Guidance issued by the Internal Revenue Service Friday allows the governors of nine Midwestern and Gulf Coast states to determine which natural disaster recovery projects can be financed with special tax-exempt private-activity bonds.

The seven-page notice, which became effective when issued, addresses several interpretive issues that have emerged with the disaster recovery bond programs, which Congress authorized in 2008.

Under the qualified Midwestern disaster area and qualified Hurricane Ike disaster area bond programs, proceeds can be used to finance repairs of private businesses that suffered a losses or to finance other businesses moving in to replace them.

But some tax lawyers have had questions about what sorts of limitations exist for the programs — such as what constitutes a loss and, in a replacement situation, whether the new business needs to be the same as the old one.

Under the notice, a governor or a designee authorized by the governor has the freedom to designate which projects or replacement businesses to finance with proceeds, as long as those decisions are made in good faith.

The programs also stipulate that bonds should be used first in areas where recovery assistance is most needed. The IRS notice grants governors or their designees the right to identify those areas in a reasonable, good-faith manner.

For public utility repairs or replacements damaged by flooding or Hurricane Ike in the nine states, the utility can decide how to use bond proceeds, even if the projects involve private parties, the IRS said.

Further, the proceeds can be used to reimburse expenditures made on or after the date of the relevant disaster and before Dec. 31, according to the notice.

In the Midwest, states can issue up to $1,000 of bonds per person living in a federally declared disaster area stemming from flooding. Counties in Arkansas, Indiana, Illinois, Iowa, Missouri, Nebraska, and Wisconsin are eligible. As much as $14.6 billion of bonds could be issued in the Midwestern disaster zones, based on census figures cited by the IRS in earlier guidance.

Wisconsin, which had the most people affected, can issue up to $3.8 billion, and Indiana can issue up to $3.1 billion. Iowa is eligible for up to $2.6 billion of bonds. Illinois can issue up to $1.5 billion, Missouri can issue up to $1.4 billion, Nebraska can issue up to $1.1 billion, and Arkansas can issue up to $957 million.

Along the Gulf, affected Texas counties and Louisiana parishes can sell bonds totaling $2,000 per person in the affected areas, based on those Census figures.

Texas can issue up to $1.9 billion in Hurricane Ike disaster bonds for its seven counties and Louisiana can issue up to $384 million for projects in the two parishes, according to the figures.

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