WASHINGTON — Large local school districts would not be forced to give up their unused qualified school construction bond allocations to states to keep them from expiring at the end of the year under legislation proposed yesterday by the top tax writers in the House.
The bill, introduced by House Ways and Means chairman Charles Rangel, D-N.Y., and ranking minority member Dave Camp, R-Mich., also would clarify that regulated investment companies such as mutual funds that purchase and hold tax-credit bonds should treat tax credits like cash and pass them through to shareholders.
The legislation is designed to make a number of technical corrections to recently enacted laws, including the American Recovery and Reinvestment Act, which created several new tax-credit bond programs and expanded others. Members of the Senate Finance Committee are expected to introduce identical legislation soon.
“This bill responds to valuable feedback we have received to improve on how America’s tax laws are operating,” Rangel said. “I hope the House and Senate can swiftly pass this legislation.”
The QSCB technical correction addresses a portion of the stimulus law that had market participants scratching their heads and crossing their fingers that the ARRA did not intend to block local school districts from carrying forward unused allocations.
The QSCB program, which was created by the ARRA, required the Treasury Department to allocate $4.4 billion of a total $11 billion of the bonds this year to the 100 largest local school districts across the nation. The second $11 billion tranche of QSCBs will be allocated sometime next year.
However, the legislation did not give those districts the ability to carry forward unused allocations to the next year, leading some market participants to question whether that meant the districts had to transfer those allocations to their respective states, which were granted the ability to indefinitely carry forward unused cap.
An attorney with the Internal Revenue Service confirmed that interpretation of the law last month, telling a group of bond attorneys that the school districts’ allocations would expire if they do not issue the bonds by the end of the calendar year, unless they give the allocations to their states.
Attorneys were skeptical this was intended by lawmakers, given that they went to the trouble of directly allocating the bond capacity to the large school districts, coupled with the fact that tribal governments — which received $400 million under the program — were given the ability to carry forward cap.
The ARRA requires the Treasury to allocate 40% of the $22 billion authorization directly to the 100 largest school districts, with the remaining 60% going to the states, which then sub-allocate that bond authority to localities.
When the ARRA was drafted, lawmakers included a provision permitting regulated investment companies to pass through any tax credits obtained from tax-credit bonds to shareholders, to complement the potential for an unlimited amount of tax-credit Build America Bonds to be issued under the law. The technical correction would clarify how those credits would be treated.
But given that mutual funds are not heavily investing in tax-credit bonds and no tax-credit BABs have been issued yet, sources said this provision does not hold any immediate ramifications. It could prove helpful in the future if regulated investment companies become big buyers of tax-credit bonds.