Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77625

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Parts 1 and 602

[TD 9171] 

RINs 1545–AY87; 1545–BC03

New Markets Tax Credit

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Final regulations.

SUMMARY: These regulations finalize the 

rules relating to the new markets tax 

credit under section 45D and replace the 

temporary regulations which expire on 

December 23, 2004. A taxpayer making 

a qualified equity investment in a 

qualified community development 

entity that has received a new markets 

tax credit allocation may claim a 5-

percent tax credit with respect to the 

qualified equity investment on each of 

the first 3 credit allowance dates and a 

6-percent tax credit with respect to the 

qualified equity investment on each of 

the remaining 4 credit allowance dates.

DATES: Effective Date: These regulations 

are effective December 22, 2004. 

Date of Applicability: For date of 

applicability see § 1.45D–1(h).

FOR FURTHER INFORMATION CONTACT: Paul 

F. Handleman or Lauren R. Taylor, (202) 

622–3040 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act (44 U.S.C. 3507) under 

control number 1545–1765. Responses 

to this collection of information are 

mandatory so that a taxpayer may claim 

a new markets tax credit on each credit 

allowance date during the 7-year credit 

period and report compliance with the 

requirements of section 45D to the 

Secretary. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

displays a valid control number 

assigned by the Office of Management 

and Budget. 

The estimated annual burden per 

respondent varies from 15 minutes to 5 

hours, depending on individual 

circumstances, with an estimated 

average of 2.5 hours. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be sent to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP Washington, DC 

20224, and to the Office of Management 

and Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503. 

Books or records relating to this 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document amends 26 CFR part 1 

to provide rules relating to the new 

markets tax credit under section 45D of 

the Internal Revenue Code (Code). On 

December 26, 2001, the IRS published 

in the Federal Register temporary and 

proposed regulations (the 2001 

temporary regulations) (66 FR 66307, 66 

FR 66376). On March 11, 2004, the IRS 

published in the Federal Register

temporary and proposed regulations 

revising and clarifying the 2001 

temporary regulations (the 2004 

temporary regulations) (69 FR 11507; 69 

FR 11561). On March 14, 2002, and June 

2, 2004, the IRS and Treasury 

Department held public hearings on the 

2001 temporary regulations and the 

2004 temporary regulations, 

respectively. Written and electronic 

comments responding to the temporary 

regulations and notices of proposed 

rulemaking were received. After 

consideration of all the comments, the 

proposed regulations are adopted as 

amended by this Treasury decision, and 

the corresponding temporary 

regulations are removed. The revisions 

are discussed below. 

Section 45D was added to the Code by 

section 121(a) of the Community 

Renewal Tax Relief Act of 2000 (Pub. L. 

106–554). The Secretary has delegated 

certain administrative, application, 

allocation, monitoring, and other 

programmatic functions relating to the 

new markets tax credit program to the 

Under Secretary (Domestic Finance), 

who in turn has delegated those 

functions to the Community 

Development Financial Institutions 

Fund. 

Sections 221 and 223 of the American 

Jobs Creation Act of 2004 (Pub. L. 108–

357) amended the definition of a lowincome community under section 

45D(e). This document does not provide 

guidance on these amendments. The IRS 

and Treasury Department are studying 

the amendments for guidance in the 

near future. 

Explanation of Provisions 

General Overview 

Taxpayers may claim a new markets 

tax credit on a credit allowance date in 

an amount equal to the applicable 

percentage of the taxpayer’s qualified 

equity investment in a qualified 

community development entity (CDE). 

The credit allowance date for any 

qualified equity investment is the date 

on which the investment is initially 

made and each of the 6 anniversary 

dates thereafter. The applicable 

percentage is 5 percent for the first 3 

credit allowance dates and 6 percent for 

the remaining credit allowance dates. 

A CDE is any domestic corporation or 

partnership if: (1) The primary mission 

of the entity is serving or providing 

investment capital for low-income 

communities or low-income persons; (2) 

the entity maintains accountability to 

residents of low-income communities 

through their representation on any 

governing board of the entity or on any 

advisory board to the entity; and (3) the 

entity is certified by the Secretary for 

purposes of section 45D as being a CDE. 

The new markets tax credit may be 

claimed only for a qualified equity 

investment in a CDE. A qualified equity 

investment is any equity investment in 

a CDE for which the CDE has received 

an allocation from the Secretary if, 

among other things, the CDE uses 

substantially all of the cash from the 

investment to make qualified lowincome community investments. Under 

a safe harbor, the substantially-all 

requirement is treated as met if at least 

85 percent of the aggregate gross assets 

of the CDE are invested in qualified lowincome community investments.

Qualified low-income community 

investments consist of: (1) Any capital 

or equity investment in, or loan to, any 

qualified active low-income community 

business; (2) the purchase from another 

CDE of any loan made by such entity 

that is a qualified low-income 

community investment; (3) financial 

counseling and other services to 

businesses located in, and residents of, 

low-income communities; and (4) 

certain equity investments in, or loans 

to, a CDE. 

In general, a qualified active lowincome community business is a 

corporation or a partnership if for the 

taxable year: (1) At least 50 percent of 

the total gross income of the entity is 

derived from the active conduct of a 

qualified business within any lowincome community; (2) a substantial 

portion of the use of the tangible 

property of the entity is within any lowincome community; (3) a substantial 

portion of the services performed for the 

77626 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

entity by its employees is performed in 

any low-income community; (4) less 

than 5 percent of the average of the 

aggregate unadjusted bases of the 

property of the entity is attributable to 

certain collectibles; and (5) less than 5 

percent of the average of the aggregate 

unadjusted bases of the property of the 

entity is attributable to certain 

nonqualified financial property. 

A recapture event requiring an 

investor to recapture credits previously 

taken occurs for an equity investment in 

a CDE if the CDE: (1) Ceases to be a CDE; 

(2) ceases to use substantially all of the 

proceeds of the equity investment for 

qualified low-income community 

investments; or (3) redeems the 

investor’s equity investment. In 

addition, the investor’s basis in any 

qualified equity investment is reduced 

by the amount of the new markets tax 

credit. 

Substantially All 

As indicated above, a CDE must use 

substantially all of the cash from a 

qualified equity investment to make 

qualified low-income community 

investments. Section 1.45D–1T(c)(5)(i) 

provides that the substantially-all 

requirement is treated as satisfied for an 

annual period if either the direct-tracing 

calculation under § 1.45D–1T(c)(5)(ii), 

or the safe harbor calculation under 

§ 1.45D–1T(c)(5)(iii), is performed every 

six months and the average of the two 

calculations for the annual period is at 

least 85 percent. The final regulations 

clarify that a CDE may choose the same 

two testing dates for all qualified equity 

investments regardless of the date each 

qualified equity investment was initially 

made. To conform the annual testing 

requirement with the 12-month time 

limit for making qualified low-income 

community investments, the final 

regulations provide that for the first 

annual period, the substantially-all 

calculation may be performed on a 

single testing date. The final regulations 

also amend the beginning of the 12-

month period for making qualified lowincome community investments to 

provide that the 12-month period begins 

on the same date as the beginning of the 

first annual period of the 7-year credit 

period. 

Section 1.45D–1T(d)(3) provides that 

reserves (not in excess of 5 percent of 

the taxpayer’s cash investment under 

§ 1.45D–1T(b)(4)) maintained by the 

CDE for loan losses or for additional 

investments in existing qualified lowincome community investments are 

treated as invested in a qualified lowincome community investment. In 

response to comments, the final 

regulations provide that reserves 

include fees paid to third parties to 

protect against loss of all or a portion of 

the principal of, or interest on, on a loan 

that is a qualified low-income 

community investment. 

Qualified Active Low-Income 

Community Business 

As indicated above, qualified lowincome community investments include 

any capital or equity investment in, or 

loan to, any qualified active low-income 

community business. Under § 1.45D–

1T(d)(4)(i)(B), an entity is a qualified 

active low-income community business 

only if, among other requirements, at 

least 40 percent of the use of the 

tangible property of such entity 

(whether owned or leased) is within any 

low-income community. In response to 

comments, the final regulations provide 

an example of how the tangible property 

test applies to property that is used both 

outside and inside a low-income 

community. The example demonstrates 

that use is measured based on the 

entity’s business hours of operation and 

does not include non-business hours. 

Under section 45D(d)(2)(C), a 

qualified active low-income community 

business includes any trade or business 

that would qualify as a qualified active 

low-income community business if such 

trade or business were separately 

incorporated. Commentators requested 

clarification of how this rules applies. 

The final regulations provide that a 

CDE may treat any trade or business (or 

portion thereof) as a qualified active 

low-income community business if the 

trade or business (or portion thereof) 

would meet the requirements to be a 

qualified active low-income community 

business if the trade or business (or 

portion thereof) were separately 

incorporated and a complete and 

separate set of books and records is 

maintained for that trade or business (or 

portion thereof). The final regulations 

further provide, however, that under 

this rule a CDE’s capital or equity 

investment or loan is not a qualified 

low-income community investment to 

the extent the proceeds of the 

investment or loan are not used for the 

trade or business (or portion thereof) 

that is treated as a qualified active lowincome community business. 

Section § 1.45D–1T(d)(4)(iv) provides 

that an entity will be treated as engaged 

in the active conduct of a trade or 

business if, at the time the CDE makes 

a capital or equity investment in, or loan 

to, the entity, the CDE reasonably 

expects that the entity will generate 

revenues (or, in the case of a nonprofit 

corporation, receive donations) within 3 

years after the date the investment or 

loan is made. The final regulations 

amend this rule with respect to a 

nonprofit corporation by providing that 

the nonprofit corporation must be 

engaged in an activity that furthers its 

purpose as a nonprofit corporation 

within the 3-year period. 

