IRS publishes final NMTC targeted populations regulations

by Susan Reaman, Esq. on Dec 6, 2011

This article is reprinted with the permission of Nixon Peabody LLP

In addition to the usual rules defining “low income communities” where projects are eligible for the new markets tax credit, the Code provides that certain individuals or groups of individuals who are low income or lack access to loans or equity investments, may qualify as a “targeted population” that is also eligible. The IRS first provided guidance, describing how an entity serving certain targeted populations could meet the requirements to be a qualified active low-income community business (or QALICB), in Notice 2006-60, and then, proposed regulations were published in September, 2008. Under those rules, a QALICB could rely on the Notice until the regulations became “final.”

Now, more than three years later, final regulations for targeted populations have been published. The IRS received many comments with respect to the proposed regulations to expand and clarify the rules. However, with few exceptions, the final regulations adopt the guidance from the Notice and the proposed regulations. The final regulations are effective December 5, 2011. Taxpayers may apply these new rules to taxable years ending before December 5, 2011 for targeted populations designated as eligible low-income communities by Treasury after October 22, 2004. Thereafter, Notice 2006-60 is obsolete and QALICBs must use the new final regulations.

As you may recall, an entity qualifies as a QALICB serving targeted populations if at least 50% of its gross income is “derived from” sales, rentals, services, or other transactions with low-income persons, at least 50% of its ownership is by low-income persons, or at least 40% of its employees are low-income persons. Such a QALICB could not be located in a census tract that exceeds 120% of the area median family income. A targeted population also includes individuals displaced by Hurricane Katrina.

The final regulations do not expand the definition of targeted populations. However, the IRS and Treasury have asked for comments to identify other individuals or groups that may be appropriate as additional targeted populations.

Here is a summary of the important additions and clarifications to the targeted populations rules.

Documenting Low-income Persons

In general, a person is considered low-income in a metropolitan area if his or her income is not more than 80% of the area median family income; and in a non-metropolitan areas, if his or her income is not more than the greater of (i) 80% of the area median family income; or (ii) 80% of the statewide non-metropolitan area median family income.  The final regulations allow a QALICB to measure family income of a person using a range of methods, including (i) the method employed by the U.S. Census Bureau, (ii) the method used by HUD, or (iii) the individual’s total family income as reported on Form(s) 1040. Under the Form 1040 method, an individual’s family income includes the income of any member of the individual’s family (as defined in section 267(c)(4); i.e., spouse, siblings, ancestors and lineal descendants) if the family member lives with the individual regardless of whether the family member files a separate return.

Items Included in Gross Income

The final regulations clarify that when establishing that the QALICB’s income is “derived from” dealing with low-income persons, the computation includes money and the fair market value of contributions of property or services provided to a QALICB primarily for the benefit of low-income persons. This position is consistent with a recent private letter ruling.  Since letter rulings are not precedential, incorporating this definition of “derived from” in the final regulations will greatly assist QALICBs in assuring compliance with the targeted populations rules.

The Preamble to the final regulations notes that persons providing the money and contributions to a QALICB on behalf of low-income persons cannot receive a direct benefit from the entity. A contribution that benefits the general public is not a direct benefit. Thus, gross income derived from federal, state, or local grants, charitable donations, or in-kind contributions, as well as collected fees, insurance reimbursements, and other sources of income are acceptable as long as these payments and contributions are provided for the benefit of low-income persons on either an individual basis or as a class of individuals.

The QALICB must be able to document that such payments are legally required to be paid on behalf of individuals that meet the definition of low-income persons.


Under the Notice, an owner had to be a low-income person at the time the qualified low-income community investment (QLICI) was made and was then “locked in,” i.e., considered a low-income person throughout the NMTC 7-year credit period. One commentator suggested that the rule locking in an owner’s status as a low-income person as of the time of the QLICI should be similarly applied to low-income persons who acquire an ownership interest after the QLICI is made. The final regulations adopt this suggestion by locking in the status of an owner as a low-income person at the time the QLICI is made or at the time the ownership interest is acquired.

Rental to Others of Real Property

The final regulations provide a special rule for QALICBs whose sole business is the rental to others of real property by treating the QALICB as satisfying the 50-percent gross-income requirement if the entity is treated as being located in a low-income community. A QALICB is treated as being located in a low-income community if at least 50% of the entity’s total gross income is derived from (i) rentals to individuals who are low-income persons or (ii) rentals to a QALICB serving low-income targeted populations.

Gross Income – Fair Market Value of Sales, Rentals, Services, or Other Transactions

The final regulations provide a limited rule that allows a QALICB with gross income that is derived from sales, rentals, services, or other transactions with both non-low-income persons and low-income persons, to treat the value of the sales, rentals, services, or other transactions with low-income persons at fair market value even if the low-income persons do not pay fair market value.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

Leave a Comment

Previous post: