21844 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Proposed Rules

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–119436–01]

RIN 1545–AY87

New Markets Tax Credit

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Advance notice of proposed

rulemaking.

SUMMARY: This document invites

comments from the public on issues that

the IRS may address in regulations

relating to the new markets tax credit

under section 45D. A taxpayer that

makes a qualified equity investment in

a qualified community development

entity that has received a new markets

tax credit allocation may claim a 5-

percent credit for each of the first 3

years and a 6-percent tax credit for each

of the next 4 years. All materials

submitted will be available for public

inspection and copying.

DATES: Written and electronic comments

must be submitted by July 2, 2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–119436–01), room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand

delivered Monday through Friday

between the hours of 8 a.m. and 5 p.m.

to: CC:M&SP:RU (REG–119436–01),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively,

taxpayers may send submissions

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or directly to the IRS

Internet site at http://

www.irs.ustreas.gov/tax_regs/

regslist.html.

FOR FURTHER INFORMATION CONTACT:

Concerning submissions, the

Regulations Unit, (202) 622–7180;

concerning the proposals, Paul

Handleman, (202) 622–3040 (not tollfree numbers).

SUPPLEMENTARY INFORMATION: Section

121(a) of the Community Renewal Tax

Relief Act of 2000 (Public Law 106–554)

(Act), amended the Internal Revenue

Code (Code) to add the new markets tax

credit. Section 45D(a)(1) of the Code

provides 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.

In addition, section 121(f) of the Act

provides that not later than 120 days

after the date of the enactment of the

Act (Dec. 21, 2000), Treasury will issue

guidance specifying how entities will

apply for an allocation under section

45D(f)(2); the competitive procedure

through which the allocations are made;

and the actions that Treasury will take

to ensure that the allocations are

properly made to appropriate entities.

The Secretary of the Treasury has

delegated authority for issuing this

guidance to the Under Secretary

(Domestic Finance), who in turn has

delegated the authority to the Director of

Treasury’s Community Development

Financial Institutions Fund (Fund).

Simultaneously with the issuance of

this advance notice of proposed

rulemaking, the Fund is issuing separate

guidance on how an entity may apply to

become certified as a CDE; how a CDE

may apply to receive an allocation of

new markets tax credits; the competitive

procedure through which the

allocations will be made; and the

actions that Treasury will take to ensure

that the allocations are properly made to

appropriate entities.

In developing guidance to assist

taxpayers in applying the rules of

section 45D, the IRS has identified

certain issues that may be considered

for guidance or other administrative

pronouncements. The IRS invites

comments from the public on the

following issues and any other issues for

which taxpayers believe guidance is

needed.

1. The new markets tax credit may be

claimed only with respect to qualified

equity investments in a CDE. Section

45D(b)(1)(B) requires CDEs to use

substantially all of the cash from a

qualified equity investment to make

qualified low-income community

investments.

(a) How should ‘‘substantially all’’ be

defined for purposes of section

45D(b)(1)(B)? For example, what

percentage should constitute

‘‘substantially all’’ of the cash from a

qualified equity investment?

(b) What amounts should be treated as

used to make qualified low-income

community investments? For example,

how should issuance costs (including

underwriter’s compensation) and

reserves be treated?

(c) How much time under section

45D(b)(1)(B) should a CDE have to

invest the cash from a qualified equity

investment in a qualified low-income

community investment?

(d) How should repayments of equity

or principal in respect of a qualified

low-income community investment be

treated for purposes of section

45D(b)(1)(B)? For example, are there

circumstances when a CDE should not

be required to reinvest any such

amounts in another qualified lowincome community investment during

the 7-year credit period?

(e) How should the ‘‘substantially all’’

requirement under section 45D(b)(1)(B)

be administered during the 7-year credit

period?

2. Section 45D(b)(3) contains a safe

harbor under which the ‘‘substantially

all’’ requirement of section 45D(b)(1)(B)

will be treated as met if at least 85

percent of the aggregate gross assets of

the CDE are invested in qualified lowincome community investments.

(a) How should ‘‘aggregate gross

assets’’ be defined under section

45D(b)(3)? For example, are there any

assets of a CDE that should not be taken

into account for these purposes?

(b) How should the aggregate gross

assets of a CDE be determined under

section 45D(b)(3)?

