Targeted Populations Under Section 45D(e)(2), 54990-54997 [E8-22481]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 186 (Wednesday, September 24, 2008)]
[Proposed Rules]
[Pages 54990-54997]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-22481]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-142339-05]
RIN 1545-BE89


Targeted Populations Under Section 45D(e)(2)

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 how an 
entity serving certain targeted populations under section 45D(e)(2) can 
meet the requirements to be a qualified active low-income community 
business. The regulations reflect changes to the law made by the 
American Jobs Creation Act of 2004. The regulations 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 December 23, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for Thursday, January 22, 2009 at 10:00 a.m. must be received 
by Friday, December 26, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-142339-05), 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-
142339-05), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS--REG-142339-05). 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 regulations, Julie 
Hanlon-Bolton, (202) 622-3040; concerning submission of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Funmi Awosika Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 to provide rules relating to 
certain targeted populations under section 45D(e)(2). On May 24, 2005, 
the

[[Page 54991]]

Community Development Financial Institutions (CDFI) Fund published an 
advance notice of proposed rulemaking (ANPRM) (70 FR 29658) to seek 
comments from the public with respect to how targeted populations may 
be treated as eligible low-income communities under section 45D(e)(2). 
In response to the ANPRM, comments were received making various 
suggestions relating to the Treasury Department's definition of the 
term ``targeted populations'' and proposing amendments to the 
requirements to be a qualified active low-income community business 
under Sec.  1.45D-1. On June 30, 2006, the IRS and Treasury Department 
released Notice 2006-60 (2006-29 IRB 82), which announced that Sec.  
1.45D-1 would be amended to provide rules relating to how an entity 
meets the requirements to be a qualified active low-income community 
business when its activities involve certain targeted populations under 
section 45D(e)(2). Taxpayers may rely on Notice 2006-60 until final 
regulations are issued. See Sec.  601.601(d)(2) (ii)(b). The IRS and 
Treasury Department have reviewed and considered all written and 
electronic comments in the process of preparing the proposed 
regulations. This preamble to the proposed regulations describes many 
of the more significant comments received by the IRS and Treasury 
Department in response to the notice.

General Overview

    Section 45D(a)(1) provides a new markets tax credit on certain 
credit allowance dates described in section 45D(a)(3) with respect to a 
qualified equity investment in a qualified community development entity 
(CDE) described in section 45D(c).
    Section 45D(b)(1) provides that an equity investment in a CDE is a 
``qualified equity investment'' if, among other requirements: (A) The 
investment is acquired by the taxpayer at its original issue (directly 
or through an underwriter) solely in exchange for cash; (B) 
substantially all of the cash is used by the CDE to make qualified low-
income community investments; and (C) the investment is designated for 
purposes of section 45D by the CDE.
    Under section 45D(b)(2), the maximum amount of equity investments 
issued by a CDE that may be designated by the CDE as qualified equity 
investments shall not exceed the portion of the new markets tax credit 
limitation set forth in section 45D(f)(1) that is allocated to the CDE 
by the Secretary under section 45D(f)(2).
    Section 45D(c)(1) provides that an entity is a CDE if, among other 
requirements, the entity is certified by the Secretary as a CDE.
    Section 45D(d)(1) provides that the term qualified low-income 
community investment means: (A) any capital or equity investment in, or 
loan to, any qualified active low-income community business (as defined 
