rr-21-20.pdf

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Part I

Section 42. - Low-Income Housing Credit.

(Also §§ 141, 142, and 146, and 26 CFR 1.42-8, 1.42-13, and 1.150-1).

Rev. Rul. 2021-20

ISSUES

(1) Does the minimum 4 percent applicable percentage (4 percent floor) under
§ 42(b)(3) of the Internal Revenue Code (Code) apply to the building in Situation 1,
which is financed in part with a draw-down exempt facility bond issue that was issued in
2020 and on which one or more draws are taken after December 31, 2020?
(2) Does the 4 percent floor under § 42(b)(3) of the Code apply to the building in
Situation 2, which is financed in part with proceeds of an exempt facility bond issue that
was issued in 2020 and in part with proceeds of a different exempt facility bond issue
that is issued in a de minimis amount after December 31, 2020?

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(3) Does the 4 percent floor under § 42(b)(3) of the Code apply to the building in
Situation 3, which receives an allocation of housing credit dollar amount in 2020 and a
de minimis additional allocation after December 31, 2020?
FACTS
Situation 1: Draw-down loan with issue date in 2020. Agency is a State agency with
authority to issue exempt facility bonds to support qualified residential rental projects
within the meaning of § 142(d) of the Code. Taxpayer X (Conduit Borrower
1
) and
Agency entered into an agreement that Agency would provide exempt facility bond
financing to the Conduit Borrower to construct a new building for a qualified residential
rental project. In 2020, Agency borrowed pursuant to a draw-down loan that qualifies as
an issue of exempt facility bonds (the Loan), and the proceeds of the Loan are to be
used by the Conduit Borrower to construct the building. Agency plans to make multiple
draws under the Loan over the course of the construction, depending on the Conduit
Borrower’s financing needs at the time. In 2020, Agency drew an amount under the
Loan that exceeded the lesser of $50,000 or 5 percent of the issue price. In subsequent
years, Agency draws, and the Conduit Borrower uses, the remaining amounts available
under the issue to construct the building. All of the draws on the Loan (that is, the
bonds of the issue) are taken into account in applying the volume cap for private activity
bonds set forth in § 146 of the Code. The qualified low-income building is placed in
service after December 31, 2020. Any low-income housing credits earned with respect

1
A governmental issuer may serve as a conduit between investors who buy bonds, such as exempt
facility bonds, and a person (like Taxpayer X) that receives the bond proceeds and is solely responsible
for debt service payments. That person is referred to as the “conduit borrower.” See § 1.150-1(b) of the
Income Tax Regulations.

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to the building meet the requirements of § 42(h)(4)(A) for not counting against the
State’s housing credit ceiling.
Situation 2: Post-2020 issuance of a de minimis amount of exempt facility bonds.
The facts are the same as in Situation 1, except that instead of borrowing pursuant to a
draw-down loan that qualifies as an issue of exempt facility bonds, Agency issued an
issue of exempt facility bonds in 2020 to finance the Conduit Borrower’s construction of
the new building for the qualified residential rental project. In a subsequent year,
Agency issues a different issue of exempt facility bonds (not pursuant to a draw-down
loan), in a de minimis amount, that the Conduit Borrower similarly uses to finance
construction of the building.
Situation 3: Additional allocation of a de minimis housing credit dollar amount after
2020. Agency is a housing credit agency that allocates housing credit dollar amounts
under § 42(h). In 2020, Agency and Taxpayer Y entered into a binding agreement.
Under the agreement, Agency agreed to allocate to Y a housing credit dollar amount for
the acquisition of an existing building and an additional housing credit dollar amount for
the rehabilitation of the building into a qualified low-income building. In 2020, Agency
made allocations both of the amount related to the acquisition and of the additional
amount related to the rehabilitation. Each allocation qualified for an exception under
§ 42(h)(1)(E), and thus each was a valid carryover allocation. As a result of those
qualifications for an exception under § 42(h)(1)(E), the State’s housing credit ceiling for
2020 was reduced by the amounts of the two carryover allocations. Y completes the
acquisition and rehabilitation of the building into a qualified low-income building and

