Tentative & Preliminary for Discussion Purposes Only

Tentative & Preliminary – For Discussion Purposes Only

Example 1. Real Estate Qualified Low-Income Community Investment; related party lender; use of funds consistent with the intent of Section 45D

Investor A contributes $2,999,700 to an investment partnership B in exchange for a 99.99% limited partnership interest in B. Allocatee F contributes $300 to B in exchange for a 0.01% general partner interest. B borrows $7,000,000 from leverage lender C and makes a $10,000,000 capital contribution to Community Development Entity (CDE) partnership D in exchange for a 99.99% partnership interest. D designates the entire $10,000,000 as a Qualified Equity Investment (QEI). Allocatee F contributes $1,000 to D in exchange for a 0.01% partnership interest. The leverage loan is nonrecourse to the partners of B and is secured only by B’s interest in CDE D. CDE D makes a loan, which qualifies as a Qualified Low-Income Community Investment (QLICI), of $9,600,000 to limited liability company E, which qualifies as a Qualified Active Low-Income Community Business (QALICB). E’s business is the development, ownership, leasing to unrelated parties and operation of a building to be constructed with the proceeds of a QLICI loan from CDE D and operated as a retail development in a severely distressed low-income census tract in City X (the Project). E uses the loan proceeds for the following purposes:

$1,500,000 Purchase of land from C
$4,000,000 Post closing construction of a building
$2,600,000 Reimbursement to C of architectural, engineering, environmental, zoning, pre-closing construction costs and other pre-construction costs incurred in connection with the development of the Project
$660,000 Payment of a reasonable development fee to a related party
$400,000 Reasonable working capital
$440,000 Reserves

E is owned 99% by C and 1% by G. C had provided the funds used to pay the third party reimbursed costs from its own sources. The purchase price of the land purchased from C was its fair market value. C and Ghave no common ownership with A, D or F.

C obtains the $7,000,000 that was loaned to B from the following sources: $2,000,000 from a long term loan from an entity unrelated to C or E; $4,100,000 from a short term bridge loan from an affiliate of A; and $900,000 from capital generated by C’s business activities. Immediately after the closing, C uses the $2,600,000 in reimbursement proceeds and the $1,500,000 sales proceeds to repay the short term bridge loan.

The transaction is consistent with the purposes of section 45D and the QEI will be respected as a QEI for federal income tax purposes.

Example 1 Illustration: Real Estate Qualified Low-Income Community Investment; related party lender; use of funds consistent with the intent of Section 45D

Example 2. Operating Business Qualified Low-Income Community Investment; related party lender; use of funds consistent with the intent of Section 45D

Investor H contributes $2,999,700 to an investment partnership I in exchange for a 99.99% partnership interest. Allocatee M contributes $300 to Iin exchange for a 0.01% partnership interest. I borrows $7,000,000 from leverage lender J and makes a $10,000,000 capital contribution to Community Development Entity (CDE) partnership Kin exchange for a 99.99% partnership interest. Allocatee Mcontributes $1,000 to Kin exchange for a 0.01% partnership interest. The leverage loan is nonrecourse to the members of Iand is secured by I’s interest in K. Kdesignates the entire $10,000,000 as a Qualified Equity Investment (QEI). Kloans $9,600,000, which qualifies as a Qualified Low-Income Community Investment (QLICI), to corporation Lwhich qualifies as a Qualified Active Low-Income Community Business (QALICB). Lmanufactures high tech widgets at a facility located in a severely distressed low-income census tract in County Y. Luses the loan proceeds for the following purposes:

$1,800,000 Purchase of equipment at cost from J to expand the business
$6,260,000 Refinancing outstanding indebtedness from parties unrelated to J or L with indebtedness having flexible rates or terms
$700,000 Reimbursement to J of research, design, and purchase of intangible rights with respect to the business expansion
$400,000 Reasonable working capital and inventory purchases
$440,000 Reserves

L is a wholly owned corporate subsidiary of J. J incurred the research, design and purchase costs with respect to the intangible rights necessary for the manufacture of the new widget product. J and L have no common ownership with H, M or K.

