Td 9560

75774

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations

for this AD, follow the procedures in 14 CFR
39.19. Contact the Manager, Safety
Management Group, Rotorcraft Directorate,
FAA, ATTN: Gary Roach, Aviation Safety
Engineer, Regulations and Policy Group,
ASW–111, 2601 Meacham Blvd., Fort Worth,
Texas 76137, telephone (817) 222–5130, fax
(817) 222–5961, for information about
previously approved alternative methods of
compliance.
(c) The Joint Aircraft System/Component
(JASC) Code is 2700: Flight Control System.
(d) This amendment becomes effective on
December 20, 2011.
Note: The subject of this AD is addressed
in Direction Generale de l’Aviation Civile
(France) AD No. F–2005–175, dated October
26, 2005, and Eurocopter Alert Service
Bulletin No. 67A011, Revision 1, dated
October 24, 2005.

[TD 9560]

Community Development Financial
Institutions Fund published an advance
notice of proposed rulemaking
(ANPRM) (70 FR 29658) to seek
comments from the public with respect
to how targeted populations may be
treated as eligible low-income
communities under section 45D(e)(2). In
response to the ANPRM, the IRS
received various suggestions relating to
the definition of the term targeted
populations and proposing amendments
to the requirements to be a qualified
active low-income community business
under § 1.45D–1. On June 30, 2006, the
IRS and Treasury Department released
Notice 2006–60 (2006–2 CB 82), which
announced that § 1.45D–1 would be
amended to provide rules relating to
how an entity meets the requirements to
be a qualified active low-income
community business when its activities
involve certain targeted populations
under section 45D(e)(2). On September
24, 2008, a notice of proposed
rulemaking (NPRM) (REG–142339–05)
was published in the Federal Register
(73 FR 54990). Written and electronic
comments responding to the proposed
regulations were received and a public
hearing was held on January 22, 2009.
After consideration of all the comments,
the proposed regulations are adopted as
amended by this Treasury decision.

RIN 1545–BE89

General Overview

Issued in Fort Worth, Texas, on October 5,
2011.
Kim Smith,
Manager, Rotorcraft Directorate, Aircraft
Certification Service.
[FR Doc. 2011–30939 Filed 12–2–11; 8:45 am]
BILLING CODE 4910–13–P

DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1

Targeted Populations Under Section
45D(e)(2)
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations relating to how an entity
serving certain targeted populations can
meet the requirements to be a qualified
active low-income community business
for the new markets tax credit. The
regulations reflect changes to the law
made by the American Jobs Creation Act
of 2004. The regulations will affect
certain taxpayers claiming the new
markets tax credit.
DATES: Effective Date: These regulations
are effective on December 5, 2011.
Applicability Dates: For dates of
applicability, see § 1.45D–1(h)(3).
FOR FURTHER INFORMATION CONTACT: Julie
Hanlon Bolton, (202) 622–3040 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

pmangrum on DSK3VPTVN1PROD with RULES

SUMMARY:

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

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

Section 45D(a)(1) provides a new
markets tax credit on certain credit
allowance dates described in section
45D(a)(3) with respect to a qualified
equity investment in a qualified
community development entity (CDE)
described in section 45D(c).
Section 45D(b)(1) provides that an
equity investment in a CDE is a
qualified equity investment if, among
other requirements: (A) The investment
is acquired by the taxpayer at its
original issue (directly or through an
underwriter) solely in exchange for
cash; (B) substantially all of the cash is
used by the CDE to make qualified 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 an
entity is a CDE if, among other
requirements, the entity is certified by
the Secretary as a CDE.

PO 00000

Frm 00004

Fmt 4700

Sfmt 4700

Section 45D(d)(1) provides that the
term qualified low-income community
investment means: (A) Any capital or
equity investment in, or loan to, any
qualified active low-income community
business (as defined in section
45D(d)(2)); (B) the purchase from
another CDE of any loan made by the
entity that is a qualified low-income
community investment; (C) financial
counseling and other services specified
in regulations prescribed by the
Secretary to businesses located in, and
residents of, low-income communities;
and (D) any equity investment in, or
loan to, any CDE.
Under section 45D(d)(2)(A), 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.
Under section 45D(d)(3), with certain
exceptions, a qualified business is any
trade or business. The rental to others of
real property is a qualified business
only if, among other requirements, the
real property is located in a low-income
community.
Section 221(a) of the American Jobs
Creation Act of 2004 (Act) (Pub. L. 108–
357, 118 Stat. 1418) amended section
45D(e)(2) to provide that the Secretary
shall prescribe regulations under which
one or more targeted populations
(within the meaning of section 103(20)
of the Riegle Community Development
and Regulatory Improvement Act of
1994 (12 U.S.C. 4702(20))) may be
treated as low-income communities.
The regulations shall include
procedures for determining which
entities are qualified active low-income
community businesses with respect to
those populations. Section 221(c)(1) of
the Act provides that the amendment
made by section 221(a) of the Act shall
apply to designations made by the
Secretary of the Treasury after October
22, 2004, the date of enactment of the
Act.
The term targeted population, as
defined in 12 U.S.C. 4702(20) and 12
CFR 1805.201, means individuals, or an
identifiable group of individuals,
including an Indian tribe, who (A) are
low-income persons; or (B) otherwise
lack adequate access to loans or equity