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places the building in service after December 31, 2020. After 2020, but before the
building is placed in service, Agency makes an additional allocation of housing credit
dollar amount related to the acquisition of the existing building. The amount of this
additional allocation is de minimis and reduces Agency’s ceiling for housing credit dollar
amounts for the year after 2020 in which the allocation is made.
LAW
Section 42(a) provides that the amount of the low-income housing credit for any
taxable year in the credit period is an amount equal to the applicable percentage of the
qualified basis of each qualified low-income building.
Section 42(b)(1) provides rules to determine the applicable percentage.
Section 42(b)(1)(A) defines the term “applicable percentage” with respect to any
building as the appropriate percentage prescribed by the Secretary of the Treasury or
her delegate (Secretary) for the earlier of (i) the month in which the building is placed in
service, or (ii) at the election of the taxpayer—(I) the month in which the taxpayer and
the housing credit agency enter into an agreement with respect to the building (which is
binding on the agency, the taxpayer, and all successors in interest) as to the housing
credit dollar amount to be allocated to such building, or (II) in the case of any building to
which § 42(h)(4)(B) applies, the month in which the tax-exempt obligations are issued.
A month may be elected under § 42(b)(1)(A)(ii) only if the election is made not later than
the fifth day after the close of such month. Such an election, once made, is irrevocable.
Section 42(b)(2), which was enacted by section 3002(a)(1) of the Housing
Assistance Tax Act of 2008 (2008 Act), Division C of the Housing and Economic

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Recovery Act of 2008, Public Law 110-289, 122 Stat. 2654, 2879 (July 30, 2008),
provides a minimum credit rate of 9 percent for new buildings that are not federally
subsidized (9 percent floor). Section 3002(c) of the 2008 Act provides that the
9 percent floor under § 42(b)(2) applies to buildings placed in service after July 30,
2008.
Notice 2008-106, 2008-49 IRB 1239, provides guidance on application of the
9 percent floor. The notice clarifies that the 9 percent floor applies even if, before the
2008 Act, a taxpayer had made an irrevocable election under § 42(b)(1)(A)(ii) to apply
to a building an applicable percentage that is less than 9 percent. The notice also
concludes that: “Notwithstanding the application of the 9 percent floor, the housing
credit dollar amount allocated to a project shall not exceed the amount the housing
credit agency determines is necessary for the financial feasibility of the project and its
viability as a qualified low-income housing project throughout the credit period. See
42(m)(2).”
Section 201(a) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Act),
enacted as Division EE of the Consolidated Appropriations Act, 2021, Public Law 116-
260, 134 Stat. 1182, 3056 (December 27, 2020), added to the Code a new § 42(b)(3),
which provides a 4 percent minimum credit rate for buildings to which the 9 percent floor
in § 42(b)(2) does not apply and which are placed in service by the taxpayer after
December 31, 2020. The amendments to § 42(b) made by section 201(a) of the Act
“apply to (1) any building which receives an allocation of housing credit dollar amount
after December 31, 2020, and (2) in the case of any building any portion of which is

