The Internal Revenue Service (IRS) and Treasury Department issued guidance, and released IRS Form 8038-CP, relating to Build America Bonds authorized under the recently enacted American Recovery and Reinvestment Act of 2009 (Act). This guidance provides important information regarding how issuers may elect to issue Build American Bonds and may further elect to receive direct payments from the federal government with respect to interest paid on such bonds. The guidance also describes the initial procedures under which those payments will be made.  

The IRS and Treasury Department have also issued information regarding volume cap allocations with respect to a number of other categories of bonds authorized or expanded under the Act, including Qualified School Construction Bonds, Qualified Zone Academy Bonds, Qualified Energy Conservation Bonds, and New Clean Renewable Energy Bonds.  

Background  

On February 16, 2009, President Obama signed the Act into law. The Act authorized the issuance by state and local governments of a new type of tax credit bond, referred to as "Build America Bonds." The Act authorized the issuance of two types of Build America Bonds, one which provides the bondholder with a tax credit equal to 35 percent of the interest payable on the bond, referred to as "Build America Bonds (Tax Credit)," and the other which provides the issuer with direct payments from the federal government (characterized as refundable tax credits) in amounts equal to 35 percent of the interest payable on the bond, referred to as "Build America Bonds (Direct Payment)."  

The Act also authorized or expanded the issuance of a number of other categories of tax credit bonds, including Qualified School Construction Bonds, Qualified Zone Academy Bonds, Qualified Energy Conservation Bonds, and Clean Renewable Energy Bonds. Each of these categories of tax bonds are subject to a separate national volume limitations and each has different requirements as to how those volume limitations are to be allocated.  

IRS Notice 2009-26: Build America Bonds Guidance

Permitted Uses of Proceeds. IRS Notice 2009-29 confirms that Build America Bonds (Tax Credit) may be issued to finance any governmental purpose for which tax-exempt governmental purpose bonds (i.e., non-private activity bonds) may be issued, including to finance capital projects or working capital expenditures, and to current or advance refund prior issues, all within the restrictions generally applicable to tax-exempt bonds. The Notice also confirms that, in contrast, Build America Bonds (Direct Payment) may be used only to finance capital expenditures, and therefore may not be used to finance working capital expenditures or to refund prior issues. The Notice further clarifies, however, that a reimbursement for capital expenditures made in accordance with Treas. Reg. § 1.150-2 is eligible for financing with Build America Bonds (Direct Payment), as are capital expenditures that were paid or incurred after the effective date of the Act and were originally financed with temporary short-term financing issued after the effective date of the Act.  

Up-Front Election and Information Reporting. Notice 2009-29 provides that, subject to future updated forms and procedures, an issuer may elect to issue Build America Bonds (Tax Credit) or Build America Bonds (Direct Payment) by noting such election on its books and records on or before the issue date of the bonds. The Notice further provides that issuers of such bonds should file a Form 8038-G with respect to the issuance, checking the box marked "other" in the portion of the form relating to the type of bonds being issued, and the issuer must attach a separate schedule indicating the type of bond being issued (e.g., hospital, transportation, public safety, etc.).  

In the case of Build America Bonds (Direct Payment), the Form 8038-G must be filed with the IRS at least 30 days before the first Form 8038-CP (described below) with respect to the issue is filed, except that for bonds issued before July 1, 2009 only, the Form 8038-G may be filed less than 30 days before the filing of the Form 8038-CP provided that it is filed separately from and prior to the filing of the Form 8038-CP. Moreover, an issuer of Build America Bonds (Direct Payment) must attach to the Form 8038-G a schedule containing the following information: (i) for fixed-rate bonds, a list of each interest payment date, the total interest payable on such date, the total principal amount of bonds expected to be outstanding on such date, the credit payment expected to be requested from the IRS on such date, and the earliest date that the bonds can be called, all under the heading "Fixed Rate Bond – Debt Service Schedule"; and (ii) for variable rate bonds, under the heading "Variable Rate Bonds – Debt Service Schedule," a schedule providing a list of each interest payment date, the total principal amount of bonds expected to be outstanding on such date, and a description of how interest on the bonds is computed.  

Payment Procedures for Build America Bonds (Direct Payment). Notice 2009-29 states that IRS and the Treasury Department plan to implement the initial payment procedures for Build America Bonds (Direct Payment) as promptly as possible, and that the new Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, is being made available contemporaneously with the issuance of the Notice. The Notice further states that the IRS will be prepared to accept the new Form 8038-CP for processing by May 1, 2009, and will be ready to begin making payments to issuers on or after July 1, 2009.  

Under the initial procedures, an issuer must submit a Form 8038-CP to request payment of the credit under a Build America Bond (Direct Payment). On the form the issuer may designate someone other than the issuer as the recipient of the payment (e.g., a bond trustee). For fixed rate bonds, the Form 8038-CP must be filed not later than the 45th day before the applicable interest payment date for which payment of the credit is being requested, but not earlier than the 90th day before the interest payment date. For variable rate bonds, the Form 8038-CP is filed on a quarterly basis, not later than the 45th day after the last interest payment date within the quarterly period for which payment of the credit is requested. The Notice provides that in either case the issuer should expect to receive requested payments within 45 days of the date that the Form 8038-CP is filed with the IRS.  

