[Federal Register Volume 76, Number 109 (Tuesday, June 7, 2011)]
[Proposed Rules]
[Pages 32880-32882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13981]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114206-11]
RIN 1545-BK21


Encouraging New Markets Tax Credit Non-Real Estate Investments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document invites comments from the public on issues that 
the Treasury Department and the IRS may address in regulations relating 
to the new markets tax credit. Specifically, this document invites 
comments from the public on how the new markets tax credit program may 
be amended to encourage non-real estate investments. The regulations 
will affect taxpayers claiming the new markets tax credit. The Treasury 
Department and the IRS have published separately in this issue of the 
Federal Register, a notice of proposed rulemaking REG-101826-11 
modifying the new markets tax credit program by providing specific 
rules concerning a qualified community development entity's investment 
of certain returns of capital from non-real estate businesses.

DATES: Written and electronic comments must be submitted by September 
6, 2011.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-114206-11), room 
5205, 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-
114206-11),

[[Page 32881]]

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-114206-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposals, Julie 
Hanlon-Bolton, (202) 622-3040; concerning submissions, Oluwafunmilayo 
Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 45D was added to the Internal Revenue 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)); section 102, Division A, of the Tax Relief and Health 
Care Act of 2006 (Pub. L. 109-432, 120 Stat. 2922 (2006)); section 302 
of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 
(Pub. L. 110-343, 122 Stat 3765 (2008)); section 1403(a) 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)).
    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.
    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 the term 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 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.
    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 greater 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 believes that revisions to the regulations under the new 
markets tax credit program would have a favorable effect on the ability 
of the program to benefit non-real estate businesses in low-income 
communities.
    The new markets tax credit 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 these investments supported real estate related 
projects (for example, purchasing or renovations of owner-occupied 
facilities).
    The purpose of this document is to seek comments on measures that 
could facilitate greater investment in non-real estate businesses 
without disrupting the success of new markets tax credit real estate 
investments overall. The Treasury Department and the IRS have 
identified certain issues with regard to non-real estate businesses 
under the new markets tax credit program that may be considered for 
guidance or administrative pronouncements. The Treasury Department and 
the IRS invite comments from the public on the following issues and any 
other issues for which the taxpayers believe guidance would be 
necessary to promote greater investment in non-real estate businesses 
under the new markets tax credit program while still maintaining the 
structure of the credit that has been so successful for other types of 
investments.

A. Streamlined Substantiation Requirements for Second Tier CDEs Making 
Small Loans to Non-Real Estate Businesses

    Under Sec.  1.45D-1(d)(1)(iv)(A)(1), the term qualified low-income 
community investment includes any equity investment in, or loan to, any 
CDE (the second CDE) by a CDE (the primary CDE), but only to the extent 
that the second CDE uses the proceeds of the investment or loan in a 
manner described in Sec.  1.45D-1(d)(1)(i) or (d)(1)(iii) and that 
would constitute a qualified low-income community investment if it were 
made directly by the primary CDE. The net effect of this provision is 
that, if the primary CDE makes a qualified low-income community 
investment into a second CDE, the primary CDE must ensure that the new 
markets tax credit proceeds are ultimately invested in a qualified 
active low-income community business and/or are used to provide 
financial counseling and other services. This added layer of 
substantiation has placed constraints on the ability of a primary CDE 
to invest funds in a second CDE--particularly in instances where the 
second CDE intends to make smaller sized loans to non-real

[[Page 32882]]

estate businesses because transaction and compliance monitoring costs 
are higher relative to the size of smaller loans than they are for 
larger, real estate-secured transactions.
    The Treasury Department and the IRS are soliciting comments on 
whether the substantiation requirements governing investments under 
Sec.  1.45D-1(d)(1)(iv)(A)(1) should be simplified in cases where: (i) 
The second CDE uses the new markets tax credit proceeds to make 
smaller-sized loans (for example, less than $250,000) to non-real 
estate businesses; (ii) neither the second CDE nor the non-real estate 
business receiving the new markets tax credit proceeds is affiliated 
with the primary CDE or the qualified equity investment investors; and 
(iii) the second CDE demonstrates that, at the time of initial 
investment in the non-real estate business, the non-real estate 
business receiving the new markets tax credit proceeds met some basic 
qualifying requirements (for example, the business is in a low-income 
community).
    In particular, the Treasury Department and the IRS encourage 
taxpayers to submit comments on the following issues:
    1. Would simplifying the substantiation requirements in the manner 
proposed facilitate greater new markets tax credit investment in non-
real estate businesses? Are there other areas where Sec.  1.45D-1 could 
be modified to achieve a similar outcome?
    2. The Treasury Department and the IRS believe that, if there is to 
be a simplification of the substantiation requirements for these 
transactions, there may need to be a cap on the total transaction size. 
Is $250,000 the appropriate cap to put on the initial loan size? Should 
special considerations be made for follow-on investments and/or lines 
of credit? For example, should there be a cap on the total aggregate 
investment in one business? If so, what should that cap be?
    3. What are the appropriate minimum requirements that a non-real 
estate business should satisfy in order for the second CDE to be able 
to take advantage of the simplified substantiation requirements (for 
example, the business must be located in a low-income community, employ 
community residents, etc. at the time of initial investment)? How 
should this be measured (for example, that substantially all of the 
real property is located in a low-income community)?
    4. Should the Treasury Department and the IRS consider additional 
limitations (other than those specified) on unaffiliated CDEs or 
businesses? For example, should the regulations require that the second 
CDE be a non-profit entity or the affiliate of a non-profit entity?

B. Encouraging Equity Investments in Non-Real Estate Businesses

    1. What non-statutory requirements in Sec.  1.45D-1 can be revised 
to encourage CDEs to make equity investments in non-real estate 
businesses?
    2. If consideration is given to potential changes to the reasonable 
expectations test of Sec.  1.45D-1(d)(6)(i), what modifications would 
be most effective in encouraging equity investments in non-real estate 
businesses, while still preserving the purpose of the existing 
limitations on the reasonable expectations test?

Request for Comments

    Before the notice of proposed rulemaking is issued, consideration 
will be given to any written and electronic comments that are submitted 
timely to the IRS. All comments will be available for public inspection 
and copying.

Drafting Information

    The principal author of this advance notice of proposed rulemaking 
is Julie Hanlon-Bolton of the Office of Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the IRS and the 
Treasury Department participated in its development.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-13981 Filed 6-3-11; 4:15 pm]
BILLING CODE 4830-01-P