[Federal Register Volume 66, Number 245 (Thursday, December 20, 2001)]
[Notices]
[Pages 65806-65810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31391]



[[Page 65805]]

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Part VI





Department of the Treasury





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Community Development Financial Institutions Fund



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Guidance for Certification of Community Development Entities, New 
Markets Tax Credit Program; Notice

Federal Register / Vol. 66, No. 245 / Thursday, December 20, 2001 / 
Notices

[[Page 65806]]


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DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund


Guidance for Certification of Community Development Entities, New 
Markets Tax Credit Program

AGENCY: Community Development Financial Institutions Fund, Department 
of the Treasury.

ACTION: Guidance for Certification of Community Development Entities, 
New Markets Tax Credit Program.

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SUMMARY: Title I, subtitle C, section 121 of the Community Renewal Tax 
Relief Act of 2000 (the Act), as enacted by section 1(a)(7) of the 
Consolidated Appropriations Act, 2001 (Public Law 106-554, December 21, 
2000), amended the Internal Revenue Code (IRC) by adding IRC section 
45D, New Markets Tax Credit. Section 45D requires the Secretary of the 
Treasury (Treasury) to establish a program that will provide an 
incentive to investors in the form of a tax credit over seven years, 
which is expected to stimulate investment in new private capital that, 
in turn, will facilitate economic and community development in 
distressed communities. Section 121(f) of the Act, among other things, 
requires the Secretary to issue guidance on how entities may apply to 
receive allocations of New Markets Tax Credits (NMTCs), the competitive 
procedure through which such allocations will be made, and the actions 
that will be taken to ensure that proper allocations are made to 
appropriate entities. The Secretary delegated such authority to the 
Under Secretary (Domestic Finance), who in turn delegated such 
authority to the Director of the Community Development Financial 
Institutions Fund (the Fund).
    On April 20, 2001, the Fund issued guidance (which was published in 
the Federal Register on May 1, 2001 at 66 FR 21846) (the General 
Guidance) that provided general information on how an entity may apply 
to become certified as a ``qualified community development entity'' 
(CDE), how a CDE may apply to receive an allocation of NMTCs, the 
competitive procedure through which such allocations will be made, and 
the actions that will be taken to ensure that proper allocations are 
made to appropriate entities. In addition, through the General 
Guidance, the Fund sought written comments from the public as to 
certain application and allocation issues.
    This document (i) summarizes written public comments submitted to 
the Fund pursuant to the General Guidance, specifically with respect to 
the Fund's certification of entities as CDEs, and (ii) provides, in 
accordance with IRC section 45D(c)(1)(C), specific guidance on how an 
entity may apply to become certified as a CDE. Effective immediately, 
this Guidance encourages entities to apply for CDE certification. This 
Guidance does not solicit applications for allocations of NMTCs.
    As provided by IRC section 45D(i), Treasury is authorized to 
prescribe regulations relating to the NMTC Program. Treasury and the 
Internal Revenue Service (IRS) will promulgate regulations related to 
tax aspects of the NMTC Program. Following the promulgation of said IRS 
regulations, the Fund will publish a Notice of Allocation Availability 
(NOAA) that will provide additional, specific guidance on how a CDE may 
apply to receive an allocation of NMTCs, the competitive procedure 
through which such allocations will be made, and the actions that will 
be taken to ensure that proper allocations are made to appropriate 
entities. As part of the NOAA, the Fund also will summarize written 
comments submitted by the public with respect to application and 
allocation issues presented in the General Guidance. The Fund 
anticipates that, pursuant to the NOAA, it will allocate to CDEs in 
calendar year 2002 the authority to issue to their investors up to the 
aggregate amount of $2.5 billion in equity as to which NMTCs may be 
claimed (the authority will include the aggregated amounts of $1 
billion for calendar year 2001 and $1.5 billion for calendar year 2002, 
as permitted under IRC sections 45D(f)(1) and 45D(f)(3)).

DATES: Effective immediately, the Fund will accept applications from 
entities seeking to be certified as CDEs. There is no deadline for the 
submission of CDE Certification Applications. The Fund will review CDE 
Certification Applications on an ongoing basis. However, for an 
Applicant CDE that also expects to submit a NMTC allocation 
application, please refer below to Part IV, CDE Certification, Section 
A, for further information.

