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Note: To receive consideration as public
comments, comments must be submitted
through one of the two methods specified
above. Again, all submissions must refer to
the docket number and title of the rule.

No Facsimile Comments. Facsimile
(FAX) comments are not acceptable.
Public Inspection of Public
Comments. All properly submitted
comments and communications
submitted to HUD will be available for
public inspection and copying between
8 a.m. and 5 p.m. weekdays at the above
address. Due to security measures at the
HUD Headquarters building, an advance
appointment to review the public
comments must be scheduled by calling
the Regulations Division at 202–708–
3055 (this is not a toll-free number).
Individuals with speech or hearing
impairments may access this number
through TTY by calling the Federal
Relay Service at 800–877–8339. Copies
of all comments submitted are available
for inspection and downloading at
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Ann
Marie Oliva, Director, Office of Special
Needs Assistance Programs, Office of
Community Planning and Development,
Department of Housing and Urban
Development, 451 7th Street SW.,
Washington, DC 20410–7000; telephone
number 202–708–4300 (this is not a tollfree number). Hearing- and speechimpaired persons may access this
number through TTY by calling the
Federal Relay Service at 800–877–8339
(this is a toll-free number).
SUPPLEMENTARY INFORMATION: On July
31, 2012, at 77 FR 45422, HUD
published in the Federal Register an
interim rule that establishes the
regulatory framework for the new
Continuum of Care program. The
Homeless Emergency Assistance and
Rapid Transition to Housing Act of 2009
(HEARTH Act), enacted into law on
May 20, 2009, codifies in law the
Continuum of Care planning process, a
longstanding part of HUD’s application
process to assist homeless persons by
providing greater coordination in
responding to their needs. The existing
homeless assistance programs that
comprise the Continuum of Care
program are the following: the
Supportive Housing program, the
Shelter Plus Care program, and the
Moderate Rehabilitation/Single Room
Occupancy (SRO) program.
The July 31, 2012, interim rule
solicited public comment through
October 1, 2012. In response to requests
to provide additional time to comment
on this rule, HUD is extending the
public comment period to November 16,
2012.

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Dated: September 25, 2012.
Mark Johnston,
Assistant Secretary for Community Planning
and Development (Acting).
[FR Doc. 2012–23898 Filed 9–27–12; 8:45 am]
BILLING CODE 4210–67–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9600]
RIN 1545–BK04

New Markets Tax Credit Non-Real
Estate Investments
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations modifying the new markets
tax credit program to facilitate and
encourage investments in non-real
estate businesses in low-income
communities. The final regulations
affect taxpayers claiming the new
markets tax credit and businesses in
low-income communities relying on the
program.
DATES: Effective Date: These regulations
are effective September 28, 2012.
Applicability Date: For date of
applicability see § 1.45D–1(h)(4).
FOR FURTHER INFORMATION CONTACT: Julie
Hanlon-Bolton, (202) 622–3040 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:

Background
This document amends 26 CFR part 1
to provide additional rules relating to
the new markets tax credit under
section 45D of the Internal Revenue
Code (Code). On June 7, 2011, a notice
of proposed rulemaking and notice of
public hearing (REG–101826–11) was
published in the Federal Register (76
FR 32882). The IRS received comments
responding to the notice of proposed
rulemaking and held a public hearing
on September 29, 2011. After
consideration of all the comments, the
proposed regulations are adopted as
amended by this Treasury decision. The
comments are discussed in the
preamble.
General Overview
Under section 45D(a)(1), a taxpayer
may claim a new markets tax credit on
certain credit allowance dates described
in section 45D(a)(3) over a 7-year credit
period with respect to a qualified equity
investment in a qualified community

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development entity (CDE) described in
section 45D(c).
Under section 45D(b)(1), 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 lowincome 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 a
domestic corporation or partnership is a
CDE 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 Secretary as a
CDE.
Section 45D(d)(1) defines qualified
low-income community investment to
mean: (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 such 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), 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 lowincome 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.

