SECTION 6. DRAFTING

INFORMATION

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

American Recovery and Reinvestment Tax Act of 2009 Clarifications

Notice 2010–18

This notice clarifies certain issues under sections 1404 and 1602 of the American Recovery and Reinvestment Tax Act of 2009 (Pub. L. 111–5) (the Act). Specifically, this notice provides guidance on how to take into account the amount of a grant under section 1602 of the Act in reducing the amount of a state’s housing credit ceiling, on the exclusion of the amount of grants from the recipients’ gross income, and on the effect of such grants on the depreciable or eligible basis of property.

BACKGROUND

Section 42 of the Internal Revenue Code allows a 10-year tax credit for investment in qualified low-income buildings placed in service after December 31, 1986. Section 42(h)(1) provides, generally, that the amount of credit under § 42 for any taxable year for any building shall not exceed the housing credit dollar amount allocated to the building. Section 42(h)(3)(A) provides, in part, that the aggregate housing credit dollar amount that a State housing credit agency may allocate for any calendar year is limited to that year’s State housing credit ceiling (Ceiling).

Section 42(h)(3)(C) of the Code provides, in part, that the Ceiling applicable

to any State for any calendar year is an amount equal to—

(i) the unused Ceiling, if any, of the State for the preceding calendar year;

(ii) the greater of (I) $1.75 multiplied by the State population, or (II) $2,000,000;

(iii) the amount of Ceiling returned in the calendar year, and;

(iv) the amount, if any, allocated to the State by the Secretary under § 42(h)(3)(D) from a national pool (National Pool) of unused credit.

Section 42(h)(3)(H) of the Code provides that for calendar years after 2002, the $2,000,000 and $1.75 amounts in § 42(h)(3)(C)(ii) shall be increased by a cost-of-living adjustment (COLA). Section 42(h)(3)(I) increases the Ceiling for 2009 by adding (i) $0.20 for the dollar amount in effect under § 42(h)(3)(C)(ii)(I) after application of the § 42(h)(3)(H) COLA, and (ii) an amount equal to 10 percent for the dollar amount in effect under § 42(h)(3)(C)(ii)(II) (rounded to the next lowest multiple of $5,000) after application of the § 42(h)(3)(H) COLA. For the 2009 Ceiling, the § 42(h)(3)(C)(ii)(I) and (II) amounts are $2.30 and $2,665,000, respectively. See Section 3.07 of Rev. Proc. 2008–66, 2008–45 I.R.B. 1107, 1111. Section 42(i)(9)(A) of the Code, as added by section 1404 of the Act, provides that the amounts described in § 42(h)(3)(C)(i) through (iv) with respect to any State for 2009 shall each be reduced by so much of the amount as is taken into account in determining the amount of any grant to the State under section 1602 of the Act. Section 1602(a) of the Act provides that the Department of the Treasury shall make a grant to the housing credit agency of each State in an amount equal to the State’s low-income housing grant election amount. Section 1602(b) of the Act provides that the term “low-income housing grant election amount” means, for any State, the amount as the State may elect that does not exceed 85 percent of—

(1) the sum of— (A) 100 percent of the State’s 2009 Ceiling that is attributable to amounts described in § 42(h)(3)(C)(i) and (iii) of the Code, and

(B) 40 percent of the State’s 2009 Ceiling that is attributable to amounts described in § 42(h)(3)(C)(ii) and (iv), multiplied by

(2) 10.

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tion with respect to the § 42(h)(3)(C)(iii) component, the credit amount of that component from State X’s 2009 Ceiling is $2 million. Of the $1 million in credits under § 42(h)(3)(C)(iv), the Designated Agency of State X elects under section 1602 of the Act to use $800,000 for a cash assistance amount. Of the $2 million in credits under § 42(h)(3)(C)(iii), the Designated Agency elects under section 1602 of the Act to use $1.5 million for a cash assistance amount.