J obtains the $7,000,000 that was loaned to Ifrom the following sources: $2,000,000 from a long term loan from an entity unrelated to J or L; $2,500,000 from a short term bridge loan from an affiliate of H; and $2,500,000 of capital generated by J’s business activities. Immediately after closing, J uses the proceeds of the equipment purchase and the reimbursement proceeds to repay the short term bridge loan.

The transaction is consistent with the purposes of Code Section 45D and the QEI will be respected as a QEI for federal income tax purposes.

Example 2 Illustration: Operating Business Qualified Low-Income Community Investment; related party lender; use of funds consistent with the intent of Section 45D

Example 3: Real Estate Qualified Low-Income Community Investment; related party lender and lessee; use of funds consistent with the intent of Section 45D

Investor A contributes $3,000,000 to its wholly-owned limited liability company B, which is disregarded as an entity separate from A. B borrows $7,000,000 from leverage lender C and makes a $10,000,000 capital contribution to Community Development Entity partnership D in exchange for a 99.99% partnership interest. D designates the entire $10,000,000 as a Qualified Equity Investment (QEI). Allocatee F contributes $1,000 to D in exchange for a 0.01% partnership interest. The leverage loan is nonrecourse to A and B and is secured only by B’s interest in CDE D.

C is a regional health system organized as a non-profit corporation qualifying under 501(c)(3) of the Code. CDE D makes a loan, which qualifies as a Qualified Low-Income Community Investment (QLICI), of $9,600,000 to corporation E, which is organized as a non-profit corporation qualifying as a support corporation with respect to C under section 501(c)(3) of the Code, and which qualifies as a Qualified Active Low-Income Community Business (QALICB).

E’s business is the development and ownership of a building to be constructed and related equipment to be acquired (the Project) with the proceeds of the CDE D loan, which will be operated as community health center in a severely distressed low-income census tract in City X. Euses the loan proceeds for the following purposes:

$4,000,000 Post-closing construction of a building and the purchase of equipment that will be used by C in its operations
$4,100,000 distribution to C on account of C’s capital contributions in E for itsland purchase, architectural, engineering, environmental, zoning, pre-closing construction costs and other pre-construction costs incurred in connection with the development of the Project3. $660,000 payment of a reasonable development fee to C.
$400,000 Reasonable working capital
$440,000 Reserves

The building and related equipment are leased by E to C, which operates the community health center. The lease from E to C meets the requirements for constituting a lease of the building and equipment for federal income tax purposes.

C had provided the funds used to pay the third party reimbursed costs from its own sources. C and E have no common ownership with A, D or F.

C obtains the $7,000,000 that was loaned to B from the following sources: $2,000,000 from grant proceeds obtained from a governmental agency; $4,100,000 from a short term bridge loan from an affiliate of F; and $900,000 from charitable contributions received by C from its general fundraising activities. Immediately after the closing, C uses the $4,100,000 distribution proceeds to repay the short term bridge loan.

The transaction is consistent with the purposes of section 45D and the QEI will be respected as a QEI for federal income tax purposes.

Example 3 Illustration: Real Estate Qualified Low-Income Community Investment; related party lender and lessee; use of funds consistent with the intent of Section 45D

Example 4. Real Estate Qualified Low-Income Community Investment; overpayment to related party lender; use of funds not consistent with the intent of Section 45D

Investor A contributes $3,000,000 to its wholly-owned limited liability company B, which is disregarded as an entity separate from A. B borrows $7,000,000 from leverage lender C and makes a $10,000,000 capital contribution to Community Development Entity (CDE) partnership D in exchange for a 99.99% partnership interest. D designates the entire $10,000,000 as a Qualified Equity Investment (QEI). Allocatee F contributes $1,000 to D in exchange for a 0.01% partnership interest. The leverage loan is nonrecourse to A and B and is secured only by B’s interest in CDE D.

