Treasury Offers Guidance

WASHINGTON - The Treasury Department Friday released "how-to" guidance on the stimulus law's new taxable Build America Bond and Recovery Zone Economic Development Bond programs, as well as allocations for the qualified zone academy bond and qualified school construction bond tax-credit programs.

The 10-page notice covering BABs and RZEDBs is retroactive to any issued since Feb. 17, 2009, the date the stimulus law was enacted. An unlimited amount of BABs and $10 billion of RZEDBs can be issued under those programs during 2009 and 2010.

The Internal Revenue Service and Treasury are soliciting public comments on the guidance, particularly as it pertains to the "direct payment" option of these two programs.

That option, which has garnered a lot of interest in the municipal market, allows states and localities to issue an unlimited amount of taxable bonds to finance capital expenditures and to receive cash payments from the government equal to 35% of the interest paid on the bonds.

In addition, the Treasury and IRS said they plan to "actively pursue refining" how the direct payments are made, and are studying the feasibility of allowing them to be made electronically, similar to the system used by the Bureau of Public Debt for payments on state and local government series securities.

Under the BAB program, issuers could alternatively opt for the federal government to provide investors purchasing and holding the bonds with tax credits, also equal to 35%. But the Treasury estimated that the actual subsidy to the issuer will equal about 25% of the total return to the investor, in part because the bonds typically have to be sold at a discount. The tax-credit BABs can be issued for the same purposes as governmental bonds, including to finance working capital.

While the guidance outlines how the direct-pay RZEDBs will work, Treasury said it plans on issuing separate guidance on the other details of the program, including allocations.

The bonds are to be used to help finance economic development projects in areas hit particularly hard by recent unemployment. They are similar to BABs in that they provide a direct payment to issuers, but the payment is equal to 45% of the interest.

The guidance states that issuers should indicate on their books and records if they plan to issue these bonds and, in the case of BABS, which option they are electing to use. Issuers also will need to report the bonds on the IRS Form 8038-G, the information return filed by issuers of governmental bonds, the agencies said.

To request payments from the federal government, issuers must submit the new Form 8038-CP, which is available on the IRS Web site, www.irs.gov. That form can be filed as soon as 30 days after the Form 8038-G is filed. The IRS will be prepared to accept the forms by May 1, and the Treasury will begin mailing checks to issuers beginning on or after July 1.

For fixed-rate bonds, issuers should file their Form 8038-CP at least 45 days, but not more than 90 days, before they make interest payments. The federal payments will be made on the date the issuer pays interest.

Issuers of variable-rate bonds will receive payment from the federal government on a quarterly basis, based on the interest they paid in that quarter. Issuers of these bonds must file Form 8038-CP 45 days after their last interest payment during the quarter.

The notice also clarifies that issuers who could have issued BABs between when the stimulus package was enacted and when the guidance was issued, but issued other short-term debt for a project instead, can issue BABs to reimburse themselves for the capital expenditures.

The IRS and Treasury also released two notices outlining the allocations of qualified zone academy bonds, which states can use to renovate schools, and qualified school construction bonds, which states and the 100 largest school districts or agencies can use for new school construction as well as renovation.

The QZAB notice allocates $1.8 billion of bonds that were authorized for 2008 and 2009. Of the $400 million of QZABs authorized for 2008, California can issue the largest amount, at $44.364 million, while the U.S. Virgin Islands can issue the least, only $600,000.

Of the $1.4 billion of QZABs authorized for 2009, California can issue the most, $155.275 million, and the Virgin Islands can issue the least, $1.269 million.

The qualified school construction bond program was created by the stimulus package, which authorized $22 billion of these bonds to be issued in 2009 and 2010. Treasury's notice allocates just the $11 billion authorized for 2009, and says the 2010 allocations will be released in future guidance.

The tax-credit bonds can be used for the construction, rehabilitation, or repair of public schools, as well as to purchase equipment for those schools, or acquire land for the purposes of building a school.

Although the stimulus law permits Secretary of Education Arne Duncan to identify 25 additional large educational agencies to receive direct allocations of QSCBs, the notice stated that he declined to do so for 2009, to the surprise of some bond attorneys.

"I was a bit surprised that the secretary of education declined to add additional large local education agencies that would be eligible," said Thomas Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis.

All told, the Treasury allocated $6.6 billion of QSCBs to the states, with California receiving the largest chunk, $773.525 million. The District of Columbia, Hawaii, and Puerto Rico did not receive any direct allocations.

The largest school were allocated $4.4 billion, with the New York City School District receiving the lion's share of $699.872 million.

Frederic J. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP, on Friday applauded John J. Cross 3d, tax legislative counsel for the Treasury's office of tax policy, for meeting his publicly stated goal of getting the guidance out within 30 days of a bond lawyers' meeting in Orlando on March 5.

"He made it, and that's a remarkable achievement ... It's a huge piece of work," Ballard said.

Ways and Means Committee chairman Charles Rangel, D-N.Y., also applauded the guidance Friday, saying: "These bonds give state and local governments a new, direct injection of capital to jump-start infrastructure projects that will create jobs and improve our cities and towns. Secretary Geithner and the Treasury Department should be commended for their speedy implementation of this funding."

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