[Federal Register Volume 73, Number 155 (Monday, August 11, 2008)]
[Proposed Rules]
[Pages 46572-46575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18442]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-149404-07]
RIN 1545-BH34
Amendments to New Markets Tax Credit Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
new markets tax credit under section 45D of the Internal Revenue Code
(Code). The proposed regulations revise and clarify certain rules
relating to recapture of the new markets tax credit and will affect
certain taxpayers claiming the new markets tax credit. This document
also provides a notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by November 10,
2008. Outlines of topics to be discussed at the public hearing
scheduled for December 12, 2008, at 10 a.m. must be received by
November 3, 2008.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-149404-07), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
149404-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-149404-07).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Julie Hanlon-Bolton, (202) 622-7028; concerning submission of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Regina Johnson, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1 to provide and clarify rules
relating to the new markets tax credit under section 45D of the Code.
Section 45D was added to the Code by section 121 of the Community
Renewal Tax Relief Act of 2000, Public Law 106-554 (114 Stat. 2763
(2000)) and amended by section 221 of the American Jobs Creation Act of
2004, Public Law 108-357 (118 Stat. 1418 (2004)), section 101 of the
Gulf Opportunity Zone Act of 2005, Public Law 109-135 (119 Stat. 25
(2005)), and Division A, section 102 of the Tax Relief and Health Care
Act of 2006, Public Law 109-432 (120 Stat. 2922 (2006)). On December
28, 2004, the IRS and the Treasury Department published final
regulations under section 45D (69 FR 77625), with corrections on
January 28, 2005 (70 FR 4012).
Groups and organizations representing investors, qualified
community development entities, businesses, and other entities involved
with the new markets tax credit program have since submitted comments
requesting further guidance on the
[[Page 46573]]
recapture of the credit. The commentators suggested that revising the
final regulations to reduce recapture uncertainty would encourage
investors to bring increased amounts of capital to low-income
communities.
General Overview
Section 45D(a)(1) provides a new markets tax credit on a taxpayer's
qualified equity investment (QEI) in a qualified community development
entity (CDE). To qualify for the credit, among other requirements,
substantially all of the taxpayer's cash must be used by the CDE to
make qualified low-income community investments (QLICIs) pursuant to
section 45D(b)(1)(B).
A CDE is any domestic corporation or partnership if, among other
requirements, the primary mission of the entity is serving, or
providing investment capital for, low-income communities or low-income
persons pursuant to section 45D(c)(1). Section 45D(d)(1) provides that
a QLICI is: (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 the entity that 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, any CDE. A QALICB is any corporation
or partnership in which at least 50 percent of the total gross income
of the entity is derived from the active conduct of a qualified
business within any low-income community, provided certain other
requirements are met pursuant to section 45D(d)(2).
Section 45D(g)(1) provides that, if there is a recapture event at
any time during the 7-year period beginning on the date of the original
issue of a QEI in a CDE, then the tax imposed by this chapter for the
taxable year in which the event occurs must be increased by the credit
recapture amount. Section 45D(g)(3) provides that a recapture event
occurs with respect to an equity investment in a CDE if (A) such entity
ceases to be a CDE, (B) the proceeds of the investment cease to be used
to make QLICIs as required by section 45D(b)(1)(B), or (C) the QEI is
redeemed by the CDE.
Explanation of Provisions
Redemption Safe Harbor for Partnership CDEs
Section 1.45D-1(e)(3)(iii) provides that, in the case of an equity
investment that is a capital interest in a CDE that is a partnership
for Federal tax purposes, a pro rata cash distribution by the CDE to
its partners based on each partner's capital interest in the CDE during
the taxable year will not be treated as a redemption for purposes of
Sec. 1.45D-1(e)(2)(iii) if the distribution does not exceed the CDE's
operating income for the taxable year. In addition, a non-pro rata de
minimis cash distribution by a CDE to a partner or partners during the
taxable year will not be treated as a redemption provided the
distribution does not exceed the lesser of 5 percent of the CDE's
operating income for that taxable year or 10 percent of the partner's
capital interest in the CDE.
