[Federal Register Volume 76, Number 233 (Monday, December 5, 2011)]
[Rules and Regulations]
[Pages 75774-75781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31169]


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

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9560]
RIN 1545-BE89


Targeted Populations Under Section 45D(e)(2)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

SUMMARY: This document contains final regulations relating to how an 
entity serving certain targeted populations can meet the requirements 
to be a qualified active low-income community business for the new 
markets tax credit. The regulations reflect changes to the law made by 
the American Jobs Creation Act of 2004. The regulations will affect 
certain taxpayers claiming the new markets tax credit.

DATES: Effective Date: These regulations are effective on December 5, 
2011.
    Applicability Dates: For dates of applicability, see Sec.  1.45D-
1(h)(3).

FOR FURTHER INFORMATION CONTACT: Julie Hanlon Bolton, (202) 622-3040 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 to provide rules relating to 
certain targeted populations under section 45D(e)(2). On May 24, 2005, 
the Community Development Financial Institutions Fund published an 
advance notice of proposed rulemaking (ANPRM) (70 FR 29658) to seek 
comments from the public with respect to how targeted populations may 
be treated as eligible low-income communities under section 45D(e)(2). 
In response to the ANPRM, the IRS received various suggestions relating 
to the definition of the term targeted populations and proposing 
amendments to the requirements to be a qualified active low-income 
community business under Sec.  1.45D-1. On June 30, 2006, the IRS and 
Treasury Department released Notice 2006-60 (2006-2 CB 82), which 
announced that Sec.  1.45D-1 would be amended to provide rules relating 
to how an entity meets the requirements to be a qualified active low-
income community business when its activities involve certain targeted 
populations under section 45D(e)(2). On September 24, 2008, a notice of 
proposed rulemaking (NPRM) (REG-142339-05) was published in the Federal 
Register (73 FR 54990). Written and electronic comments responding to 
the proposed regulations were received and a public hearing was held on 
January 22, 2009. After consideration of all the comments, the proposed 
regulations are adopted as amended by this Treasury decision.

General Overview

    Section 45D(a)(1) provides 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).
    Section 45D(b)(1) provides that 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) provides that the term qualified low-income 
community investment means: (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.
    Section 221(a) of the American Jobs Creation Act of 2004 (Act) 
(Pub. L. 108-357, 118 Stat. 1418) amended section 45D(e)(2) to provide 
that the Secretary shall prescribe regulations under which one or more 
targeted populations (within the meaning of section 103(20) of the 
Riegle Community Development and Regulatory Improvement Act of 1994 (12 
U.S.C. 4702(20))) may be treated as low-income communities. The 
regulations shall include procedures for determining which entities are 
qualified active low-income community businesses with respect to those 
populations. Section 221(c)(1) of the Act provides that the amendment 
made by section 221(a) of the Act shall apply to designations made by 
the Secretary of the Treasury after October 22, 2004, the date of 
enactment of the Act.
    The term targeted population, as defined in 12 U.S.C. 4702(20) and 
12 CFR 1805.201, means individuals, or an identifiable group of 
individuals, including an Indian tribe, who (A) are low-income persons; 
or (B) otherwise lack adequate access to loans or equity

[[Page 75775]]

investments. Under 12 U.S.C. 4702(17) as interpreted by 12 CFR 
1805.104, the term low-income means having an income, adjusted for 
family size, of not more than (A) for metropolitan areas, 80 percent of 
the area median family income; and (B) for non-metropolitan areas, the 
greater of (i) 80 percent of the area median family income; or (ii) 80 
percent of the statewide nonmetropolitan area median family income.
    Section 101(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 
109-135, 119 Stat. 2577) added new sections 1400M and 1400N to the 
Code. Section 1400M(1) provides that the Gulf Opportunity Zone (GO 
Zone) is that portion of the Hurricane Katrina disaster area determined 
by the President to warrant individual or individual and public 
assistance from the Federal Government under the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act (the Act) by reason of 
Hurricane Katrina.
    Section 1400M(2) provides that the Hurricane Katrina disaster area 
is an area with respect to which a major disaster has been declared by 
the President before September 14, 2005, under section 401 of the Act 
by reason of Hurricane Katrina. After determination by the President 
that a disaster area warrants assistance pursuant to the Act, the 
Federal Emergency Management Agency (FEMA) makes damage assessments. 
The categories for damage assessment in the wake of a hurricane are: 
flooded area, saturated area, limited damage, moderate damage, 
extensive damage, and catastrophic damage.
    Under section 1400N(m)(1), a CDE shall be eligible for an 
allocation under section 45D(f)(2) of the increase in the new markets 
tax credit limitation described in section 1400N(m)(2) only if a 
significant mission of the CDE is the recovery and redevelopment of the 
GO Zone. Section 1400N(m)(2) provides that the new markets tax credit 
limitation otherwise determined under section 45D(f)(1) shall be 
increased by an amount equal to $300,000,000 for 2005 and 2006 and 
$400,000,000 for 2007, to be allocated among CDEs to make qualified 
low-income community investments within the GO Zone.
    Under section 45D(b)(1), a qualified equity investment does not 
include any equity investment issued by a CDE more than 5 years after 
the date the entity receives an allocation under section 45D(f). Under 
section 45D(f)(3), if the new markets tax credit limitation for any 
calendar year exceeds the aggregate amount allocated under section 
45D(f)(2) for the year, then the limitation for the succeeding calendar 
year is increased by the amount of the excess. However, no amount may 
be carried to any calendar year after 2016.

