This document amends 26 CFR part 1 to provide additional rules relating to the new markets tax credit under section 45D of the Internal Revenue Code (Code). On June 7, 2011, a notice of proposed rulemaking and notice of public hearing (REG-101826-11) was published in the Federal Register (76 FR 32882). The IRS received comments responding to the notice of proposed rulemaking and held a public hearing on September 29, 2011. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision. The comments are discussed in the preamble.

Under section 45D(a)(1), a taxpayer may claim a new markets tax credit on certain credit allowance dates described in section 45D(a)(3) over a 7-year credit period with respect to a qualified equity investment in a qualified community development entity (CDE) described in section 45D(c).

Under section 45D(b)(1), 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 a domestic corporation or partnership is a CDE if (A) the primary mission of the entity is serving, or providing investment capital for, low-income communities or low-income persons, (B) the entity maintains accountability to residents of low-income communities through their representation on any governing board of the entity or on any advisory board to the entity, and (C) the entity is certified by the Secretary as a CDE.

Section 45D(d)(1) defines qualified low-income community investment to mean: (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 such 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), 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 located in any low-income community is a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)(A)) and there are substantial improvements located on the real property.

Section 1.45D-1(d)(2)(i) requires that a CDE receiving returns on investments (including principal repayments from amortizing loans) must reinvest those proceeds into other qualified low-income community investments during the 7-year credit period. If the proceeds are not reinvested, then the credit may be subject to recapture under section 45D(g)(3)(B).

Many commentators consider the new markets tax credit under section 45D to be a successful tool for encouraging private sector investments in low-income communities. To date, the majority of new markets tax credit investments relate to real estate projects. Real estate projects are well suited to the new markets tax credit program because real estate remains in the low-income community and loans for real estate can extend through the end of the 7-year period in which investors may take the credit on their investment. The 7-year credit period and the reinvestment requirements make it difficult for CDEs to provide working capital and equipment loans to non-real estate businesses because these loans are ordinarily amortizing loans with a term of five years or less. To facilitate investment in non-real estate businesses, the proposed regulations modify the reinvestment requirements for non-real estate projects.

To encourage investments in non-real estate businesses for working capital and equipment, the proposed regulations modify the reinvestment requirements under §1.45D-1(d)(2)(i). The proposed regulations allow a CDE that makes a qualified low-income community investment in a non-real estate business to invest certain returns of capital from those investments in unrelated certified community development financial institutions that are CDEs under section 45D(c)(2)(B) (certified CDFIs) at various points during the 7-year credit period. The proposed regulations also allow an increasing aggregate amount to be invested in certified CDFIs and treated as continuously invested in a qualified low-income community investment in the later years of the 7-year credit period.

Many commentators welcomed new options for meeting the reinvestment requirements. After considering the comments received, the final regulations adopt the provisions of the proposed regulations with two minor changes based on these comments. In addition to reinvestments in certified CDFIs, the final regulations provide that the Secretary may designate other qualifying entities in the Internal Revenue Bulletin. These final regulations also clarify that investments in non-real estate qualified active low-income community businesses may be made through one or more CDEs. As discussed below, the IRS and the Treasury Department are considering other options for future guidance.

The proposed regulations define a non-real estate qualified active low-income community business as any business whose predominant business activity (measured by more than 50 percent of the business’ gross income) does not include the development (including construction of new facilities and rehabilitation/enhancement of existing facilities), management, or leasing of real estate. The purpose of the investment or loan must not be connected to the development (including construction of new facilities and rehabilitation/enhancement of existing facilities), management, or leasing of real estate.

Commentators requested that the definition of a non-real estate qualified active low-income community business be expanded to include investments connected to the development of owner occupied facilities as long as the facility is used in an operating business. The final regulations do not incorporate this comment because under current regulations, a substantial number of new markets tax credits investments are already being made in owner-occupied facilities. The purpose of these final regulations is to encourage more new markets tax credits investments not related to real estate.

