n-10-81.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Build America Bonds and Other State and Local Bonds: Timing of Issuing Bonds

Notice 2010-81

SECTION 1. PURPOSE
This Notice provides guidance on the determination of when State and local
bonds (as defined in § 103(c)) of the Internal Revenue Code (the “Code”) are
considered “issued” for purposes of deadlines on issuing bonds. This Notice provides
guidance on the relevant distinction between the “issue date” of a “bond” versus the
“issue date” of an “issue” for purposes of this determination. One instance, among
others, in which this Notice applies is in determining when Build America Bonds,
structured as “draw-down” bonds or loans in which draws are funded at different times,
are considered issued for purposes of statutory deadlines on issuing these bonds under
§ 54AA.
This Notice does not apply for purposes of applying the qualified small issuer and
de minimis exceptions to the tax-exempt carrying cost disallowance provision under
§ 265(b)(3) and § 265(b)(7) to draw-down loans.

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SECTION 2. BACKGROUND
Section 1531 of Title I of Division B of the American Recovery and Reinvestment
Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) (“ARRA”) added § 54AA to the
Code, whic
h authorizes State and local governments, at their option, to issue Build
America Bonds as taxable governmental bonds and receive Federal subsidies for a
portion of their borrowing costs. Sections 54AA(d), 54AA(g), and 6431 require that
Build America Bonds be issued before January 1, 2011.
In a related provision, § 1401 of ARRA added §§ 1400U-1 through 1400U-3 to
the Code, which authorizes two types of “Recovery Zone Bonds,” including a type of
Build America Bond known as “Recovery Zone Economic Development Bonds” and a
type of traditional tax-exempt bond known as “Recovery Zone Facility Bonds.” These
Recovery Zone Bonds have bond volume limitations and a statutory deadline that
requires the bonds to be issued before January 1, 2011.
Section 1503(a) of ARRA amended § 57(a)(5)(C) to add new clause (vi), which
provides, in part, that for purposes of the alternative minimum tax preference for interest
on certain tax-exempt private activity bonds under § 57(a)(5)(C)(i), the term “private
activity bond” shall not include any bond issued after December 31, 2008, and before
January 1, 2011. Section 1503(b) of ARRA amended § 56(g)(4)(B) to add new clause
(iv), which provides that the adjusted current earnings (ACE) adjustment under
§ 56(g)(4)(B)(i) for interest on certain tax-exempt bonds shall not include any interest on
certain bonds issued after December 31, 2008, and before January 1, 2011.

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In addition, other statutory provisions impose statutory time periods for issuing
State and local bonds in both targeted circumstances and in more general
circumstances. Another selected example of a targeted bond program that imposes a
statutory time period on issuing bonds is the Gulf Opportunity Zone Bond program
under § 1400N. One general provision that imposes statutory time periods on issuing
bonds is the annual State private activity bond volume cap under § 146, which generally
limits the amount of tax-exempt private activity bonds that may be issued in a State in a
particular year. Similarly, certain types of qualified tax credit bonds under § 54A have
volume caps and statutory time periods for issuing bonds. Another general provision is
§ 265(b)(3), which generally provides an exception to the carrying cost disallowance
provision for financial institutions that purchase tax-exempt obligations from “qualified
small issuers” that reasonably expect to issue no more than $10 million in tax-exempt
bonds in a calendar year. ARRA raises the amount of this exception to $30 million for
bonds issued in 2009 and 2010. Thus, the determination of when bonds are issued is
relevant to the statutory limitations affecting Build America Bonds and many other State
and local bond programs.
Recently, questions have arisen about which issue date rule applies for the
statutory deadline on issuing Build America Bonds with respect to a financing structure
known as “draw-down” loans in which funds are advanced at different times. The
regulations provide issue date rules for “bonds” and for “issues” of bonds (with
subsidiary special rules which treat bonds issued under draw-down loans or commercial

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paper programs as part of the same issue). Section 1.150-1(b) of the Income Tax
Regulations includes a general definition for the “issue date” of a “bond,” that provides
the issue date is the date on which the issuer receives the purchase price in exchange
for that bond, provided that in no event is the issue date of a bond earlier than the first
day on which interest begins to accrue on such bond for Federal income tax purposes.
See also Harbor Bancorp v. Commissioner
, 105 T.C. 260 (1995), aff’d 115 F.3d 722 (9
th

Cir. 1997)(citing regulatory predecessors to this general definition in interpreting
statutory deadlines for issuing bonds under the Tax Reform Act of 1986).
Section 1.150-1(b) defines a “bond” to mean any “obligation” of a State or
political subdivision thereof under § 103(c)(1). Section 1.150-1(b) also defines an
“obligation” to mean any valid evidence of indebtedness under general Federal income
tax principles.
By comparison, § 1.150-1(c) defines the broader term bond “issue” under a
general definition and various special rules that may include bonds as part of the same
issue even if they are issued at different times under a common tax plan. Section
1.150-1(b) defines the “issue date” of an “issue” to mean the first date on which the
issuer receives the purchase price in exchange for delivery of the evidence of
indebtedness representing any bond included in the issue, provided that in no event is
the issue date of an issue earlier than the first day on which interest begins to accrue on
the first bond included in the issue for Federal income tax purposes. Section 1.150-
1(c)(1) provides a general rule which treats bonds as part of the same issue if the bonds

