Testimony on NMTC Proposed Regulations

Published by Michael Novogradac on Tuesday, October 4, 2011 - 12:00am

Last Thursday, I testified in Washington, D.C. on behalf of the NMTC Working Group regarding the Internal Revenue Service’s efforts to reduce the regulatory barriers that inhibit NMTC investments in non real estate businesses.  My testimony targeted three areas:

     Draconian Tax Credit Recapture,

     Reasonable Expectations Test, and

     Allocation of NMTC.

  1. Draconian Tax Credit Recapture Rules: I noted that the statutory NMTC recapture rules are draconian in that they provide full recapture, plus interest, for recapture events during the seven year compliance period.  As such, investors incur significant costs ensuring continuing compliance.  These costs are heightened by the possible interpretation that a $1 excess redemption, or failing the substantially all test by $1, could trigger full recapture, plus interest.  To minimize the risk of such ‘foot fault’ recapture events, the NMTC Working Group recommends that the regulatory recapture rules apply on a proportional or pro rata basis.  Such that a $1 redemption on a $1,000,000 investment would generate recapture on only $1/$1,000,000 in investments.  The NMTC Working Group believes the IRS has the regulatory authority to adopt such view.
  2. Reasonable Expectations Test: The next topic I addressed in my testimony was the NMTC Working Group’s view that the current value and control based reasonable expectations test limits the ability of CDEs to make equity investments in qualified businesses.  To solve this issue, the NMTC Working Group recommends that the value test be eliminated and the control test be limited to situations where the CDE has the ability to control decisions that affect a qualified business’ status as such under NMTC rules.  Furthermore, rights of a CDE to replace the managing member or general partner of a qualified business for cause should not be considered control rights.
  3. Allocation of NMTC: To further CDE equity investments in qualified businesses, the NMTC Working Group restated its view that the IRS should issue guidance as to how the NMTC is allocated among members of a partnership.

With the regulation hearing behind us, Treasury and the IRS are continuing to review the comments, assessing them and updating the proposed regulations.  The project is targeted for completion by June 30, 2012 as part of the IRS business plan yearend.  Hopefully we will get guidance sooner than that.

To review the NMTC Working Group comment letter, or learn more about the group, go to www.nmtcworkinggroup.com.