February 10, 2011
Including Effect of Refundings on Bank-Qualified, De Minimis, Build
America, and Recovery Zone Bonds
The expiration of certain provisions of the American Recovery and
Reinvestment Act of 2009 (Recovery Act) on Dec. 31, 2010, affects certain
municipal bond provisions created or modified under the act. The
attached chart summarizes the following:
1. Bank-Qualified Bonds
- Recovery Act: Eligibility for bank-qualification of bonds under
Section 265(b) of the Internal Revenue Code of 1986, as amended (IRC), could
be determined by reference to a conduit borrower instead of the conduit
issuer; and each conduit borrower was eligible for $30 million of
bank-qualified bonds in each of 2009 and 2010. Bank-qualified bonds are
partially excluded from the rule in Section 265 of the IRC that disallows an
interest expense deduction allocable to tax-exempt debt.
- Current Law: The law has reverted to its pre-Recovery Act
formulation, and (1) bank-qualified bonds may be issued up to $10 million
for each qualified issuer, and (2) refundings of bank-qualified bonds that
were issued in 2009 and 2010 may retain the bank-qualified eligibility of
the refunded bond, if the refunded bond and the refunding bonds satisfy the
$10 million “deemed designated" requirements.
2. 2% De Minimis Rule
- Recovery Act: Financial institutions (e.g., banks), were
permitted to purchase "new money" tax-exempt bonds issued during 2009 or
2010 (or refundings of such bonds in 2009 and 2010) in an aggregate amount
not to exceed 2% of their adjusted bases of assets. De minimis bonds are
also partially excluded from the rule in Section 265 of the IRC that
disallows an interest expense deduction allocable to tax-exempt debt.
- Current Law: For "new money" bonds issued after 2010, banks are
no longer permitted to take advantage of the 2% rule; however, they may take
advantage of the rule by acquiring bonds originally issued as "new money"
bonds in 2009 or 2010. Post-2010 refundings of bonds that qualified for the
2% rule probably can also benefit from the 2% rule, although more
congressional/IRS guidance on this topic may be forthcoming.
3. Alternative Minimum Tax (AMT)
- Recovery Act: Interest on all "new-money" bonds and certain
refunding bonds issued in 2009 and 2010 (1) was not a preference item for
purposes of the AMT, and (2) was not included in adjusted current earnings
(ACE) for purposes of the corporate AMT.
- Current Law: The law has reverted to its pre-Recovery Act form
and interest on private activity bonds (except for 501(c)(3) bonds and
certain housing bonds) issued after 2010 (a) is a preference item for
purposes of the AMT and (b) may be included in ACE for purposes of the
corporate AMT. Post-2010 refundings of private activity bonds that gained
preferential AMT and ACE status under the Recovery Act may lose such status,
although more congressional/IRS guidance on this topic may be forthcoming.
4. Build America Bonds (BABs) & Recovery Zone Bonds
- Recovery Act: See our prior alerts (Feb.
April 8, 2009, and
19, 2009) for information on these programs.
- Current Law: Authority for BABs, Recovery Zone Economic
Development Bonds (RZEDBs), and Recovery Zone Facility Bonds (RZFBs) expired
Dec. 31, 2010. Refundings of direct pay subsidy BABs and RZEDBs with
tax-exempt debt will eliminate the direct pay subsidies for each, and
refundings of BABs/RZEDBs by BABs/RZEDBs and refundings of RZFBs are not
currently authorized (although more congressional/IRS guidance on this topic
may be forthcoming).
5. Certain Tax Credit Bonds
- Recovery Act: Created or expanded Qualified School Construction
Bonds (QSCBs), Qualified Zone Academy Bonds (QZABs), New Clean Renewable
Energy Bonds (New CREBs), and Qualified Energy Conservation Bonds (QECBs),
and subsequent legislation, as discussed in our
March 17, 2010 alert, enhanced these bond programs by authorizing their
issuance as direct pay subsidy bonds.
- Current Law:
- QSCBs may be issued as either tax credit or direct pay bonds only
under carry forward allocation from 2009 and 2010.
- QZABs, as discussed in our
Dec. 20, 2010 alert, received new allocation for 2011, under which
bonds may be issued as tax credit obligations only, but issuances of
QZABs under 2009 or 2010 allocation may be issued as either tax credit
bonds or direct pay bonds. QZAB carry forward allocation is available
for the two calendar years succeeding the year in which the allocation
- New CREBs and QECBs: these obligations may be issued as either tax
credit or direct pay bonds. See our prior alerts (Nov.
2, 2009, and
Sept. 20, 2010) on New CREBs and QECBs.
6. Manufacturing Facilities Bonds
- Recovery Act: Facilities that qualified for financing with small
issue manufacturing bonds ($10 million or less) under IRC Section 144(a)
were expanded in 2009 or 2010 to include (1) facilities for manufacturing
intangible property, including patents, copyrights, formulae, processes,
designs, patterns, knowhow, formats, or other similar items; and (2) certain
“functionally related and subordinate” facilities.
- Current Law: The law has reverted to its pre-Recovery Act form.
Refundings of 2009 and 2010 issuances that included the expanded types of
intangible facilities described above are not currently authorized (although
more congressional/IRS guidance on this topic may be forthcoming).
If you have questions about the information above, please contact one of the
authors of this alert. Please note that the information herein is intended to be
a summary only and is qualified by reference to the applicable legal provisions.
For more information, please visit our Stimulus Package section.
1. “Issuer” means a political subdivision for purposes of federal income
taxation, and when determining the amount of bonds per issuer, the bonds of
other entities may be included, so contact your bond counsel or tax advisor when
making that determination.
2. “Deemed designated” means that both the refunded and the refunding
obligation satisfied certain conditions in IRC Section 265, and thereby does not
count against the current year’s annual $10 million issuer limitation.
3. We are not aware of any tax credit BABs having been issued, so such BABs
are not addressed in this alert.