(a) In general. Any person who fails to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction may be subject to a monetary penalty. The penalty for failure to include information with respect to a reportable transaction, other than a listed transaction, is $10,000 in the case of a natural person, and $50,000 in any other case. The penalty for failure to include information with respect to a listed transaction is $100,000 in the case of a natural person, and $200,000 in any other case. The section 6707A penalty is in addition to any other penalty that may be imposed.

(b) Definitions—(1) Reportable transaction. The term “reportable transaction” is defined in §1.6011-4(b)(1) of this chapter.

(2) Listed transaction. The term “listed transaction” is defined in section 6707A(c) of the Code and §1.6011-4(b)(2) of this chapter.

(c) Assessment of the penalty—(1) In general. The Internal Revenue Service (IRS) may assess a penalty under section 6707A with respect to each failure to disclose a reportable transaction within the time and in the form and manner provided by §1.6011-4(d) and (e) of this chapter or pursuant to the time, form, and manner stated in other published guidance. A taxpayer who is required to disclose a reportable transaction with a return, amended return, or application for tentative refund and who also is required to disclose the transaction on a Form 8886, “Reportable Transaction Disclosure Statement” (or successor form), filed with the IRS Office of Tax Shelter Analysis (OTSA), is subject to only a single section 6707A penalty for failure to make either one or both of those disclosures. If section 6011 and the regulations thereunder require a disclosure statement to be filed at the time that a return is filed, the disclosure statement is considered to be timely filed if it is filed at the same time as the return, even if the return is filed untimely after its due date.

(2) Examples. The rules of paragraph (c)(1) of this section are illustrated by the following examples:

Example 1. Taxpayer T is required to attach a Form 8886 to its return for the 2007 taxable year and to send a copy of the Form 8886 to OTSA at the time it files its return. Taxpayer T fails to attach the Form 8886 to its return and fails to send a copy of the Form 8886 to OTSA. Taxpayer T is subject to a single penalty under section 6707A for failure to disclose because Taxpayer T failed to comply with the disclosure requirements of section 6011. A penalty under section 6707A also would apply if Taxpayer T had failed to comply with only one of the two requirements.

Example 2. Same as Example 1, except that Taxpayer T also subsequently files an amended return for 2007 that reflects Taxpayer T’s participation in the reportable transaction. Taxpayer T fails to attach a Form 8886 to the amended return as required by §1.6011-4(e)(1) of this chapter. Taxpayer T is subject to an additional penalty under section 6707A for failing to disclose a reportable transaction.

Example 3. In November 2009, Taxpayer U participates in a reportable transaction resulting in a loss that is carried back to 2008. Taxpayer U fails to attach a Form 8886 to its 2008 amended return claiming the loss carryback. Section 1.6011-4(e)(1) of this chapter requires Taxpayer U to attach a Form 8886 to its amended return for the 2008 taxable year. Taxpayer U is subject to a penalty under section 6707A.

Example 4. Taxpayer P participates in a non-listed reportable transaction and is required to attach a Form 8886 to its return for the 2008 taxable year that is due on March 16, 2009. Taxpayer P timely files its return but fails to attach the Form 8886 to its return. After the due date of Taxpayer P’s return and without an extension of time to file, Taxpayer P files an amended return relating to the 2008 taxable year to which Taxpayer P attaches the Form 8886. Taxpayer P is subject to a penalty under section 6707A for failure to disclose because Taxpayer P failed to comply with the disclosure requirements of section 6011 by not attaching a Form 8886 to its return for the 2008 taxable year that was timely filed on or before the due date of March 16, 2009. A penalty under section 6707A also would apply if Taxpayer P had failed to attach a Form 8886 to its amended return. Taxpayer P, nevertheless, may file a complete and proper Form 8886 and request in writing rescission of the penalties assessed within 30 days after the date the IRS sends notice and demand for payment of the penalties in accordance with Rev. Proc. 2007-21. The filing of the untimely Form 8886 will weigh heavily in favor of rescission provided that Taxpayer P files the Form 8886 prior to the date the IRS first contacts the taxpayer concerning a tax examination for the 2008 taxable year and there are no other circumstances that suggest that Taxpayer P delayed filing the Form 8886 until after the IRS had taken steps to identify Taxpayer P’s participation in the reportable transaction in question.

Example 5. Shareholder V, a shareholder in an S Corporation, receives a timely Schedule K-1 “Partner’s Share of Income, Deductions, Credits, etc.,” on April 10, 2009, and determines that she is required to attach a Form 8886 to her individual income tax return for the 2008 taxable year. Shareholder V fails to attach the Form 8886 to her 2008 individual income tax return but files a proper and complete Form 8886 with OTSA on June 12, 2009. Section 1.6011-4(e)(1) of this chapter provides that if a taxpayer who is a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust receives a timely Schedule K-1 less than 10 calendar days before the due date of the taxpayer’s return (including extensions) and, based on receipt of the timely Schedule K-1, the taxpayer determines that the taxpayer participated in a reportable transaction, the disclosure statement will not be considered late if the taxpayer discloses the reportable transaction by filing a disclosure statement with OTSA within 60 calendar days after the due date of the taxpayer’s return (including extensions). Accordingly, Shareholder V is not subject to a penalty under section 6707A for failure to disclose.

Example 6. In July 2008, Taxpayer W participates in Transaction Z, a transaction that is not reportable as of April 15, 2009, the date Taxpayer W files his individual income tax return for 2008. On July 15, 2009, Transaction Z is identified as a transaction of interest. Section 1.6011-4(e)(2)(i) of this chapter provides that if a transaction that is not otherwise a reportable transaction becomes a listed transaction or a transaction of interest after the taxpayer has filed a tax return (including an amended return) reflecting the taxpayer’s participation in the listed transaction or transaction of interest and before the end of the period of limitations for assessment of tax for any taxable year in which the taxpayer participated in the listed transaction or transaction of interest, then a disclosure statement must be filed with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or transaction of interest, regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest. Taxpayer W fails to file a Form 8886 with OTSA by October 13, 2009, 90 calendar days after the date that the transaction was identified as a transaction of interest. Accordingly, Taxpayer W is subject to a penalty under section 6707A.

Example 7. Taxpayer X is required to attach a Form 8886 to its return for the 2008 taxable year with respect to participation in a listed transaction. Taxpayer X attaches the Form 8886 to its return in a timely manner. The Form 8886, however, does not describe any of the potential tax benefits expected to result from this transaction and states that information will be provided upon request. Because the Form 8886 does not describe any of the potential tax benefits expected to result from the transaction and merely provides that the information will be provided upon request, the Form 8886 filed by Taxpayer X is incomplete and does not satisfy the requirements set forth in §1.6011-4(d) of this chapter. Taxpayer X is subject to a penalty under section 6707A for failure to disclose in the appropriate manner.

(d) Rescission authority—(1) In general. The Commissioner (or the Commissioner’s delegate) may rescind the section 6707A penalty if—

(i) The violation relates to a reportable transaction that is not a listed transaction, and

(ii) Rescinding the penalty would promote compliance with the requirements of the Code and effective tax administration.

(2) Requesting rescission. The Secretary may prescribe the procedures for a taxpayer to request rescission of a section 6707A penalty with respect to a reportable transaction other than a listed transaction by publishing a revenue procedure or other guidance in the Internal Revenue Bulletin.

(3) Factors that weigh in favor of granting rescission. In determining whether rescission would promote compliance with the requirements of the Code and effective tax administration, the Commissioner (or the Commissioner’s delegate) will take into account the following list of factors that weigh in favor of granting rescission. This is not an exclusive list and no single factor will be determinative of whether to grant rescission in any particular case. Rather, the Commissioner (or the Commissioner’s delegate) will consider and weigh all relevant factors, regardless of whether the factor is included in this list.

(i) The taxpayer, upon becoming aware that it failed to disclose a reportable transaction properly, filed a complete and proper, albeit untimely, Form 8886 (or successor form). This factor will weigh heavily in favor of rescission provided that—

(A) the taxpayer files the Form 8886 prior to the date the IRS first contacts the taxpayer (including contacts by the IRS with any partnership in which the taxpayer is a partner, any S corporation in which the taxpayer is a shareholder, or any trust in which the taxpayer is a beneficiary) concerning a tax examination for the tax period in which the taxpayer participated in the reportable transaction; and

(B) other circumstances suggest that the taxpayer did not delay filing an untimely but properly completed Form 8886 until after the IRS had taken steps to identify the taxpayer’s participation in the reportable transaction in question.

