CCA 1042025: Building-wide conditions can affect low-income housing credit occupancy status

Plain-English summary

Chief Counsel Advice addressed the suitable-for-occupancy requirement for low-income housing credit units under IRC § 42(i)(3)(B). It concluded that the requirement need not be determined unit by unit when poor exterior conditions, such as major foundation or wall damage, support a factual finding that all units are unsuitable. The advice also stated that a housing agency may use HUD's uniform physical condition standards for on-site inspections, but those standards do not supersede local health, safety, and building codes. A taxpayer may raise the stated affirmative defense based on local law when a HUD standard violation and the applicable local code produce different results.

Ruling snapshot

• Question: How should suitability for occupancy and inspection standards be applied to low-income housing credit buildings and units?
• Outcome: Advice given
• Key authorities: IRC §§ 42(i)(3)(A) and 42(i)(3)(B); Treas. Reg. § 1.42-5(d)(2); 24 CFR 5.703

Full text (IRS public release)

ID: CCA_2010081810303838 Number: 201042025
Release Date: 10/22/2010
Office: ----------------
UILC: 42.00-00

From: ------------------------
Sent: Wednesday, August 18, 2010 10:30:40 AM
To: ------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------

Subject: CCA

------- As you requested, here is the CCA answering the questions that ------- sent our office a few weeks
back. If you have any further questions please do not hesitate to contact me at --------.

ISSUES

  1. Must the suitable for occupancy requirement of section 42(i)(3)(B) be determined
     on a unit-by-unit basis, or can the condition of the exterior components of the
     building (e.g., wall, roof, etc.) be so poor as to lead to a determination that all the
     units in a building are not suitable for occupancy?

  2. Explain the relationship between HUD's uniform physical condition standards
     (UPCS) and the "local health, safety and buildings codes" as described in Treas.
     Reg. section 1.42-5(d).

LAW AND ANALYSIS

Section 42(i)(3)(B)(i) of the Internal Revenue Code (Code) provides that a low-income
unit (as defined by section 42(i)(3)(A)) shall not be treated as a low-income unit unless
the unit is suitable for occupancy and used other than on a transient basis. Section
42(i)(3)(B)(ii) of the Code provides that the suitability of a unit for occupancy shall be
determined under regulations prescribed by the Secretary taking into account local
health, safety, and building codes.

Treasury regulation section 1.42-5 provides compliance monitoring responsibilities
required of a State or local housing credit agency (Agency). Under section 1.42-5(d)(2),
an Agency for on-site inspections of buildings and low-income units must review any
local health, safety, or building code violations reports or notices retained by the owner
and must determine “(i) whether the buildings and units are suitable for occupancy,
taking into account local health, safety, and building codes (or other habitability
standards); or (ii) whether the buildings and units satisfy . . . the uniform physical
condition standards for public housing established by HUD (24 CFR 5.703). The HUD
physical conditions standards do not supersede or preempt local health, safety, and
building codes. A low-income housing project under section 42 must continue to satisfy
these codes and, if the Agency becomes aware of any violation of these codes, the
Agency must report the violation to the Service. However, provided the Agency
determines by inspection that the HUD standards are met, the Agency is not required …
to determine by inspection whether the project meets local health, safety, and building
codes.”

CONCLUSIONS

 1. The suitable for occupancy requirement of section 42(i)(3)(B) does not have to be
    determined on a unit-by-unit basis if the facts exist that the condition of the
    exterior components of the building (e.g., wall, roof, etc.) are so poor as to lead to
    a factual determination that all the units in a building are not suitable for
    occupancy. For example, if an earthquake created large fissures in the
    foundation and exterior walls of a building than the building could be determined
    not suitable for occupancy for safety reasons without having to check each unit.

 2. Under Treas. Reg. section 1.42-5(d)(2), an Agency may use the HUD uniform
    physical condition standard to perform an on-site inspection to satisfy the
    Agency’s inspection responsibility. A violation of the HUD physical condition
    standard alone is sufficient for a violation of § 42(i)(3)(B). However, a taxpayer,
    in response to the IRS finding a violation, may raise an affirmative defense by
    proving that local health, safety, or building codes address the specific point in
    question, and after application of the facts, local law reaches a taxpayer
    favorable result where as the HUD standard does not reach a taxpayer favorable
    result. Under these circumstances, the local law would control as respects the
    violation itself.

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