Law Firm Suggests Change to New Markets Tax Credit Regs

Dear Ladies and Gentleman:

We are responding to your request for comments on the proposed New Markets Tax Credit ("NMTC")regulations issued August 11, 2008. The issue on which we are providing comments does not specifically address the proposed regulations but instead relates to an issue that we believe should be clarified in additional regulations. We have also submitted comments on the provision cited below as part of the Novogradac NMTC Working Group. We request that the change recommended below be implemented only if the changes requested by the Novogradac NMTC Working Group on that provision are not adopted.

Tenant excluded businesses

Treasury Regulation § 1.45D-l(d)(5)(ii) provides that "a CDE's investment in or loan to a business engaged in the rental of real property is not a qualified low-income community investment under paragraph (d)(1)(i) of this section to the extent a lessee of the real property is described in paragraph (d)(5)(iii)(B) of this section." This provision takes the approach of disqualifying a CDE's investment as a QLICI "to the extent a lessee . . .is" one of the prohibited businesses listed in paragraph (d)(5)(iii)(B).

We recommend that Treasury Regulation § 1.45D-l(d)(5)(ii) be revised as follows: "a CDE's investment in or loan to a business engaged in the rental of real property is not a qualified low-income community investment under paragraph (d)(l)(i) of this section to the extent a lessee of the real property utilizes such real property in a trade or business is described in paragraph (d)(5)(iii)(B) of this section". It would present a considerable burden on CDEs and investors if tenant activities by lessees in property not owned by the QALICB could trigger disqualification.

An example of such off-site activities would be a state government that leases office space from a QALICB, but which operates state owned liquor stores in properties not owned by the QALICB. The tenant utilizes the space that it leases from the QALICB for a non-prohibited business. But because governmental entities typically do not have the ability to create separately recognized taxpayer entities in which to conduct separate activities, the phrase "to the extent a lessee . . . is" can arguably be interpreted to apply to all activities conducted by a tenant regardless of whether those activities occur in the property leased from the QALICB. To disallow leases to a governmental entity which is conducting non-disqualified activities in the property leased from the QALICB simply because the governmental entity (unlike privately owned entities) does not have the ability to create separate taxpaying entities in which to conduct wholly unrelated prohibited activities does not seem to further any of the purposes of the NMTC program.

Thank you in advance for your time and consideration. Please do not hesitate to contact us if you have any questions regarding our comments or if we can be of further assistance.