Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations 66307

Actions Addressing Main Deck Cargo 9g

Crash Barrier

(h) For airplanes that have been converted

from a passenger- to a cargo-carrying

(‘‘freighter’’) configuration in accordance

with STC SA1377SO: Within 3 years or 4,000

flight cycles after the effective date of this

AD, whichever occurs first, install a main

deck cargo 9g crash barrier that complies

with the applicable requirements of CAR part

4b, in accordance with a method approved by

the Manager, Los Angeles ACO.

Alternative Methods of Compliance

(i) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager, Los

Angeles ACO, FAA. Operators shall submit

their requests through an appropriate FAA

Principal Maintenance Inspector, who may

add comments and then send it to the

Manager, Los Angeles ACO.

Note 3: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Los Angeles ACO.

Special Flight Permit

(j) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

Effective Date

(k) This amendment becomes effective on

January 30, 2002.

Issued in Renton, Washington, on

December 13, 2001.

Kalene C. Yanamura,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 01–31550 Filed 12–21–01; 8:45 am]

BILLING CODE 4910–13–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8971]

RIN 1545–BA49

New Markets Tax Credit

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations that provide

guidance for taxpayers claiming the new

markets tax credit under section 45D. 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. The text of these temporary

regulations also serves as the text of the

proposed regulations set forth in the

notice of proposed rulemaking on this

subject in REG–119436–01 published

elsewhere in this issue of the Federal

Register.

DATES: Effective Date: These regulations

are effective December 26, 2001.

Date of Applicability: For date of

applicability of § 1.45D–1T, see § 1.45D–

1T(h).

FOR FURTHER INFORMATION CONTACT: Paul

Handleman, (202) 622–3040.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued

without prior notice and public

procedure pursuant to the

Administrative Procedure Act (5 U.S.C.

553). For this reason, the collections of

information contained in these

regulations have been reviewed and,

pending receipt and evaluation of

public comments, approved by the

Office of Management and Budget under

control number 1545–1765. Responses

to these collections of information are

mandatory.

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 OMB control number.

For further information concerning

these collections of information, and

where to submit comments on the

collections of information and the

accuracy of the estimated burden, and

suggestions for reducing this burden,

please refer to the preamble to the crossreferencing notice of proposed

rulemaking published in the Proposed

Rules section of this issue of the Federal

Register.

Books or records relating to a

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 contains temporary

regulations relating to the new markets

tax credit under section 45D of the

Internal Revenue Code (Code). This

provision 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 (CDFI Fund).

On May 1, 2001, the IRS published an

advance notice of proposed rulemaking

in the Federal Register (66 FR 21844)

inviting comments relating to tax issues

arising under section 45D. Numerous

comments have been received. The IRS

and Treasury Department have reviewed

and considered all the comments in the

process of preparing this Treasury

decision. This preamble to the

temporary regulations describes many,

but not all, of the comments received by

the IRS.

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.

66308 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations

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

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.

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. Most commentators

suggest that the substantially-all test

should require that at least 85 percent

of the taxpayer’s cash be committed to,

or invested in, qualified low-income

community investments. Some

commentators propose that in order to

provide CDEs with financial flexibility

in managing their investments, the

percentage should be reduced for the

later years of the 7-year credit period.

The temporary regulations adopt the

suggestion to define substantially all as

85 percent or more and reduce the

substantially-all percentage to 75

percent for the seventh year of the 7-

year credit period.

Some commentators suggest that a

CDE’s costs of obtaining equity

investments in the CDE (such as

underwriters’ fees and broker fees) and

the CDE’s overhead expenses (such as

staff salaries) should count toward

satisfying the substantially-all

requirement. Some commentators

suggest that reserves maintained by the

CDE of up to 10 percent of the

taxpayer’s cash investment in the CDE

should count toward satisfying the

substantially-all requirement. The

temporary regulations do not include

issuance costs or CDE overhead

expenses as counting toward the

substantially-all requirement. However,

the temporary regulations provide that

reserves (but not in excess of 5 percent

of the taxpayer’s cash investment) for

loan losses and for additional

investments in existing qualified lowincome community investments are

treated as invested in a qualified lowincome community investment.

Several commentators suggest that, for

purposes of the ‘‘85 percent of the

aggregate gross assets’’ safe harbor,

aggregate gross assets should be

determined according to cost basis and

not, for example, fair market value. The

temporary regulations adopt this

suggestion. Cost basis is defined under

the temporary regulations as cost basis

under section 1012.

