SECTION 2. Background

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.

SECTION 3. Allocation, Carryforward, Use, and Reporting of Additional Bond Volume Cap under § 3021(a) of the 2008 Housing Act

3.1 General Volume Cap under § 146 of the Code

Section 146 generally provides a unified annual state tax-exempt private activity bond volume cap for most private activity bonds and § 146(f) provides a three-year carryforward mechanism for unused bond volume cap. Section 146(d)(1) provides that the State ceiling applicable to any State for any calendar

October 6, 2008 815 2008–40 I.R.B.

allocations are based on the 2008 General Volume Cap, determined using the population figures provided in Notice 2008–22, 2008–8 I.R.B. 465, and reflecting the Costof-Living Adjustments for 2008 contained in Rev. Proc. 2007–66, 2007–45 I.R.B. 970.

Columbia and possessions of the United States receive allocations of the 2008 Housing Act Volume Cap. In this regard, § 103(c)(2) defines a “State” for purposes of the tax-exempt bond provisions of the Code, including § 146, as amended by the 2008 Housing Act, to include the District of Columbia and any possession of the United States. Further, in determining

2008 General Volume Cap for this purpose, although § 146(d)(4) provides an adjustment for certain possessions, this adjustment only affects the amount determined under § 146(d)(1)(A).

The following list provides the allocations of 2008 Housing Act Volume Cap to the States, the District of Columbia, and possessions of the United States. These

Area Allocation

Alabama 144,908,544 Alaska 96,550,479 American Samoa 96,550,479 Arizona 198,480,840 Arkansas 96,550,479 California 1,144,564,324 Colorado 152,225,095 Connecticut 109,665,263 Delaware 96,550,479 D.C. 96,550,479 Florida 571,487,942 Georgia 298,867,838 Guam 96,550,479 Hawaii 96,550,479 Idaho 96,550,479 Illinois 402,442,519 Indiana 198,685,435 Iowa 96,550,479 Kansas 96,550,479 Kentucky 132,810,201 Louisiana 134,429,985 Maine 96,550,479 Maryland 175,923,133 Massachusetts 201,956,503 Michigan 315,371,661 Minnesota 162,749,339 Mississippi 96,550,479 Missouri 184,066,548 Montana 96,550,479 Nebraska 96,550,479 Nevada 96,550,479 New Hampshire 96,550,479 New Jersey 271,975,917 New Mexico 96,550,479 New York 604,255,799 North Carolina 283,721,527 North Dakota 96,550,479 Northern Mariana Islands 96,550,479 Ohio 359,055,260 Oklahoma 113,266,394 Oregon 117,341,342 Pennsylvania 389,299,003 Puerto Rico 123,416,049 Rhode Island 96,550,479 South Carolina 138,015,397 South Dakota 96,550,479 Tennessee 192,780,879 Texas 748,500,523 U.S. Virgin Islands 96,550,479 Utah 96,550,479

2008–40 I.R.B. 816 October 6, 2008

Area Allocation

Vermont 96,550,479 Virginia 241,483,115 Washington 202,541,072 West Virginia 96,550,479 Wisconsin 175,400,093 Wyoming 96,550,479

Total 11,000,000,000

For qualified subprime loan refinancings to be funded from qualified mortgage bonds that have received an allocation of General Volume Cap (as opposed to 2008 Housing Act Volume Cap), an issuer may make proceeds of such bonds available for use for qualified subprime loan refinancings during the permitted 12-month origination period for such loans, and then either redeem bonds from unused proceeds or make such proceeds available for regular qualified mortgage loans under § 143 for the balance of the permitted 42-month origination period for such loans under the general rules for qualified mortgage bonds under § 143(a)(2)(D) before redemption of bonds from unused proceeds. Qualified mortgage bonds that receive an allocation of 2008 Housing Act Volume Cap must apply all unused proceeds to the redemption of bonds after the 12-month period as provided in § 146(d)(5)(B)(ii)(II), as added by § 3021(a) of the 2008 Housing Act.