ADDRESSES: CDE Certification Applications should be sent by mail or 
courier to: CDFI Fund Awards Manager, Bureau of Public Debt--
Franchising, 200 Third Street, Room 211, Parkersburg, WV 26101. 
Applications will not be accepted at the Fund's offices. CDE 
Certification Applications and other NMTC Program information may be 
downloaded from the Fund's web site at http://www.cdfifund.gov. If you 
would like CDE Certification Application materials to be sent to you, 
contact the Fund by telephone at (202) 622-8662; by e-mail to 
<a href="/cdn-cgi/l/email-protection#b8dbdcded1d0ddd4c8f8dbdcded196cccaddd9cb96dfd7ce"><span class="__cf_email__" data-cfemail="d7b4b3b1bebfb2bba797b4b3b1bef9a3a5b2b6a4f9b0b8a1">[email protected]</span></a>; or by facsimile at (202) 622-8244. These are 
not toll free numbers.

FOR FURTHER INFORMATION: Information regarding the Fund and its 
programs may be downloaded from the Fund's web site at http://www.cdfifund.gov.

I. Definitions

    (a) Affiliate: means any legal entity that Controls, is Controlled 
by, or is under common Control with the Applicant CDE.
    (b) Applicant CDE: means any legal entity that is applying to the 
Fund to be certified as a CDE, either for itself or on behalf of its 
Subsidiaries.
    (c) CDE Certification Application: means the application form, 
issued by the Fund, to be completed and submitted by an Applicant CDE 
in order to be certified as a CDE.
    (d) Community Development Entity or CDE: see Qualified Community 
Development Entity, below.
    (e) Community Development Financial Institution or CDFI: means an 
entity that has been certified by the Fund as meeting the criteria set 
forth in section 103 of the Community Development Banking and Financial 
Institutions Act of 1994 (12 U.S.C. 4702). For further details, refer 
to the CDFI Program regulations set forth at 12 CFR 1805.201.
    (f) Control: means (i) Ownership, control, or power to vote more 
than 50 percent of the outstanding shares of any class of voting 
securities of any entity, directly or indirectly or acting through one 
or more other persons; (ii) control in any manner over the election of 
a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of any other entity; or (iii) 
the power to exercise, directly or indirectly, a controlling influence 
over the management policies or investment decisions of another entity, 
as determined by the Fund.
    (g) Low-Income Community: means, under IRC section 45D(e)(1), any 
population census tract if (A) the poverty rate for such tract is at 
least 20 percent, or (B)(i) in the case of a tract not located within a 
Metropolitan Area (as hereinafter defined), the median family income 
for such tract does not exceed 80 percent of statewide median family 
income, or (ii) in the case of a tract located within a Metropolitan 
Area, the median family income for such tract does not exceed 80 
percent of the greater of statewide median family

[[Page 65807]]