E:\FR\FM\05DER1.SGM

05DER1

pmangrum on DSK3VPTVN1PROD with RULES

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations
investments. Under 12 U.S.C. 4702(17)
as interpreted by 12 CFR 1805.104, the
term low-income means having an
income, adjusted for family size, of not
more than (A) for metropolitan areas, 80
percent of the area median family
income; and (B) for non-metropolitan
areas, the greater of (i) 80 percent of the
area median family income; or (ii) 80
percent of the statewide
nonmetropolitan area median family
income.
Section 101(a) of the Gulf
Opportunity Zone Act of 2005 (Pub. L.
109–135, 119 Stat. 2577) added new
sections 1400M and 1400N to the Code.
Section 1400M(1) provides that the Gulf
Opportunity Zone (GO Zone) is that
portion of the Hurricane Katrina disaster
area determined by the President to
warrant individual or individual and
public assistance from the Federal
Government under the Robert T.
Stafford Disaster Relief and Emergency
Assistance Act (the Act) by reason of
Hurricane Katrina.
Section 1400M(2) provides that the
Hurricane Katrina disaster area is an
area with respect to which a major
disaster has been declared by the
President before September 14, 2005,
under section 401 of the Act by reason
of Hurricane Katrina. After
determination by the President that a
disaster area warrants assistance
pursuant to the Act, the Federal
Emergency Management Agency
(FEMA) makes damage assessments.
The categories for damage assessment in
the wake of a hurricane are: flooded
area, saturated area, limited damage,
moderate damage, extensive damage,
and catastrophic damage.
Under section 1400N(m)(1), a CDE
shall be eligible for an allocation under
section 45D(f)(2) of the increase in the
new markets tax credit limitation
described in section 1400N(m)(2) only if
a significant mission of the CDE is the
recovery and redevelopment of the GO
Zone. Section 1400N(m)(2) provides
that the new markets tax credit
limitation otherwise determined under
section 45D(f)(1) shall be increased by
an amount equal to $300,000,000 for
2005 and 2006 and $400,000,000 for
2007, to be allocated among CDEs to
make qualified low-income community
investments within the GO Zone.
Under section 45D(b)(1), a qualified
equity investment does not include any
equity investment issued by a CDE more
than 5 years after the date the entity
receives an allocation under section
45D(f). Under section 45D(f)(3), if the
new markets tax credit limitation for
any calendar year exceeds the aggregate
amount allocated under section
45D(f)(2) for the year, then the

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

limitation for the succeeding calendar
year is increased by the amount of the
excess. However, no amount may be
carried to any calendar year after 2016.
Summary of Comments and
Explanation of Provisions
Ownership Requirement and Non-Profit
Businesses
Generally, the proposed regulations
provide that an entity will not be treated
as a qualified active low-income
community business for low-income
targeted populations unless (i) At least
50 percent of the entity’s total gross
income for any taxable year is derived
from sales, rentals, services, or other
transactions with individuals who are
low-income persons for purposes of
section 45D(e)(2) (the 50-percent grossincome requirement), (ii) at least 40
percent of the entity’s employees are
individuals who are low-income
persons for purposes of section
45D(e)(2), or (iii) at least 50 percent of
the entity is owned by individuals who
are low-income persons for purposes of
section 45D(e)(2).
Commentators recommended that the
ownership requirement for being treated
as a qualified active low-income
community business for low-income
targeted populations under the
proposed regulations be amended to
accommodate non-profit businesses that
are not individually owned.
Commentators suggested that if a nonprofit business can document that at
least 20 percent of its board, with a
minimum of two board members, are
low-income persons or represent lowincome targeted populations, then the
non-profit business should be treated as
satisfying the ownership requirement.
The final regulations do not adopt this
recommendation because, if a non-profit
business does not derive at least 50
percent of its gross income from sales,
rentals, services, or other transactions
with low-income persons, or if at least
40 percent of the non-profit business’
employees are not low-income persons,
then the non-profit business is not
adequately serving targeted populations
solely because 20 percent or more of its
board members are low-income persons.
Start-Up or Expanding Businesses
Commentators requested that, in order
to accommodate start-up entities, the
final regulations should provide a rule
allowing an entity to meet the
requirements to be a qualified active
low-income community business for
low-income targeted populations if the
CDE reasonably expects that the entity
will generate revenues within three
years after the date the CDE makes the

PO 00000

Frm 00005

Fmt 4700

Sfmt 4700

75775

investment in, or loan to, that entity. If
an entity serving targeted populations
chooses to apply the 50-percent grossincome requirement rather than the
employee requirement or the ownership
requirement, then the commentators’
suggestion could potentially allow an
entity to be a qualified active lowincome community business for three
years without having to meet any
requirement. As stated in the preamble
of the proposed regulations, this result
is clearly inappropriate. Therefore, the
final regulations do not adopt the
commentators’ suggestion. In addition,
the final regulations clarify that the
three-year active conduct of a trade or
business safe harbor in § 1.45D–
1(d)(4)(iv)(A) does not apply to the 50percent gross-income requirement.
Documenting Low-Income Persons
The IRS and Treasury Department
specifically requested comments on
what measure of income should be used
to determine an individual’s income for
purposes of the definition of lowincome persons found in the proposed
regulations. The proposed regulations
asked whether the measure of income
should be the same as the measure of
income used by the U.S. Census Bureau,
the measure of income on the Form
1040, or the measure of income in 24
CFR part 5, which is used for certain
Department of Housing and Urban
Development (HUD) programs and other
Federal programs.
Two commentators recommended
that the IRS and Treasury Department
accept as a proxy for income
documentation proof of an individual’s
participation in other federal programs
targeted specifically to low-income
individuals and families. The final
regulations do not adopt the
commentators’ recommendation
because, as stated in the proposed
regulations, the IRS and Treasury
Department have not analyzed other
Federal programs to determine whether
they meet the statutory requirements
under section 45D(e), and whether the
programs currently meeting the
requirements will continue to do so in
the future.
Another commentator recommended
that the IRS and Treasury Department
allow an entity to measure income using
any reasonable method including
measures of income by the U.S. Census
Bureau, Form 1040, or the HUD rules in
24 CFR part 5. If one measure must be
used, the commentator recommended
using the HUD rules because they are
consistent with low-income
determinations used for the Section 8
rental voucher program and the lowincome housing tax credit under section