(ii) The failure to disclose properly was due to an unintentional mistake of fact that existed despite the taxpayer’s reasonable attempts to ascertain the correct facts with respect to the transaction.

(iii) The taxpayer has an established history of properly disclosing other reportable transactions and complying with other tax laws.

(iv) The taxpayer demonstrates that the failure to include on any return or statement any information required to be disclosed under section 6011 arose from events beyond the taxpayer’s control.

(v) The taxpayer cooperates with the IRS by providing timely information with respect to the transaction at issue that the Commissioner (or the Commissioner’s delegate) may request in consideration of the rescission request. In considering whether a taxpayer cooperates with the IRS, the Commissioner (or the Commissioner’s delegate) will take into account whether the taxpayer meets the deadlines described in Rev. Proc. 2007-21 (or successor document) (see §601.601(d)(2)(ii)(b) of this chapter) for complying with requests for additional information.

(vi) Assessment of the penalty weighs against equity and good conscience, including whether the penalty is disproportionate to the tax benefit received and whether the taxpayer demonstrates that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the failure to timely file or to include on any return any information required to be disclosed under section 6011. An important factor in determining reasonable cause and good faith is the extent of the taxpayer’s efforts to ensure that persons who prepared the taxpayer’s return were informed of the taxpayer’s participation in the reportable transactions. The presence of reasonable cause, however, will not necessarily be determinative of whether to grant rescission.

(4) Absence of favorable factors weighs against rescission. The absence of facts establishing the factors described in paragraph (d)(3) of this section weighs against granting rescission. The absence of any one of these factors, however, will not necessarily be determinative of whether to grant rescission.

(5) Factors not considered. In determining whether to grant rescission, the Commissioner (or the Commissioner’s delegate) will not consider doubt as to liability for, or collectibility of, the penalties.

(e) Reports to the Securities and Exchange Commission (SEC)—(1) In general. Under section 6707A(e), a taxpayer who is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 (or is required to file consolidated reports with another person) must disclose in periodic reports filed with the SEC the requirement to pay each of the following penalties:

(i) The penalty imposed by section 6707A(a) in the amount of $200,000 for failure to disclose a listed transaction.

(ii) The accuracy-related penalty imposed by section 6662A(a) at the 30-percent rate determined under section 6662A(c) for a reportable transaction understatement with respect to which the relevant facts affecting the tax treatment of the reportable transaction were not adequately disclosed in accordance with regulations prescribed under section 6011.

(iii) The accuracy-related penalty imposed by section 6662(a) at the 40-percent rate determined under section 6662(h) for a gross valuation misstatement, if the taxpayer (but for the exclusionary rule of section 6662A(e)(2)(C)(ii)) would have been subject to the accuracy-related penalty under section 6662A(a) at the 30-percent rate determined under section 6662A(c).

(iv) The penalty described in paragraph (e)(3) of this section for failure to disclose in periodic reports filed with the SEC the requirement to pay any of the penalties described in paragraphs (e)(1)(i) through (iii) or (e)(3) of this section.

(2) Manner and content of disclosure. The Secretary may prescribe the manner in which disclosure of the requirement to pay the penalties identified in paragraph (e)(1) of this section must be made on reports filed with the SEC, including identification of the specific SEC form and section thereof in which the taxpayer must make the disclosure as well as specification of the timing and contents of the disclosure, by publishing a revenue procedure or other guidance in the Internal Revenue Bulletin.

(3) Penalty for failure to disclose in SEC filings. Any taxpayer who is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 (or is required to file consolidated reports with another person) may be subject to a penalty in the amount of $200,000 for each failure to disclose the requirement to pay a penalty identified in paragraphs (e)(1)(i) through (e)(1)(iii) of this section in the manner specified by revenue procedure or other guidance published in the Internal Revenue Bulletin. The taxpayer also may be subject to an additional penalty in the amount of $200,000 for each failure to disclose a penalty arising under this section in the manner specified by revenue procedure or other guidance published in the Internal Revenue Bulletin. The penalty provided by this paragraph is not subject to rescission as described in paragraph (d) of this section.

(f) Effective/applicability date—(1) The rules of this section apply to disclosure statements that are due after September 11, 2008.

(2) The applicability of this section expires on or before September 9, 2011.

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.

Approved September 5, 2008.

Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).

[The text of proposed §301.6707A-1 is the same as the text of §301.6707A-1T published elsewhere in this issue of the Bulletin].

Linda E. Stiff,
Deputy Commissioner
for Services and Enforcement.

Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in section 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE) described in section 45D(c).

Section 45D(b)(1) provides that an equity investment in a CDE is a “qualified equity investment” if, among other requirements: (A) the investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash; (B) substantially all of the cash is used by the CDE to make qualified low-income community investments; and (C) the investment is designated for purposes of section 45D by the CDE.

Under section 45D(b)(2), the maximum amount of equity investments issued by a CDE that may be designated by the CDE as qualified equity investments shall not exceed the portion of the new markets tax credit limitation set forth in section 45D(f)(1) that is allocated to the CDE by the Secretary under section 45D(f)(2).

Section 45D(c)(1) provides that an entity is a CDE if, among other requirements, the entity is certified by the Secretary as a CDE.

Section 45D(d)(1) provides that the term qualified low-income community investment means: (A) any capital or equity investment in, or loan to, any qualified active low-income community business (as defined in section 45D(d)(2)); (B) the purchase from another CDE of any loan made by the entity that is a qualified low-income community investment; (C) financial counseling and other services specified in regulations prescribed by the Secretary to businesses located in, and residents of, low-income communities; and (D) any equity investment in, or loan to, any CDE.

Under section 45D(d)(2), a qualified active low-income community business is any corporation (including a nonprofit corporation) or partnership if for such year, among other requirements, (i) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business within any low-income community, (ii) a substantial portion of the use of the tangible property of the entity (whether owned or leased) is within any low-income community, and (iii) a substantial portion of the services performed for the entity by its employees are performed in any low-income community.

Under section 45D(d)(3), with certain exceptions, a qualified business is any trade or business. The rental to others of real property is a qualified business only if, among other requirements, the real property is located in a low-income community.

Section 221 of the American Jobs Creation Act of 2004 (Public Law 108-357, 118 Stat. 1418) amended section 45D(e)(2) to provide that the Secretary shall prescribe regulations under which one or more targeted populations (within the meaning of section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20))) may be treated as low-income communities. The regulations shall include procedures for determining which entities are qualified active low-income community businesses with respect to those populations.

The term targeted population, as defined in 12 U.S.C. 4702(20) and 12 C.F.R. 1805.201, means individuals, or an identifiable group of individuals, including an Indian tribe, who (A) are low-income persons; or (B) otherwise lack adequate access to loans or equity investments. Under 12 U.S.C. 4702(17) as interpreted by 12 C.F.R 1805.104, the term low-income means having an income, adjusted for family size, of not more than (A) for metropolitan areas, 80 percent of the area median family income; and (B) for non-metropolitan areas, the greater of (i) 80 percent of the area median family income; or (ii) 80 percent of the statewide nonmetropolitan area median family income.

Section 101(a) of the Gulf Opportunity Zone Act of 2005 (Public Law 109-135, 119 Stat. 2577) added new section 1400M(1), which provides that the Gulf Opportunity Zone (GO Zone) is that portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Act) by reason of Hurricane Katrina.

Section 1400M(2) provides that the Hurricane Katrina disaster area is an area with respect to which a major disaster has been declared by the President before September 14, 2005, under section 401 of the Act by reason of Hurricane Katrina. After determination by the President that a disaster area warrants assistance pursuant to the Act, the Federal Emergency Management Agency (FEMA) makes damage assessments. The categories for damage assessment in the wake of a hurricane are: flooded area, saturated area, limited damage, moderate damage, extensive damage, and catastrophic damage.

Under section 1400N(m)(1), a CDE shall be eligible for an allocation under section 45D(f)(2) of the increase in the new markets tax credit limitation described in section 1400N(m)(2) only if a significant mission of the CDE is the recovery and redevelopment of the GO Zone. Section 1400N(m)(2) provides that the new markets tax credit limitation otherwise determined under section 45D(f)(1) shall be increased by an amount equal to $300,000,000 for 2005 and 2006 and $400,000,000 for 2007, to be allocated among CDEs to make qualified low-income community investments within the GO Zone.

Notice 2006-60 provides rules relating to how an entity meets the requirements to be a qualified active low-income community business when its activities involve targeted populations. Targeted populations that will be treated as a low-income community are defined as individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons or who are individuals who otherwise lack adequate access to loans or equity investments. The notice provides requirements for qualified active low-income community businesses that serve low-income targeted populations and for qualified active low-income community businesses that serve the GO Zone Targeted Population.