income or the Metropolitan Area median family income. With respect to 
IRC section 45D(e)(1)(B), possession-wide median family income shall be 
used (in lieu of statewide income) in assessing the status of census 
tracts located within a possession of the United States. Upon 
application by an entity for certification as a CDE, the Fund may 
designate under IRC section 45D(e)(2) an area within a census tract as 
a Low-Income Community if (A) the boundary of the area is continuous; 
(B) the area would otherwise meet the definition of a Low-Income 
Community under IRC section 45D(e)(1) if it were a census tract; and 
(C) there is inadequate access to investment capital in the area (as 
demonstrated by studies, surveys, or other analyses provided by the 
applicant). Under IRC section 45D(e)(3), in the case of an area that is 
not tracted for population census tracts, the equivalent county 
divisions (as defined by the Bureau of the Census for purposes of 
determining poverty areas) shall be used for purposes of defining 
poverty rates and median family incomes.
    (h) Low-Income Persons: means individuals having an income, 
adjusted for family size, of not more than (A) for non-Metropolitan 
Areas, 80 percent of the statewide median family income; and (B)(i) for 
Metropolitan Areas, the greater of (A) 80 percent of the statewide 
median family income or (ii) 80 percent of the Metropolitan Area median 
family income.
    (i) Metropolitan Area: means an area designated as such by the 
Office of Management and Budget pursuant to 44 U.S.C. 3504(e) and 31 
U.S.C. 1104(d) and Executive Order 10253 (3 CFR 1949-1953 Comp., p. 
758), as amended.
    (j) Qualified Community Development Entity or CDE: means, under IRC 
section 45D(c)(1), any domestic corporation or partnership if (A) the 
primary mission of the entity is serving, or providing investment 
capital for, Low-Income Communities or Low-Income Persons; (B) 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 (C) the entity is certified by 
the Fund as a CDE. SSBICs, as hereinafter defined, and CDFIs will be 
deemed to be CDEs in the manner hereinafter set forth.
    (k) Qualified Equity Investment: means, under IRC section 
45D(b)(1), any equity investment in a CDE if (A) such investment is 
acquired by the investor at its original issue (directly or through an 
underwriter) solely in exchange for cash; (B) substantially all of such 
cash is used by the CDE to make Qualified Low-Income Community 
Investments; and (C) the investment is designated by the CDE as a 
Qualified Equity Investment. Qualified Equity Investment also includes 
an equity investment purchased from a prior holder, to the extent 
provided in IRC section 45D(b)(4). Qualified Equity Investment does not 
include any equity investment issued by a CDE more than five years 
after the date the CDE receives a NMTC allocation. Under IRC section 
45D(b)(6), ``equity investment'' means (A) any stock (other than 
nonqualified preferred stock as defined in IRC section 351(g)(2)) in a 
corporation and (B) any capital interest in a partnership.
    (l) Qualified Low-Income Community Investment: means, under IRC 
section 45D(d)(1), (A) any capital or equity investment in, or loan to, 
any qualified active low-income community business (as defined in IRC 
section 45D(d)(2)); (B) the purchase from a CDE of any loan made by 
such entity that is a Qualified Low-Income Community Investment; (C) 
financial counseling and other services to businesses located in, and 
residents of, Low-Income Communities; and (D) any equity investment in, 
or loan to, any CDE.
    (m) Specialized Small Business Investment Company or SSBIC: is 
defined in IRC section 1044(c)(3).
    (n) Subsidiary: means a legal entity that is owned or Controlled 
directly or indirectly by the Applicant CDE.

II. The NMTC Program: Background

    By providing an incentive in the form of a tax credit over seven 
years, NMTCs are intended to stimulate the investment of $15 billion in 
new private capital in CDEs that, in turn, will make investments in 
eligible businesses in distressed urban, rural, Native American and 
Native Hawaiian communities, thus facilitating economic and community 
development.
    Through the NMTC Program, an entity may apply to the Fund to be 
certified as a CDE. Nonprofit entities and for-profit entities may be 
certified as CDEs by the Fund. Only CDEs that are for-profit entities 
are eligible to issue Qualified Equity Investments with respect to 
which investors will be entitled to claim NMTCs. A taxpayer (including, 
for example, individuals, corporations, partnerships, and investment 
funds) that makes a Qualified Equity Investment in a CDE that has 
received a NMTC allocation from the Fund may claim a five percent tax 
credit on the investment amount for each of the first three years after 
the date of the investment and a six percent tax credit for each of the 
next four years.
    In the NOAA, the Fund will address specifically how a CDE may apply 
to receive an allocation of NMTCs, the competitive procedure through 
which such allocations will be made, and the actions that will be taken 
to ensure that proper allocations are made to appropriate entities.

III. Comments Submitted by the Public on the General Guidance

    On April 20, 2001, the Fund issued the General Guidance, which 
described, in general terms, certain aspects of the NMTC Program. The 
Fund has received numerous comments from organizations and individuals. 
The following is a discussion of the significant and most frequently 
commented upon issues related to CDE certification. In the NOAA or in 
guidance to be issued at a later date, the Fund will summarize written 
and electronic comments submitted by the public with respect to other 
application and allocation issues presented in the General Guidance.
    A. General CDE Eligibility Issues: IRC section 45D(c)(1) defines a 
CDE as any domestic corporation or partnership if: (A) the primary 
mission of the entity is serving, or providing investment capital for, 
Low-Income Communities or Low-Income Persons (Primary Mission Test); 
(B) 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 (Accountability Test); 
and (C) the entity is certified by the Secretary as a CDE.
    (1) One commenter suggested that the Fund clarify that an entity 
may apply for CDE certification even if the entity does not intend to 
apply for a NMTC allocation. IRC sections 45D(d)(1)(B) and 45D(d)(1)(D) 
permit CDEs receiving NMTC allocations to make Qualified Low-Income 
Community Investments by purchasing a qualifying loan from another CDE 
or by investing in another CDE. Therefore, an entity may apply for CDE 
certification regardless of whether such entity intends to apply for a 
NMTC allocation.
    (2) Another commenter recommended that an organization certified as 
a CDE be allowed to transfer its CDE certification to its Subsidiary or 
Subsidiaries. IRC section 45D(c)(1) requires that, in order to be 
certified as a CDE, an entity must meet two tests: the Primary Mission 
Test and the Accountability Test. Each entity that applies for 
certification as a CDE must meet both tests regardless of its 
affiliation with other organizations. In order to make the CDE 
certification process as efficient as possible, the

