[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

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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