rr-10-16.pdf

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Part I

Section 469.--Passive Activity Losses And Credits Limited

26 CFR 1.469-1: General rules.
(Also: § 45D; 1.45D-1; 1.469-4; 1.469-5T; 1.469-9).

Rev. Rul. 2010-16

ISSUE
Where the acquis
ition of the qualified equity investment in a qualified community
development entity (CDE) is not in connection with the conduct of a trade or business
(or in anticipation of a trade or business), is the new markets tax credit allowable under
§ 45D a passive activity credit under § 469?
FACTS
Situation 1. On February 1, 2010, X, an individual, acquires a qualified equity
investment (as defined in § 45D(b)) in a CDE (as defined in § 45D(c)). Because X holds
the qualified equity inv
estment on February 1, 2010, the initial credit allowance date (as
defined in § 45D(a)(3)), a new markets tax credit under § 45D is allowable to X. X’s

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acquisition of the qualified equity investment in the CDE is not in connection with the
conduct of a trade or business by X (or in anticipation of a trade or business).
Situation 2. On February 1, 2010, ABC, an entity treated as a partnership for federal
tax purposes, acquires a qualified equity investment (as defined in § 45D(b)) in a CDE.
Because ABC holds the qualified equity investment on February 1, 2010, the initial
credit allowance date (as defined in § 45D(a)(3)), a new markets tax credit under § 45D
is allowable to ABC. ABC allocates the new markets tax credit to its partners A, B, and
C, in accordance with § 704(b). ABC’s acquisition of the qualified equity investment in
the CDE is not in connection with the conduct of a trade or business by ABC (or in
anticipation of a trade or business).
LAW AND ANALYSIS
Section 45D(a)(1) provides that for purposes of § 38, in the case of a taxpayer who
holds a qualified equit
y investment on a credit allowance date (as defined in
§ 45D(a)(3)) of the investment that occurs during the taxable year, the new markets tax
credit determined under § 45D for the taxable year is an amount equal to the applicable
percentage (as defined in § 45D(a)(2)) of the amount paid to the CDE for the investment
at its original issue.
Section 7701(a)(14) defines the term "taxpayer" to mean any
person subject to any internal revenue tax. Section 7701(a)(1) provides that the term
"person" shall be construed to mean and include an individual, a trust, estate,
partnership, association, company, or corporation.
Section 45D(b)(1) provides that an equity investment in a CDE is a “qualified equity
investment” if, among other requirements, the CDE uses substantially all of the cash
from the investment to make qualified low-income community investments.

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Section 45D(d) defines the term “qualified low-income community investment” as (A)
any capital or equity investment in, or loan to, any qualified active low-income
community business, (B) the purchase from another CDE of any loan made by such
entity which is a qualified low-income community investment, (C) financial counseling
and other services specified in regulations prescribed by the Secretary to businesses
located in, or residents of, low-income communities, and (D) any equity investment in,
or loan to, any CDE.
Section 469(a) provides that for any taxable year of any individual, estate, trust,
closely-held C corporation, or personal service corporation, neither the passive activity
loss, nor the passive activity credit for the taxable year will be allowed.
Section 469(d)(2)(A) defines “passive activity credit” as the amount (if any) by which
(A) the sum of the credits from all passive activities allowable for the taxable year under
(i) subpart D of part IV of subchapter A, or (ii) subpart B (other than § 27(a)) of part IV,
exceeds (b) the regular tax liability of the taxpayer for the taxable year allocable to all
passive activities.
Section 469(c) defines a “passive activity” as (1) any activity which involves the
conduct of any trade or business, and in which the taxpayer does not materially
participate, and (2) any rental activity, except as provided by § 469(c)(7).
Section 469(c)(6) provides that, to the extent provided in the regulations, “trade or
business” includes (A) any activity in connection with a trade or business, or (B) any
activity with respect to which expenses are allowable as a deduction under § 212.