[[Page 65808]]

Fund will permit an Applicant CDE to submit a single CDE Certification 
Application for itself and on behalf of its Subsidiaries. Each of the 
entities must satisfy the Primary Mission Test and the Accountability 
Test. The CDE Certification Application contains the specific 
requirements for such consolidated submissions.
    (3) Another commenter suggested that the Fund should not require 
entities to be duly organized prior to submission of a CDE 
Certification Application. While the Fund recognizes that Applicant 
CDEs will have to expend resources in order to form a legal entity that 
is eligible to apply for CDE certification, the Fund is requiring that 
a CDE be a duly organized entity. Therefore, the Fund will not confer 
CDE certification to an entity that has not yet been legally 
established.
    (4) One commenter stated that community development banks should 
receive automatic CDE certification. The Fund recognizes the important 
role that community development banks play in providing access to 
credit for Low-Income Persons and Low-Income Communities. However, IRC 
section 45D(c)(2) only allows for the automatic certification of SSBICs 
certified by the Small Business Administration, and CDFIs certified by 
the Fund. A community development bank applying for certification as a 
CDE will be required to meet the CDE certification criteria set forth 
in IRC section 45D, this Guidance, and the CDE Certification 
Application. A community development bank that is certified as a CDFI, 
however, will be deemed to meet the requirements for CDE certification.
    (5) Two commenters requested clarification as to whether an entity 
organized as a business trust would be eligible for certification as a 
CDE if such an entity is taxable as a partnership. An entity may apply 
for certification as a CDE if it is treated either as a domestic 
corporation or a partnership for Federal income tax purposes.
    (6) Several commenters suggested that an applicant whose business 
structure consists of an entity with a series of funds be deemed 
eligible for CDE certification as a single entity. The Fund has 
considered these comments, and has determined that, if an Applicant CDE 
represents that it is properly classified for Federal income tax 
purposes as a single partnership or corporation, it may apply for CDE 
certification as a single entity. If the Applicant CDE represents that 
it is properly classified for Federal income tax purposes as multiple 
partnerships or corporations, it may submit a single application on 
behalf of the entire series of funds, and each fund must meet the 
Primary Mission Test and the Accountability Test.
    (7) Two commenters requested that the Fund permit organizations 
that are governmentally controlled entities to qualify for CDE 
certification. Since the Act does not exclude governmentally controlled 
entities from being eligible for CDE certification, the Fund will 
permit governmentally controlled entities that are properly classified 
as domestic corporations or partnerships for Federal income tax 
purposes to apply for CDE certification.
    B. Primary Mission Test: Pursuant to IRC section 45D(c)(1)(A), a 
CDE must have a primary mission of serving, or providing investment 
capital for, Low-Income Communities or Low-Income Persons.
    (1) Several commenters suggested that Applicant CDEs be allowed to 
meet the Primary Mission Test by either indirectly or directly serving, 
or providing investment capital for, Low-Income Communities or Low-
Income Persons. The Fund recognizes the merits of these comments and 
will permit Applicant CDEs to meet the Primary Mission Test either by 
directly serving Low-Income Communities or Low-Income Persons (e.g., by 
providing loans to Low-Income Persons or to individuals or businesses 
located in Low-Income Communities), or by indirectly serving Low-Income 
Communities or Low-Income Persons (e.g., by providing loans to or 
investments in other entities that will in turn provide assistance in 
Low-Income Communities or assistance to Low-Income Persons).
    (2) One commenter requested that the Fund deem an Applicant CDE to 
have met the Primary Mission Test if the Applicant CDE is a nonprofit 
organization exempt from federal income tax under IRC Sec. 501(c) or 
any other IRC provision, and the exempt purpose relates to serving Low-
Income Communities or Low-Income Persons. However, the exempt purpose 
test required for tax-exempt status under the IRC is based on different 
underlying policies than the Primary Mission Test set forth in IRC 
section 45D(c)(1)(A). Therefore, all Applicant CDEs will be required to 
provide the documentation required to meet the Primary Mission Test.
    (3) One commenter expressed concern about the basis for the Fund's 
requirement that an Applicant CDE demonstrate that at least 60 percent 
of its activities are dedicated to serving, or providing investment 
capital for, Low-Income Communities or Low-Income Persons. The Fund has 
determined that the 60 percent threshold is an appropriate standard: it 
is the standard currently used by the Fund in certifying CDFIs and it 
provides the Fund with evidence that a significant portion of the 
Applicant CDE's activities are targeted to Low-Income Communities or 
Low-Income Persons.
    C. Accountability Test: Pursuant to IRC section 45D(c)(1)(B), a CDE 
must maintain 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.
    (1) One commenter recommended that the definition of Low-Income 
Community be expanded to include census tracts in which the median 
family income does not exceed 80 percent of the national median family 
income. Because IRC section 45D(e) clearly defines Low-Income 
Community, the Fund will adhere to such definition, without 
modification.
    (2) Several commenters recommended that the Fund permit Applicant 
CDEs greater flexibility to meet the Accountability Test. Specifically, 
the commenters suggested that an Applicant CDE be allowed to meet the 
Accountability Test by demonstrating that it maintains accountability 
to residents of Low-Income Communities or Low-Income Persons through 
the residents' representation not only on governing boards or advisory 
boards, but alternatively in focus groups and community meetings. The 
Fund has not accepted this comment because IRC section 45D(c)(1)(B) 
clearly requires CDEs to maintain ``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.''
    (3) One commenter suggested that when evaluating a CDE 
Certification Application, the Fund should assess the extent to which 
representatives of Low-Income Communities exert meaningful influence 
over the policies and procedures of the Applicant CDE. The Fund is 
mindful of the need to create a mechanism for meaningful and 
substantive participation and influence in CDEs by representatives of 
Low-Income Communities and has developed evaluation criteria that will 
provide the Fund with information on the level of participation and 
influence held by representatives of Low-Income Communities who serve 
on advisory or governing boards of a CDE. This criterion is further 
described in the CDE Certification Application.
    (4) Several commenters suggested that the Fund allow Applicant CDEs 
to demonstrate accountability to Low-Income Communities by 
representatives other than residents of such Low-

