WASHINGTON — The American Bar Association Section of Taxation sent a report to Treasury Department and Internal Revenue Service officials last week outlining its thoughts on various issues tied to stripping the tax credits from tax-credit bonds and selling them separately.
The 14-page document tackles a number of technical issues that Treasury officials are currently grappling with as they figure out how to draft regulations outlining the credit-stripping process for bonds.
The ABA section said in an introduction that the report tries to identify specific points in need of regulatory guidance and suggest appropriate actions the Treasury could take to ensure the tax-credit bond market is as attractive to investors and helpful to state and local governments as possible.
The ABA lawyers said though they believe the statute is clear on this point, the Treasury should clarify in guidance that the tax-credit allowance is treated as a cash payment on the credit allowance date.
Since the credit allowance only goes to the person or institution holding the credit on the specific credit allowance date — March 15, June 15, Sept. 15, and Dec. 15 for tax-credit bonds — as opposed to the allowance being spread over every holder of the credit during that quarterly period, the attorneys argue that it functions basically like a cash payment. Statements in the legislative history referring to treating the credits like payments of interest buttress this point, the report said.
When it comes to tax-credit Build America Bonds, however, the tax code and legislative history are less clear. Nevertheless, the ABA report concludes that the credits should be considered automatically provided on scheduled interest payment dates, pointing out that it would greatly reduce the financial credit risk of the credits, which could in turn boost the nonexistent tax-credit BAB market.
If the underlying bonds are redeemed before the stated maturity date, the stripped credit should expire, given that the holder of the credit is no longer entitled to it, just as the holder of a redeemed tax-exempt bond is no longer entitled to interest payments, according to the report.
However, in situations where a portion of a tax-credit bond issue is redeemed before maturity, it would likely be “impossible” for the issuer to identify and redeem the tax credits stripped specifically from the redeemed bonds, the group said. As a result, the Treasury should state that the issuer only needs to redeem an amount of stripped credits equal to the credits on the redeemed bonds.
The federal government granted tax-credit bond issuers and investors the ability to strip the credits from the bonds and sell them separately in an attempt to broaden the fledgling tax-credit bond market as part of the farm bill enacted in the summer of 2008.
But so far no stripping has been attempted because the Treasury has not yet provided guidance on it. Treasury officials have said the stripping rules are a high priority, but have conceded that the long list of technical issues make it a slow-moving project.