Under section 1602(b)(1)(B) of the Act, the percentage applicable to credit amounts under § 42(h)(3)(C)(iv) is 40 percent. The product of $800,000 and 40 percent is $320,000. As required by § 42(i)(9)(A), the $1 million of credits under § 42(h)(3)(C)(iv) is reduced by $320,000, not $800,000. The remaining $680,000 in credits ( i.e., $1 million $320,000) under § 42(h)(3)(C)(iv) is available for use in making credit allocations by the Designated Agency. However, the $1 million of credit under § 42(h)(3)(C)(iv) is reduced by $800,000 for purposes of making any future elections for cash assistance under section 1602 of the Act.

Under section 1602(b)(1)(A) of the Act, the percentage applicable to credit amounts under § 42(h)(3)(C)(iii) is 100 percent. The product of $1.5 million and 100 percent is $1.5 million. As required by § 42(i)(9)(A), the $2 million of credits under § 42(h)(3)(C)(iii) is reduced by $1.5 million, the actual credit amount elected by the Designated Agency to make a cash assistance election under section 1602 of the Act. The remaining $500,000 in credits ( i.e., $2 million - $1.5 million) under § 42(h)(3)(C)(iii) is available for use in making credit allocations by the Designated Agency. Similarly, the $2 million in credits under § 42(h)(3)(C)(iii) is reduced by $1.5 million for purposes of making any future elections for cash assistance under section 1602 of the Act.

2. Income Tax Treatment of Subawards

Based on the legislative history of the Act, subawards made pursuant to section 1602(c) of the Act are excluded from the gross income of recipients and are exempt from taxation.

3. Basis Treatment of Subawards

Section 42(i)(9)(B) of the Code, as added by section 1404 of the Act, provides

with the proceeds of a federally funded grant. Section 42(i)(9)(B), as added by section 1404 of the Act, provides that the basis of a qualified building shall not be reduced by the amount of any grant described in § 42(i)(9)(A). The legislative history to the Act provides that grants received under this provision ( i.e., cash assistance received under section 1602 of the Act) do not reduce [the] tax basis of a qualified low-income building. The legislative history to the Act further provides that grants under this provision are not taxable income to recipients. See H.R. Conf. Rep. No. 16, 111 ^th Cong., 1 ^st Sess. 532, 533 (2009).

CLARIFICATIONS

1. Credit Equivalent of Cash Assistance and Tracking under § 42(i)(9)(A)

Section 42(i)(9)(A) of the Code, as added by section 1404 of the Act, requires that the amounts in § 42(h)(3)(C)(i) through (iv) shall each be reduced by so much of such amount as is taken into account in determining the amount of any grant (cash assistance) under section 1602 of the Act. Thus, similar to the way the Designated Agency tracks allocations of credit during the course of a calendar year to ensure that total credits allocated do not exceed the Ceiling for that year, § 42(i)(9)(A) implies a duty (and paragraph 7 of the grant application Terms and Conditions imposes a duty) by the Designated Agency to track credits allocated and the credit equivalent of cash assistance amounts to ensure that total credits allocated from the 2009 Ceiling and the credit equivalent of total cash assistance amounts do not exceed the 2009 Ceiling. A Designated Agency may determine the credit equivalent of a cash assistance amount by dividing the cash assistance amount by 8.5 and rounding the result up to the nearest dollar.

For example, in computing the reduction with respect to the § 42(h)(3)(C)(ii) component of the Ceiling (and using an actual figure published by the Department of the Treasury in the List of Designated Agencies attached to the Application), assume that the maximum cash assistance amount permissible from the 2009 Ceiling for State X with respect to that component is $9,061,000.