Summary of Comments and Explanation of Provisions

Ownership Requirement and Non-Profit Businesses

    Generally, the proposed regulations provide that an entity will not 
be treated as a qualified active low-income community business for low-
income targeted populations unless (i) At least 50 percent of the 
entity's total gross income for any taxable year is derived from sales, 
rentals, services, or other transactions with individuals who are low-
income persons for purposes of section 45D(e)(2) (the 50-percent gross-
income requirement), (ii) at least 40 percent of the entity's employees 
are individuals who are low-income persons for purposes of section 
45D(e)(2), or (iii) at least 50 percent of the entity is owned by 
individuals who are low-income persons for purposes of section 
45D(e)(2).
    Commentators recommended that the ownership requirement for being 
treated as a qualified active low-income community business for low-
income targeted populations under the proposed regulations be amended 
to accommodate non-profit businesses that are not individually owned. 
Commentators suggested that if a non-profit business can document that 
at least 20 percent of its board, with a minimum of two board members, 
are low-income persons or represent low-income targeted populations, 
then the non-profit business should be treated as satisfying the 
ownership requirement.
    The final regulations do not adopt this recommendation because, if 
a non-profit business does not derive at least 50 percent of its gross 
income from sales, rentals, services, or other transactions with low-
income persons, or if at least 40 percent of the non-profit business' 
employees are not low-income persons, then the non-profit business is 
not adequately serving targeted populations solely because 20 percent 
or more of its board members are low-income persons.

Start-Up or Expanding Businesses

    Commentators requested that, in order to accommodate start-up 
entities, the final regulations should provide a rule allowing an 
entity to meet the requirements to be a qualified active low-income 
community business for low-income targeted populations if the CDE 
reasonably expects that the entity will generate revenues within three 
years after the date the CDE makes the investment in, or loan to, that 
entity. If an entity serving targeted populations chooses to apply the 
50-percent gross-income requirement rather than the employee 
requirement or the ownership requirement, then the commentators' 
suggestion could potentially allow an entity to be a qualified active 
low-income community business for three years without having to meet 
any requirement. As stated in the preamble of the proposed regulations, 
this result is clearly inappropriate. Therefore, the final regulations 
do not adopt the commentators' suggestion. In addition, the final 
regulations clarify that the three-year active conduct of a trade or 
business safe harbor in Sec.  1.45D-1(d)(4)(iv)(A) does not apply to 
the 50-percent gross-income requirement.

Documenting Low-Income Persons

    The IRS and Treasury Department specifically requested comments on 
what measure of income should be used to determine an individual's 
income for purposes of the definition of low-income persons found in 
the proposed regulations. The proposed regulations asked whether the 
measure of income should be the same as the measure of income used by 
the U.S. Census Bureau, the measure of income on the Form 1040, or the 
measure of income in 24 CFR part 5, which is used for certain 
Department of Housing and Urban Development (HUD) programs and other 
Federal programs.
    Two commentators recommended that the IRS and Treasury Department 
accept as a proxy for income documentation proof of an individual's 
participation in other federal programs targeted specifically to low-
income individuals and families. The final regulations do not adopt the 
commentators' recommendation because, as stated in the proposed 
regulations, the IRS and Treasury Department have not analyzed other 
Federal programs to determine whether they meet the statutory 
requirements under section 45D(e), and whether the programs currently 
meeting the requirements will continue to do so in the future.
    Another commentator recommended that the IRS and Treasury 
Department allow an entity to measure income using any reasonable 
method including measures of income by the U.S. Census Bureau, Form 
1040, or the HUD rules in 24 CFR part 5. If one measure must be used, 
the commentator recommended using the HUD rules because they are 
consistent with low-income determinations used for the Section 8 rental 
voucher program and the low-income housing tax credit under section

[[Page 75776]]

42. The final regulations adopt this commentator's recommendation that 
an entity may use any of the three stated methods. Specifically, the 
final regulations allow an individual's family income to be determined 
using household income as measured by the U.S. Census Bureau or HUD, or 
using the individual's total family income as reported on Form(s) 1040. 
An individual's family income includes the income of any member of the 
individual's family (as defined in section 267(c)(4)) if the family 
member resides with the individual regardless of whether the family 
member files a separate return. Lastly, the final regulations 
incorporate the preamble language in the proposed regulations that 
provides additional detail on what estimates may be relied upon in 
determining the applicable income limitation for area median family 
income.

