II

106TH CONGRESS

1ST SESSION S. 1526

To amend the Internal Revenue Code of 1986 to provide a tax credit to

taxpayers investing in entities seeking to provide capital to create new

markets in low-income communities.

IN THE SENATE OF THE UNITED STATES

AUGUST 5, 1999

Mr. ROCKEFELLER (for himself, Mr. ROBB, Mr. SARBANES, Mr. KERRY, Mr.

KENNEDY, and Mr. DASCHLE) introduced the following bill; which was

read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

a tax credit to taxpayers investing in entities seeking

to provide capital to create new markets in low-income

communities.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. NEW MARKETS TAX CREDIT.

4 (a) IN GENERAL.—Subpart D of part IV of sub5 chapter A of chapter 1 of the Internal Revenue Code of

6 1986 (relating to business-related credits) is amended by

7 adding at the end the following new section:
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1 ‘‘SEC. 45D. NEW MARKETS TAX CREDIT.

2 ‘‘(a) ALLOWANCE OF CREDIT.—

3 ‘‘(1) IN GENERAL.—For purposes of section 38,

4 in the case of a taxpayer who holds a qualified eq5 uity investment on a credit allowance date of such

6 investment which occurs during the taxable year, the

7 new markets tax credit determined under this sec8 tion for such taxable year is an amount equal to 6

9 percent of the amount paid to the qualified commu10 nity development entity for such investment at its

11 original issue.

12 ‘‘(2) CREDIT ALLOWANCE DATE.—The term

13 ‘credit allowance date’ means, with respect to any

14 qualified equity investment—

15 ‘‘(A) the date on which such investment is

16 initially made, and

17 ‘‘(B) each of the 6 anniversary dates of

18 such date thereafter.

19 ‘‘(b) QUALIFIED EQUITY INVESTMENT.—For pur20 poses of this section—

21 ‘‘(1) IN GENERAL.—The term ‘qualified equity

22 investment’ means any equity investment in a quali23 fied community development entity if—

24 ‘‘(A) such investment is acquired by the

25 taxpayer at its original issue (directly or
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1 through an underwriter) solely in exchange for

2 cash,

3 ‘‘(B) substantially all of the proceeds from

4 such investment is used by the qualified com5 munity development entity to make qualified

6 low-income community investments, and

7 ‘‘(C) such investment is designated for

8 purposes of this section by the qualified com9 munity development entity.

10 Such term shall not include any equity investment

11 issued by a qualified community development entity

12 more than 7 years after the date that such entity re13 ceives an allocation under subsection (f). Any alloca14 tion not used within such 7-year period may be re15 allocated by the Secretary under subsection (f).

16 ‘‘(2) LIMITATION.—The maximum amount of

17 equity investments issued by a qualified community

18 development entity which may be designated under

19 paragraph (1)(C) by such entity shall not exceed the

20 portion of the limitation amount allocated under

21 subsection (f) to such entity.

22 ‘‘(3) SAFE HARBOR FOR DETERMINING USE OF

23 CASH.—The requirement of paragraph (1)(B) shall

24 be treated as met if at least 85 percent of the aggre25 gate gross assets of the qualified community devel-
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1 opment entity are invested in qualified low-income

2 community investments.

3 ‘‘(4) TREATMENT OF SUBSEQUENT PUR4 CHASERS.—The term ‘qualified equity investment’

5 includes any equity investment which would (but for

6 paragraph (1)(A)) be a qualified equity investment

7 in the hands of the taxpayer if such investment was

8 a qualified equity investment in the hands of a prior

9 holder.

10 ‘‘(5) REDEMPTIONS.—A rule similar to the rule

11 of section 1202(c)(3) shall apply for purposes of this

12 subsection.

13 ‘‘(6) EQUITY INVESTMENT.—The term ‘equity

14 investment’ means—

15 ‘‘(A) any stock in a qualified community

16 development entity which is a corporation, and

17 ‘‘(B) any capital interest in a qualified

18 community development entity which is a part19 nership.

