On March 23, 2010, the Internal Revenue Service (IRS) released IRS Notice
2010-28 (Notice), that provides guidance on how issuers may properly separate
the ownership of qualified tax credit bonds (QTCBs) and the entitlement to the
tax credit associated with these bonds, and how such “stripping” transactions
are to be reported to the IRS. A QTCB is a taxable municipal obligation that
generally allows the holder to receive a non-refundable credit against the
holder’s federal income tax liability.
The American Recovery and Reinvestment Act of 2009 authorized billions
of dollars in QTCBs, which include qualified forestry conservation bonds, new
clean renewable energy bonds, qualified energy conservation bonds, qualified
zone academy bonds, and qualified school construction bonds. Federal law permits
the ownership of QTCBs to be separated from the entitlement to the associated
tax credit, and the Notice provides guidance to effectuate such a separation.
Generally, the Notice identifies four requirements that must be satisfied in
order to separate tax credits from QTCBs.
- On or before the date of issuance of the
underlying QTCBs, the issuer must state in the bond documents that the tax
credits are subject to separation from the underlying bonds.*
- The issuer must identify the issue of QTCBs as a “strippable” issue on
the first information return filed with the IRS with respect to the QTCB
- The issue of QTCBs must be issued in registered or “book-entry” form.
- Separate CUSIP numbers must be assigned to the issue of QTCBs, to all
rights to receive tax credits on each credit allowance date, and to all
rights to receive cash (i.e., principal and interest, if any) with respect
to the QTCB issue.
*QTCBs issued prior to March 31, 2010, and failing to meet the bond document
designation requirement and/or the information return requirement may meet these
respective requirements retroactively by designating such QTCBs as strippable
bonds in the bond documents, filing an amended information return with the IRS
identifying the QTCBs as strippable bonds, and listing the required CUSIP
numbers. Any such corrective designation or amended return filing must be
effected prior to May 17, 2010, in order to comply with the Notice.
The ability to separate the entitlement to receive a tax credit from the
underlying QTCB is expected to improve the marketability of such obligations by
attracting certain investors who have a specific interest in a tax credit
without the associated bond.
If you have any questions regarding the separation of tax credits from QTCBs
or about QTCBs in general, please contact one of the authors, or visit
McGuireWoods’ public finance practice website. You also can refer to prior
alerts on, and recent changes to, QTCBs and other newly available financing
tools, such as Build America Bonds, Recovery Zone Economic Development Bonds,
and Recovery Zone Facility Bonds, in our news archive and the Stimulus Package
section of our website.