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Federal Register / Vol. 77, No. 189 / Friday, September 28, 2012 / Rules and Regulations
Under section 45D(d)(3), with certain
exceptions, a qualified business is any
trade or business. The rental to others of
real property located in any low-income
community is a qualified business 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.
Section 1.45D–1(d)(2)(i) requires that
a CDE receiving returns on investments
(including principal repayments from
amortizing loans) must reinvest those
proceeds into other qualified lowincome community investments during
the 7-year credit period. If the proceeds
are not reinvested, then the credit may
be subject to recapture under section
45D(g)(3)(B).
Many commentators consider the new
markets tax credit under section 45D to
be a successful tool for encouraging
private sector investments in lowincome communities. To date, the
majority of new markets tax credit
investments relate to real estate projects.
Real estate projects are well suited to
the new markets tax credit program
because real estate remains in the lowincome community and loans for real
estate can extend through the end of the
7-year period in which investors may
take the credit on their investment. The
7-year credit period and the
reinvestment requirements make it
difficult for CDEs to provide working
capital and equipment loans to non-real
estate businesses because these loans
are ordinarily amortizing loans with a
term of five years or less. To facilitate
investment in non-real estate
businesses, the proposed regulations
modify the reinvestment requirements
for non-real estate projects.

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Overview of Proposed Regulations and
Summary of Comments
To encourage investments in non-real
estate businesses for working capital
and equipment, the proposed
regulations modify the reinvestment
requirements under § 1.45D–1(d)(2)(i).
The proposed regulations allow a CDE
that makes a qualified low-income
community investment in a non-real
estate business to invest certain returns
of capital from those investments in
unrelated certified community
development financial institutions that
are CDEs under section 45D(c)(2)(B)
(certified CDFIs) at various points
during the 7-year credit period. The
proposed regulations also allow an
increasing aggregate amount to be
invested in certified CDFIs and treated
as continuously invested in a qualified
low-income community investment in

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the later years of the 7-year credit
period.
Many commentators welcomed new
options for meeting the reinvestment
requirements. After considering the
comments received, the final regulations
adopt the provisions of the proposed
regulations with two minor changes
based on these comments. In addition to
reinvestments in certified CDFIs, the
final regulations provide that the
Secretary may designate other
qualifying entities in the Internal
Revenue Bulletin. These final
regulations also clarify that investments
in non-real estate qualified active lowincome community businesses may be
made through one or more CDEs. As
discussed below, the IRS and the
Treasury Department are considering
other options for future guidance.
Definition of Non-Real Estate Qualified
Active Low-Income Community
Business
The proposed regulations define a
non-real estate qualified active lowincome community business as any
business whose predominant business
activity (measured by more than 50
percent of the business’ gross income)
does not include the development
(including construction of new facilities
and rehabilitation/enhancement of
existing facilities), management, or
leasing of real estate. The purpose of the
investment or loan must not be
connected to the development
(including construction of new facilities
and rehabilitation/enhancement of
existing facilities), management, or
leasing of real estate.
Commentators requested that the
definition of a non-real estate qualified
active low-income community business
be expanded to include investments
connected to the development of owner
occupied facilities as long as the facility
is used in an operating business. The
final regulations do not incorporate this
comment because under current
regulations, a substantial number of new
markets tax credits investments are
already being made in owner-occupied
facilities. The purpose of these final
regulations is to encourage more new
markets tax credits investments not
related to real estate.
Commentators also requested that if a
non-real estate qualified active lowincome community business is allowed
to use investments for construction or
improvements to real estate facilities
primarily used in its business, then the
definition of working capital under
§ 1.45D–1(d)(4)(i)(E)(2) should include
the proceeds of an equity investment or
a loan that the non-real estate qualified
active low-income community business