CDE D makes a loan, which qualifies as a Qualified Low-Income Community Investment (QLICI), of $9,600,000 to limited liability company E, which qualifies as a Qualified Active Low-Income Community Business (QALICB). E’s business is the development, ownership and leasing of a building to be constructed with the proceeds of the CDE D loan and operated as a retail development in a severely distressed low-income census tract in City X.

C recently completed construction of the building on its land. E purchases the land and finished building from C. E uses the QLICI loan proceeds for the following purposes:

$7,000,000 Purchase of land and building from C
$1,760,000 Additional improvements to the building
$400,000 Reasonable working capital
$440,000 Reserves

E is owned 99% by C and 1% by G. C incurred costs of $5,000,000 in its purchase of the land and construction of the building, and the fair market value of the land and building does not exceed this amount. C and Ghave no common ownership with A, D or F.

C obtains the $7,000,000 that was loaned to B from a short term bridge loan from an affiliate of A. Immediately after the closing, C uses all of the $7,000,000 sales proceeds to repay the short term bridge loan.

The amounts paid for the purchase of land and building in excess of cost and fair marketvalue is not consistent with the purposes of section 45D because E used $2,000,000 of QLICI proceeds to make payments to C, who is a lender to B, significantly in excess of the costs incurred by the related-party seller and the fair market value of the property. $2,000,000 of the QEI will not be respected as a QEI for federal income tax purposes.

Example 4 Illustration: Real Estate Qualified Low-Income Community Investment; overpayment to related party lender; use of funds not consistent with the intent of Section 45D

Example 5. Operating Business Qualified Low-Income Community Investment; use of funds not consistent with the intent of Section 45D

Investor M contributes $2,999,700 to an investment partnership N in exchange for a 99.99% partnership interest. Allocatee O contributes $300 to N in exchange for a 0.01% partnership interest. N borrows $7,000,000 from leverage lender P and makes a $10,000,000 capital contribution to Community Development Entity (CDE) partnership Q in exchange for a 99.99% partnership interest in Q. Allocatee O contributes $1,000 to Q in exchange for a 0.01% partnership interest. Q designates the entire $10,000,000 as a Qualified Equity Investment (QEI). The leverage loan is nonrecourse to the partners of M and is secured only by N’s interest in CDE Q.

Q makes a loan, which qualifies as a Qualified Low-Income Community Investment (QLICI),of $9,600,000 to corporation R which qualifies as a Qualified Active Low-Income Community Business (QALICB). R manufactures high tech widgets at a facility located in a severely distressed low-income census tract in County Y. R uses the loan proceeds for the following purposes:

$9,200,000 distribution to its shareholder
$400,000 Working capital and inventory purchases

R is a wholly owned corporate subsidiary of P. R and P have no common ownership with M, N or O.

P obtains the $7,000,000 that was loaned to N from a short term bridge loan from an affiliate of M. Immediately after the closing, P uses $7,000,000 of thedistribution proceeds to repay the short term bridge loan. The fair market value of P’s interest in R is $2,200,000.

The distribution by R to P is in excess of the fair market value of P’s interest in R, and the excess distribution is not made on account of any particular assets acquired by P for the benefit of R, any services provided to R for its benefit, or any particular contributions of cash, assets or property made by P to R.

The amounts distributed by R to P in excess of the fair market value of P’s interest in R is not consistent with the purposes of section 45D because R used $7,000,000 of QLICI proceeds to make distributions to P, who is a lender to N, significantly in excess of the fair market value of P’s interest in R and such excess distribution is not reasonably anticipated to be used to support or benefit R’s business activities or its overall financial condition. $7,000,000 of the QEI will not be respected as a QEI for federal income tax purposes.

Example 5 Illustration: Operating Business Qualified Low-Income Community Investment; use of funds not consistent with the intent of Section 45D