Items Included in Gross Income

    A commentator requested that the final regulations conclude that 
the term derived from in the proposed regulations includes gross income 
derived from payments made directly by low-income persons to an entity 
and amounts and contributions of property or services provided to the 
entity for the benefit of low-income persons. Another commentator 
recommended that only operating revenue should be included for the 
purpose of meeting the 50-percent gross-income requirement.
    The final regulations adopt the first commentator's recommendation 
that the term derived from includes gross income derived from both 
payments made directly by low-income persons to the entity and money 
and the fair market value of contributions of property or services 
provided to the entity primarily for the benefit of low-income persons. 
However, persons providing the money and contributions cannot receive a 
direct benefit from the entity (notably, a contribution that benefits 
the general public is not a direct benefit). Accordingly, an entity's 
total gross income derived from transactions with low-income persons 
for purposes of section 45D(e)(2) can include Federal, state, or local 
grants, charitable donations, or in-kind contributions, as well as 
collected fees, insurance reimbursements, and other sources of income 
as long as these payments and contributions are provided for the 
benefit of low-income persons on an individual basis or as a class of 
individuals. If an entity receiving such payments can document that 
those amounts are legally required to be paid on behalf of individuals 
that meet the definition of low-income persons, the amounts may be 
treated as derived from transactions with low-income persons. The 
second commentator's suggestion to limit a gross income consideration 
to operating revenue is too restrictive because any money, property, or 
services provided to the entity may be provided to the entity for the 
benefit of low-income persons.

Owners

    The proposed regulations provide that the determination of whether 
an owner is a low-income person must be made at the time the qualified 
low-income community investment is made. If an owner is a low-income 
person at the time the qualified low-income community investment is 
made, that owner is considered a low-income person for purposes of 
section 45D(e)(2) throughout the time the ownership interest is held by 
that owner. A commentator suggested that the rule locking in an owner's 
status as a low-income person as of the time of investment should be 
similarly applied to low-income persons who acquire an ownership 
interest after the time the qualified low-income community investment 
is made. The final regulations adopt this suggestion by locking in the 
status of an owner as a low-income person at the time the qualified 
low-income community investment is made or at the time the ownership 
interest is acquired by the owner, whichever is later.

Rental to Others of Real Property

    Commentators requested clarification on the 50-percent gross-income 
requirement under the proposed regulations for an entity whose sole 
business is the rental to others of real property. Because an entity 
whose sole business is the rental to others of real property will often 
not have employees, the entity will have to satisfy the 50-percent 
gross-income requirement or the ownership requirement for low-income 
targeted populations. To satisfy the 50-percent gross-income 
requirement, the proposed regulations require that the entity must 
derive gross income solely from low-income individuals. However, in the 
case of an entity engaged solely in the rental of property, the 
entity's gross income would only be derived from rents, and in many 
instances, the tenants are not individuals as required under the 
proposed regulations. Thus, commentators recommend that the 50-percent 
gross-income requirement be deemed satisfied if at least 50 percent of 
gross rental income is derived from tenants that are low-income 
individuals and entities that are qualified active low-income community 
businesses for low-income targeted populations. The final regulations 
adopt a rule similar to this recommendation by providing a special rule 
that generally treats an entity whose sole business is the rental to 
others of real property as satisfying the 50-percent gross-income 
requirement if the entity is treated as being located in a low-income 
community.

Gross Income--Fair Market Value of Sales, Rentals, Services, or Other 
Transactions

    The IRS and Treasury Department specifically requested comments in 
the proposed regulations on the question of whether the 50-percent 
gross-income requirement should be modified to include the fair market 
value of goods and services provided to low-income persons at reduced 
fees. Commentators responded by stating that a CDE should have the 
option to include the fair market value of goods and services provided 
to low-income persons for purposes of the 50-percent gross-income 
requirement. The final regulations adopt the commentator's suggestion 
but limit the rule to an entity with gross income that is derived from 
sales, rentals, services, or other transactions with both non low-
income persons and low-income persons. The entity may treat the value 
of the sales, rentals, services, or other transactions with low-income 
persons at fair market value even if the low-income persons do not pay 
fair market value.

