Code Sections 1400U-1

In General

The provision permits an issuer to designate one or more areas as recovery zones. The area must: (1) have significant poverty, unemployment, general distress, or home foreclosures; (2) be an area for which a designation as an empowerment zone or renewal community is in effect or; (3) be an area designated by the issuer as economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990. Issuers may issue recovery zone economic development bonds and recovery zone facility bonds with respect to these zones.

There is a national recovery zone economic development bond limitation of $10 billion. In addition, there is a separate national recovery zone facility bond limitation of $15 billion. Under the Act the national recovery zone economic development bond limitation and national recovery zone facility bond limitation are allocated among the States in the proportion that each State’s employment decline bears to the national decline in employment (the aggregate 2008 State employment declines for all States).²⁰³ The Secretary is to adjust each State’s allocation for a calendar year such that no State receives less than 0.9 percent of the national recovery zone economic development bond limitation and no less than 0.9 percent of the national recovery zone facility bond limitation. The Act also permits a county or large municipality to waive all or part of its allocation of the State bond limitations to allow further allocation within that State. In calculating the local employment decline with respect to a county, the portion of such decline attributable to a large municipality is disregarded for purposes of determining the county’s portion of the State employment decline and is attributable to the large municipality only.

For purposes of the provision ‘‘2008 State employment decline’’ means, with respect to any State, the excess (if any) of (i) the number of individuals employed in such State as determined for December 2007, over (ii) the number of individuals employed in such State as determined for December 2008. The term ‘‘large municipality’’ means a municipality with a population of more than 100,000.

Recovery Zone Economic Development Bonds

New section 54AA(h) of the Act creates a special rule for qualified bonds (a type of taxable governmental bond) issued before January 1, 2011, that entitles the issuer of such bonds to receive an advance tax credit equal to 45 percent of the interest payable on an interest payment date. For taxable governmental bonds that are designated recovery zone economic development bonds, the applicable percentage is 55 percent.

A recovery zone economic development bond is a 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 one or more qualified economic development purposes and the issuer designates  such bond for purposes of this section. However, the Act allows for  a reasonably required reserve fund to be funded from the proceeds of a recovery zone economic development bond. A qualified economic development purpose means expenditures for purposes of promoting development or other economic activity in a recovery zone, including (1) capital expenditures paid or incurred with respect to property located in such zone, (2) expenditures for public infrastructure and construction of public facilities located in a recovery zone.

The aggregate face amount of bonds which may be designated by any issuer cannot exceed the amount of the recovery zone economic development bond limitation allocated to such issuer.

Recovery Zone Facility Bonds

The provision creates a new category of exempt facility bonds, ‘‘recovery zone facility bonds.’’ A recovery zone facility bond means any bond issued as part of an issue if: (1) 95 percent or more of the net proceeds of such issue are to be used for recovery zone property and (2) such bond is issued before January 1, 2011, and (3) the issuer designates such bond as a recovery zone facility bond. The aggregate face amount of bonds which may be designated by any issuer cannot exceed the amount of the recovery zone facility bond limitation allocated to such issuer.

Under the provision, the term ‘‘recovery zone property’’ means any property subject to depreciation to which section 168 applies (or would apply but for section 179) if (1) such property was acquired, constructed, reconstructed, or renovated by the taxpayer after the date on which the designation of the recovery zone took effect; (2) the original use of such property in the recovery zone commences with the taxpayer; and (3) substantially all of the use of such property is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in such zone. The term ‘‘qualified business’’ means any trade or business except that the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)) and does not include any trade or business consisting of the operation of any facility described in section 144(c)(6)(B) (i.e., any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal purpose of which is the sale of alcoholic beverages for consumption off premises).

Subject to the following exceptions and modifications, issuance of recovery zone facility bonds is subject to the general rules applicable to issuance of qualified private activity bonds:

1. Issuance of the bonds is not subject to the aggregate annual State private activity bond volume limits (sec. 146);
2. The restriction on acquisition of existing property does not apply (sec. 147(d));

²⁰³ The Bureau of Labor Statistics prepares data on regional and State employment and unemployment. See, e.g., Bureau of Labor Statistics, USDL 09–0093, Regional and State Employment and Unemployment: December 2008 (January 27, 2009), http://www.bls.gov/news.release/laus.nr0.htm.
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