New Markets Tax Credit Program
Progress Made in Implementation, but Further Actions Needed to Monitor Compliance Gao ID: GAO-04-326 January 30, 2004The Community Renewal Tax Relief Act of 2000 authorized up to $15 billion under the New Markets Tax Credit (NMTC) program to stimulate capital investment in low-income and economically distressed communities. The act mandated that GAO report to Congress on the NMTC program by January 31, 2004, 2007, and 2010. Based on consultation with staff at appropriate congressional committees, this report (1) describes the status of the NMTC program, (2) profiles community development entities (CDE) that were selected to receive NMTC allocations in 2003, and (3) determines whether systems are in place or planned to ensure compliance and evaluate the success of the NMTC program.
Although Congress authorized the NMTC program to provide credit against federal taxes for billions of dollars starting in 2001 to spur investments in community development projects, CDFI Fund officials said that it is unlikely that many projects had started by the end of 2003 and that they will not know the status of projects for all CDEs until early 2005. Progress was made in developing data systems, selection processes, and program rules, but allocations were delayed because of the various start-up tasks associated with a new program, especially in establishing the rules on using the allocated credits. CDEs that received NMTC allocations (allocatees) proposed projects to serve urban, rural, and mixed areas, as well as local, state, multiple-local, multistate, and national areas. The distribution of state and local allocations was not concentrated in any one state or in a few states. All allocatees reported at least some prior experience in low-income communities, particularly in providing capital to low-income communities. The CDFI Fund and IRS have identified data with which to monitor compliance with allocation agreements and tax laws, and are developing systems to collect the data. However, many details remain to be settled on how the data will actually be used to monitor compliance. Agency officials believe they have time to devise their compliance monitoring processes. However, they do not have schedules or documented plans for ensuring that compliance monitoring processes will be in place when needed, and they have other tasks to complete. In terms of evaluating the NMTC program, the CDFI Fund intends to contract for an evaluation, and officials believe they are collecting significant amounts of data that will be useful for the evaluation and that CDEs will maintain additional relevant data.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-326, New Markets Tax Credit Program: Progress Made in Implementation, but Further Actions Needed to Monitor Compliance
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Report to Congressional Committees:
January 2004:
NEW MARKETS TAX CREDIT PROGRAM:
Progress Made in Implementation, but Further Actions Needed to Monitor
Compliance:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-326]:
GAO Highlights:
Highlights of GAO-04-326, a report to congressional committees
Why GAO Did This Study:
The Community Renewal Tax Relief Act of 2000 authorized up to $15
billion under the New Markets Tax Credit (NMTC) program to stimulate
capital investment in low-income and economically distressed
communities. The act mandated that GAO report to Congress on the NMTC
program by January 31, 2004, 2007, and 2010.
Based on consultation with staff at appropriate congressional
committees, this report (1) describes the status of the NMTC
program, (2) profiles community development entities (CDE) that were
selected to receive NMTC allocations in 2003, and (3) determines
whether systems are in place or planned to ensure compliance and
evaluate the success of the NMTC program.
What GAO Found:
Although Congress authorized the NMTC program to provide credit
against federal taxes for billions of dollars starting in 2001 to spur
investments in community development projects, CDFI Fund officials
said that it is unlikely that many projects had started by the end of
2003 and that they will not know the status of projects for all CDEs
until early 2005. Progress was made in developing data systems,
selection processes, and program rules, but allocations were delayed
because of the various start-up tasks associated with a new program,
especially in establishing the rules on using the allocated credits.
CDEs that received NMTC allocations (allocatees) proposed projects to
serve urban, rural, and mixed areas, as well as local, state, multiple-
local, multistate, and national areas. The distribution of state and
local allocations was not concentrated in any one state or in a few
states. All allocatees reported at least some prior experience in low-
income communities, particularly in providing capital to low-income
communities.
The CDFI Fund and IRS have identified data with which to monitor
compliance with allocation agreements and tax laws, and are developing
systems to collect the data. However, many details remain to be
settled on how the data will actually be used to monitor compliance.
Agency officials believe they have time to devise their compliance
monitoring processes. However, they do not have schedules or
documented plans for ensuring that compliance monitoring processes
will be in place when needed, and they have other tasks to complete.
In terms of evaluating the NMTC program, the CDFI Fund intends to
contract for an evaluation, and officials believe they are collecting
significant amounts of data that will be useful for the evaluation and
that CDEs will maintain additional relevant data.
What GAO Recommends:
To ensure that compliance monitoring processes will be in place when
needed, GAO recommends that the Community Development Financial
Institutions (CDFI) Fund and Internal Revenue Service (IRS) develop
plans, including milestones, for designing and implementing compliance
monitoring processes for the NMTC program.
In commenting on a draft of this report, the CDFI Fund and IRS agreed
with our recommendation and that they will work together to complete
implementation of a comprehensive NMTC compliance program.
www.gao.gov/cgi-bin/getrpt?GAO-04-326.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Michael Brostek at
(202) 512-9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Scope and Methodology:
Initial NMTC Investments in Community Development Projects Were
Unlikely Until Late 2003 due to NMTC Program Start-up Delays:
Profile of CDE Allocatees Indicates Variation in Proposed Projects and
Experience:
Data Have Been Identified for Monitoring Compliance, but How the Data
Are to Be Used Is Not Defined; a Contractor Is to Evaluate the NMTC
Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Distribution of New Market Tax Credit Eligibility by
State:
Appendix II: Congressional Staff Interviews:
Appendix III: Profile of Participants:
Appendix IV: Comments from the Community Development Financial
Institutions Fund:
Appendix V: Comments from the Internal Revenue Service:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: NMTC Limitation on Amount of Investments by Calendar Year:
Table 2: NMTC Allocations by Proposed Service Area:
Table 3: NMTC Allocatees Proposing Projects Serving One State or Only
Local Areas:
Table 4: Types of Services Proposed by Allocatees in 2002:
Table 5: Number of CDEs Certified, Applying for, and Receiving NMTCs
by CDE Structure and Profit Status:
Table 6: Percentage of CDEs Certified, Applying for, and Receiving
NMTCs by CDE Structure and Profit Status:
Table 7: Number of NMTC Allocation Applicants and Allocatees by
Community Type and Service Area:
Table 8: Percentage of NMTC Allocation Applicants and Allocatees by
Community Type and Service Area:
Figures:
Figure 1: U.S. Census Bureau Tracts Eligible for NMTCs:
Figure 2: NMTC Process for Using Allocated Tax Credits to Make QLICIs:
Figure 3: The CDFI Fund's Primary Data Systems for Monitoring NMTC
Compliance:
Abbreviations:
AAS: Allocation Agreement System:
ATS: Allocation Tracking System:
CDE: community development entity:
CDFI: Community Development Financial Institutions:
CIIS: Community Investment Intelligence System:
CM Tool: Compliance Monitoring Tool:
IRS: Internal Revenue Service:
NMTC: New Markets Tax Credit:
QALICB: qualified active low-income community business:
QEI: qualified equity investments:
QLICI: qualified low-income community investments:
[See PDF for image]
[End of figure]
Letter January 30, 2004:
Congressional Committees:
Access to credit and investment capital is essential for creating and
retaining jobs, developing affordable housing, revitalizing
neighborhoods, and promoting the development of small businesses.
However, such access through conventional sources is often limited for
communities comprising large low-income populations or suffering from
economic distress.
The Community Renewal Tax Relief Act of 2000[Footnote 1] authorized up
to $15 billion in equity that is eligible for tax credits under the New
Markets Tax Credit (NMTC) program. This program is expected to
stimulate capital investment in low-income communities. The Community
Development Financial Institutions (CDFI) Fund[Footnote 2] in the
Department of the Treasury allocates the available tax credit authority
to community development entities (CDE), which are entities that manage
NMTC investments in low-income community development projects. In
return for the tax credit, which may be claimed over 7 years, investors
supply capital to the CDEs that are to invest the capital in low-income
communities.
As we discussed in a previous report,[Footnote 3] the CDFI Fund is to
administer the NMTC program over annual increments of allocations and
has been developing processes and systems to allocate the tax credits
under allocation agreements, monitor compliance with allocation
agreements and CDE certification requirements, and evaluate the
program. In addition, the Internal Revenue Service (IRS) is responsible
for overseeing taxpayer and CDE compliance with applicable provisions
of the Internal Revenue Code.
The act mandated that we report to Congress on the NMTC program by
January 31, 2004, 2007, and 2010. Based on consultation with staff at
cognizant congressional committees, this report (1) describes the
status of the NMTC program (including the allocations), (2) profiles
CDEs that were selected to receive NMTC allocations in 2003 by the
issues raised most frequently by the congressional committee staffs
(proposed geographical distribution, prior experience in low-income
communities, and type of proposed service[Footnote 4]), and (3)
determines whether systems are in place or planned to ensure compliance
and evaluate the success of the NMTC program in achieving its goals.
To accomplish the reporting objectives, we met with CDFI Fund and IRS
officials and collected documents on the program status as well as on
the status of data and systems to be used to monitor compliance and
evaluate the program, collected data on the profile of CDE applicants
based on the issues raised by congressional staff, and reviewed any
plans for using the data and systems to monitor compliance and evaluate
the NMTC program given the program goals. (Our scope and methodology
section provides more details on how we did our work.):
Results in Brief:
Although Congress authorized the NMTC program to provide credit against
federal taxes for billions of dollars, starting in 2001, to spur
investments in community development projects, CDFI Fund officials did
not believe that many projects were started by the end of 2003. These
officials said that they are unlikely to know the status of projects
until early 2005. CDEs that received the NMTC allocations were not
selected until March 2003, and the tax credits were not generally
available to be released to investors until the last week in August
2003 at the earliest. Progress was made in developing various program
rules and processes, but according to the CDFI Fund officials, the
various start-up tasks associated with a new program, such as
establishing program rules, delayed the NMTC allocations.
In profiling the CDEs that received NMTC allocations (allocatees), we
found that they reflect variation among the areas of interest of the
congressional committees. Allocatees proposed service to a variety of
geographic areas, ranging from local to national areas and including
both urban and rural areas. The distribution of state and local
allocations was not concentrated in any one state or in a few states.
All allocatees reported at least some prior experience in low-income
communities, particularly in providing capital to low-income
communities. In addition, the allocatees proposed investments that
cover a variety of services, most often development or rehabilitation
of real estate projects.
The CDFI Fund and IRS have made progress in identifying data to use in
monitoring NMTC compliance with the allocation agreements and tax laws,
respectively, and in developing and implementing systems to collect
these data. However, many details remain to be settled on how these
data will actually be used to monitor compliance. Officials from both
agencies believe that they have time to devise their compliance
monitoring processes because some data required for compliance checks
will not be available until 2005.
Even so, the agencies have not established schedules or documented
plans for ensuring that compliance monitoring processes will be in
place when needed. Such schedules and plans are important because
previous self-imposed deadlines for selecting CDEs and finalizing
allocation agreements have been missed, and other major tasks need to
be done, such as those for the second round of allocations. In terms of
evaluating the NMTC program, the CDFI Fund has decided to contract for
an evaluation. CDFI Fund officials believe that the CDFI Fund is
collecting significant amounts of data that will be useful for the
evaluation and that CDEs will maintain additional relevant data.
We are making a recommendation on developing plans, including
milestones, to ensure that compliance-monitoring processes are in place
when needed. In commenting on a draft of this report, the CDFI Fund and
IRS agreed with our recommendation and that they will work together to
complete implementation of a comprehensive NMTC compliance program and
to formalize appropriate information sharing arrangements.
Background:
As discussed in our previous report, according to congressional
supporters of the legislation, the goals of the NMTC program are to
direct new business capital to low-income communities, facilitate
economic development in these communities, and encourage investment in
high-risk areas.[Footnote 5] The program strives to meet these goals by
providing tax credits as investment incentives to prompt investors to
provide capital that in turn, will facilitate development in low-income
communities and businesses.
For purposes of the NMTC program, low-income communities generally are
defined as census tracts[Footnote 6] that meet specified poverty rate
or median family income levels.[Footnote 7] The darkened areas of
figure 1 illustrate that census tracts qualifying for NMTCs are widely
distributed across the nation. Specifically, about 39 percent of all
census tracts qualify for NMTCs and 36 percent of the nation's
population lives in these census tracts (see app. I for a table of NMTC
eligibility as a percentage of state population and of state census
tracts).
Figure 1: U.S. Census Bureau Tracts Eligible for NMTCs:
[See PDF for image]
[End of figure]
Certification and Allocation Process:
The CDFI Fund has the authority to allocate NMTCs under the direction
of the Secretary of the Treasury. The legislation limits the allocation
of equity eligible for tax credits from 2001 through 2007 from $1
billion to $3.5 billion per year, totaling $15 billion over the 7
years.