Commentators expressed the concern that a CDE may not be able to
calculate its operating income in time to make a distribution during
the taxable year. Because most CDEs will make a low estimate of
operating income in order to lessen the risk of not satisfying the
requirements of the redemption safe harbor, many CDEs may not
distribute the entire amount of operating income during the taxable
year. In response to this concern, the proposed regulations provide
that, in the case of an equity investment that is a capital interest in
a CDE that is a partnership for Federal tax purposes, a pro rata cash
distribution by the CDE to its partners based on each partner's capital
interest in the CDE during the taxable year will not be treated as a
redemption for purposes of Sec. 1.45D-1(e)(2)(iii) if the distribution
does not exceed the sum of the CDE's operating income for the taxable
year and the CDE's undistributed operating income (if any) for the
prior taxable year.
Additionally, for purposes of the redemption safe harbor for
partnership CDEs, Sec. 1.45D-1(e)(3)(iii) defines operating income as
the sum of (A) the CDE's taxable income as determined under section 703
(except that (1) the items described in section 703(a)(1) shall be
aggregated with the non-separately stated tax items of the partnership;
and (2) any gain resulting from the sale of a capital asset under
section 1221(a) or section 1231 property shall not be included in
taxable income); (B) deductions under section 165 (but only to the
extent the losses were realized from QLICIs under Sec. 1.45D-1(d)(1));
(C) deductions under sections 167 and 168 (including the additional
first-year depreciation under section 168(k)); (D) start-up
expenditures amortized under section 195; and (E) organizational
expenses amortized under section 709. The proposed regulations add tax-
exempt income under section 103 and any other depreciation and
amortization deductions under the Code to the list of Code sections
that determine the amount of operating income.
Commentators have indicated that some CDEs are adding their
distributive share of the deductions listed in Sec. 1.45D-1(e)(3)(iii)
from another partnership to the CDE's calculation of operating income.
For example, some CDEs are adding their distributive share of the
amortization and depreciation deductions under sections 167 and 168
from another partnership to the CDE's calculation of operating income.
The proposed regulations clarify that a CDE may rely on Sec. 1.704-
1(b)(1)(vii) to determine its allocable share of the deductions listed
in Sec. 1.45D-1(e)(3)(iii) from another partnership to the CDE's
calculation of its operating income. Therefore, Sec. 1.704-
1(b)(1)(vii) applies to treat an allocation to a partner of its share
of partnership net or ``bottom line'' taxable income or loss as an
allocation to such partner of the same share of each item of income,
gain, loss, and deduction that is taken into account in computing the
partner's net or ``bottom line'' taxable income or loss.
Termination of a Partnership CDE Under Section 708(b)(1)(B)
Under section 708(b)(1)(B), a partnership is considered as
terminated if within a twelve-month period there is a sale or exchange
of 50 percent or more of the total interest in partnership capital and
profits. Section 1.708-1(b)(4) provides, in part, that if a partnership
is terminated by a sale or exchange of an interest, the following is
deemed to occur: The partnership contributes all of its assets and
liabilities to a new partnership in exchange for an interest in the new
partnership; and, immediately thereafter, the terminated partnership
distributes interests in the new partnership to the purchasing partner
and the other remaining partners in proportion to their respective
interests in the terminated partnership in liquidation of the
terminated partnership, either for the continuation of the business by
the new partnership or for its dissolution and winding up.
If the terminating partnership is a CDE, because of the deemed
distribution of interests in that new partnership to the purchasing
partner and the other remaining partners, a recapture event may be
triggered under section 45D(g)(3)(C) and Sec. 1.45D-1(e)(2)(iii).
