[Federal Register Volume 76, Number 109 (Tuesday, June 7, 2011)]
[Proposed Rules]
[Pages 32882-32885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13978]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101826-11]
RIN 1545-BK04
New Markets Tax Credit Non-Real Estate Investments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations modifying the new
markets tax credit program to facilitate and encourage investments in
non-real estate businesses in low-income communities. The regulations
will affect taxpayers claiming the new markets tax credit and
businesses in low-income communities relying on the program. This
document also provides a notice of a public hearing on these proposed
regulations. The Treasury Department and the IRS have published
separately in this issue of the Federal Register an advance notice of
proposed rulemaking REG-114206-11 requesting comments on additional
modifications to the new markets tax credit program to facilitate and
encourage investments in non-real estate businesses in low-income
communities.
DATES: Written or electronic comments must be received by September 8,
2011. Outlines of topics to be discussed at the public hearing
scheduled for Thursday, September 29, 2011, must be received by
September 8, 2011.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-101826-11), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
101826-11), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-101826-11).
The public hearing will be held in the Auditorium of the Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Julie
Hanlon-Bolton, (202) 622-3040; concerning submission of comments, the
hearing, and/or to be placed on the building access list to attend the
hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1 to provide additional rules
relating to the new markets tax credit under section 45D of the
Internal Revenue Code (Code). Section 45D was added to the Code by
section 121 of the Community Renewal Tax Relief Act of 2000 (Pub. L.
106-554, 114 Stat. 2763 (2000)) and amended by section 221 of the
American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 1418
(2004)), section 101 of the Gulf Opportunity Zone Act of 2005 (Pub. L.
109-135, 119 Stat. 25 (2005)), Division A, section 102 of the Tax
Relief and Health Care Act of 2006 (Pub. L. 109-432, 120 Stat. 2922
(2006)), section 302, Division C of the Tax Extenders and Alternative
Minimum Tax Relief Act of 2008 (Pub. L. 110-343, 122 Stat. 3765
(2008)),
[[Page 32883]]
section 1403(a)(1) of the American Recovery and Reinvestment Tax Act of
2009 (Pub. L. 111-5, 123 Stat. 115 (2009)), and section 733 of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010 (Pub. L. 111-312, 124 Stat. 3296 (2010)).
Groups and organizations representing investors, qualified
community development entities, businesses, and other entities involved
with the new markets tax credit program have submitted comments
requesting additional guidance to encourage more investment in non-real
estate businesses. The commentators suggested that revising the new
markets tax credit program to encourage investment in non-real estate
businesses will bring increased amounts of capital to underserved
businesses in low-income communities. The Treasury Department and IRS
believe that revisions of the reinvestment rules of the new markets tax
credit program would have a positive impact on the ability of the
program to benefit non-real estate businesses in low-income
communities.
General Overview
Section 45D(a)(1) allows a new markets tax credit on certain credit
allowance dates described in section 45D(a)(3) with respect to a
qualified equity investment in a qualified community development entity
(CDE) described in section 45D(c).
Under section 45D(b)(1), an equity investment in a CDE is a
qualified equity investment if, among other requirements: (A) the
investment is acquired by the taxpayer at its original issue (directly
or through an underwriter) solely in exchange for cash; (B)
substantially all of the cash is used by the CDE to make qualified low-
income community investments; and (C) the investment is designated for
purposes of section 45D by the CDE.
Under section 45D(b)(2), the maximum amount of equity investments
issued by a CDE that may be designated by the CDE as qualified equity
investments shall not exceed the portion of the new markets tax credit
limitation set forth in section 45D(f)(1) that is allocated to the CDE
by the Secretary under section 45D(f)(2).
Section 45D(c)(1) provides that an entity is a CDE if, among other
requirements, the entity is certified by the Secretary as a CDE.