(a) * * *

(d) * * *

(9) Targeted populations.

(i) Low-income persons.

(A) Definition.

(B) Qualified active low-income community business requirements for low-income targeted populations.

(1) In general.

(2) Employee.

(3) Owner.

(C) 120-percent-income restriction.

(1) In general.

(2) Population census tract location.

(D) Rental of real property for low-income targeted populations.

(ii) Individuals who otherwise lack adequate access to loans or equity investments.

(A) In general.

(B) GO Zone Targeted Population.

(C) Qualified active low-income community business requirements for the GO Zone Targeted Population.

(1) In general.

(2) Location.

(i) In general.

(ii) Determination.

(D) 200-percent-income restriction.

(1) In general.

(2) Population census tract location.

(E) Rental of real property for the GO Zone Targeted Population.

* * * * *

(h) Effective/applicability dates.

(3) Targeted populations.

* * * * *

(d) * * *

(4) * * *

(i) In general. The term qualified active low-income community business means, with respect to any taxable year, a corporation (including a nonprofit corporation) or a partnership engaged in the active conduct of a qualified business (as defined in paragraph (d)(5) of this section), if the requirements of (d)(4)(i)(A), (B), (C), (D), and (E) of this section are met (or in the case of an entity serving targeted populations, if the requirements of paragraphs (d)(4)(i)(D), (E), and (d)(9)(i) or (ii) of this section are met). Solely for purposes of this section, a nonprofit corporation will be deemed to be engaged in the active conduct of a trade or business if it is engaged in an activity that furthers its purpose as a nonprofit corporation.

* * * * *

(iv) Active conduct of a trade or business—(A) * * * This paragraph (d)(4)(iv) applies only for purposes of determining whether an entity is engaged in the active conduct of a trade or business and does not apply for purposes of determining whether the gross-income requirement under paragraph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i), or (d)(9)(ii)(C)(1)(i) of this section is satisfied.

* * * * *

(9) Targeted populations. As determined by the Treasury Department, for purposes of section 45D(e)(2), targeted populations that will be treated as a low-income community are individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons as defined in paragraph (d)(9)(i) of this section or who are individuals who otherwise lack adequate access to loans or equity investments as defined in paragraph (d)(9)(ii) of this section.

(i) Low-income persons—(A) Definition. For purposes of section 45D(e)(2), an individual shall be considered to be low-income if the individual’s family income, adjusted for family size, is not more than—

(1) For metropolitan areas, 80 percent of the area median family income; and

(2) For non-metropolitan areas, the greater of 80 percent of the area median family income, or 80 percent of the statewide non-metropolitan area median family income.

(B) Qualified active low-income community business requirements for low-income targeted populations—(1) In general. An entity will not be treated as a qualified active low-income community business for low-income targeted populations unless—

(i) At least 50 percent of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with individuals who are low-income persons for purposes of section 45D(e)(2) and this paragraph (d)(9),

(ii) At least 40 percent of the entity’s employees are individuals who are low-income persons for purposes of section 45D(e)(2) and this paragraph (d)(9), or

(iii) At least 50 percent of the entity is owned by individuals who are low-income persons for purposes of section 45D(e)(2) and this paragraph (d)(9).

(2) Employee. The determination of whether an employee is a low-income person must be made at the time the employee is hired. If the employee is a low-income person at the time of hire, that employee is considered a low-income person for purposes of section 45D(e)(2) and this paragraph (d)(9) throughout the time of employment, without regard to any increase in the employee’s income after the time of hire.

(3) Owner. The determination of whether an owner is a low-income person must be made at the time the qualified low-income community investment is made. If an owner is a low-income person at the time the qualified low-income community investment is made, that owner is considered a low-income person for purposes of section 45D(e)(2) and this paragraph (d)(9) throughout the time the ownership interest is held by that owner.

(C) 120-percent-income restriction—(1) In general—(i) In no case will an entity be treated as a qualified active low-income community business under paragraph (d)(9)(i) of this section if the entity is located in a population census tract for which the median family income exceeds 120 percent of—

(A) In the case of a tract not located within a metropolitan area, the statewide median family income, or

(B) In the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (120-percent-income restriction).

(ii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use. For this purpose, the 75 percent calculation should be made using the area of the population census tract. For purposes of this paragraph (d)(9)(i)(C)(1)(iii), property for which commercial or industrial use is a permissible zoning use will be treated as zoned for commercial or industrial use.

(2) Population census tract location—(i) For purposes of the 120-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 120 percent of the applicable median family income under paragraph (d)(9)(i)(C)(1)(i)(A) or (B) of this section (non-qualifying population census tract) if—

(A) At least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in paragraph (d)(5) of this section) within one or more non-qualifying population census tracts (non-qualifying gross income amount);

(B) At least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts (non-qualifying tangible property usage); and

(C) At least 40 percent of the services performed for the entity by its employees are performed in one or more non-qualifying population census tracts (non-qualifying services performance).

(ii) The entity is considered to have the non-qualifying gross income amount if the entity has non-qualifying tangible property usage or non-qualifying services performance of at least 50 percent instead of 40 percent.

(iii) If the entity has no employees, the entity is considered to have the non-qualifying gross income amount as well as non-qualifying services performance if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts.

(D) Rental of real property for low-income targeted populations. The rental to others of real property for low-income targeted populations that otherwise satisfies the requirements to be a qualified business under paragraph (d)(5) of this section will be treated as located in a low-income community for purposes of paragraph (d)(5)(ii) of this section if at least 50 percent of the entity’s total gross income is derived from rentals to individuals who are low-income persons for purposes of section 45D(e)(2) and this paragraph (d)(9) and/or to a qualified active low-income community business that meets the requirements for low-income targeted populations under paragraphs (d)(9)(i)(B)(1)(i) or (ii) and (d)(9)(i)(B)(2) of this section.

(ii) Individuals who otherwise lack adequate access to loans or equity investments—(A) In general. Paragraph (d)(9)(ii) of this section may be applied only with regard to qualified low-income community investments made under the increase in the new markets tax credit limitation pursuant to section 1400N(m)(2). Therefore, only CDEs with a significant mission of recovery and redevelopment of the Gulf Opportunity Zone (GO Zone) that receive an allocation from the increase described in section 1400N(m)(2) may make qualified low-income community investments from that allocation pursuant to the rules in paragraph (d)(9)(ii) of this section.

(B) GO Zone Targeted Population. As determined by the Treasury Department, for purposes of targeted populations under section 45D(e)(2), an individual is considered to otherwise lack adequate access to loans or equity investments only if the individual was displaced from his or her principal residence as a result of Hurricane Katrina and/or the individual lost his or her principal source of employment as a result of Hurricane Katrina (GO Zone Targeted Population). In order to meet this definition, the individual’s principal residence or principal source of employment, as applicable, must have been located in a population census tract within the GO Zone that contains one or more areas designated by the Federal Emergency Management Agency (FEMA) as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.

(C) Qualified active low-income community business requirements for the GO Zone Targeted Population—(1) In general. An entity will not be treated as a qualified active low-income community business for the GO Zone Targeted Population unless—

(i) At least 50 percent of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with the GO Zone Targeted Population, low-income persons as defined in paragraph (d)(9)(i) of this section, or some combination thereof;

(ii) At least 40 percent of the entity’s employees consist of the GO Zone Targeted Population, low-income persons as defined in paragraph (d)(9)(i) of this section, or some combination thereof; or

(iii) At least 50 percent of the entity is owned by the GO Zone Targeted Population, low-income persons as defined in paragraph (d)(9)(i) of this section, or some combination thereof.

(2) Location—(i) In general. In order to be a qualified active low-income community business under paragraph (d)(9)(ii)(C) of this section, the entity must be located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina (qualifying population census tract).

(ii) Determination—(A) For purposes of the preceding paragraph, an entity will be considered to be located in a qualifying population census tract if—

(I) At least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in paragraph (d)(5) of this section) within one or more qualifying population census tracts (gross income requirement);

(II) At least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more qualifying population census tracts (use of tangible property requirement); and

(III) At least 40 percent of the services performed for the entity by its employees are performed in one or more qualifying population census tracts (services performed requirement).

(B) The entity is deemed to satisfy the gross income requirement if the entity satisfies the use of tangible property requirement or the services performed requirement on the basis of at least 50 percent instead of 40 percent.

