WASHINGTON — The Treasury Department Tuesday released interim guidance detailing how issuers, bondholders, and other market participants should “strip” the tax credits from tax-credit bonds and how that information should be reported to the Internal Revenue Service.
The 28-page notice outlines the steps issuers need to take to make bonds strippable, how to account for those strips, as well as the extensive information that will eventually have to be reported on tax forms, including two new ones, for the IRS to ensure the credits are properly and legitimately claimed.
The guidance, which is immediately effective, describes proposed regulations the Treasury plans to issue in the future.
Market participants were clamoring for the Treasury to issue stripping rules after the American Recovery and Reinvestment Act authorized tens of billions of dollars in new tax-credit bond authority last February. But the rules may almost be moot now because the programs never took off and a new jobs law allows issuers of four types of tax-credit bonds to receive the popular Build America Bond-style direct payments as subsidies instead of the government offering investors tax credits.
Issuers are expected to overwhelmingly opt for the direct-pay subsidies, meaning the stripping notice will apply primarily to the paltry amount of tax-credit bonds previously issued, market sources said.
The notice details four requirements issuers must meet to make their tax-credit bonds strippable. First, the issuer on or before the date the bonds are issued, must state in its bond documents that the bonds are strippable. Issuers that have already issued the bonds as of March 31 have until May 17 to make that designation. Issuers also must file an information return with the IRS identifying the bond issue as strippable. However, for bonds sold before March 31, issuers have until May 17 to file the information returns.
The strippable bonds also must be issued in registered form, and separate Cusip numbers must be assigned to the following: the bond issue, the strippable credits, and to all rights to receive cash, whether it be interest or principal. The separate Cusips are intended to help the IRS track the various parts of the bond issue.
However, strippable tax-credit bonds “raise significant tax compliance and tax administration issues,” the notice stated. The concerns also have emerged on Capitol Hill, where Senate Finance Committee ranking minority member Charles Grassley, R-Iowa, has introduced legislation, currently stalled, that would ban the stripping of tax credits from bonds.
To address this, the IRS plans “to implement and maintain a robust system of information reporting,” which will be subject to the same penalties that apply generally regarding failures to accurately file required forms, the notice stated. Some market participants complain the new requirements are redundant or even “mind-numbing,” but generally acknowledge that they are an attempt to address a major concern for the IRS.
A new form, Form 8038-TC, is currently in the works, which will be the primary information return issuers must file with the IRS to identify bonds as strippable. Until that form becomes available, issuers should file a Form 8038 and make the identification either on that form or in an attachment, the Treasury said in the notice.
A new Form 1097-BTC will inform the IRS, as well as the credit recipient, of the amount of credit received. Issuers, or intermediaries not acting on behalf of the issuer, will have to include the amount of credit granted to the recipient, as well as the issuer’s tax identification number and the Cusip for the bond or stripped credit.
Beginning with credits received in 2010, the form will have to be submitted to the IRS annually after the end of the calendar year, where it will list the total amount of tax credits transmitted that year. Starting in 2011, the form also will have to be sent to the credit recipient quarterly within 30 to 60 days after the credit allowance dates — March 15, June 15, Sept. 15, and Dec. 15.
Taxpayers claiming a tax credit from a tax-credit bond will have to file a Form 8912 as part of their tax return, which must include the type of bond, the amount of credit claimed, the tax identification number of the issuer, and the Cusip for the bond or stripped credit held.
For federal income-tax purposes, the credit is treated as a payment of interest, but the full credit amount only goes to the taxpayer holding the credit on the credit-allowance dates. The notice clarifies that taxpayers can carry forward indefinitely any credit exceeding their tax liability, but must claim it at the first available opportunity.
The notice also asks for public input on three specific points: how much time and effort would be required to establish systems to meet new information reporting requirements; how the notice should apply to tax-credit Build America Bonds, which do not appear to have been issued yet; and whether any particular guidance is needed to limit duplicative claims of tax credits. Public comments should be submitted to the IRS by May 24.
The primary authors of the notice were Aviva Roth, Timothy Jones and Russen Subin from the IRS.