What’s new in Sec. 42 compliance: Catching up with changes to Form 8609 and Form 8823 … states weigh in on changes to key issues.

Welcome to the fourth year of “Ask Ruth,” and thank you to all of our readers, especially the ones who ask the questions that we attempt to answer in this column. Here’s what’s been happening since our last column appeared in the November 2005 issue.

• The Internal Revenue Service (IRS) announced inflation adjustments to low-income housing tax credit figures for 2006 in Revenue Procedure 2005-70. The per capita authority has jumped to $1.90 (from $1.85 in 2005), which is multiplied by the state’s population, with small states getting a minimum of $2.19 million. The population multiplier figures should be released in late February or early March.

• Revisions were announced in November as to how processing will be handled for Form 8609 – the allocation certification.

This is good news for those who can feel our trees weeping as we attach copies of Form 8609 for each building for all 15 years of the federal compliance period for the tax credit program.

Effective as of the date of publication, owners are only required to attach Form 8609 for each building when filing the tax paperwork for the first year of the credit period for the building.

The IRS has also notified us that Form 8609 is being revised for use by State Housing Finance Agencies for years 2005 and forward.)

• Form 8823, the Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, was revised in September.

While similar to the old Form 8823, the new form changes in the following ways:

  • It is now easier to indicate when the Form 8823 is being amended by checking the box on the top of page one;
  • Page one now also contains a box to identify the total value of the credits allocated to the building (see Line 5); and
  • Clearer instructions defining Uniform Physical Conditions Standard (UPCS) and local inspection standards are provided.

Owners and managers are encouraged to review this new document for the additional information it provides. If you haven’t looked at Form 8823 in the past six months, it’s time. Seeing it in its current state as a blank document is far easier than looking at it later with the Building Identification Number (BIN) of one of your buildings on it.
• An update on changes in state positions on key industry issues:

Recently, TheoPRO surveyed state housing finance agencies about two changing aspects of Sec. 42 compliance: unit transfers between buildings, and whether children K-12 are considered full-time students. Both items have caused the industry to take another look and to rethink its position in important ways. Here’s what we learned.

Transfers between buildings: Last year the IRS informed the industry that it did not consider it necessary to income-qualify families if they transferred between tax credit units in different buildings. This came as a surprise to many practitioners who have faithfully applied the requirement that families must income-qualify as a “new move-in” into different buildings in a project. (Each building has a BIN that defines what constitutes the “building.” Transfers between BINs – buildings – are typically handled as a new move-in by state housing finance agencies.)

Update: States have been slow to come on board and allow transfers between buildings without a new move-in process. When TheoPRO surveyed states just after this was announced last year, only one state had relaxed its standard, thereby permitting households to transfer between buildings without an initial qualification into the new building.

As of this survey, five states are now permitting transfers without requalifying the family to move-in income limits. Most states, however, appear to be holding back and applying the former standard. Virginia is noteworthy for adopting a unique approach to its procedures. A family may transfer between buildings without an income certification only on 100% buildings. Buildings with both low-income and market-rate units must certify the family as income-eligible for the new move-in into the next building. See State Survey #1.

Children K-12 as full-time students: A number of states that in the past have not considered children K-12 as full-time students have reversed their positions since TheoPRO’s last survey of this issue in 2002 (see State Survey #2). Our records indicate that at least nine states that permitted the exclusion of children K-12 from full-time-student rules in 2002 have reversed their positions as of this survey. Why?

Once again, the IRS appears to be influencing this issue, but this time, instead of relaxing a long-standing standard, as it did with between-building transfers, it appears to be tightening up. A historic perspective might help to explain the issue.

The tax credit program was introduced in 1986 in conjunction with the tax-exempt bond program. Sec. 42 (the tax credit code) was formulated based on bond program requirements (Sec. 103(b)), which served as a guide to Sec. 42.

Bond program regulations regarding students have always been quite clear. Not only is the bond program more restrictive in terms of eligible full-time student households, it also defines a full-time student more clearly. In Sec. 103(b)(8)(v), a full-time student is defined as “any individual who during each of five calendar months in which the taxable year of the taxpayer begins is a full-time student at an educational institution described in Sec. 170(b)(1)(A)(ii).” The words “any individual” constrains the IRS.

Note the following exception: If a state does not consider kindergarten to be full-time (and states vary on this, so be certain to clarify your state’s position), then only children in grades 1-12 would be considered full-time students.

Why did states lean away from this distinction in the first place? Partially because of a long-standing belief that the IRS and Congress truly wanted to focus the full-time-student rules on post-high school education; partially because the rule to include children as full-time students appeared to disqualify families who in all other ways truly qualified for Sec. 42 housing; partly because under the leadership of the National Council of State Housing Agencies, a recommended practice clearly stated that children K-12 should not be considered full-time students; and perhaps in part because the IRS never officially said the rule could not be interpreted to exclude children K-12 as full-time students.

Whatever the reason, TheoPRO’s survey in 2002 demonstrated that half the states elected to exclude children K-12 from consideration as full-time students. Some of them are now returning to the more restrictive definition because the IRS has been unable to affirm otherwise.

If in the past your state housing finance agency has permitted a property to exclude children K-12 as full-time students, keep a watch on this issue. Check the current position of each state in State Survey #2.

Have you got a compliance question that is keeping you up at night? Contact ruth@icomply42.comand get it answered. All questions presented in this column and in TheoPRO’s Weekly On-Line Compliance Advisor are real questions, and all are answered by Ruth personally. See www.icomply42.com for more information.