Under § 1.45D–1T(d)(4)(i)(E), an 

entity is a qualified active low-income 

community business only if, among 

other requirements, less than 5 percent 

of the average of the aggregate 

unadjusted bases of the property of such 

entity is attributable to nonqualified 

financial property (as defined in section 

1397C(e)). Section 1397C(e)(1) contains 

an exception to the definition of 

nonqualified financial property for 

reasonable amounts of working capital 

held in cash, cash equivalents, or debt 

instruments with a term of 18 months or 

less. The final regulations provide that, 

for these purposes, the proceeds of a 

capital or equity investment or loan by 

a CDE that will be expended on 

construction of real property within 12 

months after the date the investment or 

loan is made qualify as a reasonable 

amount of working capital.

Section 45D(d)(3)(A) provides that the 

rental to others of real property located 

in any low-income community is treated 

as a qualified business only if, among 

other requirements, there are substantial 

improvements located on such property. 

Commentators requested clarification of 

the term substantial improvements. The 

final regulations provide that the term 

substantial improvements means 

improvements the cost basis of which 

equals or exceeds 50 percent of the cost 

basis of the land on which the 

improvements are located and the costs 

of which are incurred after the date the 

CDE makes the investment or loan. In 

addition, the final regulations provide 

that a CDE’s investment in or loan to a 

business engaged in the rental of real 

property is not a qualified low-income 

community investment to the extent any 

lessee of the real property is not a 

qualified business. 

Recapture 

As indicated above, there is a 

recapture event with respect to an 

equity investment in a CDE if such 

investment is redeemed by the CDE. 

Commentators requested clarification of 

when distributions by a CDE to its 

investors will be treated as redemptions. 

The final regulations provide guidance 

on when a distribution by a CDE that is 

a corporation for Federal tax purposes 

will be treated as a redemption. 

Some commentators suggested that, in 

the case of a CDE that is treated as a 

partnership for Federal tax purposes, a 

redemption should be limited to 

purchases by the CDE of a partner’s 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77627

capital interest. Alternatively, 

commentators requested guidance on 

how to distinguish between a return of 

capital and a distribution of profits if a 

return of capital is treated as a 

redemption. In response to comments, 

the final regulations provide a safe 

harbor under which cash distributions 

by a partnership will not be treated as 

a redemption. Under the safe harbor, a 

pro rata cash distribution by the CDE to 

its partners based on each partner’s 

capital interest in the CDE during the 

taxable year will not be treated as a 

redemption if the distribution does not 

exceed the CDE’s operating income (as 

defined in the final regulations) for the 

taxable year. In addition, a non-pro rata 

de minimis cash distribution by a CDE 

to a partner or partners during the 

taxable year will be not treated as a 

redemption. A non-pro rata de minimis

cash distribution may not exceed the 

lesser of 5 percent of the CDE’s 

operating income for that taxable year or 

10 percent of the partner’s capital 

interest in the CDE. 

Commentators suggested that cure 

periods be provided to enable CDEs to 

correct any noncompliance with the 

requirements under section 45D. One 

commentator suggested that a cure 

period be provided to allow an 

investment that no longer qualifies as a 

qualified low-income community 

investment to be replaced with a 

qualifying investment by the end of the 

calendar year following the year the 

original investment lost its status as a 

qualified low-income community 

investment. Other commentators 

suggested that, if a qualified equity 

investment fails the substantially-all 

requirement, the failure should not be a 

recapture event if the CDE corrects the 

failure within 6 months after the date 

the CDE discovers (or reasonably should 

have discovered) the failure. The final 

regulations provide that, if a qualified 

equity investment fails the 

substantially-all requirement, the failure 

is not a recapture event if the CDE 

corrects the failure within 6 months 

after the date the CDE becomes aware 

(or reasonably should have become 

aware) of the failure. Only one 

correction is permitted for each 

qualified equity investment during the 

7-year credit period. 

Other Issues 

Section 45D(i)(1) authorizes the 

Secretary to prescribe regulations as 

may be appropriate to carry out section 

45D including regulations that limit the 

new markets tax credit for investments 

that are directly or indirectly subsidized 

by other Federal tax benefits (including 

the low-income housing credit under 

section 42 and the exclusion from gross 

income under section 103). The final 

regulations do not prohibit a CDE from 

purchasing tax-exempt bonds because 

tax-exempt financing provides a subsidy 

to borrowers and not bondholders. 

However, the final regulations provide 

that if a CDE makes a capital or equity 

investment or loan with respect to a 

qualified low-income building under 

section 42, the investment or loan is not 

a qualified low-income community 

investment to the extent the building’s 

eligible basis under section 42(d) is 

financed by the proceeds of the 

investment or loan. 

Effective Dates 

The final regulations are effective 

December 22, 2004, and may be applied 

by taxpayers before December 22, 2004. 

However, both the definition of the term 

substantial improvements and the 

requirement that each lessee be a 

qualified business apply to qualified 

low-income community investments 

made on or after February 22, 2005.

Special Analyses 

It has been determined that this 

Treasury decision 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. It is hereby 

certified that the collection of 

information in these regulations will not 

have a significant economic impact on 

a substantial number of small entities. 

This certification is based upon the fact 

that any burden on taxpayers is 

minimal. Accordingly, a Regulatory 

Flexibility Analysis under the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Code, the notices 

of proposed rulemaking preceding these 

regulations were submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

Drafting Information 

The principal author of these 

regulations is Paul F. Handleman, 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 

26 CFR Part 1

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602

Reporting and recordkeeping 

requirements.

Adoption of Amendments to the 

Regulations

■ Accordingly, 26 CFR parts 1 and 602 

are 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 * * *

Section 1.45D–1 also issued under 26 

U.S.C. 45D(i); * * *

■ Par. 2. Section 1.45D–1 is added to 

read as follows:

§ 1.45D–1 New markets tax credit. 

(a) Table of contents. This paragraph 

lists the headings that appear in 

§ 1.45D–1.

(a) Table of contents 

(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 lowincome 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 

77628 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

(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 

(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 dates 

(1) In general 

(2) Exception for certain provisions

(b) Allowance of credit—(1) In 

general. For purposes of the general 

business credit under section 38, 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 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. Qualified equity 

investment is defined in paragraph (c) of 

this section. Credit allowance date is 

defined in paragraph (b)(2) of this 

section. Applicable percentage is 

defined in paragraph (b)(3) of this 

section. A CDE is a qualified community 

development entity as defined in 

section 45D(c). The amount paid at 

original issue is determined under 

paragraph (b)(4) of this section. 

(2) Credit allowance date. The term 

credit allowance date means, with 

respect to any qualified equity 

investment—

(i) The date on which the investment 

is initially made; and 

(ii) Each of the 6 anniversary dates of 

such date thereafter. 

(3) Applicable percentage. The 

applicable percentage is 5 percent for 

the first 3 credit allowance dates and 6 

percent for the other 4 credit allowance 

dates. 

(4) Amount paid at original issue. The 

amount paid to the CDE for a qualified 

equity investment at its original issue 

consists of all amounts paid by the 

taxpayer to, or on behalf of, the CDE 

(including any underwriter’s fees) to 

purchase the investment at its original 

issue. 

(c) Qualified equity investment—(1) In 

general. The term qualified equity 

investment means any equity 

investment (as defined in paragraph 

(c)(2) of this section) in a CDE if—

(i) The investment is acquired by the 

taxpayer at its original issue (directly or 

through an underwriter) solely in 

exchange for cash; 

(ii) Substantially all (as defined in 

paragraph (c)(5) of this section) of such 

cash is used by the CDE to make 

qualified low-income community 

investments (as defined in paragraph 

(d)(1) of this section); and 

(iii) The investment is designated for 

purposes of section 45D and this section 

by the CDE on its books and records 

using any reasonable method. 

(2) Equity investment. The term equity 

investment means any stock (other than 

nonqualified preferred stock as defined 

in section 351(g)(2)) in an entity that is 

a corporation for Federal tax purposes 

and any capital interest in an entity that 

is a partnership for Federal tax 

purposes. See §§ 301.7701–1 through 

301.7701–3 of this chapter for rules 

governing when a business entity, such 

as a business trust or limited liability 

company, is classified as a corporation 

or a partnership for Federal tax 

purposes. 

(3) Equity investments made prior to 

allocation—(i) In general. Except as 

provided in paragraph (c)(3)(ii) of this 

section, an equity investment in an 

entity is not eligible to be designated as 

a qualified equity investment if it is 

made before the entity enters into an 

allocation agreement with the Secretary. 

An allocation agreement is an 

agreement between the Secretary and a 

CDE relating to a new markets tax credit 

allocation under section 45D(f)(2). 

(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 under paragraph (c)(1)(iii) of 

this section if—

(A) Allocation applications submitted 

by August 29, 2002.

(1) The equity investment is made on 

or after April 20, 2001; 

(2) The designation of the equity 

investment as a qualified equity 

investment is made for a credit 

allocation received pursuant to an 

allocation application submitted to the 

Secretary no later than August 29, 2002; 

and 

(3) The equity investment otherwise 

satisfies the requirements of section 45D 

and this section; or 

(B) Other allocation applications.

