80R4363 CBH-F

By: Ritter H.B. No. 3287

A BILL TO BE ENTITLED

AN ACT

relating to a franchise tax credit for qualified low-income community investments.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Chapter 171, Tax Code, is amended by adding Subchapter J-1 to read as follows: SUBCHAPTER J-1. CREDIT FOR QUALIFIED LOW-INCOME COMMUNITY INVESTMENTS

Sec. 171.521. DEFINITIONS. In this subchapter:

(1) "Credit allowance date" means, with respect to a qualified equity investment:

(A) the date on which the investment is initially made; and

(B) each of the next six anniversaries of that date.

(2) "Long-term debt security" means a debt instrument issued by a qualified community development entity, at par value or a premium, with an original maturity date of at least seven years from the date of its issuance, with no acceleration of repayment, amortization, or prepayment features before its original maturity date, and with no distribution, payment, or interest features related to the profitability of the qualified community development entity or the performance of the qualified community development entity's investment portfolio. This subdivision does not limit the ability of the holder of the debt instrument to accelerate payments on the debt instrument in a situation in which the issuer has defaulted on a covenant designed to ensure compliance with this subchapter or Section 45D, Internal Revenue Code of 1986.

(3) "Qualified active low-income community business" has the meaning assigned by Section 45D(d)(2), Internal Revenue Code of 1986, except that a business that derives or projects to derive 15 percent or more of its annual revenue from the rental or sale of real estate is not a qualified active low-income community business for purposes of this subchapter.

(4) "Qualified community development entity" has the meaning assigned by Section 45D(c), Internal Revenue Code of 1986, but only if the entity has entered into an allocation agreement with the Community Development Financial Institutions Fund of the United States Department of the Treasury with respect to credits authorized by Section 45D, Internal Revenue Code of 1986.

(5) "Qualified equity investment" means an equity investment in, or long-term debt security issued by, a qualified community development entity that:

(A) is acquired after January 1, 2008, at the investment's original issuance solely in exchange for cash or that was a qualified equity investment in the hands of a prior holder;

(B) has at least 85 percent of its cash purchase price used by the issuer to make qualified low-income community investments; and

(C) is designated by the issuer as a qualified equity investment under this subchapter, regardless of whether it also has been designated as a qualified equity investment under Section 45D, Internal Revenue Code of 1986.

(6) "Qualified low-income community investment" means a capital or equity investment in, or loan to, a qualified active low-income community business.

Sec. 171.522. TOTAL AMOUNT OF CREDITS THAT MAY BE CLAIMED. (a) Notwithstanding any other provision of this subchapter, the total amount of tax credits that may be claimed by taxable entities under this subchapter in a state fiscal year may not exceed $15 million.

(b) The comptroller by rule shall prescribe procedures by which the comptroller may allocate credits under this subchapter. The procedures:

(1) must provide that credits are allocated on a "first-come, first-served" basis unless the comptroller determines that allocation on this basis would violate state or federal law;

(2) may provide for allocating the credits on a pro rata basis if the comptroller determines that credits may not be allocated as provided by Subdivision (1); and

(3) may include requiring a taxable entity to apply for a credit before the due date of the report on which the taxable entity will first claim the credit.

(c) To assist the comptroller in determining the amount of credits that may be claimed each year, the issuer of a qualified equity investment shall certify to the comptroller the anticipated dollar amount of that investment to be made in this state during the first 12-month period following the initial credit allowance date. If on the second credit allowance date the actual dollar amount of that investment is different than the amount previously estimated, the comptroller shall adjust the amount of the credits that may be claimed on the second allowance date to account for the difference.

Sec. 171.523. QUALIFICATION FOR CREDIT. (a) A taxable entity qualifies for a credit under this subchapter on a report if the taxable entity holds a qualified equity investment on a credit allowance date of that investment that occurs during the period on which the report is based.

(b) A taxable entity that holds a qualified equity investment may claim a credit under this subchapter for not more than seven consecutive reports beginning with the report based on the period during which the taxable entity first holds the investment on a credit allowance date.