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59545

will expend for the construction of real
property within 18 months (as opposed
to 12 months) after the date of the
investment or loan. The final
regulations do not incorporate this
comment because the final rules for
non-real estate qualified active lowincome community businesses do not
pertain to investments for construction
or improvements to real estate facilities.
In response to comments, the final
regulations clarify that an investment in
a non-real estate qualified active lowincome community business may be
made through one or more CDEs. Thus,
for example, a CDE that designates an
equity investment as a non-real estate
qualified equity investment may invest
the proceeds in another CDE if that
investment is directly traceable to a
non-real estate qualified active lowincome community business.
Payments of Capital, Equity, or
Principal With Respect to a Non-Real
Estate Qualified Active Low-Income
Community Business
The proposed regulations require that
any portion that the CDE chooses to
reinvest in a certified CDFI must be
reinvested by the CDE no later than 30
days from the date of receipt to be
treated as continuously invested in a
qualified low-income community
investment. Commentators requested
that instead of 30 days, CDEs invested
in a non-real estate qualified active lowincome community business should
have 12 months to decide whether to
reinvest capital, equity, or principal in
another non-real estate qualified active
low-income community business or a
certified CDFI under § 1.45D–1(d)(9)(ii)
(similar to the 12-month reinvestment
requirement in § 1.45D–1(d)(2)(i)). The
final regulations do not incorporate this
comment because a CDE that has not
found a new non-real estate qualified
active low-income community business
to invest in at the expiration of the 30
day period can invest the capital,
equity, or principal in a certified CDFI
until it finds a suitable non-real estate
qualified active low-income community
business. It can then withdraw its
investment in the certified CDFI and
invest that capital, equity, or principal
in the suitable non-real estate qualified
active low-income community business.
Commentators also requested that the
final regulations allow a CDE that makes
an equity investment in a non-real estate
qualified active low-income community
business to reinvest up to 100 percent
of its equity investment in a certified
CDFI under § 1.45D–1(d)(9)(ii) after the
first year of the 7-year credit period. The
commentators explained that this would
encourage venture capital investments

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Federal Register / Vol. 77, No. 189 / Friday, September 28, 2012 / Rules and Regulations

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in a non-real estate qualified active lowincome community business because
liquidity events (cashing out some or all
of an investment) occurring early in the
7-year credit period, which often
happen with venture capital
investments, would not automatically
cause recapture. The final regulations
do not incorporate this comment
because the proposal could create a
situation in which the proceeds of the
new markets tax credit investment may
only be invested in a qualified active
low-income community business for a
brief period without any new markets
tax credit restrictions on how a certified
CDFI may use the proceeds. Such a
result would be inconsistent with
encouraging investments in qualified
active low-income community
businesses during the 7-year credit
period.
Commentators also requested that the
final regulations allow a CDE to invest
returns of capital, equity, or principal
into entities other than certified CDFIs
under § 1.45D–1(d)(9)(ii). Such entities
would include non-profit and for-profit
entities focused on economic and
community development, funds that
provide equity and loans to small and
medium businesses, and funds that
provide equity or loans to minority and
women owned businesses. The final
regulations do not incorporate this
comment because it would make
administering the final regulations
unworkable given the breadth of
potential reinvestment vehicles. The
final regulations allow investments in
certified CDFIs because there are rules
that ensure that a certified CDFI serves
low-income communities. Such rules do
not currently exist for other potential
reinvestment entities. However, the
final regulations provide that in the
future the Secretary may designate other
qualifying entities in the Internal
Revenue Bulletin. See
§ 601.601(d)(2)(ii)(b).
Section 1.45D–1(d)(9) of the proposed
regulations is renumbered as § 1.45D–
1(d)(10) in the final regulations due to
the amendments made by TD 9560
involving targeted populations.
Lines of Credit
A commentator requested that the
final regulations consider the entire
amount of a line of credit as outstanding
loan principal for purposes of the
substantially-all requirement under
§ 1.45D–1(c)(5)(i). Lines of credit often
serve the capital needs of non-real estate
businesses better than fully disbursed
loans with fixed terms, which may be
more appropriate for real estate
investments. The IRS and the Treasury
Department are studying these issues