(1) The equity investment is made on 

or after the date the Secretary publishes 

a Notice of Allocation Availability 

(NOAA) in the Federal Register; 

(2) The designation of the equity 

investment as a qualified equity 

investment is made for a credit 

allocation received pursuant to an 

allocation application submitted to the 

Secretary under that NOAA; and 

(3) The equity investment otherwise 

satisfies the requirements of section 45D 

and this section.

(iii) Failure to receive allocation. For 

purposes of paragraph (c)(3)(ii)(A) of 

this section, if the entity in which the 

equity investment is made does not 

receive an allocation pursuant to an 

allocation application submitted no 

later than August 29, 2002, the equity 

investment will not be eligible to be 

designated as a qualified equity 

investment. For purposes of paragraph 

(c)(3)(ii)(B) of this section, if the entity 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77629

in which the equity investment is made 

does not receive an allocation under the 

NOAA described in paragraph 

(c)(3)(ii)(B)(1) of this section, the equity 

investment will not be eligible to be 

designated as a qualified equity 

investment. 

(iv) Initial investment date. If an 

equity investment is designated as a 

qualified equity investment in 

accordance with paragraph (c)(3)(ii) of 

this section, the investment is treated as 

initially made on the effective date of 

the allocation agreement between the 

CDE and the Secretary. 

(4) Limitations—(i) In general. The 

term qualified equity investment does 

not include—

(A) Any equity investment issued by 

a CDE more than 5 years after the date 

the CDE enters into an allocation 

agreement (as defined in paragraph 

(c)(3)(i) of this section) with the 

Secretary; and 

(B) Any equity investment by a CDE 

in another CDE, if the CDE making the 

investment has received an allocation 

under section 45D(f)(2). 

(ii) Allocation limitation. The 

maximum amount of equity investments 

issued by a CDE that may be designated 

under paragraph (c)(1)(iii) of this section 

by the CDE may not exceed the portion 

of the limitation amount allocated to the 

CDE by the Secretary under section 

45D(f)(2). 

(5) Substantially all—(i) In general.

Except as provided in paragraph 

(c)(5)(v) of this section, the term 

substantially all means at least 85 

percent. The substantially-all 

requirement must be satisfied for each 

annual period in the 7-year credit 

period using either the direct-tracing 

calculation under paragraph (c)(5)(ii) of 

this section, or the safe harbor 

calculation under paragraph (c)(5)(iii) of 

this section. For the first annual period, 

the substantially-all requirement is 

treated as satisfied if either the directtracing calculation under paragraph 

(c)(5)(ii) of this section, or the safeharbor calculation under paragraph 

(c)(5)(iii) of this section, is performed on 

a single testing date and the result of the 

calculation is at least 85 percent. For 

each annual period other than the first 

annual period, the substantially-all 

requirement is treated as satisfied if 

either the direct-tracing calculation 

under paragraph (c)(5)(ii) of this section, 

or the safe harbor calculation under 

paragraph (c)(5)(iii) of this section, is 

performed every six months and the 

average of the two calculations for the 

annual period is at least 85 percent. For 

example, the CDE may choose the same 

two testing dates for all qualified equity 

investments regardless of the date each 

qualified equity investment was initially 

made under paragraph (b)(2)(i) of this 

section, provided the testing dates are 

six months apart. The use of the directtracing calculation under paragraph 

(c)(5)(ii) of this section (or the safe 

harbor calculation under paragraph 

(c)(5)(iii) of this section) for an annual 

period does not preclude the use of the 

safe harbor calculation under paragraph 

(c)(5)(iii) of this section (or the directtracing calculation under paragraph 

(c)(5)(ii) of this section) for another 

annual period, provided that a CDE that 

switches to a direct-tracing calculation 

must substantiate that the taxpayer’s 

investment is directly traceable to 

qualified low-income community 

investments from the time of the CDE’s 

initial investment in a qualified lowincome community investment. For 

purposes of this paragraph (c)(5)(i), the 

7-year credit period means the period of 

7 years beginning on the date the 

qualified equity investment is initially 

made. See paragraph (c)(6) of this 

section for circumstances in which a 

CDE may treat more than one equity 

investment as a single qualified equity 

investment. 

(ii) Direct-tracing calculation. The 

substantially-all requirement is satisfied 

if at least 85 percent of the taxpayer’s 

investment is directly traceable to 

qualified low-income community 

investments as defined in paragraph 

(d)(1) of this section. The direct-tracing 

calculation is a fraction the numerator 

of which is the CDE’s aggregate cost 

basis determined under section 1012 in 

all of the qualified low-income 

community investments that are directly 

traceable to the taxpayer’s cash 

investment, and the denominator of 

which is the amount of the taxpayer’s 

cash investment under paragraph (b)(4) 

of this section. For purposes of this 

paragraph (c)(5)(ii), cost basis includes 

the cost basis of any qualified lowincome community investment that 

becomes worthless. See paragraph (d)(2) 

of this section for the treatment of 

amounts received by a CDE in payment 

of, or for, capital, equity or principal 

with respect to a qualified low-income 

community investment. 

(iii) Safe harbor calculation. The 

substantially-all requirement is satisfied 

if at least 85 percent of the aggregate 

gross assets of the CDE are invested in 

qualified low-income community 

investments as defined in paragraph 

(d)(1) of this section. The safe harbor 

calculation is a fraction the numerator 

of which is the CDE’s aggregate cost 

basis determined under section 1012 in 

all of its qualified low-income 

community investments, and the 

denominator of which is the CDE’s 

aggregate cost basis determined under 

section 1012 in all of its assets. For 

purposes of this paragraph (c)(5)(iii), 

cost basis includes the cost basis of any 

qualified low-income community 

investment that becomes worthless. See

paragraph (d)(2) of this section for the 

treatment of amounts received by a CDE 

in payment of, or for, capital, equity or 

principal with respect to a qualified 

low-income community investment. 

(iv) Time limit for making 

investments. The taxpayer’s cash 

investment received by a CDE is treated 

as invested in a qualified low-income 

community investment as defined in 

paragraph (d)(1) of this section only to 

the extent that the cash is so invested 

within the 12-month period beginning 

on the date the cash is paid by the 

taxpayer (directly or through an 

underwriter) to the CDE. 

(v) Reduced substantially-all 

percentage. For purposes of the 

substantially-all requirement (including 

the direct-tracing calculation under 

paragraph (c)(5)(ii) of this section and 

the safe harbor calculation under 

paragraph (c)(5)(iii) of this section), 85 

percent is reduced to 75 percent for the 

seventh year of the 7-year credit period 

(as defined in paragraph (c)(5)(i) of this 

section). 

(vi) Examples. The following 

examples illustrate an application of 

this paragraph (c)(5):

Example 1. X is a partnership and a CDE 

that has received a $1 million new markets 

tax credit allocation from the Secretary. On 

September 1, 2004, X uses a line of credit 

from a bank to fund a $1 million loan to Y. 

The loan is a qualified low-income 

community investment under paragraph 

(d)(1) of this section. On September 5, 2004, 

A pays $1 million to acquire a capital interest 

in X. X uses the proceeds of A’s equity 

investment to pay off the $1 million line of 

credit that was used to fund the loan to Y. 

X’s aggregate gross assets consist of the $1 

million loan to Y and $100,000 in other 

assets. A’s equity investment in X does not 

satisfy the substantially-all requirement 

under paragraph (c)(5)(i) of this section using 

the direct-tracing calculation under 

paragraph (c)(5)(ii) of this section because the 

cash from A’s equity investment is not used 

to make X’s loan to Y. However, A’s equity 

investment in X satisfies the substantially-all 

requirement using the safe harbor calculation 

under paragraph (c)(5)(iii) of this section 

because at least 85 percent of X’s aggregate 

gross assets are invested in qualified lowincome community investments.

Example 2. X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On August 1, 

2004, A pays $100,000 for a capital interest 

in X. On August 5, 2004, X uses the proceeds 

of A’s equity investment to make an equity 

investment in Y. X controls Y within the 

meaning of paragraph (d)(6)(ii)(B) of this 

section. For the annual period ending July 

77630 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

31, 2005, Y is a qualified active low-income 

community business (as defined in paragraph 

(d)(4) of this section). Thus, for that period, 

A’s equity investment satisfies the 

substantially-all requirement under 

paragraph (c)(5)(i) of this section using the 

direct-tracing calculation under paragraph 

(c)(5)(ii) of this section. For the annual period 

ending July 31, 2006, Y no longer is a 

qualified active low-income community 

business. Thus, for that period, A’s equity 

investment does not satisfy the substantiallyall requirement using the direct-tracing 

calculation. However, during the entire 

annual period ending July 31, 2006, X’s 

remaining assets are invested in qualified 

low-income community investments with an 

aggregate cost basis of $900,000. 

Consequently, for the annual period ending 

July 31, 2006, at least 85 percent of X’s 

aggregate gross assets are invested in 

qualified low-income community 

investments. Thus, for the annual period 

ending July 31, 2006, A’s equity investment 

satisfies the substantially-all requirement 

using the safe harbor calculation under 

paragraph (c)(5)(iii) of this section.