Notice 2009-29 further states that the IRS and Treasury Department plan to study the feasibility of moving the payment procedures for Build America Bonds (Direct Payment) to an electronic platform similar to that used by the Bureau of Public Debt to make recurring electronic payments on U.S Treasury Securities, such as on securities in the State and Local Government Series (SLGs).  

The Notice further clarifies that the refundable credits for Build America Bonds (Direct Payments) will generally be treated as overpayments of tax, so that various procedural IRS rules relating to overpayments of tax will be applicable, including certain credit and offset provisions, provisions for interest on overpayments of tax, and limitations on credits or refunds of overpayments of tax. The IRS and Treasury Department will consider whether special rules are needed to adopt or tailor the procedural framework implementing these provisions.  

The Notice concludes by soliciting public comments on all aspects of the direct payment procedures for Build America Bonds. Specific comments are requested on the following topics with respect to Build America Bonds (Direct Payment): (i) whether consideration should be given to employing an electronic platform to make payments similar to that used for SLGs and what features would be important to make that platform workable; (ii) whether a different approach should be taken regarding making payments with respect to variable rate bonds; (iii) whether payments should be made only to issuers in order to simplify the process; and (iv) whether consideration should be given to imposing uniform interest payment dates to improve the efficiency of the program.  

IRS Notice 2009-35: Qualified School Construction Bond Allocations for 2009 and Related Guidance  

IRS Notice 2009-35 provides allocations for 2009 of the $11 billion national volume cap for Qualified School Construction Bonds among the states and 100 large local educational agencies as set forth in the Act. The Notice reflects the determination by the Secretary of Education to decline to select 25 additional large local educational agencies for specific volume cap allocations as would have been permitted under the Act. The Notice further clarifies that an issuer that is allocated a portion of the national volume limitation may issues those bonds directly or may be a conduit borrower with respect to bonds issued by another issuer, but only if the financed facilities are located within the jurisdictions of both the entity receiving the volume cap allocation and the issuer of the bonds. Notice 2009-35 also provides guidance on how to obtain the credit rate, maximum maturity, and permitted sinking fund yield for Qualified School Construction Bonds. Finally, the Notice provides guidance on how to complete the required information return for an issue of Qualified School Construction Bonds.  

IRS Notice 2009-29: Qualified Energy Conservation Bond Allocations for 2009 and Related Guidance

IRS Notice 2009-39 provides allocations for 2009 of the $3.2 billion national volume cap for Qualified Energy Conservation Bonds among the states and certain large local governments as set forth in the Act. The Notice further clarifies that an issuer that is allocated a portion of the national volume limitation may issues those bonds directly or may be a conduit borrower with respect to bonds issued by another issuer, but only if the financed facilities are located within the jurisdictions of both the entity receiving the volume cap allocation and the issuer of the bonds. Notice 2009-29 also provides guidance on how to obtain the credit rate, maximum maturity, and permitted sinking fund yield for Qualified Energy Conservation Bonds. Finally, the Notice provides guidance on how to complete the required information return for an issue of Qualified Energy Conservation Bonds.  

IRS Notice 2009-30: Qualified Zone Academy Bond Allocations for 2008 and 2009  

IRS Notice 2009-30 provides allocations among the states of the national volume cap for Qualified Zone Academy Bonds of $400 million for 2008 and $1.4 billion for 2009. Notice 2009-30 also provides guidance on how to obtain the credit rate, maximum maturity, and permitted sinking fund yield for Qualified Zone Academy Bonds.  

IRS Notice 2009-33: New Clean Renewable Energy Bonds Application Solicitation and Requirements

IRS Notice 2009-33 solicits applications for allocations of the $2.4 billion national volume cap for New Clean Renewable Energy Bonds. The Notice also provides related guidance on a number of related matters including the project eligibility requirements that must be met in order to be considered for an allocation, and the application form and application requirements for a volume cap allocation request.  

The Notice also describes the methodology by which the volume cap will be allocated. The Notice confirms that, as required by the Act, up to one-third of the volume cap will be allocated to qualified projects owned by governmental bodies and up to an additional one-third to qualified projects owned by cooperative electric companies. Within each of these categories, the full amount of volume cap requested will be allocated beginning with the project for which the smallest amount has been requested, with the allocations continuing to the next smallest amount requested until the total amount set aside for that category has been allocated. The Notice further provides that in the case of a project that previously received an allocation of old Clean Renewable Energy Bonds, such prior allocation will be considered part of the allocation amount being requested, except that a project that causes an increase in capacity will generally be treated as a separate new project and any previous allocation of Clean Renewable Energy Bonds will not be taken into account. The Notice further provides that up to one-third of the national volume cap will be allocated to qualified projects owned by public power providers, and will be allocated among such public power providers using a pro rata allocation method (in contrast to the "smallest first" method for the other categories described above).  

Notice 2009-33 also provides guidance on how to obtain the credit rate, maximum maturity, and permitted sinking fund yield for New Clean Renewable Energy Bonds. The Notice provides guidance with respect to joint ownership of projects, allocation and accounting rules for mixed use projects, qualified expenditures, and coordination with the tax credit provided under Section 45K of the Internal Revenue Code.