Commentators propose that a CDE

should have from 12 months to 5 years

to invest the cash from a qualified

equity investment in a qualified lowincome community investment,

depending upon the type of investment.

The temporary regulations adopt a 12-

month period for investing the

taxpayer’s cash investment.

Commentators propose that

repayments to a CDE of equity or

principal from qualified low-income

community investments should have to

be reinvested by the CDE within 12

months, but that no reinvestment

should be required in the sixth and

seventh years of the 7-year credit

period. One commentator proposes that

reinvestment should be encouraged, but

not required. Another commentator

would limit the time period to 45 days

for identifying the investment and 180

days for making the investment. The

temporary regulations adopt the

suggestion that repayment amounts

reinvested within 12 months are treated

as continuously invested in qualified

low-income community investments. In

addition, repayments received in the

seventh year of the 7-year credit period

are not required to be reinvested.

Qualified Active Low-Income

Community Businesses

As indicated above, qualified lowincome community investments include

any capital or equity investment in, or

loan to, any qualified active low-income

community business. A business is a

qualified active low-income community

business only if, among other things: (1)

At least 50 percent of the total gross

income of the business is derived from

the active conduct of a qualified

business within any low-income

community; (2) a substantial portion of

the use of the tangible property of the

business is within any low-income

community; and (3) a substantial

portion of the services performed for the

business by its employees is performed

in any low-income community.

Commentators propose that, to satisfy

the ‘‘50 percent of the total gross income

* * * derived from the active conduct’’

requirement (50-percent requirement) in

the case of a manufacturing business, 50

percent of production, but not sales,

should have to occur within a lowincome community. For a services

business, commentators recommend a

requirement that at least 50 percent of

the services be provided by employees

of offices in low-income communities

even if the services are provided

elsewhere. One commentator suggests

that the 50-percent requirement should

be deemed met if the business is located

in the low-income community and most

of the employees are residents of the

low-income community. Another

commentator suggests that the

requirement should be satisfied if 50

percent of the total gross income is

derived from: (1) The operation of, or

production at, a facility located in a

low-income community; (2) most of the

employees are based at such a facility;

and (3) the management is located

within the low-income community.

For purposes of the tangible property

and services performed requirements,

recommendations for the percentage

that should constitute a substantial

portion range from 20 percent to 50

percent. Alternatively, some

commentators propose that the tangible

property and services performed

requirements should be satisfied if the

business satisfies one of the following:

(1) The business is located in a qualified

area; (2) the business operates a major

facility in a qualified area; (3) the

business’ primary business activity

takes place in a qualified area; or (4) the

business’ primary mission is working

with people in qualified areas.

For purposes of the tangible property

and services performed requirements,

the temporary regulations define a

substantial portion as 40 percent. In

addition, the temporary regulations

provide that the 50-percent requirement

is deemed to be satisfied if the entity

meets the requirements of either the

tangible property test or the services

performed test, if 50 percent is

substituted for 40 percent. Further, the

entity may satisfy the 50-percent

requirement based on all the facts and

circumstances.

Commentators propose that for

purposes of determining when a trade or

business constitutes a qualified active

Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations 66309

low-income community business, an

entity should qualify as a qualified

active low-income community business

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

throughout the entire period of the

investment or loan. This proposal has

been adopted in the temporary

regulations, except in the case where the

CDE controls the entity.

If the CDE controls the entity at any

time during the 7-year credit period, the

reasonable expectation test does not

apply and the entity must be a qualified

active low-income community business

during the entire period the CDE

controls the entity. Commentators

suggest that control for this purpose

should be defined as at least 50 percent

of voting power. Some commentators

suggest that control should be

determined based on whether the CDE

is related to the entity within the

meaning of sections 267(b) or 707(b)(1).

The temporary regulations define

control with respect to an entity as

direct or indirect ownership (based on

value) or control (based on voting or

management rights) of 33 percent or

more of the entity. However, a CDE does

not control an entity if an unrelated

person possesses greater control over

the entity than the CDE.

Financial Counseling and Other

Services

Commentators suggest that the

definition of financial counseling and

other services should include services

for identifying CDE investment

opportunities; preparing business

owners to use financial products;

underwriting loans and investments;

helping business owners create viable

business plans; and, after loans and

investments are made, enhancing

business planning, marketing,

management, and financial skills of

business owners and serving on their

boards of directors. The temporary

regulations define financial counseling

and other services as advice provided by

the CDE relating to the organization or

operation of a trade or business that is

provided to a qualified active lowincome community business or to

residents of a low-income community.

