low-Income Housing Credit Average Income Test Regulations, Proposed/Temporary Treasury Regulation Section 1.42-19 T

To Whom It May Concern:

We appreciate the opportunity to provide comments on the Internal Revenue Service (IRS) temporary regulation concerning recordkeeping and reporting requirements for the average income test (AIT) for purposes of the low-income housing credit. For over forty years we have been involved in almost all aspects of the development and management of affordable housing. We are the owners of a consulting firm with clients who are state LIHTC allocating agencies and have worked directly with over 2/3 of the state agencies. We are also active affiliates of the National Council of State Housing Agencies (NCSHA). We also assist developers and investors to develop compliance systems to meet the regulations of various housing programs. From this broad perspective, we feel that minor modifications to the temporary guidance would be very helpful in ensuring the AIT functions efficiently and practically.

Our developer clients and their legal counsels’ primary concern is with the consequences in the temporary AIT rule relating to modification of the qualified group of units after the close of a year to address noncompliance. Our contacts with state Agencies are also concerned about the administrative burden involved. We propose simplification to the process of correcting the groups of qualified units in future years and the reporting process relating to the qualified groups required by the AIT regulation. We worked with the Novogradac LIHTC Working Group, NCSHA, and other industry groups on the proposed changes. We believe these represent a consensus position among a significant portion of the industry and understand that these suggestions are similar or identical to other comments that will be received.

Suggested Adjustment 1 | Noncompliance discovered after a taxable year

[Treas. Reg. 1.42 T (c)(4)]

Noncompliance discovered after the close of the year may impact the groups of qualified units reported to the state agency. Of special concern is if the noncompliant unit would cause the average designations of the remaining units in the group of qualified units for the minimum set aside to exceed 60%, or to fall below 40% of the project’s total units, even if other units could easily be substituted to satisfy these requirements of the AIT. This is being interpreted by some to create a potential situation where a single noncompliant unit could cause a violation of the minimum set aside. Our reading of the Summary of Comments and Explanation of Revisions for the AIT Rule is that the intent was to eliminate provisions that created a significant additional risk to properties using the AIT over the other minimum set asides. For example, at a project with a 40-60 minimum set aside, if a taxpayer found a nonqualified unit upon internal or state Agency audit, they would adjust their tax returns as necessary and would not need the state agency to grant them approval to demonstrate that a different set of units meets the 40% minimum commitment. We understand that a 40-60 property must simply choose among compliant 60% units while the AIT qualified group must include designations that additionally average 60%. We do not believe that this distinction should preclude the taxpayer from being able to demonstrate compliance using a different path from what was originally reported if the adjusted group is still otherwise compliant with the AIT.

Attorneys and others that we have discussed this matter with agree that the state agency could use their authority under the waiver in Tres. Reg. 1.42-19 T(c)(4) to allow the taxpayer to submit a corrected group of qualified units, However, there are concerns that the waiver has to be approved on a case-by-case basis, creating an administrative burden on agencies, unnecessary delays, and the perceived risk that a project that is demonstrably in compliance with the average requirements is technically out of compliance with the minimum set aside because of a reporting error or noncompliance with a few units.

The suggested adjustment to the language allows the taxpayer to perfect the grouping without case-by-case state agency approval. This simply extends the authority to make adjustments during taxable years included in the Final regulation 1.42-19 (d)(1)(iv) to future years. The taxpayer is allowed to submit a new qualified group of units if a unit goes out of compliance without needing state approval. For example, if a taxpayer discovered noncompliance after an internal audit, they would be able to submit a new grouping of qualified units, excluding that unit and any additional units to establish that they meet 60% averages without needing the state agency to approve the updated grouping. Since the taxpayer would have 180 days to notify the state agency of the new group of qualified units, state agencies would be aware of the noncompliance in a timely fashion and would be able to take any additional monitoring steps they deemed necessary. The proposed language also retains the temporary provision to allow the state agency to issue a waiver. Finally, it seems appropriate to allow the usual correction period under Treas. Reg 1.42-5 for a taxpayer to correct noncompliance before addressing the implications to the AIT, meaning that the 180-day period would follow the existing correction period.

(c)(4) Waiver for failure to comply with procedural requirements. Any failure to comply with the requirements of paragraph (c)(1) or (2) or (c)(3)(iv) of this section is treated as having been satisfied if up to 180 days after discovery of the failure, whether by taxpayer or Agency, a taxpayer submits a corrected qualified group of units, or the Agency waives in writing any failure to comply. If a taxpayer submits a corrected qualified group of units or an Agency exercises the discretion to waive, then the relevant requirements are treated as having been satisfied. In such a case, the tax consequences under this section correspond to that deemed satisfaction. In all cases, the 180-day period does not commence until the close of the correction period described in Treas. Reg 1.42-5 (e)(4).

Suggested Adjustment 2 | Reporting the larger group of qualified units

[Treas. Reg. 1.42-19 T (c)(1)(ii)]

Reporting two separate groups of qualified units, one each for the minimum set aside and the applicable fraction, appears to be unnecessary since all LIHTC units must average 60% or less. Our other recommended change is to streamline the reporting process so that the taxpayer reports one group of qualified units to the state agency, where the 40% minimum set-aside is contained within the qualified group of units used to establish units used for the applicable fraction(s) for the project. The taxpayer would remain responsible for recording in its books and records the applicable qualified group of units for the minimum set aside for record keeping. However, for the requirement to report to the state, the following adjustment will make the reporting process far easier for both state agencies and the taxpayer.

(c)(1)(ii)

(C) The requirement of paragraph (c)(1)(i)(A) will be considered met if the qualified group of units under (c)(1)(i)(B) is at least 40% of the units in the project.

We believe the proposed language will relieve investor concerns while continuing to foster compliant behavior and not requiring revision of the Final AIT regulation. Please do not hesitate to reach out to us if you have any questions.

Sincerely,

Scott Michael Dunn

CEO/President

Costello Compliance LLC

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