However, because the sale of a QEI is not a recapture event under
section 45D(g)(3) and because the remaining partner or partners are not
being cashed out, the IRS and the Treasury Department do not believe
that the sale
[[Page 46574]]
of a QEI that causes the termination of a CDE partnership under section
708(b)(1)(B) should trigger recapture. Accordingly, the proposed
regulations provide that a termination under section 708(b)(1)(B) of a
CDE partnership is not a recapture event.
Reasonable Expectations
Section 1.45D-1(d)(6)(i) provides that an entity is generally
treated as a QALICB 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 QALICB under Sec. 1.45D-
1(d)(4)(i) throughout the entire period of the investment or loan.
The proposed regulations clarify how the reasonable expectations
rule of Sec. 1.45D-1(d)(6)(i) applies when a CDE makes an investment
in or loan to another CDE. The proposed regulations provide that a CDE
may rely on Sec. 1.45D-1(d)(6)(i) to treat an entity as a QALICB even
if the CDE's investment in or loan to the entity is made through other
CDEs under Sec. 1.45D-1(d)(1)(iv)(A).
Commentators indicated that some CDEs are unsure whether they may
rely on Sec. 1.45D-1(d)(6)(i) if their investments involve the
portions of business rule under section 45D(d)(2)(C), the rental to
others of real property under sections 45D(d)(3)(A), and the exclusions
from the definition of a qualified business under Sec. 1.45D-
1(d)(5)(iii). Section 1.45D-1(d)(6)(i) already applies to all of these
rules in determining whether an entity meets the requirements to be a
QALICB under Sec. 1.45D-1(d)(4)(i). Nevertheless, the proposed
regulations clarify that CDEs may rely on these rules when applying
Sec. 1.45D-1(d)(6)(i).
Proposed Effective Date
The rules contained in these regulations are proposed to apply to
taxable years ending on or after the date of publication of the
Treasury decision adopting these rules as final regulations in the
Federal Register.
Request for Comments
The IRS and the Treasury Department invite taxpayers to submit
comments on issues relating to this notice of proposed rulemaking. In
particular, the IRS and the Treasury Department encourage taxpayers to
submit comments on how to define, under Sec. 1.45D-1(d)(2)(i), the
dollar amounts received by a CDE ``in payment of, or for, capital,
equity, or principal'' that are set aside either for financial
counseling and other services, for an equity investment, or as
principal received on a loan. Section 1.45D-1(d)(2)(i) provides that
such amounts must be reinvested by the CDE in a QLICI no later than
twelve months from the date of receipt to be treated as continuously
invested in a QLICI. Commentators suggested defining amounts received
``in payment of, or for, capital, equity, or principal'' by using the
same rules and redemption safe harbor in Sec. 1.45D-1(e)(3), which
defines when an investment is redeemed or otherwise cashed out by a
CDE. The proposed regulations do not adopt this suggestion. The IRS and
the Treasury Department believe this approach may be inappropriate
because redeeming one dollar of an equity investment is a recapture
event under section 45D(g)(3)(C), while failing to reinvest one dollar
in a QLICI under Sec. 1.45D-1(d)(2)(i) lowers the dollar amount
treated as meeting the substantially-all requirement by one dollar.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. Comments are requested on all aspects of the proposed
regulations. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for December 12, 2008,
beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments by November 10, 2008. Outline of the topics to be
discussed and the time to be devoted to each topic (a signed original
and eight (8) copies) by November 3, 2008. A period of 10 minutes will
be allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these regulations is Julie Hanlon-Bolton
with the Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.45D-1 is amended by:
1. Redesignating the paragraph (a) entries for paragraphs (e)(4),
(e)(5), (e)(6), and (e)(7) as paragraphs (e)(5), (e)(6), (e)(7), and
(e)(8), respectively, adding a new entry for paragraph (e)(4), and
revising the entry for paragraph (h)(2).