State X is a state whose population qualifies for $2,665,000 in credits under § 42(h)(3)(C)(ii)(II), as adjusted for inflation under § 42(h)(3)(H). The Department of the Treasury determined the maximum cash assistance amount of $9,061,000 available to State X by multiplying total available credits of $2,665,000 under § 42(h)(3)(C)(ii)(II) by the formula prescribed by section 1602(b) of the Act for credits under § 42(h)(3)(C)(ii)(II) ( i.e., 0.85 x ([$2,665,000 x 0.4] x 10)). Of this amount, assume the Designated Agency of State X elects under section 1602(b) of the Act a cash assistance amount of $5 million. The credit equivalent of $5 million is $588,236 ( i.e., $5 million/8.5 = $588,235.29, rounded up to the nearest dollar). For purposes of making the reduction required by § 42(i)(9)(A) to State X’s 2009 Ceiling, the $2,665,000 in credits under § 42(h)(3)(C)(ii) must be reduced by $588,236, the credit equivalent of the $5 million cash assistance amount, not by the $5 million cash assistance amount. The $2,076,764 ( i.e., $2,665,000 - $588,236) remaining in credit under § 42(h)(3)(C)(ii) is available for use in making credit allocations by the Designated Agency. However, for purposes of making any future cash assistance election under section 1602 of the Act from the § 42(h)(3)(C)(ii) portion of State X’s 2009 Ceiling, the $9,061,000 maximum cash assistance amount is reduced by $5 million to $4,061,000.

The Department of the Treasury may not, in view of the taxpayer privacy and disclosure rules under § 6103 of the Code, publish the maximum cash assistance amounts from the other components of a State’s 2009 Ceiling (unlike credits under § 42(h)(3)(C)(ii)). To ensure that credits allocated and the credit equivalent of cash assistance amounts from any of these components of the 2009 Ceiling do not exceed credits available from those components, a Designated Agency should multiply the credit amount used to elect a cash assistance amount by the percentage applicable to that credit amount under section 1602(b)(1) of the Act, and then reduce the 2009 Ceiling accordingly.

For example, in computing the reduction with respect to the § 42(h)(3)(C)(iv) component of the Ceiling, assume that the credit amount of that component from State X’s 2009 Ceiling is $1 million. Assume further that in computing the reduc

2010–14 I.R.B. 526 April 5, 2010

Chile Earthquake Occurring in February 2010 Designated as a Qualified Disaster Under § 139 of the Internal Revenue Code

Notice 2010–26

This notice designates the Chile earthquake occurring in February 2010 as a qualified disaster for purposes of § 139 of the Internal Revenue Code in the affected areas of Chile.

EARTHQUAKE DISASTER

On February 27, 2010, a magnitude 8.8 earthquake with numerous significant aftershocks and a tsunami affected southern and central Chile (“Chile earthquake”). The earthquake and resulting aftershocks affected approximately 2 million individuals, displaced thousands of individuals from damaged and destroyed houses, and resulted in 795 deaths. The earthquake also caused major damage to buildings and infrastructure near the epicenter, and disrupted communications, electricity, water, and gas services in the affected areas. In addition, a tsunami caused significant damage along parts of coastal Chile. USAID Chile — Earthquake Fact Sheet No. 1 (March 1, 2010) and No. 2 (March 2, 2010).

This notice enables employer-sponsored private foundations to assist certain victims in areas affected by the Chile earthquake and enables recipients to exclude qualified disaster relief payments from gross income.

QUALIFIED DISASTER RELIEF PAYMENTS EXCLUDED FROM RECIPIENT’S GROSS INCOME

Section 139(a) provides that gross income shall not include any amount received by an individual as a qualified disaster relief payment.

Section 139(b) provides that a qualified disaster relief payment includes any amount paid to or for the benefit of an individual—

(1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses (not otherwise compensated for by insurance or otherwise)

that the basis of a qualified building shall not be reduced by the amount of any grant described in § 42(i)(9)(A). The legislative history to the Act provides that grants received under this provision ( i.e., cash assistance received under section 1602 of the Act) do not reduce the tax basis of a qualified low-income building. By extension, subawards under section 1602(c) of the Act derived from cash assistance under that section that are used in a qualified low-income building are not federal grants for purposes of § 42(d)(5)(A) and do not otherwise reduce the depreciable or eligible basis of the building.