[[Page 65809]]

Income Communities (e.g., a clergy member, a small business owner, or a 
director of a community development corporation). The Fund recognizes 
that a person may be representative of a Low-Income Community because 
of the type of work that he or she performs in the Low-Income 
Community. The Fund provides specific guidance in the CDE Certification 
Application on the various ways in which an Applicant CDE can meet the 
Accountability Test through persons who are residents of Low-Income 
Communities or whose work or community development activities makes 
them accountable to such residents. However, the Fund seeks to 
encourage, as much as possible, Applicant CDEs to appoint some Low-
Income Persons from Low-Income Communities to advisory and/or governing 
boards.
    (5) Several commenters recommended that a CDE be permitted to meet 
the Accountability Test if it demonstrates that a majority of its 
governing or advisory board is accountable to residents of Low-Income 
Communities. The Fund has considered these comments and has determined 
that, for a CDE wishing to meet the Accountability Test through its 
governing board, the Fund will require that a minimum of 20 percent of 
the members of the governing board be representative of the Low-Income 
Community. For a CDE wishing to meet the Accountability Test through an 
advisory board or boards, a minimum of 20 percent of the members of 
each advisory board must be representative of a Low-Income Community.
    (6) One commenter proposed that the Fund allow a CDE that serves 
multiple geographic areas to satisfy the Accountability Test by 
establishing local advisory boards that are representative of Low-
Income Communities. As proposed, these advisory boards would in turn 
report to a CDE with a regional or national service area. The Fund 
agrees with this comment, and provides specific guidance in the CDE 
Certification Application with respect to establishing multiple 
advisory boards.
    D. Consolidated Applications for Related Entities: Several 
commenters suggested that the Fund allow a CDE that receives a NMTC 
allocation to transfer its allocation to its Affiliates or 
Subsidiaries. One commenter also suggested that the Fund develop a 
consolidated CDE Certification Application for multiple legal entities 
that are commonly controlled (i.e., parent and affiliated entities or 
entities under common control). The Fund has considered these comments 
and will permit an entity and its Subsidiaries to apply for CDE 
certification in a single CDE Certification Application. A for-profit 
CDE that receives a NMTC allocation may transfer such NMTC allocation 
to its for-profit Subsidiary or Subsidiaries, provided that said 
transferees have been certified as CDEs and such transfer is pre-
approved in writing by the Fund, in its sole discretion. A nonprofit 
CDE may apply for and receive a NMTC allocation but must transfer such 
NMTC allocation to its for-profit Subsidiary or Subsidiaries; said 
transferees must be certified as CDEs and such a transfer must be pre-
approved in writing by the Fund, in its sole discretion.