Commentators also requested that if a non-real estate qualified active low-income community business is allowed to use investments for construction or improvements to real estate facilities primarily used in its business, then the definition of working capital under §1.45D-1(d)(4)(i)(E)(2) should include the proceeds of an equity investment or a loan that the non-real estate qualified active low-income community business will expend for the construction of real property within 18 months (as opposed to 12 months) after the date of the investment or loan. The final regulations do not incorporate this comment because the final rules for non-real estate qualified active low-income community businesses do not pertain to investments for construction or improvements to real estate facilities.

In response to comments, the final regulations clarify that an investment in a non-real estate qualified active low-income community business may be made through one or more CDEs. Thus, for example, a CDE that designates an equity investment as a non-real estate qualified equity investment may invest the proceeds in another CDE if that investment is directly traceable to a non-real estate qualified active low-income community business.

The proposed regulations require that any portion that the CDE chooses to reinvest in a certified CDFI must be reinvested by the CDE no later than 30 days from the date of receipt to be treated as continuously invested in a qualified low-income community investment. Commentators requested that instead of 30 days, CDEs invested in a non-real estate qualified active low-income community business should have 12 months to decide whether to reinvest capital, equity, or principal in another non-real estate qualified active low-income community business or a certified CDFI under §1.45D-1(d)(9)(ii) (similar to the 12-month reinvestment requirement in §1.45D-1(d)(2)(i)). The final regulations do not incorporate this comment because a CDE that has not found a new non-real estate qualified active low-income community business to invest in at the expiration of the 30 day period can invest the capital, equity, or principal in a certified CDFI until it finds a suitable non-real estate qualified active low-income community business. It can then withdraw its investment in the certified CDFI and invest that capital, equity, or principal in the suitable non-real estate qualified active low-income community business.

Commentators also requested that the final regulations allow a CDE that makes an equity investment in a non-real estate qualified active low-income community business to reinvest up to 100 percent of its equity investment in a certified CDFI under §1.45D-1(d)(9)(ii) after the first year of the 7-year credit period. The commentators explained that this would encourage venture capital investments in a non-real estate qualified active low-income community business because liquidity events (cashing out some or all of an investment) occurring early in the 7-year credit period, which often happen with venture capital investments, would not automatically cause recapture. The final regulations do not incorporate this comment because the proposal could create a situation in which the proceeds of the new markets tax credit investment may only be invested in a qualified active low-income community business for a brief period without any new markets tax credit restrictions on how a certified CDFI may use the proceeds. Such a result would be inconsistent with encouraging investments in qualified active low-income community businesses during the 7-year credit period.

Commentators also requested that the final regulations allow a CDE to invest returns of capital, equity, or principal into entities other than certified CDFIs under §1.45D-1(d)(9)(ii). Such entities would include non-profit and for-profit entities focused on economic and community development, funds that provide equity and loans to small and medium businesses, and funds that provide equity or loans to minority and women owned businesses. The final regulations do not incorporate this comment because it would make administering the final regulations unworkable given the breadth of potential reinvestment vehicles. The final regulations allow investments in certified CDFIs because there are rules that ensure that a certified CDFI serves low-income communities. Such rules do not currently exist for other potential reinvestment entities. However, the final regulations provide that in the future the Secretary may designate other qualifying entities in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b).

Section 1.45D-1(d)(9) of the proposed regulations is renumbered as §1.45D-1(d)(10) in the final regulations due to the amendments made by T.D. 9560, 2012-4 I.R.B. 299, involving targeted populations.

A commentator requested that the final regulations consider the entire amount of a line of credit as outstanding loan principal for purposes of the substantially-all requirement under §1.45D-1(c)(5)(i). Lines of credit often serve the capital needs of non-real estate businesses better than fully disbursed loans with fixed terms, which may be more appropriate for real estate investments. The IRS and the Treasury Department are studying these issues and may address them in future guidance.

Other comments were received on issues unrelated to the proposed regulations. The final regulations do not incorporate comments that are outside the scope of the proposed regulations, although they may be relevant to future guidance under the new markets tax credit.