Sec. 171.524. COMPUTATION OF CREDIT. (a) The amount of the credit is equal to the adjusted purchase price paid to the issuer of the qualified equity investment multiplied by the percentage prescribed by Section 171.525. For purposes of this section, the adjusted purchase price is equal to the product of:

(1) the amount paid to the issuer of the qualified equity investment for the qualified equity investment; and

(2) the following fraction:

(A) the numerator of which is the dollar amount of qualified low-income community investments held by the issuer in this state on the credit allowance date during the period on which the report is based; and

(B) the denominator of which is the total dollar amount of qualified low-income community investments held by the issuer on the credit allowance date during the period on which the report is based.

(b) For purposes of computing the amount of qualified low-income community investments held by an issuer under Subsection (a), an investment is considered held by an issuer regardless of whether the investment has been sold or repaid if the issuer reinvests an amount equal to the capital returned to or recovered by the issuer from the original investment, exclusive of any profits realized, in another qualified low-income community investment not later than the first anniversary of the date the issuer receives the capital. An issuer is not required to reinvest capital returned from a qualified low-income community investment after the sixth anniversary of the date the investment was issued and the proceeds were used to make the qualified low-income community investment, and the qualified low-income community investment is considered held by the issuer through the seventh anniversary of the issuance of the investment.

(c) With respect to one qualified active low-income community business, on a collective basis with all of its affiliates, the maximum amount of investment that a qualified community development entity, on an aggregate basis with all of its affiliates, may use for the computation of the numerator under Subsection (a) is $10 million.

Sec. 171.525. AMOUNT OF ANNUAL CREDIT. (a) Except as otherwise provided by this subchapter, the amount of the tax credit a taxable entity may claim on a report is equal to:

(1) for each of the first three years for which the taxable entity may claim the credit, five percent of the adjusted purchase price on the applicable credit allowance date; and

(2) for the remaining four years for which the taxable entity may claim the credit, six percent of the adjusted purchase price on the applicable credit allowance date.

(b) The total credit claimed under this subchapter for a report, including the amount of any carryforward credit under Section 171.526, may not exceed the amount of franchise tax due after any other applicable credits.

Sec. 171.526. CARRYFORWARD. (a) If a taxable entity is eligible for a credit that exceeds the limitation under Section 171.525(b), the taxable entity may carry the unused credit forward to subsequent consecutive reports.

(b) A carryforward is considered the remaining portion of a credit that cannot be claimed in the current year because of the tax limitation under Section 171.525. A carryforward is added to the next year's credit in determining the tax limitation for that year.

Sec. 171.527. CERTIFICATION OF ELIGIBILITY. (a) For the initial and each succeeding report in which a credit is claimed under this subchapter, the taxable entity shall file with its report, on a form provided by the comptroller, information that sufficiently demonstrates that the taxable entity is eligible for the credit.

(b) The burden of establishing entitlement to and the value of the credit is on the taxable entity.

Sec. 171.528. ASSIGNMENT PROHIBITED. (a) A taxable entity may not convey, assign, or transfer the credit allowed under this subchapter to another entity unless all of the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.

(b) Notwithstanding Subsection (a), a tax credit earned by a partnership, limited liability company, S corporation, or other "pass-through" entity may be allocated to the partners, members, or shareholders of that entity and claimed under this subchapter in accordance with the provisions of any agreement among the partners, members, or shareholders.

Sec. 171.529. RECAPTURE OF CREDIT. (a) The comptroller shall recapture a tax credit allowed under this subchapter with respect to a qualified equity investment if:

(1) any amount of the federal tax credit available with respect to the qualified equity investment is recaptured under Section 45D, Internal Revenue Code of 1986; or

(2) the issuer redeems the investment or makes any principal repayment with respect to the investment before the seventh anniversary of the date the investment was issued.

(b) The comptroller shall recapture the tax credit from the taxable entity that claimed the credit. The recapture must be done on a scaled proportional basis.

SECTION 2. (a) This Act applies only to a report originally due on or after the effective date of this Act.

(b) A taxable entity may claim the credit under Subchapter J-1, Chapter 171, Tax Code, as added by this Act, only in relation to a qualified equity investment issued on or after the effective date of this Act.

SECTION 3. This Act takes effect January 1, 2008.