in section 45D(d)(2)); (B) the purchase from another CDE of any loan 
made by the entity that is a qualified low-income community investment; 
(C) financial counseling and other services specified in regulations 
prescribed by the Secretary to businesses located in, and residents of, 
low-income communities; and (D) any equity investment in, or loan to, 
any CDE.
    Under section 45D(d)(2), a qualified active low-income community 
business is any corporation (including a nonprofit corporation) or 
partnership if for such year, among other requirements, (i) 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, 
(ii) a substantial portion of the use of the tangible property of the 
entity (whether owned or leased) is within any low-income community, 
and (iii) a substantial portion of the services performed for the 
entity by its employees are performed in any low-income community.
    Under 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.
    Section 221 of the American Jobs Creation Act of 2004 (Pub. L. 108-
357, 118 Stat. 1418) amended 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. The regulations 
shall include procedures for determining which entities are qualified 
active low-income community businesses with respect to those 
populations.
    The term targeted population, as defined in 12 U.S.C. 4702(20) and 
12 CFR 1805.201, means individuals, or an identifiable group of 
individuals, including an Indian tribe, who (A) are low-income persons; 
or (B) otherwise lack adequate access to loans or equity investments. 
Under 12 U.S.C. 4702(17) as interpreted by 12 CFR 1805.104, the term 
low-income means having an income, adjusted for family size, of not 
more than (A) for metropolitan areas, 80 percent of the area median 
family income; and (B) for non-metropolitan areas, the greater of (i) 
80 percent of the area median family income; or (ii) 80 percent of the 
statewide nonmetropolitan area median family income.
    Section 101(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 
109-135, 119 Stat. 2577) added new section 1400M(1), which provides 
that the Gulf Opportunity Zone (GO Zone) is that portion of the 
Hurricane Katrina disaster area determined by the President to warrant 
individual or individual and public assistance from the Federal 
Government under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act (the Act) by reason of Hurricane Katrina.
    Section 1400M(2) provides that the Hurricane Katrina disaster area 
is an area with respect to which a major disaster has been declared by 
the President before September 14, 2005, under section 401 of the Act 
by reason of Hurricane Katrina. After determination by the President 
that a disaster area warrants assistance pursuant to the Act, the 
Federal Emergency Management Agency (FEMA) makes damage assessments. 
The categories for damage assessment in the wake of a hurricane are: 
Flooded area, saturated area, limited damage, moderate damage, 
extensive damage, and catastrophic damage.
    Under section 1400N(m)(1), a CDE shall be eligible for an 
allocation under section 45D(f)(2) of the increase in the new markets 
tax credit limitation described in section 1400N(m)(2) only if a 
significant mission of the CDE is the recovery and redevelopment of the 
GO Zone. Section 1400N(m)(2) provides that the new markets tax credit 
limitation otherwise determined under section 45D(f)(1) shall be 
increased by an amount equal to $300,000,000 for 2005 and 2006 and 
$400,000,000 for 2007, to be allocated among CDEs to make qualified 
low-income community investments within the GO Zone.
    Notice 2006-60 provides rules relating to how an entity meets the 
requirements to be a qualified active low-income community business 
when its activities involve targeted populations. Targeted populations 
that will be treated as a low-income community are defined as 
individuals, or an identifiable group of individuals, including an 
Indian tribe, who are low-income persons or who are individuals who 
otherwise lack adequate access to loans or equity investments. The 
notice provides requirements for qualified active low-income community