Individuals or Groups That Otherwise Lack Adequate Access to Loans or 
Equity Investments

    Commentators have asked that the IRS and the Treasury Department 
consider defining particular individuals or groups of individuals as 
lacking adequate access to loans or equity investments. Although the 
IRS and the Treasury Department cannot include new rules describing 
additional targeted populations in these final regulations, taxpayers 
are hereby invited to submit comments: (1) Identifying individuals or 
groups that may be considered to lack adequate access to loans or 
equity investments, (2) describing the reasons such individuals or 
group of individuals qualify as lacking adequate access to loans or 
equity investments, and (3) suggesting ways for additional targeted 
populations rules to appropriately limit the definition of such 
individuals or group of individuals to ensure that the purposes of the 
targeted populations provision are not abused. Send submissions to:

[[Page 75777]]

    Submissions to the Service submitted by U.S. mail: Internal Revenue 
Service, Attn: Julie Hanlon Bolton, CC:PSI:5, Room 5111, P.O. Box 7604, 
Ben Franklin Station, Washington, DC 20044.
    Submissions to the Service submitted by a private delivery service: 
Internal Revenue Service, Attn: Julie Hanlon Bolton, CC:PSI:5, Room 
5111, 1111 Constitution Ave. NW., Washington, DC 20224.

Effect on Other Documents

    Notice 2006-60 (2006-1 CB 82) is obsolete for taxable years ending 
on or after December 5, 2011.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It has also been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. It is hereby certified that these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based upon 
the fact that the final regulations provide a benefit to small entities 
in low-income communities from the proceeds of a tax credit because, 
consistent with legislative intent, the final regulations allow a tax 
credit to be claimed in situations where it was previously unavailable 
without the Secretary providing for such situations in final 
regulations. Accordingly, a Regulatory Flexibility Analysis under the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these regulations is Julie Hanlon Bolton 
with the Office of the Associate Chief Counsel (Passthroughs and 
Special Industries), IRS. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.45D-1 also issued under 26 U.S.C. 45D(e)(2) and (i); * 
* *


0
Par. 2. Section 1.45D-0 is added to read as follows:


Sec.  1.45D-0  Table of contents.

    This section lists the paragraphs contained in Sec.  1.45D-1.
    (a) Current year credit.
    (b) Allowance of credit.
    (1) In general.
    (2) Credit allowance date.
    (3) Applicable percentage.
    (4) Amount paid at original issue.
    (c) Qualified equity investment.
    (1) In general.
    (2) Equity investment.
    (3) Equity investments made prior to allocation.
    (i) In general.
    (ii) Exceptions.
    (A) Allocation applications submitted by August 29, 2002.
    (B) Other allocation applications.
    (iii) Failure to receive allocation.
    (iv) Initial investment date.
    (4) Limitations.
    (i) In general.
    (ii) Allocation limitation.
    (5) Substantially all.
    (i) In general.
    (ii) Direct-tracing calculation.
    (iii) Safe harbor calculation.
    (iv) Time limit for making investments.
    (v) Reduced substantially-all percentage.
    (vi) Examples.
    (6) Aggregation of equity investments.
    (7) Subsequent purchasers.
    (d) Qualified low-income community investments.
    (1) In general.
    (i) Investment in a qualified active low-income community business.
    (ii) Purchase of certain loans from CDEs.
    (A) In general.
    (B) Certain loans made before CDE certification.
    (C) Intermediary CDEs.
    (D) Examples.
    (iii) Financial counseling and other services.
    (iv) Investments in other CDEs.
    (A) In general.
    (B) Examples.
    (2) Payments of, or for, capital, equity or principal.
    (i) In general.
    (ii) Subsequent reinvestments.
    (iii) Special rule for loans.
    (iv) Example.
    (3) Special rule for reserves.
    (4) Qualified active low-income community business.
    (i) In general.
    (A) Gross-income requirement.
    (B) Use of tangible property.
    (1) In general.
    (2) Example.
    (C) Services performed.
    (D) Collectibles.
    (E) Nonqualified financial property.
    (1) In general.
    (2) Construction of real property.
    (ii) Proprietorships.
    (iii) Portions of business.
    (A) In general.
    (B) Examples.
    (iv) Active conduct of a trade or business.
    (A) Special rule.
    (B) Example.
    (5) Qualified business.
    (i) In general.
    (ii) Rental of real property.
    (iii) Exclusions.
    (A) Trades or businesses involving intangibles.
    (B) Certain other trades or businesses.
    (C) Farming.
    (6) Qualifications.
    (i) In general.
    (ii) Control.
    (A) In general.
    (B) Definition of control.
    (C) Disregard of control.
    (7) Financial counseling and other services.
    (8) Special rule for certain loans.
    (i) In general.
    (ii) Example.
    (9) Targeted populations.
    (i) Low-income persons.
    (A) Definition.
    (1) In general.
    (2) Area median family income.
    (3) Individual's family income.
    (B) Qualified active low-income community business requirements for 
low-income targeted populations.
    (1) In general.
    (2) Employee.
    (3) Owner.
    (4) Derived from.
    (5) Fair market value of sales, rentals, services, or other 
transactions.
    (C) 120-percent-income restriction.
    (1) In general.
    (2) Population census tract location.
    (D) Rental of real property for low-income targeted populations.
    (1) In general.
    (2) Special rule for entities whose sole business is the rental to 
others of real property.