20 ‘‘(c) QUALIFIED COMMUNITY DEVELOPMENT ENTI21 TY.—For purposes of this section—

22 ‘‘(1) IN GENERAL.—The term ‘qualified com23 munity development entity’ means any domestic cor24 poration or partnership if—
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1 ‘‘(A) the primary mission of the entity is

2 serving, or providing investment capital for,

3 low-income communities or low-income persons,

4 ‘‘(B) the entity maintains accountability to

5 residents of low-income communities through

6 representation on governing or advisory boards

7 or otherwise, and

8 ‘‘(C) the entity is certified by the Secretary

9 for purposes of this section as being a qualified

10 community development entity.

11 ‘‘(2) SPECIAL RULES FOR CERTAIN ORGANIZA12 TIONS.—The requirements of paragraph (1) shall be

13 treated as met by—

14 ‘‘(A) any specialized small business invest15 ment company (as defined in section

16 1044(c)(3)), and

17 ‘‘(B) any community development financial

18 institution (as defined in section 103 of the

19 Community Development Banking and Finan20 cial Institutions Act of 1994 (12 U.S.C. 4702)).

21 ‘‘(d) QUALIFIED LOW-INCOME COMMUNITY INVEST22 MENTS.—For purposes of this section—

23 ‘‘(1) IN GENERAL.—The term ‘qualified low-in24 come community investment’ means—
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1 ‘‘(A) any equity investment in, or loan to,

2 any qualified active low-income community busi3 ness,

4 ‘‘(B) the purchase from another commu5 nity development entity of any loan made by

6 such entity which is a qualified low-income com7 munity investment if the amount received by

8 such other entity from such purchase is used by

9 such other entity to make qualified low-income

10 community investments,

11 ‘‘(C) financial counseling and other serv12 ices specified in regulations prescribed by the

13 Secretary to businesses located in, and resi14 dents of, low-income communities, and

15 ‘‘(D) any equity investment in, or loan to,

16 any qualified community development entity if

17 substantially all of the investment or loan is

18 used by such entity to make qualified low-in19 come community investments described in sub20 paragraphs (A), (B), and (C).

21 ‘‘(2) QUALIFIED ACTIVE LOW-INCOME COMMU22 NITY BUSINESS.—

23 ‘‘(A) IN GENERAL.—For purposes of para24 graph (1), the term ‘qualified active low-income

25 community business’ means, with respect to any
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1 taxable year, any corporation or partnership if

2 for such year—

3 ‘‘(i) at least 50 percent of the total

4 gross income of such entity is derived from

5 the active conduct of a qualified business

6 within any low-income community,

7 ‘‘(ii) a substantial portion of the use

8 of the tangible property of such entity

9 (whether owned or leased) is within any

10 low-income community,

11 ‘‘(iii) a substantial portion of the serv12 ices performed for such entity by its em13 ployees are performed in any low-income

14 community,

15 ‘‘(iv) less than 5 percent of the aver16 age of the aggregate unadjusted bases of

17 the property of such entity is attributable

18 to collectibles (as defined in section

19 408(m)(2)) other than collectibles that are

20 held primarily for sale to customers in the

21 ordinary course of such business, and

22 ‘‘(v) less than 5 percent of the aver23 age of the aggregate unadjusted bases of

24 the property of such entity is attributable
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1 to nonqualified financial property (as de2 fined in section 1397B(e)).

3 ‘‘(B) PROPRIETORSHIP.—Such term shall

4 include any business carried on by an individual

5 as a proprietor if such business would meet the

6 requirements of subparagraph (A) were it incor7 porated.

8 ‘‘(C) PORTIONS OF BUSINESS MAY BE

9 QUALIFIED ACTIVE LOW-INCOME COMMUNITY

10 BUSINESS.—The term ‘qualified active low-in11 come community business’ includes any trades

12 or businesses which would qualify as a qualified

13 active low-income community business if such

14 trades or businesses were separately incor15 porated.