[[Page 54992]]

businesses that serve low-income targeted populations and for qualified 
active low-income community businesses that serve the GO Zone Targeted 
Population.

Summary of Comments and Explanation of Provisions

    The proposed amendments to Sec.  1.45D-1 incorporate the guidance 
provided by Notice 2006-60 into the regulations. Unless otherwise 
stated, the existing rules of Sec.  1.45D-1 relating to qualified 
active low-income community businesses apply to businesses serving 
targeted populations. For example, the ``reasonable expectations'' safe 
harbor of Sec.  1.45D-1(d)(6)(i) applies to businesses serving targeted 
populations. That rule allows an entity to be treated as a qualified 
active low-income community business for the duration of the CDE's 
investment if the CDE reasonably expects, at the time the CDE makes the 
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. Except as 
discussed later in this preamble, the rules in these proposed 
regulations are the same as those provided in Notice 2006-60.
    Sections 3.03 and 3.04 of Notice 2006-60 and the proposed 
amendments to Sec.  1.45D-1 include a definition of Targeted 
Populations, determined by the Treasury Department, that further 
defines the terms ``low-income persons'' and ``individuals who 
otherwise lack adequate access to loans or equity investments.''
    Section 3.03(1) of Notice 2006-60 states that an individual shall 
be considered to be low-income if the individual's family income, 
adjusted for family size, is not more than (A) for metropolitan areas, 
80 percent of the area median family income; and (B) for non-
metropolitan areas, the greater of (i) 80 percent of the area median 
family income; or (ii) 80 percent of the statewide nonmetropolitan area 
median family income. A commentator requested guidance on calculating 
the applicable income limitation and calculating the family income. In 
calculating the applicable income limitation, taxpayers must rely on 
the annual estimates of median family income released by the Department 
of Housing and Urban Development (HUD) and may rely on those figures 
until 45 days after HUD releases a new list of income limits, or until 
HUD's effective date for the new list, whichever is later. For example, 
a taxpayer hires on January 1, 2007, a new employee who is a member of 
a four person family. The most recent HUD median family income 
estimates were released on March 19, 2007. In determining whether the 
employee is low-income on January 1, 2008, the taxpayer may rely on the 
2007 HUD median family income estimates for a four person family until 
45 days after HUD releases a new list of income limits, or until HUD's 
effective date for the new list, whichever is later. The income limits 
are computed and listed, according to family size, by HUD for every 
Metropolitan Statistical Area, Primary Metropolitan Statistical Area, 
and nonmetropolitan county of the United States and Puerto Rico. HUD 
also releases income limits for the possessions of Guam and the Virgin 
Islands.
    One commentator suggested that it would be less burdensome for a 
qualified active low-income community businesses to document that an 
individual is low-income for purposes of section 45D(e)(2) if 
individuals who live in a low-income community as defined in section 
45D(e)(1), (3), (4), or (5) were deemed to be low-income for purposes 
of section 45D(e)(2). However, section 45D(e)(2) directly cross 
references targeted populations as defined in 12 U.S.C. 4702(20). The 
term low-income is defined in 12 U.S.C. 4702(17) to mean having an 
income, adjusted for family size, of not more than: For metropolitan 
areas, 80 percent of the area median income; and for nonmetropolitan 
areas, the greater of 80 percent of the area median income or 80 
percent of the statewide nonmetropolitan area median income. 
Accordingly, the Treasury Department is not adopting the commentator's 
suggestion.
    Some commentators suggested stricter requirements for targeted 
populations by increasing the 120-percent-income restriction in section 
3.03(3) of Notice 2006-60 to 150 percent of municipal median income and 
requiring that taxpayers meet all three of the qualified active low-
income community business tests set forth in sections 3.03(2)(a) and 
3.04(3)(a) instead of one of the three. The commentators also suggested 
providing stricter requirements for the definitions of low-income 
persons, low-income communities, and qualified active low-income 
community businesses. The commentators expressed concern that Notice 
2006-60 permits investments beyond low-income communities. Neither 
Notice 2006-60 nor the proposed regulations change the existing rules 
governing low-income communities. Rather, they provide guidance on how 
an entity serving certain targeted populations under section 45D(e)(2) 
can be a qualified active low-income community business. The IRS and 
Treasury Department believe that Notice 2006-60 and the proposed 
regulations appropriately implement Congressional intent to expand new 
market tax credit investments to low-income individuals and individuals 
that otherwise lack adequate access to loans or equity investments by 
treating targeted populations as a low-income community. Congress 
enacted the targeted populations provisions under section 45D(e)(2) to 
expand new markets tax credit investment dollars to other underserved 
areas. Consequently, the proposed regulations do not adopt the 
commentators' suggestions.
    Some commentators believe that the rules in Notice 2006-60 should 
be broadened in scope to allow entities engaged in essential 
governmental functions, such as health care services to the community, 
to be deemed to be a qualified active low-income community business 
serving targeted populations. The IRS and Treasury Department do not 
believe that it is appropriate to provide targeted benefits to 
particular industries. Accordingly, the proposed regulations do not 
adopt this comment.
    Other commentators believe that a non-profit business that is not 
individually owned should be able to satisfy the ownership test if at 
least 25 percent of the business's board is comprised of individuals 
who are low-income or represent a low-income targeted population. 
Another commentator suggested removing the 120-percent-income 
restriction. Concerning the rules for the GO Zone Targeted Population, 
one commentator suggested using parishes rather than census tracts and 
suggested removing or substantially reducing the percentage test for 
the gross income requirement. The proposed regulations do not adopt 
these suggestions because the IRS and Treasury Department believe that 
the guidance provided in Notice 2006-60 generally ensures that the 
businesses receiving qualified low-income community investments serve 
targeted populations for low-income and GO Zone populations. Finally, 
some commentators suggested providing geographic rules for targeted 
populations. Targeted populations is not a geographic concept; it is 
designed to provide a new markets tax credit to investors of qualified 
active low-income community businesses that serve targeted populations. 
Therefore, this comment was not adopted.
    Section 3.03(2) of Notice 2006-60 provides qualified active low-
income community business requirements for

