T-2

BUILD AMERICA BONDS AND RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS

Chair: Bruce M. Serchuk

Nixon Peabody LLP – Washington, DC

Panelists: David J. Cholst Timothy L. Jones

Chapman and Cutler LLP – Chicago, IL Internal Revenue Service – Washington, DC

Build America Bond (Direct Payment) Issues I. Federal Guarantee. Section 54AA(d)(2) provides that for purposes of Section 149(b), a Build America Bond (“BAB”) will not be treated as federally guaranteed by reason of the credit allowed under Section 6431. A. payments?

Was this provision necessary? Are the subsidy payments from the IRS guarantee

B. Assume you have BABs issued under an open indenture, and the subsidy payments are security for other tax-exempt bonds. Is this a problem for the tax-exempt bonds? II. Issue Price and De Minimis Premium. Section 54AA provides that a bond will not be treated as a BAB if the issue price has more than a de minimis amount of premium. A. Do the Section 148 rules for determining issue price apply? Are different standards applied to BABs than to tax-exempt bonds (e.g., 10% rule)? Or is it based entirely on actual sales? How does bond counsel confirm that BABs were sold to ultimate purchasers? Are sources like EMMA and investinginbonds.com applicable? Are these sources reliable? B. When one applies the de minimis rule to a term bond, is the “number of complete years to maturity” determined by reference to the first sinking fund payment, the average maturity or the final payment on the bond? C. Is there an argument that the de minimis premium rule applies to an issue of BABs as a whole rather than by maturity? D. Are there any particular issues with competitive sales? What should the notice of sale say to properly limit the reoffering price to confirm with the premium limitations? III. Qualified Bond. For purposes of direct payment BABs, Section 54AA(g)(2) provides that 100 percent of the available project proceeds of an issue, over amounts in a reasonable required reserve, are to be used for capital expenditures. A. The available project proceeds definition allows up to 2 percent of the proceeds of an issue to be used for costs of issuance. Is costs of issuance defined in the same manner as for tax-exempt bonds? If a BABs purchaser immediately sells their bond for a price greater than they paid for it, is the different a cost of issuance? B. In sizing a reasonably required reserve, and applying the 125% of average annual debt service and 100% of maximum annual debt service rules, is an issuer required to net any payments from the IRS? C. Are all reserve fund earnings required to be used for capital expenditures? Could Congress really have meant this?

D. Is it a permitted use of BABs proceeds to make a grant to another party who will use the grant proceeds to pay for capital expenditures? Are grants themselves capital expenditures? The Section 1.150-1 definitions define working capital as everything that is not capital. What is the implication of this rule? E. The Section 1.148-6 rules allow interest to be funded with proceeds for a period equal to the later of 3 years or the date the project is placed into service. What rules should be applied to BABs? F.

Is bond insurance a capital expenditure that can be financed with BABs?

IV. Payment Issues. Section 6431 provides that the amount of the issuer payment is 35% of the “interest payable under such bond on such date.” A. Will the IRS make payments even if the issuer does not make a payment because the statute refers to the interest “payable,” rather than the interest “paid?” B. The IRS notice with respect to BABs sets forth a requirement for fixed rate bonds that the Form 8038-CP be sent to the IRS no earlier than 90 days before and no later than 45 days before the related interest payment date. What happens if you miss the 45 day deadline? Does that just mean you may not receive your payment from the IRS by the interest payment date? C.

Does anyone have any experience with the IRS withholding any payments on

BABs? V. Reimbursements and Temporary Financing. Section 54AA provides that, for direct payment BABs, refundings are not permitted. The IRS notice with respect to BABs provides that “Further, for this purpose, Build America Bonds (Direct Payment) may be used to reimburse otherwise-eligible capital expenditures under Treas. Reg. § 1.150-2 that were paid or incurred after the effective date of ARRA and that were financed originally with temporary short-term financing issued after the effective date of ARRA, and such reimbursement will not be treated as a refunding issue under Treas. Reg. §§ 1.150-1(d) or 1.150-2(g).” A. What happens if an issuer issues a temporary financing, but before spending all of the proceeds, wants to refinance with BABs? Does the notice allow this? B. Can this rule be applied for other purposes, such as meeting the hedge bond spenddown requirements? VI.

Single Issue Questions. A. What happens if you sell BABs and tax-exempt bonds at the same time for the same project—will this be treated as a single issue? Does the rule in Section 1.150-1(c) that provides that taxable and tax-exempt bonds apply? If not, why not? B. What if you sell BABs and taxable bonds at the same time—part of the same issue? Can you make a 1.150-1(c)(3) election?

C. What if you sell a combination of BABs, tax-credit bonds, taxable bonds and taxexempt bonds? VII.

Remedial Actions. A.

Do the tax-exempt bond remedial action rules apply?

B. If a project is abandoned, are BABs required to be redeemed immediately? Is that sufficient to remediate the requirement that proceeds be used for capital expenditures? What impact does the existence of a make-whole call make? Is one option to have the issuer subsidy stop on the date the issuer abandons the project? VIII.

Documentation and other IRS Issues.

A. With a tax-exempt bond, issuers typically covenant in the bond documents to comply with the applicable rules. Is this typical with BABs? What is the impact of not having the covenant? What happens if the bondholder is relying on the issuer payments as security for the bonds? B. Is the bond counsel opinion part of the transcript? Or is it addressed solely to the issuer and kept as a privileged document? Are any differing opinion standards developing for BABs opinions? C.

How are tax documents otherwise different with a BAB?