(C) If the entity has no employees, the entity is deemed to satisfy the services performed requirement as well as the gross income requirement if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more qualifying population census tracts.

(D) 200-percent-income restriction—(1) In general—(i) In no case will an entity be treated as a qualified active low-income community business under paragraph (d)(9)(ii) of this section if the entity is located in a population census tract for which the median family income exceeds 200 percent of—

(A) In the case of a tract not located within a metropolitan area, the statewide median family income, or

(B) In the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (200-percent-income restriction).

(ii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use. For this purpose, the 75 percent calculation should be made using the area of the population census tract. For purposes of this paragraph (d)(9)(ii)(D)(1)(iii), property for which commercial or industrial use is a permissible zoning use will be treated as zoned for commercial or industrial use.

(2) Population census tract location—(i) For purposes of the 200-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 200 percent of the applicable median family income under paragraph (d)(9)(ii)(D)(1)(i)(A) or (B) of this section (non-qualifying population census tract) if—

(A) At least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in paragraph (d)(5) of this section) within one or more non-qualifying population census tracts (non-qualifying gross income amount);

(B) At least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts (non-qualifying tangible property usage); and

(C) At least 40 percent of the services performed for the entity by its employees are performed in one or more non-qualifying population census tracts (non-qualifying services performance).

(ii) The entity is considered to have the non-qualifying gross income amount if the entity has non-qualifying tangible property usage or non-qualifying services performance of at least 50 percent instead of 40 percent.

(iii) If the entity has no employees, the entity is considered to have the non-qualifying gross income amount as well as non-qualifying services performance if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts.

(E) Rental of real property for the GO Zone Targeted Population. The rental to others of real property for the GO Zone Targeted Population that otherwise satisfies the requirements to be a qualified business under paragraph (d)(5) of this section will be treated as located in a low-income community for purposes of paragraph (d)(5)(ii) of this section if at least 50 percent of the entity’s total gross income is derived from rentals to the GO Zone Targeted Population, low-income persons as defined in paragraph (d)(9)(i) of this section and/or to a qualified active low-income community business that meets the requirements for the GO Zone Targeted Population under paragraphs (d)(9)(ii)(C)(1)(i) or (ii) of this section.

* * * * *

(h) Effective/applicability dates * * *

* * * * *

(3) Targeted populations. The rules in paragraph (d)(9) of this section apply to taxable years ending on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.

In general, interest on State and local bonds is excludable from gross income under section 103 of the Internal Revenue Code of 1986 (the “Code”). Interest on a private activity bond is excludable from gross income under section 103 only if the bond meets the requirements for a “qualified bond” under section 141(e) and other applicable requirements under section 103. Section 141(e) requires that a bond meet the public approval requirement of section 147(f), among other requirements, to be a qualified bond.

The predecessor to section 147(f) was section 103(k) of the Internal Revenue Code of 1954 (“1954 Code”), which was added by the Tax Equity and Fiscal Responsibility Act of 1982, Public L. No. 97-248, 96 Stat. 324 (1982). Section 103(k) of the 1954 Code imposed a public approval requirement on industrial development bonds. Temporary Income Tax Regulations §5f.103-2 were published under section 103(k) of the 1954 Code in the Federal Register on May 11, 1983 (T.D. 7892, 1983-1 C.B. 30 [48 FR 21115]) (the “Existing Regulations”).

In the Tax Reform Act of 1986, Public Law No. 99-514 (the “1986 Act”), Congress reorganized the tax-exempt bond provisions and largely carried forward the provisions of section 103(k) of the 1954 Code into new section 147(f) of the Code. In new section 147(f), Congress also expanded this public approval requirement to apply to all types of tax-exempt private activity bonds under section 141. The legislative history to the 1986 Act provides that “[t]he conferees intend that, to the extent not amended, all principles of present law continue to apply under the reorganized provisions.” 2 H.R. Conf. Rep. No. 841, 99^th Cong., 2d Sess. II-686 (1986), 1986-3 C.B. (Vol. 4) at 686.

In general, the Proposed Regulations provide updating, clarifying, and simplifying guidance on discrete aspects of the public approval requirement under section 147(f) (the “public approval requirement”). The Proposed Regulations provide guidance that focuses generally on the scope, content, process, and timing for reasonable public notices, public hearings, and public approvals of tax-exempt private activity bonds under section 147(f).

The Proposed Regulations provide some special rules to address certain changes to the public approval requirement made by the 1986 Act that expanded the application of this requirement to include all types of tax-exempt private activity bonds. The Proposed Regulations also provide guidance to simplify compliance and reduce administrative burdens on State and local governments associated with the public approval requirement, including guidance to recognize advances in technology and electronic communication. The Proposed Regulations also ensure that the affected public will receive reasonable public notice and an opportunity for a public hearing and that appropriate governmental units will approve a bond issue following public notice and a public hearing.

The Proposed Regulations generally do not update the portions of the Existing Regulations relating to the applicable governmental units that are required to provide public approvals for a bond issue and the applicable elected representatives of those governmental units. One special rule in the Proposed Regulations provides that only the governmental unit by or on behalf of which bonds are issued is required for certain types of financings and that no separate public approval is required by a host governmental unit with respect to the location, if any, of financed facilities due to the absence of financed facilities (for example, qualified student loan bonds under section 144(b) or qualified 501(c)(3) bonds under section 145 for working capital expenditures) or the widespread or unknown locations of the financed facilities (for example, mortgage revenue bonds). The Treasury Department and the IRS solicit public comment on whether or in what respects those portions of the Existing Regulations should be updated or modified further.

The Proposed Regulations provide that the Existing Regulations continue to apply for purposes of section 147(f) to the extent that the Existing Regulations are not inconsistent with the final version of the Proposed Regulations, the 1986 Act, or subsequent law.

The Proposed Regulations provide updated guidance on the content of information required to be included in a reasonable public notice and public approval. The Proposed Regulations continue and modify in limited respects the existing general standard from the Existing Regulations. Under the Proposed Regulations, required information for this purpose generally includes the information described in this preamble.

The Existing Regulations require a functional description of the type and use of the facility to be financed with the bond issue. In response to public comment, the Proposed Regulations streamline this requirement to allow a general reference to the type of exempt facility bond being issued or, for other types of private activity bonds, a reference to the type of qualified bond and a general description of the type and use of the facility to be financed. (for example, an exempt facility bond for an airport under section 142(a)(1), or a qualified 501(c)(3) bond to finance a hospital).

The Existing Regulations also require the maximum stated principal amount of bonds expected to be issued for the facility. The Proposed Regulations continue this requirement.

The Existing Regulations require the name of the expected initial legal owner, operator, or manager of the facility. The Proposed Regulations modify this requirement. Under the Proposed Regulations, the name provided may be either the name of the legal owner or principal user (as defined under section 144(a)) or, alternatively, the name of the true beneficial party of interest (for example, the name of a 501(c)(3) organization, which is the sole member of a limited liability company owner).

The Existing Regulations require a general description of the prospective location of the facility by street address, or, if none, by a general description that is reasonably designed to inform the public about the location of the project. The Existing Regulations assume that bond issues finance a single capital project. The Proposed Regulations provide that, for a facility that involves multiple capital projects on the same site, or adjacent or reasonably proximate sites used for similar purposes, a consolidated description of the geographic boundaries of all such capital projects may be a sufficient description of the location.

The Proposed Regulations also modify and expand the existing definition of a “facility” to include within the scope of that defined term the principle that a facility may include multiple capital projects.

The 1986 Act extended the public approval requirement beyond traditional facility-focused industrial development bonds under the 1954 Code to include qualified mortgage bonds and qualified veterans mortgage bonds under section 143(a) and 143(b) of the Code (together, “mortgage revenue bonds”), qualified student loan bonds under section 144(b) of the Code, and qualified 501(c)(3) bonds under section 145 of the Code. The expansion of the public approval requirement to these types of bonds raises questions about the scope of information appropriately needed for public approvals for these types of bonds. Section 147(f) and congressional intent generally suggest that the public approval requirement must be met before the issuance of the bonds. For these types of bonds, however, certain information generally required for public approvals about specific borrowers or specific projects may be unknown before the issuance of the bonds or may be inappropriate for portfolio loan financings.