3.6 Information Reporting and Carryforward Elections for Use of 2008 Housing Act Volume Cap

Subject to updated IRS information reporting forms or procedures, an issuer of a qualified housing issue that uses 2008 Housing Act Volume Cap should make the following modifications to the IRS Infor- mation Return for Tax-Exempt Private Ac- tivity Bond Issues on Form 8038 filed with respect to the issue:

1. Report the bond issue on Line 20c of IRS Form 8038;
2. If the bond issue is an issue described in § 142(a)(7) (relating to qualified residential rental projects), enter the following description: “2008 Housing Act Qualified Housing Issue under 142”;
3. If the bond issue is a qualified mortgage issue (determined by substituting “12-month period” for “42-month

3.4 Use and Carryforward of 2008 Housing Act Volume Cap

New § 146(f)(6), added by § 3021(a)(2) of the 2008 Housing Act, provides that any carryforwards of 2008 Housing Act Volume Cap may be used only for qualified housing issues that are issued by the end of calendar year 2010. Certain interpretive questions have arisen about allocations and carryforwards of 2008 Housing Act Volume Cap in relation to General Volume Cap.

In order to facilitate prompt and flexible use of the 2008 Housing Act Volume Cap to address challenges in the housing market within the limited time-frame provided for this purpose, the Internal Revenue Service will afford issuers flexibility in their use of 2008 Housing Act Volume Cap and in coordinating the use of this volume cap with their General Volume Cap. Accordingly, the 2008 Housing Act Volume Cap should be tracked and accounted for separately from General Volume Cap. Further, in this regard, for purposes of both initial allocations and carryforwards of 2008 Housing Act Volume Cap and General Volume Cap, including, without limitation, the “first-in, first-out” ordering rule for carryforwards of General Volume Cap under § 146(f)(3)(B), an issuer may in its discretion utilize 2008 Housing Act Volume Cap or carryforwards of 2008 Housing Act Volume Cap either before or after the use of General Volume Cap or carryforwards of General Volume Cap.

In applying § 146(f)(2) regarding identification of carryforward purposes for 2008 Housing Act Volume Cap, it is sufficient to identify such carryforwards for use for “qualified housing issues.” Thus, issuers retain the flexibility to use such carryforwards for the different types of qualified housing issues as needs dictate.

Further, in order to provide flexibility, an issuer who files a proper carryforward election for 2008 Housing Act Volume Cap may assign any portion of that 2008 Housing Act Volume Cap to another eligible issuer in the state.

3.5 Refinancing of Qualified Subprime Loans under the 2008 Housing Act

Section 3021(b) of the 2008 Housing Act provides temporary authority under new § 143(k)(12) to refinance qualified subprime loans with qualified mortgage bonds under § 143 that are issued by the end of calendar year 2010. This provision applies to qualified mortgage bonds issued pursuant to General Volume Cap as well as 2008 Housing Act Volume Cap. Section 143(k)(12)(A) provides an exception to the new mortgage requirement under § 143(i)(1) to allow such refinancings. Section 143(k)(12)(B) provides the following special rules for such refinancings: (i) the general 42-month loan origination period under § 143(a)(2)(D)(i) is shortened to 12 months; (ii) the rule under § 143(d) limiting borrowers to those who had no ownership interest in a home in the preceding three years is inapplicable; and (iii) the purchase price limitation under § 143(e) applies based on the market value of the residence at the time of refinancing in lieu of the acquisition cost.

Section 143(k)(12)(C) defines the term “qualified subprime loan” to mean an adjustable rate single-family residential mortgage loan made after December 31, 2001 and before January 1, 2008 that the bond issuer determines would be reasonably likely to cause financial hardship to the borrower if not refinanced. For this purpose, issuers may base determinations with respect to likely financial hardship to borrowers on reasonable estimates made in good faith.

October 6, 2008 817 2008–40 I.R.B.

§ 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.