E:\FR\FM\05DER1.SGM

05DER1

75776

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations

pmangrum on DSK3VPTVN1PROD with RULES

42. The final regulations adopt this
commentator’s recommendation that an
entity may use any of the three stated
methods. Specifically, the final
regulations allow an individual’s family
income to be determined using
household income as measured by the
U.S. Census Bureau or HUD, or using
the individual’s total family income as
reported on Form(s) 1040. An
individual’s family income includes the
income of any member of the
individual’s family (as defined in
section 267(c)(4)) if the family member
resides with the individual regardless of
whether the family member files a
separate return. Lastly, the final
regulations incorporate the preamble
language in the proposed regulations
that provides additional detail on what
estimates may be relied upon in
determining the applicable income
limitation for area median family
income.
Items Included in Gross Income
A commentator requested that the
final regulations conclude that the term
derived from in the proposed
regulations includes gross income
derived from payments made directly by
low-income persons to an entity and
amounts and contributions of property
or services provided to the entity for the
benefit of low-income persons. Another
commentator recommended that only
operating revenue should be included
for the purpose of meeting the 50percent gross-income requirement.
The final regulations adopt the first
commentator’s recommendation that the
term derived from includes gross
income derived from both payments
made directly by low-income persons to
the entity and money and the fair
market value of contributions of
property or services provided to the
entity primarily for the benefit of lowincome persons. However, persons
providing the money and contributions
cannot receive a direct benefit from the
entity (notably, a contribution that
benefits the general public is not a
direct benefit). Accordingly, an entity’s
total gross income derived from
transactions with low-income persons
for purposes of section 45D(e)(2) can
include Federal, state, or local grants,
charitable donations, or in-kind
contributions, as well as collected fees,
insurance reimbursements, and other
sources of income as long as these
payments and contributions are
provided for the benefit of low-income
persons on an individual basis or as a
class of individuals. If an entity
receiving such payments can document
that those amounts are legally required
to be paid on behalf of individuals that

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

meet the definition of low-income
persons, the amounts may be treated as
derived from transactions with lowincome persons. The second
commentator’s suggestion to limit a
gross income consideration to operating
revenue is too restrictive because any
money, property, or services provided to
the entity may be provided to the entity
for the benefit of low-income persons.
Owners
The proposed regulations provide that
the determination of whether an owner
is a low-income person must be made at
the time the qualified low-income
community investment is made. If an
owner is a low-income person at the
time the qualified low-income
community investment is made, that
owner is considered a low-income
person for purposes of section 45D(e)(2)
throughout the time the ownership
interest is held by that owner. A
commentator suggested that the rule
locking in an owner’s status as a lowincome person as of the time of
investment should be similarly applied
to low-income persons who acquire an
ownership interest after the time the
qualified low-income community
investment is made. The final
regulations adopt this suggestion by
locking in the status of an owner as a
low-income person at the time the
qualified low-income community
investment is made or at the time the
ownership interest is acquired by the
owner, whichever is later.
Rental to Others of Real Property
Commentators requested clarification
on the 50-percent gross-income
requirement under the proposed
regulations for an entity whose sole
business is the rental to others of real
property. Because an entity whose sole
business is the rental to others of real
property will often not have employees,
the entity will have to satisfy the 50percent gross-income requirement or the
ownership requirement for low-income
targeted populations. To satisfy the 50percent gross-income requirement, the
proposed regulations require that the
entity must derive gross income solely
from low-income individuals. However,
in the case of an entity engaged solely
in the rental of property, the entity’s
gross income would only be derived
from rents, and in many instances, the
tenants are not individuals as required
under the proposed regulations. Thus,
commentators recommend that the 50percent gross-income requirement be
deemed satisfied if at least 50 percent of
gross rental income is derived from
tenants that are low-income individuals
and entities that are qualified active