IV. CDE Certification

A. Applications

    As stated above, the Fund is currently accepting applications from 
entities wishing to be certified as CDEs. CDE Certification 
Applications will be reviewed on a rolling basis. However, any 
Applicant CDE interested in applying for a NMTC allocation must submit 
a CDE Certification Application prior to the deadline for the 
submission of an application for a NMTC allocation. The Fund 
anticipates that this deadline for submitting CDE Certification 
Applications will be 30 days prior to the deadline for submission of 
applications for NMTC allocations. Both deadlines will be published in 
the NOAA.
    An Applicant CDE may be a for-profit or a nonprofit entity. An 
Applicant CDE may apply for certification for itself, or it may apply 
for itself and on behalf of one or more Subsidiaries under a single CDE 
Certification Application. The CDE Certification Application requires 
that the Applicant CDE provide, among other items, specific information 
relating to how it (and, if appropriate, each of its Subsidiaries ) 
meets the Primary Mission Test and the Accountability Test. These 
requirements are discussed under Section B, Eligibility, below, and in 
the CDE Certification Application.
    Entities that have been certified by the Fund as CDFIs and entities 
that have been designated by the SBA as SSBICs are deemed to meet the 
requirements for CDE certification and do not need to complete the CDE 
Certification Application. Each CDFI and SSBIC desiring CDE 
certification must indicate to the Fund its desire either (i) by 
registering on-line with the Fund through the Fund's website at http://www.cdfifund.gov, or (ii) by contacting the Fund (see Addresses, above) 
to have registration documents sent to it.
    Notwithstanding the preceding paragraph, Subsidiaries and 
Affiliates of CDFIs and SSBICs will not be deemed to meet the 
requirements of CDE certification without completing a CDE 
Certification Application. A CDFI or SSBIC wishing to apply for 
certification on behalf of one or more of its Subsidiaries must 
complete a CDE Certification Application for itself and all 
Subsidiaries it would like certified, and each Subsidiary must meet the 
Primary Mission Test and the Accountability Test.

B. Eligibility

    (1) Legal Entity Requirements: IRC section 45D(c)(1) specifies the 
eligibility requirements that each entity must meet in order to be 
certified by the Fund as a CDE. The Fund will not confer CDE 
certification to an Applicant CDE unless the entity is a duly organized 
and validly existing legal entity under the laws of the jurisdiction in 
which it is incorporated or otherwise established. As described above, 
a CDE is any entity treated as a domestic corporation or partnership, 
for federal income tax purposes, if: (A) The primary mission of the 
entity is serving, or providing investment capital for, Low-Income 
Communities or Low-Income Persons; (B) 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 (C) the entity is certified by the Fund as a 
CDE. CDFIs certified by the Fund and SSBICs certified by the SBA will 
be deemed to be CDEs. An applicant whose business structure consists of 
an entity with a series of funds may apply for CDE certification as a 
single entity, or as multiple entities, in accordance with this 
paragraph. If such an applicant represents that it is properly 
classified for Federal income tax purposes as a single partnership or 
corporation, it may apply for CDE certification as a single entity. If 
the applicant represents that it is properly classified for Federal 
income tax purposes as multiple partnerships or corporations, then (1) 
it may submit a single application on behalf of the entire series of 
funds, and each fund must meet the Primary Mission Test and the 
Accountability Test; and (2) it may transfer any NMTC allocation it 
receives to one or more of its funds if the transfer is pre-approved by 
the Fund. Applicants should note, however, that receipt of CDE 
certification as a single entity or as multiple entities is not a 
determination that the applicant and its related funds are properly 
classified as a single entity