[[Page 75778]]

    (ii) Individuals who otherwise lack adequate access to loans or 
equity investments.
    (A) In general.
    (B) GO Zone Targeted Population.
    (C) Qualified active low-income community business requirements for 
the GO Zone Targeted Population.
    (1) In general.
    (2) Location.
    (i) In general.
    (ii) Determination.
    (D) 200-percent-income restriction.
    (1) In general.
    (2) Population census tract location.
    (E) Rental of real property for the GO Zone Targeted Population.
    (e) Recapture.
    (1) In general.
    (2) Recapture event.
    (3) Redemption.
    (i) Equity investment in a C corporation.
    (ii) Equity investment in an S corporation.
    (iii) Capital interest in a partnership.
    (4) Bankruptcy.
    (5) Waiver of requirement or extension of time.
    (i) In general.
    (ii) Manner for requesting a waiver or extension.
    (iii) Terms and conditions.
    (6) Cure period.
    (7) Example.
    (f) Basis reduction.
    (1) In general.
    (2) Adjustment in basis of interest in partnership or S 
corporation.
    (g) Other rules.
    (1) Anti-abuse.
    (2) Reporting requirements.
    (i) Notification by CDE to taxpayer.
    (A) Allowance of new markets tax credit.
    (B) Recapture event.
    (ii) CDE reporting requirements to Secretary.
    (iii) Manner of claiming new markets tax credit.
    (iv) Reporting recapture tax.
    (3) Other Federal tax benefits.
    (i) In general.
    (ii) Low-income housing credit.
    (4) Bankruptcy of CDE.
    (h) Effective/applicability dates.
    (1) In general.
    (2) Exception for certain provisions.
    (3) Targeted populations.

0
Par. 3. Section 1.45D-1 is amended by:
0
1. Revising paragraph (a).
0
2. Revising the first sentence in paragraph (b)(1).
0
3. Revising paragraph (d)(4)(i) introductory text.
0
4. Adding a new sentence to the end of paragraph (d)(4)(i)(A).
0
5. Adding a new sentence to the end of paragraph (d)(4)(i)(B)(1).
0
6. Adding a new sentence to the end of paragraph (d)(4)(i)(C).
0
7. Adding a new sentence at the end of paragraph (d)(4)(iv)(A).
0
8. Adding new paragraph (d)(9).
0
9. Revising the heading for paragraph (h) and adding new paragraph 
(h)(3).
    The additions and revisions read as follows:


Sec.  1.45D-1  New markets tax credit.

    (a) Current year credit. The current year general business credit 
under section 38(b)(13) includes the new markets tax credit under 
section 45D(a).
    (b) * * * (1) * * * A taxpayer holding a qualified equity 
investment on a credit allowance date which occurs during the taxable 
year may claim the new markets tax credit determined under section 
45D(a) and this section for such taxable year in an amount equal to the 
applicable percentage of the amount paid to a qualified community 
development entity (CDE) for such investment at its original issue. * * 
*
* * * * *
    (d) * * *
    (4) * * *
    (i) In general. The term qualified active low-income community 
business means, with respect to any taxable year, a corporation 
(including a nonprofit corporation) or a partnership engaged in the 
active conduct of a qualified business (as defined in paragraph (d)(5) 
of this section), if the requirements of paragraphs (d)(4)(i)(A), (B), 
(C), (D), and (E) of this section are met (or in the case of an entity 
serving targeted populations, if the requirements of paragraphs 
(d)(4)(i)(D), (E), and (d)(9)(i) or (ii) of this section are met). 
Solely for purposes of this section, a nonprofit corporation will be 
deemed to be engaged in the active conduct of a trade or business if it 
is engaged in an activity that furthers its purpose as a nonprofit 
corporation.
    (A) * * * See paragraph (d)(9) of this section for rules relating 
to targeted populations.
    (B) * * *
    (1) * * * See paragraph (d)(9) of this section for rules relating 
to targeted populations.
* * * * *
    (C) * * * See paragraph (d)(9) of this section for rules relating 
to targeted populations.
* * * * *
    (iv) Active conduct of a trade or business--(A) * * * This 
paragraph (d)(4)(iv) applies only for purposes of determining whether 
an entity is engaged in the active conduct of a trade or business and 
does not apply for purposes of determining whether the gross-income 
requirement under paragraph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i), or 
(d)(9)(ii)(C)(1)(i) of this section is satisfied.
* * * * *
    (9) Targeted populations. For purposes of section 45D(e)(2), 
targeted populations that will be treated as a low-income community are 
individuals, or an identifiable group of individuals, including an 
Indian tribe, who are low-income persons as defined in paragraph 
(d)(9)(i) of this section or who are individuals who otherwise lack 
adequate access to loans or equity investments as defined in paragraph 
(d)(9)(ii) of this section.
    (i) Low-income persons--(A) Definition--(1) In general. For 
purposes of section 45D(e)(2) and this paragraph (d)(9), an individual 
shall be considered to be low-income if the individual's family income, 
adjusted for family size, is not more than--
    (i) For metropolitan areas, 80 percent of the area median family 
income; and
    (ii) For non-metropolitan areas, the greater of 80 percent of the 
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.
    (2) Area median family income. For purposes of paragraph 
(d)(9)(i)(A)(1) of this section, area median family income is 
determined in a manner consistent with the determinations of median 
family income under section 8 of the Housing Act of 1937, as amended. 
Taxpayers must use the annual estimates of median family income 
released by the Department of Housing and Urban Development (HUD) and 
may rely on those figures until 45 days after HUD releases a new list 
of income limits, or until HUD's effective date for the new list, 
whichever is later.
    (3) Individual's family income. For purposes of paragraph 
(d)(9)(i)(A)(1) of this section, an individual's family income is 
determined using any one of the following three methods for measuring 
family income:
    (i) Household income as measured by the U.S. Census Bureau,
    (ii) Adjusted gross income under section 62 as reported on Internal 
Revenue Service Form 1040. Adjusted gross income must include the 
adjusted gross income of any member of the individual's family (as 
defined in section 267(c)(4)) if the family member resides with the 
individual regardless of whether the family member files a separate 
return,
    (iii) Household income determined under section 8 of the Housing 
Act of 1937, as amended.