The Treasury Department and IRS realize there may have been uncertainty on how to apply certain aspects of the public approval requirement to mortgage revenue bonds, qualified student loan bonds, and qualified 501(c)(3) pooled financing bonds under section 145 after the 1986 Act in light of special characteristics of these financings (for example, the absence of financed facilities for qualified student loan bonds or the widespread or unknown locations of the facilities to be financed for mortgage revenue bonds or certain 501(c)(3) pooled bonds). Therefore, issuers of these types of bonds that made a good faith effort to comply with section 147(f) and section 5f.103-2(f)(2) of the Existing Regulations, taking into account Congressional intent and the special characteristics of these types of financings, will not be subject to audit by the IRS merely because the issuer did not include all of the information required to be included in the public notice and public approval for industrial development bonds under section 5f.103-2(f)(2) of the Existing Regulations.

The Proposed Regulations provide special rules that allow less specific information for public approvals of mortgage revenue bonds, qualified student loan bonds, and qualified 501(c)(3) bonds that finance loans described in the special rule for pooled financings under section 147(b)(4).

For mortgage revenue bonds, the Proposed Regulations generally require that reasonable public notice and public approval state the maximum stated principal amount of the bonds that will be issued to finance mortgage loans under section 143 and a general description of the geographic jurisdiction in which residences financed with proceeds of the mortgage revenue bonds will be located (for example, residences located throughout a state for an issuer with a statewide jurisdiction). No information is required on specific names of mortgage loan borrowers or specific locations of individual residences to be financed.

For qualified student loan bonds, the Proposed Regulations generally require that reasonable public notice and public approval state the maximum stated principal amount of the bonds that will be issued to finance student loans and a general description of the type of student loan program that the loans will be made under (for example, a Federally-guaranteed student loan program under the Higher Education Act of 1965 or a state supplemental student loan program). Recognizing that these bonds do not finance facilities, the Proposed Regulations do not require names of specific student loan borrowers or locations of facilities.

For qualified 501(c)(3) bonds that finance loans described in the special provision for pooled loan financings under section 147(b)(4), the Proposed Regulations provide for a two-stage public approval process. First, within the time specified in the Proposed Regulations for public approval generally, public approval must be obtained based on the stated maximum principal amount of bonds to be issued to finance such loans and a general description of the types of facility or facilities to be financed with the loans (for example, loans for hospital facilities). No statement need be made about the location of the facility or the initial user of the facility if that information is not known at that time. Second, before a loan is originated and potentially after the issue date of the issue, a supplemental public approval for that loan must be obtained based on specific information about the borrower and the particular facility to be financed with the loan, including the location of the facility. In applying the supplemental public approval requirement to specific loans, the public approval requirement applies generally as if the bonds that financed the specific loans were reissued for purposes of section 147(b). This requirement is similar to the remedial action requirement in §1.141-12(e)(2) and (f), which treats bonds as reissued for purposes of section 147 when complying with certain remedial action rules. The Treasury Department and the IRS solicit comments on whether a rule similar to the special two-stage public approval requirement for qualified 501(c)(3) bonds in pooled bond issues should apply to other types of pooled bond issues.

The Proposed Regulations provide generally that a substantial deviation between information required to be conveyed in a reasonable public notice and public approval and actual information causes the issue to fail to meet the public approval requirement. Whether a deviation is substantial is generally based on all the facts and circumstances.

The Proposed Regulations continue and clarify a rule from the Existing Regulations that provides that insubstantial deviations in public approval information do not invalidate a public approval. Public commentators have indicated that questions often arise about what changes are substantial.

The Proposed Regulations provide two objective safe harbors under which certain changes will not be considered substantial deviations. The Proposed Regulations provide that each of the following is an insubstantial deviation: (1) a difference in the amount of proceeds used for a facility when the amount used for the facility differs from the amount the public approval stated would be used for the facility by an amount that is not more than five percent (5%) of net proceeds of the issue; and (2) a change in initial owner or principal user of a project when the new owner or principal user is a related party (as defined in §1.150-1) to the initial owner or principal user named in the public approval on the issuance date.

The prohibition against substantial deviations has created problems when an issuer reasonably expected at the time the bonds were issued to use the bonds proceeds for the facility stated in the public approval, but later determined, as a result of unexpected events or unforeseen changes in circumstances, that the original planned use was no longer feasible or that it did not need all of the proceeds for the facility. In these circumstances, an issuer may be unable to use the bond proceeds for another purpose because the new use was not covered by the information in the public approval.

The Proposed Regulations propose a special rule for certain cases in which there is a substantial deviation between the information required to be provided in a reasonable public notice and public approval and subsequent events. This rule provides that, if certain conditions are met, an issuer can cure a substantial deviation in public approval information through a subsequent public approval. This remedial action is similar to the permitted post-issuance public approval used for remedial actions under §1.141-12(e)(2) and (f).

In general, the Proposed Regulations provide that an issuer may cure a substantial deviation if it satisfies several conditions. First, the issuer must have obtained a timely public approval for the bond issue in accordance with the public approval requirement and the issuer must have reasonably expected on the issue date to use the proceeds of the issue in accordance with the public approval information. Second, the issuer must encounter unexpected events or unforeseen changes in circumstances after the issue date as a result of which it determines either that it is no longer feasible or viable to use the proceeds of some or all of the bonds in the manner set forth in the original public approval, or that it did not need to use the full amount of the proceeds stated in the public approval for the facility. Third, the issuer must obtain a supplemental public approval for the bonds affected by the substantial deviation that meets the public approval requirement applied by treating those bonds as if they were reissued for this purpose.

The Proposed Regulations update and simplify the rules in the Existing Regulations on reasonable public notice and public hearings in several ways. First, in addition to the existing permitted methods for providing reasonable public notice, which include newspaper publication or television or radio broadcast, the Proposed Regulations allow a governmental unit to provide reasonable public notice of a public hearing by posting notice of the hearing electronically on its website if it regularly uses that website to inform its residents about events affecting the residents (including notice of public meetings of the governmental unit) and it offers a reasonable alternative method for obtaining this information for residents without access to computers (such as phone recordings). In addition, the Proposed Regulations define a “writing” generally to include electronic communication if permitted by the governmental unit. Thus, the public may submit electronic comments to the governmental unit if permitted by the governmental unit. The proposed regulations also reduce the time required between the reasonable public notice and public hearing from fourteen days to seven business days. These revisions recognize the current market environment and the increasing importance of electronic communication.

In addition, the Proposed Regulations expand the types of governmental units that may provide public notice in an alternative manner under a general State law on public notice procedures for public hearings to include all approving governmental units.

Finally, the Proposed Regulations allow a governmental unit to cancel a public hearing if it provides reasonable public notice of the hearing and receives no requests to participate in the hearing.

The proposed regulations will apply to bonds that are sold on or after the date of publication of final regulations in the Federal Register and that are subject to section 147(f).

(a) In general. Interest on a private activity bond is excludable from gross income under section 103(a) only if the bond meets the requirements for a qualified bond under section 141(e) and other applicable requirements under section 103. In order to be a qualified bond under section 141(e), one of the requirements that must be met is the public approval requirement under section 147(f). This section provides guidance on the public approval requirement under section 147(f). In addition, to the extent not inconsistent with this section, the Tax Reform Act of 1986 (Public Law 99-514), or subsequent law, §5f.103-2 of this chapter continues to apply for purposes of the public approval requirement under section 147(f).

(b) Scope, content, process, and timing for public approvals.

(1) In general. This paragraph (b) provides guidance on the scope, content, process, and timing required for public approval of an issue of private activity bonds under section 147(f). In general, except as otherwise provided in this section, to meet the public approval requirement under section 147(f) for an issue (as defined in §1.150-1) of private activity bonds, reasonable public notice (as defined in paragraph (c)(3) of this section) must be given in advance for a public hearing (as defined in paragraph (c)(2) of this section), a public hearing must be held, and the applicable governmental units under section 147(f)(2)(A) must provide public approval within the time set forth in paragraph (b)(8) of this section and in the manner set forth in section 147(f)(2)(B).

(2) General rule on information required for a reasonable public notice and public approval. Except as otherwise provided in this section, a facility (as defined in paragraph (c) of this section) to be financed with an issue is within the scope of a public approval under section 147(f) if the reasonable public notice of the public hearing and the public approval include the information set forth in paragraphs (b)(2)(i) through (iv)of this section.

(i) The facility. The information includes a general functional description of the type and use of the facility to be financed with the issue. For this purpose, a facility description generally is sufficient if it identifies the facility by reference to a particular category of exempt facility bond to be issued (for example, an exempt facility bond for an airport under section 142(a)(1) or an enterprise zone facility bond under section 1394(a)), or if not an exempt facility bond, by reference to another general category of private activity bond, together with accompanying information on the type and use of the facility to be financed with the issue (for example, a qualified small issue bond under section 144(b) for a manufacturing facility, a qualified 501(c)(3) bond under section 145 for a hospital facility and working capital expenditures, or a qualified mortgage bond for qualified mortgage loans for single-family housing residences under section 143).

