On Nov. 23, 2010, the IRS issued Notice 2010-81 which will affect certain financings issued under the American Recovery and Reinvestment Act of 2009 (ARRA). In ARRA, Congress attempted to aid state and local governments by (i) establishing a number of new bond programs, such as the Build America Bonds (BABs) and Recovery Zone Bond programs, and (ii) including several provisions to encourage purchase of traditional tax-exempt bonds, such as AMT relief for certain bond purchasers. Many of these new programs and relief provisions expire on Dec. 31, 2010, and require the issuance of the subject bonds on or before the December 31 deadline. The BABs program is the most significant ARRA bond program with the December 31 deadline.
Some issuers have structured their ARRA bond financings as “draw-down loans” with notes or bonds under which the principal is advanced at different times and bear interest only to the extent principal is advanced. Others have opted for commercial paper programs in which tranches of CP notes are issued and sold only as and when the issuer needs proceeds to pay project costs or to roll over outstanding CP notes.
Notice 2010-81 and Affected Programs and Provisions
Notice 2010-81 provides long-awaited guidance on how to apply the December 31 deadline to BABs and other ARRA bond programs and relief provisions to draw-down loan and commercial paper structures. Unfortunately, the guidance applies the December 31 deadline to many of the ARRA bond programs and provisions on a “bond” approach rather than on an “issue” approach. This means that the applicable ARRA bond programs and provisions will be effective only for the portion of a draw-down loan or a CP authorization that has actually been funded on or before Dec. 31, 2010. For example, a BAB issued in the form of a draw-down loan qualifies for the 35% interest subsidy only to the extent of the principal advances made on or before December 31, 2010.
The ARRA bond programs and relief provisions subject to the December 31 deadline are as follows:
|ARRA Bond Program or Relief Provision||Principal Features|
|Build America Bonds (BABs)||Eligible for 35% direct payment interest subsidy.|
|Recovery Zone Economic Development Bonds||“Super BABs” issued to finance economic development projects in recovery zones; 45% direct payment interest subsidy.|
|Recovery Zone Facility Bonds||Private activity bonds which can finance a wide range of purposes within recovery zones.|
|AMT Relief||Interest on most private activity bonds issued in 2009 and 2010 not a specific item of tax preference.|
|Adjusted Current Earnings (ACE) Corporate AMT Relief||Interest on most tax-exempt bonds issued in 2009 and 2010 does not have to be taken into account in computing ACE for purposes of the corporate AMT.|
|Gulf Opportunity Zone Bonds||Provide special financing opportunities in the Hurricane Katrina-affected States of Alabama, Louisiana and Mississippi.|
If an issuer has entered into a draw-down loan or commercial paper structure with the expectation that the full authorized principal amount will qualify for one or more of the ARRA provisions described in the chart above, the issuer should contact its lender and/or bond counsel to determine what steps can be taken to maximize the outstanding principal amount of such loan or commercial paper before the December 31 deadline.
Not Applicable to Bank-Qualified Bonds and the De Minimis Exception
ARRA also liberalized the “bank-qualified” bond and “de minimis” exceptions to the tax-exempt carrying cost disallowance provisions. ARRA raised the $10 million bank-qualified bond limitation to $30 million for bonds issued in 2009 and 2010 and allowed 501(c)(3) organizations their own $30 million annual limitation.
The liberalized de minimis exception allows a financial institution to apply the carrying cost disallowance provisions by disregarding most tax-exempt bonds issued in 2009 and 2010 up to two percent of the average adjusted bases for all assets of the financial institution.
Fortunately, for purposes of the bank-qualified bond and de minimis provisions, Notice 2010-81 provides that existing law will continue in effect until further guidance is provided, which guidance will be prospective. Existing law provides in general that all of the authorized principal amount of a draw-down loan or in a commercial paper program is deemed issued on the first date that the aggregate principal advances or CP notes outstanding exceeds the lesser of $50,000 or five percent of the authorized principal amount. Therefore, an issuer can still draw down principal advances and issue CP notes after December 31, 2010, and still be eligible for bank-qualified or de minimis treatment.
For a copy of Notice 2010-81 or to request additional information, please contact one of the authors.