[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Proposed Rules]
[Pages 21844-21845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10544]



[[Page 21843]]

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Part IV





Department of the Treasury





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Internal Revenue Service



26 CFR Part 1



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Community Development Financial Institutions Fund



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New Markets Tax Credits and Guidance New Market Tax Credit Program; 
Proposed Rule and Notice

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

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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.

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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 toll-free 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 low-income 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 low-income 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 low-income 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

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the services performed for the entity by its employees is performed in 
any low-income 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