Td 9171

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9171]
RINs 1545–AY87; 1545–BC03

New Markets Tax Credit
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

SUMMARY: These regulations finalize the
rules relating to the new markets tax
credit under section 45D and replace the
temporary regulations which expire on
December 23, 2004. A taxpayer making
a qualified equity investment in a
qualified community development
entity that has received a new markets
tax credit allocation may claim a 5percent tax credit with respect to the
qualified equity investment on each of
the first 3 credit allowance dates and a
6-percent tax credit with respect to the
qualified equity investment on each of
the remaining 4 credit allowance dates.
DATES: Effective Date: These regulations
are effective December 22, 2004.
Date of Applicability: For date of
applicability see § 1.45D–1(h).
FOR FURTHER INFORMATION CONTACT: Paul
F. Handleman or Lauren R. Taylor, (202)
622–3040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1765. Responses
to this collection of information are
mandatory so that a taxpayer may claim
a new markets tax credit on each credit
allowance date during the 7-year credit
period and report compliance with the
requirements of section 45D to the
Secretary.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number
assigned by the Office of Management
and Budget.
The estimated annual burden per
respondent varies from 15 minutes to 5
hours, depending on individual
circumstances, with an estimated
average of 2.5 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to

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the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document amends 26 CFR part 1
to provide rules relating to the new
markets tax credit under section 45D of
the Internal Revenue Code (Code). On
December 26, 2001, the IRS published
in the Federal Register temporary and
proposed regulations (the 2001
temporary regulations) (66 FR 66307, 66
FR 66376). On March 11, 2004, the IRS
published in the Federal Register
temporary and proposed regulations
revising and clarifying the 2001
temporary regulations (the 2004
temporary regulations) (69 FR 11507; 69
FR 11561). On March 14, 2002, and June
2, 2004, the IRS and Treasury
Department held public hearings on the
2001 temporary regulations and the
2004 temporary regulations,
respectively. Written and electronic
comments responding to the temporary
regulations and notices of proposed
rulemaking were received. After
consideration of all the comments, the
proposed regulations are adopted as
amended by this Treasury decision, and
the corresponding temporary
regulations are removed. The revisions
are discussed below.
Section 45D was added to the Code by
section 121(a) of the Community
Renewal Tax Relief Act of 2000 (Pub. L.
106–554). The Secretary has delegated
certain administrative, application,
allocation, monitoring, and other
programmatic functions relating to the
new markets tax credit program to the
Under Secretary (Domestic Finance),
who in turn has delegated those
functions to the Community
Development Financial Institutions
Fund.
Sections 221 and 223 of the American
Jobs Creation Act of 2004 (Pub. L. 108–
357) amended the definition of a lowincome community under section
45D(e). This document does not provide
guidance on these amendments. The IRS
and Treasury Department are studying
the amendments for guidance in the
near future.

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Explanation of Provisions
General Overview
Taxpayers may claim a new markets
tax credit on a credit allowance date in
an amount equal to the applicable
percentage of the taxpayer’s qualified
equity investment in a qualified
community development entity (CDE).
The credit allowance date for any
qualified equity investment is the date
on which the investment is initially
made and each of the 6 anniversary
dates thereafter. The applicable
percentage is 5 percent for the first 3
credit allowance dates and 6 percent for
the remaining credit allowance dates.
A CDE is any domestic corporation or
partnership if: (1) The primary mission
of the entity is serving or providing
investment capital for low-income
communities or low-income persons; (2)
the entity maintains accountability to
residents of low-income communities
through their representation on any
governing board of the entity or on any
advisory board to the entity; and (3) the
entity is certified by the Secretary for
purposes of section 45D as being a CDE.
The new markets tax credit may be
claimed only for a qualified equity
investment in a CDE. A qualified equity
investment is any equity investment in
a CDE for which the CDE has received
an allocation from the Secretary if,
among other things, the CDE uses
substantially all of the cash from the
investment to make qualified lowincome community investments. Under
a safe harbor, the substantially-all
requirement is treated as met if at least
85 percent of the aggregate gross assets
of the CDE are invested in qualified lowincome community investments.
Qualified low-income community
investments consist of: (1) Any capital
or equity investment in, or loan to, any
qualified active low-income community
business; (2) the purchase from another
CDE of any loan made by such entity
that is a qualified low-income
community investment; (3) financial
counseling and other services to
businesses located in, and residents of,
low-income communities; and (4)
certain equity investments in, or loans
to, a CDE.
In general, a qualified active lowincome community business is a
corporation or a partnership if for the
taxable year: (1) At least 50 percent of
the total gross income of the entity is
derived from the active conduct of a
qualified business within any lowincome community; (2) a substantial
portion of the use of the tangible
property of the entity is within any lowincome community; (3) a substantial
portion of the services performed for the

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entity by its employees is performed in
any low-income community; (4) less
than 5 percent of the average of the
aggregate unadjusted bases of the
property of the entity is attributable to
certain collectibles; and (5) less than 5
percent of the average of the aggregate
unadjusted bases of the property of the
entity is attributable to certain
nonqualified financial property.
A recapture event requiring an
investor to recapture credits previously
taken occurs for an equity investment in
a CDE if the CDE: (1) Ceases to be a CDE;
(2) ceases to use substantially all of the
proceeds of the equity investment for
qualified low-income community
investments; or (3) redeems the
investor’s equity investment. In
addition, the investor’s basis in any
qualified equity investment is reduced
by the amount of the new markets tax
credit.
Substantially All
As indicated above, a CDE must use
substantially all of the cash from a
qualified equity investment to make
qualified low-income community
investments. Section 1.45D–1T(c)(5)(i)
provides that the substantially-all
requirement is treated as satisfied for an
annual period if either the direct-tracing
calculation under § 1.45D–1T(c)(5)(ii),
or the safe harbor calculation under
§ 1.45D–1T(c)(5)(iii), is performed every
six months and the average of the two
calculations for the annual period is at
least 85 percent. The final regulations
clarify that a CDE may choose the same
two testing dates for all qualified equity
investments regardless of the date each
qualified equity investment was initially
made. To conform the annual testing
requirement with the 12-month time
limit for making qualified low-income
community investments, the final
regulations provide that for the first
annual period, the substantially-all
calculation may be performed on a
single testing date. The final regulations
also amend the beginning of the 12month period for making qualified lowincome community investments to
provide that the 12-month period begins
on the same date as the beginning of the
first annual period of the 7-year credit
period.
Section 1.45D–1T(d)(3) provides that
reserves (not in excess of 5 percent of
the taxpayer’s cash investment under
§ 1.45D–1T(b)(4)) maintained by the
CDE for loan losses or for additional
investments in existing qualified lowincome community investments are
treated as invested in a qualified lowincome community investment. In
response to comments, the final
regulations provide that reserves

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include fees paid to third parties to
protect against loss of all or a portion of
the principal of, or interest on, on a loan
that is a qualified low-income
community investment.
Qualified Active Low-Income
Community Business
As indicated above, qualified lowincome community investments include
any capital or equity investment in, or
loan to, any qualified active low-income
community business. Under § 1.45D–
1T(d)(4)(i)(B), an entity is a qualified
active low-income community business
only if, among other requirements, at
least 40 percent of the use of the
tangible property of such entity
(whether owned or leased) is within any
low-income community. In response to
comments, the final regulations provide
an example of how the tangible property
test applies to property that is used both
outside and inside a low-income
community. The example demonstrates
that use is measured based on the
entity’s business hours of operation and
does not include non-business hours.
Under section 45D(d)(2)(C), a
qualified active low-income community
business includes any trade or business
that would qualify as a qualified active
low-income community business if such
trade or business were separately
incorporated. Commentators requested
clarification of how this rules applies.
The final regulations provide that a
CDE may treat any trade or business (or
portion thereof) as a qualified active
low-income community business if the
trade or business (or portion thereof)
would meet the requirements to be a
qualified active low-income community
business if the trade or business (or
portion thereof) were separately
incorporated and a complete and
separate set of books and records is
maintained for that trade or business (or
portion thereof). The final regulations
further provide, however, that under
this rule a CDE’s capital or equity
investment or loan is not a qualified
low-income community investment to
the extent the proceeds of the
investment or loan are not used for the
trade or business (or portion thereof)
that is treated as a qualified active lowincome community business.
Section § 1.45D–1T(d)(4)(iv) provides
that 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, receive donations) within 3
years after the date the investment or
loan is made. The final regulations