Example 3. X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On August 1, 

2004, A and B each pay $100,000 for a capital 

interest in X. X does not treat A’s and B’s 

equity investments as one qualified equity 

investment under paragraph (c)(6) of this 

section. On September 1, 2004, X uses the 

proceeds of A’s equity investment to make an 

equity investment in Y and X uses the 

proceeds of B’s equity investment to make an 

equity investment in Z. X has no assets other 

than its investments in Y and Z. X controls 

Y and Z within the meaning of paragraph 

(d)(6)(ii)(B) of this section. For the annual 

period ending July 31, 2005, Y and Z are 

qualified active low-income community 

businesses (as defined in paragraph (d)(4) of 

this section). Thus, for the annual period 

ending July 31, 2005, A’s and B’s equity 

investments satisfy the substantially-all 

requirement under paragraph (c)(5)(i) of this 

section using either the direct-tracing 

calculation under paragraph (c)(5)(ii) of this 

section or the safe harbor calculation under 

paragraph (c)(5)(iii) of this section. For the 

annual period ending July 31, 2006, Y, but 

not Z, is a qualified active low-income 

community business. Thus, for the annual 

period ending July 31, 2006—

(1) X does not satisfy the substantially-all 

requirement using the safe harbor calculation 

under paragraph (c)(5)(iii) of this section; 

(2) A’s equity investment satisfies the 

substantially-all requirement using the 

direct-tracing calculation because A’s equity 

investment is directly traceable to Y; and 

(3) B’s equity investment does not satisfy 

the substantially-all requirement because B’s 

equity investment is traceable to Z.

Example 4. X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On November 

1, 2004, A pays $100,000 for a capital interest 

in X. On December 1, 2004, B pays $100,000 

for a capital interest in X. On December 31, 

2004, X uses $85,000 from A’s equity 

investment and $85,000 from B’s equity 

investment to make a $170,000 equity 

investment in Y, a qualified active lowincome community business (as defined in 

paragraph (d)(4) of this section). X has no 

assets other than its investment in Y. X 

determines whether A’s and B’s equity 

investments satisfy the substantially-all 

requirement under paragraph (c)(5)(i) of this 

section on December 31, 2004. The 

calculation for A’s and B’s equity 

investments is 85 percent using either the 

direct-tracing calculation under paragraph 

(c)(5)(ii) of this section or the safe harbor 

calculation under paragraph (c)(5)(iii) of this 

section. Therefore, for the annual periods 

ending October 31, 2005, and November 30, 

2005, A’s and B’s equity investments, 

respectively, satisfy the substantially-all 

requirement under paragraph (c)(5)(i) of this 

section. For the subsequent annual period, X 

performs its calculations on December 31, 

2005, and June 30, 2006. The average of the 

two calculations on December 31, 2005, and 

June 30, 2006, is 85 percent using either the 

direct-tracing calculation under paragraph 

(c)(5)(ii) of this section or the safe harbor 

calculation under paragraph (c)(5)(iii) of this 

section. Therefore, for the annual periods 

ending October 31, 2006, and November 30, 

2006, A’s and B’s equity investments, 

respectively, satisfy the substantially-all 

requirement under paragraph (c)(5)(i) of this 

section.

(6) Aggregation of equity investments.

A CDE may treat any qualified equity 

investments issued on the same day as 

one qualified equity investment. If a 

CDE aggregates equity investments 

under this paragraph (c)(6), the rules in 

this section shall be construed in a 

manner consistent with that treatment. 

(7) Subsequent purchasers. A 

qualified equity investment includes 

any equity investment that would (but 

for paragraph (c)(1)(i) of this section) be 

a qualified equity investment in the 

hands of the taxpayer if the investment 

was a qualified equity investment in the 

hands of a prior holder. 

(d) Qualified low-income community 

investments—(1) In general. The term 

qualified low-income community 

investment means any of the following: 

(i) Investment in a 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). 

(ii) Purchase of certain loans from 

CDEs—(A) In general. The purchase by 

a CDE (the ultimate CDE) from another 

CDE (whether or not that CDE has 

received an allocation from the 

Secretary under section 45D(f)(2)) of any 

loan made by such entity that is a 

qualified low-income community 

investment. A loan purchased by the 

ultimate CDE from another CDE is a 

qualified low-income community 

investment if it qualifies as a qualified 

low-income community investment 

either—

(1) At the time the loan was made; or 

(2) At the time the ultimate CDE 

purchases the loan. 

(B) Certain loans made before CDE 

certification. For purposes of paragraph 

(d)(1)(ii)(A) of this section, a loan by an 

entity is treated as made by a CDE, 

notwithstanding that the entity was not 

a CDE at the time it made the loan, if 

the entity is a CDE at the time it sells 

the loan.

(C) Intermediary CDEs. For purposes 

of paragraph (d)(1)(ii)(A) of this section, 

the purchase of a loan by the ultimate 

CDE from a CDE that did not make the 

loan (the second CDE) is treated as a 

purchase of the loan by the ultimate 

CDE from the CDE that made the loan 

(the originating CDE) if—

(1) The second CDE purchased the 

loan from the originating CDE (or from 

another CDE); and 

(2) Each entity that sold the loan was 

a CDE at the time it sold the loan. 

(D) Examples. The following 

examples illustrate an application of 

this paragraph (d)(1)(ii):

Example 1. X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. Y, a 

corporation, made a $500,000 loan to Z in 

1999. In January of 2004, Y is certified as a 

CDE. On September 1, 2004, X purchases the 

loan from Y. At the time X purchases the 

loan, Z is a qualified active low-income 

community business under paragraph 

(d)(4)(i) of this section. Accordingly, the loan 

purchased by X from Y is a qualified lowincome community investment under 

paragraphs (d)(1)(ii)(A) and (B) of this 

section.

Example 2. The facts are the same as in 

Example 1 except that on February 1, 2004, 

Y sells the loan to W and on September 1, 

2004, W sells the loan to X. W is a CDE. 

Under paragraph (d)(1)(ii)(C) of this section, 

X’s purchase of the loan from W is treated 

as the purchase of the loan from Y. 

Accordingly, the loan purchased by X from 

W is a qualified low-income community 

investment under paragraphs (d)(1)(ii)(A) and 

(C) of this section.

Example 3. The facts are the same as in 

Example 2 except that W is not a CDE. 

Because W was not a CDE at the time it sold 

the loan to X, the purchase of the loan by X 

from W is not a qualified low-income 

community investment under paragraphs 

(d)(1)(ii)(A) and (C) of this section.

(iii) Financial counseling and other 

services. Financial counseling and other 

services (as defined in paragraph (d)(7) 

of this section) provided to any 

qualified active low-income community 

business, or to any residents of a lowincome community (as defined in 

section 45D(e)). 

(iv) Investments in other CDEs—(A) In 

general. Any equity investment in, or 

loan to, any CDE (the second CDE) by 

a CDE (the primary CDE), but only to the 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77631

extent that the second CDE uses the 

proceeds of the investment or loan—

(1) In a manner—

(i) That is described in paragraph 

(d)(1)(i) or (iii) of this section; and 

(ii) That would constitute a qualified 

low-income community investment if it 

were made directly by the primary CDE; 

(2) To make an equity investment in, 

or loan to, a third CDE that uses such 

proceeds in a manner described in 

paragraph (d)(1)(iv)(A)(1) of this section; 

or 

(3) To make an equity investment in, 

or loan to, a third CDE that uses such 

proceeds to make an equity investment 

in, or loan to, a fourth CDE that uses 

such proceeds in a manner described in 

paragraph (d)(1)(iv)(A)(1) of this section. 

(B) Examples. The following 

examples illustrate an application of 

paragraph (d)(1)(iv)(A) of this section:

Example 1. X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On September 

1, 2004, X uses $975,000 to make an equity 

investment in Y. Y is a corporation and a 

CDE. On October 1, 2004, Y uses $950,000 

from X’s equity investment to make a loan to 

Z. Z is a qualified active low-income 

community business under paragraph 

(d)(4)(i) of this section. Of X’s equity 

investment in Y, $950,000 is a qualified lowincome community investment under 

paragraph (d)(1)(iv)(A)(1) of this section.

Example 2. W is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On September 

1, 2004, W uses $975,000 to make an equity 

investment in X. On October 1, 2004, X uses 

$950,000 from W’s equity investment to 

make an equity investment in Y. X and Y are 

corporations and CDEs. On October 5, 2004, 

Y uses $925,000 from X’s equity investment 

to make a loan to Z. Z is a qualified active 

low-income community business under 

paragraph (d)(4)(i) of this section. Of W’s 

equity investment in X, $925,000 is a 

qualified low-income community investment 

under paragraph (d)(1)(iv)(A)(2) of this 

section because X uses proceeds of W’s 

equity investment to make an equity 

investment in Y, which uses $925,000 of the 

proceeds in a manner described in paragraph 

(d)(1)(iv)(A)(1) of this section.

Example 3. U is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On September 

1, 2004, U uses $975,000 to make an equity 

investment in V. On October 1, 2004, V uses 

$950,000 from U’s equity investment to make 

an equity investment in W. On October 5, 

2004, W uses $925,000 from V’s equity 

investment to make an equity investment in 

X. On November 1, 2004, X uses $900,000 

from W’s equity investment to make an 

equity investment in Y. V, W, X, and Y are 

corporations and CDEs. On November 5, 

2004, Y uses $875,000 from X’s equity 

investment to make a loan to Z. Z is a 

qualified active low-income community 

business under paragraph (d)(4)(i) of this 

section. U’s equity investment in V is not a 

qualified low-income community investment 

because X does not use proceeds of W’s 

equity investment in a manner described in 

paragraph (d)(1)(iv)(A)(1) of this section.