The first step in the NMTC program is to apply to the CDFI Fund for
certification as a CDE, which is an entity that manages investments for
community development.[Footnote 8] Nonprofit entities and for-profit
entities may be certified as CDEs. To be certified, the CDE must be a
domestic corporation or partnership, for federal tax purposes, and be
duly organized under the laws of the jurisdiction in which it is
incorporated or established. A CDE must have a primary mission of
serving or providing investment capital for low-income communities or
low-income persons, and must maintain accountability to residents of
these low-income communities by filling at least 20 percent of the CDE
governing or advisory board positions with low-income community
representatives.
The second step for a CDE is to apply for an allocation of tax credits
from the CDFI Fund. CDEs are to use the tax credits allocated to
attract investors. Both for-profit and nonprofit CDEs can apply for
allocations of NMTCs. However, only a for-profit CDE may offer NMTCs to
its investors while a nonprofit CDE must intend to transfer the
allocation to one or more for-profit subsidiaries.[Footnote 9] The
application asks a series of questions about the CDE, its track record,
the dollar amount of allocated tax credits being requested, and the
plans for using the credits to support activities in low-income
communities.
Applications are then reviewed and scored by a mix of CDFI Fund staff
and external reviewers who have experience in business, real estate, or
community development finance.[Footnote 10] The CDFI Fund considers
reviewers' scores, reviews applications, and awards an amount of
allocated tax credits to those applicants judged to be the most highly
qualified. These decisions on scoring applications and awarding
allocations are to be based on a range of criteria under which
applicants can receive scores of up to 25 points in each of the four
following areas:[Footnote 11]
* community impact, which is the extent to which the applicant targets
particularly economically distressed communities, has the active
participation of community representatives in designing and
implementing its business plan, and can demonstrate community
development and economic impacts;
* business strategy, which is having prior performance providing
similar kinds of products and services--applicants can score an
additional 5 points by demonstrating a record of successful investment
in disadvantaged communities or businesses and another 5 points by
investing in businesses unrelated to the applicant;
* capitalization strategy, which is securing investor commitments; and:
* management capacity, which is experience investing in low-income
communities.
Figure 2 shows what happens after the allocations are made to CDEs
(i.e., CDE allocatees). The basic process is that investors acquire
stock or capital interest in CDEs in order to receive the tax credits.
In turn, these CDEs must use "substantially all"[Footnote 12] of the
proceeds in making qualified low-income community investments (QLICI).
Eligible QLICIs might include loans or investments to businesses;
development of commercial, industrial, and retail real estate projects;
and development of for-sale housing in low-income areas.
Figure 2: NMTC Process for Using Allocated Tax Credits to Make QLICIs:
[See PDF for image]
[End of figure]
Beginning with the first year of the investment in a CDE, investors are
entitled to claim the tax credit over a 7-year period with 5 percent of
the initial investment claimed for each of the first 3 years and 6
percent for each of the final 4 years, or a total of 39 percent over
the 7 years. During the 7-year period, NMTCs could be subject to a
recapture event if the CDE allocatee (1) ceases to be a CDE, (2) does
not satisfy the "substantially all" requirement, or (3) redeems the
investment.[Footnote 13] In general, a recapture event means that
investors in that CDE are required to increase their income tax
liability by the credits previously used plus interest for each
resulting underpayment of tax. The recapture of credits affects the
investor who originally purchased the equity investment and subsequent
holders. Investors cannot continue to claim the tax credit if their
equity investment is returned to them before the end of the 7-year
period. A CDE is required to provide notice, within a certain period,
to (1) any investor who acquires a qualified equity investment (QEI) in
the CDE that entitles the investor to claim the NMTC and (2) each
current and prior holder of a QEI if a recapture event has
occurred.[Footnote 14]
NMTC Allocation Agreements:
After being selected to receive an allocation, each CDE allocatee must
sign an allocation agreement with the CDFI Fund before officially
designating QEIs and offering tax credits to its investors. The
agreement is to set forth the terms and conditions, such as the amount
of NMTC allocation, approved uses of the allocation, approved service
area, and reporting requirements. While most sections of the agreement
are the same for every allocatee, other sections, such as the
authorized uses of an allocation (e.g., loans to businesses and equity
investments in other CDEs), are tailored to each CDE allocatee.
As specified in the IRS regulations, CDE allocatees must issue the
NMTCs to investors within 5 years of receiving an allocation. CDEs that
receive returns of capital from investing in QLICIs have 12 months to
reinvest those funds in QLICIs; reinvestment is not required in the
final year of the 7-year credit allowance period. CDEs also must agree
to periodically report data on investors and project activities.
The rules also govern the types of businesses that can participate in
NMTC projects. In general, a qualified active low-income community
business (QALICB) is a corporation (including nonprofit corporations)
or partnership that satisfies certain requirements, including the
following:
* Gross income.[Footnote 15] Generally, at least 50 percent of the
total gross income must be derived from the active conduct of a
qualified business within any low-income community.
* Tangible property.[Footnote 16] At least 40 percent of the use of
tangible property must be within a low-income community.
* Services performed.[Footnote 17] At least 40 percent of the services
performed by its employees must be performed in a low-income community.
Regulatory requirements preclude some types of business activities from
qualifying as QALICBs (e.g., residential rental property, golf courses,
massage parlors, liquor stores, race tracks or other gambling
facilities, and farms).[Footnote 18] In general, for a business to be
treated as a QALICB, the CDE must have "reasonably expected" at the
time of the investment that the business would remain in compliance
with the QALICB requirements for the term of the investment.[Footnote
19] Except for those requirements that affect a QALICB, the CDE is not
required to monitor whether a business continues to comply with
requirements after the initial investment is made.
As investors provide equity to CDEs and CDEs invest in low-income
communities, the CDFI Fund is to monitor compliance with the allocation
agreements. IRS is to monitor compliance with the tax consequences of
NMTC allocations, focusing on whether CDEs met the "substantially all"
requirement. If this requirement is not satisfied, the tax credits
claimed by investors plus interest thereon are potentially subject to
recapture.
Scope and Methodology:
To describe the status of the NMTC program, we interviewed various CDFI
Fund and IRS officials tasked with program design and implementation.
We reviewed CDFI Fund notices and planning documents on program
milestones and implementation. We also attended conferences sponsored
by the CDFI Fund and various industry groups to better understand the
NMTC program implementation as it proceeded.
To profile CDEs that received NMTC allocations based on the issues
raised most frequently by the staff of congressional committees, we
analyzed both certification and allocation application data provided by
the CDFI Fund.[Footnote 20] We identified the issues and counted their
frequency based on interviews with majority and minority staff at seven
congressional committees and subcommittees as we prepared our 2002
report[Footnote 21] (see app. II). We could not analyze one of the
issues on the size of the CDEs because of concerns about the data
reported.[Footnote 22] The identified issues that we could analyze were
as follows:
* geographic distribution of the community development projects
proposed by CDE allocatees, including the scope of the area to be
served ranging from local to national, the type of community served
such as urban or rural, and the specific states to be served;
* experience in serving low-income communities; and:
* type of service activity proposed for the community development
project.
Because the data on these issues came from proposals made in
applications filed by the 66 CDE allocatees rather than the signed
allocation agreements, we cannot say that the CDEs will actually serve
the geographic areas or provide the types of service proposed. Much of
the data on actual investments and projects will not be known until
later in 2004. To better understand the issues and data, we interviewed
officials from five CDEs in the Washington, D.C., area that had
received NMTC allocations and from groups representing venture
capitalists, community development corporations, and historic
preservation interests.
To determine whether the CDFI Fund and IRS have systems in place or
planned to ensure compliance with the NMTC program and to evaluate the
success of the NMTC program in achieving its goals, we interviewed
various CDFI Fund and IRS officials on the systems for obtaining the
data to be used for compliance monitoring and evaluation. We reviewed
the NMTC legislation and our 2002 NMTC report to determine the goals of
the NMTC program. We reviewed the CDFI Fund's 2003-2008 Strategic Plan
to help determine overall CDFI Fund goals related to the NMTC program.
We reviewed various CDFI Fund notices and Treasury regulations and
rulings on NMTC provisions that may affect NMTC compliance. We met with
CDFI Fund and IRS officials about the data they intend to collect and
their strategies for identifying noncompliance. We reviewed draft
versions of the CDFI Fund's data collection instruments to identify the
data to be captured for compliance monitoring and program evaluation.
To gain understanding of evaluation approaches and issues, we reviewed
literature on economic development evaluation and reviewed our previous
reports and other government documents on economic development
evaluation.
We did our work at the CDFI Fund's and IRS's offices in Washington,
D.C., from June 2003 through December 2003 in accordance with generally
accepted government auditing standards. We requested written comments
on a draft of this report from the CDFI Fund and IRS; their comments
are reprinted in appendixes IV and V.
Initial NMTC Investments in Community Development Projects Were
Unlikely Until Late 2003 due to NMTC Program Start-up Delays:
Although Congress authorized billions of dollars in annual NMTC
allocations beginning in 2001 to spur investments in community
development projects, it is unlikely that many investments had been
made as of December 2003, according to CDFI Fund officials. The CDEs
were not notified of their allocation awards until March 2003, and
according to CDFI Fund officials, very few CDEs had offered credits to
investors until the last week in August 2003. According to CDFI Fund
officials, they made the allocations to CDEs in 2003 instead of 2001
because of the time taken for various start-up tasks for the new
program, such as establishing the rules for using the allocations.
Most NMTC Investments Were Just Being Initiated by December 2003:
Congress provided a schedule limiting the annual NMTC allocation for
calendar years 2001 through 2007. Table 1 shows this schedule of NMTC
limitations.
Table 1: NMTC Limitation on Amount of Investments by Calendar Year:
Year: 2001; Dollars: 1.0 billion.
Year: 2002; Dollars: 1.5 billion.
Year: 2003; Dollars: 1.5 billion.
Year: 2004; Dollars: 2.0 billion.
Year: 2005; Dollars: 2.0 billion.
Year: 2006; Dollars: 3.5 billion.
Year: 2007; Dollars: 3.5 billion.
Total; Dollars: $15.0 billion.
Source: IRC Section 45D(f).:
Note: Unallocated investment authority can be carried over to future
years through 2014.
[End of table]
The CDFI Fund allocated to CDEs the authority to issue to their
investors up to the aggregate amount of $2.5 billion in equity for
which NMTCs may be claimed (the authority includes the aggregate
amounts of $1 billion for calendar year 2001 and $1.5 for 2002); it
plans to allocate up to the aggregate amount of $3.5 billion for 2003
and 2004 in April 2004. After the March 2003 allocations, the CDFI Fund
generated allocation agreements for the 66 CDEs that received the
allocations. These agreements govern the use of the allocations and the
actions to be taken by CDEs to stay in compliance with the NMTC
program. Once agreements have been properly executed and notification
is provided to the allocatees, the CDEs can offer tax credits in
negotiating with investors on community development projects. The CDFI
Fund finished these agreements by September 2003 and CDEs had 60 days
to sign them. By January 21, 2004, 57 of the 66 CDEs had signed their
agreements. CDFI Fund officials expected that the other 9 CDEs would
sign by the end of January 2004.[Footnote 23]
As a result of the timing of the NMTC allocation agreements and
investments, CDFI Fund officials did not anticipate that many NMTC
community development projects would start in 2003. The CDFI Fund is
prepared to start receiving data about specific investor activities in
CDEs. In contrast, according to a CDFI Fund official, because CDE
allocatees are required to report project-level data annually (through
the Community Investment Impact System) at the end of their fiscal
years, it is unlikely that significant QLICI activities will be
reported until their fiscal year 2004 reports are submitted, which in
most cases will not be until the first part of calendar year 2005.
The CDFI Fund Attributes Delays in Initiating Investments to NMTC
Program Start-up Tasks and Points Out Efforts to Overcome the Effects
of Delays:
CDFI Fund officials said that various NMTC program start-up tasks
contributed to the delays in meeting self-imposed deadlines for making
allocations and finalizing the allocation agreements. Officials have
taken steps, like combining the allocation limitations for the first 4
years into 2, which they believe will mitigate any adverse effects of
the delays.
To prepare to make the allocations and negotiate the allocation
agreements, the CDFI Fund used a three-phased approach that started
after Congress authorized the NMTC program in December 2000. These
phases implemented a variety of tasks, as follows:
* Phase 1 on Initial Policy and Regulatory Development (January 2001 to
December 2001): The CDFI Fund developed program guidance, certification
applications, and other documents; assisted IRS in developing
regulations; and reached out to CDEs and other stakeholders.
* Phase 2 on Policy Refinement and Award Implementation (January 2002
to March 2003): The CDFI Fund certified 1,021 CDEs, developed applicant
selection policies, reviewed 345 allocation applications, and announced
the allocations in March 2003.
* Phase 3 on Ongoing Allocations, Post-Award Activities, and Compliance
Monitoring (March 2003 projected through July 2004): The CDFI Fund
negotiated allocation agreements and debriefed the 279 applicants that
did not receive allocations in round one. It is continuing to develop
processes to monitor NMTC compliance.