Section 45D(d)(1) defines qualified low-income community investment
to mean: (A) any capital or equity investment in, or loan to, any
qualified active low-income community business (as defined in section
45D(d)(2)); (B) the purchase from another CDE of any loan made by the
entity that is a qualified low-income community investment; (C)
financial counseling and other services specified in regulations
prescribed by the Secretary to businesses located in, and residents of,
low-income communities; and (D) any equity investment in, or loan to,
any CDE.
Under section 45D(d)(2)(A), a qualified active low-income community
business is any corporation (including a nonprofit corporation) or
partnership if for such year, among other requirements, (i) at least 50
percent of the total gross income of the entity is derived from the
active conduct of a qualified business within any low-income community,
(ii) a substantial portion of the use of the tangible property of the
entity (whether owned or leased) is within any low-income community,
and (iii) a substantial portion of the services performed for the
entity by its employees are performed in any low-income community.
Under section 45D(d)(3), with certain exceptions, a qualified
business is any trade or business. The rental to others of real
property is a qualified business only if, among other requirements, the
real property is located in a low-income community.
Explanation of Provisions
The new markets tax credit under section 45D has been a successful
tool for encouraging private sector investments in low-income
communities. According to the Treasury Department's Community
Development Financial Institutions Fund, through 2009, the new markets
tax credit has helped to spur $16 billion of investments in
approximately 3,000 businesses and real estate projects located in low-
income communities throughout the country, including investments in
manufacturing businesses, alternative energy companies, charter
schools, health care facilities, and job training centers. Although new
markets tax credit investments may be made in non-real estate
businesses, the investments made to date have been predominantly in
real estate projects. Through 2009, only 35 percent of new market tax
credit dollars invested in qualified active low-income community
businesses were invested in non-real estate businesses, and much of
this investment supported real estate related projects (for example,
purchasing or renovations of owner-occupied facilities).
Currently, the new markets tax credit program generally requires
that a CDE that receives returns on investments (including principal
repayments from amortizing loans) re-invest those proceeds into other
qualified low-income community investments during the seven-year credit
period. This reinvestment requirement makes it difficult for CDEs to
provide working capital and equipment loans to non-real estate
businesses because these loans are ordinarily amortizing loans with a
term of five years or less. Therefore, the proposed regulations would
allow a CDE that makes a qualified low-income community investment
involving a non-real estate business to invest certain returns of
capital from those investments in unrelated certified community
development financial institutions that are CDEs under section
45D(c)(2)(B) (certified CDFIs) at various points during the seven-year
credit period. CDFIs are financial institutions that provide credit and
financial services to underserved markets and populations. The CDE's
reinvestment of returned capital in certified CDFIs would be considered
to meet the reinvestment requirements of the new markets tax credit
program. The proposed regulations would allow an increasing aggregate
amount to be invested in certified CDFIs and treated as continuously
invested in a qualified low-income community investment in the latter
years of the seven-year credit period.
The proposed regulations define a non-real estate qualified active
low-income community business as any business whose predominant
business activity (measured by more than 50 percent of the business'
gross income) does not include the development (including construction
of new facilities and rehabilitation/enhancement of existing
facilities), management, or leasing of real estate. The purpose of the
investment or loan must not be connected to the development (including
construction of new facilities and rehabilitation/enhancement of
existing facilities), management, or leasing of real estate.
Proposed Effective Date
The rules contained in these regulations are proposed to apply to
taxable years ending on or after the date of publication of the
Treasury decision adopting these rules as final regulations in the
Federal Register.
Request for Comments
The IRS and the Treasury Department invite taxpayers to submit
comments on issues relating to how a CDE can make a qualified low-
income community investment into a non-real estate qualified active
low-income community
[[Page 32884]]
business. In particular, the IRS and the Treasury Department encourage
taxpayers to submit comments on the following issues:
1. Will the proposed rules allowing a payment from a non-real
estate qualified active low-income community business to be invested in
a certified CDFI facilitate loans to, or equity investments in, non-
real estate businesses? Should the rule take into account whether a
loan to the non-real estate business is an amortizing or non-amortizing
loan, the loan period, and the loan repayment schedule?