D. With the Form 8038-CP, there is a place for a “paid preparer” to sign the form. What are the implications and liabilities associated with this designation? What of the proposed new paid preparer registration requirements—will these apply to preparers of a Form 8038-CP? Any implications for bond counsel? Does the preparer of the form have any obligation to determine whether the BABs have satisfied the applicable rules? E. Are there any particular issues of note relating to variable rate BABs? Have many been issued? F. There have been reports that the IRS may offset payments to issuers against payments the issuer owes to the IRS. Any experience with this? G. Will IRS examinations of BABs differ in any way from examinations of taxexempt bonds? Does the issuer’s ability to take the IRS to court change the dynamic of the examination? H. Should an issuer be able to separately securitize their IRS payments? Will the proposed electronic payments from the IRS facilitate this? IX.

Other issues in applying the Tax-Exempt Bond rules?

A. Can an issuer invest proceeds of direct-pay BABs in non-AMT tax-exempt bonds to comply with the arbitrage and hedge bond rules? B. Could a BAB be sold to another governmental entity, such as the Federal government, with a below market interest rate and still collect the federal subsidy payments? Or to an another issuer who uses tax-exempt bond proceeds? X.

What is the future of BABs? A.

12/31/10 sunset.

B.

Will the issuer subsidy change?

C.

Other changes?

Build America Bond (Tax Credit) Issues I.

Have many been issued?

II. Will guidance regarding stripping increase the issuance for issuers who want to issue tax credit BABs for refundings or working capital financings? Does experience with other tax-credit bonds, and the difficulty in selling them, suggest not?

Recovery Zone Economic Development Bonds I.

Allocation and Zone Designation Issues

A. Section 1400U-1(a)(3)(A) indicates that a county or large municipality may waive any portion of an allocation. The IRS notice refers to a “deemed” waiver? Many states have imposed schedules on counties and large municipalities to use their allocations and have indicated that there is a deemed waiver if the schedules are not satisfied. Is this permissible? Is this a matter of state law? Consider that one aspect of the recovery bond statute is a strong focus on local control. B. Section 1400U-1 defines the term “recovery zone” to mean: (1) any area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures, or general distress; (2) any area designated by the issuer as economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; and (3) any area for which a designation as an empowerment zone or renewal community is in effect as of the effective date of ARRA, which effective date is February 17, 2009.

1. What practical guidance is this definition? How does bond counsel advise its clients in making these determinations? Do state law based designation provide a useful source of recovery zones? 2. Can an entire county or large municipality be designated? Apparently, this approach has been suggested by some government personnel. Even if there is a full jurisdiction designation, should there be some “smell test” to make sure that a wealthy area doesn’t benefit from recovery zone bonds? 3. How will the IRS audit issuer determinations of what qualifies as a recovery zone? Shouldn’t the IRS defer to issuer determinations? C. Section 1400U-1(b) provides that “issuers” designate recovery zones based on certain specified criteria. For this purpose, any State, county, or large municipality that receives a volume cap allocation for Recovery Zone Bonds may make these designations of recovery zones in any reasonable manner as it shall determine in good faith in its discretion. 1. Can a state designate recovery zones for all counties and large municipalities without any action by the counties or large municipalities? What if counties and large municipalities ratify the state’s action? 2. Presumably, a state, county or large municipality can assign this responsibility to another entity on its behalf. Same for allocations of recovery zone volume cap. D. Section 1400U-2(b)(1)(B) provides that the issuer must designate the RZEDBs. If a county or large municipality receives an allocation, but another entity actually issues the bonds, who is the issuer for this purpose? II. Qualified Economic Development Purposes. Section 1400U-2(c) defines the term “qualified economic development purpose” for purposes of § 1400U-2 to mean any expenditures for purposes of promoting development or other economic activity in a recovery zone, including (1) capital expenditures paid or incurred with respect to property located in the recovery zone, (2) expenditures for public infrastructure and construction of public facilities, and (3) expenditures for job training and educational programs. The IRS notice on RZEDBs indicates that his broad definition of qualified economic development purpose includes capital expenditures (as defined in § 1.150-1(b) of the Income Tax Regulations) and working capital expenditures to promote development or other economic activity in a recovery zone. A. Under Section 1.148-6, an issuer may only spend proceeds of a tax-exempt bond for working capital expenditures if it doesn’t have other available amounts. Does that limitation apply to RZEDBs? B. For RZEDBs that finance working capital, how long may the bonds be outstanding without being outstanding longer than necessary? Are Richmond-like provisions necessary to assure that bonds are not outstanding longer than necessary?

C. The IRS recovery bond notice states that the eligible costs for qualified economic development purposes or recovery zone property, as applicable, financed with the proceeds of an issue of Recovery Zone Bonds under §§ 1400U-2 or 1400U-3, respectively, must relate to any such purpose or property that is located within, or attributable to, both the jurisdiction of the issuer of the bonds and the jurisdiction of the entity authorized to allocate volume cap to an issue of bonds for the financing of such purpose or property. 1.

What are the limits on financing costs outside the recovery zone?

2. What does it mean to be “attributable” to a jurisdiction? If one county believes a project located in an adjacent county will benefit them, would the IRS question this? 3. If the issuer of the bonds is an “on behalf of” issuer, what does it mean to be in the jurisdiction of that entity? Isn’t it sufficient that they have the state law authority to issue bonds for a project in a particular jurisdiction? D. III.

What can’t be financed with a RZEDB other than refundings?

Davis-Bacon. Section 1601 indicates that Davis-Bacon applies to any RZEDB. A.

Does this provision have any impact on whether a bond qualifies as an RZEDB?

B.

What are the implications of this rule?

No.

IV.

Other Issues?