[[Page 75779]]

    (B) Qualified active low-income community business requirements for 
low-income targeted populations--(1) In general. An entity will not be 
treated as a qualified active low-income community business for low-
income targeted populations unless--
    (i) Except as provided in paragraph (d)(9)(i)(D)(2) of this 
section, at least 50 percent of the entity's total gross income for any 
taxable year is derived from sales, rentals, services, or other 
transactions with individuals who are low-income persons for purposes 
of section 45D(e)(2) and this paragraph (d)(9);
    (ii) At least 40 percent of the entity's employees are individuals 
who are low-income persons for purposes of section 45D(e)(2) and this 
paragraph (d)(9); or
    (iii) At least 50 percent of the entity is owned by individuals who 
are low-income persons for purposes of section 45D(e)(2) and this 
paragraph (d)(9).
    (2) Employee. The determination of whether an employee is a low-
income person must be made at the time the employee is hired. If the 
employee is a low-income person at the time of hire, that employee is 
considered a low-income person for purposes of section 45D(e)(2) and 
this paragraph (d)(9) throughout the time of employment, without regard 
to any increase in the employee's income after the time of hire.
    (3) Owner. The determination of whether an owner is a low-income 
person must be made at the time the qualified low-income community 
investment is made, or at the time the ownership interest is acquired 
by the owner, whichever is later. If an owner is a low-income person at 
the time the qualified low-income community investment is made or at 
the time the ownership interest is acquired by the owner, whichever is 
later, that owner is considered a low-income person for purposes of 
section 45D(e)(2) and this paragraph (d)(9) throughout the time the 
ownership interest is held by that owner.
    (4) Derived from. For purposes of paragraph (d)(9)(i)(B)(1)(i) of 
this section, the term derived from includes gross income derived from:
    (i) Payments made directly by low-income persons to the entity; and
    (ii) Money and the fair market value of property or services 
provided to the entity primarily for the benefit of low-income persons, 
but only if the persons providing the money, property, or services do 
not receive a direct benefit from the entity (for this purpose, a 
contribution that benefits the general public is not a direct benefit).
    (5) Fair market value of sales, rentals, services, or other 
transactions. For purposes of paragraph (d)(9)(i)(B)(1)(i) of this 
section, an entity with gross income that is derived from sales, 
rentals, services, or other transactions with both non low-income 
persons and low-income persons may treat the gross income derived from 
the sales, rentals, services, or other transactions with low-income 
persons as including the full fair market value even if the low-income 
persons do not pay fair market value.
    (C) 120-percent-income restriction--(1) In general--(i) In no case 
will an entity be treated as a qualified active low-income community 
business under paragraph (d)(9)(i) of this section if the entity is 
located in a population census tract for which the median family income 
exceeds 120 percent of, in the case of a tract not located within a 
metropolitan area, the statewide median family income, or in the case 
of a tract located within a metropolitan area, the greater of statewide 
median family income or metropolitan area median family income (120-
percent-income restriction).
    (ii) The 120-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is not located in a metropolitan area.
    (iii) The 120-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is located in a metropolitan area and 
more than 75 percent of the tract is zoned for commercial or industrial 
use. For this purpose, the 75 percent calculation should be made using 
the area of the population census tract. For purposes of this paragraph 
(d)(9)(i)(C)(1)(iii), property for which commercial or industrial use 
is a permissible zoning use will be treated as zoned for commercial or 
industrial use.
    (2) Population census tract location--(i) For purposes of the 120-
percent-income restriction, an entity will be considered to be located 
in a population census tract for which the median family income exceeds 
120 percent of the applicable median family income under paragraph 
(d)(9)(i)(C)(1)(i) of this section (non-qualifying population census 
tract) if at least 50 percent of the total gross income of the entity 
is derived from the active conduct of a qualified business (as defined 
in paragraph (d)(5) of this section) within one or more non-qualifying 
population census tracts (non-qualifying gross income amount); at least 
40 percent of the use of the tangible property of the entity (whether 
owned or leased) is within one or more non-qualifying population census 
tracts (non-qualifying tangible property usage); and at least 40 
percent of the services performed for the entity by its employees are 
performed in one or more non-qualifying population census tracts (non-
qualifying services performance).
    (ii) The entity is considered to have the non-qualifying gross 
income amount if the entity has non-qualifying tangible property usage 
or non-qualifying services performance of at least 50 percent instead 
of 40 percent.
    (iii) If the entity has no employees, the entity is considered to 
have the non-qualifying gross income amount and non-qualifying services 
performance if at least 85 percent of the use of the tangible property 
of the entity (whether owned or leased) is within one or more non-
qualifying population census tracts.
    (D) Rental of real property for low-income targeted populations--
(1) In general. An entity that rents to others real property for low-
income targeted populations and that otherwise satisfies the 
requirements to be a qualified business under paragraph (d)(5) of this 
section will be treated as located in a low-income community for 
purposes of paragraph (d)(5)(ii) of this section if at least 50 percent 
of the entity's total gross income is derived from rentals to 
individuals who are low-income persons for purposes of section 
45D(e)(2) and this paragraph (d)(9) or rentals to a qualified active 
low-income community business that meets the requirements for low-
income targeted populations under paragraphs (d)(9)(i)(B)(1)(i) or (ii) 
and (d)(9)(i)(B)(2) of this section.
    (2) Special rule for entities whose sole business is the rental to 
others of real property. If an entity's sole business is the rental to 
others of real property under paragraph (d)(9)(i)(D)(1) of this 
section, then the gross income requirement in paragraph 
(d)(9)(i)(B)(1)(i) of this section will be considered satisfied if the 
entity is treated as being located in a low-income community under 
paragraph (d)(9)(i)(D)(1) of this section.
    (ii) Individuals who otherwise lack adequate access to loans or 
equity investments--(A) In general. Paragraph (d)(9)(ii) of this 
section may be applied only with regard to qualified low-income 
community investments made under the increase in the new markets tax 
credit limitation pursuant to section 1400N(m)(2). Therefore, only CDEs 
with a significant mission of recovery and redevelopment of the Gulf 
Opportunity Zone (GO Zone) that receive an allocation from the increase 
described in section 1400N(m)(2) may make

[[Page 75780]]