(2) Payments of, or for, capital, equity 

or principal—(i) In general. Except as 

otherwise provided in this paragraph 

(d)(2), amounts received by a CDE in 

payment of, or for, capital, equity or 

principal with respect to a qualified 

low-income community investment 

must be reinvested by the CDE in a 

qualified low-income community 

investment no later than 12 months 

from the date of receipt to be treated as 

continuously invested in a qualified 

low-income community investment. If 

the amounts received by the CDE are 

equal to or greater than the cost basis of 

the original qualified low-income 

community investment (or applicable 

portion thereof), and the CDE reinvests, 

in accordance with this paragraph 

(d)(2)(i), an amount at least equal to 

such original cost basis, then an amount 

equal to such original cost basis will be 

treated as continuously invested in a 

qualified low-income community 

investment. In addition, if the amounts 

received by the CDE are equal to or 

greater than the cost basis of the original 

qualified low-income community 

investment (or applicable portion 

thereof), and the CDE reinvests, in 

accordance with this paragraph (d)(2)(i), 

an amount less than such original cost 

basis, then only the amount so 

reinvested will be treated as 

continuously invested in a qualified 

low-income community investment. If 

the amounts received by the CDE are 

less than the cost basis of the original 

qualified low-income community 

investment (or applicable portion 

thereof), and the CDE reinvests an 

amount in accordance with this 

paragraph (d)(2)(i), then the amount 

treated as continuously invested in a 

qualified low-income community 

investment will equal the excess (if any) 

of such original cost basis over the 

amounts received by the CDE that are 

not so reinvested. Amounts received by 

a CDE in payment of, or for, capital, 

equity or principal with respect to a 

qualified low-income community 

investment during the seventh year of 

the 7-year credit period (as defined in 

paragraph (c)(5)(i) of this section) 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. 

(ii) Subsequent reinvestments. In 

applying paragraph (d)(2)(i) of this 

section to subsequent reinvestments, the 

original cost basis is reduced by the 

amount (if any) by which the original 

cost basis exceeds the amount 

determined to be continuously invested 

in a qualified low-income community 

investment. 

(iii) Special rule for loans. Periodic 

amounts received during a calendar year 

as repayment of principal on a loan that 

is a qualified low-income community 

investment are treated as continuously 

invested in a qualified low-income 

community investment if the amounts 

are reinvested in another qualified lowincome community investment by the 

end of the following calendar year.

(iv) Example. The application of 

paragraphs (d)(2)(i) and (ii) of this 

section is illustrated by the following 

example:

Example. On April 1, 2003, A, B, and C 

each pay $100,000 to acquire a capital 

interest in X, a partnership. X is a CDE that 

has received a new markets tax credit 

allocation from the Secretary. X treats the 3 

partnership interests as one qualified equity 

investment under paragraph (c)(6) of this 

section. In August 2003, X uses the $300,000 

to make a qualified low-income community 

investment under paragraph (d)(1) of this 

section. In August 2005, the qualified lowincome community investment is redeemed 

for $250,000. In February 2006, X reinvests 

$230,000 of the $250,000 in a second 

qualified low-income community investment 

and uses the remaining $20,000 for operating 

expenses. Under paragraph (d)(2)(i) of this 

section, $280,000 of the proceeds of the 

qualified equity investment is treated as 

continuously invested in a qualified lowincome community investment. In December 

2008, X sells the second qualified lowincome community investment and receives 

$400,000. In March 2009, X reinvests 

$320,000 of the $400,000 in a third qualified 

low-income community investment. Under 

paragraphs (d)(2)(i) and (ii) of this section, 

$280,000 of the proceeds of the qualified 

equity investment is treated as continuously 

invested in a qualified low-income 

community investment ($40,000 is treated as 

invested in another qualified low-income 

community investment in March 2009).

(3) Special rule for reserves. Reserves 

(not in excess of 5 percent of the 

taxpayer’s cash investment under 

paragraph (b)(4) of this section) 

maintained by the CDE for loan losses 

or for additional investments in existing 

qualified low-income community 

investments are treated as invested in a 

qualified low-income community 

investment under paragraph (d)(1) of 

this section. Reserves include fees paid 

to third parties to protect against loss of 

all or a portion of the principal of, or 

interest on, a loan that is a qualified 

low-income community investment. 

(4) Qualified active low-income 

community business—(i) In general. The 

term qualified active low-income 

community business means, with 

respect to any taxable year, a 

77632 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

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 in 

paragraphs (d)(4)(i)(A), (B), (C), (D), and 

(E) 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) Gross-income requirement. At 

least 50 percent of the total gross 

income of such entity is derived from 

the active conduct of a qualified 

business (as defined in paragraph (d)(5) 

of this section) within any low-income 

community (as defined in section 

45D(e)). An entity is deemed to satisfy 

this paragraph (d)(4)(i)(A) if the entity 

meets the requirements of either 

paragraph (d)(4)(i)(B) or (C) of this 

section, if ‘‘50 percent’’ is applied 

instead of 40 percent. In addition, an 

entity may satisfy this paragraph 

(d)(4)(i)(A) based on all the facts and 

circumstances. See paragraph (d)(4)(iv) 

of this section for certain circumstances 

in which an entity will be treated as 

engaged in the active conduct of a trade 

or business. 

(B) Use of tangible property—(1) In 

general. At least 40 percent of the use 

of the tangible property of such entity 

(whether owned or leased) is within any 

low-income community. This 

percentage is determined based on a 

fraction the numerator of which is the 

average value of the tangible property 

owned or leased by the entity and used 

by the entity during the taxable year in 

a low-income community and the 

denominator of which is the average 

value of the tangible property owned or 

leased by the entity and used by the 

entity during the taxable year. Property 

owned by the entity is valued at its cost 

basis as determined under section 1012. 

Property leased by the entity is valued 

at a reasonable amount established by 

the entity. 

(2) Example. The application of 

paragraph (d)(4)(i)(B)(1) of this section 

is illustrated by the following example:

Example. X is a corporation engaged in the 

business of moving and hauling scrap metal. 

X operates its business from a building and 

an adjoining parking lot that X owns. The 

building and the parking lot are located in a 

low-income community (as defined in 

section 45D(e)). X’s cost basis under section 

1012 for the building and parking lot is 

$200,000. During the taxable year, X operates 

its business 10 hours a day, 6 days a week. 

X owns and uses 40 trucks in its business, 

which, on average, are used 6 hours a day 

outside a low-income community and 4 

hours a day inside a low-income community 

(including time in the parking lot). The cost 

basis under section 1012 of each truck is 

$25,000. During non-business hours, the 

trucks are parked in the lot. Only X’s 10-hour 

business days are used in calculating the use 

of tangible property percentage under 

paragraph (d)(4)(i)(B)(1) of this section. Thus, 

the numerator of the tangible property 

calculation is $600,000 (4⁄10 of $1,000,000 

(the $25,000 cost basis of each truck times 40 

trucks) plus $200,000 (the cost basis of the 

building and parking lot)) and the 

denominator is $1,200,000 (the total cost 

basis of the trucks, building, and parking lot), 

resulting in 50 percent of the use of X’s 

tangible property being within a low-income 

community. Consequently, X satisfies the 40 

percent use of tangible property test under 

paragraph (d)(4)(i)(B)(1) of this section.

(C) Services performed. At least 40 

percent of the services performed for 

such entity by its employees are 

performed in a low-income community. 

This percentage is determined based on 

a fraction the numerator of which is the 

total amount paid by the entity for 

employee services performed in a lowincome community during the taxable 

year and the denominator of which is 

the total amount paid by the entity for 

employee services during the taxable 

year. If the entity has no employees, the 

entity is deemed to satisfy this 

paragraph (d)(4)(i)(C), and paragraph 

(d)(4)(i)(A) of this section, if the entity 

meets the requirement of paragraph 

(d)(4)(i)(B) of this section if ‘‘85 

percent’’ is applied instead of 40 

percent.

(D) Collectibles. Less than 5 percent of 

the average of the aggregate unadjusted 

bases of the property of such entity is 

attributable to collectibles (as defined in 

section 408(m)(2)) other than 

collectibles that are held primarily for 

sale to customers in the ordinary course 

of business. 

(E) Nonqualified financial property—

(1) In general. Less than 5 percent of the 

average of the aggregate unadjusted 

bases of the property of such entity is 

attributable to nonqualified financial 

property. For purposes the preceding 

sentence, the term nonqualified 

financial property means debt, stock, 

partnership interests, options, futures 

contracts, forward contracts, warrants, 

notional principal contracts, annuities, 

and other similar property except that 

such term does not include— 

(i) Reasonable amounts of working 

capital held in cash, cash equivalents, or 

debt instruments with a term of 18 

months or less (because the definition of 

nonqualified financial property

includes debt instruments with a term 

in excess of 18 months, banks, credit 

unions, and other financial institutions 

are generally excluded from the 

definition of a qualified active lowincome community business); or 

(ii) Debt instruments described in 

section 1221(a)(4). 

(2) Construction of real property. For 

purposes of paragraph (d)(4)(i)(E)(1)(i) of 

this section, the proceeds of a capital or 

equity investment or loan by a CDE that 

will be expended for construction of 

real property within 12 months after the 

date the investment or loan is made are 

treated as a reasonable amount of 

working capital.

(ii) Proprietorships. Any business 

carried on by an individual as a 

proprietor is a qualified active lowincome community business if the 

business would meet the requirements 

of paragraph (d)(4)(i) of this section if 

the business were incorporated. 

(iii) Portions of business—(A) In 

general. A CDE may treat any trade or 

business (or portion thereof) as a 

qualified active low-income community 

business if the trade or business (or 

portion thereof) would meet the 

requirements of paragraph (d)(4)(i) of 

this section if the trade or business (or 

portion thereof) were separately 

incorporated and a complete and 

separate set of books and records is 

maintained for that trade or business (or 

portion thereof). However, the CDE’s 

capital or equity investment or loan is 

not a qualified low-income community 

investment under paragraph (d)(1)(i) of 

this section to the extent the proceeds 

of the investment or loan are not used 

for the trade or business (or portion 

thereof) that is treated as a qualified 

active low-income community business 

under this paragraph (d)(4)(iii)(A). 