At the same time that the CDFI Fund is doing phase 3 tasks, it is also
doing tasks for the second round of allocations and making refinements
as needed. For example, it is continuing to certify new CDEs, refine
allocation materials and selection policies, and work with IRS on
resolving rule making and other issues.
CDFI Fund officials said that delays in meeting self-imposed deadlines
on making the NMTC allocations and finalizing the allocation agreements
could be attributed to the many start-up tasks for a new program, such
as developing application documents and processes, writing rules and
regulations, and addressing comments. For example, CDFI Fund officials
noted that they had hoped to make the allocation decisions for 2001 and
2002 during 2002 rather than in March 2003, but they experienced delays
in publishing the application announcement, developing the application
review system, and dealing with a larger pool of applicants than
anticipated. Similarly, CDFI Fund officials said they had hoped to have
allocation agreements ready about the same time as the allocation
announcement in March 2003 rather than in September 2003 but were
delayed due to the longer than anticipated time to publish the initial
document; delays in developing and clearing the document; and handling
comments from allocatees, investors, and attorneys on the program's
rules and processes.
It is not clear whether the 3-year period between program authorization
and the first potential NMTC investments had any effects beyond
delaying the projects to assist low-income communities and persons.
CDFI Fund officials believe that delays have not hurt the program and
that they took some steps to minimize any effects. For example, the
CDFI Fund released multiple draft versions of the allocation agreement
template, in part so that investors wishing to make investments into
CDEs in advance of the allocation agreement being finalized would
better understand the terms and conditions of those aggreement. Also,
the first four annual rounds were aggregated into two multiyear rounds-
-$2.5 billion for 2001 and 2002 and $3.5 billion for 2003 and 2004. The
CDFI Fund has legislative authority to carry over unused limitations on
annual allocations.[Footnote 24] Additionally, given the delays in
finalizing the allocation agreements and application
system, the CDFI Fund extended the deadline for CDEs allocatees in the
first round to prove their eligibility for the second allocation round
from February 17, 2004, to March 5, 2004.[Footnote 25]
Profile of CDE Allocatees Indicates Variation in Proposed Projects and
Experience:
The profile of the 66 CDE allocatees reflected variation among the
issues we analyzed--geographical distribution in areas to be served by
community development projects, type of proposed service, and
experience with low-income communities.[Footnote 26] Geographically,
allocatees proposed community development projects that served areas
ranging from local to national in scope, all types of communities
(e.g., urban and rural), and at least 20 states. Also, the proposed
projects covered all types of services listed in the allocation
application. Finally, all allocatees reported at least some experience
in assisting low-income communities.
Allocatee Profile by Geographic Distribution:
The 66 allocatees had the following profiles for the three geographical
issues--service area, type of community, and states served by proposed
projects (see app. III for details).
Proposed service area:[Footnote 27] Table 2 shows the number of CDE
allocatees and amount of equity that is eligible for credits by the
area an allocatee proposed to serve. Of the 66 allocatees, 54, or 82
percent, proposed projects that serve local, state, or national service
areas. The remaining proposed projects covered multiple-local areas or
multiple states. In terms of the $2.5 billion in equity eligible for
NMTC allocated to CDEs, nearly $1.2 billion, or nearly half of the
total, went to allocatees with proposed projects having a national
scope.
Table 2: NMTC Allocations by Proposed Service Area:
Proposed service area: Local;
Number of allocatees: 22;
Percentage of allocatees: 33.3%;
Equity that is eligible for NMTCs: (dollars in millions): $591;
Percentage of NMTC value: 23.6%.
Proposed service area: Multiple-local;
Number of allocatees: 5;
Percentage of allocatees: 7.6%;
Equity that is eligible for NMTCs: (dollars in millions): 176;
Percentage of NMTC value: 7.0%.
Proposed service area: State;
Number of allocatees: 17;
Percentage of allocatees: 25.8%;
Equity that is eligible for NMTCs: (dollars in millions): 344;
Percentage of NMTC value: 13.8%.
Proposed service area: Multistate;
Number of allocatees: 7;
Percentage of allocatees: 10.6%;
Equity that is eligible for NMTCs: (dollars in millions): 198;
Percentage of NMTC value: 7.9%.
Proposed service area: National;
Number of allocatees: 15;
Percentage of allocatees: 22.7%;
Equity that is eligible for NMTCs: (dollars in millions): 1,192;
Percentage of NMTC value: 47.7%.
Total;
Number of allocatees: 66;
Percentage of allocatees: 100.0%;
Equity that is eligible for NMTCs: (dollars in millions): $2,500;
Percentage of NMTC value: 100.0%.
Source: GAO analysis of CDFI Fund data.
Note: Columns may not sum to totals due to rounding.:
[End of table]
Proposed type of community: The 66 allocatees proposed projects that
focused more on urban areas (70 percent) than rural areas or mixed/
suburban areas. Of the $2.5 billion in equity eligible for NMTCs, the
urban projects received 86 percent while rural and mixed/suburban areas
received the rest. However, CDEs proposing to serve predominantly urban
areas might also serve some rural areas, and vice versa.
State and local allocations across states: Of the 66 CDE allocatees, 39
proposed local or single state projects. These 39 projects covered 20
states and the District of Columbia. California and Ohio had the
highest number of allocatees. An Arizona allocatee received the largest
allocation while the smallest allocation went to a Pennsylvania
allocatee. Table 3 shows the number of CDEs receiving allocations and
the total amount of equity that is eligible for NMTCs only for projects
proposed within one state.[Footnote 28]
Table 3: NMTC Allocatees Proposing Projects Serving One State or Only
Local Areas:
State: Alabama; Number of allocatees: 1; Equity that is eligible for
NMTCs: $40,000,000.
State: Alaska; Number of allocatees: 1; Equity that is eligible for
NMTCs: 5,000,000.
State: Arizona; Number of allocatees: 1; Equity that is eligible for
NMTCs: 170,000,000.
State: California; Number of allocatees: 6; Equity that is eligible for
NMTCs: 192,000,000.
State: Delaware; Number of allocatees: 1; Equity that is eligible for
NMTCs: 15,000,000.
State: District of Columbia; Number of allocatees: 2; Equity that is
eligible for NMTCs: 86,000,000.
State: Illinois; Number of allocatees: 2; Equity that is eligible for
NMTCs: 14,000,000.
State: Indiana; Number of allocatees: 2; Equity that is eligible for
NMTCs: 9,000,000.
State: Kentucky; Number of allocatees: 4; Equity that is eligible for
NMTCs: 24,000,000.
State: Louisiana; Number of allocatees: 1; Equity that is eligible for
NMTCs: 50,000,000.
State: Maryland; Number of allocatees: 1; Equity that is eligible for
NMTCs: 10,000,000.
State: Massachusetts; Number of allocatees: 2; Equity that is eligible
for NMTCs: 26,000,000.
State: New Jersey; Number of allocatees: 1; Equity that is eligible for
NMTCs: 15,000,000.
State: New York; Number of allocatees: 1; Equity that is eligible for
NMTCs: 21,000,000.
State: Ohio; Number of allocatees: 6; Equity that is eligible for
NMTCs: 82,000,000.
State: Oklahoma; Number of allocatees: 2; Equity that is eligible for
NMTCs: 134,000,000.
State: Pennsylvania; Number of allocatees: 1; Equity that is eligible
for NMTCs: 500,000.
State: Tennessee; Number of allocatees: 1; Equity that is eligible for
NMTCs: 1,000,000.
State: Virginia; Number of allocatees: 1; Equity that is eligible for
NMTCs: 15,000,000.
State: West Virginia; Number of allocatees: 1; Equity that is eligible
for NMTCs: 4,000,000.
State: Wisconsin; Number of allocatees: 1; Equity that is eligible for
NMTCs: 21,000,000.
Total; Number of allocatees: 39; Equity that is eligible for
NMTCs: $934,500,000.
Source: GAO analysis of CDFI Fund data.:
[End of table]
CDE Allocatee Profile by Experience with Low-Income Communities and
Proposed Type of Services:
The profile of experience in low-income communities and the proposed
services to be provided among the 66 CDE allocatees follows.
Experience serving low-income communities: Prior experience in serving
low-income communities was common among allocatees. All 66 allocatees
reported that they have successfully deployed capital to low-income
communities and 61 reported successfully providing financial counseling
and other services or technical assistance to disadvantaged businesses
or communities.
Proposed types of services in projects: The proposed projects cover the
five types of services included in the NMTC allocation application, as
shown in table 4. Some of the 66 CDE allocatees proposed more than one
service, which resulted in 171 proposed types of services. Of the 66
CDEs, 78 percent proposed development or rehabilitation of real estate
(e.g., retail, manufacturing, office, and community facilities) and 61
percent proposed financial counseling or advice on organizing or
operating a business.
Table 4: Types of Services Proposed by Allocatees in 2002:
Non-real estate investments: 48 (72.7%);
Proposed service type: Development or rehabilitation of real estate:
52 (77.8%);
Proposed service type: Investments in, or loans to, other CDEs: 18
(27.3%);
Proposed service type: Purchase of loans from other CDEs: 13 (19.7%);
Proposed service type: Financial counseling and advice: 40 (60.6%).
Source: GAO analysis of CDFI Fund data.
Note: The allocation application asked applicants to check all types of
services that applied to their proposals. The 66 allocatees checked a
total of 171 services. As a result, the percentages should not be added
because they relate to the portion of the 66 CDEs that checked that
service as being provided in their projects.:
[End of table]
Data Have Been Identified for Monitoring Compliance, but How the Data
Are to Be Used Is Not Defined; a Contractor Is to Evaluate the NMTC
Program:
CDFI Fund and IRS officials have made progress in identifying the data
for monitoring NMTC compliance, and the CDFI Fund has developed systems
to collect some of these data. However, a number of details remain to
be settled on how the data will actually be used to monitor compliance.
Officials believe they still have adequate time to complete their plans
for monitoring compliance. However, previous deadlines in implementing
the NMTC have been missed, many other tasks have to be done, and the
agencies have not established schedules or documented plans for
ensuring that compliance monitoring processes will be in place when
needed. CDFI Fund officials intend to use contractors to evaluate the
effectiveness of the NMTC program. The CDFI Fund and CDEs are expected
to have significant amounts of data that should be useful for the
evaluation.
Progress Made in Identifying Compliance Monitoring Data and Developing
Systems to Collect the Data, but Methods for Using the Data Are Not
Developed:
CDFI Fund and IRS officials have identified data for monitoring
compliance with NMTC provisions, and the CDFI Fund has made progress in
implementing data collection systems. These officials also mentioned
various methods for how the data could be used to monitor compliance.
However, many details remain to be settled on which methods will be
used and how. Officials from both agencies believe they have time to
complete their plans for monitoring compliance, but they do not have
schedules or documented plans for ensuring that compliance monitoring
processes will be in place when needed.
Data and Systems to Support Compliance Monitoring:
NMTC compliance monitoring will focus on (1) events that could lead to
recapture of NMTCs from investors and (2) CDEs' compliance with the
terms of their allocation agreements. For both of these areas, the CDFI
Fund and IRS will rely on some data that will be routinely collected.
The statute establishing the NMTC provide three events that trigger
recapture of tax credits for an equity investment in a CDE:[Footnote
29]
* the entity ceases to be a CDE,
* the proceeds of the equity investment cease to be used in a manner
that satisfies the "substantially all" requirement, and:
* the investment is redeemed by the CDE.
IRS is responsible for determining whether a recapture event has
occurred. IRS officials said that they will focus primarily on the
"substantially all" requirement and rely on the CDFI Fund to help
monitor whether a CDE ceases to be qualified. Further, IRS will rely on
data collected by the CDFI Fund to some extent in identifying whether
any of the three events leading to recapture occur.
To determine whether CDEs remain qualified for the NMTC program, data
will be needed on whether CDEs continue to meet the primary mission and
accountability tests. To meet the primary mission test, a CDE must show
that it has a primary mission of serving or providing investment
capital for low-income communities or low-income persons and that at
least 60 percent of its activities are dedicated to serving low-income
communities or persons. The accountability test is met by demonstrating
that 20 percent of the members of either the governing board or
advisory board(s) represent the low-income communities or persons in
the CDE's service area.[Footnote 30] Adherence to these two tests is
required as long as an entity participates in the NMTC program as a
CDE.[Footnote 31]
To determine whether the entity has a primary mission of serving low-
income communities or low-income persons during the initial application
for CDE certification, the CDFI Fund reviews an organization's mission
statements (as contained in its bylaws, articles of incorporation,
board resolutions, etc.) during the initial application for CDE
certification. The CDFI Fund requires applicants to certify that at
least 60 percent of its products and services will be directed to low-
income communities or low-income persons. To determine whether CDEs
meet their accountability test, the CDFI Fund reviews the composition
of the governing boards, advisory boards, or both at the time of the
initial application. According to an official, the CDFI Fund requires
all CDE allocatees, subsidiary allocatees, and CDE investees to certify
annually that they continue to meet their certification requirements.
