May 20, 2010
On April 26, 2010, the Internal Revenue Service (IRS) released IRS Notice 2010-35 (the Notice) that provides guidance on certain qualified tax credit bonds (QTCBs) and build America bonds (BABs). BABs are taxable municipal obligations for which the issuer may receive a direct federal subsidy, in the form of a cash payment, to offset the interest cost of the BAB. Alternatively, an issuer of BABs may elect that the subsidy be delivered as a non-refundable federal income tax credit to the BAB investor, although that option is generally less attractive and is not being utilized on a widespread basis. QTCBs are taxable municipal obligations that were originally conceived with a subsidy in the form of a refundable tax credit for the investor. However, the Hiring Incentives to Restore Employment Act of 2010, enacted on March 18, 2010, authorized issuers of new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds and qualified school construction bonds (collectively, Direct Pay QTCBs) the option of receiving a federal subsidy in the form of a direct cash payment to offset the interest cost of the borrowing.
The amount of the direct cash subsidy for qualified zone academy bonds and qualified school construction bonds with respect to any interest payment date is equal to the lesser of (i) 100 percent of the amount of interest payable under the bond on such date, or (ii) 100 percent of the amount of interest that would have been payable under such bond on such date if such interest were determined at the applicable tax credit bond rate determined under Section 54A(b)(3). For new clean renewable energy bonds and qualified energy conservation bonds, the amount of the direct cash subsidy with respect to any interest payment date under the bond is equal to the lesser of (i) 100 percent of the amount of any interest payable under the bond on such date, or (ii) 70 percent of the amount of interest that would have been payable under such bond on such date if such interest were determined at the applicable tax credit bond rate determined under Section 54A(b)(3).
The following summarizes certain key reporting, qualification and other rules identified in the Notice for Direct Pay QTCBs. By the terms of the Notice, certain of these rules also apply to BABs issued after March 18, 2010.
Qualification and Reporting Rules
Other Rules for Direct Pay QTCBs and BABs
If you have any questions regarding BABs, Direct Pay QTCBs or QTCBs in general, please contact one of the authors, or visit McGuireWoods’ Public Finance practice website. You also can refer to prior alerts on 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.