(B) Examples. The following 

examples illustrate an application of 

paragraph (d)(4)(iii) of this section:

Example 1. X is a partnership and a CDE 

that receives a new markets tax credit 

allocation from the Secretary. A pays $1 

million for a capital interest in X. Z is a 

corporation that operates a supermarket that 

is not in a low-income community (as 

defined in section 45D(e)). X uses the 

proceeds of A’s equity investment to make a 

loan to Z that Z will use to construct a new 

supermarket in a low-income community. Z 

will maintain a complete and separate set of 

books and records for the new supermarket. 

The proceeds of X’s loan to Z will be used 

exclusively for the new supermarket. Assume 

that Z’s new supermarket in the low-income 

community would meet the requirements to 

be a qualified active low-income community 

business under paragraph (d)(4)(i) of this 

section if it were separately incorporated. 

Pursuant to paragraph (d)(4)(iii)(A) of this 

section, X treats Z’s new supermarket as the 

qualified active low-income community 

business. Accordingly, X’s loan to Z is a 

qualified low-income community investment 

under paragraph (d)(1)(i) of this section.

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77633

Example 2. X is a partnership and a CDE 

that receives a new markets tax credit 

allocation from the Secretary. A pays $1 

million for a capital interest in X. Z is a 

corporation that operates a liquor store in a 

low-income community (as defined in 

section 45D(e)). A liquor store is not a 

qualified business under paragraph 

(d)(5)(iii)(B) of this section. X uses the 

proceeds of A’s equity investment to make a 

loan to Z that Z will use to construct a 

restaurant next to the liquor store. Z will 

maintain a complete and separate set of 

books and records for the new restaurant. 

The proceeds of X’s loan to Z will be used 

exclusively for the new restaurant. Assume 

that Z’s restaurant would meet the 

requirements to be a qualified active lowincome community business under 

paragraph (d)(4)(i) of this section if it were 

separately incorporated. Pursuant to 

paragraph (d)(4)(iii) of this section, X treats 

Z’s restaurant as the qualified active lowincome community business. Accordingly, 

X’s loan to Z is a qualified low-income 

community investment under paragraph 

(d)(1)(i) of this section.

Example 3. X is a partnership and a CDE 

that receives a new markets tax credit 

allocation from the Secretary. A pays $1 

million for a capital interest in X. Z is a 

corporation that operates an insurance 

company in a low-income community (as 

defined in section 45D(e)). Five percent or 

more of the average of the aggregate 

unadjusted bases of Z’s property is 

attributable to nonqualified financial 

property under paragraph (d)(4)(i)(E) of this 

section. Z’s insurance operations include 

different operating units including a claims 

processing unit. X uses the proceeds of A’s 

equity investment to make a loan to Z for use 

in Z’s claims processing operations. Z will 

maintain a complete and separate set of 

books and records for the claims processing 

unit. The proceeds of X’s loan to Z will be 

used exclusively for the claims processing 

unit. Assume that Z’s claims processing unit 

would meet the requirements to be a 

qualified active low-income community 

business under paragraph (d)(4)(i) of this 

section if it were separately incorporated. 

Pursuant to paragraph (d)(4)(iii) of this 

section, X treats Z’s claims processing unit as 

the qualified active low-income community 

business. Accordingly, X’s loan to Z is a 

qualified low-income community investment 

under paragraph (d)(1)(i) of this section.

(iv) Active conduct of a trade or 

business—(A) Special rule. For 

purposes of paragraph (d)(4)(i) of this 

section, an entity will be treated as 

engaged in the active conduct of a trade 

or business if, at the time the CDE 

makes a capital or equity investment in, 

or loan to, the entity, the CDE 

reasonably expects that the entity will 

generate revenues (or, in the case of a 

nonprofit corporation, engage in an 

activity that furthers its purpose as a 

nonprofit corporation) within 3 years 

after the date the investment or loan is 

made. 

(B) Example. The application of 

paragraph (d)(4)(iv)(A) of this section is 

illustrated by the following example:

Example. X is a partnership and a CDE that 

receives a new markets tax credit allocation 

from the Secretary on July 1, 2004. X makes 

a ten-year loan to Y. Y is a newly formed 

entity that will own and operate a shopping 

center to be constructed in a low-income 

community. Y has no revenues but X 

reasonably expects that Y will generate 

revenues beginning in December 2005. Under 

paragraph (d)(4)(iv)(A) of this section, Y is 

treated as engaged in the active conduct of 

a trade or business for purposes of paragraph 

(d)(4)(i) of this section.

(5) Qualified business—(i) In general.

Except as otherwise provided in this 

paragraph (d)(5), the term qualified 

business means any trade or business. 

There is no requirement that employees 

of a qualified business be residents of a 

low-income community. 

(ii) Rental of real property. The rental 

to others of real property located in any 

low-income community (as defined in 

section 45D(e)) is a qualified business if 

and only if the property is not 

residential rental property (as defined in 

section 168(e)(2)(A)) and there are 

substantial improvements located on the 

real property. For purposes of the 

preceding sentence, the term substantial 

improvements means improvements the 

cost basis of which equals or exceeds 50 

percent of the cost basis of the land on 

which the improvements are located 

and the costs of which are incurred after 

the date the CDE makes the investment 

or loan. However, a CDE’s investment in 

or loan to a business engaged in the 

rental of real property is not a qualified 

low-income community investment 

under paragraph (d)(1)(i) of this section 

to the extent any lessee of the real 

property is not a qualified business 

under this paragraph (d)(5).

(iii) Exclusions—(A) Trades or 

businesses involving intangibles. The 

term qualified business does not include 

any trade or business consisting 

predominantly of the development or 

holding of intangibles for sale or license. 

(B) Certain other trades or businesses.

The term qualified business does not 

include any trade or business consisting 

of the operation of any private or 

commercial golf course, country club, 

massage parlor, hot tub facility, suntan 

facility, racetrack or other facility used 

for gambling, or any store the principal 

business of which is the sale of 

alcoholic beverages for consumption off 

premises. 

(C) Farming. The term qualified 

business does not include any trade or 

business the principal activity of which 

is farming (within the meaning of 

section 2032A(e)(5)(A) or (B)) if, as of 

the close of the taxable year of the 

taxpayer conducting such trade or 

business, the sum of the aggregate 

unadjusted bases (or, if greater, the fair 

market value) of the assets owned by the 

taxpayer that are used in such a trade or 

business, and the aggregate value of the 

assets leased by the taxpayer that are 

used in such a trade or business, 

exceeds $500,000. For purposes of this 

paragraph (d)(5)(iii)(C), two or more 

trades or businesses will be treated as a 

single trade or business under rules 

similar to the rules of section 52(a) and 

(b). 

(6) Qualifications—(i) In general.

Except as provided in paragraph 

(d)(6)(ii) of this section, an entity is 

treated as a qualified active low-income 

community business for the duration of 

the CDE’s investment in the entity if the 

CDE reasonably expects, at the time the 

CDE makes the capital or equity 

investment in, or loan to, the entity, that 

the entity will satisfy the requirements 

to be a qualified active low-income 

community business under paragraph 

(d)(4)(i) of this section throughout the 

entire period of the investment or loan. 

(ii) Control—(A) In general. If a CDE 

controls or obtains control of an entity 

at any time during the 7-year credit 

period (as defined in paragraph (c)(5)(i) 

of this section), the entity will be treated 

as a qualified active low-income 

community business only if the entity 

satisfies the requirements of paragraph 

(d)(4)(i) of this section throughout the 

entire period the CDE controls the 

entity. 

(B) Definition of control. Control 

means, with respect to an entity, direct 

or indirect ownership (based on value) 

or control (based on voting or 

management rights) of more than 50 

percent of the entity. For purposes of 

the preceding sentence, the term 

management rights means the power to 

influence the management policies or 

investment decisions of the entity. 

(C) Disregard of control. For purposes 

of paragraph (d)(6)(ii)(A) of this section, 

the acquisition of control of an entity by 

a CDE is disregarded during the 12-

month period following such 

acquisition of control (the 12-month 

period) if—

(1) The CDE’s capital or equity 

investment in, or loan to, the entity met 

the requirements of paragraph (d)(6)(i) 

of this section when initially made; 

(2) The CDE’s acquisition of control of 

the entity is due to financial difficulties 

of the entity that were unforeseen at the 

time the investment or loan described in 

paragraph (d)(6)(ii)(C)(1) of this section 

was made; and 

(3) If the acquisition of control occurs 

before the seventh year of the 7-year 

77634 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

credit period (as defined in paragraph 

(c)(5)(i) of this section), either—

(i) The entity satisfies the 

requirements of paragraph (d)(4) of this 

section by the end of the 12-month 

period; or 

(ii) The CDE sells or causes to be 

redeemed the entire amount of the 

investment or loan described in 

paragraph (d)(6)(ii)(C)(1) of this section 

and, by the end of the 12-month period, 

reinvests the amount received in respect 

of the sale or redemption in a qualified 

low-income community investment 

under paragraph (d)(1) of this section. 

For this purpose, the amount treated as 

continuously invested in a qualified 

low-income community investment is 

determined under paragraphs (d)(2)(i) 

and (ii) of this section. 