Investments in Other CDEs

Commentators propose that, for

purposes of the substantially-all

requirement, tracing should not be

required when a CDE invests in another

CDE, but other mechanisms should be

required (for example, decertifying the

recipient CDE if it does not use funds

properly). Alternatively, commentators

propose tracing at the recipient CDE

level, but minimizing the reporting and

recapture burdens for the recipient

CDEs. Some commentators suggest that

the recipient CDE should have the same

restrictions placed on it as the investing

CDE. The temporary regulations provide

that an equity investment in, or loan to,

another CDE is a qualified low-income

community investment only to the

extent that the recipient CDE uses the

proceeds: (1) For either an investment

in, or a loan to, a qualified active lowincome community business, or

financial counseling and other services;

and (2) in a manner that would

constitute a qualified low-income

community investment if it were made

directly by the CDE making the equity

investment or loan.

Recapture

A recapture event requiring an

investor to recapture credits previously

taken may occur 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 lowincome community investments; or (3)

redeems the investor’s equity

investment. Commentators suggest that

a CDE should be permitted to take

remedial actions to avoid recapture. The

temporary regulations adopt this

suggestion by providing a CDE the

opportunity to request a waiver of a

requirement or an extension of time to

meet a deadline contained in the

temporary regulations if such waiver or

extension does not materially frustrate

the purposes of section 45D and the

regulations thereunder. A CDE that

believes it has good cause for a waiver

or an extension may request relief from

the Commissioner in a ruling request. In

considering such a ruling request, the

Commissioner may consult with the

CDFI Fund in a manner consistent with

section 6103. The granting of a waiver

or an extension may require adjustments

of the CDE’s requirements under section

45D and the regulations thereunder as

may be appropriate.

Other Federal Tax Benefits

The Treasury Department is

authorized to 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). Commentators suggest that

a CDE should not be permitted to use

the proceeds of a qualified equity

investment to purchase tax-exempt

bonds. However, the same

commentators state that there should be

no restriction on the receipt of taxexempt bond proceeds by a qualified

active low-income community business.

The temporary regulations do not

prohibit a CDE from purchasing taxexempt bonds because tax-exempt

financing provides a subsidy to

borrowers and not bondholders.

Moreover, a loan by a CDE directly to

a qualified active low-income

community business cannot be a taxexempt bond because the loan is not an

obligation of a state or local government.

Because the rental to others of

residential rental property cannot be a

qualified active low-income community

business, a taxpayer cannot receive the

low-income housing tax credit and new

markets tax credit on the same

investment. Although the temporary

regulations do not provide specific rules

on double tax benefit issues, the IRS and

the Treasury Department request

additional comments on what Federal

tax benefits should limit the new

markets tax credit.

Reporting Requirements

The Treasury Department is

authorized to prescribe regulations that

impose appropriate reporting

requirements for the new markets tax

credit. Commentators suggest that the

information reporting to the Treasury

Department should be undertaken on an

annual basis and that CDEs should be

required to provide the following

information: Financial statements, a list

of investors and closing and

commitment dates, a list of eligible

investments, terms of investments and

location of investments, information on

loan loss or investments reserves, and

information on financial counseling and

other services.

The reporting requirements in the

temporary regulations require a CDE to

provide notice: (1) 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; and

(2) in the case of a recapture event, to

each holder of an equity investment,

including all prior holders of that

investment, that a recapture event has

occurred. CDEs must comply with such

reporting requirements to the Secretary

as the Secretary may prescribe.

Taxpayers may claim the new markets

tax credit by completing Form 8874,

‘‘New Markets Credit,’’ and by filing the

form with the taxpayer’s Federal income

tax return.

66310 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations

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

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, these

temporary regulations will be 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.

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 is amended by adding an entry

in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.45D–1T also issued under

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

Par. 2. Section 1.45D–1T is added to

read as follows:

§ 1.45D–1T New markets tax credit.

(a) Table of contents. This paragraph

lists the headings that appear in

§ 1.45D–1T.

(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) Exception.

(iii) 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.

(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.

(iii) Financial counseling and other services.

(iv) Investments in other CDEs.

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

principal.

(i) In general.

(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.

(C) Services performed.

(D) Collectibles.

(E) Nonqualified financial property.