2. Will the proposed rules encourage venture capital investments in
non-real estate businesses? If not, how can the proposed rules be
modified to accomplish that goal?
3. Is the definition of a non-real estate qualified active low-
income community business sufficient for CDEs and investors to rely on?
Are the ``more than 50 percent gross income'' requirement and activity
limitation the appropriate ways to define a non-real estate qualified
active low-income community business?
4. Will CDEs be able to determine whether an entity satisfies the
requirements to be a non-real estate qualified active low-income
community business without incurring unduly burdensome costs?
5. Should a payment from a non-real estate qualified active low-
income community business be permitted to be invested in entities other
than a certified CDFI (or qualified low-income community investments)?
6. Should a qualified equity investment made before the effective
date of the final regulations be eligible for designation as a non-real
estate qualified equity investment?
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. Comments are requested on all aspects of the proposed
regulations. In addition, the IRS and the Treasury Department
specifically request comments on the clarity of the proposed rules and
how they can be made easier to understand. All comments will be
available for public inspection and copying.
A public hearing has been scheduled for September 29, 2011,
beginning at 10 a.m. in the Auditorium of the Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the Constitution
Avenue entrance. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 30 minutes before
the hearing starts. In addition, all visitors must present photo
identification to enter the building. For information about having your
name placed on the building access list to attend the hearing, see the
FOR FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments by September 8, 2011, and an outline of the topics to
be discussed and the time to be devoted to each topic by September 8,
2011. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Julie Hanlon Bolton
with the Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.45D-1 is amended by:
1. Amending paragraph (a) as follows:
a. Adding entries for paragraphs (c)(8), (d)(9), (d)(9)(i),
(d)(9)(ii), (d)(9)(ii)(A), (d)(9)(ii)(B), (d)(9)(ii)(C) and (h)(3).
b. Revising the entry for paragraph (d)(1)(i).
2. Revising paragraphs (c)(1)(iii), (c)(3)(ii), and (d)(1)(i).
3. Adding new paragraphs (c)(8), (d)(9), and (h)(3).
The additions and revisions read as follows:
Sec. 1.45D-1 New markets tax credit.
* * * * *
(c) * * *
(8) Non-real estate qualified equity investment.
(d) * * *
(1) * * *
(i) Investment in a qualified active low-income community business
or a non-real estate qualified active low-income community business.
* * * * *
(9) Non-real estate qualified active low-income community business.
(i) Definition.
(ii) Payments of, or for, capital, equity or principal with respect
to a non-real estate qualified active low-income community business.
(A) In general.
(B) Seventh year of the credit period.
(C) Amounts received from a certified Community Development
Financial Institution.
* * * * *
(h) * * *
(3) Investments in non-real estate businesses.
* * * * *
(c) * * *
(1) * * *
(iii) The investment is designated for purposes of section 45D and
this section as a qualified equity investment or a non-real estate
qualified equity investment (as defined in paragraph (c)(8) of this
section) by the CDE on its books and records using any reasonable
method.
* * * * *
(3) * * *
(ii) Exceptions. Notwithstanding paragraph (c)(3)(i) of this
section, an equity investment in an entity is eligible to be designated
as a qualified equity investment or a non-real estate qualified
[[Page 32885]]
equity investment under paragraph (c)(1)(iii) of this section if--
* * * * *
(8) Non-real estate qualified equity investment. If a qualified
equity investment is designated as a non-real estate qualified equity
investment under paragraph (c)(1)(iii) of this section, then the
qualified equity investment may only satisfy the substantially-all
requirement under paragraph (c)(5) of this section if the CDE only
makes qualified low-income community investments that are directly
traceable to non-real estate qualified active low-income community
businesses (as defined in paragraph (d)(9) of this section). The
proceeds of a non-real estate qualified equity investment cannot be
used for transactions involving a qualified active low-income community
business that is not a non-real estate qualified active low-income
community business.