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amend this rule with respect to a
nonprofit corporation by providing that
the nonprofit corporation must be
engaged in an activity that furthers its
purpose as a nonprofit corporation
within the 3-year period.
Under § 1.45D–1T(d)(4)(i)(E), an
entity is a qualified active low-income
community business only if, among
other requirements, less than 5 percent
of the average of the aggregate
unadjusted bases of the property of such
entity is attributable to nonqualified
financial property (as defined in section
1397C(e)). Section 1397C(e)(1) contains
an exception to the definition of
nonqualified financial property for
reasonable amounts of working capital
held in cash, cash equivalents, or debt
instruments with a term of 18 months or
less. The final regulations provide that,
for these purposes, the proceeds of a
capital or equity investment or loan by
a CDE that will be expended on
construction of real property within 12
months after the date the investment or
loan is made qualify as a reasonable
amount of working capital.
Section 45D(d)(3)(A) provides that the
rental to others of real property located
in any low-income community is treated
as a qualified business only if, among
other requirements, there are substantial
improvements located on such property.
Commentators requested clarification of
the term substantial improvements. The
final regulations provide that the term
substantial improvements means
improvements the cost basis of which
equals or exceeds 50 percent of the cost
basis of the land on which the
improvements are located and the costs
of which are incurred after the date the
CDE makes the investment or loan. In
addition, the final regulations provide
that a CDE’s investment in or loan to a
business engaged in the rental of real
property is not a qualified low-income
community investment to the extent any
lessee of the real property is not a
qualified business.
Recapture
As indicated above, there is a
recapture event with respect to an
equity investment in a CDE if such
investment is redeemed by the CDE.
Commentators requested clarification of
when distributions by a CDE to its
investors will be treated as redemptions.
The final regulations provide guidance
on when a distribution by a CDE that is
a corporation for Federal tax purposes
will be treated as a redemption.
Some commentators suggested that, in
the case of a CDE that is treated as a
partnership for Federal tax purposes, a
redemption should be limited to
purchases by the CDE of a partner’s

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capital interest. Alternatively,
commentators requested guidance on
how to distinguish between a return of
capital and a distribution of profits if a
return of capital is treated as a
redemption. In response to comments,
the final regulations provide a safe
harbor under which cash distributions
by a partnership will not be treated as
a redemption. Under the safe harbor, 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 if the distribution does not
exceed the CDE’s operating income (as
defined in the final regulations) 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 be not 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.
Commentators suggested that cure
periods be provided to enable CDEs to
correct any noncompliance with the
requirements under section 45D. One
commentator suggested that a cure
period be provided to allow an
investment that no longer qualifies as a
qualified low-income community
investment to be replaced with a
qualifying investment by the end of the
calendar year following the year the
original investment lost its status as a
qualified low-income community
investment. Other commentators
suggested that, if a qualified equity
investment fails the substantially-all
requirement, the failure should not be a
recapture event if the CDE corrects the
failure within 6 months after the date
the CDE discovers (or reasonably should
have discovered) the failure. The final
regulations provide that, if a qualified
equity investment fails the
substantially-all requirement, the failure
is not a recapture event if the CDE
corrects the failure within 6 months
after the date the CDE becomes aware
(or reasonably should have become
aware) of the failure. Only one
correction is permitted for each
qualified equity investment during the
7-year credit period.
Other Issues
Section 45D(i)(1) authorizes the
Secretary to prescribe regulations as
may be appropriate to carry out section
45D including regulations that limit the
new markets tax credit for investments
that are directly or indirectly subsidized
by other Federal tax benefits (including
the low-income housing credit under

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section 42 and the exclusion from gross
income under section 103). The final
regulations do not prohibit a CDE from
purchasing tax-exempt bonds because
tax-exempt financing provides a subsidy
to borrowers and not bondholders.
However, the final regulations provide
that if a CDE makes a capital or equity
investment or loan with respect to a
qualified low-income building under
section 42, the investment or loan is not
a qualified low-income community
investment to the extent the building’s
eligible basis under section 42(d) is
financed by the proceeds of the
investment or loan.
Effective Dates
The final regulations are effective
December 22, 2004, and may be applied
by taxpayers before December 22, 2004.
However, both the definition of the term
substantial improvements and the
requirement that each lessee be a
qualified business apply to qualified
low-income community investments
made on or after February 22, 2005.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
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. It is hereby
certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that any burden on taxpayers is
minimal. Accordingly, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notices
of proposed rulemaking preceding these
regulations were submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these
regulations is Paul F. Handleman, Office
of the Associate Chief Counsel
(Passthroughs and Special Industries),
IRS. However, other personnel from the
IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

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26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
Section 1.45D–1 also issued under 26
U.S.C. 45D(i); * * *
■ Par. 2. Section 1.45D–1 is added to
read as follows:

§ 1.45D–1

New markets tax credit.

(a) Table of contents. This paragraph
lists the headings that appear in
§ 1.45D–1.
(a) Table of contents
(b) Allowance of credit
(1) In general
(2) Credit allowance date
(3) Applicable percentage
(4) Amount paid at original issue
(c) Qualified equity investment
(1) In general
(2) Equity investment
(3) Equity investments made prior to
allocation
(i) In general
(ii) Exceptions
(A) Allocation applications submitted by
August 29, 2002
(B) Other allocation applications
(iii) Failure to receive allocation
(iv) Initial investment date
(4) Limitations
(i) In general
(ii) Allocation limitation
(5) Substantially all
(i) In general
(ii) Direct-tracing calculation
(iii) Safe harbor calculation
(iv) Time limit for making investments
(v) Reduced substantially-all percentage
(vi) Examples
(6) Aggregation of equity investments
(7) Subsequent purchasers
(d) Qualified low-income community
investments
(1) In general
(i) Investment in a qualified active lowincome community business
(ii) Purchase of certain loans from CDEs
(A) In general
(B) Certain loans made before CDE
certification
(C) Intermediary CDEs
(D) Examples
(iii) Financial counseling and other services
(iv) Investments in other CDEs
(A) In general
(B) Examples
(2) Payments of, or for, capital, equity or
principal
(i) In general

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(ii) Subsequent reinvestments
(iii) Special rule for loans
(iv) Example
(3) Special rule for reserves
(4) Qualified active low-income community
business
(i) In general
(A) Gross-income requirement
(B) Use of tangible property
(1) In general
(2) Example
(C) Services performed
(D) Collectibles
(E) Nonqualified financial property
(1) In general
(2) Construction of real property
(ii) Proprietorships
(iii) Portions of business
(A) In general
(B) Examples
(iv) Active conduct of a trade or business
(A) Special rule
(B) Example
(5) Qualified business
(i) In general
(ii) Rental of real property
(iii) Exclusions
(A) Trades or businesses involving
intangibles
(B) Certain other trades or businesses
(C) Farming
(6) Qualifications
(i) In general
(ii) Control
(A) In general
(B) Definition of control
(C) Disregard of control
(7) Financial counseling and other services
(8) Special rule for certain loans
(i) In general
(ii) Example
(e) Recapture
(1) In general
(2) Recapture event
(3) Redemption
(i) Equity investment in a C corporation
(ii) Equity investment in an S corporation
(iii) Capital interest in a partnership
(4) Bankruptcy
(5) Waiver of requirement or extension of
time
(i) In general
(ii) Manner for requesting a waiver or
extension
(iii) Terms and conditions
(6) Cure period
(7) Example
(f) Basis reduction
(1) In general
(2) Adjustment in basis of interest in
partnership or S corporation
(g) Other rules
(1) Anti-abuse
(2) Reporting requirements
(i) Notification by CDE to taxpayer
(A) Allowance of new markets tax credit
(B) Recapture event
(ii) CDE reporting requirements to Secretary
(iii) Manner of claiming new markets tax
credit
(iv) Reporting recapture tax
(3) Other Federal tax benefits
(i) In general
(ii) Low-income housing credit
(4) Bankruptcy of CDE
(h) Effective dates

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(1) In general
(2) Exception for certain provisions

(b) Allowance of credit—(1) In
general. For purposes of the general
business credit under section 38, a
taxpayer holding a qualified equity
investment on a credit allowance date
which occurs during the taxable year
may claim the new markets tax credit
determined under section 45D and this
section for such taxable year in an
amount equal to the applicable
percentage of the amount paid to a
qualified community development
entity (CDE) for such investment at its
original issue. Qualified equity
investment is defined in paragraph (c) of
this section. Credit allowance date is
defined in paragraph (b)(2) of this
section. Applicable percentage is
defined in paragraph (b)(3) of this
section. A CDE is a qualified community
development entity as defined in
section 45D(c). The amount paid at
original issue is determined under
paragraph (b)(4) of this section.
(2) Credit allowance date. The term
credit allowance date means, with
respect to any qualified equity
investment—
(i) The date on which the investment
is initially made; and
(ii) Each of the 6 anniversary dates of
such date thereafter.
(3) Applicable percentage. The
applicable percentage is 5 percent for
the first 3 credit allowance dates and 6
percent for the other 4 credit allowance
dates.
(4) Amount paid at original issue. The
amount paid to the CDE for a qualified
equity investment at its original issue
consists of all amounts paid by the
taxpayer to, or on behalf of, the CDE
(including any underwriter’s fees) to
purchase the investment at its original
issue.
(c) Qualified equity investment—(1) In
general. The term qualified equity
investment means any equity
investment (as defined in paragraph
(c)(2) of this section) in a CDE if—
(i) The investment is acquired by the
taxpayer at its original issue (directly or
through an underwriter) solely in
exchange for cash;
(ii) Substantially all (as defined in
paragraph (c)(5) of this section) of such
cash is used by the CDE to make
qualified low-income community
investments (as defined in paragraph
(d)(1) of this section); and
(iii) The investment is designated for
purposes of section 45D and this section
by the CDE on its books and records
using any reasonable method.
(2) Equity investment. The term equity
investment means any stock (other than

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nonqualified preferred stock as defined
in section 351(g)(2)) in an entity that is
a corporation for Federal tax purposes
and any capital interest in an entity that
is a partnership for Federal tax
purposes. See §§ 301.7701–1 through
301.7701–3 of this chapter for rules
governing when a business entity, such
as a business trust or limited liability
company, is classified as a corporation
or a partnership for Federal tax
purposes.
(3) Equity investments made prior to
allocation—(i) In general. Except as
provided in paragraph (c)(3)(ii) of this
section, an equity investment in an
entity is not eligible to be designated as
a qualified equity investment if it is
made before the entity enters into an
allocation agreement with the Secretary.
An allocation agreement is an
agreement between the Secretary and a
CDE relating to a new markets tax credit
allocation under section 45D(f)(2).
(ii) 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 under paragraph (c)(1)(iii) of
this section if—
(A) Allocation applications submitted
by August 29, 2002.
(1) The equity investment is made on
or after April 20, 2001;
(2) The designation of the equity
investment as a qualified equity
investment is made for a credit
allocation received pursuant to an
allocation application submitted to the
Secretary no later than August 29, 2002;
and
(3) The equity investment otherwise
satisfies the requirements of section 45D
and this section; or
(B) Other allocation applications.
(1) The equity investment is made on
or after the date the Secretary publishes
a Notice of Allocation Availability
(NOAA) in the Federal Register;
(2) The designation of the equity
investment as a qualified equity
investment is made for a credit
allocation received pursuant to an
allocation application submitted to the
Secretary under that NOAA; and
(3) The equity investment otherwise
satisfies the requirements of section 45D
and this section.
(iii) Failure to receive allocation. For
purposes of paragraph (c)(3)(ii)(A) of
this section, if the entity in which the
equity investment is made does not
receive an allocation pursuant to an
allocation application submitted no
later than August 29, 2002, the equity
investment will not be eligible to be
designated as a qualified equity
investment. For purposes of paragraph
(c)(3)(ii)(B) of this section, if the entity

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in which the equity investment is made
does not receive an allocation under the
NOAA described in paragraph
(c)(3)(ii)(B)(1) of this section, the equity
investment will not be eligible to be
designated as a qualified equity
investment.
(iv) Initial investment date. If an
equity investment is designated as a
qualified equity investment in
accordance with paragraph (c)(3)(ii) of
this section, the investment is treated as
initially made on the effective date of
the allocation agreement between the
CDE and the Secretary.
(4) Limitations—(i) In general. The
term qualified equity investment does
not include—
(A) Any equity investment issued by
a CDE more than 5 years after the date
the CDE enters into an allocation
agreement (as defined in paragraph
(c)(3)(i) of this section) with the
Secretary; and
(B) Any equity investment by a CDE
in another CDE, if the CDE making the
investment has received an allocation
under section 45D(f)(2).
(ii) Allocation limitation. The
maximum amount of equity investments
issued by a CDE that may be designated
under paragraph (c)(1)(iii) of this section
by the CDE may not exceed the portion
of the limitation amount allocated to the
CDE by the Secretary under section
45D(f)(2).
(5) Substantially all—(i) In general.
Except as provided in paragraph
(c)(5)(v) of this section, the term
substantially all means at least 85
percent. The substantially-all
requirement must be satisfied for each
annual period in the 7-year credit
period using either the direct-tracing
calculation under paragraph (c)(5)(ii) of
this section, or the safe harbor
calculation under paragraph (c)(5)(iii) of
this section. For the first annual period,
the substantially-all requirement is
treated as satisfied if either the directtracing calculation under paragraph
(c)(5)(ii) of this section, or the safeharbor calculation under paragraph
(c)(5)(iii) of this section, is performed on
a single testing date and the result of the
calculation is at least 85 percent. For
each annual period other than the first
annual period, the substantially-all
requirement is treated as satisfied if
either the direct-tracing calculation
under paragraph (c)(5)(ii) of this section,
or the safe harbor calculation under
paragraph (c)(5)(iii) of this section, is
performed every six months and the
average of the two calculations for the
annual period is at least 85 percent. For
example, the CDE may choose the same
two testing dates for all qualified equity
investments regardless of the date each

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qualified equity investment was initially
made under paragraph (b)(2)(i) of this
section, provided the testing dates are
six months apart. The use of the directtracing calculation under paragraph
(c)(5)(ii) of this section (or the safe
harbor calculation under paragraph
(c)(5)(iii) of this section) for an annual
period does not preclude the use of the
safe harbor calculation under paragraph
(c)(5)(iii) of this section (or the directtracing calculation under paragraph
(c)(5)(ii) of this section) for another
annual period, provided that a CDE that
switches to a direct-tracing calculation
must substantiate that the taxpayer’s
investment is directly traceable to
qualified low-income community
investments from the time of the CDE’s
initial investment in a qualified lowincome community investment. For
purposes of this paragraph (c)(5)(i), the
7-year credit period means the period of
7 years beginning on the date the
qualified equity investment is initially
made. See paragraph (c)(6) of this
section for circumstances in which a
CDE may treat more than one equity
investment as a single qualified equity
investment.
(ii) Direct-tracing calculation. The
substantially-all requirement is satisfied
if at least 85 percent of the taxpayer’s
investment is directly traceable to
qualified low-income community
investments as defined in paragraph
(d)(1) of this section. The direct-tracing
calculation is a fraction the numerator
of which is the CDE’s aggregate cost
basis determined under section 1012 in
all of the qualified low-income
community investments that are directly
traceable to the taxpayer’s cash
investment, and the denominator of
which is the amount of the taxpayer’s
cash investment under paragraph (b)(4)
of this section. For purposes of this
paragraph (c)(5)(ii), cost basis includes
the cost basis of any qualified lowincome community investment that
becomes worthless. See paragraph (d)(2)
of this section for the treatment of
amounts received by a CDE in payment
of, or for, capital, equity or principal
with respect to a qualified low-income
community investment.
(iii) Safe harbor calculation. The
substantially-all requirement is satisfied
if at least 85 percent of the aggregate
gross assets of the CDE are invested in
qualified low-income community
investments as defined in paragraph
(d)(1) of this section. The safe harbor
calculation is a fraction the numerator
of which is the CDE’s aggregate cost
basis determined under section 1012 in
all of its qualified low-income
community investments, and the
denominator of which is the CDE’s

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aggregate cost basis determined under
section 1012 in all of its assets. For
purposes of this paragraph (c)(5)(iii),
cost basis includes the cost basis of any
qualified low-income community
investment that becomes worthless. See
paragraph (d)(2) of this section for the
treatment of amounts received by a CDE
in payment of, or for, capital, equity or
principal with respect to a qualified
low-income community investment.
(iv) Time limit for making
investments. The taxpayer’s cash
investment received by a CDE is treated
as invested in a qualified low-income
community investment as defined in
paragraph (d)(1) of this section only to
the extent that the cash is so invested
within the 12-month period beginning
on the date the cash is paid by the
taxpayer (directly or through an
underwriter) to the CDE.
(v) Reduced substantially-all
percentage. For purposes of the
substantially-all requirement (including
the direct-tracing calculation under
paragraph (c)(5)(ii) of this section and
the safe harbor calculation under
paragraph (c)(5)(iii) of this section), 85
percent is reduced to 75 percent for the
seventh year of the 7-year credit period
(as defined in paragraph (c)(5)(i) of this
section).
(vi) Examples. The following
examples illustrate an application of
this paragraph (c)(5):
Example 1. X is a partnership and a CDE
that has received a $1 million new markets
tax credit allocation from the Secretary. On
September 1, 2004, X uses a line of credit
from a bank to fund a $1 million loan to Y.
The loan is a qualified low-income
community investment under paragraph
(d)(1) of this section. On September 5, 2004,
A pays $1 million to acquire a capital interest
in X. X uses the proceeds of A’s equity
investment to pay off the $1 million line of
credit that was used to fund the loan to Y.
X’s aggregate gross assets consist of the $1
million loan to Y and $100,000 in other
assets. A’s equity investment in X does not
satisfy the substantially-all requirement
under paragraph (c)(5)(i) of this section using
the direct-tracing calculation under
paragraph (c)(5)(ii) of this section because the
cash from A’s equity investment is not used
to make X’s loan to Y. However, A’s equity
investment in X satisfies the substantially-all
requirement using the safe harbor calculation
under paragraph (c)(5)(iii) of this section
because at least 85 percent of X’s aggregate
gross assets are invested in qualified lowincome community investments.
Example 2. X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On August 1,
2004, A pays $100,000 for a capital interest
in X. On August 5, 2004, X uses the proceeds
of A’s equity investment to make an equity
investment in Y. X controls Y within the
meaning of paragraph (d)(6)(ii)(B) of this
section. For the annual period ending July

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31, 2005, Y is a qualified active low-income
community business (as defined in paragraph
(d)(4) of this section). Thus, for that period,
A’s equity investment satisfies the
substantially-all requirement under
paragraph (c)(5)(i) of this section using the
direct-tracing calculation under paragraph
(c)(5)(ii) of this section. For the annual period
ending July 31, 2006, Y no longer is a
qualified active low-income community
business. Thus, for that period, A’s equity
investment does not satisfy the substantiallyall requirement using the direct-tracing
calculation. However, during the entire
annual period ending July 31, 2006, X’s
remaining assets are invested in qualified
low-income community investments with an
aggregate cost basis of $900,000.
Consequently, for the annual period ending
July 31, 2006, at least 85 percent of X’s
aggregate gross assets are invested in
qualified low-income community
investments. Thus, for the annual period
ending July 31, 2006, A’s equity investment
satisfies the substantially-all requirement
using the safe harbor calculation under
paragraph (c)(5)(iii) of this section.
Example 3. X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On August 1,
2004, A and B each pay $100,000 for a capital
interest in X. X does not treat A’s and B’s
equity investments as one qualified equity
investment under paragraph (c)(6) of this
section. On September 1, 2004, X uses the
proceeds of A’s equity investment to make an
equity investment in Y and X uses the
proceeds of B’s equity investment to make an
equity investment in Z. X has no assets other
than its investments in Y and Z. X controls
Y and Z within the meaning of paragraph
(d)(6)(ii)(B) of this section. For the annual
period ending July 31, 2005, Y and Z are
qualified active low-income community
businesses (as defined in paragraph (d)(4) of
this section). Thus, for the annual period
ending July 31, 2005, A’s and B’s equity
investments satisfy the substantially-all
requirement under paragraph (c)(5)(i) of this
section using either the direct-tracing
calculation under paragraph (c)(5)(ii) of this
section or the safe harbor calculation under
paragraph (c)(5)(iii) of this section. For the
annual period ending July 31, 2006, Y, but
not Z, is a qualified active low-income
community business. Thus, for the annual
period ending July 31, 2006—
(1) X does not satisfy the substantially-all
requirement using the safe harbor calculation
under paragraph (c)(5)(iii) of this section;
(2) A’s equity investment satisfies the
substantially-all requirement using the
direct-tracing calculation because A’s equity
investment is directly traceable to Y; and
(3) B’s equity investment does not satisfy
the substantially-all requirement because B’s
equity investment is traceable to Z.
Example 4. X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On November
1, 2004, A pays $100,000 for a capital interest
in X. On December 1, 2004, B pays $100,000
for a capital interest in X. On December 31,
2004, X uses $85,000 from A’s equity
investment and $85,000 from B’s equity
investment to make a $170,000 equity

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investment in Y, a qualified active lowincome community business (as defined in
paragraph (d)(4) of this section). X has no
assets other than its investment in Y. X
determines whether A’s and B’s equity
investments satisfy the substantially-all
requirement under paragraph (c)(5)(i) of this
section on December 31, 2004. The
calculation for A’s and B’s equity
investments is 85 percent using either the
direct-tracing calculation under paragraph
(c)(5)(ii) of this section or the safe harbor
calculation under paragraph (c)(5)(iii) of this
section. Therefore, for the annual periods
ending October 31, 2005, and November 30,
2005, A’s and B’s equity investments,
respectively, satisfy the substantially-all
requirement under paragraph (c)(5)(i) of this
section. For the subsequent annual period, X
performs its calculations on December 31,
2005, and June 30, 2006. The average of the
two calculations on December 31, 2005, and
June 30, 2006, is 85 percent using either the
direct-tracing calculation under paragraph
(c)(5)(ii) of this section or the safe harbor
calculation under paragraph (c)(5)(iii) of this
section. Therefore, for the annual periods
ending October 31, 2006, and November 30,
2006, A’s and B’s equity investments,
respectively, satisfy the substantially-all
requirement under paragraph (c)(5)(i) of this
section.

(6) Aggregation of equity investments.
A CDE may treat any qualified equity
investments issued on the same day as
one qualified equity investment. If a
CDE aggregates equity investments
under this paragraph (c)(6), the rules in
this section shall be construed in a
manner consistent with that treatment.
(7) Subsequent purchasers. A
qualified equity investment includes
any equity investment that would (but
for paragraph (c)(1)(i) of this section) be
a qualified equity investment in the
hands of the taxpayer if the investment
was a qualified equity investment in the
hands of a prior holder.
(d) Qualified low-income community
investments—(1) In general. The term
qualified low-income community
investment means any of the following:
(i) Investment in a qualified active
low-income community business. Any
capital or equity investment in, or loan
to, any qualified active low-income
community business (as defined in
paragraph (d)(4) of this section).
(ii) Purchase of certain loans from
CDEs—(A) In general. The purchase by
a CDE (the ultimate CDE) from another
CDE (whether or not that CDE has
received an allocation from the
Secretary under section 45D(f)(2)) of any
loan made by such entity that is a
qualified low-income community
investment. A loan purchased by the
ultimate CDE from another CDE is a
qualified low-income community
investment if it qualifies as a qualified
low-income community investment
either—

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(1) At the time the loan was made; or
(2) At the time the ultimate CDE
purchases the loan.
(B) Certain loans made before CDE
certification. For purposes of paragraph
(d)(1)(ii)(A) of this section, a loan by an
entity is treated as made by a CDE,
notwithstanding that the entity was not
a CDE at the time it made the loan, if
the entity is a CDE at the time it sells
the loan.
(C) Intermediary CDEs. For purposes
of paragraph (d)(1)(ii)(A) of this section,
the purchase of a loan by the ultimate
CDE from a CDE that did not make the
loan (the second CDE) is treated as a
purchase of the loan by the ultimate
CDE from the CDE that made the loan
(the originating CDE) if—
(1) The second CDE purchased the
loan from the originating CDE (or from
another CDE); and
(2) Each entity that sold the loan was
a CDE at the time it sold the loan.
(D) Examples. The following
examples illustrate an application of
this paragraph (d)(1)(ii):
Example 1. X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. Y, a
corporation, made a $500,000 loan to Z in
1999. In January of 2004, Y is certified as a
CDE. On September 1, 2004, X purchases the
loan from Y. At the time X purchases the
loan, Z is a qualified active low-income
community business under paragraph
(d)(4)(i) of this section. Accordingly, the loan
purchased by X from Y is a qualified lowincome community investment under
paragraphs (d)(1)(ii)(A) and (B) of this
section.
Example 2. The facts are the same as in
Example 1 except that on February 1, 2004,
Y sells the loan to W and on September 1,
2004, W sells the loan to X. W is a CDE.
Under paragraph (d)(1)(ii)(C) of this section,
X’s purchase of the loan from W is treated
as the purchase of the loan from Y.
Accordingly, the loan purchased by X from
W is a qualified low-income community
investment under paragraphs (d)(1)(ii)(A) and
(C) of this section.
Example 3. The facts are the same as in
Example 2 except that W is not a CDE.
Because W was not a CDE at the time it sold
the loan to X, the purchase of the loan by X
from W is not a qualified low-income
community investment under paragraphs
(d)(1)(ii)(A) and (C) of this section.

(iii) Financial counseling and other
services. Financial counseling and other
services (as defined in paragraph (d)(7)
of this section) provided to any
qualified active low-income community
business, or to any residents of a lowincome community (as defined in
section 45D(e)).
(iv) Investments in other CDEs—(A) In
general. Any equity investment in, or
loan to, any CDE (the second CDE) by
a CDE (the primary CDE), but only to the

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extent that the second CDE uses the
proceeds of the investment or loan—
(1) In a manner—
(i) That is described in paragraph
(d)(1)(i) or (iii) of this section; and
(ii) That would constitute a qualified
low-income community investment if it
were made directly by the primary CDE;
(2) To make an equity investment in,
or loan to, a third CDE that uses such
proceeds in a manner described in
paragraph (d)(1)(iv)(A)(1) of this section;
or
(3) To make an equity investment in,
or loan to, a third CDE that uses such
proceeds to make an equity investment
in, or loan to, a fourth CDE that uses
such proceeds in a manner described in
paragraph (d)(1)(iv)(A)(1) of this section.
(B) Examples. The following
examples illustrate an application of
paragraph (d)(1)(iv)(A) of this section:
Example 1. X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On September
1, 2004, X uses $975,000 to make an equity
investment in Y. Y is a corporation and a
CDE. On October 1, 2004, Y uses $950,000
from X’s equity investment to make a loan to
Z. Z is a qualified active low-income
community business under paragraph
(d)(4)(i) of this section. Of X’s equity
investment in Y, $950,000 is a qualified lowincome community investment under
paragraph (d)(1)(iv)(A)(1) of this section.
Example 2. W is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On September
1, 2004, W uses $975,000 to make an equity
investment in X. On October 1, 2004, X uses
$950,000 from W’s equity investment to
make an equity investment in Y. X and Y are
corporations and CDEs. On October 5, 2004,
Y uses $925,000 from X’s equity investment
to make a loan to Z. Z is a qualified active
low-income community business under
paragraph (d)(4)(i) of this section. Of W’s
equity investment in X, $925,000 is a
qualified low-income community investment
under paragraph (d)(1)(iv)(A)(2) of this
section because X uses proceeds of W’s
equity investment to make an equity
investment in Y, which uses $925,000 of the
proceeds in a manner described in paragraph
(d)(1)(iv)(A)(1) of this section.
Example 3. U is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On September
1, 2004, U uses $975,000 to make an equity
investment in V. On October 1, 2004, V uses
$950,000 from U’s equity investment to make
an equity investment in W. On October 5,
2004, W uses $925,000 from V’s equity
investment to make an equity investment in
X. On November 1, 2004, X uses $900,000
from W’s equity investment to make an
equity investment in Y. V, W, X, and Y are
corporations and CDEs. On November 5,
2004, Y uses $875,000 from X’s equity
investment to make a loan to Z. Z is a
qualified active low-income community
business under paragraph (d)(4)(i) of this
section. U’s equity investment in V is not a

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qualified low-income community investment
because X does not use proceeds of W’s
equity investment in a manner described in
paragraph (d)(1)(iv)(A)(1) of this section.