(ii) Proprietorships.

(iii) Portions of business.

(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.

(7) Financial counseling and other services.

(e) Recapture.

(1) In general.

(2) Recapture event.

(3) Bankruptcy.

(4) Waiver of requirement or extension of

time.

(i) In general.

(ii) Manner for requesting a waiver or

extension.

(iii) Terms and conditions.

(5) 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.

(h) Effective date.

(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

Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations 66311

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) Exception. 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) The equity investment is made on

or after April 20, 2001;

(B) The entity in which the equity

investment is made is certified by the

Secretary as a CDE under section 45D(c)

before January 1, 2003;

(C) The entity in which the equity

investment is made receives notification

of the credit allocation (with the actual

receipt of such credit allocation

contingent upon subsequently entering

into an allocation agreement) from the

Secretary before January 1, 2003; and

(D) The equity investment otherwise

satisfies the requirements of section 45D

and this section.

(iii) 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. The substantially-all

requirement is treated as satisfied for an

annual period 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 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 no

later than 12 months after 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).

(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).

66312 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations

(ii) Purchase of certain loans from

CDEs. The purchase 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 lowincome community investment. A loan

purchased from another CDE is a

qualified low-income community

investment if it qualifies as such

either—

(A) At the time the selling CDE made

the loan; or

(B) At the time the loan is purchased

from the selling CDE.

(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. Any

equity investment in, or loan to, any

CDE, but only to the extent that the CDE

in which the equity investment or loan

is made uses the proceeds of the

investment or loan in a manner—

(A) That is described in paragraphs

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

(B) That would constitute a qualified

low-income community investment if it

were made directly by the CDE making

such equity investment or loan.

(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.

(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

corporation (including a nonprofit

corporation) or a partnership, if the

requirements in paragraphs (d)(4)(i)(A),

(B), (C), (D), and (E) of this section are

met.

(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.

(B) Use of tangible property. 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.

Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations 66313

(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.

(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.

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)). Because

the definition of nonqualified financial

property in section 1397C(e) 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 low-income community

business.

(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 CDE may

treat any trade or business as a qualified

active low-income community business

if the trade or business would meet the

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

this section if the trade or business were

separately incorporated.

(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.

(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. Generally,

control means, with respect to an entity,

direct or indirect ownership (based on

value) or control (based on voting or

management rights) of 33 percent or

more of the entity. However, a CDE does

not control an entity if an unrelated

person possesses greater control over

the entity than the CDE.

(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.

(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 by

the CDE.

(3) Bankruptcy. Bankruptcy of a CDE

is not a recapture event.

(4) 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. 2001–1 (2001–1 I.R.B. 1) (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

under section 45D and this section as

may be appropriate.

(5) 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

66314 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Rules and Regulations

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.

(h) Effective date. This section applies

on or after December 26, 2001.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. 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–1T .................................. 1545–1765

CFR part or section where

identified and described

Current

OMB control

No.

*****

Approved: December 17, 2001.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Mark Weinberger,

Assistant Secretary of the Treasury.

[FR Doc. 01–31528 Filed 12–21–01; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 917

[KY–221–FOR]

Kentucky Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Final rule.

SUMMARY: OSM is approving an

amendment to the Kentucky regulatory

program (Kentucky program) under the

Surface Mining Control and

Reclamation Act of 1977 (SMCRA).

Kentucky is proposing revisions to the

Kentucky Administrative Regulations

(KAR) pertaining to the general

requirements for performance bonds

and liability insurance. Kentucky

intends to revise its program to be

consistent with the corresponding

Federal regulations.

EFFECTIVE DATE: December 26, 2001.

FOR FURTHER INFORMATION CONTACT:

William J. Kovacic, Field Office

Director, Lexington Field Office, 2675

Regency Road, Lexington, Kentucky

40503. Telephone: (859) 260–8400.

Internet address: bkovacic@osmre.gov.

SUPPLEMENTARY INFORMATION:

I. Background on the Kentucky Program

II. Submission of the Amendment

III. Director’s Findings

IV. Summary and Disposition of Comments

V. Director’s Decision

VI. Procedural Determinations

I. Background on the Kentucky

Program

Section 503(a) of SMCRA permits a

State to assume primacy for the

regulation of surface coal mining and

reclamation operations on non-Federal

and non-Indian lands within its borders

by demonstrating that its State program

includes, among other things, ‘‘a State

law which provides for the regulation of