[[Page 54993]]

low-income targeted populations. Several commentators suggested that 
businesses that qualify and participate in other Federal programs 
targeted specifically to low-income individuals and families may use 
such participation as a proxy for meeting the targeted populations 
requirements. The IRS and Treasury Department have not analyzed other 
Federal programs to determine whether they meet the statutory 
requirements under section 45D(e), and it is not certain that programs 
currently meeting the requirements would continue to do so in the 
future. Moreover, the IRS and Treasury Department do not believe it is 
appropriate to exempt certain businesses from meeting the regulatory 
requirements to be a qualified active low-income community business 
based upon participation in other Federal programs, including those 
designed to aid low-income individuals and families, because these 
Federal programs cannot be substituted for the statutory requirements 
under section 45D(e). Therefore, the proposed regulations do not adopt 
this comment.
    One commentator requested that the gross income requirement of 
section 3.03(2)(a)(i) of Notice 2006-60 be amended to include income 
from the provision of services to businesses that serve targeted 
populations. The comment focuses on wholesalers that sell goods to 
retailers that resell to low-income persons. The IRS and Treasury 
Department believe that such a rule would cover too broad a range of 
transactions and would conflict with the goal of ensuring that 
qualified low-income community investment dollars go directly to 
businesses that serve targeted populations. Accordingly, the proposed 
regulations do not adopt this comment.
    Several commentators suggested that additional restrictions should 
be added to the employee requirement under sections 3.03(2)(a)(ii) and 
3.04(3)(a)(ii) of Notice 2006-60. One commentator proposed that the 
employee should be a member of a targeted group as defined by the work 
opportunity tax credit under section 51. Another commentator suggested 
that a business should be able to satisfy the employee test only if the 
business pays a wage that would increase the income of the low-income 
individual being hired. Still another commentator suggested that the 
employee requirement be satisfied only if each $25,000 in tax credit 
allocation results in at least one new job. Although the proposed 
regulations do not incorporate these suggestions at this time, the IRS 
and Treasury Department request comments regarding whether additional 
restrictions should be added to the employee requirement.
    One commentator asked that the guidance provided in section 
3.03(2)(b) of Notice 2006-60 on the determination of whether an 
employee is a low-income person be amended to provide that the 
determination should be made on the later of the date the employee was 
hired or the date the qualified low-income community investment is 
made. The IRS and Treasury Department believe that adopting this 
comment would create undue complexity. In addition, the IRS and 
Treasury Department do not want to provide a rule that may encourage 
employers to keep their employees low-income to be eligible as a 
qualified active low-income community business. Therefore, the proposed 
regulations retain the rule in Notice 2006-60 that the determination of 
whether an employee is a low-income person is made at the time of hire.
    Sections 3.03(3)(a)(iii) and 3.04(4)(a)(iii) of Notice 2006-60 
provide that the 120-percent-income restriction and the 200-percent-
income restriction, respectively, do not apply to an entity located 
within a population census tract with a population of less than 2,000 
if such tract is located in a metropolitan area and more than 75 
percent of the tract is zoned for commercial or industrial use. A 
commentator suggested that to determine whether 75 percent of a 
population census tract is zoned for commercial or industrial use, the 
area of the population census tract should be used. In addition, the 
tract should be considered zoned for commercial or industrial use if 
commercial or industrial use is a permissible zoning use. The IRS and 
Treasury Department agree that these suggestions will help clarify the 
rule. Accordingly, the proposed regulations adopt the commentator's 
suggestions.
    Sections 3.03(3)(b), 3.04(3)(b), and 3.04(4)(b) of Notice 2006-60 
provide tests to determine whether an entity is located in a particular 
census tract. One commentator suggested that the percentages used for 
the use of tangible property test and services performed test be 
increased from 40 percent to 60 percent. The proposed regulations do 
not adopt this comment because the proposed percentages are consistent 
with the qualified active low-income community business requirements 
under Sec.  1.45D-1(d)(4)(i).
    Section 3.03(4) of Notice 2006-60 provides that the rental to 
others of real property for low-income targeted populations that 
otherwise satisfies the requirements to be a qualified business will be 
treated as located in a low-income community if at least 50 percent of 
the entity's total gross income is derived from rentals to individuals 
who are low-income persons and/or to a qualified active low-income 
community business that meets the requirements for low-income targeted 
populations. Section 3.04(5) provides a similar rule for rental of real 
property for the GO Zone Targeted Population. One commentator suggested 
that ``50 percent'' be lowered to ``20 percent'' to mirror the 
definition of non-residential real property for purposes of 
depreciation under section 168. The IRS and Treasury Department believe 
that, for purposes of determining whether a business engaged in the 
rental of real property is located in a low-income community, it is 
more appropriate to adopt rules consistent with the rules governing 
whether an entity is a qualified active low-income community business 
for targeted populations. Therefore, the proposed regulations do not 
adopt the commentator's suggestion.
    The Treasury Department has determined that an individual is 
considered to otherwise lack adequate access to loans or equity 
investments only if the individual was displaced from his or her 
principal residence as a result of Hurricane Katrina and/or the 
individual lost his or her principal source of employment as a result 
of Hurricane Katrina. In order to meet this definition, the 
individual's principal residence or principal source of employment, as 
applicable, must have been located in a population census tract within 
the GO Zone that contains one or more areas designated by FEMA as 
flooded, having sustained extensive damage, or having sustained 
catastrophic damage as a result of Hurricane Katrina. One commentator 
asked how taxpayers would know which population census tracts have 
received the relevant FEMA designations. The CDFI Fund has made this 
information available on its Web site at www.cdfifund.gov.
    Commentators requested that the GO Zone Targeted Population be 
expanded to all census tracts within the GO Zone, rather than limited 
to only those areas designated by FEMA as flooded, having sustained 
extensive damage, or having sustained catastrophic damage as a result 
of Hurricane Katrina. The IRS and Treasury Department believe that for 
purposes of the increase in the limitation under section 1400N(m)(2), 
the new markets tax credit should only be used in the areas that were 
most devastated by Hurricane Katrina or are otherwise qualified as low-
income communities. The IRS and Treasury Department believe that the 
areas that were most devastated by Hurricane

[[Page 54994]]

