The IRS has recently released two taxpayer favorable Revenue Rulings regarding the NMTC: (i) Rev. Rul. 2010-16 which concludes that the passive activity rules do not necessarily prevent investors from using the NMTC and (ii) Rev. Rul. 2010-17 which allows a LLC taxable as a partnership to include recourse loans invested as equity in a community development entity (CDE) in determining the allowable NMTC. Additional discussion of each Revenue Ruling is included below.
The IRS releases come at a time when the Community Development Financial Institution (CDFI) Fund has just announced an overwhelming response to its 2010 NMTC allocation round. The CDFI received 250 applications requesting $23.5 billion in NMTC allocations, nearly 5 times the amount of NMTC allocation that Congress is expected to authorize. Congressional authority for the 2010 allocation round remains pending in the American Jobs and Closing Tax Loopholes Act of 2010 (also known as the “Tax Extenders Bill”). As currently drafted, the Tax Extenders Bill would authorize $5 billion in NMTC allocation and allow the NMTC to be used to offset the alternative minimum tax for qualifying initial investments made before January 1, 2012. The Tax Extenders Bill was passed in the House, H.R. 4213, on May 28, 2010 and is currently pending in the Senate, S.Amend. 4369.
Rev. Rul. 2010-16
The more interesting of the two NMTC Revenue Rulings is Rev. Rul. 2010-16 which provides that the passive activity rules do not necessarily prevent investors from using the NMTC. The ruling concludes that the NMTC will not be disallowed under Section 469 for either an individual or a partnership making a qualified equity investment in a CDE. Because the NMTC arises based on the amount paid to the CDE for the investment, it is the activity of acquiring the investment that is tested to determine whether it arises in connection with the conduct of a passive activity. The taxpayer’s interest or extent of participation in the CDE’s trade or business is not relevant because the credit does not pass through the CDE to the investor. Presumably, acquisition of a qualified equity investment in a CDE would be a passive activity if the activity of acquiring the investment were in connection with the conduct of the investor’s trade or business and the person claiming the NMTC did not materially participate.
Rev. Rul. 2010-17
The second Revenue Ruling, Rev. Rul. 2010-17, expands earlier IRS guidance and allows an LLC (taxable as a partnership) to include cash from recourse loans to the LLC invested as equity in a CDE for purposes of determining the allowable NMTC. The earlier guidance, Rev. Rul. 2003-20 provided that non-recourse financing obtained by an LLC to purchase an equity investment in a CDE was a qualified equity investment under Section 45D(b)(1)(C). The new IRS guidance, Rev. Rul. 2010-17 extends this same tax treatment to recourse financing. Therefore, NMTCs generated by the LLC’s qualified equity investment in the CDE are allocable to the LLC’s members.
For questions regarding the information contained in this G&S Advisory please contact your usual Goulston & Storrs attorney, any member of the Tax Group.
Pursuant to IRS Circular 230, please be advised that, to the extent this communication contains any federal tax advice, it is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
This G&S advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer or tax advisor concerning your situation and any specific legal questions you may have.
© 2010 Goulston & Storrs – A Professional Corporation All Rights Reserved