PO 00000

Frm 00006

Fmt 4700

Sfmt 4700

low-income community businesses for
low-income targeted populations. The
final regulations adopt a rule similar to
this recommendation by providing a
special rule that generally treats an
entity whose sole business is the rental
to others of real property as satisfying
the 50-percent gross-income
requirement if the entity is treated as
being located in a low-income
community.
Gross Income—Fair Market Value of
Sales, Rentals, Services, or Other
Transactions
The IRS and Treasury Department
specifically requested comments in the
proposed regulations on the question of
whether the 50-percent gross-income
requirement should be modified to
include the fair market value of goods
and services provided to low-income
persons at reduced fees. Commentators
responded by stating that a CDE should
have the option to include the fair
market value of goods and services
provided to low-income persons for
purposes of the 50-percent gross-income
requirement. The final regulations adopt
the commentator’s suggestion but limit
the rule to an entity with gross income
that is derived from sales, rentals,
services, or other transactions with both
non low-income persons and lowincome persons. The entity may treat
the value of the sales, rentals, services,
or other transactions with low-income
persons at fair market value even if the
low-income persons do not pay fair
market value.
Individuals or Groups That Otherwise
Lack Adequate Access to Loans or
Equity Investments
Commentators have asked that the IRS
and the Treasury Department consider
defining particular individuals or
groups of individuals as lacking
adequate access to loans or equity
investments. Although the IRS and the
Treasury Department cannot include
new rules describing additional targeted
populations in these final regulations,
taxpayers are hereby invited to submit
comments: (1) Identifying individuals or
groups that may be considered to lack
adequate access to loans or equity
investments, (2) describing the reasons
such individuals or group of individuals
qualify as lacking adequate access to
loans or equity investments, and (3)
suggesting ways for additional targeted
populations rules to appropriately limit
the definition of such individuals or
group of individuals to ensure that the
purposes of the targeted populations
provision are not abused. Send
submissions to:

E:\FR\FM\05DER1.SGM

05DER1

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations
Submissions to the Service submitted
by U.S. mail: Internal Revenue Service,
Attn: Julie Hanlon Bolton, CC:PSI:5,
Room 5111, P.O. Box 7604, Ben
Franklin Station, Washington, DC
20044.
Submissions to the Service submitted
by a private delivery service: Internal
Revenue Service, Attn: Julie Hanlon
Bolton, CC:PSI:5, Room 5111, 1111
Constitution Ave. NW., Washington, DC
20224.
Effect on Other Documents
Notice 2006–60 (2006–1 CB 82) is
obsolete for taxable years ending on or
after December 5, 2011.
Special Analyses
It has been determined that 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. It has also
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
these regulations will not have a
significant economic impact on a
substantial number of small entities.
This certification is based upon the fact
that the final regulations provide a
benefit to small entities in low-income
communities from the proceeds of a tax
credit because, consistent with
legislative intent, the final regulations
allow a tax credit to be claimed in
situations where it was previously
unavailable without the Secretary
providing for such situations in final
regulations. Accordingly, a Regulatory
Flexibility Analysis under the
provisions of the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.

pmangrum on DSK3VPTVN1PROD with RULES

Drafting Information
The principal author of these
regulations is Julie Hanlon Bolton with
the Office of the Associate Chief
Counsel (Passthroughs and Special
Industries), IRS. However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

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 is amended by adding an entry
in numerical order to read in part as
follows:

■

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

Par. 2. Section 1.45D–0 is added to
read as follows:

■

§ 1.45D–0

Table of contents.

This section lists the paragraphs
contained in § 1.45D–1.
(a) Current year credit.
(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
low-income 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.

PO 00000

Frm 00007

Fmt 4700

Sfmt 4700

75777

(B) Examples.
(2) Payments of, or for, capital, equity
or principal.
(i) In general.
(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.
(9) Targeted populations.
(i) Low-income persons.
(A) Definition.
(1) In general.
(2) Area median family income.
(3) Individual’s family income.
(B) Qualified active low-income
community business requirements for
low-income targeted populations.
(1) In general.
(2) Employee.
(3) Owner.
(4) Derived from.
(5) Fair market value of sales, rentals,
services, or other transactions.
(C) 120-percent-income restriction.
(1) In general.
(2) Population census tract location.
(D) Rental of real property for lowincome targeted populations.
(1) In general.
(2) Special rule for entities whose sole
business is the rental to others of real
property.

E:\FR\FM\05DER1.SGM

05DER1

pmangrum on DSK3VPTVN1PROD with RULES

75778

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations

(ii) Individuals who otherwise lack
adequate access to loans or equity
investments.
(A) In general.
(B) GO Zone Targeted Population.
(C) Qualified active low-income
community business requirements for
the GO Zone Targeted Population.
(1) In general.
(2) Location.
(i) In general.
(ii) Determination.
(D) 200-percent-income restriction.
(1) In general.
(2) Population census tract location.
(E) Rental of real property for the GO
Zone Targeted Population.
(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/applicability dates.
(1) In general.
(2) Exception for certain provisions.
(3) Targeted populations.
■ Par. 3. Section 1.45D–1 is amended
by:
■ 1. Revising paragraph (a).
■ 2. Revising the first sentence in
paragraph (b)(1).
■ 3. Revising paragraph (d)(4)(i)
introductory text.
■ 4. Adding a new sentence to the end
of paragraph (d)(4)(i)(A).

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

5. Adding a new sentence to the end
of paragraph (d)(4)(i)(B)(1).
■ 6. Adding a new sentence to the end
of paragraph (d)(4)(i)(C).
■ 7. Adding a new sentence at the end
of paragraph (d)(4)(iv)(A).
■ 8. Adding new paragraph (d)(9).
■ 9. Revising the heading for paragraph
(h) and adding new paragraph (h)(3).
The additions and revisions read as
follows:
■

§ 1.45D–1

New markets tax credit.

