[Federal Register Volume 70, Number 99 (Tuesday, May 24, 2005)]
[Proposed Rules]
[Pages 29658-29660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10223]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed 
Rules

[[Page 29658]]



DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund

12 CFR Chapter XVIII


New Markets Tax Credit Program

AGENCY: Community Development Financial Institutions Fund, Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: This document provides advance notice of proposed rulemaking 
for the issuance of regulations relating to the New Markets Tax Credit 
(NMTC) Program as authorized by 26 U.S.C. 45D. This document invites 
comments from the public on certain issues regarding the designation of 
low-income communities for purposes of the NMTC Program. All materials 
submitted will be available for public inspection and copying.

DATES: All comments and submissions must be received by July 8, 2005.

ADDRESSES: Comments should be sent by mail to: NMTC Program Manager, 
Community Development Financial Institutions Fund, U.S. Department of 
the Treasury, 601 13th Street, NW., Suite 200 South, Washington, DC 
20005; by e-mail to [email protected]; or by facsimile at (202) 
622-7754. This is not a toll free number.

FOR FURTHER INFORMATION CONTACT: Matthew Josephs, (202) 622-9254. 
Information regarding the Community Development Financial Institutions 
(CDFI) Fund and its programs may be downloaded from the CDFI Fund's Web 
site at http://www.cdfifund.gov.

SUPPLEMENTARY INFORMATION: Section 121(a) of the Community Renewal Tax 
Relief Act of 2000 (Pub. L. 106-554), enacted on December 21, 2000, 
amended the Internal Revenue Code (IRC) by adding IRC section 45D, New 
Markets Tax Credit. The New Markets Tax Credit (NMTC) is a credit 
against Federal income taxes provided to taxpayers that make qualified 
equity investments in qualified Community Development Entities (CDEs). 
The credit provided to the taxpayer totals 39 percent of the cost of 
the investment and is claimed over a seven-year credit period. 
Substantially all of the cash from the taxpayer's qualified equity 
investment must in turn be used by the CDE for making Qualified Low-
Income Community Investments (QLICIs). IRC section 45D(d)(1) defines a 
QLICI as (A) any capital or equity investment in, or loan to, any 
Qualified Active Low-Income Community Business (QALICB); (B) the 
purchase from another CDE of any loan made by such entity which is a 
QLICI; (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, a CDE.
    Under IRC section 45D(c)(1), a CDE is 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 CDFI Fund for purposes of IRC section 45D as 
being a CDE.
    The term Low-Income Community, as defined under IRC section 
45D(e)(1), means any population census tract in which (A) the poverty 
rate is at least 20 percent; or (B)(i) in the case of a tract not 
located within a metropolitan area, the median family income for such 
tract does not exceed 80 percent of statewide (or possessionwide) 
median family income, or (B)(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 (or possessionwide) 
median family income or the metropolitan area median family income.
    Section 221(a) of the American Jobs Creation Act of 2004 (Act) 
(Pub. L. 108-357) amended IRC section 45D(e)(2) to provide that the 
Secretary shall prescribe regulations under which one or more Targeted 
Populations (within the meaning of section 103(20) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. 
4702(20)) may be treated as Low-Income Communities. Such regulations 
are to include procedures for determining which entities are QALICBs 
with respect to such Targeted Populations. Under section 221(c)(1) of 
the Act, the amendment made by section 221(a) of the Act applies to 
designations made by the Secretary after October 22, 2004. Prior to 
amendment by the Act, IRC section 45D(e)(2) provided that the Secretary 
could designate any area within any census tract as a Low-Income 
Community if (A) the boundary of the area was continuous; (B) the area 
would have satisfied the requirements of IRC section 45D(e)(1) if it 
were a census tract; and (C) an inadequate access to investment capital 
existed in such area.
    Section 221(b) of the Act added IRC section 45D(e)(4) which 
provides that a population census tract with a population of less than 
2,000 shall be treated as a Low-Income Community for purposes of IRC 
section 45D if such tract (A) is within an empowerment zone, the 
designation of which is in effect under IRC section 1391; and (B) is 
contiguous to one or more Low-Income Communities (determined without 
regard to IRC section 45D(e)(4)). Under section 221(c)(2) of the Act, 
the amendment made by section 221(b) of the Act applies to investments 
made after October 22, 2004.
    Section 223(a) of the Act added IRC section 45D(e)(5) which 
provides that, in the case of a population census tract located within 
a high migration rural county, the term Low-Income Community includes a 
tract not located within a metropolitan area if the median family 
income for such tract does not exceed 85 percent of the statewide 
median family income. For this purpose, the term ``high migration rural 
county'' means any county which, during the 20-year period ending with 
the year in which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent of the 
population of the county at the beginning of such period. Section 
223(b) of the Act provides that the amendment made by section 223 is in 
effect as if included in the original authorizing legislation for the 
NMTC (section 121(a) of the Community Renewal Tax Relief Act of 2000).
    The CDFI Fund will likely provide additional guidance on its Web 
site (at http://www.cdfifund.gov) indicating