CDFI Fund officials indicated that they might conduct audits or reviews
to determine whether CDEs continue to meet these tests.
IRS officials said that to monitor whether CDEs continue to meet the
"substantially all" test, they will review data that the CDEs are
required to report, such as the type, amount, and timing of
investments. IRS officials also said they will use data on various IRS
forms to identify NMTC investors and investment-related data reported
by taxpayers.[Footnote 32] In addition, CDEs will report identifying
data on investors and the amount of investments they made to the CDFI
Fund, which IRS may use in its compliance monitoring activities.
In terms of whether CDEs redeem investments, the CDFI Fund plans to
collect data annually on whether CDEs have redeemed any portion of the
QEIs received in the previous year. A CDFI Fund official said the Fund
was considering whether to request more data on possible redemptions.
However, he thought it unlikely that a CDE would redeem any investments
prior to the end of the 7-year investment period, since this would
disqualify it from the NMTC and would trigger a recapture event.
While IRS will monitor compliance with events that could lead to a
recapture of tax credits, the CDFI Fund will monitor CDEs for adherence
to their allocation agreements.[Footnote 33] To monitor allocation
agreement compliance, CDFI Fund officials said that they would focus on
data in section 3.2 of the allocation agreement. Section 3.2 is unique
and will be tailored to each allocatee based on specific assertions a
CDE made in its allocation application on its proposed use of the tax
credits. For example, question 67 of the application for the first
round of allocations asked if an applicant's investments or activities
would be targeted principally to communities with higher levels of
distress than the minimum poverty and income criteria required by the
NMTC program. Section 3.2 is to include related information from those
CDEs that checked "Yes" to question 67.
Web-based systems designed by the CDFI Fund are expected to be the
primary sources of the data that the CDFI Fund and IRS plan to use to
monitor compliance. CDFI Fund officials said that all the systems and
processes for capturing and using the data from all CDE allocatees
should be ready by August 2004. Figure 3 shows the planned integration
of the data systems.
Figure 3: The CDFI Fund's Primary Data Systems for Monitoring NMTC
Compliance:
[See PDF for image]
[End of figure]
A fuller description of the purposes and time frames for these systems
follows.
* Allocation Agreement System (AAS): AAS populates fields in the
allocation agreements with certain allocatee information and sends an
uneditable electronic copy of the allocation agreement to the CDE. CDFI
Fund officials told us that AAS was functional in August 2003.
* Allocation Tracking System (ATS): ATS allows reporting by CDEs of
specific data about the use of approved allocations, such as the type,
amount, and timing of investments.[Footnote 34] It will also track
various self-reported data on investors in the CDEs. IRS may use the
data to track compliance with timing requirements in the IRS
regulations. ATS was on-line in November 2003, according to CDFI Fund
officials.
* Community Investment Impact System (CIIS): CIIS is an annual
reporting system that collects various data about the CDEs as
institutions and about their transactions. These data are to be used to
analyze what is happening with CDEs and investment projects as well as
to monitor compliance. The CDFI Fund plans to test and implement CIIS
by February 2004, receive data from CDEs in June 2004, and verify the
data by August 2004.
* Compliance Monitoring (CM) Tool: The CM Tool extracts data from other
databases to monitor for compliance with allocation agreements and
helps IRS monitor for recapture events. The CDFI Fund plans for the CM
Tool to include "red flags" where appropriate and feasible. The Fund
plans to complete the CM Tool by July 2004.
CDFI Fund and IRS Have Incomplete Plans for Monitoring Compliance:
CDFI Fund and IRS officials have many details to finish on how they
will use the data that are routinely collected for actually monitoring
NMTC program compliance. While officials from both agencies have listed
possible monitoring processes (e.g., audits, compliance checks, or site
visits) and have said that they will develop "red flags" to monitor
compliance, neither agency could provide specific details about its
proposed compliance monitoring processes. Officials believe they will
have sufficient time to develop their compliance monitoring plans more
fully.
A number of details remain to be settled in determining how the actual
monitoring of compliance will occur and how the CDFI Fund and IRS will
share data. For example, the CM Tool is to include various "red flags"
on noncompliance by CDEs related to their adherence to IRS regulations
and CDFI Fund compliance concerns. Presumably, the flags would trigger
follow-up to determine whether CDEs actually have been noncompliant.
According to officials at both agencies, neither the CDFI Fund nor IRS
has yet developed its "red flags." Furthermore, whether, when, and how
follow-up would occur has not been determined by either agency. The
CDFI Fund also expects that audits will be used to help determine CDEs'
compliance with recapture events and allocation agreements. What
remains to be defined is how many audits will be conducted, who will
perform them, and how extensive those audits will be. Similarly,
processes beyond audits for following up on potential noncompliance
have not been defined.
IRS expects to monitor CDEs' adherence to the "substantially all" test
in part by accessing the CDFI Fund's data. IRS also expects that audits
will be a tool for determining CDEs' compliance and is considering
options for selecting CDEs for audit. IRS has told us that it may
conduct 5 to 10 random audits of CDEs to help gather baseline data on
CDEs. Other audit selection options include use of the CDFI Fund's data
to trigger an audit or as an adjunct to other IRS audit work that may
relate to an investor or CDE.
CDFI Fund and IRS officials have been developing a memorandum of
understanding that would define the relationship between the agencies
and their respective roles in monitoring aspects of CDEs' compliance.
For example, both agencies have an interest in monitoring whether an
investment has been redeemed. The memorandum is expected to, for
example, define how IRS would access the CDFI Fund's data and how and
when the CDFI Fund should alert IRS to CDEs that no longer qualify due
to violations of the primary mission and accountability tests. As of
January 15, 2004, the memorandum had not been finalized.
CDFI Fund and IRS officials believe that they have time to finalize
their processes for ensuring NMTC compliance. According to a CDFI Fund
official, due to the timing of the allocation agreements, very few CDE
allocatees are likely to receive QEIs and make QLICIs in 2003. Thus the
first significant data available to be used for aspects of compliance
regarding QLICIs will not be available until CDEs file CIIS reports at
the conclusion of their fiscal year 2004; some data will not be
available to IRS until 2005, after CDEs and investors file tax returns
for tax year 2004. Additionally, CDFI Fund and IRS officials note that
the potential for recapture of tax credits also provides an incentive
to investors to help ensure that CDEs comply with the NMTC program.
Finally, allocatees will be required to supply the CDFI Fund with
copies of their audited financial statements, with which the CDFI Fund
plans to verify some data reported by allocatees.
Although the CDFI Fund and IRS have some time to complete their
processes for monitoring compliance, officials do not have schedules or
documented plans for ensuring that compliance monitoring processes will
be in place when needed. To date, some CDFI Fund self-imposed deadlines
for making allocations and finalizing allocation agreements have been
missed. CDFI Fund officials also face a continuing workload apart from
finalizing and implementing these monitoring plans. Officials are
currently managing the second round of allocations and, as discussed
below, considering how to evaluate the outcomes of the NMTC program.
Further, although much of the activity that will need to be monitored
may not occur until well into 2004, some parts of the compliance
monitoring may need to be developed before others. The "red flags" that
are intended to surface potential noncompliance could be needed during
2004 to alert the CDFI Fund and IRS to possible recapture events.
Finally, completion of the compliance monitoring plans would help CDFI
Fund and IRS officials judge what type and mix of resources they will
need to adequately monitor compliance so they can make a more informed
budget request for fiscal year 2006.
The CDFI Fund Plans to Contract for an NMTC Evaluation:
CDFI Fund officials intend to issue a contract for an evaluation of the
NMTC program. They expect that the contractor will use some of the data
that CDEs will report to the CDFI Fund or maintain in their records
pursuant to their allocation agreements.
Even though the law authorizing NMTC does not charge the CDFI Fund with
responsibility for evaluating the success of the NMTC program, CDFI
Fund officials began considering how to evaluate the NMTC program
shortly after it was authorized. For example, officials sought the
advice of experts in March 2002 on the types of data that would be
useful for evaluating the program. However, there was no consensus on
the specific data required to evaluate the NMTC program. CDFI Fund
officials also drafted a document in May 2002 outlining a broad
preliminary framework for evaluating the NMTC program. The preliminary
evaluation proposal outlines topics to consider in measuring NMTC
program impacts. The topics proposed for assessment are the (1) flow of
private capital to CDEs, (2) CDE performance, and (3) outcomes at the
community level.
However, evaluating the success of economic development programs like
the NMTC program is challenging. Our 2002 report[Footnote 35] detailed
some of those challenges, all of which apply in the case of the NMTC
program. For example, program impact is usually difficult to determine
because it is hard to know what participants and others who invest in
low-income communities would have done absent the program. If a program
did not exist, what would investors have done with their capital? Would
the low-income communities have had more or less economic development
due to business growth? Further, program effectiveness is difficult to
measure when the program is small relative to total economic activity
within the geographic area of interest. These challenges will be
particularly problematic for the NMTC program because 36 percent of the
U.S. population and 39 percent of the census tracts are eligible. Many
of the eligible communities would already have significant business
activities that could mask the NMTC impacts.
In part due to these challenges and the amount of expertise needed to
deal with them, CDFI Fund officials have decided to contract for
evaluation services. CDFI Fund officials expect to have a contractor
design and implement an NMTC program evaluation. Officials plan to
issue a request for proposals in summer 2004 and hire a contractor in
early fiscal year 2005. CDFI Fund officials have not yet developed the
statement of work for the contract and do not have an expected
completion date for the evaluation design or the study itself. CDFI
Fund officials note that since initial investments under the program
will not likely begin until 2004 (as described above), program results
will not be available for evaluation until enough time elapses for the
investments to generate an effect.
To assist the contractor, the CDFI Fund is collecting significant
amounts of data that officials believe may be useful for the
evaluation. Additionally, the CDFI Fund requires CDEs to maintain
additional records. According to CDFI Fund officials, data on whether
an investment recipient (a QALICB) is minority-or woman-owned are to be
captured by the CDFI Fund data systems for all CDE allocatees
specifically for evaluation purposes. In addition, CDFI Fund officials
said that some of the other data collected from CDE allocatees through
these data systems could be useful to future evaluators, for example,
the location and type of investments made, the type of business
receiving the investment, and the gross revenues of the business. Also,
officials noted that section 6.4 of the allocation agreement provides
that CDEs "shall retain all financial records, supporting documents,
and any other records pertinent to the NMTC Allocation." Officials
expect that the data maintained under section 6.4 may also be used for
the evaluation. Finally, officials recognize that the contractor may
identify other necessary data and, if appropriate, will consider
collecting the data.
Conclusions:
The NMTC program provides billions of dollars over multiple years as an
incentive to stimulate additional billions of dollars in investments in
low-income communities. Given the significant sums involved, ensuring
that funds are properly used to accomplish the economic development
envisioned by Congress in creating the program is vital. CDFI Fund and
IRS officials have taken a number of steps to implement the program and
begin collecting information needed to monitor compliance with the tax
laws and the allocation agreements between the CDFI Fund and CDEs.
However, the CDFI Fund and IRS have not defined how they will share
data, use the data in monitoring compliance, and develop other
processes required for an effective monitoring program. Although the
agencies do have some time to develop the processes they will use to
monitor compliance, they do not have schedules and other documented
plans for developing the processes. Having such schedules and plans
would help ensure that compliance monitoring processes and resources
will be in place when needed, particularly given the other tasks that
need to be done and other deadlines that have been missed.
Recommendations for Executive Action:
To ensure that compliance monitoring processes will be in place when
needed, we recommend that the Secretary of the Treasury instruct the
Director of the CDFI Fund and the Commissioner of Internal Revenue to
develop plans, including milestones, for designing and implementing
compliance monitoring processes for the NMTC program.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the CDFI
Fund Director and IRS Commissioner (see app. IV and V). Both agencies
cited the importance of compliance monitoring in the NMTC program and
agreed with our recommendation to develop plans and milestones for
designing and implementing compliance monitoring processes for the NMTC
program. Staffs at both agencies have been directed to work together to
implement a comprehensive compliance program and appropriate
information sharing arrangements. In addition, officials from both
agencies provided technical comments that we have incorporated into the
report where appropriate.
The CDFI Fund also attached three other written comments for our
consideration (see app. IV). A summary of these comments and our
evaluation of them follows.
First, the CDFI Fund said that it provided us with a schedule and dates
for the major compliance and monitoring tools, such as AAS and ATS.
This is true. We made no changes to the report because we had already
described these schedules and dates. In making our recommendation, we
recognized that progress had been made in ensuring that data would be
available for monitoring compliance. However, we had not received
schedules or documented plans for ensuring that the processes for
monitoring compliance using data from these and other systems would be
in place when needed.
