SECTION 3. DISCUSSION

.01 Notice of Proposed Rulemaking . The Treasury Department and Internal Revenue Service are developing regulations to provide guidance on how an entity meets the requirements to be a QALICB when its activities involve certain targeted populations under § 45D(e)(2). Taxpayers may rely on this notice until the regulations are issued. Based upon the statutory changes made by the American Jobs Creation Act of 2004 and in response to comments received in response to the CDFI Fund ANPRM, the Treasury Department and Internal Revenue Service expect to amend § 1.45D–1 to provide guidance consistent with this notice.

.02 Low-Income Community . Section 1.45D–1 will be amended to provide that, for purposes of § 45D(e)(2), targeted populations that will be treated as a low-income community are individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons as defined in section 3.03 of this notice or who are individuals who otherwise lack adequate access to loans or equity investments as defined in section 3.04 of this notice.

.03 Low-Income Persons . (1) Definition . For purposes of § 45D(e)(2), an individual shall be considered to be low-income if the individual’s family income, adjusted for family size, is

not more than (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.

(2) QALICB Requirements for Low-In- come Targeted Populations .

(a) In general . Section 1.45D–1(d) (4)(A), (B), and (C) will be amended to provide that a QALICB for low-income targeted populations, with respect to any taxable year, is a corporation (including a nonprofit corporation) or a partnership engaged in the active conduct of a qualified business as defined in § 1.45D–1(d)(5) if:

(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 § 45D(e)(2),

(ii) at least 40 percent of the entity’s employees are individuals who are low-income persons for purposes of § 45D(e)(2), or

(iii) at least 50 percent of the entity is owned by individuals who are low-income persons for purposes of § 45D(e)(2).

(b) Employee . The determination of whether an employee is a low-income person must be made at the time the employee is hired. If the employee is a low-income person at the time of hire, that employee is considered a low-income person for purposes of § 45D(e)(2) throughout the time of employment, without regard to any increase in the employee’s income after the time of hire.

(c) Owner . The determination of whether an owner is a low-income person must be made at the time the QLICI is made. If an owner is a low-income person at the time the QLICI is made, that owner is considered a low-income person for purposes of § 45D(e)(2) throughout the time the ownership interest is held by that owner.

(3) 120-Percent-Income Restriction . (a) In general . (i) In no case will an entity be treated as a QALICB under section 3.03 of this notice if the entity is located in a population census tract for which the median family income exceeds 120 percent of:

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quirement of at least 50 percent instead of 40 percent. (C) If the entity has no employees, the entity is deemed to satisfy the services performed requirement as well as the gross income requirement if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more qualifying population census tracts.

(4) 200-Percent-Income Restriction . (a) In general . (i) In no case will an entity be treated as a QALICB under section 3.04 of this notice if the entity is located in a population census tract for which the median family income exceeds 200 percent of:

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

(B) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (200-percent-income restriction).

(ii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use.

(b) Population Census Tract Location . (i) For purposes of the 200-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 200 percent of the applicable median family income under section 3.04(4)(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

property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts.

(4) Rental of Real Property for Low-In- come Targeted Populations . In addition, § 1.45D–1(d)(5)(ii) will be amended to provide that the rental to others of real property for low-income targeted populations that otherwise satisfies the requirements to be a qualified business will be treated as located in a low-income community if at least 50 percent of the entity’s total gross income is derived from rentals to individuals who are low-income persons for purposes of section 45D(e)(2) and/or to a QALICB that meets the requirements for low-income targeted populations under section 3.03(2)(a)(i) or (ii) and 3.03(2)(b) of this notice.

.04 Individuals who Otherwise Lack Adequate Access to Loans or Equity In- vestments .

(1) In general . Section 3.04 of this notice may be applied only with regard to QLICIs made under the increase in the new markets tax credit limitation pursuant to § 1400N(m)(2). Therefore, only CDEs with a significant mission of recovery and redevelopment of the GO Zone that receive an allocation from the increase described in § 1400N(m)(2) may make QLICIs from that allocation pursuant to the rules in section 3.04 of this notice.

(2) GO Zone Targeted Population . For purposes of targeted populations under § 45D(e)(2), an individual is considered to otherwise lack adequate access to loans or equity investments only if the individual was displaced from his or her principal residence as a result of Hurricane Katrina and/or the individual lost his or her principal source of employment as a result of Hurricane Katrina (GO Zone Targeted Population). In order to meet this definition, the individual’s principal residence or principal source of employment, as applicable, must have been located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.

(3) QALICB Requirements for the GO Zone Targeted Population .

(a) In general . Section 1.45D–1(d) (4)(A), (B), and (C) will be amended to provide that a QALICB for the GO Zone

Targeted Population, with respect to any taxable year, is a corporation (including a nonprofit corporation) or a partnership engaged in the active conduct of a qualified business as defined in § 1.45D–1(d)(5) if:

(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 section 3.03 of this notice, 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 section 3.03 of this notice, 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 section 3.03 of this notice, or some combination thereof.

(b) Location . (i) In general . In order to be a QALICB under section 3.04(3) of this notice, the entity must be located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina (qualifying population census tract).

(ii) Determination . (A) For purposes of the preceding paragraph, an entity will be considered to be located in a qualifying population census tract if:

( 1 ) 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 qualifying population census tracts (gross income requirement);

( 2 ) 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

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

(B) The entity is deemed to satisfy the gross income requirement if the entity meets either the use of tangible property requirement or the services performed re

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