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IRS Provides Guidance on Qualified Allocation Plans

Published by Mark Shelburne on Friday, March 3, 2017

Journal cover March 2017   Download PDF

The Internal Revenue Service (IRS) issued Revenue Ruling 2016-29 and Notice 2016-77 Dec. 12, 2016. The two have important similarities in addition to being released at the same time, as well as a few noteworthy differences.


The ruling and notice are rare instances of the federal government providing direction to allocating agencies on how to distribute low-income housing tax credits (LIHTCs). Rules for states are generally contained in their qualified allocation plan (QAP) and related documents. Internal Revenue Code (IRC) Section 42 contains a few requirements for QAPs, but they are broadly worded, as is common with statutes. The interpretation of specifics is mostly left to departments.

In the case of LIHTCs, such activity is limited. Treasury Regulation 1.42-17, “Qualified Allocation Plan,” has sections for Requirements and Selection criteria. However, the entire text for each is a single word: reserved. Other than what has been necessary to implement new legislation (e.g., the American Recovery and Reinvestment Act of 2009), Rev. Rul. 2016-29 and Notice 2016-77 are the first guidance on allocation in more than a decade. By comparison, the IRS has provided more input on how to administer property-level compliance, such as the 200-page Guide for Completing Form 8823.

Therefore, the two documents are initially important because of having been drafted at all. The small federal role in LIHTC distribution is entirely appropriate, as housing markets and other relevant factors vary a great deal from state to state.


The ruling and notice both interpret requirements for QAPs contained in Section 42. As described below, they also include statements on how LIHTCs connect with fair housing. 

There is a good chance the two share a catalyst: a 2015 U.S. General Accountability Office (GAO) report critical of LIHTC oversight. The GAO concluded the IRS, and even the Department of Housing and Urban Development (HUD), should be more involved in program administration. Although the recommendations are not likely to be enacted by Congress, the report may have motived action.

The guidance could have also been provided in response to a long-running efforts by various civil rights organizations whose overall contention is the LIHTC should do more to advance fair housing objectives. The advocacy has focused on reaching out to federal departments about what they can do to promote racial integration and other related outcomes.


The ruling and notice also are distinct in several ways. As is evident from their names, the documents are not the same form of issuance. According to the IRS:

A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts.

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Other forms are regulations, Treasury decisions, revenue procedures, technical assistance memorandums, and private letter rulings. The distinctions are not of great consequence to most practitioners. What matters is each kind has legal effect for what it specifically covers, unlike what’s known as subregulatory guidance (such as the formerly issued Low-Income Housing Credit Newsletter).

A more important dissimilarity is Rev. Rul. 2016-29 being final (absent an amendment, which is possible but rare), while Notice 2016-77 is partially a draft for comment. The deadline for comment was Feb. 10, 2017.

Last but not least, the notice explains what a Section 42 requirement means, while the Ruling precludes using another provision in a certain way. In other words, one says what’s in the law, the other says what’s not.

Revenue Ruling

Under Section 42(m)(1)(A)(ii), allocating agencies must inform local governments of LIHTC applications pending in their jurisdiction and provide a “reasonable opportunity” to comment. Rev. Rul. 2016-29 starts with a question: Does this requirement mean agencies must reject applications without local approval?

Next is presumably a hypothetical fact pattern. The QAP in “State X” effectively requires support from city/county government and neighborhoods; withholding it results in a veto. The ruling says the agency considers such policies to be necessary because of the Section 42 requirement.

What is a veto and why is it significant? The idea is councils/commissions can prevent a development from moving forward without using generally applicable land-use controls (i.e., zoning, special use permits, subdivision). All developers, not just those in affordable housing, have rights under these processes, including appealing certain types of denials. As such, stopping a proposal by using a QAP provision is often easier. Some advocates argue doing so may still violate the Fair Housing Act.

The ruling’s answer is fairly narrow: agencies cannot cite the statutory notice and comment requirement as a reason for allowing local government this level of control. The holding does not preclude giving incentives for support or even allowing vetoes. Both are just as possible as before, they now just need a rationale other than Section 42.

Many QAPs favor applications with local funding, resolutions of endorsement and other demonstrations of approval. What’s less known is how many, if any, agencies base these policies on their understanding of Section 42, as opposed to other considerations. For example, a state law in Texas means the agency must recognize the extent of support from various parties. 


Section 42(m)(1)(B)(ii)(III) requires QAPs give a preference to proposed developments located in qualified census tracts (QCT) which contribute to a concerted community revitalization plan (CCRP). QCTs are determined by HUD based on either the percentage of households below a certain income limit or a poverty rate above a particular level. There has been no nationwide definition of CCRPs, a space partially filled by the notice.

The IRS claims, without citation or specifics, that some agencies “have given preference” to applications because of only

  • being in a QCT or
  • the resulting development benefiting the surrounding neighborhood.

The notice says these alone are not enough to meet the Section 42 requirement. The “preference fails to apply unless... a [CCRP] exists that contains more components than the LIHTC project itself.”

From a federal perspective how much more is unresolved. The IRS is considering providing further clarification of what qualifies for the preference, which was the reason for seeking comments. During the first half of 2016, Treasury conducted a few informal meetings with various interested parties on the subject of CCRPs. There is no official record of the discussions, but the input likely informed the contents of the notice and ruling.

Based on a review of QAPs conducted by Novogradac & Company in 2016, essentially all agencies already comply with the expectation described in the notice. Many have extensive criteria for evaluating CCRPs.

Note the holding does not preclude an agency from favoring properties in QCTs. Indeed, doing so arguably makes sense because of the 30 percent boost in eligible basis. The notice simply explains such a policy is not enough for a QAP to comply with the CCRP requirements under Section 42.

Statements on Fair Housing

In addition to providing direction on how agencies should comply with Section 42, the two documents offered commentary in a debated area. The ruling included the following in its hypothetical fact pattern:

In State X, local approval is much more likely to be secured for proposed LIHTC developments in areas with greater proportions of minority residents and fewer economic opportunities than in higher-opportunity, non-minority communities. Agency’s practice of requiring local approval has created a pattern of allocating housing credit dollar amounts to projects in the predominantly lower-income or minority areas, with the result of perpetuating residential racial and economic segregation in State X.

Since the context is an illustrative assumption, there is no need for citation. However, as a statement from the federal government, it nevertheless carries weight. Many advocates and academics consider the description to be accurate. The notice is more measured, observing simply that “placing LIHTC projects in qualified census tracts risks exacerbating concentrations of poverty.”

What this commentary misses is there being almost no research using valid, complete methodology showing the LIHTC has exacerbated racial or poverty concentrations. What has been published claiming to show a problem suffers from analytical shortcomings sufficient to cast doubt on the conclusions. The most common failing is not making a distinction between new construction (adding units) and rehabilitation (fixing up existing stock), but there are several others.


In January 2015 the U.S. Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. Inclusive Communities Project. Over the next two years, the relationship between LIHTCs and fair housing was a persistent hot topic in the affordable housing industry. Rev. Rul. 2016-29 and Notice 2016-77 may be a punctuation mark at the end of this period.

How much either will matter in practice is unknown. The effect no doubt will vary state to state. At a minimum they are a helpful reminder of the need to periodically reflect on and question even longstanding policies.

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