Second, the CDFI Fund also said that it and IRS took steps to expedite
investments in CDEs and build investor confidence, such as IRS
incorporating a "look back provision" in its regulations so that
investors could claim tax credits for certain investments made before
the CDE entered into an allocation agreement, and the CDFI Fund
releasing draft versions of the allocation agreement template so that
potential investors in CDEs could understand the terms and conditions
before an allocation agreement was finalized. Although we did not have
evidence that investor confidence was built, we agree that both
agencies took steps to offset the delays in finalizing allocation
agreements. Although the look back provision may have helped offset
delays, we did not change our report because we had already mentioned
the release of the draft templates as well as other steps.
Third, the CDFI Fund said that although data about any investments
being made in CDEs are already being collected through ATS, data on the
use of those investments in actual projects are not yet being
collected. Such project-related data will be collected annually at the
end of each CDE's fiscal year. This was one of the technical comments
that we discussed with CDFI Fund officials and incorporated into the
final report.
We are sending copies of this report to the interested congressional
committees; the Commissioner of Internal Revenue, the Director of the
Community Development Financial Institutions Fund, and other interested
parties. We will make copies available to others on request. In
addition, the report will be available at no charge on the GAO Web site
at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions on matters discussed in this
report or would like additional information, please contact me or Tom
Short at (202) 512-9110 or at [Hyperlink, brostekm@gao.gov]
or [Hyperlink, shortt@gao.gov]. Major
contributors to this report are acknowledged in appendix VI.
Signed by:
Michael Brostek:
Director, Tax Issues:
List of Congressional Committees:
The Honorable Charles E. Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate:
The Honorable Olympia J. Snowe
Chair
The Honorable John F. Kerry
Ranking Minority Member
Committee on Small Business and Entrepreneurship
United States Senate:
The Honorable Richard C. Shelby
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate:
The Honorable William M. Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives:
The Honorable Donald A. Manzullo
Chairman
The Honorable Nydia M. Velázquez
Ranking Minority Member
Committee on Small Business
House of Representatives:
The Honorable Michael G. Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives:
The Honorable Richard H. Baker
Chairman
The Honorable Paul E. Kanjorski
Ranking Minority Member
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
Committee on Financial Services
House of Representatives:
[End of section]
Appendixes:
Appendix I: Distribution of New Market Tax Credit Eligibility by
State:
State: Alabama;
Total population: 4,447,100;
Population in NMTC- eligible tracts: 1,513,897;
Percentage of population in NMTC-eligible tracts: 34.0;
Total number of census tracts: 1,081;
Number of census tracts eligible for NMTC: 447;
Percentage of census tracts eligible for NMTC: 41.4.
State: Alaska;
Total population: 626,932;
Population in NMTC-eligible tracts: 166,284;
Percentage of population in NMTC-eligible tracts: 26.5;
Total number of census tracts: 158;
Number of census tracts eligible for NMTC: 49;
Percentage of census tracts eligible for NMTC: 31.0.
State: Arizona;
Total population: 5,130,632;
Population in NMTC- eligible tracts: 2,170,799;
Percentage of population in NMTC-eligible tracts: 42.3;
Total number of census tracts: 1,107;
Number of census tracts eligible for NMTC: 458;
Percentage of census tracts eligible for NMTC: 41.4.
State: Arkansas;
Total population: 2,673,400;
Population in NMTC- eligible tracts: 837,645;
Percentage of population in NMTC-eligible tracts: 31.3;
Total number of census tracts: 624;
Number of census tracts eligible for NMTC: 227;
Percentage of census tracts eligible for NMTC: 36.4.
State: California;
Total population: 33,871,648;
Population in NMTC- eligible tracts: 14,228,860;
Percentage of population in NMTC-eligible tracts: 42.0;
Total number of census tracts: 7,049;
Number of census tracts eligible for NMTC: 2,909;
Percentage of census tracts eligible for NMTC: 41.3.
State: Colorado;
Total population: 4,301,261;
Population in NMTC- eligible tracts: 1,626,666;
Percentage of population in NMTC-eligible tracts: 37.8;
Total number of census tracts: 1,062;
Number of census tracts eligible for NMTC: 425;
Percentage of census tracts eligible for NMTC: 40.0.
State: Connecticut;
Total population: 3,405,565;
Population in NMTC- eligible tracts: 1,018,248;
Percentage of population in NMTC-eligible tracts: 29.9;
Total number of census tracts: 819;
Number of census tracts eligible for NMTC: 267;
Percentage of census tracts eligible for NMTC: 32.6.
State: Delaware;
Total population: 783,600;
Population in NMTC-eligible tracts: 253,756;
Percentage of population in NMTC-eligible tracts: 32.4;
Total number of census tracts: 197;
Number of census tracts eligible for NMTC: 68;
Percentage of census tracts eligible for NMTC: 34.5.
State: District of Columbia;
Total population: 572,059;
Population in NMTC-eligible tracts: 392,784;
Percentage of population in NMTC- eligible tracts: 68.7;
Total number of census tracts: 188;
Number of census tracts eligible for NMTC: 128;
Percentage of census tracts eligible for NMTC: 68.1.
State: Florida;
Total population: 15,982,378;
Population in NMTC- eligible tracts: 5,383,460;
Percentage of population in NMTC-eligible tracts: 33.7;
Total number of census tracts: 3,154;
Number of census tracts eligible for NMTC: 1,104;
Percentage of census tracts eligible for NMTC: 35.0.
State: Georgia;
Total population: 8,186,453;
Population in NMTC- eligible tracts: 3,373,431;
Percentage of population in NMTC-eligible tracts: 41.2;
Total number of census tracts: 1,618;
Number of census tracts eligible for NMTC: 816;
Percentage of census tracts eligible for NMTC: 50.4.
State: Hawaii;
Total population: 1,211,537;
Population in NMTC-eligible tracts: 389,822;
Percentage of population in NMTC-eligible tracts: 32.2;
Total number of census tracts: 286;
Number of census tracts eligible for NMTC: 100;
Percentage of census tracts eligible for NMTC: 35.0.
State: Idaho;
Total population: 1,293,953;
Population in NMTC-eligible tracts: 289,973;
Percentage of population in NMTC-eligible tracts: 22.4;
Total number of census tracts: 280;
Number of census tracts eligible for NMTC: 71;
Percentage of census tracts eligible for NMTC: 25.4.
State: Illinois;
Total population: 12,419,293;
Population in NMTC- eligible tracts: 4,451,452;
Percentage of population in NMTC-eligible tracts: 35.8;
Total number of census tracts: 2,966;
Number of census tracts eligible for NMTC: 1,259;
Percentage of census tracts eligible for NMTC: 42.4.
State: Indiana;
Total population: 6,080,485;
Population in NMTC- eligible tracts: 1,580,385;
Percentage of population in NMTC-eligible tracts: 26.0;
Total number of census tracts: 1,414;
Number of census tracts eligible for NMTC: 456;
Percentage of census tracts eligible for NMTC: 32.2.
State: Iowa;
Total population: 2,926,324;
Population in NMTC-eligible tracts: 554,614;
Percentage of population in NMTC-eligible tracts: 19.0;
Total number of census tracts: 793;
Number of census tracts eligible for NMTC: 174;
Percentage of census tracts eligible for NMTC: 21.9.
State: Kansas;
Total population: 2,688,418;
Population in NMTC-eligible tracts: 847,596;
Percentage of population in NMTC-eligible tracts: 31.5;
Total number of census tracts: 727;
Number of census tracts eligible for NMTC: 266;
Percentage of census tracts eligible for NMTC: 36.6.
State: Kentucky;
Total population: 4,041,769;
Population in NMTC- eligible tracts: 1,666,229;
Percentage of population in NMTC-eligible tracts: 41.2;
Total number of census tracts: 994;
Number of census tracts eligible for NMTC: 465;
Percentage of census tracts eligible for NMTC: 46.8.
State: Louisiana;
Total population: 4,468,976;
Population in NMTC- eligible tracts: 2,006,649;
Percentage of population in NMTC-eligible tracts: 44.9;
Total number of census tracts: 1,106;
Number of census tracts eligible for NMTC: 568;
Percentage of census tracts eligible for NMTC: 51.4.
State: Maine;
Total population: 1,274,923;
Population in NMTC-eligible tracts: 281,916;
Percentage of population in NMTC-eligible tracts: 22.1;
Total number of census tracts: 348;
Number of census tracts eligible for NMTC: 92;
Percentage of census tracts eligible for NMTC: 26.4.
State: Maryland;
Total population: 5,296,486;
Population in NMTC- eligible tracts: 1,768,525;
Percentage of population in NMTC-eligible tracts: 33.4;
Total number of census tracts: 1,218;
Number of census tracts eligible for NMTC: 471;
Percentage of census tracts eligible for NMTC: 38.7.
State: Massachusetts;
Total population: 6,349,097;
Population in NMTC- eligible tracts: 1,874,138;
Percentage of population in NMTC-eligible tracts: 29.5;
Total number of census tracts: 1,367;
Number of census tracts eligible for NMTC: 465;
Percentage of census tracts eligible for NMTC: 34.0.
State: Michigan;
Total population: 9,938,444;
Population in NMTC- eligible tracts: 3,291,727;
Percentage of population in NMTC-eligible tracts: 33.1;
Total number of census tracts: 2,757;
Number of census tracts eligible for NMTC: 1,005;
Percentage of census tracts eligible for NMTC: 36.5.
State: Minnesota;
Total population: 4,919,479;
Population in NMTC- eligible tracts: 1,640,749;
Percentage of population in NMTC-eligible tracts: 33.4;
Total number of census tracts: 1,303;
Number of census tracts eligible for NMTC: 510;
Percentage of census tracts eligible for NMTC: 39.1.
State: Mississippi;
Total population: 2,844,658;
Population in NMTC- eligible tracts: 1,288,823;
Percentage of population in NMTC-eligible tracts: 45.3;
Total number of census tracts: 605;
Number of census tracts eligible for NMTC: 309;
Percentage of census tracts eligible for NMTC: 51.1.
State: Missouri;
Total population: 5,595,211;
Population in NMTC- eligible tracts: 2,110,929;
Percentage of population in NMTC-eligible tracts: 37.7;
Total number of census tracts: 1,320;
Number of census tracts eligible for NMTC: 596;
Percentage of census tracts eligible for NMTC: 45.2.
State: Montana;
Total population: 902,195;
Population in NMTC-eligible tracts: 238,126;
Percentage of population in NMTC-eligible tracts: 26.4;
Total number of census tracts: 270;
Number of census tracts eligible for NMTC: 96;
Percentage of census tracts eligible for NMTC: 35.6.
State: Nebraska;
Total population: 1,711,263;
Population in NMTC- eligible tracts: 487,124;
Percentage of population in NMTC-eligible tracts: 28.5;
Total number of census tracts: 503;
Number of census tracts eligible for NMTC: 167;
Percentage of census tracts eligible for NMTC: 33.2.
State: Nevada;
Total population: 1,998,257;
Population in NMTC-eligible tracts: 615,332;
Percentage of population in NMTC-eligible tracts: 30.8;
Total number of census tracts: 487;
Number of census tracts eligible for NMTC: 131;
Percentage of census tracts eligible for NMTC: 26.9.
State: New Hampshire;
Total population: 1,235,786;
Population in NMTC- eligible tracts: 335,288;
Percentage of population in NMTC-eligible tracts: 27.1;
Total number of census tracts: 273;
Number of census tracts eligible for NMTC: 82;
Percentage of census tracts eligible for NMTC: 30.0.
State: New Jersey;
Total population: 8,414,350;
Population in NMTC- eligible tracts: 2,807,584;
Percentage of population in NMTC-eligible tracts: 33.4;
Total number of census tracts: 1,950;
Number of census tracts eligible for NMTC: 715;
Percentage of census tracts eligible for NMTC: 36.7.
State: New Mexico;
Total population: 1,819,046;
Population in NMTC- eligible tracts: 852,741;
Percentage of population in NMTC-eligible tracts: 46.9;
Total number of census tracts: 456;
Number of census tracts eligible for NMTC: 213;
Percentage of census tracts eligible for NMTC: 46.7.
State: New York;
Total population: 18,976,457;
Population in NMTC- eligible tracts: 7,346,694;
Percentage of population in NMTC-eligible tracts: 38.7;
Total number of census tracts: 4,907;
Number of census tracts eligible for NMTC: 1,956;
Percentage of census tracts eligible for NMTC: 39.9.
State: North Carolina;
Total population: 8,049,313;
Population in NMTC- eligible tracts: 2,550,363;
Percentage of population in NMTC-eligible tracts: 31.7;
Total number of census tracts: 1,563;
Number of census tracts eligible for NMTC: 579;
Percentage of census tracts eligible for NMTC: 37.0.
