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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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