(d) * * *
(1) * * *
(i) Investment in a qualified active low-income community business
or a non-real estate qualified active low-income community business.
Any capital or equity investment in, or loan to, any qualified active
low-income community business (as defined in paragraph (d)(4) of this
section) or any non-real estate qualified active low-income community
business (as defined in paragraph (d)(9) of this section).
* * * * *
(9) Non-real estate qualified active low-income community
business--(i) Definition. The term non-real estate qualified active
low-income community business means any qualified active low-income
community business (as defined in paragraph (d)(4) of this section)
whose predominant business activity does not include the development
(including construction of new facilities and rehabilitation/
enhancement of existing facilities), management, or leasing of real
estate. For purposes of the preceding sentence, predominant business
activity means a business activity that generates more than 50 percent
of the business' gross income. The purpose of the capital or equity
investment in, or loan to, the non-real estate qualified active low-
income community business must not be connected to the development
(including construction of new facilities and rehabilitation/
enhancement of existing facilities), management, or leasing of real
estate.
(ii) Payments of, or for, capital, equity or principal with respect
to a non-real estate qualified active low-income community business--
(A) In general. For purposes of paragraph (d)(2)(i) of this section, a
portion of the amounts received by a CDE in payment of, or for,
capital, equity, or principal with respect to a non-real estate
qualified active low-income community business after year one of the 7-
year credit period (as defined by paragraph (c)(5)(i) of this section)
may be reinvested by the CDE in a certified community development
financial institution that is a CDE under section 45D(c)(2)(B)
(certified CDFI) (as defined by 12 CFR 1805.201) and that is unrelated
to the CDE (in accordance with section 267(b) or section 707(b)(1)).
Any portion that the CDE chooses to reinvest in a certified CDFI must
be reinvested by the CDE no later than 30 days from the date of receipt
to be treated as continuously invested in a qualified low-income
community investment for purposes of paragraph (d)(2)(i) of this
section. If the amount reinvested in a certified CDFI exceeds the
maximum aggregate portion of the non-real estate qualified equity
investment, then the excess will not be treated as invested in a
qualified low-income community investment. The maximum aggregate
portion of the non-real estate qualified equity investment that may be
reinvested into a certified CDFI, which will be treated as continuously
invested in a qualified low-income community investment, may not exceed
the following percentages of the non-real estate qualified equity
investment in the following years:
(1) 15 percent in Year 2 of the 7-year credit period;
(2) 30 percent in Year 3 of the 7-year credit period;
(3) 50 percent in Year 4 of the 7-year credit period; and
(4) 85 percent in Year 5 and Year 6 of the 7-year credit period.
(B) Seventh year of the credit period. Amounts received by a CDE in
payment of, or for, capital, equity, or principal with respect to a
non-real estate qualified active low-income community business (as
defined in paragraph (d)(9)(i) of this section) during the seventh year
of the 7-year credit period do not have to be reinvested by the CDE in
a qualified low-income community investment in order to be treated as
continuously invested in a qualified low-income community investment.
(C) Amounts received from a certified Community Development
Financial Institution. Except for the seventh year of the credit period
under paragraph (d)(9)(ii)(B) of this section, amounts received from a
certified CDFI must be reinvested by the CDE no later than 30 days from
the date of receipt to be treated as continuously invested in a
qualified low-income community investment.
* * * * *
(h) * * *
(3) Investments in non-real estate businesses. The rules in
paragraphs (c)(8) and (d)(9) of this section apply to taxable years
ending on or after the date of publication of the Treasury decision
adopting these rules as final regulation in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-13978 Filed 6-3-11; 4:15 pm]
BILLING CODE 4830-01-P