State: North Dakota;
Total population: 642,200;
Population in NMTC- eligible tracts: 148,687;
Percentage of population in NMTC-eligible tracts: 23.2;
Total number of census tracts: 227;
Number of census tracts eligible for NMTC: 65;
Percentage of census tracts eligible for NMTC: 28.6.
State: Ohio;
Total population: 11,353,140;
Population in NMTC-eligible tracts: 3,444,005;
Percentage of population in NMTC-eligible tracts: 30.3;
Total number of census tracts: 2,941;
Number of census tracts eligible for NMTC: 1,092;
Percentage of census tracts eligible for NMTC: 37.1.
State: Oklahoma;
Total population: 3,450,654;
Population in NMTC- eligible tracts: 1,255,471;
Percentage of population in NMTC-eligible tracts: 36.4;
Total number of census tracts: 990;
Number of census tracts eligible for NMTC: 394;
Percentage of census tracts eligible for NMTC: 39.8.
State: Oregon;
Total population: 3,421,399;
Population in NMTC-eligible tracts: 1,052,608;
Percentage of population in NMTC-eligible tracts: 30.8;
Total number of census tracts: 755;
Number of census tracts eligible for NMTC: 254;
Percentage of census tracts eligible for NMTC: 33.6.
State: Pennsylvania;
Total population: 12,281,054;
Population in NMTC- eligible tracts: 3,892,107;
Percentage of population in NMTC-eligible tracts: 31.7;
Total number of census tracts: 3,135;
Number of census tracts eligible for NMTC: 1,121;
Percentage of census tracts eligible for NMTC: 35.8.
State: Puerto Rico;
Total population: 3,808,610;
Population in NMTC- eligible tracts: 3,603,560;
Percentage of population in NMTC-eligible tracts: 94.6;
Total number of census tracts: 861;
Number of census tracts eligible for NMTC: 773;
Percentage of census tracts eligible for NMTC: 89.8.
State: Rhode Island;
Total population: 1,048,319;
Population in NMTC- eligible tracts: 304,225;
Percentage of population in NMTC-eligible tracts: 29.0;
Total number of census tracts: 234;
Number of census tracts eligible for NMTC: 72;
Percentage of census tracts eligible for NMTC: 30.8.
State: South Carolina;
Total population: 4,012,012;
Population in NMTC- eligible tracts: 1,329,983;
Percentage of population in NMTC-eligible tracts: 33.2;
Total number of census tracts: 867;
Number of census tracts eligible for NMTC: 346;
Percentage of census tracts eligible for NMTC: 39.9.
State: South Dakota;
Total population: 754,844;
Population in NMTC- eligible tracts: 186,224;
Percentage of population in NMTC-eligible tracts: 24.7;
Total number of census tracts: 235;
Number of census tracts eligible for NMTC: 82;
Percentage of census tracts eligible for NMTC: 34.9.
State: Tennessee;
Total population: 5,689,283;
Population in NMTC- eligible tracts: 1,813,322;
Percentage of population in NMTC-eligible tracts: 31.9;
Total number of census tracts: 1,261;
Number of census tracts eligible for NMTC: 485;
Percentage of census tracts eligible for NMTC: 38.5.
State: Texas;
Total population: 20,851,820;
Population in NMTC-eligible tracts: 8,948,614;
Percentage of population in NMTC-eligible tracts: 42.9;
Total number of census tracts: 4,388;
Number of census tracts eligible for NMTC: 2,020;
Percentage of census tracts eligible for NMTC: 46.0.
State: Utah;
Total population: 2,233,169;
Population in NMTC-eligible tracts: 665,977;
Percentage of population in NMTC-eligible tracts: 29.8;
Total number of census tracts: 496;
Number of census tracts eligible for NMTC: 154;
Percentage of census tracts eligible for NMTC: 31.0.
State: Vermont;
Total population: 608,827;
Population in NMTC-eligible tracts: 115,063;
Percentage of population in NMTC-eligible tracts: 18.9;
Total number of census tracts: 179;
Number of census tracts eligible for NMTC: 35;
Percentage of census tracts eligible for NMTC: 19.6.
State: Virginia;
Total population: 7,078,515;
Population in NMTC- eligible tracts: 2,830,159;
Percentage of population in NMTC-eligible tracts: 40.0;
Total number of census tracts: 1,541;
Number of census tracts eligible for NMTC: 675;
Percentage of census tracts eligible for NMTC: 43.8.
State: Washington;
Total population: 5,894,121;
Population in NMTC- eligible tracts: 1,986,457;
Percentage of population in NMTC-eligible tracts: 33.7;
Total number of census tracts: 1,318;
Number of census tracts eligible for NMTC: 464;
Percentage of census tracts eligible for NMTC: 35.2.
State: West Virginia;
Total population: 1,808,344;
Population in NMTC- eligible tracts: 782,252;
Percentage of population in NMTC-eligible tracts: 43.3;
Total number of census tracts: 466;
Number of census tracts eligible for NMTC: 214;
Percentage of census tracts eligible for NMTC: 45.9.
State: Wisconsin;
Total population: 5,363,675;
Population in NMTC- eligible tracts: 1,386,144;
Percentage of population in NMTC-eligible tracts: 25.8;
Total number of census tracts: 1,333;
Number of census tracts eligible for NMTC: 423;
Percentage of census tracts eligible for NMTC: 31.7.
State: Wyoming;
Total population: 493,782;
Population in NMTC-eligible tracts: 89,243;
Percentage of population in NMTC-eligible tracts: 18.1;
Total number of census tracts: 127;
Number of census tracts eligible for NMTC: 24;
Percentage of census tracts eligible for NMTC: 18.9.
Total;
Total population: 285,230,516;
Population in NMTC- eligible tracts: 104,076,710;
Percentage of population in NMTC-eligible tracts: 36.5;
Total number of census tracts: 66,304;
Number of census tracts eligible for NMTC: 26,337;
Percentage of census tracts eligible for NMTC: 39.7.
Total without Puerto Rico;
Total population: 281,421,906;
Population in NMTC-eligible tracts: 100,473,150;
Percentage of population in NMTC-eligible tracts: 35.7;
Total number of census tracts: 65,443;
Number of census tracts eligible for NMTC: 25,564;
Percentage of census tracts eligible for NMTC: 39.1.
Source: GAO analysis of U.S. Census Bureau data.
[End of table]
[End of section]
Appendix II: Congressional Staff Interviews:
To provide a profile of community development entities (CDE) that
received New Markets Tax Credit (NMTC) allocations, we reviewed the
congressional contact file from a recent GAO report.[Footnote 36] For
that report, we conducted 14 interviews with congressional staff of
majority and minority members serving on the following committees.
* United States Senate:
* Committee on Finance:
* Committee on Small Business and Entrepreneurship:
* Committee on Banking, Housing, and Urban Affairs:
* House of Representatives:
* Committee on Ways and Means and its Subcommittee on Oversight:
* Committee on Small Business:
* Committee on Financial Services and its Subcommittee on Capital
Markets, Insurance and Government Sponsored Enterprises:
[End of section]
Appendix III: Profile of Participants:
As of the August 2002 allocation application deadline for the first
round of NMTC allocations, the Community Development Financial
Institutions (CDFI) Fund had certified 1,033 CDEs. Of these 1,033
certified CDEs, 345 applied in the first round of NMTC allocation,
requesting nearly $26 billion of equity related to NMTCs. From this
applicant pool, 66 CDEs received NMTC allocations.
These 66 allocatees requested $5.1 billion in equity, but the
allocation limitation for the first round was $2.5 billion. While the
average and median amounts requested were $76.8 million and $40.0
million, respectively, the amounts allocated were $37.9 million and $18
million. Furthermore, while 11 of the 66 allocatees received the full
amounts requested, the typical allocation was reduced by 58 percent to
reach the 2002 allocation limitation.
Tables 5 and 6 profile CDEs according to their structure and profit
status. Of the 1,033 CDEs certified by the CDFI Fund, nearly 60 percent
were structured as single entities and 16 percent were parents with at
least one subsidiary[Footnote 37] CDE. Also, 57 percent of CDEs were
certified as for-profit entities and 39 percent as nonprofit entities.
Table 5: Number of CDEs Certified, Applying for, and Receiving NMTCs by
CDE Structure and Profit Status:
Structures of CDEs: CDFI;
Number of certified/registered CDEs: 317;
Allocation applicants: Number: 88;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $4,593;
Allocatees: Number: 22;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $1,214;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $625.
Structures of CDEs: Specialized Small Business Investment Companies;
Number of certified/registered CDEs: 9;
Allocation applicants: Number: 5;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 102;
Allocatees: Number: [Empty];
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): [Empty];
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): [Empty].
Structures of CDEs: Not specified;
Number of certified/registered CDEs: 707;
Allocation applicants: Number: 252;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 21,217;
Allocatees: Number: 44;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 3,855;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 1,876.
Total;
Number of certified/registered CDEs: 1,033;
Allocation applicants: Number: 345;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $25,912;
Allocatees: Number: 66;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $5,069;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $2,500.
Single entities;
Number of certified/registered CDEs: 615;
Allocation applicants: Number: 215;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $15,110;
Allocatees: Number: 27;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $1,008;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $574.
Parents with subsidiaries;
Number of certified/registered CDEs: 166;
Allocation applicants: Number: 120;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 10,506;
Allocatees: Number: 36;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 3,961;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 1,883.
Subsidiaries;
Number of certified/registered CDEs: 252;
Allocation applicants: Number: 10;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 296;
Allocatees: Number: 3;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 100;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 43.
Total;
Number of certified/registered CDEs: 1,033;
Allocation applicants: Number: 345;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $25,912;
Allocatees: Number: 66;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $5,069;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $2,500.
Profit status; Profit;
Number of certified/registered CDEs: 593;
Allocation applicants: Number: 224;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $18,966;
Allocatees: Number: 36;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $2,563;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $1,301.
Profit status; Nonprofit;
Number of certified/registered CDEs: 400;
Allocation applicants: Number: 102;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 5,061;
Allocatees: Number: 17;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 1,135;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 555.
Profit status; Other;
Number of certified/registered CDEs: 13;
Allocation applicants: Number: 3;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 196;
Allocatees: Number: 1;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 16;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 15.
Profit status; Not specified;
Number of certified/registered CDEs: 27;
Allocation applicants: Number: 16;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): 1,689;
Allocatees: Number: 12;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): 1,355;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): 630.
Total;
Number of certified/registered CDEs: 1,033;
Allocation applicants: Number: 345;
Allocation applicants: Requested equity that is eligible for NMTCs
(dollars in millions): $25,912;
Allocatees: Number: 66;
Allocatees: Requested equity that is eligible for NMTCs
(dollars in millions): $5,069;
Allocatees: Allocated equity that is eligible for NMTCs
(dollars in millions): $2,500.
Source: GAO analysis of CDFI Fund data.
Note: Results are based on self-reported data from applicants.
Columns may not sum to totals due to rounding.
[End of table]
Table 6: Percentage of CDEs Certified, Applying for, and Receiving
NMTCs by CDE Structure and Profit Status:
Structures of CDEs;
CDFI;
Percentage of certified/registered CDEs: 31.0%;
Allocation applicants: Percentage of applicants: 26.0%;
Allocation applicants: Percentage of request: 18.0%;
Allocatees: Percentage of allocatees: 33.0%;
Allocatees: Percentage of request: 24.0%;
Allocatees: Percentage of allocation: 25.0%.
Structures of CDEs;
Specialized Small Business Investment Companies;
Percentage of certified/registered CDEs: 1.0%;
Allocation applicants: Percentage of applicants: 1.0%;
Allocation applicants: Percentage of request: 0.0%;
Allocatees: Percentage of allocatees: [Empty];
Allocatees: Percentage of request: [Empty];
Allocatees: Percentage of allocation: [Empty].
Structures of CDEs;
Not Specified;
Percentage of certified/registered CDEs: 68.0%;
Allocation applicants: Percentage of applicants: 73.0%;
Allocation applicants: Percentage of request: 82.0%;
Allocatees: Percentage of allocatees: 67.0%;
Allocatees: Percentage of request: 76.0%;
Allocatees: Percentage of allocation: 75.0%.
Total;
Percentage of certified/registered CDEs: 100.0%;
Allocation applicants: Percentage of applicants: 100.0%;
Allocation applicants: Percentage of request: 100.0%;
Allocatees: Percentage of allocatees: 100.0%;
Allocatees: Percentage of request: 100.0%;
Allocatees: Percentage of allocation: 100.0%.
Single entities;
Percentage of certified/registered CDEs: 60.0%;
Allocation applicants: Percentage of applicants: 62.0%;
Allocation applicants: Percentage of request: 58.0%;
Allocatees: Percentage of allocatees: 41.0%;
Allocatees: Percentage of request: 20.0%;
Allocatees: Percentage of allocation: 23.0%.
