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Internal Revenue Service Notice 2010-28, published by the IRS in April 2010, provides interim guidance addressing stripping transactions for qualified tax credit bonds and certain related procedural and accounting matters.  Notice 2010-28 is available for download here.

Background

The American Recovery and Reinvestment Act of 2009 and the Economic Stabilization Act of 2008 authorized the issuance of several types of tax credit bonds constituting “qualified tax credit bonds” under Section 54A of the Internal Revenue Code of 1986, as amended, including Qualified School Construction Bonds, Qualified Energy Conservation Bonds and New Clean Renewable Energy Bonds.  A qualified tax credit bond is a bond that meets applicable requirements set forth in Section 54A(d) of the tax code.  These bonds allow the registered owners of the bonds to claim a federal tax credit equal to a specified credit rate as determined by the Secretary of the Treasury.  Pursuant to the tax code, the credits may be stripped from the underlying bond.  Stripping tax credits refers to the separation of the ownership of the bond and the entitlement to the credit with respect to such bond.

The Peck Shaffer Tax and Financial Analysis practice group has prepared a detailed client alert providing additional information on qualified tax credit bonds and is available for download here.

Interim Guidance

Based on the interim guidance contained in Notice 2010-28, four requirements must be satisfied to effect the stripping of tax credits from the underlying qualified tax credit bonds:

1. On or before the issue date of the bonds, the issuer must state in the bond documents that the tax credits are subject to separation from the underlying bonds (for an issue of qualified tax credit bonds issued before March 31, 2010, such designation may be effected on or before May 17, 2010);
2. The issuer must identify the bond issue as a strippable issue on the first information return filed with the Internal Revenue Service in connection with such bond issue;
3. The issue of bonds must be issued in registered form (registered form means that all rights to stated principal, stated cash interest and tax credits under the bond may be transferred only through book entry); and
4. Separate CUSIP numbers must be assigned to the bonds, to all rights to receive tax credits on each credit allowance date and to all rights to receive cash (e.g., principal and interest) with respect to the bond issue.
5. If you have questions about qualified tax credit bonds or stripping of tax credits, or if you have questions about other tax credit bonds or tax-exempt bonds, please contact the Peck Shaffer Tax and Financial Analysis practice group.

To ensure compliance with requirements of the Internal Revenue Service under 31 CFR Part 10, Section 10.35, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (a) avoiding tax-related penalties under the Code or (b) promoting, marketing or recommending to another party any tax-related matter addressed herein.