Notice 2008-79

This notice provides guidance regarding certain provisions affecting tax-exempt bonds and related matters under the Housing Assistance Tax Act of 2008, Division C of Pub. L. No. 110-289, enacted on July 30, 2008 (“2008 Housing Act”). Section 3021 of the 2008 Housing Act amends §§ 143 and 146 of the Internal Revenue Code (“Code”) to provide a temporary $11 billion increase in the annual private activity bond volume cap under § 146 for qualified housing issues and to allow the use of qualified mortgage bonds to refinance certain subprime mortgage loans. (Except as otherwise provided, section references in this notice are to the Code.) This notice provides guidance on allocations, carryforwards, information reporting, and uses of this additional bond volume cap, and guidance on the use of qualified mortgage revenue bonds to refinance certain subprime mortgage loans. In addition, § 3005 of the 2008 Housing Act amends § 142(d)(2) of the Code to disregard basic housing allowance payments to military members at certain military bases for purposes of applicable low-income set-aside income limitations under § 42 and § 142. This notice lists certain affected military bases. Section 3023 of the 2008 Housing Act provides temporary authority to Federal Home Loan Banks to guarantee certain tax-exempt bonds. This notice provides guidance on tax-exempt bonds eligible for such guarantees.

Section 103(a) provides that interest on bonds issued by States or political subdivisions thereof is excluded from gross income upon satisfaction of certain requirements. Sections 142(a)(7) and 142(d) authorize the issuance of tax-exempt multifamily housing bonds to finance qualified residential rental projects with certain low-income set-aside limitations. Income determinations for purposes of compliance with these low-income set-aside limitations are made under § 142(d)(2)(B). Section 143 authorizes the issuance of tax-exempt qualified mortgage bonds to finance owner-occupied single-family housing mortgages upon satisfaction of a number of program requirements. Section 143(a)(2)(D) generally requires proceeds of qualified mortgage bonds to be used to originate loans within a 42-month period after the issue date of the bonds and unused proceeds remaining at the end of such 42-month period to be used to redeem bonds (the “42-month loan origination period”). Section 146 imposes an annual bond volume cap on most tax-exempt private activity bonds, including qualified mortgage bonds under § 143 and tax-exempt bonds for qualified residential rental projects under § 142(a)(7). Section 25 allows an issuer to exchange tax-exempt bond volume cap under § 146 with respect to qualified mortgage bonds under § 143 for authority to issue certain mortgage credit certificates. Section 42 provides a low-income housing tax credit for certain projects which, among other things, meet low-income set-aside limitations similar to those applicable to tax-exempt bonds for qualified residential rental projects under § 142(d). Section 42(g)(4) provides that § 142(d)(2)(B) applies for purposes of determining whether a project qualifies for the low-income housing tax credit.

In general, mortgage credit certificates under § 25 provide Federal subsidies to borrowers in the form of Federal tax credits with respect to eligible home mortgage loans that are similar to the Federal subsidies provided through qualified mortgage loans at subsidized interest rates financed with tax-exempt qualified mortgage bonds under § 143. The program restrictions on mortgage credit certificates under § 25 are substantially identical to the program restrictions on qualified mortgage bonds under § 143. Section 25(a) allows a taxpayer a credit against income tax for any taxable year in an amount equal to the product of the certificate credit rate and the interest paid or accrued by the taxpayer during the taxable year on the remaining principal of the certified indebtedness amount.

In addition, § 25(c)(2) basically allows an issuer to elect to exchange unused tax-exempt private activity bond volume cap authority under § 146 with respect to qualified mortgage bonds under § 143 for a prescribed amount of mortgage certificate issuance authority. Section 146(n) provides that the applicable private activity bond volume cap authority of any issuer for any calendar year is reduced by the sum of the amount of qualified mortgage bonds that such issuer elects not to issue under § 25(c)(2)(A)(ii) during such year, plus the amount of any reduction in such ceiling under § 25(f) for noncompliance of such issuer for such year.

An interpretive question has arisen regarding whether an issuer may elect to exchange unused authority to issue private activity bonds with the 2008 Housing Act Volume Cap under § 146 for authority to issue mortgage credit certificates under § 25. For calendar years 2008 through 2010, in determining the amount of private activity bonds that an issuer may otherwise issue in such years, § 25(c)(2)(A)(ii) is applied by taking into account any 2008 Housing Act Volume Cap authority or carryforward of such 2008 Housing Volume Cap authority allocated to such issuer. Consequently, for calendar years 2008 through 2010 an issuer may elect to exchange such unused 2008 Housing Act Volume Cap authority under § 146 for mortgage credit certificate authority under § 25. Consistent with the requirements of new § 146(d)(5)(B)(ii)(II) added by § 3021(a) of the 2008 Housing Act, an issuer may elect to exchange 2008 Housing Act Volume Cap authority for mortgage credit certificate authority only if the indebtedness to which the mortgage credit certificate relates is incurred within 12 months of the date of the election under § 25(c)(2)(A)(ii) not to issue an amount of private activity bonds which it may otherwise issue during the calendar year under § 146.

In addition, an issuer may elect to issue mortgage credit certificates to refinance qualified subprime loans if it otherwise satisfies the requirements of § 143(k)(12), as added by § 3021(b) of the 2008 Housing Act. Any such qualified subprime loan refinancing must be incurred within 12 months after such election. Further, an issuer must make any such election with respect to such mortgage credit certificates by December 31, 2010.