16 ‘‘(3) QUALIFIED BUSINESS.—For purposes of

17 this subsection, the term ‘qualified business’ has the

18 meaning given to such term by section 1397B(d);

19 except that—

20 ‘‘(A) in lieu of applying paragraph (2)(B)

21 thereof, the rental to others of real property lo22 cated in any low-income community shall be

23 treated as a qualified business if there are sub24 stantial improvements located on such property,
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1 ‘‘(B) paragraph (3) thereof shall not apply,

2 and

3 ‘‘(C) such term shall not include any busi4 ness if a significant portion of the equity inter5 ests in such business are held by any person

6 who holds a significant portion of the equity in7 vestments in the community development entity.

8 ‘‘(e) LOW-INCOME COMMUNITY.—For purposes of

9 this section—

10 ‘‘(1) IN GENERAL.—The term ‘low-income com11 munity’ means any population census tract if—

12 ‘‘(A) the poverty rate for such tract is at

13 least 20 percent, or

14 ‘‘(B)(i) in the case of a tract not located

15 within a metropolitan area, the median family

16 income for such tract does not exceed 80 per17 cent of statewide median family income, or

18 ‘‘(ii) in the case of a tract located within

19 a metropolitan area, the median family income

20 for such tract does not exceed 80 percent of the

21 greater of statewide median family income or

22 the metropolitan area median family income.

23 ‘‘(2) AREAS NOT WITHIN CENSUS TRACTS.—In

24 the case of an area which is not tracted for popu25 lation census tracts, the equivalent county divisions
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1 (as defined by the Bureau of the Census for pur2 poses of defining poverty areas) shall be used for

3 purposes of determining poverty rates and median

4 family income.

5 ‘‘(3) TARGETED POPULATION.—The Secretary

6 may prescribe regulations under which 1 or more

7 targeted populations (within the meaning of section

8 3(20) of the Riegle Community Development and

9 Regulatory Improvement Act of 1974 (12 U.S.C.

10 4702(20))) may be treated as low-income commu11 nities. Such regulations shall include procedures for

12 identifying the area covered by any such community

13 for purposes of determining entities which are quali14 fied active low-income community businesses with re15 spect to such community.

16 ‘‘(f) NATIONAL LIMITATION ON AMOUNT OF INVEST17 MENTS DESIGNATED.—

18 ‘‘(1) IN GENERAL.—There is a new markets tax

19 credit limitation of $1,200,000,000 for each of cal20 endar years 2000 through 2004.

21 ‘‘(2) ALLOCATION OF LIMITATION.—The limita22 tion under paragraph (1) shall be allocated by the

23 Secretary among qualified community development

24 entities selected by the Secretary. In making alloca25 tions under the preceding sentence, the Secretary
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1 shall give priority to entities with records of having

2 successfully provided capital or technical assistance

3 to disadvantaged businesses or communities.

4 ‘‘(3) CARRYOVER OF UNUSED LIMITATION.—If

5 the new markets tax credit limitation for any cal6 endar year exceeds the aggregate amount allocated

7 under paragraph (2) for such year, such limitation

8 for the succeeding calendar year shall be increased

9 by the amount of such excess.

10 ‘‘(g) RECAPTURE OF CREDIT IN CERTAIN CASES.—

11 ‘‘(1) IN GENERAL.—If, at any time during the

12 7-year period beginning on the date of the original

13 issue of a qualified equity investment in a qualified

14 community development entity, there is a recapture

15 event with respect to such investment, then the tax

16 imposed by this chapter for the taxable year in

17 which such event occurs shall be increased by the

18 credit recapture amount.

19 ‘‘(2) CREDIT RECAPTURE AMOUNT.—For pur20 poses of paragraph (1), the credit recapture amount

21 is an amount equal to the sum of—

22 ‘‘(A) the aggregate decrease in the credits

23 allowed to the taxpayer under section 38 for all

24 prior taxable years which would have resulted if
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1 no credit had been determined under this sec2 tion with respect to such investment, plus

3 ‘‘(B) interest at the overpayment rate es4 tablished under section 6621 on the amount de5 termined under subparagraph (A) for each

6 prior taxable year for the period beginning on

7 the due date for filing the return for the prior

8 taxable year involved.

