Code Section 54F
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 54F and 6431 | 3/18/2010 | The Hiring Incentives to Restore Employment Act | Refundable Credit for Certain Qualified Tax Credit Bonds | -4,561 |
| 54F | 2/17/2009 | The American Recovery and Reinvestment Act of 2009 (Public Law 111-5) | Qualified school construction bonds | -9,877 |
Refundable Credit for Certain Qualified Tax Credit Bonds
Explanation of Provision
For bonds originally issued after the date of enactment, the provision allows an issuer of New CREBS, QECs, QZABs, or QSCBs to make an irrevocable election on or before the issue date of such bonds to receive a payment under section 6431 in lieu of providing a tax credit to the holder of the bonds.433 The payment to the issuer on each payment date is equal to the lesser of (1) the amount of interest payable under such bond on such date, or (2) the amount of interest which would have been payable under such bond on such date if such interest were determined by the Secretary at the applicable credit rate under section 54A(b)(3) with reamount determined pursuant to (2), immediately above, is 70 percent of such amount, without regard to sections 54C(b) and 54D(b). Bonds for which the election is made count against the national limitation in the same way that they would if no election were made.
The provision also adds a technical correction relating to QSCBs. The technical correction provides first that the limitation amount allocated to a State is to be allocated to issuers within such State by the State education agency (or such other agency as is authorized under State law to make such allocation). In addition, the technical correction provides that the rule in section 54F(e), permitting the carryover of unused QSCB limitation by a State or Indian tribal government, shall also apply to the 40 percent of QSCB limitation that is allocated among the largest school districts.
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Qualified school construction bonds
Explanation of Provision178
- In general
- National limitation
- Allocation to the States
- Allocation to large school districts
- Application of qualified tax credit bond rules
1. In General
The provision creates a new category of tax-credit bonds: qualified school construction bonds. Qualified school construction bonds must meet three requirements: (1) 100 percent of the available project proceeds of the bond issue is used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a bond-financed facility is to be constructed; (2) the bond is issued by a State or local government within which such school is located; and (3) the issuer designates such bonds as a qualified school construction bond.
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2. National limitation
There is a national limitation on qualified school construction bonds of $11 billion for calendar years 2009 and 2010, respectively.
3. Allocation to the States
The national limitation is tentatively allocated among the States in proportion to respective amounts each such State is eligible to receive under section 1124 of the Elementary and Secondary Education Act of 1965 for the most recent fiscal year ending before such calendar year. The amount each State is allocated under the above formula is then reduced by the amount received by any local large educational agency within the State.
For allocation purposes, a State includes the District of Columbia and any possession of the United States. The provision provides a special allocation for possessions of the United States other than Puerto Rico under the national limitation for States. Under this special rule an allocation to a possession other than Puerto Rico is made on the basis of the respective populations of individuals below the poverty line (as defined by the Office of Management and Budget) rather than respective populations of children aged five through seventeen. This special allocation reduces the State allocation share of the national limitation otherwise available for allocation among the States. Under another special rule, the Secretary of the Interior may allocate $200 million of school construction bonds for 2009 and 2010, respectively, to Indian schools. This special allocation for Indian schools is to be used for purposes of the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. For purposes of such allocations Indian tribal governments are qualified issuers. The special allocation for Indian schools does not reduce the State allocation share of the national limitation otherwise available for allocation among the States.
If an amount allocated under this allocation to the States is unused for a calendar year it may be carried forward by the State to the next calendar year.
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4. Allocation to large school districts
Forty percent of the national limitation is allocated among large local educational agencies in proportion to the respective amounts each agency received under section 1124 of the Elementary and Secondary Education Act of 1965 for the most recent fiscal year ending before such calendar year. Any unused allocation of any agency within a State may be allocated by the agency to such State. With respect to a calendar year, the term large local educational agency means any local educational agency if such agency is: (1) among the 100 local educational agencies with the largest numbers of children aged 5 through 17 from families living below the poverty level, or (2) one of not more than 25 local educational agencies (other than in (1), immediately above) that the Secretary of Education determines are in particular need of assistance, based on a low level of resources for school construction, a high level of enrollment growth, or other such factors as the Secretary of Education deems appropriate. If any amount allocated to large local educational agency is unused for a calendar year the agency may reallocate such amount to the State in which the agency is located.
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5. Application of qualified tax credit bond rules
The provision makes qualified school construction bonds a type of qualified tax credit bond for purposes of section 54A. In addition, qualified school construction bonds may be issued by Indian tribal governments only to the extent such bonds are issued for purposes that satisfy the present law requirements for tax-exempt bonds issued by Indian tribal governments (i.e., essential governmental functions and certain manufacturing purposes).
The provision requires 100 percent of the available project proceeds of qualified school construction bonds to be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified purposes during the three-year spending period, bonds will continue to qualify as qualified school construction bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the issuer’s request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.
Qualified school construction bonds generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified school construction bonds are issued.
The maturity of qualified school construction bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified school construction bonds are issued.
As with present-law tax credit bonds, the taxpayer holding qualified school construction bonds on a credit allowance date is entitled to a tax credit. The credit rate on the bonds is set by the Secretary at a rate that is 100 percent of the rate that would permit issuance of such bonds without discount and interest cost to the issuer. The amount of the tax credit is determined by multiplying the bond’s credit rate by the face amount on the holder’s bond. The credit accrues quarterly, is includible in gross income (as if it were an interest payment on the bond), and can be claimed against regular income tax liability and alternative minimum tax liability. Unused credits may be carried forward to succeeding taxable years. In addition, credits may be separated from the ownership of the underlying bond in a manner similar to the manner in which interest coupons can be stripped from interest-bearing bonds.
Issuers of qualified school construction bonds are required to certify that the financial disclosure requirements and applicable State and local law requirements governing conflicts of interest are satisfied with respect to such issue, as well as any other additional conflict of interest rules prescribed by the Secretary with respect to any Federal, State, or local government official directly involved with the issuance of qualified school construction bonds.
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178- Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111–147, added a provision to section 6431, allowing the issuer of the bonds to elect to receive a direct payment from the Treasury in lieu of providing a tax credit to the holders of the bonds. For further discussion, see Part Seven of this document.
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433- It is anticipated that the election procedure will be similar to the procedure for making the election required under Sec. 54AA(g) for a direct-pay build America bond. See Notice 2009–26, 2009–16 I.R.B. 833.
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