(ii) The maximum stated principal amount of bonds. The information includes the maximum stated principal amount of the issue of private activity bonds to be issued to finance the facility.

(iii) The name of the initial owner or principal user of the facility. The information includes the name of the expected initial owner or principal user (as defined under section 144(a)) of the facility. The name provided may be either the name of the legal owner or principal user of the facility or, alternatively, the name of the true beneficial party of interest for such legal owner or user (for example, the name of a 501(c)(3) organization which is the sole member of a limited liability company owner).

(iv) The location of the facility. The information includes a general description of the prospective location of the facility by street address, reference to boundary streets or other geographic boundaries, or other description of the specific geographic location that is reasonably designed to inform readers of the location. For a facility involving multiple capital projects located on the same site, or on adjacent or reasonably proximate sites with similar uses, a consolidated description of the location of those capital projects may provide a sufficient description of the location of the facility. For example, a facility for a 501(c)(3) educational entity involving multiple buildings on the entity’s main urban college campus may describe the location of the facility by reference to the outside street boundaries of that campus with a reference to any noncontiguous features of that campus.

(3) Special rule for mortgage revenue bonds. Mortgage revenue bonds under section 143 are treated as within the scope of a public approval under paragraph (b)(2) of this section if the reasonable public notice of the public hearing and the public approval state that the bonds are to be issued under section 143, the maximum stated principal amount of mortgage revenue bonds expected to be issued, and a general description of the geographic jurisdiction in which the residences to be financed with the proceeds of the mortgage revenue bonds are expected to be located, recognizing the issuer jurisdictional limitations on such financing under section 143(c)(1)(B) (for example, residences located throughout a state for an issuer with a statewide jurisdiction or residences within a particular local geographic jurisdiction, such as within a city or county, for a local issuer). In applying paragraph (b)(2) of this section to mortgage revenue bonds, no information is required on specific names of mortgage loan borrowers or specific locations of individual residences to be financed.

(4) Special rule for qualified student loan bonds. Qualified student loan bonds under section 144(b) are treated as within the scope of a public approval under paragraph (b)(2) of this section if the reasonable public notice of the public hearing and the public approval state that the bonds will be issued under section 144(b), the maximum stated principal amount of qualified student loan bonds expected to be issued for qualified student loans, and a general description of the type of student loan program that the loans are to be made under (for example, a Federally-guaranteed student loan program under the Higher Education Act of 1965 or a state supplemental student loan program). In applying paragraph (b)(2) of this section to qualified student loan bonds, and recognizing that these bonds do not finance facilities, no information is required with respect to names of specific student loan borrowers or locations of facilities.

(5) Special rule for certain qualified 501(c)(3) bonds. Qualified 501(c)(3) bonds under section 145 to be used to finance loans described in section 147(b)(4)(B) (without regard to any election under section 147(b)(4)(A)) are treated as within the scope of a public approval under paragraph (b)(2) of this section if both of the following requirements are met—

(i) Pre-issuance general public approval. Within the time period defined in paragraph (b)(8) of this section, public approval is obtained after reasonable public notice of a public hearing is provided and a public hearing is held. For this purpose, a facility is treated as described in a public notice of a public hearing and public approval if the notice and public approval provide that the bonds will be qualified 501(c)(3) bonds to be used to finance loans described in section 147(b)(4)(B), the maximum stated principal amount of bonds expected to be issued to finance loans to other 501(c)(3) organizations or governmental units as described in section 147(b)(4)(B), a general description of the type of facility to be financed with such loans (for example, loans for hospital facilities or college facilities), and a statement that an additional public approval that includes specific project information will be obtained before any such loans are originated; and

(ii) Post-issuance public approval for specific loans. Before a loan described in section 147(b)(4)(B) is originated, a supplemental public approval for the bonds to be used to finance that loan is obtained, and that supplemental public approval meets all the requirements of section 147(f) and this section applied by treating the bonds to be used to finance such loan as if they were reissued for purpose of section 147(f) (applied without regard to this paragraph (b)(5)).

(6) Deviations in public approval information.

(i) In general. Except as otherwise provided in this paragraph (b)(6), a substantial deviation between the information required to be provided in a public notice of public hearing and public approval under paragraph (b)(2) of this section and actual information causes that issue to fail to meet the public approval requirement under section 147(f). Conversely, insubstantial deviations between information required to be provided in a notice of public hearing and public approval and actual information do not cause a failure to meet section 147(f). In general, for purposes of this paragraph (b)(6), the determination of whether a deviation is substantial is based on all the facts and circumstances. However, a change in the fundamental nature or type of a project is a substantial deviation.

(ii) Certain insubstantial deviations in public approval information. For purposes of this paragraph (b)(6), the following deviations are treated as insubstantial deviations:

(A) Use of proceeds. A deviation between the amount of proceeds of the issue that the notice of public hearing and public approval stated would be used for a facility and the amount of proceeds actually used for that facility is insubstantial if the amount of the difference does not exceed an amount equal to five percent (5%) of the net proceeds (as defined in section 150(a)(3)) of the issue.

(B) Initial owner or principal user. A deviation between the initial owner or principal user of the facility named in a notice of public hearing and public approval and the actual initial owner or principal user of the facility is treated as insubstantial if such parties are related parties (as defined in §1.150-1) on the issue date of the issue.

(iii) Special rule to address certain substantial deviations in public approval information. A substantial deviation between the information required to be conveyed in the notice of public hearing and the public approval under paragraph (b)(2) and the actual information does not cause that issue to fail to meet the public approval requirement under section 147(f) if the following requirements are met:

(A) Original public approval and reasonable expectations. The issuer obtained a timely public approval (as set forth in paragraph (b)(8) of this section) for the issue in accordance with section 147(f) and, on the issue date of the issue, the issuer reasonably expected there would be no substantial deviations between the information required to be conveyed in the notice of public hearing and public approval and actual information.

(B) Unexpected events or unforeseen changes in circumstances. As a result of unexpected events or unforeseen changes in circumstances that arise after the issue date of the issue, the issuer determines that it cannot use some or all of the proceeds in the manner provided in the public approval either because such use is no longer feasible or viable, or because the cost of the facility was less than expected so the issuer did not need all of the proceeds specified in the public approval for the facility.

(C) Supplemental public approval. Before using the proceeds of the bonds that are affected by the substantial deviation for a different use, the issuer obtains a supplemental public approval for those bonds, and that supplemental public approval meets all the requirements of section 147(f) applied by treating those bonds as if they were reissued for purposes of section 147(f).

(7) Certain timing requirements. Except as otherwise provided in this section, a public approval of an issue under section 147(f) is timely only if the issuer obtains the public approval within one year before the issue date (as defined in section 1.150-1) of the issue. For a plan of financing described in section 147(f)(2)(C), public approval is timely for the plan of financing if the issuer obtains public approval for the plan of financing within one year before the issue date of the first issue issued under the plan of financing and the issuer issues all issues under the plan of financing within three years after the issue date of such first issue.

(c) Definitions—Unless otherwise stated, for purposes of this section, the following definitions apply:

(1) Facility. In general, for purposes of this section and section 5f.103-2, the term facility means one or more capital projects, including land, buildings, equipment, and other property to be financed with an issue that is located on the same site, or adjacent or proximate sites used for similar purposes, and that is subject to the public approval requirement under section 147(f). For an issue of mortgage revenue bonds under section 143 or qualified student loan bonds under section 144(b), the term facility means the mortgage loans or qualified student loans to be financed with the proceeds of the issue. For an issue of qualified 501(c)(3) bonds under section 145, the term facility means a facility, as defined in the first sentence of this paragraph (c)(1), and also includes working capital expenditures to be financed with proceeds of the issue.

(2) Public hearing. The term public hearing means a forum providing a reasonable opportunity for interested individuals to express their views, both orally and in writing, on the proposed issue of bonds and the location and nature of the proposed facility to be financed. In general, a governmental unit may select its own procedure for a public hearing, provided that interested individuals have a reasonable opportunity to express their views. Thus, a governmental unit may impose reasonable requirements on persons who wish to participate in the hearing, such as a requirement that persons desiring to speak at the hearing make a written request to speak at least 24 hours before the hearing or that they limit their oral remarks to a prescribed time. If a governmental unit provides reasonable public notice for a public hearing and receives no timely requests to participate in the hearing, then the governmental unit may cancel the hearing and, for purposes of this section, the public hearing requirement will be treated as met. For purposes of this public hearing requirement, it is unnecessary, for example, to have the applicable elected representative of the approving governmental unit present at the hearing, to submit a report on the hearing to that applicable elected representative, or to meet State administrative procedural requirements for public hearings. Except to the extent in conflict with a specific requirement of this paragraph (c)(2), compliance with State procedural requirements for public hearings generally satisfies the requirements of this paragraph (c)(2). A public hearing may be conducted by an individual appointed or employed to perform such function by the governmental unit or its agencies, or by the issuer. Thus, for example, for bonds to be issued by an authority that acts on behalf of a county, the hearing may be conducted by the authority, the county, or an appointee of either.