Katrina are in greater need of assistance, due to lack of adequate 
access to loans or equity investments, than other areas within the GO 
Zone.
    Commentators requested that the proposed regulations not limit use 
of the rules governing the GO Zone Targeted Population to investments 
made by CDEs with allocations from the increase under section 
1400N(m)(2). The IRS and Treasury Department do not believe that it is 
appropriate to expand the ability to use the rules governing the GO 
Zone Targeted Population beyond investments made by CDEs with GO Zone 
allocations, because it would remove much needed assistance from other 
low-income communities within the GO Zone.
    Section 1.45D-1(d)(4)(iv)(A) provides that for purposes of Sec.  
1.45D-1(d)(4)(i), an entity will be treated as engaged in the active 
conduct of a trade or business if, at the time the CDE makes a capital 
or equity investment in, or loan to, the entity, the CDE reasonably 
expects that the entity will generate revenues (or, in the case of a 
nonprofit corporation, engage in an activity that furthers its purpose 
as a nonprofit corporation) within 3 years after the date the 
investment or loan is made. This ``active conduct of a trade or 
business'' safe harbor applies only for purposes of determining whether 
an entity is engaged in the active conduct of a trade or business and 
does not apply for purposes of determining whether an entity is 
otherwise a qualified active low-income community business. Further, 
the ``active conduct of a trade or business'' safe harbor does not 
conflict with the gross-income requirement of Sec.  1.45D-1(d)(4)(i)(A) 
because that paragraph provides that the entity is deemed to meet the 
gross-income requirement if the entity meets the requirements of either 
Sec.  1.45D-1(d)(4)(i)(B) or (C) if ``50 percent'' is applied instead 
of ``40 percent.'' Therefore, an entity that has no gross receipts and 
relies on the ``active conduct of a trade or business'' safe harbor of 
Sec.  1.45D-1(d)(4)(iv)(A) can meet the requirements to be a qualified 
active low-income community business by satisfying either the use of 
tangible property requirement of Sec.  1.45D-1(d)(4)(i)(B) or the 
services performed requirement of Sec.  1.45D-1(d)(4)(i)(C) at 50 
percent instead of 40 percent. Several commentators requested that, in 
order to accommodate start-up entities, the proposed regulations 
provide a rule wherein a business could qualify as a qualified active 
low-income community business serving targeted populations if the CDE 
reasonably expects that the entity will generate revenues within three 
years after the date the investment or loan is made. If a business 
serving targeted populations chose to apply the gross income 
requirement rather than the employee requirement or the owner 
requirement, the commentators' suggestion could potentially allow a 
business to be a qualified active low-income community business for 
three years without having to meet any requirement. This result is 
clearly inappropriate. Therefore, the proposed regulations do not adopt 
the commentators' suggestion. In addition, the proposed regulations 
clarify the language in Sec.  1.45D-1(d)(4)(iv)(A) to address any 
confusion as to the application of the ``active conduct of a trade or 
business'' safe harbor.
    Several commentators submitted comments that address subjects not 
within the scope of these proposed regulations. For example, comments 
were received addressing CDFI Fund allocation application procedures, 
such as minimum submission requirements, weighted scoring criteria, 
approval procedures, ``high distress'' criteria, underwriting criteria, 
and amendments to existing allocation agreements. These comments have 
been forwarded to the CDFI Fund for consideration.

Proposed Effective/Applicability 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 regulation in the 
Federal Register. In the meantime, taxpayers may rely on Notice 2006-60 
(2006-29 IRB 82) for designations made by the Secretary after October 
22, 2004.

Request for Comments

    The IRS and Treasury Department invite taxpayers to submit comments 
on issues relating to how an entity meets the requirements to be a 
qualified active low-income community business when its activities 
involve certain targeted populations under section 45D(e)(2). In 
particular, the IRS and Treasury Department encourage taxpayers to 
submit comments on the following issues:
    1. What measure of income should be used to determine an 
individual's income for purposes of the definition of low-income 
persons in Sec.  1.45D-1(d)(9)(i)(A)? For example, should the measure 
of income for this purpose be the same as the measure of income used by 
the U.S. Census Bureau, the measure of income on the IRS Form 1040, or 
the measure of income in 24 CFR Part 5, which is used for certain HUD 
programs and other Federal programs? The IRS and Treasury Department 
are considering using the measure of income used by the U.S. Census 
Bureau to ensure a consistent comparison between the individual's 
family income and the applicable area median family income.
    2. Should the gross income requirements in Sec.  1.45D-
1(d)(9)(i)(B)(1)(i) and (ii)(C)(1)(i) be modified to include the fair 
market value of goods and services provided to low-income persons at 
reduced fees? For example, should a business that provides its services 
to low-income persons for half of what it charges its other customers 
be able to include the fair market value of the services provided to 
low-income persons in its calculation of gross income for purposes of 
the requirement in Sec.  1.45D-1(d)(9)(i)(B)(1)(i)?
    3. Should additional restrictions be added to the employee 
requirements in Sec.  1.45D-1(d)(9)(i)(B)(1)(ii) and (ii)(C)(1)(ii)? 
For example, as one commentator suggested, should a requirement be 
added that the employee be a member of a targeted group as defined by 
the work opportunity tax credit? As another commentator suggested, 
should the employee test be satisfied only if the business pays a wage 
that would increase the income of the low-income individual being 
hired?

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 is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based upon the fact that the regulations provide a positive impact 
because, consistent with legislative intent, they allow a tax credit to 
be claimed in situations where it was previously unavailable without 
the Secretary providing for such situations in regulations. Therefore, 
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 Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their 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

[[Page 54995]]

that are submitted timely to the IRS. Comments are requested on all 
aspects of the proposed regulations. In addition, the IRS and Treasury 
Department specifically request comments on the clarity of the proposed 
rules and how they can be made easier to understand. All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for Friday, January 22, 2009 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 and an outline of the topics to 
be discussed and the time to be devoted to each topic (a signed 
original and eight (8) copies) by December 26, 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 Lauren Ross Taylor, 
formerly with the 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 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 is amended by adding 
an entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.45D-1 also issued under 26 U.S.C. 45D(e)(2) * * *

