Code Section 6431
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 6431 and 54F | 3/18/2010 | The Hiring Incentives to Restore Employment Act | Refundable Credit for Certain Qualified Tax Credit Bonds | -4,561 |
| 6431 | 2/17/2009 | The American Recovery and Reinvestment Act of 2009 (Public Law 111-5) | Build America bonds | -4,348 |
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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Build America bonds
Explanation of Provision
- In General
- Special rule for qualified bonds issued during 2009 and 2010
- Transitional coordination with State law
1. In General
The provision permits an issuer to elect to have an otherwise tax-exempt bond treated as a ‘‘Build America Bond.’’ A ‘‘Build America Bond’’ is any obligation (other than a private activity bond) if the interest on such obligation would be (but for this provision) excludable from gross income under section 103 and the issuer makes an irrevocable election to have the provision apply. In determining if an obligation would be tax-exempt under section 103, the credit (or the payment discussed below for qualified bonds) is not treated as a Federal guarantee. Further, the yield on a taxable governmental bond is determined without regard to the credit. A taxable governmental bond does not include any bond if the issue price has more than a de minimis amount of premium over the stated principal amount of the bond.
The holder of a taxable governmental bond will accrue a tax credit in the amount of 35 percent of the interest paid on the interest payment dates of the bond during the calendar year.193 The interest payment date is any date on which the holder of record of the taxable governmental bond is entitled to a payment of interest under such bond. The sum of the accrued credits is allowed against regular and alternative minimum tax. Unused credit may be carried forward to succeeding taxable years. The credit, as well as the interest paid by the issuer, is included in gross income and the credit may be stripped under rules similar to those provided in section 54A regarding qualified tax credit bonds. Rules similar to those that apply for S corporations, partnerships and regulated investment companies with respect to qualified tax credit bonds also apply to the credit.
Unlike the tax credit for bonds issued under section 54A, the credit rate would not be calculated by the Secretary, but rather would be set by law at 35 percent. The actual credit that a taxpayer may claim is determined by multiplying the interest payment that the taxpayer receives from the issuer (i.e., the bond coupon payment) by 35 percent. Because the credit that the taxpayer claims is also included in income, the Congress anticipates that State and local issuers will issue bonds paying interest at rates approximately equal to 74.1 percent of comparable taxable bonds. The Congress anticipates that if an issuer issues a taxable governmental bond with coupons at 74.1 percent of a comparable taxable bond’s coupon that the issuer’s bond should sell at par. For example, if a taxable bond of comparable risk pays a $1,000 coupon and sells at par, then if a State or local issuer issues an equal-sized bond with coupon of $741.00, such a bond should also sell at par. The taxpayer who acquires the latter bond will receive an interest payment of $741 and may claim a credit of $259 (35 percent of $741). The credit and the interest payment are both included in the taxpayer’s income. Thus, the taxpayer’s taxable income from this instrument would be $1,000. This is the same taxable income that the taxpayer would recognize from holding the comparable taxable bond. Consequently the issuer’s bond should sell at the same price as would the taxable bond.
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2. Special rule for qualified bonds issued during 2009 and 2010
A ‘‘qualified bond’’ is any taxable governmental bond issued as part of an issue if 100 percent of the available project proceeds of such issue are to be used for capital expenditures.194 The Act also allows a reasonably required reserve fund to be funded from bond proceeds.195 The bond must be issued after the date of enactment of the provision and before January 1, 2011. The issuer must make an irrevocable election to have the special rule for qualified bonds apply.
Under the special rule for qualified bonds, in lieu of the tax credit to the holder, the issuer is allowed a credit equal to 35 percent of each interest payment made under such bond.196 If in 2009 or 2010, the issuer elects to receive the credit, in the example above, for the State or local issuer’s bond to sell at par, the issuer would have to issue the bond with a $1,000 interest coupon. The taxpayer who holds such a bond would include $1,000 on interest in his or her income. From the taxpayer’s perspective the bond is the same as the taxable bond in the example above and the taxpayer would be willing to pay par for the bond. However, under the provision the State or local issuer would receive a payment of $350 for each $1,000 coupon paid to bondholders. (The net interest cost to the issuer would be $650.)
The payment by the Secretary is to be made contemporaneously with the interest payment made by the issuer, and may be made either in advance or as reimbursement. In lieu of payment to the issuer, the payment may be made to a person making interest payments on behalf of the issuer. For purposes of the arbitrage rules, the yield on a qualified bond is reduced by the amount of the credit/payment.
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3. Transitional coordination with State law
As noted above, interest on a taxable governmental bond and the related credit are includible in gross income to the holder for Federal tax purposes. The provision provides that until a State provides otherwise, the interest on any taxable governmental bond and the amount of any credit determined with respect to such bond shall be treated as being exempt from Federal income tax for purposes of State income tax laws.
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193- Original issue discount (OID) is not treated as a payment of interest for purposes of determining the credit under the provision. OID is the excess of an obligation’s stated redemption price at maturity over the obligation’s issue price (section 1273(a)).
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194- Under Treas. Reg. sec. 150–1(b), capital expenditure means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under Treas. Reg. sec. 1.150–2(c)) under general Federal income tax principles. For purposes of applying the ‘‘general Federal income tax principles’’ standard, an issuer should generally be treated as if it were a corporation subject to taxation under subchapter C of chapter 1 of the Code. An example of a capital expenditure would include expenditures made for the purchase of fiber-optic cable to provide municipal broadband service.
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195- Under section 148(d)(2), a bond is an arbitrage bond if the amount of the proceeds from the sale of such issue that is part or any reserve or replacement fund exceeds 10 percent of the proceeds. As such the interest on such bond would not be tax-exempt under section 103 and thus would not be a qualified bond for purposes of the provision.
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196- Original issue discount (OID) is not treated as a payment of interest for purposes of calculating the refundable credit under the provision.
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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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