The IRS and the Treasury Department received a few comments regarding whether the final regulations should allow a qualified equity investment made before the effective date of the final regulations to be eligible for designation as a non-real estate qualified equity investment. The majority of commentators recommended not adopting a look-back rule because it would be confusing and complicate compliance. After further examination, the IRS and the Treasury Department agree with these commentators. Further, allowing CDEs to designate investments as non-real estate after the investments are made does not serve the purpose of incentivizing new investments in non-real estate projects. Section 1.45D-1(c)(1)(iii) requires that an investment in a non-real estate qualified equity investment must be designated as such for a CDE to qualify for benefits allowed under the final regulations. Accordingly, the final regulations apply to equity investments made on or after the date the final regulations are published in the Federal Register.

This Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. Section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business and no comments were received.

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.45D-0 is amended by:

1. Adding entries for paragraphs (c)(8), (d)(10), (d)(10)(i), (d)(10)(ii), (d)(10)(ii)(A), (d)(10)(ii)(B), (d)(10)(ii)(C), (d)(10)(ii)(D), and (h)(4).

2. Revising the entry for paragraph (d)(1)(i).

The additions and revisions read as follows:

To avoid certain excise taxes under chapter 42, private foundations must make a minimum level of qualifying distributions (as defined in section 4942 of the Internal Revenue Code) each year and must avoid making taxable expenditures (as defined in section 4945). Grants for charitable purposes to certain foreign organizations generally may be treated as qualifying distributions under section 4942 if the private foundation makes a good faith determination that the foreign organization is an organization described in sections 501(c)(3) and 509(a)(1), (a)(2), or (a)(3) (“public charity”) that is not a supporting organization described in section 4942(g)(4)(A)(i) or (g)(4)(A)(ii) (“disqualified supporting organization”) or is an organization described in sections 501(c)(3) and 4942(j)(3) (“private operating foundation”). Similarly, grants for charitable purposes to certain foreign organizations may be treated as other than taxable expenditures under section 4945 if the private foundation makes a good faith determination that the foreign organization is a public charity (other than a disqualified supporting organization) or an organization described in sections 501(c)(3) and 4940(d)(2) (“exempt operating foundation”).

Section 4942 generally requires a private foundation (other than a private operating foundation) to make “qualifying distributions” equal to or exceeding a minimum “distributable amount” for each taxable year. If a private foundation has not distributed the full distributable amount by the end of the succeeding taxable year, section 4942 imposes an excise tax on the undistributed portion. A private foundation’s distributable amount for any taxable year generally equals five percent of the aggregate fair market value of its non-exempt-use assets, increased by any repayments of amounts treated as qualifying distributions in prior years, and reduced by any taxes imposed under subtitle A and section 4940. Section 4942(g) generally defines a “qualifying distribution” as any expenditure or grant, including program-related investments and certain set-asides of income, paid to accomplish one or more purposes described in section 170(c)(2)(B) (“charitable purposes”). Under section 4942(g)(1)(A), however, grants to organizations controlled, directly or indirectly, by the foundation or one or more of its disqualified persons are not qualifying distributions unless the grant is redistributed for charitable purposes within the period specified in section 4942(g)(3). Similarly, grants to other private foundations (except private operating foundations), are not qualifying distributions. In addition, in 2006, the Pension Protection Act of 2006, Public Law No. 109-208, 120 Stat. 780 (2006) (“PPA”), added section 4942(g)(4), which provides that a qualifying distribution does not include any amount paid to a disqualified supporting organization. Section 53.4942(a)-3(a)(6), however, has not been amended to reflect this statutory change.

For purposes of section 4942, a grant for charitable purposes to a foreign organization that does not have a determination letter from the IRS may be treated as a qualifying distribution if the grantor private foundation makes a “good faith determination” that the foreign organization is a private operating foundation or a public charity that is not a disqualified supporting organization, provided that the foreign organization is not controlled by the foundation or its disqualified persons. See §53.4942(a)-3(a)(6). Under §53.4942(a)-3(a)(6), a private foundation will ordinarily be considered to have made a “good faith determination” if the determination is based on an affidavit of the grantee or on an opinion of counsel of either the grantor or the grantee. The affidavit or opinion must set forth sufficient facts concerning the operations and support of the grantee for the IRS to determine that the grantee would be likely to qualify as a public charity or a private operating foundation.