    Par. 2. Section 1.45D-1 is amended by:
    1. In paragraph (a), revising the entry for paragraph (h) and 
adding new entries for (d)(9), (d)(9)(i), (d)(9)(i)(A), (d)(9)(i)(B), 
(d)(9)(i)(B)(1), (d)(9)(i)(B)(2), (d)(9)(i)(B)(3), (d)(9)(i)(C), 
(d)(9)(i)(C)(1), (d)(9)(i)(C)(2), (d)(9)(i)(D), (d)(9)(ii), 
(d)(9)(ii)(A), (d)(9)(ii)(B), (d)(9)(ii)(C), (d)(9)(ii)(C)(1), 
(d)(9)(ii)(C)(2), (d)(9)(ii)(C)(2)(i), (d)(9)(ii)(C)(2)(ii), 
(d)(9)(ii)(D), (d)(9)(ii)(D)(1), (d)(9)(ii)(D)(2), (d)(9)(ii)(E), and 
(h)(3).
    2. Revising paragraph (d)(4)(i) introductory text.
    3. Adding the language ``See paragraph (d)(9) of this section for 
rules relating to targeted populations.'' to the end of paragraph 
(d)(4)(i)(A).
    4. Adding the language ``See paragraph (d)(9) of this section for 
rules relating to targeted populations.'' to the end of paragraph 
(d)(4)(i)(B)(1).
    5. Adding the language ``See paragraph (d)(9) of this section for 
rules relating to targeted populations.'' to the end of paragraph 
(d)(4)(i)(C).
    6. Adding a new sentence at the end of paragraph (d)(4)(iv)(A).
    7. Adding new paragraph (d)(9).
    8. Revising the heading for paragraph (h) and adding new paragraph 
(h)(3).
    The additions and revisions read as follows:


Sec.  1.45D-1  New markets tax credit.

    (a) * * *

    (d) * * *
    (9) Targeted populations.
    (i) Low-income persons.
    (A) Definition.
    (B) Qualified active low-income community business requirements 
for low-income targeted populations.
    (1) In general.
    (2) Employee.
    (3) Owner.
    (C) 120-percent-income restriction.
    (1) In general.
    (2) Population census tract location.
    (D) Rental of real property for low-income targeted populations.
    (ii) Individuals who otherwise lack adequate access to loans or 
equity investments.
    (A) In general.
    (B) GO Zone Targeted Population.
    (C) Qualified active low-income community business requirements 
for the GO Zone Targeted Population.
    (1) In general.
    (2) Location.
    (i) In general.
    (ii) Determination.
    (D) 200-percent-income restriction.
    (1) In general.
    (2) Population census tract location.
    (E) Rental of real property for the GO Zone Targeted Population.
* * * * *
    (h) Effective/applicability dates
    (3) Targeted populations.
* * * * *
    (d) * * *
    (4) * * *
    (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 engaged in the 
active conduct of a qualified business (as defined in paragraph (d)(5) 
of this section), if the requirements of (d)(4)(i)(A), (B), (C), (D), 
and (E) of this section are met (or in the case of an entity serving 
targeted populations, if the requirements of paragraphs (d)(4)(i)(D), 
(E), and (d)(9)(i) or (ii) of this section are met). Solely for 
purposes of this section, a nonprofit corporation will be deemed to be 
engaged in the active conduct of a trade or business if it is engaged 
in an activity that furthers its purpose as a nonprofit corporation.
* * * * *
    (iv) Active conduct of a trade or business--(A) * * * This 
paragraph (d)(4)(iv) applies only for purposes of determining whether 
an entity is engaged in the active conduct of a trade or business and 
does not apply for purposes of determining whether the gross-income 
requirement under paragraph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i), or 
(d)(9)(ii)(C)(1)(i) of this section is satisfied.
* * * * *
    (9) Targeted populations. As determined by the Treasury Department, 
for purposes of section 45D(e)(2), targeted populations that will be 
treated as a low-income community are individuals, or an identifiable 
group of individuals, including an Indian tribe, who are low-income 
persons as defined in paragraph (d)(9)(i) of this section or who are 
individuals who otherwise lack adequate access to loans or equity 
investments as defined in paragraph (d)(9)(ii) of this section.
    (i) Low-income persons--(A) Definition. For purposes of section 
45D(e)(2), an individual shall be considered to be low-income if the 
individual's family income, adjusted for family size, is not more 
than--
    (1) For metropolitan areas, 80 percent of the area median family 
income; and
    (2) For non-metropolitan areas, the greater of 80 percent of the 
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.
    (B) Qualified active low-income community business requirements for

[[Page 54996]]

