Rev. Proc. 83-5

Section 1. Purpose

The purpose of this revenue procedure is to provide issuers of "mortgage subsidy bonds," as defined in section 103A(b)(1) of the Internal Revenue Code, with a list of the "average area purchase price" safe harbor limitations to assist the issuers in determining whether the bonds will be treated as tax-exempt obligations under section 103(a)(1) or (2).

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. 512. Section 103A was amended by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 1982-2 C.B. 462, 497. 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 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." An issue by a state or political subdivision of a state of one or more obligations is a qualified mortgage issue if (1) all the proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences, and (2) the issue meets the requirements of subsections (d), (e), (f), (g), (h), (i), and (j) of section 103A.

.04 An issue of obligations issued after September 3, 1982, meets the requirements of subsection (f) of section 103A of the Code if the acquisition cost of each residence, other than a targeted area residence, to be financed with the proceeds of such issue does not exceed 110 percent (previously 90 percent) of the average area purchase price applicable to such residence. In the case of a targeted area residence (defined in subsection (k)), the acquisition cost may not exceed 120 percent (previously 110 percent) of the average area purchase price applicable to such residence. The average area purchase price is, with respect to any residence, the average purchase price of single-family residences in the statistical area in which the residence is located and for which sufficient statistical information for the most recent 12-month period is available. Separate determinations are made for new and existing residences, and for two-, three-, and four-family residences.

.05 Section 103A(f)(2) of the Code provides that the determination of whether the acquisition cost of each residence does not exceed 110 or 120 percent of the average area purchase price for that statistical area shall be made as of the date on which the commitment to provide the financing is made or, if earlier, the date of the purchase of the residence.

.06 Temporary Income Tax Regulations relating to the tax-exempt status of certain mortgage subsidy bonds under section 103A of the Code were published in the Federal Register dated July 1, 1981 (46 FR 34311), T.D. 7780, 1981-2 C.B. 25, and were amended November 10, 1981 (46 FR 55513), T.D. 7794, 1981-2 C.B. 40; May 24, 1982 (47 FR 22360), T.D. 7817, 1982-1 C.B. 23; June 8, 1982 (47 FR 24701), T.D. 7819, 1982-2 C.B. 51; and June 29, 1982 (47 FR 28094), T.D. 7821, 1982-2 C.B. 52. The temporary regulations under section 6a.103A-2(f)(5)(i) provide that an issuer may rely upon the average area purchase price safe harbor limitations published by the Department of the Treasury for the statistical area in which a residence is located. An issuer may use a limitation different than the published safe harbor limitation if the issuer has more accurate and comprehensive data.

.07 The average area purchase price safe harbor limitations for the period ending February 28, 1982, were released by News Release IR-81-91 on August 6, 1981, and were published in Rev. Proc. 81-36, 1981-2 C.B. 589. News Release IR-82-30, dated February 24, 1982, announced that, after February 28, 1982, issuers of qualified mortgage bonds may continue to rely on the published average area purchase price safe harbor limitations until new safe harbor limitations are released. News Release IR-82-30 was published as Announcement 82-45, 1982-11 I.R.B. 28.

Sec. 3. Application

.01 Issuers of qualified mortgage bonds may rely on the average area purchase price safe harbor limitations contained in this revenue procedure for the period beginning December 29, 1982, and ending December 31, 1983. The safe harbor limitations are estimates of the average area purchase price on which issuers may rely to satisfy the requirements of section 103A(f) of the Code. The estimates are based on information from the Federal Home Loan Bank Board's monthly survey of "Terms of Conventional Home Mortgages." The survey contains sales price estimates for both new and existing one-family nonfarm residences. The safe harbor limitations are based on the sales price estimates from four overlapping 12-month periods: April 1, 1981, through March 31, 1982; January 1, 1981, through December 31, 1981; October 1, 1980, through September 30, 1981; and July 1, 1980, through June 30, 1981. If adequate data were not available from the most recent 12-month period, the estimate is based on data from an earlier 12-month period in which there were sufficient data. The sales price data are adjusted for non-ventional (Federal Housing Administration (FHA) insured and Veterans' Administration guaranteed) home sales. The data are presented for Standard Metropolitan Statistical Areas (SMSA) and non-SMSA portions of each state, when sufficient data were available. When insufficient data for an SMSA occurred, the data were combined with other non-SMSA areas in the same state. When there were sufficient data for an SMSA but not for the other non-SMSA areas in the same state, the safe harbor limitations for the other non-SMSA areas were based on data for the entire state or on regional data. If insufficient data occurred for the entire state, regional data were used. Safe harbor limitations for two-four family residences are equal to the appropriate average area purchase price for single-family residences multiplied by the following adjustment factor; 1.126 for two-family residences, 1.363 for three-family residences, and 1.585 for four-family residences. These adjustment factors are similar to those used for the FHA mortgage limitations.

.02 Issuers of qualified mortgage bonds that are sold prior to January 28, 1983, may rely on the average area purchase price safe harbor limitations contained in Rev. Proc. 81-36 for the period beginning March 1, 1982 and ending December 28, 1982. If the average area purchase price safe harbor limitation in a statistical area for the period ending December 28, 1982, as contained in Rev. Proc. 81-36, is greater than the average area purchase price safe harbor limitation in the same statistical area for the period ending December 31, 1983, as contained in this revenue procedure, an issuer of mortgage subsidy bonds may rely on the average area purchase price safe harbor limitation for the period ending December 28, 1982, provided commitments are made before March 29, 1983, to provide financing for owner-occupied residences. Issuers of qualified mortgage bonds that have received a letter ruling from the Service approving an average area purchase price limitation that is higher than the safe harbor limitation in this revenue procedure may rely on the letter ruling for 1 year after the date of the letter ruling.

.03 If an SMSA is contained in two or more states, the acquisition cost of a residence within that SMSA shall not exceed the safe harbor limitation provided for the SMSA, not the limitation provided for all other areas in the state.

.04 The following average area purchase price safe harbor limitations have not been adjusted to reflect either the 110 percent of the average area purchase price described in section 103A(f)(1) of the Code or the 120 percent of the average area purchase price described in section 103A(f)(5).

 State and Area Designation                Average Area Purchase