[[Page 29659]]

where interested parties may access the data necessary to determine 
whether certain census tracts qualify under IRC sections 45D(e)(4) and 
(e)(5), but it is not anticipated that further regulations will be 
published with respect to these two provisions.
    The CDFI Fund is publishing this advance notice of proposed 
rulemaking to seek comments from the public with respect to how 
Targeted Populations under IRC section 45D(e)(2) may be treated as 
eligible Low-Income Communities under the NMTC Program. The CDFI Fund 
specifically invites comments from the public on the following issues 
and any other issues related to IRC section 45D(e)(2) for which the 
public believes guidance is particularly needed.
    1. Definition of Targeted Population. The term ``Targeted 
Population,'' as defined in 12 U.S.C. 4702(20), means individuals, or 
an identifiable group of individuals, including an Indian tribe, who 
(A) are low-income persons (Low-Income Targeted Population); or (B) 
otherwise lack adequate access to loans or equity investments (Other 
Targeted Populations). The term ``low-income,'' as defined in 12 U.S.C. 
4702(17), means having an income, adjusted for family size, of not more 
than (A) for metropolitan areas, 80 percent of the area median income; 
and (B) for non-metropolitan areas, the greater of (i) 80 percent of 
the area median income; or (ii) 80 percent of the statewide 
nonmetropolitan area median income. Under the CDFI Program (see 12 CFR 
1805.201(b)(3)(iii) and 69 FR 65250), the CDFI Fund has already 
determined, for purposes of 12 U.S.C. 4702(20), that there exists 
strong evidence that the following groups of individuals lack adequate 
access to loans and equity investments on a national level and 
automatically qualify as Other Targeted Populations: Blacks or African-
Americans; Native Americans or American Indians; and Hispanics or 
Latinos. The CDFI Fund has also determined that there exists strong 
evidence that Alaska Natives residing in Alaska and Native Hawaiians or 
other Pacific Islanders, residing in Hawaii or other Pacific Islands, 
lack adequate access to loans and equity investments and automatically 
qualify as Other Targeted Populations.
    (a) Should these same populations (i.e., Blacks or African 
Americans; Native Americans or American Indians; Hispanics or Latinos; 
Alaska Natives residing in Alaska; and Native Hawaiians or other 
Pacific Islanders residing in Hawaii or other Pacific Islands) 
automatically qualify as Other Targeted Populations for the purposes of 
the NMTC Program? Should any of these identified populations be 
removed, or additional populations be added? If so, what evidence 
(i.e., research, studies) exists to support your position?
    (b) Is it appropriate for the CDFI Fund to designate certain 
populations to automatically qualify as Other Targeted Populations for 
the purposes of the NMTC Program without applying a further test to 
determine whether the person or persons specifically benefiting from a 
given NMTC transaction in fact lack adequate access to loans and equity 
investments?
    (c) Assuming the CDFI Fund does designate certain populations to 
automatically qualify as Other Targeted Populations, should the CDFI 
Fund permit CDE applicants to request that the CDFI Fund designate 
additional populations as Other Targeted Populations? If so, what 
evidence should an applicant be required to provide to demonstrate the 
population lacks adequate access to loans and equity investments?
    2. CDE Certification. The CDFI Fund's Guidance for Certification of 
Community Development Entities, New Markets Tax Credit Program (66 FR 
65806), provides that an entity may be certified as a CDE under IRC 
section 45D(c)(1) only if, among other things, the entity designates a 
geographic service area and demonstrates that at least 20 percent of 
the membership of its governing board or advisory board is 
representative of the interests of the residents of Low-Income 
Communities in that service area. In general, the CDFI Fund's CDE 
certification guidance provides that the following persons are 
representative of the interests of Low-Income Community residents: 
residents of Low-Income Communities; certain small business owners 
located in Low-Income Communities; representatives or employees of 
community-based organizations operating in Low-Income Communities; 
religious leaders whose congregations are based in Low-Income 
Communities; and employees of governmental agencies or departments that 
principally serve Low-Income Communities.
    (a) Should CDEs wishing to serve Targeted Populations be required 
to identify a geographic service area as part of their CDE 
certification and NMTC Program allocation application materials?
    (b) Should CDEs wishing to serve Targeted Populations be required 
to demonstrate that members of the designated Targeted Population are 
directly represented on their Governing Board or Advisory Board? If the 
CDFI Fund should impose such a requirement, should the minimum 
threshold be 20 percent of the total number of board members, which is 
the percentage currently required in the CDFI Fund's CDE certification 
guidance?
    (c) Assuming that a CDE is interested in serving both a geographic 
Low-Income Community and a Targeted Population, should it be sufficient 
for that CDE to simply demonstrate that 20 percent of its board 
membership is representative of either geographic Low-Income 
Communities or Targeted Populations--or should a CDE be required to 
separately demonstrate that at least 20 percent of its board is 
representative of residents of geographic Low-Income Communities and at 
least 20 percent of its board is representative of members of the 
Targeted Population?
    (d) If a CDE has already been certified by the CDFI Fund but now 
wishes to serve Targeted Populations, how should the CDE be required to 
demonstrate that it is accountable to those Targeted Populations? 
Should the CDE be required to submit new certification materials to the 
Fund?
    3. QALICB Requirements. Under IRC section 45D(d)(2)(A), a QALICB 
means, with respect to any taxable year, any corporation (including a 
nonprofit corporation) or partnership if for such year (i) at least 50 
percent of the total gross income of such entity is derived from the 
active conduct of a qualified business within any Low-Income Community; 
(ii) a substantial portion of the use of the tangible property of such 
entity (whether owned or leased) is within any Low-Income Community; 
(iii) a substantial portion of the services performed for such entity 
by its employees are performed in any Low-Income Community; (iv) less 
than five percent of the average of the aggregate unadjusted bases of 
the property of such entity is attributable to collectibles (as defined 
in IRC section 408(m)(2)) other than collectibles that are held 
primarily for sale to customers in the ordinary course of such 
business; and (v) less than five percent of the average of the 
aggregate unadjusted bases of the property of such entity is 
attributable to nonqualified financial property (as defined in IRC 
section 1397C(e)). Under IRC section 45D(d)(3), with certain 
exceptions, a qualified business is any trade or business. The rental 
to others of real property is a qualified business only if, among other 
requirements, the real property is located in a Low-Income Community.
    (a) As indicated above, IRC section 45D(e)(2) requires that 
regulations be issued to provide procedures for

