SECTION 2. BACKGROUND

.01 Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in § 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE) described in § 45D(c).

.02 Section 45D(b)(1) provides that an equity investment in a CDE is a “qualified equity investment” if, among other requirements: (A) the investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash; (B) substantially all of the cash is used by the CDE to make qualified low-income community investments; and (C) the investment is designated for purposes of § 45D by the CDE.

.03 Under § 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 § 45D(f)(1) that is allocated to the CDE by the Secretary under § 45D(f)(2).

.04 Section 45D(c)(1) provides that an entity is a CDE only if, among other requirements, the entity is certified by the Secretary as a CDE.

.05 Section 45D(d)(1) provides that the term “qualified low-income community investment” (QLICI) means: (A) any capital or equity investment in, or loan to, any qualified active low-income community business (QALICB) (as defined in

§ 45D(d)(2)); (B) the purchase from another CDE of any loan made by the entity that is a QLICI; (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.

.06 Under § 45D(d)(2), a QALICB is any corporation (including a nonprofit corporation) or partnership if, among other requirements, (i) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business within any low-income community, (ii) a substantial portion of the use of the tangible property of the entity (whether owned or leased) is within any low-income community, and (iii) a substantial portion of the services performed for the entity by its employees are performed in any low-income community.

.07 Under § 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.

.08 Section 221 of the American Jobs Creation Act of 2004 (P.L. 108–357) amended § 45D(e)(2) to provide that the Secretary shall prescribe regulations under which one or more targeted populations (within the meaning of § 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 QALICBs with respect to those populations.

.09 The term “targeted population,” as defined in 12 U.S.C. 4702(20) and 12 C.F.R. 1805.201, means individuals, or an identifiable group of individuals, including an Indian tribe, who (A) are low-income persons; or (B) otherwise lack adequate access to loans or equity investments. Under 12 U.S.C. 4702(17) as interpreted by 12 C.F.R. 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.

.10 Section 101(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 109–135) (the Act) added new § 1400M(1), which provides that the Gulf Opportunity Zone (GO Zone) is that portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina.

.11 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 Robert T. Stafford Disaster Relief and Emergency Assistance 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.

.12 Under § 1400N(m)(1), a CDE shall be eligible for an allocation under § 45D(f)(2) of the increase in the new markets tax credit limitation described in § 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 § 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 QLICIs within the GO Zone. CDEs may make such QLICIs under the existing rules of § 1.45D–1 or using the guidance contained in this notice.

.13 On May 24, 2005, the Community Development Financial Institutions (CDFI) Fund published an advance notice of proposed rulemaking (ANPRM) (70 FR 29658) to seek comments from the public with respect to how targeted populations

2006–29 I.R.B. 82 July 17, 2006

(A) in the case of a tract not located within a metropolitan area, the statewide median family income, or

(B) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (120-percent-income restriction).

(ii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use.

(b) Population Census Tract Location . (i) For purposes of the 120-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 120 percent of the applicable median family income under section 3.03(3)(a)(i)(A) or (B) of this notice (nonqualifying population census tract) if:

(A) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in § 1.45D–1(d)(5)) within one or more non-qualifying population census tracts (non-qualifying gross income amount);

(B) at least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts (non-qualifying tangible property usage); and

(C) at least 40 percent of the services performed for the entity by its employees are performed in one or more non-qualifying population census tracts (non-qualifying services performance).

(ii) The entity is considered to have the non-qualifying gross income amount if the entity has non-qualifying tangible property usage or non-qualifying services performance of at least 50 percent instead of 40 percent.

(iii) If the entity has no employees, the entity is considered to have the non-qualifying gross income amount as well as non-qualifying services performance if at least 85 percent of the use of the tangible

may be treated as eligible low-income communities under § 45D(e)(2). In response to the ANPRM, comments have been received making various suggestions relating to the definition of the term “targeted populations” and proposing amendments to the requirements to be a QALICB under § 1.45D–1.

.14 In conjunction with the publication of Income Tax Regulations specifying how an entity meets the requirements to be a QALICB when its activities involve certain targeted populations under § 45D(e)(2), the CDFI Fund shall provide additional guidance with respect to: (A) the definition of such targeted populations; and (B) administrative procedures relating to the certification of CDEs wishing to serve such populations. Taxpayers may rely upon this notice until such guidance is issued.