9 No deduction shall be allowed under this chapter for

10 interest described in subparagraph (B).

11 ‘‘(3) RECAPTURE EVENT.—For purposes of

12 paragraph (1), there is a recapture event with re13 spect to an equity investment in a qualified commu14 nity development entity if—

15 ‘‘(A) such entity ceases to be a qualified

16 community development entity,

17 ‘‘(B) the proceeds of the investment cease

18 to be used as required of subsection (b)(1)(B),

19 or

20 ‘‘(C) such investment is redeemed by such

21 entity.

22 ‘‘(4) SPECIAL RULES.—

23 ‘‘(A) TAX BENEFIT RULE.—The tax for

24 the taxable year shall be increased under para25 graph (1) only with respect to credits allowed
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1 by reason of this section which were used to re2 duce tax liability. In the case of credits not so

3 used to reduce tax liability, the carryforwards

4 and carrybacks under section 39 shall be appro5 priately adjusted.

6 ‘‘(B) NO CREDITS AGAINST TAX.—Any in7 crease in tax under this subsection shall not be

8 treated as a tax imposed by this chapter for

9 purposes of determining the amount of any

10 credit under this chapter or for purposes of sec11 tion 55.

12 ‘‘(h) BASIS REDUCTION.—The basis of any qualified

13 equity investment shall be reduced by the amount of any

14 credit determined under this section with respect to such

15 investment.

16 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

17 such regulations as may be appropriate to carry out this

18 section, including regulations—

19 ‘‘(1) which limit the credit for investments

20 which are directly or indirectly subsidized by other

21 Federal benefits (including the credit under section

22 42 and the exclusion from gross income under sec23 tion 103),

24 ‘‘(2) which prevent the abuse of the provisions

25 of this section through the use of related parties,
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1 ‘‘(3) which impose appropriate reporting re2 quirements, and

3 ‘‘(4) which apply the provisions of this section

4 to newly formed entities.’’

5 (b) CREDIT MADE PART OF GENERAL BUSINESS

6 CREDIT.—

7 (1) IN GENERAL.—Subsection (b) of section 38

8 of the Internal Revenue Code of 1986 is amended by

9 striking ‘‘plus’’ at the end of paragraph (12), by

10 striking the period at the end of paragraph (13) and

11 inserting ‘‘, plus’’, and by adding at the end the fol12 lowing new paragraph:

13 ‘‘(14) the new markets tax credit determined

14 under section 45D(a).’’

15 (2) LIMITATION ON CARRYBACK.—Subsection

16 (d) of section 39 of such Code is amended by adding

17 at the end the following new paragraph:

18 ‘‘(10) NO CARRYBACK OF NEW MARKETS TAX

19 CREDIT BEFORE JANUARY 1, 2000.—No portion of

20 the unused business credit for any taxable year

21 which is attributable to the credit under section 45D

22 may be carried back to a taxable year ending before

23 January 1, 2000.’’

24 (c) DEDUCTION FOR UNUSED CREDIT.—Subsection

25 (c) of section 196 of the Internal Revenue Code of 1986
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1 is amended by striking ‘‘and’’ at the end of paragraph (7),

2 by striking the period at the end of paragraph (8) and

3 inserting ‘‘, and’’, and by adding at the end the following

4 new paragraph:

5 ‘‘(9) the new markets tax credit determined

6 under section 45D(a).’’

7 (d) CLERICAL AMENDMENT.—The table of sections

8 for subpart D of part IV of subchapter A of chapter 1

9 of the Internal Revenue Code of 1986 is amended by add10 ing at the end the following new item:

‘‘Sec. 45D. New markets tax credit.’’

11 (e) EFFECTIVE DATE.—The amendments made by

12 this section shall apply to investments made after Decem13 ber 31, 1999.

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