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and may address them in future
guidance.
Other Comments
Other comments were received on
issues unrelated to the proposed
regulations. The final regulations do not
incorporate comments that are outside
the scope of the proposed regulations,
although they may be relevant to future
guidance under the new markets tax
credit.
Effective Date/Applicability
The IRS and the Treasury Department
received a few comments regarding
whether the final regulations should
allow a qualified equity investment
made before the effective date of the
final regulations to be eligible for
designation as a non-real estate
qualified equity investment. The
majority of commentators recommended
not adopting a look-back rule because it
would be confusing and complicate
compliance. After further examination,
the IRS and the Treasury Department
agree with these commentators. Further,
allowing CDEs to designate investments
as non-real estate after the investments
are made does not serve the purpose of
incentivizing new investments in nonreal estate projects. Section 1.45D–
1(c)(1)(iii) requires that an investment in
a non-real estate qualified equity
investment must be designated as such
for a CDE to qualify for benefits allowed
under the final regulations.
Accordingly, the final regulations apply
to equity investments made on or after
the date the final regulations are
published in the Federal Register.
Special Analyses
This Treasury decision is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. 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 Internal Revenue
Code, the notice of proposed rulemaking
that preceded these final regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business and no
comments were received.
Drafting Information
The principal author of these
regulations is Julie Hanlon Bolton with

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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.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
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–0 is amended
by:
■ 1. Adding entries for paragraphs
(c)(8), (d)(10), (d)(10)(i), (d)(10)(ii),
(d)(10)(ii)(A), (d)(10)(ii)(B), (d)(10)(ii)(C),
(d)(10)(ii)(D), and (h)(4).
■ 2. Revising the entry for paragraph
(d)(1)(i).
The additions and revisions read as
follows:
■

§ 1.45D–0

Table of contents.

*

*
*
*
*
(c) * * *
(8) Non-real estate qualified equity
investment.
(d) * * *
(1) * * *
(i) Investment in a qualified active
low-income community business or a
non-real estate qualified active lowincome community business.
*
*
*
*
*
(10) Non-real estate qualified active
low-income community business.
(i) Definition.
(ii) Payments of, or for, capital, equity
or principal with respect to a non-real
estate qualified active low-income
community business.
(A) In general.
(B) Seventh year of the 7-year credit
period.
(C) Amounts received from a
qualifying entity.
(D) Definition of qualifying entity.
*
*
*
*
*
(h) * * *
(4) Investments in non-real estate
businesses.
*
*
*
*
*
■ Par. 3. Section 1.45D–1 is amended
by:
■ 1. Revising paragraphs (c)(1)(iii),
(c)(3)(ii) introductory text, and (d)(1)(i).
■ 2. Amending paragraph (h)(1) by
removing the language ‘‘paragraph

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Federal Register / Vol. 77, No. 189 / Friday, September 28, 2012 / Rules and Regulations
(h)(2)’’ and adding ‘‘paragraphs (h)(2),
(h)(3), and (h)(4)’’ in its place.
■ 3. Adding new paragraphs (c)(8),
(d)(10), and (h)(4).
The additions and revisions read as
follows:
§ 1.45D–1

New markets tax credit.

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*

*
*
*
*
(c) * * *
(1) * * *
(iii) The investment is designated for
purposes of section 45D and this section
as a qualified equity investment or a
non-real estate qualified equity
investment (as defined in paragraph
(c)(8) of this section) by the CDE on its
books and records using any reasonable
method.
*
*
*
*
*
(3) * * *
(ii) Exceptions. Notwithstanding
paragraph (c)(3)(i) of this section, an
equity investment in an entity is eligible
to be designated as a qualified equity
investment or a non-real estate qualified
equity investment under paragraph
(c)(1)(iii) of this section if—
*
*
*
*
*
(8) Non-real estate qualified equity
investment. If a qualified equity
investment is designated as a non-real
estate qualified equity investment under
paragraph (c)(1)(iii) of this section, then
the qualified equity investment may
only satisfy the substantially-all
requirement under paragraph (c)(5) of
this section if the CDE makes qualified
low-income community investments
that are directly traceable (including
investments made through one or more
CDEs) to non-real estate qualified active
low-income community businesses (as
defined in paragraph (d)(10) of this
section). The proceeds of a non-real
estate qualified equity investment
cannot be used for transactions
involving a qualified active low-income
community business that is not a nonreal estate qualified active low-income
community business.
(d) * * *
(1) * * *
(i) Investment in a qualified active
low-income community business or a
non-real estate qualified active lowincome 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) or any
non-real estate qualified active lowincome community business (as defined
in paragraph (d)(10) of this section).
*
*
*
*
*
(10) Non-real estate qualified active
low-income community business—(i)
Definition. The term non-real estate