(3) Reasonable public notice. Reasonable public notice means notice that is reasonably designed to inform residents of the affected governmental units, including residents of the issuing governmental unit and the governmental unit where a facility is to be located, of the proposed issue. The notice must state the time and place for the public hearing and contain the information required under paragraph (b) of this section. Notice is presumed reasonable if given no fewer than seven (7) business days before the public hearing in one of the ways permitted by this paragraph (c)(2). Notice is treated as reasonably designed to inform affected residents of an approving governmental unit if it is given in one of the following ways:

(i) Newspaper publication. Public notice may be given by publication in one or more newspapers of general circulation available to the residents of the governmental unit.

(ii) Radio or television broadcast. Public notice may be given by radio or television broadcast to the residents of the governmental unit.

(iii) Governmental unit website posting. Public notice may be given by electronic posting on the approving governmental unit’s website for its residents, provided that the governmental unit regularly uses that website to inform its residents about events affecting the residents (including notice of public meetings of the governmental unit) and the governmental unit offers a reasonable, publicly known alternative method for obtaining this information for residents without access to computers (such as phone recordings).

(iv) Alternative State law public notice procedures. Public notice may be given in a way that is permitted under a general State law for public notices for public hearings for the approving governmental unit.

(4) Writing. Unless specifically stated otherwise in this section, if permitted by the governmental unit, the term writing includes electronic communication.

(5) Mortgage revenue bonds. The term mortgage revenue bonds means qualified mortgage bonds under section 143(a) of the Code or qualified veterans’ mortgage bonds under section 143(b) of the Code.

(d) Special rule on required governmental unit approvals for certain types of financings. In applying section 147(f)(2) and §5f.103-2(c) of this chapter, to mortgage revenue bonds under section 143, to qualified student loan bonds under section 144(b), and to the portion of an issue of qualified 501(c)(3) bonds under section 145 that finance working capital expenditures, the governmental unit by or on behalf of which those types of bonds are issued is treated as the only governmental unit required to provide a public approval and no separate public approval is required by a host governmental unit with respect to the location, if any, of a financed facility.

(e) Effective/applicability date. Except as otherwise provided in this section, §1.147(f)-1 applies to bonds that are sold on or after the date of publication of final regulations in the Federal Register and that are subject to section 147(f).

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.

Section 411(a)(11)(A) provides that, if the present value of any nonforfeitable accrued benefit exceeds $5,000, a qualified plan must provide that such benefit may not be immediately distributed without the consent of the participant. Similarly, section 203(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), provides that if the present value of any nonforfeitable accrued benefit with respect to a participant in a plan exceeds $5,000, the benefit may not be immediately distributed without the consent of the participant.

Section 1102(b)(1) of the Pension Protection Act of 2006 (PPA ’06), 109 Public Law 280, 120 Stat. 780, instructs the Secretary of the Treasury to modify the regulations under section 411(a)(11) of the Code “to provide that the description of a participant’s right, if any, to defer receipt of a distribution shall also describe the consequences of failing to defer such receipt.” Section 1102(b)(2)(A) of PPA ’06 provides that the modifications required by section 1102(b)(1) of PPA ’06 shall apply to years beginning after December 31, 2006. Section 1102(b)(2)(B) of PPA ’06, however, states that a plan shall not be treated as failing to meet the requirements of section 411(a)(11) with respect to any description of the consequences of failing to defer provided “within 90 days after the Secretary of the Treasury issues the modifications required by [section 1102(b)(1) of PPA ’06] if the plan administrator makes a reasonable attempt to comply with such requirements.”

Section 1.411(a)-11(c)(2)(i) states that, in order for a plan to obtain valid consent under section 411(a)(11), “so long as a benefit is immediately distributable, a participant must be informed of the right, if any, to defer receipt of the distribution.” Section 1.411(a)-11(c)(4) states that a distribution is immediately distributable prior to the later of the time a participant has attained normal retirement age or age 62.

Q&A-32 of Notice 2007-7, 2007-5 I.R.B. 395, provides that a plan administrator is required to revise the notice required under section 411 to reflect the modifications made by section 1102(b) of PPA ’06 for notices provided in plan years beginning after December 31, 2006. Notice 2007-7 further provides that, pursuant to section 1102(b)(2)(B) of PPA ’06, a plan will not be treated as failing to meet the new requirements of section 1102(b) of PPA ’06 if the plan administrator makes a reasonable attempt to comply with the new requirements with respect to a notice that is provided prior to the 90th day after the issuance of regulations reflecting the modifications required by such section 1102(b) of PPA ’06. See §601.601(b)(2) (ii)(b).

Q&A-33 of Notice 2007-7 includes a safe harbor that would be considered a reasonable attempt to comply with the requirement in section 1102(b)(1) of PPA ’06 that a description of a participant’s right to defer receipt of a distribution include a description of the consequences of failing to defer. In particular, Q&A-33 provides that a description that is written in a manner reasonably calculated to be understood by the average participant and that includes the following information is a reasonable attempt to comply with the requirements of section 1102(b)(2)(B) of PPA ’06: (a) in the case of a defined benefit plan, a description of how much larger benefits will be if the commencement of distributions is deferred; (b) in the case of a defined contribution plan, a description indicating the investment options available under the plan (including fees) that will be available if distributions are deferred; and (c) the portion of the summary plan description that contains any special rules that might materially affect a participant’s decision to defer. For purposes of clause (a), a plan administrator can use a description that includes the financial effect of deferring distributions, as described in §1.417(a)(3)-1(d)(2)(i), based solely on the normal form of benefit.

Q&A-31 of Notice 2007-7 provides that the provisions of section 1102 apply to plan years that begin after December 31, 2006. Q&A-31 explains that this means that the new rules relating to the content of the notices apply only to notices issued in those plan years, without regard to the annuity starting date for the distributions.

Section 401(a)(11)(A)(i) provides that, except as provided in section 417, a plan that is qualified under section 401(a) must provide the accrued benefit payable to a vested participant who does not die before the annuity starting date in the form of a qualified joint and survivor annuity.

Section 417(a)(1)(A) provides that, in general, a plan satisfies section 401(a)(11) only if each participant may elect at any time during the “applicable election period” to waive the qualified joint and survivor annuity form of benefit (and to revoke the waiver), and certain other requirements are satisfied. Before PPA ’06, section 417(a)(6)(A) provided that the “applicable election period” for a participant to waive the qualified joint and survivor annuity form of distribution was the 90-day period ending on the annuity starting date.

Section 1102(a)(1)(A) of PPA ’06 amended section 417(a)(6)(A) by changing the 90-day “applicable election period” for electing a distribution subject to the qualified joint and survivor annuity (QJSA) rules of sections 401(a)(11) and 417 in a form other than a QJSA to a 180-day applicable election period. Section 1102(a)(2)(A) of PPA ’06 made a parallel amendment to section 205(c)(7)(A) of ERISA by striking “90-day” and inserting “180-day”.

Sections 1102(a)(1)(B) and 1102(a)(2)(B) of PPA ’06 provide that the Secretary of the Treasury shall modify the regulations relating to section 417 of the Code and section 205 of ERISA by substituting “180 days” for “90 days” each place it appears.

Section 1102(a)(3) of PPA ’06 provides that the amendments to the applicable election period apply to years beginning after December 31, 2006.

Section 417(a)(3)(A) of the Code and section 205(c)(3)(A) of ERISA provide that a plan must provide to each participant, “within a reasonable period of time before the annuity starting date” and consistent with such regulations as the Secretary of the Treasury may prescribe, a written explanation that describes the terms and conditions of the qualified joint and survivor annuity and certain other information. Similarly, section 402(f)(1) provides that a plan administrator must, “within a reasonable period of time” before making an eligible rollover distribution, provide to recipients an explanation of certain tax consequences of the distribution.