Section 4945 imposes an excise tax on a private foundation’s “taxable expenditures” as defined in section 4945(d), including expenditures for other than charitable purposes. Under section 4945(d)(4), a taxable expenditure includes any grant to an organization unless: (1) the grantee is a public charity (other than a disqualified supporting organization) or an exempt operating foundation; or (2) the private foundation exercises expenditure responsibility with respect to the grant in accordance with section 4945(h). The Deficit Reduction Act of 1984, Public Law No. 98-369, 98 Stat. 494 (1984), amended section 4945(d)(4) to provide that expenditure responsibility is not required for a grant to an exempt operating foundation. The PPA amended section 4945(d)(4) to require the exercise of expenditure responsibility with respect to a grant to a disqualified supporting organization. Section 53.4945-5(a)(5), however, has not been amended to reflect these statutory changes.

Section 53.4945-5(a)(5) provides that a grant to a foreign organization that does not have a determination letter from the IRS will be treated as a grant to a public charity (for which the grantor is not required to exercise expenditure responsibility) if the grantor has made a “good faith determination” that the grantee is a public charity. Under §53.4945-5(a)(5), a private foundation will ordinarily be considered to have made a “good faith determination” if the determination is based on an affidavit of the grantee or on an opinion of counsel of either the grantor or the grantee. The affidavit or opinion must set forth sufficient facts concerning the operations and support of the grantee for the IRS to determine that the grantee would be likely to qualify as a public charity.

Section 330 of title 31 of the United States Code authorizes the Secretary of the Treasury to regulate practice before the Treasury Department. The Secretary has published regulations governing practice before the IRS in 31 CFR part 10 and reprinted the regulations as Treasury Department Circular No. 230 (“Circular 230”). Circular 230 provides minimum standards of conduct that tax practitioners are required to meet with respect to written advice concerning Federal tax issues. Many of these standards (including, among others, §10.37 and §10.51(a)(13)) reflect principles a qualified and competent practitioner uses when considering and rendering any written tax advice.

Section 6664 of the Internal Revenue Code provides a defense to taxpayers for certain penalties imposed on an underpayment of tax if the taxpayer shows that there was reasonable cause for the underpayment and the taxpayer acted in good faith with respect to the underpayment. A taxpayer may demonstrate reasonable cause and good faith with respect to the underpayment by reasonably relying on written advice from a professional tax advisor. Section 1.6664-4(c)(1) provides that all pertinent facts and circumstances must be taken into account in determining whether a taxpayer has reasonably relied in good faith on written advice, including written advice from a professional tax advisor. A taxpayer’s education, sophistication, and business experience are factors taken into account in determining whether the taxpayer’s reliance on written advice was reasonable and made in good faith. A taxpayer will not be considered to have reasonably relied in good faith on written advice unless the requirements of §1.6664-4(c)(1) are satisfied. For example, a private foundation’s reliance on written advice is not reasonable and in good faith if the private foundation knows, or reasonably should have known, that a professional tax advisor lacks knowledge of the relevant aspects of Federal tax law or that the professional tax advisor is otherwise not qualified or competent to render the written advice. Moreover, a private foundation may not rely on written advice if it knows, or has reason to know, that relevant facts were not disclosed to the professional tax advisor or the written advice is based on a representation or assumption that the private foundation knows, or has reason to know, is unlikely to be true.

The current regulations under sections 4942 and 4945 state that a determination is ordinarily considered as made in good faith if it is based on an affidavit of the foreign organization or an opinion of counsel of the grantor or the grantee. The proposed regulations modify this rule to identify a broader class of tax practitioners upon whose written advice a private foundation may base a “good faith determination.” The proposed regulations also make certain conforming changes consistent with statutory amendments that have been made to sections 4942 and 4945.