qualified low-income community investments from that allocation 
pursuant to the rules in paragraph (d)(9)(ii) of this section.
    (B) GO Zone Targeted Population. For purposes of the targeted 
populations rules under section 45D(e)(2), an individual otherwise 
lacks adequate access to loans or equity investments only if the 
individual was displaced from his or her principal residence as a 
result of Hurricane Katrina or the individual lost his or her principal 
source of employment as a result of Hurricane Katrina (GO Zone Targeted 
Population). In order to meet this definition, the individual's 
principal residence or principal source of employment, as applicable, 
must have been located in a population census tract within the GO Zone 
that contains one or more areas designated by the Federal Emergency 
Management Agency (FEMA) as flooded, having sustained extensive damage, 
or having sustained catastrophic damage as a result of Hurricane 
Katrina.
    (C) Qualified active low-income community business requirements for 
the GO Zone Targeted Population--(1) In general. An entity will not be 
treated as a qualified active low-income community business for the GO 
Zone Targeted Population unless--
    (i) At least 50 percent of the entity's total gross income for any 
taxable year is derived from sales, rentals, services, or other 
transactions with the GO Zone Targeted Population, low-income persons 
as defined in paragraph (d)(9)(i) of this section, or some combination 
thereof;
    (ii) At least 40 percent of the entity's employees consist of the 
GO Zone Targeted Population, low-income persons as defined in paragraph 
(d)(9)(i) of this section, or some combination thereof; or
    (iii) At least 50 percent of the entity is owned by the GO Zone 
Targeted Population, low-income persons as defined in paragraph 
(d)(9)(i) of this section, or some combination thereof.
    (2) Location--(i) In general. In order to be a qualified active 
low-income community business under paragraph (d)(9)(ii)(C) of this 
section, the entity must be located in a population census tract within 
the GO Zone that contains one or more areas designated by FEMA as 
flooded, having sustained extensive damage, or having sustained 
catastrophic damage as a result of Hurricane Katrina (qualifying 
population census tract).
    (ii) Determination--For purposes of the preceding paragraph, an 
entity will be considered to be located in a qualifying population 
census tract if at least 50 percent of the total gross income of the 
entity is derived from the active conduct of a qualified business (as 
defined in paragraph (d)(5) of this section) within one or more 
qualifying population census tracts (gross income requirement); at 
least 40 percent of the use of the tangible property of the entity 
(whether owned or leased) is within one or more qualifying population 
census tracts (use of tangible property requirement); and at least 40 
percent of the services performed for the entity by its employees are 
performed in one or more qualifying population census tracts (services 
performed requirement). The entity is deemed to satisfy the gross 
income requirement if the entity satisfies the use of tangible property 
requirement or the services performed requirement on the basis of at 
least 50 percent instead of 40 percent. If the entity has no employees, 
the entity is deemed to satisfy the services performed requirement and 
the gross income requirement if at least 85 percent of the use of the 
tangible property of the entity (whether owned or leased) is within one 
or more qualifying population census tracts.
    (D) 200-percent-income restriction--(1) In general--(i) In no case 
will an entity be treated as a qualified active low-income community 
business under paragraph (d)(9)(ii) of this section if the entity is 
