Rev. Proceeding 96-32
Affecting - 26 CFR 601.201: Rulings and determination letters. (Also
Part I, ? 501(c)(3); 1.501(c)(3)-1.)
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 Section 501(c)(3) of the Internal Revenue
because they relieve the poor and distressed as described in
1.501(c)(3)-l(d)(2) of the Income Tax Regulations. This
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
.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
(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
(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
.02 In applying this safe harbor, the Service will follow the
provisions listed below:
(1) 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
(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 income limits. (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. 72124, 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
(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
(4) Participation in a government housing program designed to provide
( 5 ) Operation through a community-based board of directors,
particularly if the selection process demonstrates that community
groups have input into the organization's operations.
(6) The provision of additional social services affordable to the poor
(7) Relationship with an existing 501(c)(3) organization active in low
income housing for at least five years if the existing organization
(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
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)(l)(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 and distressed.
(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. How- ever, 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
(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
(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
SEC. 6. EXEMPT PURPOSES OTHER THAN RELIEVING THE POOR AND DISTRESSED
.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
(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].
DRAFTING INFORMATION 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).