May 01, 1996
Tax Simplification for
Low-Income Housing Groups
WASHINGTON - Today the IRS released a revenue
procedure that will assist charities involved in low-income housing to obtain tax
exemptions more expeditiously. The revenue procedure represents a cooperative effort of
the IRS and the low-income housing community to furnish beneficial guidance.
Each year housing organizations file nearly 1,000 exemption applications. The new
guidance should significantly reduce the average processing time for these applications.
In addition, the guidance will make it easier for housing organizations to know the full
range of exemption options and select the one that best suits their needs.
The guidance is provided in a revenue procedure that was proposed in Announcement
95-37. Comments received from a variety of groups were incorporated into the final revenue
procedure. The guidance lists general exemption qualifications standards for housing
organizations under Section 501(c)(3) of the Internal Revenue Code It also sets forth a
safe harbor for low-income housing groups seeking tax-exempt status.
The revenue procedure (Rev. Proc. 96-32) will appear in Internal Revenue Bulletin
1996-20, dated May 13, 1996.
Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also Part I, �� 501(c)(3); 1.501(c)(3)-1.)
Rev. Proc. 96-32, 1996-20 I.R.B. (May 13, 1996)
SECTION 1. PURPOSE
.01 This revenue procedure sets forth a safe harbor under which organizations
that provide low-income housing will be considered charitable as described in � 501(c)(3)
of the Internal Revenue Code because they relieve the poor and distressed as described in
� 1.501(c)(3)-l(d)(2) of the Income Tax Regulations. This revenue procedure also
describes the facts and circumstances test that will apply to determine whether
organizations that fall outside the safe harbor relieve the poor and distressed such that
they will be considered charitable organizations described in � 501(c)(3). It also
clarifies that housing organizations may rely on other charitable purposes to qualify for
recognition of exemption from federal income tax as organizations described in �
501(c)(3). These other charitable purposes are described in � 1.501(c)(3)-l(d)(2). This
revenue procedure supersedes the application referral described in Notice 93-1, 1993-1
.02 This revenue procedure does not alter the standards that have long been applied to
determine whether low-income housing organizations qualify for tax-exempt status under �
501(c)(3). Rather, it is intended to expedite the consideration of applications for
tax-exempt status filed by such organizations by providing a safe harbor and by
accumulating relevant information on the existing standards for exemption in a single
document. Low-income housing organizations that have ruling or determination letters and
have not materially changed their organizations or operations from how they were described
in their applications can continue to rely on those letters.
SEC. 2. BACKGROUND OF SAFE HARBOR
.01 Rev. Rul. 67-138, 1967-1 C.B. 129, Rev. Rul. 70-585, 1970-2 C.B. 115, and
Rev. Rul. 76-408, 1976-2 C.B. 145, hold that the provision of housing for low-income
persons accomplishes charitable purposes by relieving the poor and distressed. The Service
has long held that poor and distressed beneficiaries must be needy in the sense that they
cannot afford the necessities of life. Rev. Ruls. 67-138, 70-585, and 76-408 refer to the
needs of housing recipients and to their inability to secure adequate housing under all
the facts and circumstances to determine whether they are poor and distressed.
.02 The existence of a national housing policy to maintain a commitment to provide
decent, safe, and sanitary housing for every American family is reflected in several
federal housing acts. See, for example, � 2 of the United States Housing Act of 1937, 42
U.S.C. � 1437; � 2 of the Housing Act of 1949, 42 U.S.C. � 1441; � 2 of the Housing
and Urban Development Act of 1968, 12 U.S.C. � 1701t; and �� 101, 102, and 202 of the
Cranston-Gonzalez National Affordable Housing Act, 42 U.S.C. �� 12701, 12702, and 12721.
Not all beneficiaries of these housing acts, however, are necessarily poor and distressed
within the meaning of � 1.501(c)(3)-l(d)(2).
.03 In order to support national housing policy, the safe harbor contained in this
revenue procedure identifies those low-income housing organizations that will, with
certainty, be considered to relieve the poor and distressed. The safe harbor permits a
limited number of units occupied by residents with incomes above the low-income limits in
order to assist in the social and economic integration of the poorer residents and,
thereby, further the organization's charitable purposes. To avoid giving undue assistance
to those who can otherwise afford safe, decent, and sanitary housing, the safe harbor
requires occupancy by significant levels of both very low-income and low income families.