(7) Financial counseling and other 

services. The term financial counseling 

and other services means advice 

provided by the CDE relating to the 

organization or operation of a trade or 

business. 

(8) Special rule for certain loans—(i) 

In general. For purposes of paragraphs 

(d)(1)(i), (ii), and (iv) of this section, a 

loan is treated as made by a CDE to the 

extent the CDE purchases the loan from 

the originator (whether or not the 

originator is a CDE) within 30 days after 

the date the originator makes the loan if, 

at the time the loan is made, there is a 

legally enforceable written agreement 

between the originator and the CDE 

which—

(A) Requires the CDE to approve the 

making of the loan either directly or by 

imposing specific written loan 

underwriting criteria; and 

(B) Requires the CDE to purchase the 

loan within 30 days after the date the 

loan is made.

(ii) Example. The application of 

paragraph (d)(8)(i) of this section is 

illustrated by the following example:

Example. (i) X is a partnership and a CDE 

that has received a new markets tax credit 

allocation from the Secretary. On October 1, 

2004, Y enters into a legally enforceable 

written agreement with W. Y and W are 

corporations but only Y is a CDE. The 

agreement between Y and W provides that Y 

will purchase loans (or portions thereof) from 

W within 30 days after the date the loan is 

made by W, and that Y will approve the 

making of the loans. 

(ii) On November 1, 2004, W makes a 

$825,000 loan to Z pursuant to the agreement 

between Y and W. Z is a qualified active lowincome community business under 

paragraph (d)(4) of this section. On 

November 15, 2004, Y purchases the loan 

from W for $840,000. On December 31, 2004, 

X purchases the loan from Y for $850,000.

(iii) Under paragraph (d)(8)(i) of this 

section, the loan to Z is treated as made by 

Y. Y’s loan to Z is a qualified low-income 

community investment under paragraph 

(d)(1)(i) of this section. Accordingly, under 

paragraph (d)(1)(ii)(A) of this section, X’s 

purchase of the loan from Y is a qualified 

low-income community investment in the 

amount of $850,000.

(e) Recapture—(1) In general. If, at 

any time during the 7-year period 

beginning on the date of the original 

issue of a qualified equity investment in 

a CDE, there is a recapture event under 

paragraph (e)(2) of this section with 

respect to such investment, then the tax 

imposed by Chapter 1 of the Internal 

Revenue Code for the taxable year in 

which the recapture event occurs is 

increased by the credit recapture 

amount under section 45D(g)(2). A 

recapture event under paragraph (e)(2) 

of this section requires recapture of 

credits allowed to the taxpayer who 

purchased the equity investment from 

the CDE at its original issue and to all 

subsequent holders of that investment. 

(2) Recapture event. There is a 

recapture event with respect to an 

equity investment in a CDE if—

(i) The entity ceases to be a CDE; 

(ii) The proceeds of the investment 

cease to be used in a manner that 

satisfies the substantially-all 

requirement of paragraph (c)(1)(ii) of 

this section; or 

(iii) The investment is redeemed or 

otherwise cashed out by the CDE. 

(3) Redemption—(i) Equity investment 

in a C corporation. For purposes of 

paragraph (e)(2)(iii) of this section, an 

equity investment in a CDE that is 

treated as a C corporation for Federal tax 

purposes is redeemed when section 

302(a) applies to amounts received by 

the equity holder. An equity investment 

is treated as cashed out when section 

301(c)(2) or section 301(c)(3) applies to 

amounts received by the equity holder. 

An equity investment is not treated as 

cashed out when only section 301(c)(1) 

applies to amounts received by the 

equity holder. 

(ii) Equity investment in an S 

corporation. For purposes of paragraph 

(e)(2)(iii) of this section, an equity 

investment in a CDE that is an S 

corporation is redeemed when section 

302(a) applies to amounts received by 

the equity holder. An equity investment 

in an S corporation is treated as cashed 

out when a distribution to a shareholder 

described in section 1368(a) exceeds the 

accumulated adjustments account 

determined under § 1.1368–2 and any 

accumulated earnings and profits of the 

S corporation. 

(iii) Capital interest in a partnership.

In the case of an equity investment that 

is a capital interest in a CDE that is a 

partnership for Federal tax purposes, a 

pro rata cash distribution by the CDE to 

its partners based on each partner’s 

capital interest in the CDE during the 

taxable year will not be treated as a 

redemption for purposes of paragraph 

(e)(2)(iii) of this section if the 

distribution does not exceed the CDE’s 

operating income for the taxable year. In 

addition, a non-pro rata de minimis cash 

distribution by a CDE to a partner or 

partners during the taxable year will not 

be treated as a redemption. A non-pro 

rata de minimis cash distribution may 

not exceed the lesser of 5 percent of the 

CDE’s operating income for that taxable 

year or 10 percent of the partner’s 

capital interest in the CDE. For purposes 

of this paragraph (e)(3)(iii), with respect 

to any taxable year, operating income is 

the sum of: 

(A) The CDE’s taxable income as 

determined under section 703, except 

that—

(1) The items described in section 

703(a)(1) shall be aggregated with the 

non-separately stated tax items of the 

partnership; and 

(2) Any gain resulting from the sale of 

a capital asset under section 1221(a) or 

section 1231 property shall not be 

included in taxable income; 

(B) Deductions under section 165, but 

only to the extent the losses were 

realized from qualified low-income 

community investments under 

paragraph (d)(1) of this section; 

(C) Deductions under sections 167 

and 168, including the additional firstyear depreciation under section 168(k); 

(D) Start-up expenditures amortized 

under section 195; and 

(E) Organizational expenses amortized 

under section 709. 

(4) Bankruptcy. Bankruptcy of a CDE 

is not a recapture event. 

(5) Waiver of requirement or extension 

of time—(i) In general. The 

Commissioner may waive a requirement 

or extend a deadline if such waiver or 

extension does not materially frustrate 

the purposes of section 45D and this 

section.

(ii) Manner for requesting a waiver or 

extension. A CDE that believes it has 

good cause for a waiver or an extension 

may request relief from the 

Commissioner in a ruling request. The 

request should set forth all the relevant 

facts and include a detailed explanation 

describing the event or events relating to 

the request for a waiver or an extension. 

For further information on the 

application procedure for a ruling, see 

Rev. Proc. 2005–1 (2005–1 I.R.B. 1) or 

its successor revenue procedure (see 

§ 601.601(d)(2) of this chapter). 

(iii) Terms and conditions. The 

granting of a waiver or an extension to 

a CDE under this section may require 

adjustments of the CDE’s requirements 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 77635

under section 45D and this section as 

may be appropriate. 

(6) Cure period. If a qualified equity 

investment fails the substantially-all 

requirement under paragraph (c)(5)(i) of 

this section, the failure is not a 

recapture event under paragraph 

(e)(2)(ii) of this section if the CDE 

corrects the failure within 6 months 

after the date the CDE becomes aware 

(or reasonably should have become 

aware) of the failure. Only one 

correction is permitted for each 

qualified equity investment during the 

7-year credit period under this 

paragraph (e)(6). 

(7) Example. The application of this 

paragraph (e) is illustrated by the 

following example:

Example. In 2003, A and B acquire 

separate qualified equity investments in X, a 

partnership. X is a CDE that has received a 

new markets tax credit allocation from the 

Secretary. X uses the proceeds of A’s 

qualified equity investment to make a 

qualified low-income community investment 

in Y, and X uses the proceeds of B’s qualified 

equity investment to make a qualified lowincome community investment in Z. Y and 

Z are not CDEs. X controls both Y and Z 

within the meaning of paragraph (d)(6)(ii)(B) 

of this section. In 2003, Y and Z are qualified 

active low-income community businesses. In 

2007, Y, but not Z, is a qualified active lowincome community business and X does not 

satisfy the substantially-all requirement using 

the safe harbor calculation under paragraph 

(c)(5)(iii) of this section. A’s equity 

investment satisfies the substantially-all 

requirement of paragraph (c)(1)(ii) of this 

section using the direct-tracing calculation of 

paragraph (c)(5)(ii) of this section because A’s 

equity investment is traceable to Y. However, 

B’s equity investment fails the substantiallyall requirement using the direct-tracing 

calculation because B’s equity investment is 

traceable to Z. Therefore, under paragraph 

(e)(2)(ii) of this section, there is a recapture 

event for B’s equity investment (but not A’s 

equity investment).

(f) Basis reduction—(1) In general. A 

taxpayer’s basis in a qualified equity 

investment is reduced by the amount of 

any new markets tax credit determined 

under paragraph (b)(1) of this section 

with respect to the investment. A basis 

reduction occurs on each credit 

allowance date under paragraph (b)(2) of 

this section. This paragraph (f) does not 

apply for purposes of sections 1202, 

1400B, and 1400F. 

(2) Adjustment in basis of interest in 

partnership or S corporation. The 

adjusted basis of either a partner’s 

interest in a partnership, or stock in an 

S corporation, must be appropriately 

adjusted to take into account 

adjustments made under paragraph 

(f)(1) of this section in the basis of a 

qualified equity investment held by the 

partnership or S corporation (as the case 

may be). 

(g) Other rules—(1) Anti-abuse. If a 

principal purpose of a transaction or a 

series of transactions is to achieve a 

result that is inconsistent with the 

purposes of section 45D and this 

section, the Commissioner may treat the 

transaction or series of transactions as 

causing a recapture event under 

paragraph (e)(2) of this section. 