(a) Current year credit. The current
year general business credit under
section 38(b)(13) includes the new
markets tax credit under section 45D(a).
(b) * * * (1) * * * 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(a) 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. * * *
*
*
*
*
*
(d) * * *
(4) * * *
(i) In general. The term qualified
active low-income community business
means, with respect to any taxable year,
a corporation (including a nonprofit
corporation) or a partnership engaged in
the active conduct of a qualified
business (as defined in paragraph (d)(5)
of this section), if the requirements of
paragraphs (d)(4)(i)(A), (B), (C), (D), and
(E) of this section are met (or in the case
of an entity serving targeted
populations, if the requirements of
paragraphs (d)(4)(i)(D), (E), and (d)(9)(i)
or (ii) of this section are met). Solely for
purposes of this section, a nonprofit
corporation will be deemed to be
engaged in the active conduct of a trade
or business if it is engaged in an activity
that furthers its purpose as a nonprofit
corporation.
(A) * * * See paragraph (d)(9) of this
section for rules relating to targeted
populations.
(B) * * *
(1) * * * See paragraph (d)(9) of this
section for rules relating to targeted
populations.
*
*
*
*
*
(C) * * * See paragraph (d)(9) of this
section for rules relating to targeted
populations.
*
*
*
*
*
(iv) Active conduct of a trade or
business—(A) * * * This paragraph
(d)(4)(iv) applies only for purposes of
determining whether an entity is
engaged in the active conduct of a trade

PO 00000

Frm 00008

Fmt 4700

Sfmt 4700

or business and does not apply for
purposes of determining whether the
gross-income requirement under
paragraph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i),
or (d)(9)(ii)(C)(1)(i) of this section is
satisfied.
*
*
*
*
*
(9) Targeted populations. For
purposes of section 45D(e)(2), targeted
populations that will be treated as a
low-income community are individuals,
or an identifiable group of individuals,
including an Indian tribe, who are lowincome persons as defined in paragraph
(d)(9)(i) of this section or who are
individuals who otherwise lack
adequate access to loans or equity
investments as defined in paragraph
(d)(9)(ii) of this section.
(i) Low-income persons—(A)
Definition—(1) In general. For purposes
of section 45D(e)(2) and this paragraph
(d)(9), an individual shall be considered
to be low-income if the individual’s
family income, adjusted for family size,
is not more than—
(i) For metropolitan areas, 80 percent
of the area median family income; and
(ii) For non-metropolitan areas, the
greater of 80 percent of the area median
family income, or 80 percent of the
statewide non-metropolitan area median
family income.
(2) Area median family income. For
purposes of paragraph (d)(9)(i)(A)(1) of
this section, area median family income
is determined in a manner consistent
with the determinations of median
family income under section 8 of the
Housing Act of 1937, as amended.
Taxpayers must use the annual
estimates of median family income
released by the Department of Housing
and Urban Development (HUD) and may
rely on those figures until 45 days after
HUD releases a new list of income
limits, or until HUD’s effective date for
the new list, whichever is later.
(3) Individual’s family income. For
purposes of paragraph (d)(9)(i)(A)(1) of
this section, an individual’s family
income is determined using any one of
the following three methods for
measuring family income:
(i) Household income as measured by
the U.S. Census Bureau,
(ii) Adjusted gross income under
section 62 as reported on Internal
Revenue Service Form 1040. Adjusted
gross income must include the adjusted
gross income of any member of the
individual’s family (as defined in
section 267(c)(4)) if the family member
resides with the individual regardless of
whether the family member files a
separate return,
(iii) Household income determined
under section 8 of the Housing Act of
1937, as amended.

E:\FR\FM\05DER1.SGM

05DER1

pmangrum on DSK3VPTVN1PROD with RULES

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations
(B) Qualified active low-income
community business requirements for
low-income targeted populations—(1) In
general. An entity will not be treated as
a qualified active low-income
community business for low-income
targeted populations unless—
(i) Except as provided in paragraph
(d)(9)(i)(D)(2) of this section, at least 50
percent of the entity’s total gross income
for any taxable year is derived from
sales, rentals, services, or other
transactions with individuals who are
low-income persons for purposes of
section 45D(e)(2) and this paragraph
(d)(9);
(ii) At least 40 percent of the entity’s
employees are individuals who are lowincome persons for purposes of section
45D(e)(2) and this paragraph (d)(9); or
(iii) At least 50 percent of the entity
is owned by individuals who are lowincome persons for purposes of section
45D(e)(2) and this paragraph (d)(9).
(2) Employee. The determination of
whether an employee is a low-income
person must be made at the time the
employee is hired. If the employee is a
low-income person at the time of hire,
that employee is considered a lowincome person for purposes of section
45D(e)(2) and this paragraph (d)(9)
throughout the time of employment,
without regard to any increase in the
employee’s income after the time of
hire.
(3) Owner. The determination of
whether an owner is a low-income
person must be made at the time the
qualified low-income community
investment is made, or at the time the
ownership interest is acquired by the
owner, whichever is later. If an owner
is a low-income person at the time the
qualified low-income community
investment is made or at the time the
ownership interest is acquired by the
owner, whichever is later, that owner is
considered a low-income person for
purposes of section 45D(e)(2) and this
paragraph (d)(9) throughout the time the
ownership interest is held by that
owner.
(4) Derived from. For purposes of
paragraph (d)(9)(i)(B)(1)(i) of this
section, the term derived from includes
gross income derived from:
(i) Payments made directly by lowincome persons to the entity; and
(ii) Money and the fair market value
of property or services provided to the
entity primarily for the benefit of lowincome persons, but only if the persons
providing the money, property, or
services do not receive a direct benefit
from the entity (for this purpose, a
contribution that benefits the general
public is not a direct benefit).