low-income targeted populations--(1) In general. An entity will not be 
treated as a qualified active low-income community business for low-
income targeted populations unless--
    (i) At least 50 percent of the entity's total gross income for any 
taxable year is derived from sales, rentals, services, or other 
transactions with individuals who are low-income persons for purposes 
of section 45D(e)(2) and this paragraph (d)(9),
    (ii) At least 40 percent of the entity's employees are individuals 
who are low-income persons for purposes of section 45D(e)(2) and this 
paragraph (d)(9), or
    (iii) At least 50 percent of the entity is owned by individuals who 
are low-income persons for purposes of section 45D(e)(2) and this 
paragraph (d)(9).
    (2) Employee. The determination of whether an employee is a low-
income person must be made at the time the employee is hired. If the 
employee is a low-income person at the time of hire, that employee is 
considered a low-income person for purposes of section 45D(e)(2) and 
this paragraph (d)(9) throughout the time of employment, without regard 
to any increase in the employee's income after the time of hire.
    (3) Owner. The determination of whether an owner is a low-income 
person must be made at the time the qualified low-income community 
investment is made. If an owner is a low-income person at the time the 
qualified low-income community investment is made, that owner is 
considered a low-income person for purposes of section 45D(e)(2) and 
this paragraph (d)(9) throughout the time the ownership interest is 
held by that owner.
    (C) 120-percent-income restriction--(1) In general--(i) In no case 
will an entity be treated as a qualified active low-income community 
business under paragraph (d)(9)(i) of this section if the entity is 
located in a population census tract for which the median family income 
exceeds 120 percent of--
    (A) In the case of a tract not located within a metropolitan area, 
the statewide median family income, or
    (B) In the case of a tract located within a metropolitan area, the 
greater of statewide median family income or metropolitan area median 
family income (120-percent-income restriction).
    (ii) The 120-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is not located in a metropolitan area.
    (iii) The 120-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is located in a metropolitan area and 
more than 75 percent of the tract is zoned for commercial or industrial 
use. For this purpose, the 75 percent calculation should be made using 
the area of the population census tract. For purposes of this paragraph 
(d)(9)(i)(C)(1)(iii), property for which commercial or industrial use 
is a permissible zoning use will be treated as zoned for commercial or 
industrial use.
    (2) Population census tract location--(i) For purposes of the 120-
percent-income restriction, an entity will be considered to be located 
in a population census tract for which the median family income exceeds 
120 percent of the applicable median family income under paragraph 
(d)(9)(i)(C)(1)(i)(A) or (B) of this section (non-qualifying population 
census tract) if--
    (A) At least 50 percent of the total gross income of the entity is 
derived from the active conduct of a qualified business (as defined in 
paragraph (d)(5) of this section) within one or more non-qualifying 
population census tracts (non-qualifying gross income amount);
    (B) At least 40 percent of the use of the tangible property of the 
entity (whether owned or leased) is within one or more non-qualifying 
population census tracts (non-qualifying tangible property usage); and
    (C) At least 40 percent of the services performed for the entity by 
its employees are performed in one or more non-qualifying population 
census tracts (non-qualifying services performance).
    (ii) The entity is considered to have the non-qualifying gross 
income amount if the entity has non-qualifying tangible property usage 
or non-qualifying services performance of at least 50 percent instead 
of 40 percent.
    (iii) If the entity has no employees, the entity is considered to 
have the non-qualifying gross income amount as well as non-qualifying 
services performance if at least 85 percent of the use of the tangible 
property of the entity (whether owned or leased) is within one or more 
non-qualifying population census tracts.
    (D) Rental of real property for low-income targeted populations. 
The rental to others of real property for low-income targeted 
populations that otherwise satisfies the requirements to be a qualified 
business under paragraph (d)(5) of this section will be treated as 
located in a low-income community for purposes of paragraph (d)(5)(ii) 
of this section if at least 50 percent of the entity's total gross 
income is derived from rentals to individuals who are low-income 
persons for purposes of section 45D(e)(2) and this paragraph (d)(9) 
and/or to a qualified active low-income community business that meets 
the requirements for low-income targeted populations under paragraphs 
(d)(9)(i)(B)(1)(i) or (ii) and (d)(9)(i)(B)(2) of this section.
    (ii) Individuals who otherwise lack adequate access to loans or 
equity investments--(A) In general. Paragraph (d)(9)(ii) of this 
section may be applied only with regard to qualified low-income 
community investments made under the increase in the new markets tax 
credit limitation pursuant to section 1400N(m)(2). Therefore, only CDEs 
with a significant mission of recovery and redevelopment of the Gulf 
Opportunity Zone (GO Zone) that receive an allocation from the increase 
described in section 1400N(m)(2) may make qualified low-income 
community investments from that allocation pursuant to the rules in 
paragraph (d)(9)(ii) of this section.
    (B) GO Zone Targeted Population. As determined by the Treasury 
Department, for purposes of targeted populations under section 
45D(e)(2), an individual is considered to otherwise lack adequate 
access to loans or equity investments only if the individual was 
displaced from his or her principal residence as a result of Hurricane 
Katrina and/or the individual lost his or her principal source of 
employment as a result of Hurricane Katrina (GO Zone Targeted 
Population). In order to meet this definition, the individual's 
principal residence or principal source of employment, as applicable, 
must have been located in a population census tract within the GO Zone 
that contains one or more areas designated by the Federal Emergency 
Management Agency (FEMA) as flooded, having sustained extensive damage, 
or having sustained catastrophic damage as a result of Hurricane 
Katrina.
    (C) Qualified active low-income community business requirements for 
the GO Zone Targeted Population--(1) In general. An entity will not be 
treated as a qualified active low-income community business for the GO 
Zone Targeted Population unless--
    (i) At least 50 percent of the entity's total gross income for any 
taxable year is derived from sales, rentals, services, or other 
transactions with the GO Zone Targeted Population, low-income persons 
as defined in paragraph (d)(9)(i) of this section, or some combination 
thereof;
    (ii) At least 40 percent of the entity's employees consist of the 
GO Zone Targeted Population, low-income persons as defined in paragraph 
(d)(9)(i)