(2) Payments of, or for, capital, equity
or principal—(i) In general. Except as
otherwise provided in this paragraph
(d)(2), amounts received by a CDE in
payment of, or for, capital, equity or
principal with respect to a qualified
low-income community investment
must be reinvested by the CDE in a
qualified low-income community
investment no later than 12 months
from the date of receipt to be treated as
continuously invested in a qualified
low-income community investment. If
the amounts received by the CDE are
equal to or greater than the cost basis of
the original qualified low-income
community investment (or applicable
portion thereof), and the CDE reinvests,
in accordance with this paragraph
(d)(2)(i), an amount at least equal to
such original cost basis, then an amount
equal to such original cost basis will be
treated as continuously invested in a
qualified low-income community
investment. In addition, if the amounts
received by the CDE are equal to or
greater than the cost basis of the original
qualified low-income community
investment (or applicable portion
thereof), and the CDE reinvests, in
accordance with this paragraph (d)(2)(i),
an amount less than such original cost
basis, then only the amount so
reinvested will be treated as
continuously invested in a qualified
low-income community investment. If
the amounts received by the CDE are
less than the cost basis of the original
qualified low-income community
investment (or applicable portion
thereof), and the CDE reinvests an
amount in accordance with this
paragraph (d)(2)(i), then the amount
treated as continuously invested in a
qualified low-income community
investment will equal the excess (if any)
of such original cost basis over the
amounts received by the CDE that are
not so reinvested. Amounts received by
a CDE in payment of, or for, capital,
equity or principal with respect to a
qualified low-income community
investment during the seventh year of
the 7-year credit period (as defined in
paragraph (c)(5)(i) of this section) do not
have to be reinvested by the CDE in a
qualified low-income community
investment in order to be treated as
continuously invested in a qualified
low-income community investment.
(ii) Subsequent reinvestments. In
applying paragraph (d)(2)(i) of this
section to subsequent reinvestments, the
original cost basis is reduced by the
amount (if any) by which the original

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cost basis exceeds the amount
determined to be continuously invested
in a qualified low-income community
investment.
(iii) Special rule for loans. Periodic
amounts received during a calendar year
as repayment of principal on a loan that
is a qualified low-income community
investment are treated as continuously
invested in a qualified low-income
community investment if the amounts
are reinvested in another qualified lowincome community investment by the
end of the following calendar year.
(iv) Example. The application of
paragraphs (d)(2)(i) and (ii) of this
section is illustrated by the following
example:
Example. On April 1, 2003, A, B, and C
each pay $100,000 to acquire a capital
interest in X, a partnership. X is a CDE that
has received a new markets tax credit
allocation from the Secretary. X treats the 3
partnership interests as one qualified equity
investment under paragraph (c)(6) of this
section. In August 2003, X uses the $300,000
to make a qualified low-income community
investment under paragraph (d)(1) of this
section. In August 2005, the qualified lowincome community investment is redeemed
for $250,000. In February 2006, X reinvests
$230,000 of the $250,000 in a second
qualified low-income community investment
and uses the remaining $20,000 for operating
expenses. Under paragraph (d)(2)(i) of this
section, $280,000 of the proceeds of the
qualified equity investment is treated as
continuously invested in a qualified lowincome community investment. In December
2008, X sells the second qualified lowincome community investment and receives
$400,000. In March 2009, X reinvests
$320,000 of the $400,000 in a third qualified
low-income community investment. Under
paragraphs (d)(2)(i) and (ii) of this section,
$280,000 of the proceeds of the qualified
equity investment is treated as continuously
invested in a qualified low-income
community investment ($40,000 is treated as
invested in another qualified low-income
community investment in March 2009).

(3) Special rule for reserves. Reserves
(not in excess of 5 percent of the
taxpayer’s cash investment under
paragraph (b)(4) of this section)
maintained by the CDE for loan losses
or for additional investments in existing
qualified low-income community
investments are treated as invested in a
qualified low-income community
investment under paragraph (d)(1) of
this section. Reserves include fees paid
to third parties to protect against loss of
all or a portion of the principal of, or
interest on, a loan that is a qualified
low-income community investment.
(4) Qualified active low-income
community business—(i) In general. The
term qualified active low-income
community business means, with
respect to any taxable year, a

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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 in
paragraphs (d)(4)(i)(A), (B), (C), (D), and
(E) 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.
(A) Gross-income requirement. At
least 50 percent of the total gross
income of such entity is derived from
the active conduct of a qualified
business (as defined in paragraph (d)(5)
of this section) within any low-income
community (as defined in section
45D(e)). An entity is deemed to satisfy
this paragraph (d)(4)(i)(A) if the entity
meets the requirements of either
paragraph (d)(4)(i)(B) or (C) of this
section, if ‘‘50 percent’’ is applied
instead of 40 percent. In addition, an
entity may satisfy this paragraph
(d)(4)(i)(A) based on all the facts and
circumstances. See paragraph (d)(4)(iv)
of this section for certain circumstances
in which an entity will be treated as
engaged in the active conduct of a trade
or business.
(B) Use of tangible property—(1) In
general. At least 40 percent of the use
of the tangible property of such entity
(whether owned or leased) is within any
low-income community. This
percentage is determined based on a
fraction the numerator of which is the
average value of the tangible property
owned or leased by the entity and used
by the entity during the taxable year in
a low-income community and the
denominator of which is the average
value of the tangible property owned or
leased by the entity and used by the
entity during the taxable year. Property
owned by the entity is valued at its cost
basis as determined under section 1012.
Property leased by the entity is valued
at a reasonable amount established by
the entity.
(2) Example. The application of
paragraph (d)(4)(i)(B)(1) of this section
is illustrated by the following example:
Example. X is a corporation engaged in the
business of moving and hauling scrap metal.
X operates its business from a building and
an adjoining parking lot that X owns. The
building and the parking lot are located in a
low-income community (as defined in
section 45D(e)). X’s cost basis under section
1012 for the building and parking lot is
$200,000. During the taxable year, X operates
its business 10 hours a day, 6 days a week.
X owns and uses 40 trucks in its business,
which, on average, are used 6 hours a day
outside a low-income community and 4
hours a day inside a low-income community

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(including time in the parking lot). The cost
basis under section 1012 of each truck is
$25,000. During non-business hours, the
trucks are parked in the lot. Only X’s 10-hour
business days are used in calculating the use
of tangible property percentage under
paragraph (d)(4)(i)(B)(1) of this section. Thus,
the numerator of the tangible property
calculation is $600,000 (4⁄10 of $1,000,000
(the $25,000 cost basis of each truck times 40
trucks) plus $200,000 (the cost basis of the
building and parking lot)) and the
denominator is $1,200,000 (the total cost
basis of the trucks, building, and parking lot),
resulting in 50 percent of the use of X’s
tangible property being within a low-income
community. Consequently, X satisfies the 40
percent use of tangible property test under
paragraph (d)(4)(i)(B)(1) of this section.