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Section 1.469-1(e)(2) of the Income Tax Regulations provides that trade or business
activities are activities that constitute trade or business activities within the meaning of
§ 1.469-4(b)(1).
Section 1.469-4(b)(1) defines “trade or business activities” as activities, other than
rental activities or activities that are treated under § 1.469-1T(e)(3)(vi)(B) as incidental
to an activity of holding property for investment, that (i) involve the conduct of a trade or
business (within the meaning of § 162), (ii) are conducted in anticipation of the
commencement of a trade or business, or (iii) involve research or experimental
expenditures that are deductible under § 174.
Section 1.469-9(b)(1) provides that a trade or business is any trade or business
determined by treating the types of activities in § 1.469-4(b)(1) as if they involved the
conduct of a trade or business, and any interest in rental real estate, including any
interest in rental real estate that gives rise to deductions under § 212.
Section 469(h)(1) provides that a taxpayer will be treated as materially participating
in an activity only if the taxpayer is involved in the operations of the activity on a basis
that is regular, continuous, and substantial.
The new markets tax credit under § 45D is subject to the provisions of § 469 since it
is a credit allowable under subpart D of part IV of subchapter A of the Code. A credit
may be disallowed under § 469 for a taxable year if the credit attributable to the taxable
year arises in connection with the conduct of a passive activity. Allowance of the new
markets tax credit under § 45D is predicated on acquiring a qualified equity investment
in the CDE. The CDE does not pass through the new markets tax credit to the person
claiming the new markets tax credit. Rather, the amount of the new markets tax credit

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is determined based on a percentage of the amount paid to the CDE for the qualified
equity investment at its original issue. Accordingly, in determining whether the new
markets tax credit under § 45D is disallowed under § 469, the determination depends
on whether the acquisition of the qualified equity investment in the CDE arises in
connection with the conduct of a passive activity. The determination of whether the new
markets tax credit under § 45D is disallowed under § 469 does not depend on the
taxpayer’s interest or extent of participation in the CDE’s trade or business.
To be a passive activity, the activity of acquiring a qualified equity investment in the
CDE must be in connection with the conduct of a trade or business in which the person
claiming the new markets tax credit does not materially participate, or be a rental
activity. Because the activity of acquiring an equity investment in a CDE is not a rental
activity, the only issue is whether the acquisition activity is in connection with the
conduct of a trade or business activity (or in anticipation of a trade or business) in which
the person claiming the new markets tax credit does not materially participate.
The term “trade or business” is not defined in either the Code or the regulations. The
determination of what constitutes a trade or business depends on the facts and
circumstances of each case. The Supreme Court, in Commissioner v. Groetzinger
, 480
U.S. 23 (1987), has held that there are generally two requirements for an activity to
constitute a trade or business: the activity must be conducted for income or profit, and
the activity must be engaged in with some regularity and continuity.
If it is determined that the acquisition of a qualified equity investment in a CDE is in
connection with the conduct of a trade or business activity (or in anticipation of a trade
or business), a determination must next be made as to whether the person claiming the

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new markets tax credit materially participates in the activity. If the person claiming the
new markets tax credit materially participates in the activity, the new markets tax credit
under § 45D will not be disallowed under § 469.
In Situation 1, X’s activity of acquiring a qualified equity investment in the CDE is not
in connection with the conduct of X’s trade or business activity (or in anticipation of a
trade or business). Consequently, X’s new markets tax credit under § 45D will not be
disallowed under § 469.
In Situation 2, ABC
allocates to A, B, and C the amount of the new markets tax
credit that ABC claims. This allocation must be made in accordance with § 704(b)
(which provides rules regarding a partnership's allocation of income, gain, loss,
deduction, or credit (or item thereof) among the partners). ABC’s activity of acquiring a
qualified equity investment in the CDE is not in connection with the conduct of ABC’s
trade or business activity (or in anticipation of a trade or business). Consequently, the
new markets tax credit allowable to ABC, and claimed by A, B, and C, individually, will
not be disallowed under § 469.
HOLDING
1. Where an individual’s acquisition of a qualified equity investment in a CDE is not
in connection with the conduct of the individual’s trade or business (or in anticipation of
the individual’s trade or business), the new markets tax credit allowable to an individual
under § 45D will not be a passive activity credit under § 469.
2. Where a partnership’s acquisition of a qualified equity investment in a CDE is not
in connection with the conduct of the partnership’s trade or business (or in anti
cipation

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of the partnership’s trade or business), the new markets tax credit allowable to the
partnership under § 45D will not be a passive activity credit under § 469.
DRAFTING INFORMATION
The principal author of this revenue ruling is Benjamin H. Weaver of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this revenue ruling, contact Benjamin H. Weaver at (202) 622-3050. For
information regarding issues under § 45D, co
ntact Julie Hanlon Bolton of the Office of
Associate Chief Counsel (Passthroughs & Special Industries) at (202) 622-3040. These
are not toll-free calls.