Important Public Finance Changes In Stimulus Bill

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 which implemented a number of changes to the Internal Revenue Code and specifically respecting tax exempt bond provisions of the Code. A number of these provisions are temporary and would only apply to bonds issued in 2009 and 2010. The following is a brief summary of the provisions. It should be kept in mind that the Treasury continues to work on guidelines and guidance with respect to this new law.

1. Temporary Repeal of Alternative Minimum Tax for Private Activity Bonds

Interest on private activity bonds is no longer treated as a preference item for purposes of the alternative minimum tax for individuals and it also is not included in the current earnings adjustment under the corporate alternative minimum tax. These changes apply to bonds issued in 2009 and 2010, and for bonds issued in 2009 and 2010 to refund bonds which were issued from 2004 to 2008.

2. Provisions Relating to Bank Deductibility and Holding

Requirements for bonds to be bank qualified and not subject to the automatic interest deduction disallowance rule for bank holders has been modified so that the $10,000,000 annual issuance limitation on issuer's of bank qualified bonds is increased to $30,000,000, and 501(c)(3) and governmental conduit borrowers are treated as direct issuers for purposes of the qualification requirements. Again, these changes only apply to bonds issued in 2009 and 2010. Also banks are now allowed to invest up to 2% of their assets in tax exempt bonds without a portion of that interest expense deduction being disallowed under Section 265 of the Code, for bonds issued in 2009 and 2010.

3. Build America Bonds

There are 2 types of Build America Bonds in the new Act. One will allow a taxable option with a tax credit and the other provides a taxable option with a partial reimbursement to issuers for interest paid on bonds, each of which is described briefly below.

First, a government issuer may designate as a taxable Build America Bond a bond (other than a private activity bond) which would otherwise be tax-exempt. When a bond is so designated, bondholders will be entitled to a tax credit equal to 35% of the taxable interest. Bonds issued in 2009 and 2010 may be designated as Build America Bonds, provided that no more than a minimal premium is received upon issuance.

Second, instead of the tax credit for bondholders, an issuer may designate a Build America Bond and receive reimbursement or refund from the Treasury Department equal to 35% of the taxable interest payable at each qualified bond interest payment date. A "qualified bond" is a bond that would otherwise be tax-exempt, the proceeds of which are used for capital expenditures.

Recent guidance from the Internal Revenue Service prescribes forms and procedures for obtaining direct payments, and the time limits within which issuers must claim reimbursements for interest. Currently, issuers must file a claim for reimbursement for each interest payment.

4. Recovery Zone Bonds

A Recovery Zone is an area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures, or general distress. Recovery Zones can also include areas economically distressed by reason of the closing of a military installation, or an empowerment zone or renewal community. There are two types of Recovery Zone bonds: Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds. These provisions apply to bonds issued in 2009 and 2010.

A Recovery Zone Economic Development Bond is a Build America Bond eligible for an increased reimbursement or refund to issues of 45% instead of 35% of the interest paid. Recovery Zone Economic Development Bonds are taxable bonds which must be used for purposes which promote development or other economic activity in a recovery zone, including expenditures for public infrastructure, construction of public facilities, job training and educational programs, and capital expenditures for property within the recovery zone.

Recovery Zone Facility Bonds are a new category of exempt facility bonds which are tax-exempt, the proceeds of which are used for recovery zone depreciable property which is constructed, renovated or acquired by a taxpayer after the designation of the recovery zone. The recovery zone property must be used by the taxpayer in the active conduct of a qualified business in the zone. A Qualified Business is any trade or business except residential rental property, private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, gambling facility, or liquor store for off-premises consumption.

The tax-exempt private activity bond volume cap of IRC §146 (based on population) does not apply to Recovery Zone Facility Bonds.

Each State will be allocated a share of the national limit of $10 Billion for Recovery Zone Economic Development Bonds and $15 Billion for Recovery Zone Facility Bonds. Each state receives a minimum authorization (0.9% of the total amount) and the remaining amount is distributed based on unemployment. States are to re-allocate the State's share in turn, among counties and large municipalities (more than 100,000 in population). This re-allocation is to be proportionate to the county or city's decline in employment compared to the state-wide decline in employment. We are still awaiting rules to determine the exact method of designating recovery zones.

There are numerous other changes in the American Recovery and Reinvestment Act including an expansion in the definition of manufacturing facilities to include facilities used in production of intangible property, new Clean Renewable Energy Bonds and new Qualified School Construction Bonds.

To discuss the foregoing changes and how they might impact or enhance your public finance opportunities, please call or e-mail our Public Finance attorneys: Dennis R. Wilcox, Thomas J. Tarantino and Patricia M. Ritzert.