SMALL LANDLORD EXEMPTION

On January 6, 1972, the Cost of Living Council, upon recommendation of the Rent Board and the Price Commission, decided to decontrol single family dwelling units and rental units in multifamily dwellings provided that the owner did not own more than four such rental units. Single family rentals comprised 38 percent of total rentals, two family units were 18 percent, and three to four family units accounted for 11 percent. Thus, two thirds of all rental units were in dwellings of four or fewer units. The Rent Board cited two major justifications for such an exemption. First, New York City rent control, consulted as a model, had a small landlord exemption. Second, landlords of such units very likely would not be able to document costs as required by some of the regulations. However, the exemption of such a large portion of the rental sector was later questioned by various consumer groups (see section on Rent Watch). These exemptions taken as a whole greatly limited the number of units under coverage. The approximate number was not documented by the Rent Advisory Board, the Price Commission, or the Cost of Living Council, but it is likely that almost two thirds of all units were exempted at the start of Phase II. This eased the job of enforcing compliance with the rent regulations.

EXCEPTIONS

The Economic Stabilization Act mandated that the Stabilization Program regulations allow adjustments for gross inequities and hardships. This requirement, of course, applied to the rent sector, and a mechanism had to be established for landlords to apply for an exception to the allowable rent ceiling when they felt the regulations caused them undue hardship. Landlords began applying for exceptions immediately after the Freeze was lifted, beginning November 13, 1971, when the interim price regulations applied to rents.

Exceptions requests were filed at the local IRS office. The IRS, however, served only as the conduit for the request, which was forwarded to the Price Commission for actual review.

The Price Commision considered two general threshhold criteria in considering the possible granting of relief: 1) when allowable rents did not permit a landlord adequate revenues to provide normal services to tenants, or 2) when a landlord did not receive an eight percent return on the fair market value of the property. These were screening criteria, and their presence did not guarantee relief. More

over, in particular cases, the Commission considered criteria. The Commission denied relief in cases where increases in operating costs were attributable to mismanagement and in cases where landlords could, without hardship, obtain increased cash flow from sources other than increased rents (e.g., by borrowing).

During the first quarter of 1972, 17 exceptions were granted by the Commission, 92 denied, and several hundred cases remained under review. Data for subsequent periods is not readily available, although it is clear that requests continued to come in.

Although the ability to seek relief from gross hardship was available as mandated by the Stabilization Act, the exception procedure was not a major part of the rent control program. Thus, extensive data on rent exceptions does not appear to have been compiled in an easily available reference source.

Compliance and Enforcement

THE INTERNAL REVENUE SERVICE

Early in the first freeze, the Cost of Living Council determined that the Internal Revenue Service should be the enforcement arm of the Stabilization Program, including the rent regulations.

Enforcement of rent regulations occupied from one third to one half of the Internal Revenue Service's Stabilization Program manpower from the beginning of the Freze through the end of Phase II. Midway through Phase II (June, 1972) the distribution of the 3,000 Internal Revenue Service Personnel positions among wage, price and rent were as follows:

The proportion of Internal Revenue resources devoted to rent was far in excess of the relative importance of rent to inflation (as registered by its weighting in the CPI) because of the tremendous number of rental units affected by the regulations. The Rent Board explained

that the Internal Revenue Service workload could have been even larger than it was had it not been for the "voluntary compliance" nature of the Stabiliaztion Program. The Board noted that there were 24 million rental units available in the United States. "Obviously by sheer volume alone, a great number of people are affected by rent increases." The Board concluded that "rent is a very visible expenditure and as such accounts for the vast number of complaints received by the Internal Revenue Service."

Upon analysis, this explanation of why the IRS workload in rent was so heavy is not entirely satisfactory. The Rent Advisory Board sought simplicity in its policy to enable tenants, landlords, and the IRS easily to understand and apply the regulations. Furthermore, the Board sought to design a program under which tenants and landlords would be able to resolve differences between themselves without the necessity of IRS involvement but the regulations were so complex and technical that these goals were not achieved. The IRS workload remained heavy despite the fact that, midway through the summer, over two thirds of the 24 million units had been decontrolled. The Cost of Living Council had determined that Internal Revenue Service rent compliance efforts should be passive, not active, and that the IRS role should be limited to responding to complaints of violations rather than seeking them out. Otherwise the IRS manpower devoted to the Economic Stabilization Program would have been completely consumed with rent matters. Compliance efforts in the rental sector differed from compliance in other sectors because in the rental sector consumers are in a unique position to monitor violations. Furthermore, a tenant's complaint to the IRS of an illegal rent increase could be investigated immediately, whereas in other sectors the IRS often had to wait until the end of a fiscal quarter to evaluate a company's overall pricing and profit information. The IRS's ability to react quickly to a rent complaint tended to encourage voluntary compliance by landlords. The Council decided that an attempt should be made to respond to each complaint or inquiry, since the rationale for continuing rent control after the Freeze had been the public support it would engender for the overall Stabilization Program. Throughout the rent control program, policies and decisions were often based on whether public support would be heightened or lessened. The Council believed that unresponsiveness to individual complaints would severely undermine the popular support of the Program.

