IRS Notice Raises Questions on Tax-Exempt Bond State Volume Cap Allocations

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On November 23, 2010, the IRS issued Notice 2010-81 (“Notice”) relating to establishment of the “issue date” of tax-exempt bonds issued under “drawn-down” loan structures. The primary purpose of the Notice was to provide guidance and clarification with respect to determining the issue date of Build America Bonds (“BABs”) and other special temporary tax-exempt bond programs established under the American Recovery and Reinvestment Act of 2009 that were subject to sunset on December 31, 2010*.

In anticipation of the rush to market of BABs and other terminating special tax-exempt bonds before December 31, 2010, particularly through the structuring of these bonds as “drawn down” financings that would close by year end but be subject to draw-down after that date, the IRS sought to provide guidance as to when such obligations would be considered by the IRS to have been “issued” for purposes of meeting the statutory deadline. In the Notice, the IRS recites the rules regarding the issue date of an “issue” of tax-exempt bonds under IRS Regulation 1.150-1(b) and the general rules under IRS Regulation 1.150-1(c)(1) as to when bonds issued as part of an issue will constitute the same “issue” for federal tax purposes. The Notice further recognizes and discusses the special rules regarding so-called “draw-down” loans and commercial paper financings under IRS Regulation 1.150-1(c)(4)(i) and (ii), but creates a distinction between the issue date of the issue itself and the issue date of the bonds comprising such issue by concluding that “[t]hese special rules apply to the issue date of the issue. The regulations do not provide special issue date rules for the issue date of bonds issued as draws under draw-down loans or as commercial paper.”

The Notice by its terms is applicable for purposes of determining whether a bond is “issued” for purposes of any Internal Revenue Code (“Code”) statutory deadlines, such as those applicable to BABs or other ARRA bond programs that terminated on December 31, 2010. The Notice expressly does not apply for purposes of applying the rules for so-called “bank-qualified” bonds under Sections 265(b)(3) and 265(b)(7) of the Code, leaving those items to future IRS guidance. Clear enough. However, the Notice also provides that it is applicable for determining whether bonds have been issued for purposes of “various volume cap limitations on State and local bonds…”

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