Treasury Releases Guidance on Stripping Transactions for Qualified Tax Credit Bonds Following Passage of the HIRE Act

On March 23, 2010, the U.S. Treasury Department released interim guidance regarding the ability to "strip" tax credits from certain types of tax credit bonds. A taxpayer either holding such a bond or holding the right to receive the credit on a "credit allowance date" is allowed a credit against income taxes. Credit allowance dates occur each calendar quarter. Because of the existence of a credit in connection with these bonds, theoretically, it is possible to issue the bonds with zero or relatively little interest paid to holders of the bonds. Qualified Tax Credit Bonds include Qualified Forestry Conservation Bonds (QFCBs), New Clean Renewable Energy Bonds (NCREBs), Qualified Energy Conservation Bonds (QECBs), Qualified Zone Academy Bonds (QZABs) and Qualified School Construction Bonds (QSCBs). The American Recovery and Reinvestment Act of 2009 (Act) added QSCBs to the list of Qualified Tax Credit Bonds.

For these Qualified Tax Credit Bonds, the Internal Revenue Code provides that there may be a separation of the ownership of the bond and the entitlement to the credit with respect to such bond. If the credit is "stripped" the holder to the instrument evidencing the entitlement to the credit will receive the credit payments, rather than the holder of the bond. In essence, this allows financing for qualified projects to be structured with both debt and tax credit equity. NCREBs, QSCBs and QECBs may be of particular interest to project developers. NCREBs can be issued for projects which constitute qualified renewable energy facilities that produce electricity (including wind, solar, hydropower, biomass and geothermal facilities). QSCBs may be issued for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a facility is to be constructed. QECBs may be issued for certain capital expenditures made for the purpose of reducing energy consumption in publicly-owned buildings, expenditures made for certain energy research and mass commuting facilities among other things.

The interim guidance provides that in order to have a Qualified Tax Credit Bond capable of being "stripped," the issuer of the bond on or before the date of issue must include a statement in the bond documents that the bonds are strippable. This designation can be placed in the bond indenture or resolution, the transcript of proceedings, and any related document. If an issuer has issued Qualified Tax Credit Bonds prior to March 31, 2010, the issuer may make this designation on or before May 17, 2010, in order to allow for stripping. In addition, the issuer must identify the bonds as strippable on an information return filed with the Internal Revenue Service. For issues of Qualified Tax Credit Bonds occurring before March 31, 2010, the issuer can file an amended information return before May 17, 2010, identifying the issue as strippable. Other requirements concerning registration and CUSIP numbers apply as well.

The interim guidance also provides that a tax credit will not be allowed if a person holds any division of a credit which is not a whole credit or a proportional share of a whole credit. A disallowed division of a credit may occur if a partnership owns the credit and the operating structure of the partnership causes a person's share in the credit to become a variable interest.

However, the interim guidance comes on the heels of the recently enacted Hiring Incentives to Restore Employment (HIRE) Act, signed into law on March 18, 2010. The HIRE Act provides that issuers of certain Qualified Tax Credit Bonds may issue taxable interest rate bonds without tax credits and instead receive a direct interest payment subsidy similar to a Build America Bond (which was added by the Act). Pursuant to the HIRE Act, an issuer of QSCBs, QZABs, QECBs and NCREBs, issued after December 31, 2009, can elect to receive a direct subsidy from the federal government in lieu of the tax credit available for these bonds. For QSCBs and QZABs, the direct subsidy payment allowed pursuant to the HIRE Act on each interest payment date is equal to the lesser of the amount of interest payable on such bonds on such date or the amount of interest which would have been payable on such bonds on such date if such interest was determined using the applicable credit rate. For QECBs and NCREBs, the direct subsidy payment amount on each interest payment date is reduced to 70 percent of the lesser of the amount of interest payable on such bonds on such date or the amount of interest which would have been payable on such bonds on such date if such interest was determined using the applicable credit rate. The direct subsidy payment allowance should lead to an increase in demand for these types of bonds and as a consequence result in much lower borrowing costs. Similar to the §§1602 and 1603 cash in lieu of redemption programs for affordable housing and renewable energy, the direct subsidy allows borrowers to benefit from the program despite the decreased demand for tax credits.

For more information regarding Qualified Tax Credit Bonds contact Jane Herndon, Paul Jones, Tyler Kalachnik or Kristin McClellan.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.