This policy of investigating all complaints caused difficulties. The number of problems encountered by the public caused Internal Revenue Service personnel to get bogged down in the enforcement of the

regulations soon after their implementation.16 At first, the agents and revenue officers were nearly as confused as the tenants and landlords over interpretations and application of the regulations. By developing answers to the most frequently asked questions, the Internal Revenue Service, the Justice Department, the Cost of Living Council, the Price Commission, and the Rent Advisory Board all worked together to clarify the regulations and to make IRS enforcement easier and more precise. Despite these efforts, the IRS had great difficulty in determining the allowable rent.

In addition to the problem of limited manpower, there were other problems which caused the IRS to question the desirability of rent controls. The Economic Stabilization Act of 1970 provided that landlords charging illegal rents could be penalized up to $2,500 for a civil violation and fined up to $5,000 for a criminal violation. There were practical considerations which hampered widespread court enforcement of these sanctions. Initially, the Justice Department was reluctant to litigate any but the large and flagrant rent violations. Relatively insignificant cases were unlikely to be tried quickly in the U.S. District Courts because of the crowded dockets in most jurisdictions. In cases where rent violations were found, the investigator would decide whether the violation was willful and flagrant and of such size that it would be a suitable candidate for litigation. If so, the case would be sent to the Price Commission for review by the General Counsel's office. If the General Counsel decided in favor of litigation, the case would then be sent to the Justice Department. If the case was not suitable for litigation, the investigator would give written notice to the violator that he was directed to make restitution to overcharged tenants, rollback overcharges, and pay a penalty equal to twice the amount of the overcharged rent. The penalty notification would advise the violator of his right to request a district conference within 48 hours. At the district conference the IRS representative would have the option of modifying the findings of fact and the amount of the penalty. The IRS would notify the violator in writing of its findings and, if the findings were that a violation had taken place, it would advise the violator that he or she could appeal the findings within 30 days to the Internal Revenue Service Regional Appellate Office. The Appellate Conferee would have the authority to compromise the amount of the penalty, based upon hazards of litigation (in keeping with general tax litigation criteria). Following the Appellate conference, the violater would be given a final notice of the amount of penalty. That final notice would state that unless the amount was paid within ten days, the case would be referred to the Assistant U.S. Attorney for litigation.

RENT WATCH

On September 29, 1972 the Cost of Living Council announced a nationwide "rent watch," aimed at preventing landlords from boosting rents to take advantage of increased Social Security payments to the elderly, the handicapped, widows, and children. The elderly who relied on Social Security benefits spent a larger percentage of their income on rent than the average American renter did. Implementation of the rent watch began October 2, 1972, the day before checks reflecting increases of 20 percent were mailed to 28 million people on Social Security.

The rent watch represented an enlargement of the rent-compliance role of the Internal Revenue Service. Passive enforcement became active, as the Service began a "rent sweep" audit of senior citizens housing. The Internal Revenue Service had previously conducted sweeps of various sectors, for example the retail posting sweep, so this technique was not new. It merely required a personnel reallocation to adequately staff the increased level of investigation. IRS estimated that the rent sweep covered over 50,000 units. The rent watch also included expediting responses to rent complaints from Social Security recipients. The handling of walk-in, telephone, and mail inquiries from Social Security beneficiaries was given top priority in Internal Revenue local and district offices. Follow-up investigations were also handled quickly. New authority to levy financial penalties was delegated to the IRS.

The Council implemented the rent watch for two reasons. First, it sought to protect the Social Security recipients. In Washington, D.C. landlords had traditionally increased rents just before a government pay raise took effect, whether the new rent reflected higher costs or not. The Council sought to ensure that this type of rent increase would not occur nationwide in response to the Social Security increase. Second, the Council sought to warn any landlords who might not be voluntarily complying with the program. The success of the overall program depended heavily on voluntary compliance, and a threat such as the rent watch, tended to promote voluntary compliance.

The major shortcoming of the rent watch was that by the time it was implemented, only slightly more than 20 percent of all rental units were directly regulated by the Economic Stabilization rent regulations. Five million two hundred thousand units were controlled but 18.4 million unit were not. Of 28 million Social Security beneficiaries, four to seven million lived in rental housing, and of those living in rental housing, many lived in apartments which were