located in a population census tract for which the median family income 
exceeds 200 percent of, in the case of a tract not located within a 
metropolitan area, the statewide median family income, or, in the case 
of a tract located within a metropolitan area, the greater of statewide 
median family income or metropolitan area median family income (200-
percent-income restriction).
    (ii) The 200-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is not located in a metropolitan area.
    (iii) The 200-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is located in a metropolitan area and 
more than 75 percent of the tract is zoned for commercial or industrial 
use. For this purpose, the 75 percent calculation should be made using 
the area of the population census tract. For purposes of this paragraph 
(d)(9)(ii)(D)(1)(iii), property for which commercial or industrial use 
is a permissible zoning use will be treated as zoned for commercial or 
industrial use.
    (2) Population census tract location--(i) For purposes of the 200-
percent-income restriction, an entity will be considered to be located 
in a population census tract for which the median family income exceeds 
200 percent of the applicable median family income under paragraph 
(d)(9)(ii)(D)(1)(i) of this section (non-qualifying population census 
tract) if--at least 50 percent of the total gross income of the entity 
is derived from the active conduct of a qualified business (as defined 
in paragraph (d)(5) of this section) within one or more non-qualifying 
population census tracts (non-qualifying gross income amount); at least 
40 percent of the use of the tangible property of the entity (whether 
owned or leased) is within one or more non-qualifying population census 
tracts (non-qualifying tangible property usage); and at least 40 
percent of the services performed for the entity by its employees are 
performed in one or more non-qualifying population census tracts (non-
qualifying services performance).
    (ii) The entity is considered to have the non-qualifying gross 
income amount if the entity has non-qualifying tangible property usage 
or non-qualifying services performance of at least 50 percent instead 
of 40 percent.
    (iii) If the entity has no employees, the entity is considered to 
have the non-qualifying gross income amount and non-qualifying services 
performance if at least 85 percent of the use of the tangible property 
of the entity (whether owned or leased) is within one or more non-
qualifying population census tracts.
    (E) Rental of real property for the GO Zone Targeted Population. 
The rental to others of real property for the GO Zone Targeted 
Population that otherwise satisfies the requirements to be a qualified 
business under paragraph (d)(5) of this section will be treated as 
located in a low-income community for purposes of paragraph (d)(5)(ii) 
of this section if at least 50 percent of the entity's total gross 
income is derived from rentals to the GO Zone Targeted Population, 
rentals to low-income persons as defined in paragraph (d)(9)(i) of this 
section, or rentals to a qualified active low-income community business 
that meets the requirements for the GO Zone Targeted Population under 
paragraph (d)(9)(ii)(C)(1)(i) or (ii) of this section.
* * * * *
    (h) Effective/applicability dates.
* * * * *
    (3) Targeted populations. The rules in paragraph (d)(9) of this 
section and the last sentence in paragraph (d)(4)(iv)(A) of this 
section apply to taxable years ending on or after December 5, 2011. A 
taxpayer may apply the rules in

[[Page 75781]]

paragraph (d)(9) of this section to taxable years ending before 
December 5, 2011 for designations made by the Secretary after October 
22, 2004.

    Approved: November 22, 2011.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-31169 Filed 12-2-11; 8:45 am]
BILLING CODE 4830-01-P