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

(5) Fair market value of sales, rentals,
services, or other transactions. For
purposes of paragraph (d)(9)(i)(B)(1)(i)
of this section, an entity with gross
income that is derived from sales,
rentals, services, or other transactions
with both non low-income persons and
low-income persons may treat the gross
income derived from the sales, rentals,
services, or other transactions with lowincome persons as including the full fair
market value even if the low-income
persons do not pay fair market value.
(C) 120-percent-income restriction—
(1) In general—(i) In no case will an
entity be treated as a qualified active
low-income community business under
paragraph (d)(9)(i) of this section if the
entity is located in a population census
tract for which the median family
income exceeds 120 percent of, in the
case of a tract not located within a
metropolitan area, the statewide median
family income, or in the case of a tract
located within a metropolitan area, the
greater of statewide median family
income or metropolitan area median
family income (120-percent-income
restriction).
(ii) The 120-percent-income
restriction shall not apply to an entity
located within a population census tract
with a population of less than 2,000 if
such tract is not located in a
metropolitan area.
(iii) The 120-percent-income
restriction shall not apply to an entity
located within a population census tract
with a population of less than 2,000 if
such tract is located in a metropolitan
area and more than 75 percent of the
tract is zoned for commercial or
industrial use. For this purpose, the 75
percent calculation should be made
using the area of the population census
tract. For purposes of this paragraph
(d)(9)(i)(C)(1)(iii), property for which
commercial or industrial use is a
permissible zoning use will be treated as
zoned for commercial or industrial use.
(2) Population census tract location—
(i) For purposes of the 120-percentincome restriction, an entity will be
considered to be located in a population
census tract for which the median
family income exceeds 120 percent of
the applicable median family income
under paragraph (d)(9)(i)(C)(1)(i) of this
section (non-qualifying population
census tract) if at least 50 percent of the
total gross income of the entity is
derived from the active conduct of a
qualified business (as defined in
paragraph (d)(5) of this section) within
one or more non-qualifying population
census tracts (non-qualifying gross
income amount); at least 40 percent of
the use of the tangible property of the
entity (whether owned or leased) is

PO 00000

Frm 00009

Fmt 4700

Sfmt 4700

75779

within one or more non-qualifying
population census tracts (non-qualifying
tangible property usage); and at least 40
percent of the services performed for the
entity by its employees are performed in
one or more non-qualifying population
census tracts (non-qualifying services
performance).
(ii) The entity is considered to have
the non-qualifying gross income amount
if the entity has non-qualifying tangible
property usage or non-qualifying
services performance of at least 50
percent instead of 40 percent.
(iii) If the entity has no employees, the
entity is considered to have the nonqualifying gross income amount and
non-qualifying services performance if
at least 85 percent of the use of the
tangible property of the entity (whether
owned or leased) is within one or more
non-qualifying population census tracts.
(D) Rental of real property for lowincome targeted populations—(1) In
general. An entity that rents to others
real property for low-income targeted
populations and that otherwise satisfies
the requirements to be a qualified
business under paragraph (d)(5) of this
section will be treated as located in a
low-income community for purposes of
paragraph (d)(5)(ii) of this section if at
least 50 percent of the entity’s total
gross income is derived from rentals to
individuals who are low-income
persons for purposes of section
45D(e)(2) and this paragraph (d)(9) or
rentals to a qualified active low-income
community business that meets the
requirements for low-income targeted
populations under paragraphs
(d)(9)(i)(B)(1)(i) or (ii) and (d)(9)(i)(B)(2)
of this section.
(2) Special rule for entities whose sole
business is the rental to others of real
property. If an entity’s sole business is
the rental to others of real property
under paragraph (d)(9)(i)(D)(1) of this
section, then the gross income
requirement in paragraph
(d)(9)(i)(B)(1)(i) of this section will be
considered satisfied if the entity is
treated as being located in a low-income
community under paragraph
(d)(9)(i)(D)(1) of this section.
(ii) Individuals who otherwise lack
adequate access to loans or equity
investments—(A) In general. Paragraph
(d)(9)(ii) of this section may be applied
only with regard to qualified lowincome community investments made
under the increase in the new markets
tax credit limitation pursuant to section
1400N(m)(2). Therefore, only CDEs with
a significant mission of recovery and
redevelopment of the Gulf Opportunity
Zone (GO Zone) that receive an
allocation from the increase described
in section 1400N(m)(2) may make