[[Page 54997]]

of this section, or some combination thereof; or
    (iii) At least 50 percent of the entity is owned by the GO Zone 
Targeted Population, low-income persons as defined in paragraph 
(d)(9)(i) of this section, or some combination thereof.
    (2) Location--(i) In general. In order to be a qualified active 
low-income community business under paragraph (d)(9)(ii)(C) of this 
section, the entity must be located in a population census tract within 
the GO Zone that contains one or more areas designated by FEMA as 
flooded, having sustained extensive damage, or having sustained 
catastrophic damage as a result of Hurricane Katrina (qualifying 
population census tract).
    (ii) Determination--(A) For purposes of the preceding paragraph, an 
entity will be considered to be located in a qualifying population 
census tract if--
    (I) At least 50 percent of the total gross income of the entity is 
derived from the active conduct of a qualified business (as defined in 
paragraph (d)(5) of this section) within one or more qualifying 
population census tracts (gross income requirement);
    (II) At least 40 percent of the use of the tangible property of the 
entity (whether owned or leased) is within one or more qualifying 
population census tracts (use of tangible property requirement); and
    (III) At least 40 percent of the services performed for the entity 
by its employees are performed in one or more qualifying population 
census tracts (services performed requirement).
    (B) The entity is deemed to satisfy the gross income requirement if 
the entity satisfies the use of tangible property requirement or the 
services performed requirement on the basis of at least 50 percent 
instead of 40 percent.
    (C) If the entity has no employees, the entity is deemed to satisfy 
the services performed requirement as well as the gross income 
requirement if at least 85 percent of the use of the tangible property 
of the entity (whether owned or leased) is within one or more 
qualifying population census tracts.
    (D) 200-percent-income restriction--(1) In general--(i) In no case 
will an entity be treated as a qualified active low-income community 
business under paragraph (d)(9)(ii) of this section if the entity is 
located in a population census tract for which the median family income 
exceeds 200 percent of--
    (A) In the case of a tract not located within a metropolitan area, 
the statewide median family income, or
    (B) In the case of a tract located within a metropolitan area, the 
greater of statewide median family income or metropolitan area median 
family income (200-percent-income restriction).
    (ii) The 200-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is not located in a metropolitan area.
    (iii) The 200-percent-income restriction shall not apply to an 
entity located within a population census tract with a population of 
less than 2,000 if such tract is located in a metropolitan area and 
more than 75 percent of the tract is zoned for commercial or industrial 
use. For this purpose, the 75 percent calculation should be made using 
the area of the population census tract. For purposes of this paragraph 
(d)(9)(ii)(D)(1)(iii), property for which commercial or industrial use 
is a permissible zoning use will be treated as zoned for commercial or 
industrial use.
    (2) Population census tract location--(i) For purposes of the 200-
percent-income restriction, an entity will be considered to be located 
in a population census tract for which the median family income exceeds 
200 percent of the applicable median family income under paragraph 
(d)(9)(ii)(D)(1)(i)(A) or (B) of this section (non-qualifying 
population census tract) if--
    (A) At least 50 percent of the total gross income of the entity is 
derived from the active conduct of a qualified business (as defined in 
paragraph (d)(5) of this section) within one or more non-qualifying 
population census tracts (non-qualifying gross income amount);
    (B) At least 40 percent of the use of the tangible property of the 
entity (whether owned or leased) is within one or more non-qualifying 
population census tracts (non-qualifying tangible property usage); and
    (C) At least 40 percent of the services performed for the entity by 
its employees are performed in one or more non-qualifying population 
census tracts (non-qualifying services performance).
    (ii) The entity is considered to have the non-qualifying gross 
income amount if the entity has non-qualifying tangible property usage 
or non-qualifying services performance of at least 50 percent instead 
of 40 percent.
    (iii) If the entity has no employees, the entity is considered to 
have the non-qualifying gross income amount as well as non-qualifying 
services performance if at least 85 percent of the use of the tangible 
property of the entity (whether owned or leased) is within one or more 
non-qualifying population census tracts.
    (E) Rental of real property for the GO Zone Targeted Population. 
The rental to others of real property for the GO Zone Targeted 
Population that otherwise satisfies the requirements to be a qualified 
business under paragraph (d)(5) of this section will be treated as 
located in a low-income community for purposes of paragraph (d)(5)(ii) 
of this section if at least 50 percent of the entity's total gross 
income is derived from rentals to the GO Zone Targeted Population, low-
income persons as defined in paragraph (d)(9)(i) of this section and/or 
to a qualified active low-income community business that meets the 
requirements for the GO Zone Targeted Population under paragraphs 
(d)(9)(ii)(C)(1)(i) or (ii) of this section.
* * * * *
    (h) Effective/applicability dates * * *
* * * * *
    (3) Targeted populations. The rules in paragraph (d)(9) 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. E8-22481 Filed 9-23-08; 8:45 am]
BILLING CODE 4830-01-P