.04 Low-income housing organizations that fall outside the safe harbor may still be
considered organizations that offer relief to the poor and distressed based on all the
surrounding facts and circumstances. Some of the facts and circumstances that will be
taken into consideration in determining whether a low-income housing organization will be
so considered are set forth in section 4.
.05 Low-income housing organizations may also qualify for tax-exempt status because
they serve a charitable purpose described in � 501 (c) (3) other than relief of the poor
and distressed. Exempt purposes other than relief of the poor and distressed are discussed
in section 6.
.06 To be recognized as exempt from income tax under � 501(c)(3), a low-income housing
organization must not only serve a charitable purpose but also meet the other requirements
of that section, including the prohibitions against inurement and private benefit.
Specific concerns with respect to these prohibitions are set forth in section 7.
SEC. 3. SAFE HARBOR FOR RELIEVING THE POOR AND DISTRESSED
.01 An organization will be considered charitable as described in � 501(c)(3)
if it satisfies the following requirements:
(1) The organization establishes for each project that (a) at least 75 percent of the
units are occupied by residents that qualify as low-income; and (b) either at least 20
percent of the units are occupied by residents that also meet the very low-income limit
for the area or 40 percent of the units are occupied by residents that also do not exceed
120 percent of the area's very low-income limit. Up to 25 percent of the units may be
provided at market rates to persons who have incomes in excess of the low-income limit.
(2) The project is actually occupied by poor and distressed residents. For projects
requiring construction or rehabilitation, a reasonable transition period is allowed for an
organization to place the project in service. Whether an organization's transition period
is reasonable is determined by reference to all relevant facts and circumstances. For
projects that do not require substantial construction or substantial rehabilitation, a
one-year transition period to satisfy the actual occupancy requirement will generally be
considered to be reasonable. If a project operates under a government program that allows
a longer transition period, this longer period will be used to determine reasonableness.
(3) The housing is affordable to the charitable beneficiaries. In the case of rental
housing, this requirement will ordinarily be satisfied by the adoption of a rental policy
that complies with government-imposed rental restrictions or otherwise provides for the
limitation of the tenant's portion of the rent charged to ensure that the housing is
affordable to low-income and very low-income residents. In the case of homeownership
programs, this requirement will ordinarily be satisfied by the adoption of a mortgage
policy that complies with government-imposed mortgage limitations or otherwise makes the
initial and continuing costs of purchasing a home affordable to low and very low-income
(4) If a project consists of multiple buildings and each building does not separately
meet the requirements of sections 3.01(1), (2), and (3), then the buildings must share the
same grounds. This requirement does not apply to organizations that provide individual
homes or individual apartment units located at scattered sites in the community
exclusively to families with incomes at or below 80 percent of the area's median income.
.02 In applying this safe harbor, the Service will follow the provisions listed below:
(l) Low-income families and very low-income families will be identified in accordance
with the income limits computed and published by the Department of Housing and Urban
Development ("HUD") in Income Limits for Low and Very Low-Income Families Under
the Housing Act of 1937. The term "very low-income" is defined by the relevant
housing statute as 50 percent of an area's median income. The term "low-income"
is defined by the same statute as 80 percent of an area's median income. However, these
income limits may be adjusted by HUD to reflect economic differences, such as high housing
costs, in each area. The income limits are then tailored to reflect different family
sizes. If HUD's program terminates, the Service will use income limits computed under such
program as is in effect immediately before such termination. Copies of all or part of
HUD's publication may be obtained by calling HUD at (800) 245-2691 (HUD charges a small
fee to cover costs of reproduction).
(2) The retention of the right to evict tenants for failure to pay rent or other
misconduct, or the right to foreclose on homeowners for defaulting on loans will not, in
and of itself, cause the organization to fail to meet the safe harbor.
(3) An organization originally meeting the safe harbor will continue to satisfy the
requirements of the safe harbor if a resident's income increases and causes the
organization to fail the safe harbor, provided that the resident's income does not exceed
140 percent of the applicable income limit under the safe harbor. If the resident's income
exceeds 140 percent of the qualifying income limit, the organization will not fail to meet
the safe harbor if it rents the next comparable non-qualifying unit to someone under the
(4) To be considered charitable, an organization that provides assistance to the aged
or physically handicapped who are not poor must satisfy the requirements set forth in Rev.