Section 1102(a)(1)(B) of PPA ’06 provides that the Secretary of the Treasury shall modify the regulations under sections 402(f), 411(a)(11), and 417 by substituting “180 days” for “90 days” each place it appears in §§1.402(f)-1, 1.411(a)-11(c), and 1.417(e)-1(b). Similarly, section 1102(a)(2)(B) of PPA ’06 provides that the Secretary of the Treasury shall modify the regulations relating to sections 203(e) and 205 of ERISA by substituting “180 days” for “90 days” each place it appears.

Section 1102(a)(3) provides that the amendments to the notice periods apply to years beginning after December 31, 2006. Q&A-31 of Notice 2007-7 explains that the 180-day period for distributing notices applies to notices distributed in a plan year that begins after December 31, 2006.

ERISA section 203(e) is the parallel provision to section 411(a)(11) of the Code and ERISA section 205 is the ERISA parallel to section 417 of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of 1978, 29 U.S.C. 1001nt (the Reorganization Plan), the Secretary of the Treasury generally has authority to issue regulations under parts 2 and 3 of subtitle B of title I of ERISA, including sections 203(e) and 205 of ERISA. Thus, the changes required by section 1102 of PPA ’06 would apply as well for purposes of ERISA sections 203(e) and 205.

These proposed regulations would provide that the notice required by section 411(a)(11) advising a participant of the right, if any, to defer receipt of a distribution must also inform the participant of the consequences of failing to defer such receipt. The proposed regulations would also provide guidance on the relevant information that must be provided to a participant in order to satisfy the requirement that the participant be notified of the consequences of failing to defer.

Specifically, these proposed regulations would require that the participant be provided a description of specified federal tax implications of failing to defer and, in the case of a defined benefit plan, a statement of the amount payable to the participant under the normal form of benefit both upon immediate commencement and when the benefit is no longer immediately distributable (that is, the later of age 62 or attainment of normal retirement age). Section 1.417(a)(3)-1(c)(2)(ii) permits a plan to provide participants with a QJSA explanation, which does not vary based on the participant’s marital status, of the relative value of optional forms of benefit compared to the value of a QJSA. These proposed regulations would permit the statement of the amount payable to not be based on the participant’s marital status, to the extent the plan is permitted under §1.417(a)(3)-1(c)(2)(ii) to use a QJSA explanation that does not vary based on whether the participant is married or unmarried.

The proposed regulations would also require the information in the notice to include, in the case of a defined contribution plan, a statement that some currently available investment options in the plan may not be generally available on similar terms outside the plan and contact information for obtaining additional information on the general availability outside the plan of currently available investment options in the plan. In addition, the proposed regulations would require the notice to include, in the case of a defined contribution plan, a statement that fees and expenses (including administrative or investment-related fees) outside the plan may be different from fees and expenses that apply to the participant’s account and contact information for obtaining information on such fees.

The proposed regulations also include an additional category of information that must be provided relating to any provisions of the plan (and provisions of any accident or health plan maintained by the employer) that could reasonably be expected to materially affect a participant’s decision whether to defer receipt of the distribution. Thus, for example, the proposed regulations would require a description of the eligibility requirements for retiree health benefits if such benefits are limited to participants who have an undistributed benefit under the employer’s retirement plan.

In general, the proposed regulations would also provide that the required information regarding the consequences of a participant’s failing to defer receipt of a distribution must appear together. However, the proposed regulations would permit a cross-reference to where the required information may be found in notices or other information provided or made available to the participant, as long as the notice of consequences of failing to defer includes a statement of how the referenced information may be obtained without charge and explains why the referenced information is relevant to a decision whether to defer.

Consistent with sections 1102(a)(1)(A) and (1)(B) and 1102(a)(2)(A) and (2)(B) of PPA ’06, the proposed regulations would both (1) expand the definition of applicable election period to up to 180 days, and (2) expand the time period for notices issued under sections 402(f), 411(a)(11), and 417 to allow the notices to be issued up to 180 days prior to the annuity starting date (or, in the case of a notice under section 402(f), the date of distribution). Specifically, the proposed regulations would substitute “180 days” for “90 days” and “180-day” for “90-day” each place those terms appear in §1.401(a)-13(g)(4)(ii), §1.401(a)-20, A-3(b)(1), A-4, A-10(a), A-16, and A-24(a)(1), §1.402(f)-1, §1.411(a)-11(c), and §1.417(e)-1(b).

Pursuant to section 101 of the Reorganization Plan, the Secretary of Treasury has the authority to issue regulations under ERISA sections 203(e) and 205. Thus, these proposed regulations that apply to sections 402(f), 411(a)(11), and 417 of the Code would apply as well for purposes of sections 203(e) and 205 of ERISA.

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(c) * * *

(2) Consent—(i) * * * In addition, so long as a benefit is immediately distributable, a participant must be informed of the right, if any, to defer receipt of the distribution and of the consequences of failing to defer such receipt. * * *

* * * * *

(iii) * * *

(B) * * *

(3) * * * The summary described in paragraph (c)(2)(iii)(B)(2) of this section must advise the participant of the right, if any, to defer receipt of the distribution and of the consequences of failing to defer such receipt, must set forth a summary of the distribution options under the plan, must refer the participant to the most recent version of the notice (and, in the case of a notice provided in any document containing information in addition to the notice, must identify that document and must provide a reasonable indication of where the notice may be found in that document, such as by index reference or by section heading), and must advise the participant that, upon request, a copy of the notice will be provided without charge.

* * * * *

(vi) Consequences of failing to defer—(A) A notice under this paragraph (c)(2) that is required to describe the consequences of failing to defer receipt of a distribution until it is no longer immediately distributable must, to the extent applicable under the plan and in a manner designed to be easily understood, provide the participant with the information set out in paragraphs (c)(2)(vi)(A)(1) through (5) of this section and explain why it is relevant to a decision whether to defer.

(1) A description of the following federal tax implications of failing to defer: differences in the timing of inclusion in taxable income of an immediately commencing distribution that is not rolled over (or not eligible to be rolled over) and a distribution that is deferred until it is no longer immediately distributable (including, as applicable, differences in the taxation of distributions of designated Roth contributions within the meaning of section 402A); application of the 10% additional tax on certain distributions before age 59¹/₂ under section 72(t); and, in the case of a defined contribution plan, loss of the opportunity upon immediate commencement for future tax-favored treatment of earnings if the distribution is not rolled over (or not eligible to be rolled over) to an eligible retirement plan described in section 402(c)(8)(B).

(2) In the case of a defined benefit plan, a statement of the amount payable to the participant under the normal form of benefit both upon immediate commencement and upon commencement when the benefit is no longer immediately distributable (assuming no future benefit accruals). The statement need not vary based on the participant’s marital status if the plan is permitted, pursuant to §1.417(a)(3)-1(c)(2)(ii), to provide a QJSA explanation that does not vary based on the participant’s marital status.

(3) In the case of a defined contribution plan, a statement that some currently available investment options in the plan may not be generally available on similar terms outside the plan and contact information for obtaining additional information on the general availability outside the plan of currently available investment options in the plan.

(4) In the case of a defined contribution plan, a statement that fees and expenses (including administrative or investment-related fees) outside the plan may be different from fees and expenses that apply to the participant’s account and contact information for obtaining additional information on the fees and expenses that apply to the participant’s account.

(5) An explanation of any provisions of the plan (and provisions of an accident or health plan maintained by the employer) that could reasonably be expected to materially affect a participant’s decision whether to defer receipt of the distribution. Such provisions would include, for example: plan terms under which a participant who fails to defer may lose eligibility for retiree health coverage or eligibility for early retirement subsidies or social security supplements; plan terms under which the benefit of a rehired participant who failed to defer may be adversely affected by the decision not to defer; and, in the case of a defined contribution plan, plan terms under which undistributed benefits that otherwise are nonforfeitable become forfeitable upon the participant’s death.

(B) Location of information; incorporation by reference. In general, the information required to be provided in a notice under this paragraph (c)(2)(vi) must appear together (for example, in a list of consequences of failing to defer). However, the notice will not be treated as failing to satisfy the requirements of this paragraph (c)(2)(vi) merely because the notice includes a cross-reference to where the required information may be found in notices or other information provided or made available to the participant, as long as the notice of consequences of failing to defer includes a statement of how the referenced information may be obtained without charge and explains why the referenced information is relevant to a decision whether to defer.

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(h) Consequences of Failing to Defer Effective/Applicability Date. The provisions in paragraph (c) of this section that describe the requirement to notify participants of the consequences of failing to defer are effective for notices provided on or after the first day of the first plan year beginning on or after January 1, 2010.

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.