The Internal Revenue Service (“IRS”) recently published Notice 2010-35, which addresses the new direct payment option for certain qualified tax credit bonds under the Hiring Incentives to Restore Employment Act (“HIRE Act”). The notice provides guidance with respect to, among other things, payment procedures for the direct payment option, as well as information regarding required elections and information reporting.
The American Recovery and Reinvestment Act of 2009 (“ARRA”) permits state and local governments to issue special purpose tax credit bonds, including Qualified School Construction Bonds (“QSCBs”), Clean Renewable Energy Bonds (“CREBs”), Qualified Zone Academy Bonds (“QZABs”), and Qualified Energy Conservation Bonds (“QECBs”), which all include provisions for tax credits to be provided to investors in lieu of interest. Earlier this year, President Obama signed the HIRE Act, a $17.6 billion jobs bill that, among other things, permits state and local governments to issue the foregoing tax credit bonds as direct payment bonds. Issuers of QSCBs and QZABs will get payments up to the credit rates that would apply if the bonds had been sold as tax credit bonds under ARRA. Issuers of CREBs and QECBs will receive payments approximately equal to 70% of interest costs.
The new direct payment mechanism is similar to the successful direct payment structure of Build America Bonds. Many in the municipal bond industry are hoping that these HIRE Act changes will jump-start the market for QSCBs, QZABs, CREBs, and QECBs, which have to date not drawn much investor interest.
Notice 2010-35 provides guidance with respect to various aspects of the new direct payment bonds, including:
- The issuer of direct payment bonds must make an irrevocable election to issue the bonds.
- Form 8038-TC (the IRS form required upon closing of the bonds) must be filed with the IRS at least 30 days before the first Form 8038-CP is filed to request the refundable credit payment for an interest payment date for the subject issue.
- For purposes of determining the refundable credit payments on a direct payment bond, original issue discount is not treated as a payment of interest.
- Direct payment bonds issued to reimburse otherwise eligible expenditures that were paid or incurred after the date of enactment of the HIRE Act and that were financed originally with temporary short-term financing issued after the date of enactment of the HIRE Act will not be treated as a refunding issue.
- Proceeds from direct payment bonds may be used to reimburse otherwise eligible expenditures, regardless of whether such expenditures were paid or incurred before or after the date of enactment of the HIRE Act.