IRS Publishes Targeted Populations Proposed Rule; CDFI Fund Issues New Guidance

By A. J. Johnson & Caitlin Jones
November 3, 2008 6 min read

The Internal Revenue Service has issued a new proposed rule outlining requirements for investments serving “targeted populations” under the federal new markets tax credit (NMTC) program. The IRS invited public comments by 12/23/08 and announced a public hearing for 1/22/09.

Separately, the Community Development Financial Institutions (CDFI) Fund issued a four-page document with additional information and guidance on how community development entities (CDEs) can serve targeted populations and geographic areas.

Targeted Population

The new IRS rule, published on 9/24/08 in the Federal Register, is the first IRS guidance on the targeted population requirements since IRS Notice 2006-60. Until the final rule is published, taxpayers can continue to rely on Notice 2006-60, the proposed rule’s preamble says.

Under the NMTC program, capital raised from investors must be invested by CDEs in qualified businesses (Qualified Active Low Income Community Businesses, or QALICBs) located in low-income communities.

The program was amended in 2004 to expand the definition of low-income communities to add three new categories, one of which is targeted populations. There are two categories of eligible targeted populations: (1) a low-income targeted population; and (2) a GO Zone targeted population. The second was established by the Gulf Opportunity (GO) Zone Act of 2005, which provided special additional NMTC allocation authority (GO Zone NMTCs) for each of 2005, 2006, and 2007 to be used in designated GO Zone areas – parts of Alabama, Mississippi, and Louisiana ravaged by Hurricane Katrina.

For purposes of the targeted population rules, low-income is defined as a household income, adjusted for family size, not exceeding 80% of: the area median income (AMI), for metropolitan areas; the greater of the AMI or statewide median income, for non-metropolitan areas.

A GO Zone targeted population consists of individuals who were displaced from their principal home and/or who lost their principal job due to Hurricane Katrina. The principal home or job must have been in a census tract within the GO Zone containing one or more areas that were designated by the Federal Emergency Management Agency (FEMA) as flooded, or as having sustained extensive or catastrophic damage as a result of Katrina.

In general, an entity serving a low-income targeted population, to qualify as a QALICB, must: (1) be at least 50% owned by low-income persons; (2) have at least 40% of its employees as low-income persons; or (3) derive at least 50% of its annual gross income from sales, rentals, services, or other transactions with low-income persons. In addition, the QALICB must be in a census tract in which the median family income doesn’t exceed 120% of the area or statewide median income.

An entity serving a GO Zone targeted population, to qualify as a QALICB, must meet the same preceding threshold percentages, but can achieve this through any combination of low-income persons and/or GO Zone targeted population individuals. In addition, the census tract income cap is higher – 200% of the area or statewide median income.

Few, Clarifying Changes

The proposed rule makes a few, clarifying modifications to certain requirements in Notice 2006-60.

First, it clarifies that the annual income estimates of median family income to be used to determine whether an individual or household qualifies as low-income – published yearly by the U.S. Department of Housing and Urban Development (HUD) – may be relied upon until 45 days after the later of (1) the date on which HUD publishes its new list of income estimates, or (2) HUD’s effective date for the new list.

The rule also clarifies the exception to the requirement that a QALICB serving a targeted population be in a census tract with a median family income not above 120% or 200% of the area or statewide median income. Under this exception, this cap doesn’t apply if the QALICB is in a census tract with a population below 2,000, if the tract is (1) in a metropolitan area, and (2) more than 75% of the tract is zoned for commercial or industrial use. The proposed rule clarifies that the 75% calculation is to be made using the physical area of the census tract, and that property will be treated as zoned for commercial or industrial use if zoning permits commercial or industrial use of the property.

Finally, the rule clarifies that the current safe harbor under which an entity will be deemed to be engaged in the active conduct of a trade or business, one of the requirements for a QALICB, doesn’t also apply for purposes of determining if the gross income requirement is met, another threshold requirement.

The modifications made by the proposed rule were based on public comments received in response to questions on various targeted population issues outlined in a May 2005 notice published by the CDFI Fund, which administers the NMTC program in partnership with the IRS.

The proposed rule’s preamble discusses other suggestions that weren’t adopted, and requests public comments on specific questions. These include: whether additional requirements should be added to the employee test under the targeted population standards; what measure of income should be used to determine income for purposes of the definition of low-income; and whether the gross-income requirement should be modified to include the fair market value of goods and services provided to low-income persons at reduced fees.

(Proposed rule, http://www. access.gpo.gov/su_docs/fedreg/a080924c.html.)

CDFI Document

In its new document, the CDFI Fund describes and outlines the requirements for the three new categories of low-income communities: targeted populations; high out-migration rural county census tracts; and low-population/empowerment zone (EZ) census tracts. It also identifies resources to use to determine whether a particular area qualifies as one of the latter two geographic areas.

Among other things, the document notes that:

Users may rely on the CDFI Fund’s mapping program (CIMS) to determine if a census tract has a median income at or below 120% (or 200%) of the applicable median family income.
The CDFI Fund’s Web site (http://www. cdfifund.gov) lists all qualifying FEMA-designated census tracts in the GO Zone, and all 371 census tracts nationwide in high out-migration rural counties.
All certified CDES may serve targeted populations within their approved service area, without any special certification.
HUD’s Web site (http://www.hud.gov) lists empowerment zone communities.

(CDFI document: http://www.cdfifund.gov/docs/ nmtc/Targeted%20 Population%20QA.pdf.)

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