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financed with an obligation described in section 42(h)(4)(A), any such building if any
such obligation which so finances such building is issued after December 31, 2020.”
Section 201(b)(1) and (2) of the Act.
Section 42(d)(2)(B) provides that, except as provided in § 42(f)(5), a credit is
allowable under § 42(a) by reason of rehabilitation expenditures that are treated as a
new building under § 42(e) with respect to the building. Section 42(e)(1) provides that if
rehabilitation expenditures are paid or incurred by the taxpayer with respect to any
building and if the expenditures meet the criteria in § 42(e)(2) and (3), those
expenditures are treated as a separate new building.
Under § 42(h)(1), the amount of the credit determined under § 42(a) for any taxable
year with respect to any building must not exceed the housing credit dollar amount
allocated to the building. Section 42(h)(1)(E) provides general rules for carryover
allocations of the low-income housing credit. A carryover allocation is defined in § 1.42-
6(a)(1) as an allocation that meets the requirements of § 42(h)(1)(E) (relating to
carryover allocations for single buildings) or § 42(h)(1)(F) (relating to carryover
allocations for multiple-building projects).
Section 42(h)(4)(A) provides an exception to the requirement in § 42(h)(1). Thus, a
building within the exception can earn low-income housing credits without having
received any allocation. The exception applies to the portion of any credit allowed
under § 42(a) that is attributable to a building's eligible basis financed by an obligation
the interest on which is exempt from tax under § 103 of the Code if: (i) the obligation is
taken into account under § 146; and (ii) principal payments on the financing are applied

7
within a reasonable period to redeem obligations the proceeds of which were used to
provide such financing or such financing is refunded under § 146(i)(6).
Section 42(m)(2)(D) provides that § 42(h)(4) does not apply to any project unless the
governmental unit which issued the bonds makes a determination under rules similar to
the rules provided for in § 42(m)(2)(A) and (B). Section 42(m)(2)(A) provides that a
housing credit dollar amount allocated to a project cannot exceed the amount the
housing credit agency determines is necessary for the financial feasibility of the project
and its viability as a qualified low-income housing credit project throughout the credit
period. Under § 42(m)(2)(B) and § 1.42-17(a)(3), when a housing credit agency makes
a determination under § 42(m)(2)(A), it must consider a number of factors including: (i)
the sources and uses of funds and total financing planned for the project; (ii) any
proceeds or receipts expected to be generated by reason of tax benefits; (iii) the
percentage of housing credit dollar amount used for project costs other than the cost of
intermediaries; and (iv) the reasonableness of the developmental and operational costs
of the project.
Section 1.42-17(a)(4)(i) describes the timing of the housing credit agency
determinations and certifications under § 1.42-17(a)(3). They must be made at (A) the
time of the application for the housing credit dollar amount; (B) the time of the allocation
of the housing credit dollar amount; and (C) the date the building is placed in service.
Section 1.42-17(a)(5) provides that, for the determination at the time the building is
placed in service, the taxpayer must submit a schedule of project costs. Section 1.42-
17(a)(6), provides that a project qualifying under § 42(h)(4) (concerning bond-financed

8
projects) is not entitled to any credit unless the governmental unit that issued the bonds,
or the housing credit agency responsible for issuing the Form(s) 8609, Low-Income
Housing Credit Allocation and Certification, to the project, makes determinations under
rules similar to the rules in § 1.42-17(a)(3), (4), and (5).
Section 142 provides rules for exempt facility bonds. Section 142(a) provides that an
exempt facility bond is any bond issued as part of an issue 95 percent or more of the
net proceeds of which are to be used to support certain categories of building projects,
one of which is a qualified residential rental project. Section 142(d) generally defines a
“qualified residential rental project” as any project for residential rental property if, at all
times during the qualified project period and disregarding that part of the building in
which such property is located that is used for purposes other than residential rental
purposes, either (1) 20 percent or more of the residential units in such project are
occupied by individuals whose income is 50 percent or less of area median gross
income, or (2) 40 percent or more of the residential units in such project are occupied by
individuals whose income is 60 percent or less of area median gross income.
Under § 1.150-1(c)(4)(i), bonds issued pursuant to a draw-down loan are treated as
part of a single issue. The issue date of the issue is the first date on which the
aggregate draws under the loan exceed the lesser of $50,000 or 5 percent of the issue
price.
ANALYSIS
In a determination of whether the 4 percent floor applies, all the buildings described
in the FACTS of this revenue ruling satisfy the requirement of § 42(b)(3) that a building