(C) Services performed. At least 40
percent of the services performed for
such entity by its employees are
performed in a low-income community.
This percentage is determined based on
a fraction the numerator of which is the
total amount paid by the entity for
employee services performed in a lowincome community during the taxable
year and the denominator of which is
the total amount paid by the entity for
employee services during the taxable
year. If the entity has no employees, the
entity is deemed to satisfy this
paragraph (d)(4)(i)(C), and paragraph
(d)(4)(i)(A) of this section, if the entity
meets the requirement of paragraph
(d)(4)(i)(B) of this section if ‘‘85
percent’’ is applied instead of 40
percent.
(D) Collectibles. Less than 5 percent of
the average of the aggregate unadjusted
bases of the property of such entity is
attributable to collectibles (as defined in
section 408(m)(2)) other than
collectibles that are held primarily for
sale to customers in the ordinary course
of business.
(E) Nonqualified financial property—
(1) In general. Less than 5 percent of the
average of the aggregate unadjusted
bases of the property of such entity is
attributable to nonqualified financial
property. For purposes the preceding
sentence, the term nonqualified
financial property means debt, stock,
partnership interests, options, futures
contracts, forward contracts, warrants,
notional principal contracts, annuities,
and other similar property except that
such term does not include—
(i) Reasonable amounts of working
capital held in cash, cash equivalents, or
debt instruments with a term of 18
months or less (because the definition of
nonqualified financial property
includes debt instruments with a term
in excess of 18 months, banks, credit
unions, and other financial institutions
are generally excluded from the

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definition of a qualified active lowincome community business); or
(ii) Debt instruments described in
section 1221(a)(4).
(2) Construction of real property. For
purposes of paragraph (d)(4)(i)(E)(1)(i) of
this section, the proceeds of a capital or
equity investment or loan by a CDE that
will be expended for construction of
real property within 12 months after the
date the investment or loan is made are
treated as a reasonable amount of
working capital.
(ii) Proprietorships. Any business
carried on by an individual as a
proprietor is a qualified active lowincome community business if the
business would meet the requirements
of paragraph (d)(4)(i) of this section if
the business were incorporated.
(iii) Portions of business—(A) In
general. A CDE may treat any trade or
business (or portion thereof) as a
qualified active low-income community
business if the trade or business (or
portion thereof) would meet the
requirements of paragraph (d)(4)(i) of
this section if the trade or business (or
portion thereof) were separately
incorporated and a complete and
separate set of books and records is
maintained for that trade or business (or
portion thereof). However, the CDE’s
capital or equity investment or loan is
not a qualified low-income community
investment under paragraph (d)(1)(i) of
this section to the extent the proceeds
of the investment or loan are not used
for the trade or business (or portion
thereof) that is treated as a qualified
active low-income community business
under this paragraph (d)(4)(iii)(A).
(B) Examples. The following
examples illustrate an application of
paragraph (d)(4)(iii) of this section:
Example 1. X is a partnership and a CDE
that receives a new markets tax credit
allocation from the Secretary. A pays $1
million for a capital interest in X. Z is a
corporation that operates a supermarket that
is not in a low-income community (as
defined in section 45D(e)). X uses the
proceeds of A’s equity investment to make a
loan to Z that Z will use to construct a new
supermarket in a low-income community. Z
will maintain a complete and separate set of
books and records for the new supermarket.
The proceeds of X’s loan to Z will be used
exclusively for the new supermarket. Assume
that Z’s new supermarket in the low-income
community would meet the requirements to
be a qualified active low-income community
business under paragraph (d)(4)(i) of this
section if it were separately incorporated.
Pursuant to paragraph (d)(4)(iii)(A) of this
section, X treats Z’s new supermarket as the
qualified active low-income community
business. Accordingly, X’s loan to Z is a
qualified low-income community investment
under paragraph (d)(1)(i) of this section.

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Example 2. X is a partnership and a CDE
that receives a new markets tax credit
allocation from the Secretary. A pays $1
million for a capital interest in X. Z is a
corporation that operates a liquor store in a
low-income community (as defined in
section 45D(e)). A liquor store is not a
qualified business under paragraph
(d)(5)(iii)(B) of this section. X uses the
proceeds of A’s equity investment to make a
loan to Z that Z will use to construct a
restaurant next to the liquor store. Z will
maintain a complete and separate set of
books and records for the new restaurant.
The proceeds of X’s loan to Z will be used
exclusively for the new restaurant. Assume
that Z’s restaurant would meet the
requirements to be a qualified active lowincome community business under
paragraph (d)(4)(i) of this section if it were
separately incorporated. Pursuant to
paragraph (d)(4)(iii) of this section, X treats
Z’s restaurant as the qualified active lowincome community business. Accordingly,
X’s loan to Z is a qualified low-income
community investment under paragraph
(d)(1)(i) of this section.
Example 3. X is a partnership and a CDE
that receives a new markets tax credit
allocation from the Secretary. A pays $1
million for a capital interest in X. Z is a
corporation that operates an insurance
company in a low-income community (as
defined in section 45D(e)). Five percent or
more of the average of the aggregate
unadjusted bases of Z’s property is
attributable to nonqualified financial
property under paragraph (d)(4)(i)(E) of this
section. Z’s insurance operations include
different operating units including a claims
processing unit. X uses the proceeds of A’s
equity investment to make a loan to Z for use
in Z’s claims processing operations. Z will
maintain a complete and separate set of
books and records for the claims processing
unit. The proceeds of X’s loan to Z will be
used exclusively for the claims processing
unit. Assume that Z’s claims processing unit
would meet the requirements to be a
qualified active low-income community
business under paragraph (d)(4)(i) of this
section if it were separately incorporated.
Pursuant to paragraph (d)(4)(iii) of this
section, X treats Z’s claims processing unit as
the qualified active low-income community
business. Accordingly, X’s loan to Z is a
qualified low-income community investment
under paragraph (d)(1)(i) of this section.

(iv) Active conduct of a trade or
business—(A) Special rule. For
purposes of paragraph (d)(4)(i) of this
section, 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.

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the close of the taxable year of the
taxpayer conducting such trade or
business, the sum of the aggregate
Example. X is a partnership and a CDE that unadjusted bases (or, if greater, the fair
market value) of the assets owned by the
receives a new markets tax credit allocation
taxpayer that are used in such a trade or
from the Secretary on July 1, 2004. X makes
business, and the aggregate value of the
a ten-year loan to Y. Y is a newly formed
entity that will own and operate a shopping
assets leased by the taxpayer that are
center to be constructed in a low-income
used in such a trade or business,
community. Y has no revenues but X
exceeds $500,000. For purposes of this
reasonably expects that Y will generate
paragraph (d)(5)(iii)(C), two or more
revenues beginning in December 2005. Under trades or businesses will be treated as a
paragraph (d)(4)(iv)(A) of this section, Y is
single trade or business under rules
treated as engaged in the active conduct of
similar to the rules of section 52(a) and
a trade or business for purposes of paragraph
(b).
(d)(4)(i) of this section.
(6) Qualifications—(i) In general.
(5) Qualified business—(i) In general. Except as provided in paragraph
Except as otherwise provided in this
(d)(6)(ii) of this section, an entity is
paragraph (d)(5), the term qualified
treated as a qualified active low-income
business means any trade or business.
community business for the duration of
There is no requirement that employees the CDE’s investment in the entity if the
of a qualified business be residents of a
CDE reasonably expects, at the time the
low-income community.
CDE makes the capital or equity
(ii) Rental of real property. The rental investment in, or loan to, the entity, that
to others of real property located in any
the entity will satisfy the requirements
low-income community (as defined in
to be a qualified active low-income
section 45D(e)) is a qualified business if community business under paragraph
and only if the property is not
(d)(4)(i) of this section throughout the
residential rental property (as defined in entire period of the investment or loan.
section 168(e)(2)(A)) and there are
(ii) Control—(A) In general. If a CDE
substantial improvements located on the controls or obtains control of an entity
real property. For purposes of the
at any time during the 7-year credit
preceding sentence, the term substantial period (as defined in paragraph (c)(5)(i)
improvements means improvements the of this section), the entity will be treated
cost basis of which equals or exceeds 50 as a qualified active low-income
percent of the cost basis of the land on
community business only if the entity
which the improvements are located
satisfies the requirements of paragraph
and the costs of which are incurred after (d)(4)(i) of this section throughout the
the date the CDE makes the investment
entire period the CDE controls the
or loan. However, a CDE’s investment in entity.
or loan to a business engaged in the
(B) Definition of control. Control
rental of real property is not a qualified
means, with respect to an entity, direct
low-income community investment
or indirect ownership (based on value)
under paragraph (d)(1)(i) of this section
or control (based on voting or
to the extent any lessee of the real
management rights) of more than 50
property is not a qualified business
percent of the entity. For purposes of
under this paragraph (d)(5).
the preceding sentence, the term
(iii) Exclusions—(A) Trades or
management rights means the power to
businesses involving intangibles. The
influence the management policies or
term qualified business does not include investment decisions of the entity.
any trade or business consisting
(C) Disregard of control. For purposes
predominantly of the development or
of paragraph (d)(6)(ii)(A) of this section,
holding of intangibles for sale or license. the acquisition of control of an entity by
(B) Certain other trades or businesses. a CDE is disregarded during the 12The term qualified business does not
month period following such
include any trade or business consisting acquisition of control (the 12-month
of the operation of any private or
period) if—
commercial golf course, country club,
(1) The CDE’s capital or equity
massage parlor, hot tub facility, suntan
investment in, or loan to, the entity met
facility, racetrack or other facility used
the requirements of paragraph (d)(6)(i)
for gambling, or any store the principal
of this section when initially made;
business of which is the sale of
(2) The CDE’s acquisition of control of
alcoholic beverages for consumption off the entity is due to financial difficulties
premises.
of the entity that were unforeseen at the
(C) Farming. The term qualified
time the investment or loan described in
business does not include any trade or
paragraph (d)(6)(ii)(C)(1) of this section
business the principal activity of which was made; and
(3) If the acquisition of control occurs
is farming (within the meaning of
before the seventh year of the 7-year
section 2032A(e)(5)(A) or (B)) if, as of
(B) Example. The application of
paragraph (d)(4)(iv)(A) of this section is
illustrated by the following example:

