The American Recovery and Reinvestment Act of 2009 ("ARRA") included a number of provisions designed to aid State and local governments by authorizing the issuance of various new categories of tax favored bonds including Build America Bonds, Recovery Zone Economic Development Bonds, and Recovery Zone Facility Bonds, as well as repealing the adverse treatment under the federal alternative minimum tax of interest on tax-exempt bonds. These favorable provisions under ARRA are of limited duration, however, and generally will not apply to bonds issued after December 31, 2010 (unless extended by future legislation).
The IRS recently issued Notice 2010-81, addressing the question of whether a draw-down bond issued before the end of 2010, but only a portion of which is actually drawn before the end of the 2010, will qualify in its entirety as being issued in 2010 and therefore be eligible for the favorable ARRA provisions described above. Existing authority under other provisions applicable to State and local bonds had caused some to believe such treatment may be available.
The Notice clarifies that for purposes of the favorable ARRA provisions described above, only those bonds for which the issuer receives the purchase price, and on which interest begins to accrue, before January 1, 2011 will considered issued before January 1, 2011. For example, in the case of a draw-down bond, only the portion of such bond that represents draws funded before January 1, 2011 will be eligible. The Notice provides that similar treatment will apply to obligations issued under a commercial paper program, i.e., only draws under the program funded before January 1, 2011 will be eligible.
Notice 2010-81 further provides, however, that this rule does not apply for purposes of determining when bonds are considered issued for purposes of the "bank qualified" provisions in Section 265 of the Internal Revenue Code of 1986, as amended. State and local bonds that are bank qualified generally may he held by banks and other financial institutions without adversely affecting the holder's interest deductions under Section 265. ARRA increased the annual issuer limit on bank qualified bonds from $10 million to $30 million, applied the limit at the borrower rather than the issuer level, and applied a 2% de minimis exception for other holders, but these provisions also generally do not apply to bonds issued after December 31, 2010. Notice 2010-81 provides that prior authority will continue to apply for purposes of the bank qualified rules, under which the entire stated principal amount of a draw-down bond is considered issued on the date on which more than a de minimis amount of the bond is first advanced (See Rev. Rul. 89-70, 1989-1 C.B. 88). Thus, an entire draw-down bond may be eligible for the more favorable bank qualified limits under ARRA despite the fact that only a portion of the total funds have actually been drawn before January 1, 2011.