Parents with subsidiaries;
Percentage of certified/registered CDEs: 16.0%;
Allocation applicants: Percentage of applicants: 35.0%;
Allocation applicants: Percentage of request: 41.0%;
Allocatees: Percentage of allocatees: 55.0%;
Allocatees: Percentage of request: 78.0%;
Allocatees: Percentage of allocation: 75.0%.
Subsidiaries;
Percentage of certified/registered CDEs: 24.0%;
Allocation applicants: Percentage of applicants: 3.0%;
Allocation applicants: Percentage of request: 1.0%;
Allocatees: Percentage of allocatees: 5.0%;
Allocatees: Percentage of request: 2.0%;
Allocatees: Percentage of allocation: 2.0%.
Total;
Percentage of certified/registered CDEs: 100.0%;
Allocation applicants: Percentage of applicants: 100.0%;
Allocation applicants: Percentage of request: 100.0%;
Allocatees: Percentage of allocatees: 100.0%;
Allocatees: Percentage of request: 100.0%;
Allocatees: Percentage of allocation: 100.0%.
Profit status; Profit;
Percentage of certified/registered CDEs: 57.0%;
Allocation applicants: Percentage of applicants: 65.0%;
Allocation applicants: Percentage of request: 73.0%;
Allocatees: Percentage of allocatees: 55.0%;
Allocatees: Percentage of request: 51.0%;
Allocatees: Percentage of allocation: 52.0%.
Profit status; Nonprofit;
Percentage of certified/registered CDEs: 39.0%;
Allocation applicants: Percentage of applicants: 30.0%;
Allocation applicants: Percentage of request: 20.0%;
Allocatees: Percentage of allocatees: 26.0%;
Allocatees: Percentage of request: 22.0%;
Allocatees: Percentage of allocation: 22.0%.
Profit status; Other;
Percentage of certified/registered CDEs: 1.0%;
Allocation applicants: Percentage of applicants: 1.0%;
Allocation applicants: Percentage of request: 1.0%;
Allocatees: Percentage of allocatees: 2.0%;
Allocatees: Percentage of request: 0.0%;
Allocatees: Percentage of allocation: 1.0%.
Profit status; Not specified;
Percentage of certified/registered CDEs: 3.0%;
Allocation applicants: Percentage of applicants: 5.0%;
Allocation applicants: Percentage of request: 7.0%;
Allocatees: Percentage of allocatees: 18.0%;
Allocatees: Percentage of request: 27.0%;
Allocatees: Percentage of allocation: 25.0%.
Total;
Percentage of certified/registered CDEs: 100.0%;
Allocation applicants: Percentage of applicants: 100.0%;
Allocation applicants: Percentage of request: 100.0%;
Allocatees: Percentage of allocatees: 100.0%;
Allocatees: Percentage of request: 100.0%;
Allocatees: Percentage of allocation: 100.0%.
Source: GAO analysis of CDFI Fund data.:
Note: Results are based on self-reported data from applicants.
Columns may not sum to totals due to rounding.
[End of table]
The equity allocations for NMTCs ranged from $500,000 to $170 million
in credits with:
* 13 allocatees receiving $5 million or less,
* 20 allocatees receiving more than $5 million to $20 million,
* 16 allocatees receiving more than $20 million to $50 million,
* 10 allocatees receiving more than $50 million to $100 million, and:
* 7 allocatees receiving over $100 million.
The goals of the NMTC program are not stated in the legislation that
authorizes it. Interested congressional staff said they are interested
in how the program will affect different community types and service
areas. Tables 7 and 8 profile NMTC activity by community types and
service areas in terms of the number and percentage of participants,
respectively.[Footnote 38] Over three-quarters of the CDEs applied for
NMTC allocations primarily to serve urban areas, while less than 20
percent intended to focus primarily on rural areas. Additionally, a
majority of applicant CDEs were planning to serve specific local areas,
while 18 percent intended to serve specific states.
For type of service area, allocatees proposing local projects received
63 percent of what was requested and multiple-local projects received
37 percent; state, national, and multistate projects received about
half of what they requested. Regardless of the type of community (e.g.,
urban or rural) they proposed to serve, the 66 allocatees received
about half of the requested allocations.
Table 7: Number of NMTC Allocation Applicants and Allocatees by
Community Type and Service Area:
Community type[A]: Urban;
Applied for NMTC allocation: Number: 265;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $22,100;
Received NMTC allocation: Number: 46;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $4,366;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): $2,137.
Community type[A]: Rural;
Applied for NMTC allocation: Number: 59;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 2,808;
Received NMTC allocation: Number: 15;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 606;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 310.
Community type[A]: Mixed;
Applied for NMTC allocation: Number: 17;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 903;
Received NMTC allocation: Number: 5;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 98;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 53.
Community type[A]: Suburban;
Applied for NMTC allocation: Number: 4;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 101;
Received NMTC allocation: Number: [Empty];
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): [Empty];
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): [Empty].
Total:
Applied for NMTC allocation: Number: 345;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $25,912;
Received NMTC allocation: Number: 66;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $5,069;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): $2,500.
Service area[B]: Local;
Applied for NMTC allocation: Number: 179;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $8,332;
Received NMTC allocation: Number: 22;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $938;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 591.
Service area[B]: State;
Applied for NMTC allocation: Number: 62;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 5,560;
Received NMTC allocation: Number: 17;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 659;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 344.
Service area[B]: Regional[C];
Applied for NMTC allocation: Number: 32;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 2,069;
Received NMTC allocation: Number: [Empty];
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): [Empty];
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): [Empty].
Service area[B]: Multiple-local[C];
Applied for NMTC allocation: Number: [Empty];
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): [Empty];
Received NMTC allocation: Number: 5;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 471;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 176.
Service area[B]: Multistate;
Applied for NMTC allocation: Number: 17;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 1,246;
Received NMTC allocation: Number: 7;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 445;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 198.
Service area[B]: National;
Applied for NMTC allocation: Number: 55;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 8,706;
Received NMTC allocation: Number: 15;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): 2,557;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): 1,192.
Total;
Applied for NMTC allocation: Number: 345;
Applied for NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $25,912;
Received NMTC allocation: Number: 66;
Received NMTC allocation: Requested equity that is eligible
for NMTCs (dollars in millions): $5,069;
Received NMTC allocation: Allocated equity that is eligible
for NMTCs (dollars in millions): $2,500.
Source: GAO analysis of CDFI Fund data.
Note: Columns may not sum to totals due to rounding.
[A] CDEs were required to report the percentage of activity they
intended to conduct in selected degrees of urbanization on the NMTC
Allocation Application. We categorized CDEs according to their
predominant response. In cases in which two or more predominant
responses exist, we categorized the CDE as mixed.
[B] CDEs were required to report their intended type of service area on
the NMTC Allocation Application. We used the categories as defined by
the CDFI Fund.
[C] The measure of service area comes from certification and allocation
applications. However, the CDFI Fund reclassified the service area for
allocatees, eliminating the regional category and adding a multiple-
local category.:
[End of table]
Table 8: Percentage of NMTC Allocation Applicants and Allocatees by
Community Type and Service Area:
Community type[A]: Urban;
Applied for NMTC allocation: Percentage of applicants: 76.8%;
Applied for NMTC allocation: Percentage of requests: 85.3%;
Received NMTC allocation: Percentage of allocatees: 69.7%;
Received NMTC allocation: Percentage of requests: 86.1%;
Received NMTC allocation: Percentage of allocations: 85.5%.
Community type[A]: Rural;
Applied for NMTC allocation: Percentage of applicants: 17.1%;
Applied for NMTC allocation: Percentage of requests: 10.8%;
Received NMTC allocation: Percentage of allocatees: 22.7%;
Received NMTC allocation: Percentage of requests: 12.0%;
Received NMTC allocation: Percentage of allocations: 12.4%.
Community type[A]: Mixed;
Applied for NMTC allocation: Percentage of applicants: 4.9%;
Applied for NMTC allocation: Percentage of requests: 3.5%;
Received NMTC allocation: Percentage of allocatees: 7.6%;
Received NMTC allocation: Percentage of requests: 1.9%;
Received NMTC allocation: Percentage of allocations: 2.1%.
Community type[A]: Suburban;
Applied for NMTC allocation: Percentage of applicants: 1.2%;
Applied for NMTC allocation: Percentage of requests: 0.4%;
Received NMTC allocation: Percentage of allocatees: [Empty];
Received NMTC allocation: Percentage of requests: [Empty];
Received NMTC allocation: Percentage of allocations: [Empty].
Total;
Applied for NMTC allocation: Percentage of applicants: 100.0%;
Applied for NMTC allocation: Percentage of requests: 100.0%;
Received NMTC allocation: Percentage of allocatees: 100.0%;
Received NMTC allocation: Percentage of requests: 100.0%;
Received NMTC allocation: Percentage of allocations: 100.0%.
Service area[B]: Local;
Applied for NMTC allocation: Percentage of applicants: 51.9%;
Applied for NMTC allocation: Percentage of requests: 32.2%;
Received NMTC allocation: Percentage of allocatees: 33.3%;
Received NMTC allocation: Percentage of requests: 18.5%;
Received NMTC allocation: Percentage of allocations: 23.6%.
Service area[B]: State;
Applied for NMTC allocation: Percentage of applicants: 18.0%;
Applied for NMTC allocation: Percentage of requests: 21.4%;
Received NMTC allocation: Percentage of allocatees: 25.8%;
Received NMTC allocation: Percentage of requests: 13.0%;
Received NMTC allocation: Percentage of allocations: 13.8%.
Service area[B]: Regional[C];
Applied for NMTC allocation: Percentage of applicants: 9.3%;
Applied for NMTC allocation: Percentage of requests: 8.0%;
Received NMTC allocation: Percentage of allocatees: [Empty];
Received NMTC allocation: Percentage of requests: [Empty];
Received NMTC allocation: Percentage of allocations: [Empty].
Service area[B]: Multiple-Local[C];
Applied for NMTC allocation: Percentage of applicants: [Empty];
Applied for NMTC allocation: Percentage of requests: [Empty];
Received NMTC allocation: Percentage of allocatees: 7.6%;
Received NMTC allocation: Percentage of requests: 9.3%;
Received NMTC allocation: Percentage of allocations: 7.0%.
Service area[B]: MultiState;
Applied for NMTC allocation: Percentage of applicants: 4.9%;
Applied for NMTC allocation: Percentage of requests: 4.8%;
Received NMTC allocation: Percentage of allocatees: 10.6%;
Received NMTC allocation: Percentage of requests: 8.8%;
Received NMTC allocation: Percentage of allocations: 7.9%.
Service area[B]: National;
Applied for NMTC allocation: Percentage of applicants: 15.9%;
Applied for NMTC allocation: Percentage of requests: 33.6%;
Received NMTC allocation: Percentage of allocatees: 22.7%;
Received NMTC allocation: Percentage of requests: 50.4%;
Received NMTC allocation: Percentage of allocations: 47.7%.
Total;
Applied for NMTC allocation: Percentage of applicants: 100.0%;
Applied for NMTC allocation: Percentage of requests: 100.0%;
Received NMTC allocation: Percentage of allocatees: 100.0%;
Received NMTC allocation: Percentage of requests: 100.0%;
Received NMTC allocation: Percentage of allocations: 100.0%.
Source: GAO analysis of CDFI Fund data.
Note: Columns may not sum to 100 percent due to rounding.
[A] CDEs were required to report the percentage of activity they
intended to conduct in selected degrees of urbanization on the NMTC
Allocation Application. We categorized CDEs according to their
predominant response. In cases in which two or more predominant
responses exist, we categorized the CDE as mixed.
[B] CDEs were required to report the of the type service area that they
intended to serve on the NMTC Allocation Application. We used the
categories as defined by the CDFI Fund.
[C] The measure of service area comes from certification and allocation
applications. However, the CDFI Fund reclassified the service area for
allocatees, eliminating the regional category and adding a multiple-
local category.:
[End of table]
[End of section]
Appendix IV: Comments from the Community Development Financial
Institutions Fund:
DEPARTMENT OF THE TREASURY
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND
601 THIRTEENTH STREET, NW, SUITE 200 SOUTH
WASHINGTON, DC 20005:
DIRECTOR:
Michael Brostek
Director, Tax Issues
United States General Accounting Office
Washington, DC 20548:
Dear Mr. Brostek:
Thank you for providing the Treasury Department with the opportunity to
comment on the draft GAO report, "New Markets Tax Credit Program:
Progress Made in Implementation but Further Actions Needed to Monitor
Compliance"(Report). We are very pleased with the implementation and
administration of the New Markets Tax Credit (NMTC) Program, and
appreciate that your first audit of the NMTC Program recognizes the
significant accomplishments that we have achieved to date. The $15
billion NMTC Program will stimulate job creation and economic
development in our nation's low-income communities by attracting
capital from private sector investors. The successful implementation
and quality management of this program is one of the Department's
highest priorities.