3. Revising paragraph (d)(6)(i).
4. Revising paragraph (e)(3)(iii) introductory text.
5. Redesignating paragraphs (e)(3)(iii)(B), (e)(3)(iii)(C),
(e)(3)(iii)(D), and (e)(3)(iii)(E) as paragraphs (e)(3)(iii)(C),
(e)(3)(iii)(D), (e)(3)(iii)(E), and (e)(3)(iii)(F), respectively, and
adding new paragraph (e)(3)(iii)(B).
6. Revising newly-designated paragraph (e)(3)(iii)(D).
7. Redesignating paragraphs (e)(4), (e)(5), (e)(6), and (e)(7) as
paragraphs
[[Page 46575]]
(e)(5), (e)(6), (e)(7), and (e)(8), respectively, and adding new
paragraph (e)(4).
8. Revising the heading for paragraph (h)(2) and adding a sentence
at the end of the paragraph.
The additions and revisions read as follows:
Sec. 1.45D-1 New markets tax credit.
(a) * * *
(e) * * *
(4) Section 708(b)(1)(B) termination.
* * * * *
(h) * * *
(2) Exception for certain provisions.
* * * * *
(d) * * *
(6) * * *
(i) * * * 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 qualified community
development entity's (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 paragraphs (d)(4)(i) and (d)(5) of this section (including, if
applicable, portions of business under paragraph (d)(4)(iii) of this
section) throughout the entire period of the investment or loan. A CDE
may rely on this paragraph (d)(6)(i) to treat an entity as a qualified
active low-income community business even if the CDE's investment in or
loan to the entity is made through other CDEs under paragraph
(d)(1)(iv)(A) of this section.
(e) * * *
(3) * * *
(iii) Capital interest in a partnership. In the case of an equity
investment that is a capital interest in a CDE that is a partnership
for Federal tax purposes, a pro rata cash distribution by the CDE to
its partners based on each partner's capital interest in the CDE during
the taxable year will not be treated as a redemption for purposes of
paragraph (e)(2)(iii) of this section if the distribution does not
exceed the sum of the CDE's ``operating income'' for the taxable year
and the CDE's undistributed ``operating income'' (if any) for the prior
taxable year. For purposes of this paragraph (e)(3)(iii), Sec. 1.704-
1(b)(1)(vii) applies to treat an allocation to a partner of its share
of partnership net or ``bottom line'' taxable income or loss as an
allocation to such partner of the same share of each item of income,
gain, loss, and deduction that is taken into account in computing the
partner's net or ``bottom line'' taxable income or loss. In addition, a
non-pro rata ``de minimis'' cash distribution by a CDE to a partner or
partners during the taxable year will not be treated as a redemption. A
non-pro rata ``de minimis'' cash distribution may not exceed the lesser
of 5 percent of the CDE's ``operating income'' for that taxable year or
10 percent of the partner's capital interest in the CDE. For purposes
of this paragraph (e)(3)(iii), with respect to any taxable year,
``operating income'' is the sum of:
* * * * *
(B) Tax-exempt income under section 103;
* * * * *
(D) Deductions under sections 167 and 168, including the additional
first-year depreciation under section 168(k), and any other
depreciation and amortization deductions under the Code;
* * * * *
(e) * * *
(4) Section 708(b)(1)(B) termination. A termination under section
708(b)(1)(B) of a CDE that is a partnership is not a recapture event.
* * * * *
(h) * * *
(2) Exception for certain provisions. * * * Paragraph (d)(6)(i) of
this section as it relates to a CDE's investment under paragraph
(d)(1)(iv)(A), paragraph (e)(3)(iii) of this section as it relates to
the distribution of undistributed ``operating income'' for the prior
taxable year and to the application of Sec. 1.704-1(b)(1)(vii),
paragraph (e)(3)(iii)(B) of this section, paragraph (e)(3)(iii)(D) of
this section as it relates to any other depreciation and amortization
deductions under the Code, and paragraph (e)(4) of this section apply
to taxable years ending on or after the date of publication of the
Treasury decision adopting these rules as final regulation in the
Federal Register.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-18442 Filed 8-8-08; 8:45 am]
BILLING CODE 4830-01-P