Under the proposed regulations, a private foundation’s good faith determination ordinarily may be based on written advice given by a “qualified tax practitioner” who is subject to the requirements in Circular 230, including the requirements in current §§10.37 and 10.51(a)(13) (or successor provisions). A qualified tax practitioner means an attorney, a certified public accountant (“CPA”), or an enrolled agent, as those practitioners are defined in §§10.2 and 10.3 of Circular 230. The proposed regulations limit the definition of a qualified tax practitioner to attorneys, CPAs, and enrolled agents because these practitioners generally provide advice to clients with respect to taking positions on tax returns, and these practitioners are generally authorized to represent their clients before the IRS without limitations applicable to other types of practitioners (such as enrolled actuaries). The Treasury Department and the IRS believe that expanding the class of practitioners on whose written advice a private foundation may base a good faith determination will decrease the cost of seeking professional advice regarding these determinations, enabling foundations to engage in international philanthropy in a more cost-effective manner. At the same time, expressly allowing reliance on a broader spectrum of professional tax advisors may encourage more private foundations to obtain written tax advice, thus promoting the quality of the determinations being made.

Although the proposed regulations generally expand the class of practitioners on whose written advice a private foundation may ordinarily base a good faith determination, unlike the current rule, the expanded class would not include foreign counsel unless the foreign counsel is a qualified tax practitioner (as defined in the proposed regulations). The proposed rule is consistent with the general requirements of Circular 230 that an attorney or CPA be licensed in a state, territory, or possession of the United States, and an enrolled agent be enrolled by the IRS, in order to practice before the IRS.

The proposed regulations provide that a private foundation’s determination that is based on the written advice of a qualified tax practitioner will be considered as made in good faith if the private foundation’s reliance on the written advice meets the requirements of §1.6664-4(c)(1), which are the standards that must be taken into account in determining whether a taxpayer has reasonably relied in good faith on advice for purposes of section 6664. Additionally, as is the case under the present regulations under sections 4942 and 4945, the written advice must provide sufficient facts about the operations and financial support of the foreign organization for the IRS to determine that the grantee would be likely to qualify as a public charity (other than a disqualified supporting organization) or as a private operating foundation or an exempt operating foundation, as applicable.

The Treasury Department and the IRS are considering whether it is appropriate to limit the timeframe during which a private foundation will be permitted to rely upon a qualified tax practitioner’s written advice solely for purposes of these regulations. For example, the final regulations or future guidance published in the Internal Revenue Bulletin may provide that a private foundation may base a good faith determination on written advice of a qualified tax practitioner for distributions that occur within a particular timeframe (such as 12 months) from the date of the written advice, provided the private foundation does not know nor have reason to know that the facts underlying the written advice have changed. The Treasury Department and the IRS request comments regarding the appropriateness of a time limit and, if appropriate, the length of the time limit.

The Treasury Department and the IRS are also considering whether the current standards in Rev. Proc. 92-94, 1992-2 C.B. 507, should be modified to take into account changes to the public support test for public charity status under sections 170 and 509 and whether additional guidelines regarding appropriate timeframes for gathering information upon which written advice is based should be provided in final regulations or in guidance published in the Internal Revenue Bulletin. Comments on this issue are requested.

Because the proposed rule is expected to make it easier and less costly to obtain professional tax advice that can be used as a basis to make a good faith determination, the Treasury Department and the IRS also are considering whether it is appropriate to further amend the current regulations to remove the ability of a private foundation to base a good faith determination on an affidavit of a foreign grantee, which may be a less reliable basis for making a good faith determination than advice from a qualified tax practitioner. The Treasury Department and the IRS are concerned, however, that eliminating the ability to base a good faith determination on an affidavit of a foreign grantee may inappropriately discourage foreign grantmaking by smaller private foundations, or inhibit smaller foreign grants generally. While Rev. Proc. 92-94 continues to provide a simplified procedure that private foundations may follow in making good faith determinations based on affidavits, the Treasury Department and the IRS request comments on whether a foundation’s ability to base a good faith determination on affidavits should be retained, and if so, whether the use of affidavits should be restricted. For example, future guidance could prohibit the use of affidavits for grants above a certain dollar threshold, or could require supporting factual information that might serve to corroborate the content of affidavits.