[[Page 29660]]

determining which entities are QALICBs with respect to Targeted 
Populations. Under what circumstances should an entity be determined to 
be a QALICB with respect to a Targeted Population? For example, should 
the determination be based on whether the owners, employees or 
customers of the entity (or some combination thereof) are members of a 
Targeted Population?
    (b) How should the following requirements apply in determining 
whether an entity is a QALICB with respect to a Targeted Population: 
(1) The requirement of IRC section 45D(d)(2)(A)(i) under which at least 
50 percent of the total gross income of a QALICB must be derived from 
the active conduct of a qualified business within a Low-Income 
Community; (2) the requirement of IRC section 45D(d)(2)(A)(ii) under 
which a substantial portion of the use of the tangible property of a 
QALICB (whether owned or leased) must be within a Low-Income Community; 
(3) the requirement of IRC section 45D(d)(2)(A)(iii) under which a 
substantial portion of the services performed for a QALICB by its 
employees must be performed in a Low-Income Community; and (4) the 
requirement of IRC section 45D(d)(3) under which the rental to others 
of real property is a qualified business only if the real property is 
located in a Low-Income Community?

    Authority: American Jobs Creation Act of 2004, Pub. L. 108-357, 
Consolidated Appropriations Act of 2001, Pub. L. 106-554.

    Dated: May 17, 2005.
Arthur A. Garcia,
Director, Community Development Financial Institutions Fund.
[FR Doc. 05-10223 Filed 5-23-05; 8:45 am]
BILLING CODE 4810-70-P