IRS Gift Wraps Some Bonds for Gulf, Midwest States

WASHINGTON — Gulf and Midwestern states hit by disasters in recent years received a holiday gift from the Internal Revenue Service on Friday.

The IRS issued a notice allowing the states to current-refund disaster bonds, such as Gulf Opportunity Zone bonds, on a tax-exempt basis after the programs expire, as long as certain conditions are met. In addition, the current-refunding bonds will not have to be re-designated as qualified disaster bonds by specified governmental officials, the IRS said.

The agency’s action comes after Gulf state officials and their representatives in the Congress, as well as the National Bond Lawyers Association, deluged the Treasury Department with letters urging the issuance of such guidance.

The IRS detailed three conditions that must be met for the tax-exempt current refundings to occur.

First, the underlying bonds must have been issued before the programs expired.

Second, the “issue price” of the current refunding bonds can be no greater than the outstanding stated principal amount of the bonds being refunded.

For refunded bonds originally issued with more than a de minimis amount of original issue discount or premium, the present value of the refunded bonds must be used in lieu of the outstanding stated principal amount to determine the maximum issue price of the refunding bonds.

Finally, the current refunding bonds must meet all of the requirements for tax-exempt private-activity bonds, including that the average bond maturity is no longer than 120% of the average, reasonably expected economic life of the facilities being financed or refinanced with the net proceeds of the bonds.

The IRS said the notice would apply to GO Zone bonds, Midwestern Disaster Area bonds and Hurricane Ike Disaster Area bonds.

The GO Zone bonds consist of roughly $14.8 billion of private-activity bonds issued by Louisiana, Mississippi and Alabama to finance the construction and rehabilitation of residential and other property that Hurricanes Katrina and Rita devastated in 2005.

They were created and authorized under the Gulf Opportunity Zone Act, which was enacted in December 2005. Congress later extended the period for issuing the bonds through the end of this year.

Midwestern Disaster Area bonds are made up of about $14.6 billion of PABs authorized by the Heartland Disaster Tax Relief Act of 2008. They help finance redevelopment in counties that were declared major disaster areas after being hit hard by severe storms and flooding between May 20 and Aug. 1 of 2008.

The measure was signed into law in October 2008 as part of the Emergency Economic Stabilization Act. The deadline for issuing the bonds is Dec. 31, 2012.

In addition, Texas was authorized to issue up to $1.9 billion of Hurricane Ike Disaster Area bonds for seven counties, and Louisiana was given authorization to issue $384 million for projects in two parishes ravaged by the same storm.

The bonds also can be issued through Dec. 31, 2012.

The IRS said the notice only applies to these specific kinds of bonds and not to current refundings of other bonds, such as Build America Bonds.

Louisiana’s entire congressional delegation, Louisiana Treasurer John Kennedy and Mississippi Treasurer Tate Reeves wrote the Treasury and IRS earlier this year asking for guidance allowing current refundings of GO Zone bonds on a tax-exempt basis after the end of the year.

“A lack of guidance on this issue is causing serious concern that we may not be able to realize the full recovery benefits Congress intended by the Gulf Opportunity Zone Act,” said lawmakers representing Louisiana.

NABL made a similar request, even suggesting two of the conditions that the IRS included in the notice.

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