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qualified active low-income community
business means any qualified active
low-income community business (as
defined in paragraph (d)(4) of this
section) whose predominant business
activity does not include the
development (including construction of
new facilities and rehabilitation/
enhancement of existing facilities),
management, or leasing of real estate.
For purposes of the preceding sentence,
predominant business activity means a
business activity that generates more
than 50 percent of the business’ gross
income. The purpose of the capital or
equity investment in, or loan to, the
non-real estate qualified active lowincome community business must not
be connected to the development
(including construction of new facilities
and rehabilitation/enhancement of
existing facilities), management, or
leasing of real estate.
(ii) Payments of, or for, capital, equity
or principal with respect to a non-real
estate qualified active low-income
community business—(A) In general.
For purposes of paragraph (d)(2)(i) of
this section, a portion of the amounts
received by a CDE in payment of, or for,
capital, equity, or principal with respect
to a non-real estate qualified active lowincome community business after year
one of the 7-year credit period (as
defined by paragraph (c)(5)(i) of this
section) may be reinvested by the CDE
in a qualifying entity (as defined in
paragraph (d)(10)(ii)(D)). Any portion
that the CDE chooses to reinvest in a
qualifying entity must be reinvested by
the CDE no later than 30 days from the
date of receipt to be treated as
continuously invested in a qualified
low-income community investment for
purposes of paragraph (d)(2)(i) of this
section. If the amount reinvested in a
qualifying entity exceeds the maximum
aggregate portion of the non-real estate
qualified equity investment, then the
excess will not be treated as invested in
a qualified low-income community
investment. The maximum aggregate
portion of the non-real estate qualified
equity investment that may be
reinvested into a qualifying entity,
which will be treated as continuously
invested in a qualified low-income
community investment, may not exceed
the following percentages of the nonreal estate qualified equity investment
in the following years:
(1) 15 percent in Year 2 of the 7-year
credit period.
(2) 30 percent in Year 3 of the 7-year
credit period.
(3) 50 percent in Year 4 of the 7-year
credit period.
(4) 85 percent in Year 5 and Year 6
of the 7-year credit period.

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(B) Seventh year of the 7-year credit
period. Amounts received by a CDE in
payment of, or for, capital, equity, or
principal with respect to a non-real
estate qualified active low-income
community business (as defined in
paragraph (d)(10)(i) of this section)
during the seventh year of the 7-year
credit period do not have to be
reinvested by the CDE in a qualified
low-income community investment to
be treated as continuously invested in a
qualified low-income community
investment.
(C) Amounts received from qualifying
entity. Except for the seventh year of the
7-year credit period under paragraph
(d)(10)(ii)(B) of this section, amounts
received from a qualifying entity must
be reinvested by the CDE no later than
30 days from the date of receipt to be
treated as continuously invested in a
qualified low-income community
investment.
(D) Definition of qualifying entity. For
purposes of paragraphs (d)(10)(ii) and
(d)(10)(iii) of this section, a qualifying
entity is—
(1) A certified community
development financial institution
(certified CDFI) that is a CDE under
section 45D(c)(2)(B) (as defined by 12
CFR 1805.201), which is unrelated to
the CDE making the investment in the
certified CDFI within the meaning of
section 267(b) or section 707(b)(1); or
(2) An entity designated by the
Secretary by publication in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
*
*
*
*
*
(h) * * *
(4) Investments in non-real estate
businesses. Paragraphs (c)(8) and (d)(10)
of this section apply to equity
investments in CDEs made on or after
September 28, 2012.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: September 21, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2012–23985 Filed 9–26–12; 11:15 am]
BILLING CODE 4830–01–P

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