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be placed in service after 2020. Each of these three situations, however, raises the
question whether the post-2020 events in that situation meet the relevant portions of the
effective date provisions in section 201(b) of the Act, which require a post-2020
issuance of a tax-exempt obligation or a post-2020 allocation of housing credit dollar
amount.
An evaluation of the effect of these post-2020 events must consider the apparent
reasons for the requirement in section 201(b) of the Act of certain post-2020 actions by
State or local governments. For example, when section 3002 of the 2008 Act added the
9 percent floor, the effective date required only that a building be placed in service after
July 30, 2008, the applicable date of enactment. Section 42(b)(3) also expressly
provides such a placed-in-service effective date for the 4 percent floor. However,
section 201(b) of the Act adds an additional requirement—application of the 4 percent
floor to a qualified low-income building is also dependent on the existence of some post-
2020 government action with respect to the building. The apparent reason for the
additional effective date criteria in section 201(b) of the Act can be inferred by
comparing buildings that satisfy only the placed-in-service requirement with those
satisfying both that requirement and section 201(b) of the Act.
Considered in this way, section 201(b) of the Act functions to prevent a windfall of
credits in situations where, prior to enactment of the 4 percent floor, the taxpayer had
substantially completed the structuring of the transaction. Governmental determinations
of financial feasibility under § 42(m)(2)(A) must occur not later than an allocation of
housing credit dollar amounts or an issuance of exempt facility bonds for a qualified

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residential rental project. Because the date of enactment of the Act occurred so late in
2020, absence of a post-2020 allocation or issuance means that the low-income
building had been planned, and its financial feasibility had been assessed, without
taking the 4 percent floor into account. Absent the restriction in section 201(b) of the
Act, buildings would receive unnecessary and unanticipated credits on arrangements
that had been structured and vetted to function without them. Thus, the requirements in
section 201(b) of the Act seem to treat the possibility of those unplanned for credits as if
they are a windfall to be avoided.
In Situation 1, the building is financed by a draw-down loan. Section 1.150-1(c)(4)(i)
treats bonds issued pursuant to a draw-down loan as part of a single issue. Further,
under § 1.150-1(c)(4)(i), the issue date of the issue in Situation 1 was in 2020 because
amounts drawn exceeded the lesser of $50,000 or 5 percent of the issue price. This
issue date of the issue in Situation 1 does not change under § 1.150-1(c)(4)(i) because
a subsequent draw (that is, a bond) occurs after 2020.
The language of section 201(b)(2) of the Act refers to the issue date of the
“obligation which so finances such building.” Thus, the question here is whether this
language refers to the issue or to the individual draws. Interpreting the “obligation” as
the issue rather than the draws is consistent with the apparent intent of the effective
date provisions in the Act, as discussed above. Although individual draws occur at
various times, the maximum amount of the financing provided by the Loan was finalized
before 2021. For example, in Situation 1, if the financing structure had been finalized
during September 2020, the applicable percentage for that month was 3.07 percent.

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See Table 4 of Rev. Rul. 2020-16, 2020-37 I.R.B. 550, 551. Hence, this is a situation
where the transaction was structured assuming an applicable percentage that is not
increased by a 4 percent floor. Accordingly, if the post-2020 draws under the 2020
issue caused the 4 percent floor to apply, the result would be a windfall of credits that
were not taken into account when the transaction was structured.
Thus, in Situation 1, because the Loan (that is, the draw-down issue of bonds) was
issued in 2020, the applicable percentage of the building is determined without regard to
the 4 percent floor. The applicable percentage of the building is the amount determined
under § 42(b)(1)(B) and (C) for the month determined under § 42(b)(1)(A).
Unlike the circumstances with the Loan in Situation 1 (which was a draw-down loan),
the post-2020 bond proceeds in Situation 2 were from a post-2020 issuance of an
exempt facility bond issue, and each post-2020 bond is part of that post-2020 issue.
Thus, the Situation 2 analysis does not depend on whether the language of
section 201(b)(2) of the Act refers to the issue date of a bond issue or to the issue date
of the individual bonds.
In Situation 2, the Conduit Borrower receives financing from two issues of exempt
facility bonds—one issued in 2020 and one issued in a later year. The latter issue,
however, is only a de minimis amount. See Rev. Proc. 2021-43, page __ this bulletin,
providing a safe harbor for determining whether an exempt facility bond issue that is
issued after December 31, 2020, is more than de minimis for purposes of this revenue
ruling. Because the building was placed in service after 2020, whether the 4 percent
floor applies depends on the effect, if any, of the post-2020 de minimis issuance. That