E:\FR\FM\05DER1.SGM

05DER1

pmangrum on DSK3VPTVN1PROD with RULES

75780

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations

qualified low-income community
investments from that allocation
pursuant to the rules in paragraph
(d)(9)(ii) of this section.
(B) GO Zone Targeted Population. For
purposes of the targeted populations
rules under section 45D(e)(2), an
individual otherwise lacks adequate
access to loans or equity investments
only if the individual was displaced
from his or her principal residence as a
result of Hurricane Katrina or the
individual lost his or her principal
source of employment as a result of
Hurricane Katrina (GO Zone Targeted
Population). In order to meet this
definition, the individual’s principal
residence or principal source of
employment, as applicable, must have
been located in a population census
tract within the GO Zone that contains
one or more areas designated by the
Federal Emergency Management Agency
(FEMA) as flooded, having sustained
extensive damage, or having sustained
catastrophic damage as a result of
Hurricane Katrina.
(C) Qualified active low-income
community business requirements for
the GO Zone Targeted Population—(1)
In general. An entity will not be treated
as a qualified active low-income
community business for the GO Zone
Targeted Population unless—
(i) At least 50 percent of the entity’s
total gross income for any taxable year
is derived from sales, rentals, services,
or other transactions with the GO Zone
Targeted Population, low-income
persons as defined in paragraph (d)(9)(i)
of this section, or some combination
thereof;
(ii) At least 40 percent of the entity’s
employees consist of the GO Zone
Targeted Population, low-income
persons as defined in paragraph (d)(9)(i)
of this section, or some combination
thereof; or
(iii) At least 50 percent of the entity
is owned by the GO Zone Targeted
Population, low-income persons as
defined in paragraph (d)(9)(i) of this
section, or some combination thereof.
(2) Location—(i) In general. In order
to be a qualified active low-income
community business under paragraph
(d)(9)(ii)(C) of this section, the entity
must be located in a population census
tract within the GO Zone that contains
one or more areas designated by FEMA
as flooded, having sustained extensive
damage, or having sustained
catastrophic damage as a result of
Hurricane Katrina (qualifying
population census tract).
(ii) Determination—For purposes of
the preceding paragraph, an entity will
be considered to be located in a
qualifying population census tract if at

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

least 50 percent of the total gross
income of the entity is derived from the
active conduct of a qualified business
(as defined in paragraph (d)(5) of this
section) within one or more qualifying
population census tracts (gross income
requirement); at least 40 percent of the
use of the tangible property of the entity
(whether owned or leased) is within one
or more qualifying population census
tracts (use of tangible property
requirement); and at least 40 percent of
the services performed for the entity by
its employees are performed in one or
more qualifying population census
tracts (services performed requirement).
The entity is deemed to satisfy the gross
income requirement if the entity
satisfies the use of tangible property
requirement or the services performed
requirement on the basis of at least 50
percent instead of 40 percent. If the
entity has no employees, the entity is
deemed to satisfy the services
performed requirement and the gross
income requirement if at least 85
percent of the use of the tangible
property of the entity (whether owned
or leased) is within one or more
qualifying population census tracts.
(D) 200-percent-income restriction—
(1) In general—(i) In no case will an
entity be treated as a qualified active
low-income community business under
paragraph (d)(9)(ii) of this section if the
entity is located in a population census
tract for which the median family
income exceeds 200 percent of, in the
case of a tract not located within a
metropolitan area, the statewide median
family income, or, in the case of a tract
located within a metropolitan area, the
greater of statewide median family
income or metropolitan area median
family income (200-percent-income
restriction).
(ii) The 200-percent-income
restriction shall not apply to an entity
located within a population census tract
with a population of less than 2,000 if
such tract is not located in a
metropolitan area.
(iii) The 200-percent-income
restriction shall not apply to an entity
located within a population census tract
with a population of less than 2,000 if
such tract is located in a metropolitan
area and more than 75 percent of the
tract is zoned for commercial or
industrial use. For this purpose, the 75
percent calculation should be made
using the area of the population census
tract. For purposes of this paragraph
(d)(9)(ii)(D)(1)(iii), property for which
commercial or industrial use is a
permissible zoning use will be treated as
zoned for commercial or industrial use.
(2) Population census tract location—
(i) For purposes of the 200-percent-

PO 00000

Frm 00010

Fmt 4700

Sfmt 4700

income restriction, an entity will be
considered to be located in a population
census tract for which the median
family income exceeds 200 percent of
the applicable median family income
under paragraph (d)(9)(ii)(D)(1)(i) of this
section (non-qualifying population
census tract) if—at least 50 percent of
the total gross income of the entity is
derived from the active conduct of a
qualified business (as defined in
paragraph (d)(5) of this section) within
one or more non-qualifying population
census tracts (non-qualifying gross
income amount); at least 40 percent of
the use of the tangible property of the
entity (whether owned or leased) is
within one or more non-qualifying
population census tracts (non-qualifying
tangible property usage); and at least 40
percent of the services performed for the
entity by its employees are performed in
one or more non-qualifying population
census tracts (non-qualifying services
performance).
(ii) The entity is considered to have
the non-qualifying gross income amount
if the entity has non-qualifying tangible
property usage or non-qualifying
services performance of at least 50
percent instead of 40 percent.
(iii) If the entity has no employees, the
entity is considered to have the nonqualifying gross income amount and
non-qualifying services performance if
at least 85 percent of the use of the
tangible property of the entity (whether
owned or leased) is within one or more
non-qualifying population census tracts.
(E) Rental of real property for the GO
Zone Targeted Population. The rental to
others of real property for the GO Zone
Targeted Population that otherwise
satisfies the requirements to be a
qualified business under paragraph
(d)(5) of this section will be treated as
located in a low-income community for
purposes of paragraph (d)(5)(ii) of this
section if at least 50 percent of the
entity’s total gross income is derived
from rentals to the GO Zone Targeted
Population, rentals to low-income
persons as defined in paragraph (d)(9)(i)
of this section, or rentals to a qualified
active low-income community business
that meets the requirements for the GO
Zone Targeted Population under
paragraph (d)(9)(ii)(C)(1)(i) or (ii) of this
section.
*
*
*
*
*
(h) Effective/applicability dates.
*
*
*
*
*
(3) Targeted populations. The rules in
paragraph (d)(9) of this section and the
last sentence in paragraph (d)(4)(iv)(A)
of this section apply to taxable years
ending on or after December 5, 2011. A
taxpayer may apply the rules in