(c) How should compliance with the

85 percent test of section 45D(b)(3) be

determined? For example, should the

CDE be required to satisfy the test

throughout the entire 7-year credit

period following the issuance of a

qualified equity investment? Should any

grace periods be provided? If so, what

should those grace periods be?

3. As indicated previously, section

45D(b)(1)(B) requires CDEs to use

substantially all of the cash with respect

to a qualified equity investment to make

qualified low-income community

investments. Under section

45D(d)(1)(A), the term ‘‘qualified lowincome community investment’’

includes any capital or equity

investment in, or loan to, any qualified

active low-income community business.

Section 45D(d)(2)(A) provides that the

term ‘‘qualified active low-income

community business’’ means, with

respect to any taxable year, any

corporation (including a non-profit

corporation) or partnership if for the

year (i) at least 50 percent of the total

gross income of the entity is derived

from the active conduct of a qualified

business (as defined in section

45D(d)(3)) within any low-income

community, (ii) a substantial portion of

the use of the tangible property of the

entity is within any low-income

community, (iii) a substantial portion of

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Proposed Rules 21845

the services performed for the entity by

its employees is performed in any lowincome community, (iv) less than 5

percent of the average of the aggregate

unadjusted bases of the property of the

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 the business, and (v) less than 5

percent of the average of the aggregate

unadjusted bases of the property of the

entity is attributable to nonqualified

financial property (as defined in section

1397C(e)).

(a) How should ‘‘substantial portion’’

be defined for purposes of section

45D(d)(2)(A)(ii) and (iii)?

(b) When should the determination be

made regarding whether a trade or

business constitutes a ‘‘qualified active

low-income community business:’’? For

example, should the determination be

made at the time of the investment in

the business based on reasonable

expectations? Under what

circumstances, if any, should an

investment in a business lose its status

as a ‘‘qualified low-income community

investment’’ under section 45D(d)(1)(A)

by reason of a failure of the business to

satisfy the requirements for a qualified

active low-income community business

under section 45D(d)(2)? Should the

degree of control of the CDE over the

business be relevant to this

determination?

(c) Should special rules be provided

under section 45D(d)(2)(A) for

determining whether a newly-formed

entity meets the requirements for a

qualified active low-income community

business?

4. Section 45D(d)(1)(C) provides that

the term ‘‘qualified low-income

community investment’’ includes

financial counseling and other services

to businesses located in, and residents

of, low-income communities. What

types of services should constitute

‘‘financial counseling and other

services’’ for these purposes?

5. Section 45D(d)(1)(D) provides that

the term ‘‘qualified low-income

community investment’’ includes any

equity investment in, or loan, to a CDE.

(a) What restrictions, if any, should

apply to the use by a CDE of the

proceeds of a qualified low-income

community investment received from

another CDE?

(b) Under what circumstances, if any,

should an investment by one CDE in

another CDE lose its status as a

‘‘qualified low-income community

investment’’ under section 45D(d)(1)(D)?

Should the degree of control of the

investing CDE over the other CDE be

relevant to this determination?

6. Under section 45D(g)(3)(B), a

recapture event (requiring an investor to

recapture credits previously taken) may

occur with respect to an equity

investment in a CDE if substantially all

of the proceeds of the investment cease

to be used to make investment for

qualified low-income community

investments.

(a) What circumstances should

constitute a change in use of the

proceeds of a qualified equity

investment that triggers a recapture

event under section 45D(g)(3)(B)?

(b) What remedial action(s), if any,

should a CDE be permitted to take to

avoid recapture under section

45D(g)(3)(B)?

7. Section 45D(i)(1) provides that

Treasury may prescribe 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 tax credit under section 42 and

the exclusion from gross income under

section 103). Under what circumstances

should investments be treated as

directly or indirectly subsidized by

other Federal tax benefits?

8. Section 45D(i)(2) and (4) provides

that Treasury may prescribe regulations

that prevent the abuse of the purposes

of section 45D and that impose

appropriate reporting requirements.

(a) What anti-abuse rules may be

necessary for carrying out section 45D?

(b) What types of reporting

requirements should be imposed for

carrying out section 45D?

Marlene Gross,

Deputy Associate Chief Counsel

(Passthroughs and Special Industries).

[FR Doc. 01–10544 Filed 4–30–01; 8:45 am]

BILLING CODE 4830–01–P