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are sold (versus issued) at substantially the same time (meaning sold less than 15 days
apart), the bonds are part of the same plan of financing, and the bonds are reasonably
expected to be paid from the same source of funds.
Section 1.150-1(c)(4)(i) treats bonds issued pursuant to a “draw-down loan” as
part of the same bond issue. This special rule further provides that the issue date of the
issue is the first date on which the aggregate draws under the loan exceed the lesser of
$50,000 or five percent of the issue price. Section 1.150-1(c)(4)(ii) allows commercial
paper issued pursuant to the same commercial paper program to be treated as part of
the same issue. This special rule further provides that the issue date of the issue is the
first date on which the aggregate amount of commercial paper issued under the
program exceeds the lesser of $50,000 or five percent of the issue price. This special
rule generally allows commercial paper to be treated as part of the same issue if it is
issued to finance or refinance the same governmental purposes pursuant to a single
master legal document during an 18-month period or if it is issued to refinance such
commercial paper for up to 30 years if there is no increase in the principal amount after
the initial 18-month period. These 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. In Rev. Rul. 89-70,
1989-1 C.B. 88, however, the IRS ruled that the entire stated principal amount of a
draw-down loan was considered issued on the date on which more than a de minimis
amount of the loan was first advanced.

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SECTION 3. SCOPE
This Notice applies for determining compliance with deadlines for issuing State
and local bonds such as Build America Bonds under §§ 54AA(d), 54AA(g) and 6431,
and Recovery Zone Bonds under §§ 1400U-1 through 1400U-3. The analysis in this
Notice also applies for other deadlines for issuing bonds, such as, among others, the
exceptions to the alternative minimum tax preferences and adjustments for interest on
certain tax-exempt bonds under §§ 56(g)(4)(B)(iv) and 57(a)(5)(C)(vi), Gulf Opportunity
Zone Bonds under § 1400N and various volume cap limitations on State and local
bonds (as defined in § 103(c)).
This Notice does not apply for purposes of applying the qualified small issuer and
de minimis exceptions to the tax-exempt carrying cost disallowance provision under
§ 265(b)(3) and § 265(b)(7) to draw-down loans. For this purpose, Rev. Rul. 89-70 will
continue in effect until further guidance is provided, which guidance will be prospective.
SECTION 4. GUIDANCE
In general, for determining compliance with deadlines on issuing bonds covered
by this Notice, a bond is considered issued on the “issue date” of the “bond” under
§ 1.150-1(b). Section 1.150-1(b) defines the “issue date” of a “bond” to mean the date
on which the issuer receives the purchase price in exchange for that bond, provided that
in no event is the issue date of a bond earlier than the first day on which interest begins
to accrue on such bond for Federal income tax purposes.
By contrast, the issue date of an “issue” under § 1.150-1(b) is the first date on

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which the issuer receives the purchase price in exchange for delivery of the evidence of
indebtedness representing any bond included in the issue, provided that in no event is
the issue date of an issue earlier than the first day on which interest begins to accrue on
the first bond included within the issue for Federal income tax purposes. Bonds may be
issued at different times and nonetheless be treated as part of the same bond “issue”
under the various special provisions for single issues under § 1.150-1(c). Thus, to
ensure that an entire issue of bonds meets a statutory deadline on issuing bonds, all of
the bonds that are part of the issue should be issued by the applicable statutory
deadline.
In the particular case of a “draw-down” loan under § 1.150-1(c)(4)(i) or a
commercial paper program under § 1.150-1(c)(4)(ii), in which a bond is issued as a
draw or as commercial paper at different times and interest begins to accrue on each
draw or commercial paper when it is funded, each draw or commercial paper constitutes
a separate bond that is issued on the issue date of that draw or commercial paper when
the issuer receives the purchase price, and interest begins to accrue, on that draw or
commercial paper for Federal income tax purposes. Thus, for Build America Bonds
structured as draw-down loans or commercial paper programs, only those draws or
commercial paper that are funded before January 1, 2011, and for which interest begins
to accrue for Federal income tax purposes before January 1, 2011, may qualify as Build
America Bonds for purposes of the statutory time deadlines for issuing Build America
Bonds.

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SECTION 5. DRAFTING INFORMATION
The principal authors of this notice are Vicky Tsilas and Timothy L. Jones of the
Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this notice contact Vicky Tsilas at (202) 622-3980 (not a toll-free
call).