The proposed regulations will apply for grants made after the date of publication of the Treasury decision adopting these paragraphs as final regulations in the Federal Register. However, a private foundation may rely on these proposed regulations for grants made on or after September 24, 2012.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to this notice of proposed rulemaking, and because this notice of proposed rulemaking does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register.

Par. 1. The authority citation for part 53 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 53.4942(a)-3 is amended by revising paragraph (a)(6) to read as follows:

Withholding agents, including participating FFIs and registered deemed-compliant FFIs, generally will be required to implement new account opening procedures by January 1, 2014. Accordingly, the definition of the term “preexisting obligation” (currently set forth in Prop. Reg. §1.1471-1(b)(48)) will be modified in the final regulations to include:

Withholding Agents other than Participating FFIs. With respect to preexisting obligations, the final regulations will provide that withholding agents, other than participating FFIs, will be required to document payees that are prima facie FFIs by June 30, 2014. Accordingly, the rule set forth in Prop. Reg. §1.1471-2(a)(4)(ii) will be modified in the final regulations to provide that a withholding agent will not be required to withhold on payments made to a prima facie FFI with respect to a preexisting obligation prior to July 1, 2014, unless the withholding agent has documentation establishing the payee’s status as a nonparticipating FFI. Beginning on July 1, 2014, a withholding agent will be required to treat a payee that is a prima facie FFI as a nonparticipating FFI until the date the withholding agent obtains documentation sufficient to establish a different chapter 4 status of the payee.

Participating FFIs. With respect to a preexisting obligation, the final regulations will provide that a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether a prima facie FFI payee is itself a participating FFI, deemed-compliant FFI, or nonparticipating FFI within six months after the effective date of its FFI agreement (that is, by June 30, 2014, for any FFI that enters into an FFI agreement on or before December 31, 2013). The rule set forth in Prop. Reg. §1.1471-4(c)(3) will be modified accordingly. In addition, the final regulations will provide that the presumption rules set forth in Prop. Reg. §1.1471-3(f) will begin to apply to a prima facie FFI payee with respect to a preexisting obligation six months after the effective date of the payor FFI’s FFI agreement.

Withholding Agents other than Participating FFIs. With respect to preexisting obligations, the final regulations will provide that withholding agents, other than participating FFIs, will be required to document payees that are entities other than prima facie FFIs by December 31, 2015. Accordingly, the rules set forth in Prop. Reg. §§1.1471-2(a)(4)(ii) and 1.1472-1(b) will be modified to reflect this change. Beginning on January 1, 2016, a withholding agent will be required to treat any undocumented payee that is treated as a foreign entity but that is not a prima facie FFI as a nonparticipating FFI until the date the withholding agent obtains documentation sufficient to establish a different chapter 4 status of the payee.

Participating FFIs. The final regulations will modify the rule set forth in Prop. Reg. §1.1471-4(c)(3) to provide that a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether an entity, other than a prima facie FFI, is itself a participating FFI by the later of December 31, 2015, or the date that is two years after the effective date of its FFI agreement. In addition, the final regulations will provide that a participating FFI will not be required to apply the presumption rules (currently set forth in Prop. Reg. §1.1471-3(f)) to such accounts until the day after the date (described above) by which the participating FFI is required to perform the identification procedures and obtain the appropriate documentation.

Preexisting High-Value Accounts. A participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify preexisting individual accounts that are high-value accounts (as described in Prop. Reg. §1.1471-4(c)(8)(i)) by the later of December 31, 2014, or the date that is one year after the effective date of the FFI’s FFI agreement. Accordingly, the final regulations will modify the rule set forth in Prop. Reg. §1.1471-5(g)(3)(i)(B) to provide that after the date described above, a participating FFI must treat any preexisting account that is a high-value account as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.

Preexisting Accounts other than High Value Accounts. A participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify preexisting individual accounts (other than high-value accounts) prior to the later of December 31, 2015, or the date that is two years after the effective date of the FFI’s FFI agreement. Accordingly, the final regulations will modify the rule set forth in Prop. Reg. §1.1471-5(g)(3)(i)(A) to provide that after the date described above, a participating FFI must treat any preexisting individual account, other than a high-value account, as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.