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credit period (as defined in paragraph
(c)(5)(i) of this section), either—
(i) The entity satisfies the
requirements of paragraph (d)(4) of this
section by the end of the 12-month
period; or
(ii) The CDE sells or causes to be
redeemed the entire amount of the
investment or loan described in
paragraph (d)(6)(ii)(C)(1) of this section
and, by the end of the 12-month period,
reinvests the amount received in respect
of the sale or redemption in a qualified
low-income community investment
under paragraph (d)(1) of this section.
For this purpose, the amount treated as
continuously invested in a qualified
low-income community investment is
determined under paragraphs (d)(2)(i)
and (ii) of this section.
(7) Financial counseling and other
services. The term financial counseling
and other services means advice
provided by the CDE relating to the
organization or operation of a trade or
business.
(8) Special rule for certain loans—(i)
In general. For purposes of paragraphs
(d)(1)(i), (ii), and (iv) of this section, a
loan is treated as made by a CDE to the
extent the CDE purchases the loan from
the originator (whether or not the
originator is a CDE) within 30 days after
the date the originator makes the loan if,
at the time the loan is made, there is a
legally enforceable written agreement
between the originator and the CDE
which—
(A) Requires the CDE to approve the
making of the loan either directly or by
imposing specific written loan
underwriting criteria; and
(B) Requires the CDE to purchase the
loan within 30 days after the date the
loan is made.
(ii) Example. The application of
paragraph (d)(8)(i) of this section is
illustrated by the following example:
Example. (i) X is a partnership and a CDE
that has received a new markets tax credit
allocation from the Secretary. On October 1,
2004, Y enters into a legally enforceable
written agreement with W. Y and W are
corporations but only Y is a CDE. The
agreement between Y and W provides that Y
will purchase loans (or portions thereof) from
W within 30 days after the date the loan is
made by W, and that Y will approve the
making of the loans.
(ii) On November 1, 2004, W makes a
$825,000 loan to Z pursuant to the agreement
between Y and W. Z is a qualified active lowincome community business under
paragraph (d)(4) of this section. On
November 15, 2004, Y purchases the loan
from W for $840,000. On December 31, 2004,
X purchases the loan from Y for $850,000.
(iii) Under paragraph (d)(8)(i) of this
section, the loan to Z is treated as made by
Y. Y’s loan to Z is a qualified low-income

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community investment under paragraph
(d)(1)(i) of this section. Accordingly, under
paragraph (d)(1)(ii)(A) of this section, X’s
purchase of the loan from Y is a qualified
low-income community investment in the
amount of $850,000.

(e) Recapture—(1) In general. If, at
any time during the 7-year period
beginning on the date of the original
issue of a qualified equity investment in
a CDE, there is a recapture event under
paragraph (e)(2) of this section with
respect to such investment, then the tax
imposed by Chapter 1 of the Internal
Revenue Code for the taxable year in
which the recapture event occurs is
increased by the credit recapture
amount under section 45D(g)(2). A
recapture event under paragraph (e)(2)
of this section requires recapture of
credits allowed to the taxpayer who
purchased the equity investment from
the CDE at its original issue and to all
subsequent holders of that investment.
(2) Recapture event. There is a
recapture event with respect to an
equity investment in a CDE if—
(i) The entity ceases to be a CDE;
(ii) The proceeds of the investment
cease to be used in a manner that
satisfies the substantially-all
requirement of paragraph (c)(1)(ii) of
this section; or
(iii) The investment is redeemed or
otherwise cashed out by the CDE.
(3) Redemption—(i) Equity investment
in a C corporation. For purposes of
paragraph (e)(2)(iii) of this section, an
equity investment in a CDE that is
treated as a C corporation for Federal tax
purposes is redeemed when section
302(a) applies to amounts received by
the equity holder. An equity investment
is treated as cashed out when section
301(c)(2) or section 301(c)(3) applies to
amounts received by the equity holder.
An equity investment is not treated as
cashed out when only section 301(c)(1)
applies to amounts received by the
equity holder.
(ii) Equity investment in an S
corporation. For purposes of paragraph
(e)(2)(iii) of this section, an equity
investment in a CDE that is an S
corporation is redeemed when section
302(a) applies to amounts received by
the equity holder. An equity investment
in an S corporation is treated as cashed
out when a distribution to a shareholder
described in section 1368(a) exceeds the
accumulated adjustments account
determined under § 1.1368–2 and any
accumulated earnings and profits of the
S corporation.
(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

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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 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. 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:
(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 qualified low-income
community investments under
paragraph (d)(1) of this section;
(C) Deductions under sections 167
and 168, including the additional firstyear depreciation under section 168(k);
(D) Start-up expenditures amortized
under section 195; and
(E) Organizational expenses amortized
under section 709.
(4) Bankruptcy. Bankruptcy of a CDE
is not a recapture event.
(5) Waiver of requirement or extension
of time—(i) In general. The
Commissioner may waive a requirement
or extend a deadline if such waiver or
extension does not materially frustrate
the purposes of section 45D and this
section.
(ii) Manner for requesting a waiver or
extension. A CDE that believes it has
good cause for a waiver or an extension
may request relief from the
Commissioner in a ruling request. The
request should set forth all the relevant
facts and include a detailed explanation
describing the event or events relating to
the request for a waiver or an extension.
For further information on the
application procedure for a ruling, see
Rev. Proc. 2005–1 (2005–1 I.R.B. 1) or
its successor revenue procedure (see
§ 601.601(d)(2) of this chapter).
(iii) Terms and conditions. The
granting of a waiver or an extension to
a CDE under this section may require
adjustments of the CDE’s requirements

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under section 45D and this section as
may be appropriate.
(6) Cure period. If a qualified equity
investment fails the substantially-all
requirement under paragraph (c)(5)(i) of
this section, the failure is not a
recapture event under paragraph
(e)(2)(ii) of this section if the CDE
corrects the failure within 6 months
after the date the CDE becomes aware
(or reasonably should have become
aware) of the failure. Only one
correction is permitted for each
qualified equity investment during the
7-year credit period under this
paragraph (e)(6).
(7) Example. The application of this
paragraph (e) is illustrated by the
following example:
Example. In 2003, A and B acquire
separate qualified equity investments in X, a
partnership. X is a CDE that has received a
new markets tax credit allocation from the
Secretary. X uses the proceeds of A’s
qualified equity investment to make a
qualified low-income community investment
in Y, and X uses the proceeds of B’s qualified
equity investment to make a qualified lowincome community investment in Z. Y and
Z are not CDEs. X controls both Y and Z
within the meaning of paragraph (d)(6)(ii)(B)
of this section. In 2003, Y and Z are qualified
active low-income community businesses. In
2007, Y, but not Z, is a qualified active lowincome community business and X does not
satisfy the substantially-all requirement using
the safe harbor calculation under paragraph
(c)(5)(iii) of this section. A’s equity
investment satisfies the substantially-all
requirement of paragraph (c)(1)(ii) of this
section using the direct-tracing calculation of
paragraph (c)(5)(ii) of this section because A’s
equity investment is traceable to Y. However,
B’s equity investment fails the substantiallyall requirement using the direct-tracing
calculation because B’s equity investment is
traceable to Z. Therefore, under paragraph
(e)(2)(ii) of this section, there is a recapture
event for B’s equity investment (but not A’s
equity investment).