[[Page 65810]]

or as multiple entities for Federal income tax purposes.
    (2) Primary Mission Test: To comply with the Primary Mission Test, 
an entity (a) must provide organizational documents that, in the 
opinion of the Fund, clearly evidence a mission of serving or providing 
investment capital for Low-Income Communities or Low-Income Persons; 
and (b) must be able to demonstrate that at least 60 percent of its 
activities are dedicated to serving Low-Income Communities or Low-
Income Persons. An Applicant CDE may meet the Primary Mission Test 
either by directly serving Low-Income Communities or Low-Income Persons 
(e.g., by providing loans to Low-Income Persons or to individuals or 
businesses located in Low-Income Communities), or by indirectly serving 
Low-Income Communities or Low-Income Persons (e.g., by providing loans 
or investments to other entities that will in turn provide assistance 
in Low-Income Communities or assistance to Low-Income Persons). The 
Fund reserves the right to modify or revise the requirements of the 
Primary Mission Test if it determines, in its sole discretion, that an 
Applicant CDE has demonstrated that it meets the Primary Mission Test 
in a manner other than set forth herein, but that meets the intent and 
purpose of IRC section 45D(c)(1)(A).
    (3) Accountability Test: To comply with the Accountability Test, an 
entity must demonstrate that it 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. The Fund 
seeks to encourage, as much as possible, Applicant CDEs to appoint some 
Low-Income Persons from Low-Income Communities to advisory and/or 
governing boards. In the case of a limited partnership, the 
Accountability Test may be met if residents of Low-Income Communities 
are represented on the governing or advisory board of the entity's 
managing general partner or other controlling entity (such as a 
nonprofit CDFI). For an entity wishing to meet the Accountability Test 
through its governing board, a minimum of 20 percent of the members of 
the governing board must be representative of the Low-Income Community. 
For an entity wishing to meet the Accountability Test through an 
advisory board or boards, a minimum of 20 percent of the members of 
each advisory board must be representative of the Low-Income Community. 
A CDE is not limited in the number of Low-Income Communities that it 
may serve or propose to serve. A CDE that serves multiple geographic 
areas will need to demonstrate that it is accountable to the various 
geographic areas that it serves. The Fund reserves the right to modify 
or revise the requirements of the Accountability Test if it determines, 
in its sole discretion, that an Applicant CDE has demonstrated that it 
meets the Accountability Test in a manner other than set forth herein, 
but that meets the intent and purpose of IRC section 45D(c)(1)(B).

V. Evaluation of CDE Certification Applications

    The Fund will evaluate each CDE Certification Application to 
determine whether the Applicant CDE (and, if appropriate, each of its 
Subsidiaries) meets the eligibility requirements outlined above. Those 
entities that, in the sole determination of the Fund, satisfy the 
certification requirements shall be certified by the Fund as CDEs.

VI. Certification Monitoring

    A CDE certification will continue until it is revoked or terminated 
by the Fund. To maintain its CDE certification, a CDE must attest 
annually (or so often as the Fund may deem necessary) that the CDE 
(and, if appropriate, each of its Subsidiaries) continues to meet the 
Primary Mission Test and the Accountability Test. The Fund reserves the 
right to review and verify said attestation and will revoke or 
terminate the CDE certification if the Fund, in its sole discretion, 
determines that the entity no longer meets CDE certification 
requirements. The Fund may revoke or terminate the CDE certification of 
any entity that receives designation as a CDE based on its status as a 
CDFI or SSBIC if it ceases to be designated as a CDFI or SSBIC.
    A CDE that is awarded a NMTC allocation and/or is a recipient of a 
Qualified Low-Income Community Investment from another CDE that has 
been awarded a NMTC allocation will also be required to demonstrate, on 
an annual basis (or so often as the Fund may deem necessary), that at 
least 60 percent of its activities are directed to Low-Income 
Communities or Low-Income Persons. This is in addition to any other 
reporting requirements imposed by the IRS or the Fund. Such other 
reporting requirements will be described more fully in IRS regulations 
and/or in the NOAA or subsequent guidance to be issued by the Fund.

    Authority: Consolidated Appropriations Act of 2001, Pub. L. 106-
554; 31 U.S.C. 321.

    Dated: December 17, 2001.
Tony T. Brown,
Director, Community Development Financial Institutions Fund.
[FR Doc. 01-31391 Filed 12-19-01; 8:45 am]
BILLING CODE 4810-70-P


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