Alert March 29, 2010

IRS Sends Compliance Questionnaire for BABs

The IRS has begun distributing compliance questionnaires to issuers of certain Build America Bonds (“BABs”).  BABs, which are taxable bonds authorized to be issued under the American Recovery and Reinvestment Act (“ARRA”), are the fastest growing component of the current municipal bond market.  BABs provide either an interest subsidy to the issuer or a tax credit to investors and can be issued to finance virtually any project that can otherwise be financed with tax-exempt bonds.

Only direct-pay BABs, including Recovery Zone Economic Development Bonds, are expected to be subject to the questionnaire.  Direct-pay BABs provide state and local governments a federal subsidy equal to 35% of the total interest paid on the BABs (the subsidy is 45% for BABs that are designated Recovery Zone Economic Development Bonds).  The questionnaire is expected to focus on compliance with the requirements imposed on BABs under the Internal Revenue Code and related Treasury Regulations, including questions concerning calculation of issue price, expenditure of bond proceeds, calculation of bond proceeds available for the project, arbitrage yield calculation and rebate, and costs of issuance limitations.