Q&A: How Does CDFI Fund Monitor Compliance With Unrelated Entity Requirement?

Published by Owen P. Gray, CPA on Thursday, April 6, 2017
Journal cover thumb April 2017

Question: How does the CDFI Fund monitor compliance with the unrelated-entity requirement of Section 3.2(d) of the allocation agreement?

Answers: Allocatees that indicate they will make qualified low-income community investments (QLICIs) in qualified active low-income community businesses (QALICBs) that are unrelated to the allocatee will be eligible for five bonus points in the application process. Allocatees who elect to satisfy this requirement are required to indicate in the Transaction Level Report (TLR) whether each QLICI was made to a related or unrelated QALICB. This test is measured on an aggregate qualified equity investment (QEI) basis.

For allocatees that received an allocation in the 2014 round or earlier, the allocatee will be in compliance with the allocation agreement only if persons unrelated to the allocatee will hold a majority equity interest. This is determined after the receipt of the QEI but before the allocatee uses the proceeds of that QEI to make the initial QLICI. That allocatee must determine whether such persons are unrelated to the allocatee within the meaning of IRC Sections 267(b) and 707(b)(1). In addition, for QLICIs made on or after April 15, 2010, the CDFI Fund will assess compliance with the unrelated entities requirement at either the allocatee or subsidiary CDE level depending on which entity receives the QEI and makes the corresponding QLICI.

For the latest round (i.e., CY 2015-2016 NMTC allocation round), the CDFI Fund slightly changed how the unrelated entity requirement rule is evaluated. A 2015-2016 allocatee will be in compliance with its allocation agreement only if persons unrelated to the allocatee and subsidiary CDE will hold a majority equity interest in the QALICB. This is determined after a QEI is made in the allocatee or subsidiary CDE but before the allocatee or subsidiary CDE uses the proceeds of that QEI to make its initial QLICI in the QALICB. That allocatee must determine whether such persons are unrelated to the allocatee within the meaning of IRC Sections 267(b) and 707(b)(1). The CDFI Fund will assess compliance with the unrelated entities requirement at the allocatee and subsidiary CDE level if the subsidiary CDE makes the QLICI.

Allocatees are encouraged to consult with their tax advisors to ensure they are in compliance with these requirements.