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is, the determination of whether the 4 percent floor applies depends on whether the
post-2020 de minimis issuance satisfies the effective date requirement in
section 201(b)(2) of the Act that a building be financed by a § 42(h)(4)(A) obligation
issued after December 31, 2020.
As discussed in connection with Situation 1, section 201(b) of the Act functions to
prevent windfalls. It is necessary, therefore, to consider whether a de minimis post-
2020 financing could create a windfall of tax credits. When an issue of exempt facility
bonds is issued in a non-de-minimis amount after 2020, any concern over a windfall of
credits is lessened. In those situations, because the post-2020 issuance is not de
minimis, the transaction is less likely to have been entirely structured prior to the
enactment of the 4 percent floor. Further, a greater portion of the total credits
generated by applying the 4 percent floor to the building would be expected to result
from basis financed by the post-2020 issuance. Thus, it is consistent with the apparent
intent of section 201(b) for the 4 percent floor to apply to buildings whose financing
includes both pre-2021 exempt facility bonds and a non-de-minimis amount of exempt
facility bonds that are part of an issue that is issued after December 31, 2020.
The situation is different, however, if a de minimis amount of bonds constitute a
building’s only exempt facility bonds issued as part of an issue issued after 2020. In this
case, Situation 2 aligns more closely with a building whose only tax-exempt financing
was issued before 2021 (even if it is placed in service after 2020). If a de minimis
amount of post-2020 tax-exempt bond financing caused the project to qualify for the

13
4 percent floor, then that project would receive substantially more credit than an
economically equivalent project all of whose tax-exempt financing was issued pre-2021.
Further, application of the 4 percent floor would produce an increase in credits not
commensurate with the de minimis post-2020 financing. Except for the de minimis
subsequent financing, the increased credit available by virtue of the 4 percent floor
would be based on assets whose ability to yield low-income housing credits was the
result of their pre-2021 financing. There is no indication that Congress contemplated
such an incongruous result in drafting the effective date provisions in section 201(b) of
the Act.
Moreover, the application of the 4 percent floor would create an undesirable
incentive for taxpayers if a de minimis amount of post-2020 financing were held to
satisfy section 201(b)(2) of the Act. Under this approach, taxpayers might seek nominal
additional financing even in situations where the additional financing is not necessary
for the financial feasibility of the building. Any such taxpayer efforts would increase
complexity when housing credit agencies and bond issuers evaluate the financial
feasibility of projects for purposes of § 42(m)(2)(D).
In addition, such a holding would undercut § 42(m)(2) and § 1.42-17, which guide
housing credit agencies and bond issuers when they determine whether an amount is
needed for the financial feasibility of a project. Those requirements reduce any
incentive to seek de minimis amounts that are not necessary for the project’s financial
feasibility. There is no indication that Congress meant to interpret the effective date
requirement to incentivize taxpayers to seek unnecessary amounts. This result is