E:\FR\FM\05DER1.SGM

05DER1

Federal Register / Vol. 76, No. 233 / Monday, December 5, 2011 / Rules and Regulations
paragraph (d)(9) of this section to
taxable years ending before December 5,
2011 for designations made by the
Secretary after October 22, 2004.
Approved: November 22, 2011.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2011–31169 Filed 12–2–11; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9561]
RIN 1545–BK46

Treasury Inflation-Protected Securities
Issued at a Premium
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations.
AGENCY:

This document contains
temporary regulations that provide
guidance on the tax treatment of
Treasury Inflation-Protected Securities
issued with more than a de minimis
amount of premium. The text of these
temporary regulations also serves as the
text of the proposed regulations (REG–
130777–11) set forth in the Proposed
Rules section in this issue of the Federal
Register.
DATES: Effective Date: These regulations
are effective on December 5, 2011.
Applicability Date: For the date of
applicability, see § 1.1275–7T(k).
FOR FURTHER INFORMATION CONTACT:
William E. Blanchard, (202) 622–3950
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:

pmangrum on DSK3VPTVN1PROD with RULES

Background
Treasury Inflation-Protected
Securities (TIPS) are securities issued by
the Department of the Treasury. The
principal amount of a TIPS is adjusted
for any inflation or deflation that occurs
over the term of the security. The rules
for the taxation of inflation-indexed
debt instruments, including TIPS, are
contained in § 1.1275–7 of the Income
Tax Regulations. See also § 1.171–3(b)
(rules for inflation-indexed debt
instruments with bond premium).
The coupon bond method described
in § 1.1275–7(d) has applied to TIPS
rather than the more complex discount
bond method described in § 1.1275–7(e).

VerDate Mar<15>2010

14:16 Dec 02, 2011

Jkt 226001

Under § 1.1275–7(d)(2)(i), however, the
coupon bond method is not available
with respect to inflation-indexed debt
instruments that are issued with more
than a de minimis amount of premium
(that is, an amount greater than .0025
times the stated principal amount of the
security times the number of complete
years to the security’s maturity).
In Notice 2011–21 (2011–19 IRB 761),
to provide a more uniform method for
the federal income taxation of TIPS, the
Department of the Treasury and the
Internal Revenue Service announced
that regulations would be issued to
provide that taxpayers must use the
coupon bond method described in
§ 1.1275–7(d) for TIPS issued with more
than a de minimis amount of premium.
As a result, the discount bond method
described in § 1.1275–7(e) would not
apply to TIPS issued with more than a
de minimis amount of premium. Notice
2011–21 provided that the regulations
would be effective for TIPS issued on or
after April 8, 2011.
Explanation of Provisions
The temporary regulations in this
document contain the rules described in
Notice 2011–21. Under the temporary
regulations, a taxpayer must use the
coupon bond method described in
§ 1.1275–7(d) for a TIPS that is issued
with more than a de minimis amount of
premium. The temporary regulations
contain an example of how to apply the
coupon bond method to a TIPS issued
with more than a de minimis amount of
premium. As stated in Notice 2011–21,
the temporary regulations apply to TIPS
issued on or after April 8, 2011. See
§ 601.601(d)(2)(ii)(b).
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
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulations do not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these
regulations have been 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 William E. Blanchard,
Office of Associate Chief Counsel
(Financial Institutions and Products).

PO 00000

Frm 00011

Fmt 4700

Sfmt 4700

75781

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.
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 * * *
Section 1.1275–7T also issued under
26 U.S.C. 1275(d). * * *

Par. 2. Section 1.1275–7T is added to
read as follows:

■

§ 1.1275–7T Inflation-indexed debt
instruments (temporary).

(a) through (h) [Reserved]. For further
guidance, see § 1.1275–7(a) through (h).
(i) [Reserved]
(j) Treasury Inflation-Protected
Securities issued with more than a de
minimis amount of premium—(1)
Coupon bond method. Notwithstanding
§ 1.1275–7(d)(2)(i), the coupon bond
method described in § 1.1275–7(d)
applies to Treasury Inflation-Protected
Securities (TIPS) issued with more than
a de minimis amount of premium. For
this purpose, the de minimis amount is
determined using the principles of
§ 1.1273–1(d).
(2) Example. The following example
illustrates the application of the bond
premium rules to a TIPS issued with
bond premium:
Example. (i) Facts. X, a calendar year
taxpayer, purchases at original issuance TIPS
with a stated principal amount of $100,000
and a stated interest rate of .125 percent,
compounded semiannually. For purposes of
this example, assume that the TIPS are issued
in Year 1 on January 1, stated interest is
payable on June 30 and December 31 of each
year, and that the TIPS mature on December
31, Year 5. X pays $102,000 for the TIPS,
which is the issue price for the TIPS as
determined under § 1.1275–2(d)(1). Assume
that the inflation-adjusted principal amount
for the first coupon in Year 1 is $101,225
(resulting in an interest payment of $63.27)
and for the second coupon in Year 1 is
$102,500 (resulting in an interest payment of
$64.06). X elects to amortize bond premium
under § 1.171–4. (For simplicity, contrary to
actual practice, the TIPS in this example
were issued on the date with respect to
which the calculation of the first coupon
began.)
(ii) Bond premium. The stated interest on
the TIPS is qualified stated interest under
§ 1.1273–1(c). X acquired the TIPS with bond
premium of $2,000 (basis of $102,000 minus

E:\FR\FM\05DER1.SGM

05DER1