(2) Reporting requirements—(i) 

Notification by CDE to taxpayer—(A) 

Allowance of new markets tax credit. A 

CDE must provide notice to any 

taxpayer who acquires a qualified equity 

investment in the CDE at its original 

issue that the equity investment is a 

qualified equity investment entitling the 

taxpayer to claim the new markets tax 

credit. The notice must be provided by 

the CDE to the taxpayer no later than 60 

days after the date the taxpayer makes 

the investment in the CDE. The notice 

must contain the amount paid to the 

CDE for the qualified equity investment 

at its original issue and the taxpayer 

identification number of the CDE. 

(B) Recapture event. If, at any time 

during the 7-year period beginning on 

the date of the original issue of a 

qualified equity investment in a CDE, 

there is a recapture event under 

paragraph (e)(2) of this section with 

respect to such investment, the CDE 

must provide notice to each holder, 

including all prior holders, of the 

investment that a recapture event has 

occurred. The notice must be provided 

by the CDE no later than 60 days after 

the date the CDE becomes aware of the 

recapture event. 

(ii) CDE reporting requirements to 

Secretary. Each CDE must comply with 

such reporting requirements to the 

Secretary as the Secretary may 

prescribe. 

(iii) Manner of claiming new markets 

tax credit. A taxpayer may claim the 

new markets tax credit for each 

applicable taxable year by completing 

Form 8874, ‘‘New Markets Credit,’’ and 

by filing Form 8874 with the taxpayer’s 

Federal income tax return. 

(iv) Reporting recapture tax. If there is 

a recapture event with respect to a 

taxpayer’s equity investment in a CDE, 

the taxpayer must include the credit 

recapture amount under section 

45D(g)(2) on the line for recapture taxes 

on the taxpayer’s Federal income tax 

return for the taxable year in which the 

recapture event under paragraph (e)(2) 

of this section occurs (or on the line for 

total tax, if there is no such line for 

recapture taxes) and write NMCR (new 

markets credit recapture) next to the 

entry space.

(3) Other Federal tax benefits—(i) In 

general. Except as provided in 

paragraph (g)(3)(ii) of this section, the 

availability of Federal tax benefits does 

not limit the availability of the new 

markets tax credit. Federal tax benefits 

that do not limit the availability of the 

new markets tax credit include, for 

example: 

(A) The rehabilitation credit under 

section 47; 

(B) All deductions under sections 167 

and 168, including the additional firstyear depreciation under section 168(k), 

and the expense deduction for certain 

depreciable property under section 179; 

and 

(C) All tax benefits relating to certain 

designated areas such as empowerment 

zones and enterprise communities 

under sections 1391 through 1397D, the 

District of Columbia Enterprise Zone 

under sections 1400 through 1400B, 

renewal communities under sections 

1400E through 1400J, and the New York 

Liberty Zone under section 1400L. 

(ii) Low-income housing credit. If a 

CDE makes a capital or equity 

investment or a loan with respect to a 

qualified low-income building under 

section 42, the investment or loan is not 

a qualified low-income community 

investment under paragraph (d)(1) of 

this section to the extent the building’s 

eligible basis under section 42(d) is 

financed by the proceeds of the 

investment or loan. 

(4) Bankruptcy of CDE. The 

bankruptcy of a CDE does not preclude 

a taxpayer from continuing to claim the 

new markets tax credit on the remaining 

credit allowance dates under paragraph 

(b)(2) of this section. 

(h) Effective dates—(1) In general.

Except as provided in paragraph (h)(2) 

of this section, this section applies on or 

after December 22, 2004, and may be 

applied by taxpayers before December 

22, 2004. The provisions that apply 

before December 22, 2004, are contained 

in § 1.45D–1T (see 26 CFR part 1 revised 

as of April 1, 2003, and April 1, 2004). 

(2) Exception for certain provisions.

Paragraph (d)(5)(ii) of this section as it 

relates to the definition of the term 

substantial improvements and the 

requirement that each lessee must be a 

qualified business applies to qualified 

low-income community investments 

made on or after February 22, 2005.

§ 1.45D–1T [Removed]

■ Par. 3. Section 1.45D–1T is removed.

77636 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT

■ Par. 4. The authority citation for part 

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

■ Par. 5. In § 602.101, paragraph (b) is 

amended by removing the entry for 

‘‘1.45D–1T’’ from the table.

■ Par. 6. In § 602.101, paragraph (b) is 

amended by adding an entry to the table 

in numerical order to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.45D–1 .................................... 1545–1765 

* * * * * 

Mark E. Mathews, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 21, 2004. 

Eric Solomon, 

Acting Deputy Assistant Secretary of the 

Treasury.

[FR Doc. 04–28325 Filed 12–22–04; 12:38 

pm] 

BILLING CODE 4830–01–P

LIBRARY OF CONGRESS

Copyright Office 

37 CFR Parts 202, 211, and 212 

[Docket No. RM 2004–5] 

Reconsideration Procedure

AGENCY: Copyright Office, Library of 

Congress.

ACTION: Final rule.

SUMMARY: The Copyright Office is 

publishing a final rule concerning 

reconsideration procedures. With a few 

modifications, this regulation continues 

procedures adopted by the U.S. 

Copyright Office in 1995 that permit 

copyright applicants to request 

reconsideration of its decisions to refuse 

registration. This regulation amends 

those procedures and incorporates them 

into Copyright Office regulations. 

Copyright applicants will continue to 

have two opportunities to seek 

reconsideration of a Copyright Office 

decision to refuse registration. A 

significant modification is that the 

reconsideration procedures are also 

made applicable to the Office’s refusals 

to register mask works and vessel hull 

designs.

EFFECTIVE DATE: January 27, 2005.

FOR FURTHER INFORMATION CONTACT:

Marilyn J. Kretsinger, Associate General 

Counsel, or Renee Coe, Senior Attorney 

at this address: Copyright GC/I&R, P.O. 

Box 70400, Washington, DC 20024–

0400. Telephone: (202) 707–8380. 

Telefax: (202) 707–8366.

SUPPLEMENTARY INFORMATION: On July 

13, 2004, the Copyright Office published 

a notice of proposed rulemaking seeking 

comment on its proposed revision of 

parts 202, 211 and 212 of subchapter A 

of Chapter II, 37 CFR. The purpose of 

this notice is to announce the final rule. 

This regulation establishes procedures 

for applicants to request that the 

Copyright Office reconsider refusals to 

register copyright claims and claims in 

mask works or vessel hull designs. 

There are two opportunities for 

reconsideration of a refusal to register. 

At the first level of reconsideration, the 

Examining Division of the Copyright 

Office reviews its initial decision to 

refuse registration. At the second level, 

the Review Board conducts the review 

of a refusal to register. For 

administrative reasons, the Copyright 

Office is making one change in the 

membership of the Review Board which 

considers the second request for 

reconsideration. The Review Board is 

composed of three members; the first 

two members are the Register of 

Copyrights and the General Counsel or 

their respective designees. The third 

member will be designated by the 

Register. This rule also establishes 

procedures for mailing or hand 

delivering requests for reconsideration 

and related documents. 

In response to the publication of the 

proposed rule, the Copyright Office did 

not receive any comments. 

Consequently, the Copyright Office is 

adopting the previously proposed text, 

as a final rule, with the one 

administrative change noted above and 

without substantive change, as follows:

List of Subjects 

37 CFR Part 202 

Claims, Copyright. 

37 CFR Part 211 

Freedom of Information. 

37 CFR Part 212 

Vessels.

Proposed Regulations

■ In consideration of the foregoing, the 

Copyright Office amends parts 202, 211 

and 212 of 37 CFR, chapter II in the 

manner set forth below:

PART 202—REGISTRATION OF 

CLAIMS TO COPYRIGHT

■ 1. The authority citation for part 202 

continues to read as follows:

Authority: 17 U.S.C. 702.

■ 2. Add § 202.5 to read as follows:

§ 202.5 Reconsideration Procedure for 

Refusals to Register. 

(a) General. This section prescribes 

rules pertaining to procedures for 

administrative review of the Copyright 

Office’s refusal to register a claim to 

copyright, a mask work, or a vessel hull 

design upon a finding by the Office that 

the application for registration does not 

satisfy the legal requirements of title 17 

of the United States Code. If an 

applicant’s initial claim is refused, the 

applicant is entitled to request that the 

initial refusal to register be 

reconsidered. 

(b) First reconsideration. Upon 

receiving a written notification from the 

Examining Division explaining the 

reasons for a refusal to register, an 

applicant may request that the 

Examining Division reconsider its initial 

decision to refuse registration, subject to 

the following requirements: 

(1) An applicant must request in 

writing that the Examining Division 

reconsider its decision. A request for 

reconsideration must include the 

reasons the applicant believes 

registration was improperly refused, 

including any legal arguments in 

support of those reasons and any 

supplementary information. The 

Examining Division will base its 

decision on the applicant’s written 

submissions.

(2) The fee set forth in § 201.3(d)(4) of 

this chapter must accompany the first 

request for reconsideration. 

(3) The first request for 

reconsideration and the applicable fee 

must be received by the Copyright 

Office no later than three months from 

the date that appears in the Examining 

Division’s written notice of its initial 

decision to refuse registration. When the 

ending date for the three-month time 

period falls on a weekend or a Federal 

holiday, the ending day of the threemonth period shall be extended to the 

next Federal work day. 

(4) If the Examining Division decides 

to register an applicant’s work in 

response to the first request for 

reconsideration, it will notify the 

applicant in writing of the decision and 

the work will be registered. However, if 

the Examining Division again refuses to 

register the work, it will send the