The American Bar Association’s taxation section has sent the Treasury Department several suggestions it contends would simplify and make more flexible interim guidance for issuers, bondholders, and other market participants that want to strip the tax credits from tax-credit bonds.
However, the document, which was sent last week to Internal Revenue Service commissioner Doug Shulman, comes as issuance of tax-credit bonds has come to a virtual halt thanks to a recently enacted law that allows issuers of the four most popular tax-credit bonds to receive Build America Bond-style direct payments as subsidies instead of offering investors tax credits.
The letter, written primarily by George Wolf, a partner at Orrick Herrington & Sutcliffe LLP, was sent in response to the 28-page notice the Treasury published in March that laid out the how-tos of credit stripping, as well as the information that needed to be reported to the IRS about strips.
The ABA section said Treasury should clarify some inconsistencies in the notice pertaining to information-reporting requirements. As written, the notice could require every intermediary in a tax-credit bond sale to file an information return with the IRS, which could lead to “a substantial amount of duplicate reporting … and achieve no benefit,” the letter said.
Under the notice, issuers or intermediaries not acting on behalf of the issuer have to file a new Form 1097-BTC with the IRS, as well as the credit recipient. The form must include information about the amount of credit received, as well as the issuer’s tax identification number and the Cusip for the bond or stripped credit.
The taxation section recommended the Treasury clarify that only the last broker in the chain is required to report information on the tax credits.
The group also would like Treasury to provide some flexibility when it comes to designating tax-credit bond issues as “strippable.”
The notice required issuers to do so on or before the issue date. But the taxation section said issuers should be allowed to make the designation anytime before actual stripping occurs, saying the IRS would still have adequate safeguards against over-reporting credits or under-reporting associated income.
To help the IRS track the various parts of a bond issue after stripping occurs, the Treasury notice also required separate Cusip numbers be assigned to the bond issue, the strippable credits, and all rights to receive cash, whether it be interest or principal.
However, the ABA attorneys suggested that the Cusip requirement for stripped credits not apply to banks or other financial institutions like insurance companies, given that they generally have a high rate of compliance when it comes to reporting income.
The group recommended the Treasury delete language referring to credit rates that are compounded quarterly. Since the annual credit is always broken into four quarterly components, the “compounded quarterly” reference is “unnecessary and confusing,” it said.
Tax-credit bonds received a big boost in the American Recovery and Reinvestment Act, which authorized over $20 billion in new tax-credit bond authority.
But in response to continued struggles to develop a viable tax-credit bond market, the Hiring Incentives to Restore Employment Act, enacted in March, allowed the issuance of four types of tax-credit bonds — qualified school construction bonds, qualified zone academy bonds, clean renewable energy bonds, and qualified energy conservation bonds — to receive direct subsidy payments in lieu of offering investors tax credits.