Rul. 72-124, 1972-1 C.B. 145, Rev. Rul. 79-18, 1979-1 C.B. 194, and Rev. Rul. 79-19,
1979-1 C.B. 195. If an organization meets the safe harbor, then it does not need to meet
the requirements of these rulings even if all of its residents are elderly or handicapped
residents. However, an organization may not use a combination of elderly or handicapped
persons and low-income persons to establish the 75-percent occupancy requirement of the
safe harbor. An organization with a mix of elderly or handicapped residents and low-income
residents may still qualify for tax-exempt status under the facts and circumstances test
set forth in section 4.
SEC. 4. FACTS AND CIRCUMSTANCES TEST FOR RELIEVING THE POOR AND
.01 If the safe harbor contained in section 3 is not satisfied, an organization
may demonstrate that it relieves the poor and distressed by reference to all the
surrounding facts and circumstances.
.02 Facts and circumstances that demonstrate relief of the poor may include, but are
not limited to, the following:
(1) A substantially greater percentage of residents than required by the safe harbor
with incomes up to 120 percent of the area's very low-income limit.
(2) Limited degree of deviation from the safe harbor percentages.
(3) Limitation of a resident's portion of rent or mortgage payment to ensure that the
housing is affordable to low-income and very low-income residents.
(4) Participation in a government housing program designed to provide affordable
(5) Operation through a community-based board of directors, particularly if the
selection process demonstrates that community groups have input into the organization's
(6) The provision of additional social services affordable to the poor residents.
(7) Relationship with an existing 501(c)(3) organization active in low-income housing
for at least five years if the existing organization demonstrates control.
(8) Acceptance of residents who, when considered individually, have unusual burdens
such as extremely high medical costs which cause them to be in a condition similar to
persons within the qualifying income limits in spite of their higher incomes.
(9) Participation in a homeownership-program designed to provide homeownership
opportunities for families that cannot otherwise afford to purchase safe and decent
(10) Existence of affordability covenants or restrictions running with the property.
SEC. 5. EXAMPLES
.01 Application of the safe harbor and the facts and circumstances test is
illustrated by the following examples:
(1) Organization N operates pursuant to a government program to provide low and
moderate income housing projects. Seventy percent of N's residents have incomes that do
not exceed the area's low-income limit. Fifty percent of N's residents have incomes that
are at or below the area's very low-income limit. Under the program, N restricts rents
charged to residents below the income limits to no more than 30 percent of the applicable
low or very low-income limits for N's area. N is close to meeting the safe harbor. N has a
substantially greater percentage of very low-income residents than required by the safe
harbor; it participates in a federal housing program: and it restricts its rents pursuant
to an established government program. Although N does not meet the safe harbor, the facts
and circumstances demonstrate that N relieves the poor and distressed.
(2) Organization O will finance a housing project using tax-exempt bonds pursuant to �
145(d). O will meet the 20-50 test under � 142(d)(1)(A). Another 45 percent of the
residents will have incomes at or below 80 percent of the area's median income. The final
35 percent of the residents will have incomes above 80 percent of the area's median
income. O will restrict rents charged to residents below the income limits to no more than
30 percent of the residents' incomes. O will provide social services to project residents
and to other low-income residents in the neighborhood. Also, O will purchase its project
through a government program designed to retain low-income housing stock. O does not meet
the safe harbor. However, the facts and circumstances demonstrate that O relieves the poor
(3) Organization R provides affordable homeownership opportunities to purchasers
determined to be low-income under a federal housing program. The homes are scattered
throughout a section of R's community. Beneficiaries under the program cannot afford to
purchase housing without assistance. R's program makes the initial and continuing costs of
mortgages affordable to the home buyers by providing assistance with down payments and
closing costs. Homeowners assisted by R will have the following composition: 40 percent
will not exceed 140 percent of the very low-income limit for the area, 25 percent will not
exceed the low-income limit, and 35 percent will exceed the low-income limit but will not
exceed 115 percent of the area's median income. R does not satisfy the safe harbor.
However, the facts and circumstances demonstrate that R relieves the poor and distressed.
(4) Organization U will purchase existing residential rental housing financed using
tax-exempt bonds issued in accordance with � 145(d). U will meet the minimum requirements
of the 40-60 test of � 142(d)(1)(B). It will provide the balance of its units to
residents with incomes at or above area median income levels. U has a community-based
board of directors. U does not satisfy the safe harbor. Moreover, the facts and
circumstances do not demonstrate that U relieves the poor and distressed.