(f) Basis reduction—(1) In general. A
taxpayer’s basis in a qualified equity
investment is reduced by the amount of
any new markets tax credit determined
under paragraph (b)(1) of this section
with respect to the investment. A basis
reduction occurs on each credit
allowance date under paragraph (b)(2) of
this section. This paragraph (f) does not
apply for purposes of sections 1202,
1400B, and 1400F.
(2) Adjustment in basis of interest in
partnership or S corporation. The
adjusted basis of either a partner’s
interest in a partnership, or stock in an
S corporation, must be appropriately
adjusted to take into account
adjustments made under paragraph
(f)(1) of this section in the basis of a
qualified equity investment held by the

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partnership or S corporation (as the case
may be).
(g) Other rules—(1) Anti-abuse. If a
principal purpose of a transaction or a
series of transactions is to achieve a
result that is inconsistent with the
purposes of section 45D and this
section, the Commissioner may treat the
transaction or series of transactions as
causing a recapture event under
paragraph (e)(2) of this section.
(2) Reporting requirements—(i)
Notification by CDE to taxpayer—(A)
Allowance of new markets tax credit. A
CDE must provide notice to any
taxpayer who acquires a qualified equity
investment in the CDE at its original
issue that the equity investment is a
qualified equity investment entitling the
taxpayer to claim the new markets tax
credit. The notice must be provided by
the CDE to the taxpayer no later than 60
days after the date the taxpayer makes
the investment in the CDE. The notice
must contain the amount paid to the
CDE for the qualified equity investment
at its original issue and the taxpayer
identification number of the CDE.
(B) Recapture event. If, at any time
during the 7-year period beginning on
the date of the original issue of a
qualified equity investment in a CDE,
there is a recapture event under
paragraph (e)(2) of this section with
respect to such investment, the CDE
must provide notice to each holder,
including all prior holders, of the
investment that a recapture event has
occurred. The notice must be provided
by the CDE no later than 60 days after
the date the CDE becomes aware of the
recapture event.
(ii) CDE reporting requirements to
Secretary. Each CDE must comply with
such reporting requirements to the
Secretary as the Secretary may
prescribe.
(iii) Manner of claiming new markets
tax credit. A taxpayer may claim the
new markets tax credit for each
applicable taxable year by completing
Form 8874, ‘‘New Markets Credit,’’ and
by filing Form 8874 with the taxpayer’s
Federal income tax return.
(iv) Reporting recapture tax. If there is
a recapture event with respect to a
taxpayer’s equity investment in a CDE,
the taxpayer must include the credit
recapture amount under section
45D(g)(2) on the line for recapture taxes
on the taxpayer’s Federal income tax
return for the taxable year in which the
recapture event under paragraph (e)(2)
of this section occurs (or on the line for
total tax, if there is no such line for
recapture taxes) and write NMCR (new
markets credit recapture) next to the
entry space.

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77635

(3) Other Federal tax benefits—(i) In
general. Except as provided in
paragraph (g)(3)(ii) of this section, the
availability of Federal tax benefits does
not limit the availability of the new
markets tax credit. Federal tax benefits
that do not limit the availability of the
new markets tax credit include, for
example:
(A) The rehabilitation credit under
section 47;
(B) All deductions under sections 167
and 168, including the additional firstyear depreciation under section 168(k),
and the expense deduction for certain
depreciable property under section 179;
and
(C) All tax benefits relating to certain
designated areas such as empowerment
zones and enterprise communities
under sections 1391 through 1397D, the
District of Columbia Enterprise Zone
under sections 1400 through 1400B,
renewal communities under sections
1400E through 1400J, and the New York
Liberty Zone under section 1400L.
(ii) Low-income housing credit. If a
CDE makes a capital or equity
investment or a loan with respect to a
qualified low-income building under
section 42, the investment or loan is not
a qualified low-income community
investment under paragraph (d)(1) of
this section to the extent the building’s
eligible basis under section 42(d) is
financed by the proceeds of the
investment or loan.
(4) Bankruptcy of CDE. The
bankruptcy of a CDE does not preclude
a taxpayer from continuing to claim the
new markets tax credit on the remaining
credit allowance dates under paragraph
(b)(2) of this section.
(h) Effective dates—(1) In general.
Except as provided in paragraph (h)(2)
of this section, this section applies on or
after December 22, 2004, and may be
applied by taxpayers before December
22, 2004. The provisions that apply
before December 22, 2004, are contained
in § 1.45D–1T (see 26 CFR part 1 revised
as of April 1, 2003, and April 1, 2004).
(2) Exception for certain provisions.
Paragraph (d)(5)(ii) of this section as it
relates to the definition of the term
substantial improvements and the
requirement that each lessee must be a
qualified business applies to qualified
low-income community investments
made on or after February 22, 2005.
§ 1.45D–1T
■

[Removed]

Par. 3. Section 1.45D–1T is removed.

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reconsideration procedures are also
made applicable to the Office’s refusals
to register mask works and vessel hull
designs.
■ Par. 4. The authority citation for part
EFFECTIVE DATE: January 27, 2005.
602 continues to read as follows:
FOR FURTHER INFORMATION CONTACT:
Authority: 26 U.S.C. 7805.
Marilyn J. Kretsinger, Associate General
Counsel, or Renee Coe, Senior Attorney
■ Par. 5. In § 602.101, paragraph (b) is
at this address: Copyright GC/I&R, P.O.
amended by removing the entry for
Box 70400, Washington, DC 20024–
‘‘1.45D–1T’’ from the table.
0400. Telephone: (202) 707–8380.
■ Par. 6. In § 602.101, paragraph (b) is
amended by adding an entry to the table Telefax: (202) 707–8366.
in numerical order to read as follows:
SUPPLEMENTARY INFORMATION: On July
13, 2004, the Copyright Office published
§ 602.101 OMB Control numbers.
a notice of proposed rulemaking seeking
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comment on its proposed revision of
(b) * * *
parts 202, 211 and 212 of subchapter A
of Chapter II, 37 CFR. The purpose of
Current
this notice is to announce the final rule.
CFR part or section where
OMB
control
identified and described
This regulation establishes procedures
No.
for applicants to request that the
Copyright Office reconsider refusals to
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register copyright claims and claims in
1.45D–1 ....................................
1545–1765 mask works or vessel hull designs.
There are two opportunities for
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reconsideration of a refusal to register.
At the first level of reconsideration, the
Mark E. Mathews,
Examining Division of the Copyright
Office reviews its initial decision to
Deputy Commissioner for Services and
Enforcement.
refuse registration. At the second level,
the Review Board conducts the review
Approved: December 21, 2004.
of a refusal to register. For
Eric Solomon,
administrative reasons, the Copyright
Acting Deputy Assistant Secretary of the
Office is making one change in the
Treasury.
membership of the Review Board which
[FR Doc. 04–28325 Filed 12–22–04; 12:38
considers the second request for
pm]
reconsideration. The Review Board is
BILLING CODE 4830–01–P
composed of three members; the first
two members are the Register of
Copyrights and the General Counsel or
LIBRARY OF CONGRESS
their respective designees. The third
member will be designated by the
Copyright Office
Register. This rule also establishes
procedures for mailing or hand
37 CFR Parts 202, 211, and 212
delivering requests for reconsideration
[Docket No. RM 2004–5]
and related documents.
In response to the publication of the
Reconsideration Procedure
proposed rule, the Copyright Office did
not receive any comments.
AGENCY: Copyright Office, Library of
Consequently, the Copyright Office is
Congress.
adopting the previously proposed text,
ACTION: Final rule.
as a final rule, with the one
SUMMARY: The Copyright Office is
administrative change noted above and
publishing a final rule concerning
without substantive change, as follows:
reconsideration procedures. With a few
List of Subjects
modifications, this regulation continues
procedures adopted by the U.S.
37 CFR Part 202
Copyright Office in 1995 that permit
Claims, Copyright.
copyright applicants to request
reconsideration of its decisions to refuse 37 CFR Part 211
registration. This regulation amends
Freedom of Information.
those procedures and incorporates them
37 CFR Part 212
into Copyright Office regulations.
Copyright applicants will continue to
Vessels.
have two opportunities to seek
Proposed Regulations
reconsideration of a Copyright Office
decision to refuse registration. A
■ In consideration of the foregoing, the
significant modification is that the
Copyright Office amends parts 202, 211
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT

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and 212 of 37 CFR, chapter II in the
manner set forth below:
PART 202—REGISTRATION OF
CLAIMS TO COPYRIGHT
1. The authority citation for part 202
continues to read as follows:

■

Authority: 17 U.S.C. 702.
■

2. Add § 202.5 to read as follows:

§ 202.5 Reconsideration Procedure for
Refusals to Register.

(a) General. This section prescribes
rules pertaining to procedures for
administrative review of the Copyright
Office’s refusal to register a claim to
copyright, a mask work, or a vessel hull
design upon a finding by the Office that
the application for registration does not
satisfy the legal requirements of title 17
of the United States Code. If an
applicant’s initial claim is refused, the
applicant is entitled to request that the
initial refusal to register be
reconsidered.
(b) First reconsideration. Upon
receiving a written notification from the
Examining Division explaining the
reasons for a refusal to register, an
applicant may request that the
Examining Division reconsider its initial
decision to refuse registration, subject to
the following requirements:
(1) An applicant must request in
writing that the Examining Division
reconsider its decision. A request for
reconsideration must include the
reasons the applicant believes
registration was improperly refused,
including any legal arguments in
support of those reasons and any
supplementary information. The
Examining Division will base its
decision on the applicant’s written
submissions.
(2) The fee set forth in § 201.3(d)(4) of
this chapter must accompany the first
request for reconsideration.
(3) The first request for
reconsideration and the applicable fee
must be received by the Copyright
Office no later than three months from
the date that appears in the Examining
Division’s written notice of its initial
decision to refuse registration. When the
ending date for the three-month time
period falls on a weekend or a Federal
holiday, the ending day of the threemonth period shall be extended to the
next Federal work day.
(4) If the Examining Division decides
to register an applicant’s work in
response to the first request for
reconsideration, it will notify the
applicant in writing of the decision and
the work will be registered. However, if
the Examining Division again refuses to
register the work, it will send the

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