Three separate bills recently introduced in Congress modify certain
provisions of the tax code affecting Qualified School Construction Bonds (QSCBs),
Qualified Zone Academy Bonds (QZABs), New Clean Renewable Energy Bonds (New
CREBs) and certain issuers of tax-exempt bonds.
On Dec. 3 and Dec. 8, 2009, Sen. Chuck Grassley (R- IA), the ranking member
of the U.S. Senate Finance Committee, introduced two separate bills,
2826, that among other things, modify QSCBs, QZABs and New CREBs. QSCBs,
QZABs and New CREBs provide federal subsidies in the form of tax credits to the
financing of certain eligible projects.
As more particularly described below, the modifications contained in Sen.
Grassley’s bills include permanent extensions of QSCBs and QZABs, a temporary
extension of New CREBs, the removal of the application of Davis-Bacon prevailing
wage rules for QSCBs, QZABs and newly authorized New CREBs, and the elimination
of authority for stripping the tax credits on any of them.
On Dec. 11, 2009, Rep. Travis Childers (D-MS), a member of the House
Financial Services Committee, introduced a bill,
H. R. 4292 (the Childers Bill), that establishes a direct payment option for
QSCBs and QZABs similar to the direct payment option for Build America Bonds (BABs).
Please see our prior alerts on QSCBs, QZABs, New CREBs and BABs by clicking
QSCBs and QZABs
The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) created QSCBs
with $11.2 billion in issuing authority for each of 2009 and 2010, subject to
provisions allowing carry forward beyond 2010 in certain cases. Sen. Grassley’s
Dec. 8 bill,
2851, (the Schools Bill) extends the QSCB authorization indefinitely, and
provides for a national limitation in each calendar year after 2010 of $11
billion, plus $200,000,000 for Indian tribal governments. QSCBs are intended to
lower the cost of financing construction, rehabilitation or repair of public
school facilities, including acquisition of land and equipment for such
Congress established the QZAB program in 1997 to assist certain eligible
schools with repair and rehabilitation of their facilities, equipment
acquisition, the purchase of training and course materials, and costs of teacher
training. ARRTA retained the initial features of the program and increased the
nationwide limitation of QZABs for each of calendar years 2009 and 2010 from
$400 million to $1.4 billion.
Like QSCBs, the current authorization for QZABs does not include national
limitation for years beyond 2010, but does allow for their issuance subject to
the availability of carry forward allocation. The Schools Bill provides for a
national limitation of $700 million for calendar years after 2010, and that
figure is subject to adjustment annually based upon inflation.
For each of QSCBs and QZABs, the Schools Bill eliminates the application of
the Davis-Bacon Act’s prevailing wage requirements that was instituted through
Section 1601 of ARRTA and provides that the tax credit stripping provisions of
Section 54A(i) of the Internal Revenue Code of 1986, as amended (the Code), not
apply to either QSCBs or QZABs.
The provisions of the Schools Bill affecting QSCBs and QZABs apply to
obligations issued after Dec. 31, 2010, except that the nullification of
applicability of the Davis-Bacon prevailing wage rules would take effect upon
the School Bill’s enactment into law.
The Childers Bill,
H. R. 4292, gives issuers the option to issue QSCBs and QZABs as bonds
under which an issuer may receive a subsidy payment, similar to the option given
to issuers of BABs. Under current law, QSCBs and QZABs may only be issued as
"traditional" tax credit bonds under which the purchaser receives all or part of
his or her return in the form of a federal income tax credit in lieu of interest
paid by the issuer (Tax Credit Bonds).
The Childers Bill, however, allows issuers to choose whether to issue QSCBs
and QZABs as Tax Credit Bonds or as bonds under which the issuer receives a
subsidy payment directly from the U.S. Treasury (Direct Payment Bonds) equal to
the lesser of (i) the interest paid by the issuer on each payment date; or (ii)
the amount of interest which would have been payable if the bonds were issued as
Tax Credit Bonds, and such interest were determined at the applicable credit
rate for Tax Credit Bonds. Under the Childers Bill, issuers must make an
irrevocable election to issue their QSCBs and QZABs as Direct Payment Bonds. The
provisions of the Childers Bill affecting QSCBs and QZABs apply to obligations
issued after Dec. 31, 2009.
Sen. Grassley's Dec. 3 bill,
2826, introduced the Clean Renewable Energy
Advancement Tax Extension Jobs Act of 2009 (the New CREBs Bill) that, among
other things, modifies the provisions of New CREBs.
The New CREBs Bill increases the national limitation for New CREBs from $2.4
billion to $4.6 billion, and provides that New CREBs issues under such increased
authorization are not subject to the Davis-Bacon prevailing wage rules imposed
upon New CREBs under Section 1601 of ARRTA.
In addition, the New CREBs Bill eliminates the availability of the permitted
sinking fund structure and the exclusion from the arbitrage limitations of the
investment of the proceeds.
The permitted sinking fund structure allows a qualified tax credit bond issuer
to make properly sized sinking fund installments without reducing the face
amount of the bond to which the tax credit applies.
Lastly, the New CREBs Bill eliminates the ability of a holder of a New CREB
holder to strip the tax credit. Unless stated otherwise, the changes to New
CREBs described above would apply to New CREBs issued after the enactment of the
New CREBs Bill.
New CREBs may be issued to finance certain facilities generating electricity
from, among other sources, wind, solar, landfill gas, biomass, geothermal and
hydro. Generally, the projects are owned by non-tax paying entities such as
state and local governments, Indian tribes, mutual or cooperative electric
companies, and public power providers.
The Schools Bill increases the ceiling for eligibility of the small issuer
exception to rebate found in Section 148(f)(4)(D)(vii) of the Code to $15
million from $5 million for purposes of governmental entities with general
taxing powers financing public school facilities on a tax-exempt basis.
If you have any questions regarding QSCBs, QZABs, or New CREBs, please
contact the authors, or visit McGuireWoods'
practice. You can also refer to our
Stimulus Package section for more updates on the American Recovery and