(5) Organization V provides rental housing in a section of the city where income levels
are well below the other parts of the city. All of V's residents are below the very
low-income limits for the area, yet they pay rents that are above 50 percent of the area's
very low-income limits. V has not otherwise demonstrated that the housing is affordable to
its residents. Although the residents are all considered poor and distressed under the
safe harbor, V does not relieve the poverty of the residents.
(6) Organization W provides homeownership opportunities to purchasers with incomes up
to 115 percent of the area's median income. W does not meet the income levels required
under the safe harbor. W's board of directors is representative of community interests,
and W provides classes and counseling services for its residents. The facts and
circumstances do not demonstrate that W relieves the poor and distressed.
SEC. 6. EXEMPT PURPOSES OTHER THAN RELIEVING THE POOR AND
.01 Relief of the poor and distressed, whether demonstrated by satisfaction of
the safe harbor described in section 3 of this Revenue Procedure or by reference to the
facts and circumstances test described in section 4, does not constitute the only exempt
purpose that a housing organization may have. Such organizations may qualify for exemption
without having to satisfy the standards for relief of the poor and distressed by providing
housing in a way that accomplishes any of the purposes set forth in � 501(c)(3) or �
1.501(c)(3)-1(d)(2). Those purposes include, but are not limited to, the following:
(1) Combating community deterioration is an exempt purpose, as illustrated by Rev. Rul.
68-17, 1968-1 C.B. 247, Rev. Rul. 68-655, 1968-2 C.B. 213, Rev. Rul. 70-585, 1970-2 C.B.
115 (Situation 3), and Rev. Rul. 76-147, 1976-1 C.B. 151. An organization that combats
community deterioration must (1) operate in an area with actual or potential
deterioration, and (2) directly prevent or relieve that deterioration. Constructing or
rehabilitating housing has the potential to combat community deterioration.
(2) Lessening the burdens of government is an exempt purpose, as illustrated by Rev.
Ruls. 85-1 and 85-2, 1985-1 C. B. 178. An organization lessens the burdens of government
if (a) there is an objective manifestation by the governmental unit that it considers the
activities of the organization to be the government's burdens, and (b) the organization
actually lessens the government's burdens.
(3) Elimination of discrimination and prejudice is an exempt purpose, as illustrated by
Rev. Rul. 68-655, 1968-2 C.B. 213, and Rev. Rul. 70-585, 1970-2 C.B. 115 (Situation 2).
These rulings describe organizations that further charitable purposes by assisting persons
in specific racial groups to acquire housing for the purpose of stabilizing neighborhoods
or reducing racial imbalances.
(4) Lessening neighborhood tensions is an exempt purpose, as illustrated by Rev. Rul.
68-655, 1968-2 C.B. 213, and Rev. Rul. 70-585, 1970-2 C.B. 115 (Situation 2). It is
generally identified as an additional charitable purpose by organizations that fight
poverty and community deterioration associated with overcrowding in lower income areas in
which ethnic or racial tensions are high.
(5) Relief of the distress of the elderly or physically handicapped is an exempt
purpose, as illustrated by Rev. Rul. 72-124, 1972-1 C.B. 145, Rev. Rul. 79-18, 1979-1 C.B.
194, and Rev. Rul. 79-19, 1979-1 C.B. 195. An organization may further a charitable
purpose by meeting the special needs of the elderly or physically handicapped.
SEC. 7. OTHER CONSIDERATIONS
If an organization furthers a charitable purpose such as relieving the poor and
distressed, it nevertheless may fail to qualify for exemption because private interests of
individuals with a financial stake in the project are furthered. For example, the role of
a private developer or management company in the organization's activities must be
carefully scrutinized to ensure the absence of inurement or impermissible private benefit
resulting from real property sales, development fees, or management contracts.
SEC. 8. EFFECT ON OTHER DOCUMENTS
Notice 93-1 is superseded.
SEC. 9. EFFECTIVE DATE
This revenue procedure is effective on [date of publication].
The principal authors of this revenue procedure are Lynn Kawecki and Marvin
Friedlander. For further information regarding this revenue procedure, contact Mr. Kawecki
at (202) 622-7305 (not a toll free number).
Previous | Next
1996 IRS News Releases | News Releases Main | Home