Issuers who issue bonds under § 143 of the Code and expect to use the proceeds for the refinancing of qualified subprime loans under § 143(k)(12), as added by § 3021 of the 2008 Housing Act, should attach a schedule to the IRS Form 8038 filed with respect to the issue that indicates the amount of proceeds that are reasonably expected to be used to refinance qualified subprime loans. An issuer must comply with this information reporting requirement regardless of whether the bonds are being issued using General Volume Cap or 2008 Housing Act Volume Cap. The issuer may determine the amount of bond proceeds that it expects to use to refinance qualified subprime loans under § 143(k) based on a reasonable good faith estimate of the amount of bond proceeds expected to be used for this purpose. Issuers who do not in fact utilize the full amount indicated on the schedule to refinance qualified subprime loans are permitted to apply such unused amounts to the financing of mortgage loans otherwise eligible to be financed under § 143.

In general, §§ 142(d) and 42(g) impose similar low-income set-aside restrictions on incomes of eligible residents of prescribed numbers of housing units in qualified residential rental projects and qualified low-income housing projects for purposes of eligibility for tax-exempt private activity bond financing under § 142(a)(7) and for low-income housing tax credits under § 42, respectively. In addition, § 142(d)(2)(B) applies to determinations of income both for § 142 and § 42 purposes.

Section 3005(a) of the 2008 Housing Act renumbered § 142(d)(2)(B) as § 142(d)(2)(B)(i) and added new § 142(d)(2)(B)(ii), (iii) and (iv) to the Code. Section 142(d)(2)(B)(ii) excludes military basic allowance payments under § 403 of title 37, United States Code, from income for purposes of income limitations under § 142(d)(2)(B) for certain qualified buildings. Section 142(d)(2)(B)(iii) defines a “qualified building” to mean a building located: (I) in any county in which is located a qualified military installation to which the number of members of the Armed Forces of the United States assigned to units based out of such qualified military installation, as of June 1, 2008, has increased by not less than 20 percent, as compared to such number on December 31, 2005, or (II) in any county adjacent to a county described in subclause (I). Section 142(d)(2)(B)(iv) defines a “qualified military installation” to mean any military installation or facility that has at least one thousand members of the Armed Forces of the United States assigned to it as of June 1, 2008.

The following list identifies military installations that are deemed to be qualified military installations that satisfy the 20 percent population increase requirement under § 142(d)(2)(B)(iii)(I) for purposes of the exclusion of basic housing allowance payments to military members in determining income under § 142(d)(2)(B). The Internal Revenue Service will update this list if it receives additional information indicating that other military installations should receive the same treatment. Issuers may rely on this list for income determinations made after the date of enactment of the 2008 Housing Act and before any successor list is published. The following list is not meant to be exclusive and any qualified military installation within the meaning of § 142(d)(2)(B)(iv) which satisfies the percentage requirements of § 142(d)(2)(B)(iii)(I) would be eligible to receive similar treatment regardless of its failure to be included in this list or in any future updates.

Section 3005(b) of the 2008 Housing Act limits the scope of application of this exclusion of basic housing allowances from income under § 142(d)(2) in a number of significant technical respects, as described therein. Further, this exclusion is inapplicable to tax-exempt bonds for qualified residential rental projects issued under § 142(a)(7) unless the project also receives low-income housing tax credits under § 42.

Section 3023 of the 2008 Housing Act added new § 149(b)(3)(A)(iv) to provide a temporary exception to the general restriction against Federal guarantees of tax-exempt bonds under § 149(b) for certain guarantees made by Federal Home Loan Banks. In particular, new § 149(b)(3)(A)(iv) provides that this Federal guarantee restriction is inapplicable to a guarantee by a Federal Home Loan Bank made in connection with the “original issuance” (emphasis added) of a bond during the period beginning on the date of enactment of the 2008 Housing Act and ending on December 31, 2010 (or a renewal or extension of a guarantee so made). Section 3023(b) of the 2008 Housing Act also adds new § 149(b)(3)(E) which requires guarantees by a Federal Home Loan Bank to meet certain safety and soundness collateral requirements as described therein.

An interpretive question has arisen regarding the meaning of an “original issuance” during the relevant period and whether both bonds for new money purposes (e.g. , to finance construction or acquisition costs in the first instance) and refunding bonds for refinancing purposes may be treated as originally issued during the relevant period and thereby be eligible for Federal Home Loan Bank guarantees. For this purpose, any tax-exempt bond, including a bond for new money purposes and a bond that is part of a refunding issue (as defined in § 1.150-1(d) of the Income Tax Regulations) that is issued during the relevant period may be eligible for Federal Home Loan Bank guarantees under new § 149(b)(3)(A)(iv).

This notice is effective as of the date of enactment of the 2008 Housing Act on July 30, 2008.

Notice 88-80, 1988-2 C.B. 396, is modified to the extent provided by Section 6 of this notice for the periods applicable under section 3005 of the 2008 Housing Act.

The information collection contained in this notice has been approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. chapter 35) under control number 1545-2119. Under the Paperwork Reduction Act, an agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid OMB control number.

The collections of information in this notice are in Section 3.6 and Section 5. The information is required in order to report tax-exempt bond issues that receive allocations of the 2008 Housing Act Volume Cap, to report the carryforward of unused amounts of 2008 Housing Act Volume Cap, and to report the estimated amount of proceeds expected to be used to refinance qualified subprime loans. This information will be used to quantify the use and carryforward of 2008 Housing Act Volume Cap and the refinancing of qualified subprime loans. The collections of information are mandatory. The likely respondents are state or local governmental issuers of tax-exempt housing bonds.

We estimate the total number of respondents to be 100 and the total annual responses to be 150. We estimate it will take 2 hours to comply. Estimates of the annualized cost to respondents for the hour burdens shown are not available at this time.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal authors of this notice are Aviva M. Roth and Carla Young of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact Aviva M. Roth or Carla Young at (202) 622-3980 (not a toll-free call).