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avoided by interpreting section 201(b)(2) of the Act as describing only non-de-minimis
post-2020 financing.
Thus, in Situation 2, the de minimis amount of exempt facility bonds that are part of
an issue issued after 2020 fail to cause the 4 percent floor to apply to the building. See
Rev. Proc. 2021-43, page __ this bulletin, providing a safe harbor for determining
whether an exempt facility bond issue that is issued after December 31, 2020, is more
than de minimis for purposes of this revenue ruling. Because the 4 percent floor does
not apply, the applicable percentage is the amount determined under § 42(b)(1)(B) and
(C) for the month determined under § 42(b)(1)(A).
This analysis would be the same for a building that is financed in part with proceeds
of an exempt facility bond issue that was issued in 2020 and in part with a portion of the
proceeds of a different exempt facility bond issue that is issued in a non-de-minimis
amount after December 31, 2020 (primarily to finance one or more other buildings)
when the portion of the proceeds of the exempt facility bond issue issued after
December 31, 2020, that finances the building represents a de minimis portion of the
building’s overall exempt facility bond financing.
Finally, when the 4 percent floor applies to a building, it applies to any 30-percent-
present-value applicable percentage used to compute low-income housing credits for
the building. In these cases, therefore, it is irrelevant whether an election had been
made under § 42(b)(1)(A)(ii) to use a pre-placed-in-service month for determining the
applicable percentage. Cf. Notice 2008-106 (reaching a similar result when the
9 percent floor was enacted).

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In Situation 3, Agency makes no more than a de minimis allocation of housing credit
dollar amount after 2020. Although the acquisition of the building was completed after
2020, and the building was placed in service after 2020, the transaction was structured
in 2020, and at that time, X and Agency did not take the 4 percent floor into account.
Arguably, the windfall effect with an allocation is less than in a building financed with
exempt facility bonds. The credits in this context are limited to those allocated by a
housing credit agency. By contrast, in projects financed by § 42(h)(4)(A) obligations,
the credits are limited only by what the qualified basis can generate. Nevertheless, the
requirements of section 201(b)(1) of the Act manifest the same legislative intent as
section 201(b)(2) of the Act and should therefore be interpreted consistently. Thus, the
principles that govern de minimis amounts of bonds are equally applicable to de minimis
allocations. See Rev. Proc. 2021-43, page __ this bulletin, providing a safe harbor for
determining whether an allocation of a housing credit dollar amounts that is made after
December 31, 2020, is more than de minimis for purposes of this revenue ruling.
Accordingly, the 4 percent floor does not apply to the building described in Situation 3.
X must use the applicable percentage determined under § 42(b)(1)(B) and (C) for the
month determined under § 42(b)(1)(A).
As described above, when the 4 percent floor applies to a building, it applies to any
30-percent-present-value applicable percentage used to compute low-income housing
credits for the building. In these cases, therefore, it is irrelevant whether an election had
been made under § 42(b)(1)(A)(ii) to use a pre-placed-in-service month for determining
the applicable percentage.

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HOLDINGS
(1) Situation 1. The 4 percent floor under § 42(b)(3) does not apply to the building in
Situation 1, which is financed in part with a draw-down exempt facility bond issue that
was issued in 2020 and on which one or more draws are taken after December 31,
2020.
(2) Situation 2. The 4 percent floor under § 42(b)(3) does not apply to the building in
Situation 2, which is financed in part with proceeds of an exempt facility bond issue that
was issued in 2020 and in part with proceeds of a different exempt facility bond issue
that is issued in a de minimis amount after December 31, 2020.
(3) Situation 3. The 4 percent floor under § 42(b)(3) does not apply to the building in
Situation 3, which receives an allocation of housing credit dollar amount in 2020 and a
de minimis additional allocation after December 31, 2020.
The analysis in this revenue ruling applies only for purposes of determining whether
the 4 percent floor under § 42(b)(3) applies to a building.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Dillon Taylor and Michael Torruella
Costa of the Office of Associate Chief Counsel (Passthroughs & Special Industries).
For further information regarding this revenue ruling, contact Dillon Taylor or Michael
Torruella Costa at (202) 317-4137 (not a toll-free call).