n-03-56.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Section 45D.–New Markets Tax Credit

Notice 2003-56

PURPOSE
The purpose of this notice is to announce that the Treasury Department and the
Internal Revenue Service will amend § 1.45D-1T(c)(3)(ii) of the temporary Income Tax
Regulations to provide an additional exception permitting certain equity investments
made before the receipt of a new markets tax credit allocation under § 45D(f)(2) of the
Internal Revenue Code to be designated as qualified equity investments under §
45D(b)(1)(C).

BACKGROUND

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).

Section 45D(b)(1)(C) provides that an equity investment in a CDE is a qualified
equity investment only if the CDE designates the investment as a qualified equity
investment.

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

Section 45D(b)(2) provides that 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).

Section 1.45D-1T(c)(3)(i) provides that, except as provided in § 1.45D-
1T(c)(3)(ii), 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 § 45D(f)(2).

Section 1.45D-1T(c)(3)(ii) provides that, notwithstanding § 1.45D-1T(c)(3)(i), an
equity investment in an entity is eligible to be designated as a qualified equity investment
if -- (A) the equity investment is made on or after April 20, 2001; (B) the entity in which
the equity investment is made is certified by the Secretary as a CDE under § 45D(c)
before January 1, 2003; (C) the entity in which the equity investment is made receives
notification of the credit allocation (with the actual receipt of such credit allocation
contingent upon subsequently entering into an allocation agreement) from the Secretary

before January 1, 2003; and (D) the equity investment otherwise satisfies the
requirements of § 45D and § 1.45D-1T.

The Secretary has delegated certain administrative 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
(CDFI Fund). The delegated administrative functions include CDE certifications and
new markets tax credit allocations.

Notice 2003-9, 2003-5 I.R.B. 369, announces that the Treasury Department and
the Service will amend § 1.45D-1T(c)(3)(ii) to provide that, notwithstanding § 1.45D-
1T(c)(3)(i), an equity investment in an entity is eligible to be designated as a qualified
equity investment under § 1.45D-1T(c)(1)(iii) if -- (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 CDFI Fund no later than August 29, 2002; and (3) the equity investment
otherwise satisfies the requirements of § 45D and § 1.45D-1T.

DISCUSSION

In order to encourage equity investments in CDEs, the Treasury Department and
the Service will amend § 1.45D-1T(c)(3)(ii) to provide an additional exception permitting
an equity investment made on or after the date the CDFI Fund publishes a Notice of
Allocation of Availability (NOAA) in the Federal Register to be designated as a qualified
equity investment. Accordingly, § 1.45D-1T(c)(3)(ii) will be revised to provide that,
notwithstanding § 1.45D-1T(c)(3)(i), an equity investment in an entity is eligible to be
designated as a qualified equity investment under § 1.45D-1T(c)(1)(iii) if:

1. The equity investment is made on or after the date the CDFI Fund publishes a
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 CDFI Fund under that NOAA; and

3. The equity investment otherwise satisfies the requirements of § 45D and §
1.45D-1T.

If the entity in which the equity investment is made does not receive an allocation
under that NOAA, the equity investment will not be eligible to be designated as a
qualified equity investment under future NOAAs.

The temporary regulations will be revised to incorporate the guidance set forth in
this notice and Notice 2003-9. The revision to the temporary regulations reflecting the
additional exception under this notice will be effective for equity investments made on or
after July 18, 2003.

DRAFTING INFORMATION

The principal author of this notice is Paul Handleman of the Office of Associate
Chief Counsel (Passthroughs and Special Industries). For further information regarding
this notice, contact Mr. Handleman on (202) 622-3040 (not a toll-free call).