However, in December  2006, Congress passed and the President signed the Tax Relief and Health  Care Act of 2006, which extends the NMTC for an additional year  (through the end of 2008) with an additional $3.5 billion of NMTC  allocation authority. In a tiered leveraged investment  structure, a portion of the money being invested in the investment fund  comes from equity investors and a portion of the money originates from a  debt investment (loan). Financial Institutions and Individuals Are the Primary NMTC Investors, and CDEs Most Often Use NMTC Investments to Make Loans to Qualified Businesses

Banks and individuals constitute the majority of NMTC claimants when  qualified equity investments are originally made. Banks and other corporations that invested in the credit had relatively  large net assets. Businesses Primarily Receive Loans from CDEs That They Use Chiefly for Investment in Commercial Real Estate

CDEs that received NMTC allocations have used their allocations to make  investments totaling $3.1 billion through fiscal year 2005, primarily in the  form of loans to businesses in low-income communities. NMTC Investors Report That the NMTC Increases Investment in Low- Income Communities and Statistical Analysis Indicates That These Investments May Be Financed by Shifting Assets from Other Uses and Some New Investment

The results of our investor survey and statistical analysis indicate that the  NMTC may be increasing investment in eligible low-income communities  by participating investors, which is consistent with the program’s purpose. As of January 2007, the CDFI Fund had identified nine CDEs that were not  compliant with their allocation agreements and one CDE that was not in  compliance with the NMTC program’s “substantially all” requirement. The CDFI Fund developed policies and procedures for conducting site  visits to CDEs where CDFI Fund officials check the validity of data  reported by CDEs’ to the CDFI Fund and obtain additional information  about CDEs’ efforts to remain compliant. According to IRS officials, a more streamlined format for sharing  data between IRS and the CDFI Fund would allow IRS to better target  noncompliance. Appendix I: Objectives, Scope, and Methodology

Based on consultations with staff at cognizant congressional committees,  the objectives of this report are to (1) describe the status of the New  Markets Tax Credit (NMTC) program; (2) profile the characteristics of  NMTC investors, the Community Development Entities (CDE) that receive  NMTC allocations, and the businesses and communities that receive  NMTC investments; (3) assess how effective the NMTC has been in  bringing new investment to low-income communities by the investors that  have participated in the program; and (4) assess the steps that the Internal  Revenue Service (IRS) and Community Development Financial Institutions  (CDFI) Fund are taking to ensure CDEs and investors are complying with  the NMTC and evaluate how effective these steps have been. We collected  documents on the program status and efforts to monitor NMTC  compliance.
Why GAO Did This Study

The Community Renewal Tax Relief Act of 2000 authorized up to $15 billion of allocation authority under the New Markets Tax Credit (NMTC) to stimulate investment in low-income communities. The act mandated that GAO report on the program to Congress by January 31, 2004, 2007, and 2010. Two subsequent laws authorized an additional $1 billion in NMTC authority for certain qualified investments and extended the program for 1 year with an additional $3.5 billion of authority. This report (1) describes the status of the NMTC program, (2) profiles NMTC program participants, (3) assesses the credit's effectiveness in attracting investment by participating investors, and (4) assesses IRS and the Community Development Financial Institutions (CDFI) Fund compliance monitoring efforts. To conduct the analysis, GAO surveyed NMTC investors, conducted statistical analysis, and interviewed IRS and CDFI Fund officials.

What GAO Found

As of January 2007, the CDFI Fund had awarded $12.1 billion of NMTC authority to 179 Community Development Entities (CDE). CDEs that received allocations began making NMTC investments in 2003, and the program has continued to grow since then. Investors use two main investment structures to make NMTC investments: direct investments to CDEs and tiered investments, which include equity investments and leveraged investments, where a portion of the investment amount originates from debt and a portion from equity. Banks and individuals constitute the largest proportion of NMTC investors, though banks and other corporations have made the largest share of NMTC investment. CDEs that received allocations applied for allocations in a competitive selection process and, through fiscal year 2005, most investment from CDEs to low-income communities had been used for either commercial real estate rehabilitation or new commercial real estate construction. The results of GAO's survey and statistical analysis indicate that the NMTC may be increasing investment in low-income communities by participating investors. Investors indicated that they have increased their investment budgets in low-income communities as a result of the credit, and GAO's analysis indicates that businesses may be shifting investment funds from other types of assets to invest in the NMTC, while individual investors may be using at least some new funds to invest in the NMTC. The CDFI Fund and IRS developed processes to monitor CDEs' compliance with their allocation agreements and the tax code. However, IRS's study of CDE compliance does not cover the full range of NMTC transactions, focusing instead on transactions that were readily available, and may not support the best decisions about enforcement in the future. Moreover, IRS and the CDFI Fund are not collecting data that would allow IRS to identify credit claimants and amounts to be claimed.