We concur with the Report's comments regarding the importance of the
compliance monitoring process to ensure the integrity of the NMTC
Program, and the recommendation that the Treasury Secretary "instruct
the Director of the Community Development Financial Institutions (CDFI)
Fund and the Commissioner of Internal Revenue to develop plans,
including milestones, for designing and implementing compliance
monitoring processes for the NMTC Program." The Report correctly states
that CDFI Fund and Internal Revenue Service (IRS) officials have been
working cooperatively to develop data sharing and other processes so
that both agencies can monitor allocatees' compliance with specific
provisions of the program. The Report also acknowledges that we have
achieved key compliance milestones, such as the implementation of the
CDFI Fund's automated Allocation Agreement System (AAS) and Allocation
Tracking System (ATS).
Notwithstanding these significant accomplishments, ongoing
coordination between the CDFI Fund and the IRS will be critical to
ensuring the success of the NMTC Program. Secretary Snow has directed
the IRS to work together with the CDFI Fund to complete implementation
of a comprehensive NMTC compliance program and to formalize appropriate
information sharing arrangements. Treasury plans to establish
measurable program goals by the end of fiscal year 2004 that will be
results oriented.
Thank you again for the opportunity to review and comment on your draft
report. Attached please find some additional comments that we hope you
will consider in the final report. Please be assured that Treasury will
take all appropriate measures to complete the implementation of a
monitoring and compliance system to ensure the integrity and continued
success of the NMTC Program.
Sincerely,
Tony T. Brown:
Signed by Tony T. Brown:
cc: Pamela F. Olson, Assistant Secretary for Tax Policy, U.S.
Department of the Treasury:
OTHER OBSERVATIONS AND COMMENTS TO DRAFT REPORT (GAO-04-326):
While Treasury Department concurs with the sole Recommendation for
Executive Action contained in the draft Report, there are certain other
observations in the Report that the Department would like to take this
opportunity to address:
1. The Report states "the agencies have not established schedules or
documented plans for ensuring that monitoring processes will be in
place when needed.":
Please note that CDFI Fund officials did provide the GAO with a
schedule for the major compliance and monitoring tools, and dates from
this schedule are referenced throughout the Report. The Report
correctly notes that the CDFI Fund implemented the Allocation Agreement
System (AAS) and the Allocation Tracking System (ATS) in advance of the
first investments being made into Community Development Entities
(CDEs), demonstrating that the agencies are committed to introducing
monitoring processes as they become needed.
2. The Report indicates that it is unlikely that many NMTC-related
projects had started by the end of 2003, and further states that this
may in part be because the Fund did not enter into allocation
agreements with CDE allocatees until late in calendar year 2003.
We believe it should also be noted that both the Fund and the IRS took
important measures to expedite investments in CDEs and build investor
confidence around the program. For instance, the IRS incorporated a
"lookback provision" in its regulations so that, in certain
circumstances, investors could claim tax credits for investments made
prior to the CDE entering into an allocation agreement with the Fund.
Additionally, the Fund released multiple, draft versions of the
allocation agreement template, in part so that investors wishing to
make investments into CDEs in advance of the allocation agreement being
finalized would better understand the terms and conditions of those
agreements.
3. The Report states "The CDFI Fund hopes to have initial data on the
status of actual investments and related projects by February-March of
2004, at the earliest. This is when the initial round of reporting by
all 66 allocatees is slated to be finished."
The above statement isn't entirely accurate. It is true that the Fund
is already collecting "initial data on the status of actual
investments." This is done through the ATS, a real-time, web-based
system where allocatees report information about the status and timing
of their Qualified Equity Investments (QEIs). Allocatees are required
to report this information in ATS within 60 days of receiving the
proceeds of a QEI.
However, there will be an interval between when the Fund collects data
on QEIs and when the Fund will have information regarding the status of
"related projects." By statute, an allocatee has up to one year from
the date it issues a QEI to demonstrate that substantially all of those
proceeds were used to fund Qualified Low Income Community Investments
(QLICIs). The Fund will be collecting such project-level data on an
annual basis following the conclusion of each allocatee's fiscal year.
[End of section]
Appendix V: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224:
COMMISSIONER:
Mr. Michael Brostek
Director, Tax Issues
United States General Accounting Office
Washington, D.C. 20548:
Dear Mr. Brostek:
I reviewed your draft report entitled, "New Markets Tax Credit Program:
Progress Made in Implementation but Further Actions Needed to Monitor
Compliance" (GAO Job Code 450223). We appreciate your comments
regarding the importance of the compliance monitoring process in
ensuring the integrity of the New Markets Tax Credit Program (NMTC). We
agree with your recommendation that the IRS, in coordination with the
Community Development Financial Institutions Fund (CDFI), will need to
develop a compliance program during Fiscal Year 2004 for the NMTC
Program. We anticipate that these credits will first appear on 2004
income tax returns and that the compliance program will be available
when needed. Your report also points out that CDFI Fund and IRS
officials have been cooperating on data sharing and other processes
that will help both agencies monitor compliance with provisions of the
program.
I have directed the Commissioners of Small Business/Self-Employed and
Large and Mid-Size Business to work together with the CDFI Fund to
develop a comprehensive compliance program and to formalize our
information sharing arrangements. We will establish measurable program
goals by the end of Fiscal Year 2004 which will be process and results
oriented. When appropriate, other operating units such as Tax Exempt
and Government Entities, Wage and Investment, and the Office of Chief
Counsel may participate.
If you have any questions, please contact me or Kelly Cables, Director
of Performance and Quality and Audit Assistance within the LMSB
Division at (202) 283-8334.
Sincerely,
Mark W. Everson:
Signed by Mark W. Everson:
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Donald Marples, (202) 512-5306 Demian Moore, (202) 512-6134 Neil
Pinney, (202) 512-8650:
Acknowledgments:
In addition to the individuals named above, key contributors to this
report included C. Robert DeRoy, Evan Gilman, Donna Miller, John
Mingus, Cheryl Peterson, Amy Rosewarne, and Kim Young.
(450223):
FOOTNOTES
[1] Pub. L. No. 106-554, December 21, 2000.
[2] The CDFI Fund was created in 1994 to expand the availability of
credit, investment capital, and financial services in distressed
communities. Beyond being the primary administrator of the NMTC
program, it also provides financial and technical assistance and
training to banks and thrifts and administers other programs, such as
the CDFI, Bank Enterprise Award and Native American Training and
Technical Assistance programs.
[3] U.S. General Accounting Office, New Markets Tax Credit: Status of
Implementation and Issues Related to GAO's Mandated Reports, GAO-03-
223R (Washington, D.C.: Dec. 6, 2002).
[4] We could not analyze another frequently raised issue on size of the
CDEs due to limitations in data.
[5] GAO-03-223R.
[6] A census tract is a statistical subdivision of a county or
statistically equivalent entity delineated for data presentation
purposes under U.S. Census Bureau guidelines. Designed to be relatively
homogeneous units with fairly stable boundaries over time, census
tracts generally contain from 1,000 to 8,000 people.
[7] A low-income community is defined as a census tract (1) in which
the poverty rate is at least 20 percent or (2) outside a metropolitan
area in which the median family income does not exceed 80 percent of
statewide median family income or within a metropolitan area in which
the median family income does not exceed 80 percent of the greater of
statewide or the metropolitan area median family income. The Secretary
of the Treasury can designate an area within an otherwise nonqualified
census tract as a low-income community if the area (1) has a continuous
boundary, (2) would meet the definition of a low-income community if it
were a census tract, and (3) has inadequate access to investment
capital. As of December 2003, Treasury had approved one organization
serving portions of three census tracts that do not otherwise qualify
as low-income communities.
[8] As provided for in the NMTC statute, community development
financial institutions and specialized small business investment
companies automatically qualify as CDEs and only need to register as
CDEs rather than apply for certification.
[9] The for-profit subsidiaries do not have to be formed when the
nonprofit CDE applies for an allocation. However, the subsidiary must
submit a CDE certification application to the CDFI Fund within 30 days
of receiving a Notification of Allocation from the CDFI Fund and must
be a certified CDE prior to entering into an allocation agreement. The
CDFI Fund certified 400 nonprofit CDEs before announcing the first
round of allocations in March 2003, of which 102 applied for NMTC
allocations and 17 received allocations (see app. III, table 5).
[10] The CDFI Fund also has procedures to protect against real or
potential conflicts of interest and misuse by reviewers of information
related to applications.
[11] The CDFI Fund reserves the right to decide how much of the
requested allocation to award to each applicant. It also reserves the
right to reject applications that receive scores that are exceptionally
weak in any one or more of the four application criteria.
[12] "Substantially all" means that CDEs use (within 12 months) at
least 85 percent of investor proceeds in years 1 through 6 and 75
percent in year 7 of the investment. CDEs can satisfy this requirement
by two methods: direct tracing of investments to specific QLICIs or by
showing that at least 85 percent of their aggregate gross assets are
invested in QLICIs.
[13] 26 U.S.C. § 45D(g)(3). A recapture event may be avoided if a CDE
that believes that it has "good cause" requests to waive a requirement
or extend a deadline if the waiver or extension does not materially
frustrate the purposes of the credit (Temp. Treas. Reg. § 1.45D-
IT(e)(4)).
[14] Temp. Treas. Reg. § 1.45D-1T(g)(2)(i).
[15] Temp. Treas. Reg. § 1.45D-1T(d)(4)(i)(A).
[16] Temp. Treas. Reg. § 1.45D-1T(d)(4)(i)(B).
[17] Temp. Treas. Reg. § 1.45D-1T(d)(4)(i)(C).
[18] Temp. Treas. Reg. § 1.45D-1T(d)(5)(ii) and (iii).
[19] Temp. Treas. Reg. § 1.45D-1T(d)(6)(i).
[20] We performed no reliability assessment of the data.
[21] GAO-03-223R.
[22] One issue raised was whether smaller entities were excluded in the
distribution of NMTC allocations. However, the data cannot be used to
accurately represent the size of the CDE. For example, a large
organization might establish a small CDE only for the NMTC program.
Analyzing the total assets of the CDE might not accurately reflect the
true size of the underlying organization.
[23] CDFI Fund officials stated the Fund has not penalized allocatees
that missed their 60-day deadline for returning allocation agreements
because, in almost all cases, they have been in communication with the
Fund and are making efforts to obtain proper approvals and legal
opinions so that the document may be signed and returned to the CDFI
Fund.
[24] 26 U.S.C. § 45D (f)(3) provides for the carryover of these unused
limitations on allocation amounts from one calendar year to the
succeeding calendar year. No amount can be carried over past calendar
year 2014.
[25] First round CDE allocatees can only apply for the second round if
they show that they have issued at least half of their QEIs from the
first round of allocations.
[26] The data analyzed on the proposed projects were self-reported on
the allocation applications. Profile results on the projects could
change as the allocation agreements are finalized and projects are
designed.
[27] "National" means projects proposed in seven or more states or
territories not in a region, "multistate" means projects in from two to
six states or territories, "multiple-local" means projects in more than
one local area across states, "local" means projects in a local area,
and "state" means projects in a state.
[28] Allocatees with a national, multiple-local or multistate scopes of
service are not included because we could not attribute the allocation
to one state.
[29] 26 U.S.C. § 45D(g)(3).
[30] Guidance for Certification of Community Development Entities, New
Markets Tax Credit Program, 66 Fed. Reg. 65,806 (Dec. 20, 2001).
[31] IRS Notice 2003-64 (Sept. 29, 2003) and IRS Notice 2003-68 (Oct.
14, 2003) enable each CDE that receives an allocation to either make
investments through multiple tiers of CDEs that are not allocatees or
purchase loans through multiple CDEs that are not allocatees,
respectively.
[32] According to IRS, forms 1120, 1065, 3800, and 8874 (the specific
NMTC tax form) include sections where taxpayers can report NMTC-related
information to IRS.
[33] Section 8.3 of the allocation agreement defines six actions that
the CDFI Fund may take if an allocatee is found to be in default of
section 8.1 of the allocation agreement. For example, one remedy is
that the CDFI Fund may terminate or reallocate any unused portion of
the NMTC allocation.
[34] The CDFI Fund allows up to 60 days for investments to be reported
to ATS, but encourages CDEs to report them as soon as possible.
[35] GAO-03-223R.
[36] U.S. General Accounting Office, New Markets Tax Credit: Status of
Implementation and Issues Related to GAO's Mandated Reports, GAO-03-
223R (Washington, D.C.: Dec. 6, 2002).
[37] Subsidiary means a legal entity that is owned or controlled
directly or indirectly by a CDE.
[38] Results are based on self-reported data from applicants. Also, the
terms and conditions of the NMTC allocation only become final after the
allocation agreement is signed; therefore, certain factors, such as the
service area, might change at the initiative of the applicant or the
CDFI Fund.
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