Rev. Proc. 81-30

SECTION 1. PURPOSE

The purpose of this revenue procedure is to set forth procedures for requesting approval of a state designation of a geographic area as an "area of chronic economic distress," as required by section 103A(k)(3)(A)(ii) of the Internal Revenue Code.

SEC. 2. BACKGROUND

.01 Section 103(a) of the Code provides that gross income does not include interest on (1) the obligations of a state or political subdivision of a state, and (2) qualified scholarship funding bonds.

.02 Section 103A was added to the Code by the Mortgage Subsidy Bond Tax Act of 1980, Pub.L. 96-499, 1980-2 C.B. 509, 512. Section 103A(a) provides that, with certain exceptions, any mortgage subsidy bond will be treated as an obligation not described in section 103(a)(1) or (2). A mortgage subsidy bond is, with certain exceptions, an obligation that is issued as part of an issue a significant portion of the proceeds of which is to be used directly or indirectly to provide mortgages on owner-occupied residences.

.03 Section 103A(b)(2)(A) of the Code provides that any "qualified mortgage bond" will not be treated as a mortgage subsidy bond. A qualified mortgage bond is an obligation issued as part of a "qualified mortgage issue." A qualified mortgage issue means an issue by a state or political subdivision of the state of one or more obligations in which all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences and the issue meets the requirements of subsections (d), (e), (f), (g), (h), (i), and (j) of section 103A.

.04 An issue will meet the requirement of subsection (h) of section 103A of the Code if at least 20 percent of the proceeds of the issue is made available 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 103A(k)(1)(B) defines a targeted area residence as a residence in an area of chronic economic distress. Section 103A(k)(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 the purposes of subdivision (A), and (ii) the designation of which has been approved by the Secretary and the Secretary of Housing and Urban Development.

.05 Section 103A(k)(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 this section, 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 a qualified mortgage bond issue 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.

.06 A Treasury decision containing Temporary Income Tax Regulations was published in the Federal Register dated July 1, 1981 (46 FR 34311). The temporary regulations relate to the tax-exempt status of certain mortgage subsidy bonds under section 103A of the Code. Section 6a.103A-2(b)(5)(i) of the temporary regulations defines the term "area of chronic economic distress." Section 6a.103A-2(b)(5)(iii) 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. Section 6a.103A-2(b)(5)(v) provides that the proposed designation must be submitted in triplicate to the Assistant Secretary for Housing/Federal Housing Commissioner of Housing and Urban Development.

.07 Section 103A(c)(1)(B) of the Code provides that no obligation issued after December 31, 1983, may be treated as a qualified mortgage bond.

SEC. 3. PROCEDURE

.01 A request for approval of a state designation of a geographical area as an "area of chronic economic distress," as required by section 103A(k)(3)(A)(ii) of the Code, must be submitted in triplicate to the Assistant Secretary for Housing/Federal Housing Commissioner of the Department of Housing and Urban Development (Attention: Office of State Agency and Bond Financed Programs, Room 6138, 451 7th Street, S.W., Washington, DC 20410). Section 6a.103A-2(b)(5)(v) of the temporary regulations.

.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 a geographic area as an "area of chronic economic distress" will be transmitted for concurrence or comment to the Assistant Commissioner (Technical), Internal Revenue Service, Attention: T:I:I, 1111 Constitution Avenue, N.W., Washington, DC 20224. The Internal Revenue Service (IRS) will respond in writing to HUD within 10 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 a geographic area as an "area of chronic economic distress."

.05 If the issuer or a person, other than the issuer, that has a natural financial interest in the issuance of prospective mortgage subsidy 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. 80-20, 1980-1 C.B. 633, Rev. Proc. 79-4, 1979-1 C.B. 483, as amplified by Rev. Proc. 79-12, 1979-1 C.B. 492, as amplified by Rev. Proc. 80-1, 1980-1 C.B. 579, and Rev. Proc. 81-10, 1981-1 C.B. 647.

¹ Also release as News Release IR-81-76, dated July 14, 1981.