DRAFTING INFORMATION

The principal author of this notice is Christopher J. Wilson, Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information concerning this notice, contact Mr. Wilson at (202) 622–3040 (not a toll-free call).

INTERIM GUIDANCE ON MEASUREMENT OF CONTINUITY OF INTEREST IN REORGANIZATIONS

Notice 2010–25

This notice pertains to the continuity of interest test generally applicable to reorganizations described in section 368 of the Internal Revenue Code.

I. PURPOSE

Under section 7805(e)(2) of the Internal Revenue Code, temporary regulations expire three years after issuance, if not earlier withdrawn. Section 1.368–1T(e)(2) of the Income Tax Regulations will accordingly expire on March 19, 2010. The purpose of this notice is to provide taxpayers with interim guidance applicable to the period between the expiration of the temporary regulations and the issuance of replacement guidance.

II. BACKGROUND AND INTERIM GUIDANCE

The Internal Revenue Code of 1986 (Code) generally provides nonrecognition

treatment for reorganizations described in section 368 of the Code. Besides satisfying the statutory and other requirements, in order to qualify as a reorganization, a transaction generally must satisfy the continuity of interest (COI) requirement. COI requires that, in substance, a substantial part of the value of the proprietary interests in the target corporation be preserved in the reorganization.

On March 20, 2007, the Internal Revenue Service (Service) and the Treasury Department (Treasury) published temporary regulations § 1.368–1T(e)(2) (T.D. 9316, 2007–1 C.B. 962) and proposed regulations (REG–146247–06, 2007–1 C.B. 977) in the Federal Register (72 FR 12974 and 72 FR 13058, respectively). The text of the temporary regulations and the proposed regulations is the same. The Service and the Treasury intend to issue final regulations, but do not expect to issue such regulations prior to the expiration of the temporary regulations. The purpose of this notice is to provide taxpayers with interim guidance applicable to the period between the expiration of the temporary regulations and the issuance of new regulations.

After expiration of the temporary regulations and prior to the issuance of new regulations, taxpayers may apply the rules set forth in the proposed regulations notwithstanding that the temporary regulations have expired. However, the target corporation, the issuing corporation, the controlling corporation of the acquiring corporation if stock thereof is provided as consideration in the transaction, and any direct or indirect transferee of transferred basis property from any of the foregoing, may not apply the provisions of the proposed regulations unless all such taxpayers elect to apply the provisions of such regulations. This requirement will be satisfied if none of the specified parties adopts treatment inconsistent with this election.

DRAFTING INFORMATION

The principal author of this notice is Richard Starke of the Office of Associate Chief Counsel (Corporate). For further information regarding this notice, please contact Richard Starke at (202) 622–7790 (not a toll-free call).

April 5, 2010 527 2010–14 I.R.B.

incurred as a result of a qualified disaster, or

(2) to reimburse or pay reasonable and necessary expenses (not otherwise compensated for by insurance or otherwise) incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

Under § 139(c)(3) the term “qualified disaster” includes a disaster resulting from an event that is determined by the Secretary to be of a catastrophic nature.

DESIGNATION AS QUALIFIED DISASTER

The Commissioner of Internal Revenue, pursuant to delegation by the Secretary, has determined that the Chile earthquake occurring in February 2010 is an event of a catastrophic nature under § 139(c)(3). Therefore, the Chile earthquake is designated as a qualified disaster under § 139 in the affected areas of Chile.

SECTION 501(c)(3) ORGANIZATIONS

Employer-sponsored private foundations may choose to provide disaster relief to employee victims of the Chile earthquake. Like all organizations described in § 501(c)(3), private foundations should exercise due diligence when providing disaster relief as set forth in Publication 3833, Disaster Relief: Providing Assis- tance Through Charitable Organizations .

DRAFTING INFORMATION

The principal author of this notice is Sheldon Iskow of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Mr. Iskow at (202) 622–4920 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, §§ 118, 362.)

Rev. Proc. 2010–20