PROCEDURES AVAILABLE FOR APPROVAL OF 'AREA OF CHRONIC ECONOMIC DISTRESS' DESIGNATION FOR MORTGAGE BOND QUALIFICATION.

Rev. Proc. 88-31

SECTION 1. PURPOSE

The purpose of this revenue procedure is to set forth procedures for requesting approval of a state designation of an area as an "area of chronic economic distress" under section 143(j)(3)(A)(ii) of the Internal Revenue Code.

SEC. 2 BACKGROUND

01 Section 103(a) of the Code provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that section 103(a) shall not apply to any private activity bond that is not a qualified bond. Section 141(e)(1)(B) provides that the term "qualified bond" includes a qualified mortgage bond.

02 Section 143(a)(1)(A) of the Code provides that the term "qualified mortgage bond" means a bond that is issued as part of a qualified mortgage issue. Section 143(a)(2)(A) provides that the term "qualified mortgage issue" means an issue by a state or political subdivision thereof of one or more bonds, but only if (i) all proceeds of such issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) such issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), and (i); and (iii) such issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b).

03 An issue meets the requirements of subsection (h) of section 143 of the Code only if at least 20 percent of the proceeds of the issue that are devoted to owner-financing is made available (with reasonable diligence) for owner-financing of targeted area residences for at least 1 year after the date on which owner-financing is first made available with respect to targeted area residences. However, the amount made available need not exceed 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner- occupied residences located in targeted areas within the jurisdiction of the issuing authority. Section 143(j)(1)(B) defines a targeted areas residence to include a residence in an area of chronic economic distress. Section 143(j)(3)(A) defines an "area of chronic economic distress" as an area of chronic economic distress (i) designated by the state as meeting standards established by the state for purposes of subsection (j), and (ii) the designation of which has been approved by the Secretary and the Secretary of Housing and Urban Development.

04 Section 143(j)(3)(B) of the Code provides that the criteria used by the Secretary and the Secretary of Housing and Urban Development in evaluating any proposed designation of an area will be as follows:

(i) the condition of the housing stock, including the age of the housing and the number of abandoned and substandard residential units,

(ii) the need of area residents for owner-financing under section 143, as indicated by low per capita income, a high percentage of families in poverty, a high number of welfare recipients, and high unemployment rates,

(iii) the potential for use of owner-financing under section 143 to improve housing conditions in the area, and

(iv) the existence of a housing assistance plan that provides a displacement program and a public improvements and services program.

05 Section 6a.103A-2(b)(5)(iii) of the Temporary Income Tax Regulations (issued under former section 103A(k) of the Code, the predecessor of section 143(j)) sets forth the criteria that will be used in evaluating a proposed designation of an area of chronic economic distress. Section 6a.103A-2(b)(5)(iv) lists the information that must be contained in a proposal by a state that an area be approved as an area of chronic economic distress.

06 A state or local government may elect to exchange all or part of its qualified mortgage bond authority for authority to issue mortgage credit certificates. See section 1.25-1T(a) of the Temporary Income Tax Regulations. In general, if such an election is made, section 25(a) of the Code will allow the recipient of a mortgage credit certificate to claim a credit against the recipient's federal income tax in an amount equal to the product of the certificate credit rate and the interest paid or accrued by the recipient during the taxable year on the remaining principal of the certified indebtedness amount. Section 25(c)(2)(A)(iii)(V) provides that the indebtedness certified by mortgage credit certificates must meet the requirements relating to the portion of loans that must be placed in targeted areas under section 143(h) (as modified by section 25(c)(2)(B).

07 Section 143(a)(1)(B) of the Code provides that no bond issue after December 31, 1988, may be treated as a qualified mortgage bond.

SEC. 3. PROCEDURE

01 A request for approval of a state designation of an area as an "area of chronic economic distress" under section 143(j)(3)(A)(ii) of the Code must be submitted by the state in triplicate to the Assistant Secretary for Housing/Federal Housing Commissioner of the Department of Housing and Urban Development (Attention: Office of Financial Management, Financial Policy Division, Room 9132, 451 7th Street, S.W., Washington D.C. 20410).

02 The approval or disapproval by the Assistant Secretary for Housing/Federal Housing Commissioner of the Department of Housing and Urban Development(HUD) of the state designation of an area as an "area of chronic economic distress" will be transmitted for concurrence or comment to the Associate Chief Counsel (Technical and International), Internal Revenue Service, Attention: CC:IND:2, 1111 Constitution Avenue, N.W., Washington D.C. 20224. The Internal Revenue Service (IRS) generally will respond in writing to HUD within 20 working days of the receipt of HUD's approval or disapproval.

03 If the state desires a conference because of an adverse decision on the proposed designation, representatives of HUD and IRS will attend the conference.

04 HUD will issue the response to the state's request for approval of the state designation of an area as an "area of chronic economic distress."

05 If the state, as an issuer of mortgage revenue bonds, requests a ruling concerning a prospective issue of mortgage revenue bonds that addresses requirements in addition to those pertaining to the approval of a state designation of "areas of chronic economic distress," the issuer must submit a separate request relating to the approval of the state designation of "areas of chronic economic distress" and must follow the procedures set forth in this revenue. The request pertaining to the other requirements applicable to the prospective issue of mortgage revenue bonds must follow the procedures set forth in Rev. Proc. 88-32, this page, this Bulletin. Only by following the procedures set forth in this revenue procedure and in Rev. Proc. 88-32, will the issuer be treated as having exhausted its administrative remedies and be able to seek a declaratory judgment from the United States Tax Court under section 7478 of the Code involving a determination by the IRS (or the failure by IRS to make a determination) whether prospective obligations are described in section 103(a). Even though a letter may be issued by HUD approving or disapproving the designation of a geographic area as an area of chronic economic distress, an issuer will in no event be deemed to have exhausted its administrative remedies for purposes of section 7478 until the earlier of the times set forth in section 6.02 of Rev. Proc. 88-32.

06 If an issuer, other than the state, desires to request a ruling that a prospective issue of mortgage revenue bonds will satisfy all the requirements necessary for the bonds to be described in section 103(a) of the Code, and a request for approval of state designated "areas of chronic economic distress" has already been considered by HUD and the IRS, the issuer must follow the procedures set forth in Rev. Proc. 88-32, this page, this Bulletin.

07 If a person (other than the issuer) with a material financial interest in the issuance of prospective mortgage revenue bonds desires to request a ruling on questions relating to the bonds other than the state designation of a geographic area as an "area of chronic economic distress," a separate request for such questions must be submitted to the IRS. Such request must comply with the requirements of Rev. Proc. 88-1, 1988-1 I.R.B. 7; Rev. Proc. 88-33, page 48, this Bulletin; and Rev. Proc. 88-3, 1988-1 I.R.B. 29.

08 If an issuer of, or a person (other than the issuer) with a material financial interest in, an outstanding issue of mortgage revenue bonds desires to request a ruling on questions relating to the bonds, such request must comply with the requirements of Rev. Proc. 88-1, Rev. Proc. 88-33, and Rev. Proc. 88-3.

SEC. 4. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 81-20 is amplified and superseded.

DRAFTING INFORMATION

The principal author of this revenue procedure is Gene Overton of the Individual Tax Division. For further information regarding this revenue procedure contact Mr. Overton on (202) 566-3650 (not a toll-free call).