Build America Bonds (BABs) were authorized in February 2009 by the American Recovery and Reinvestment Act. BABs are governmental bonds issued by states and local governments. Unlike traditional tax-exempt bonds, BABs bear interest at a taxable rate; however, the Federal government pays the issuer of the bonds a subsidy equal to 35 percent of each interest payment. The net interest cost to the issuer is equal to or below the interest cost of a traditional tax-exempt bond.
The IRS has reported that between April 3, 2009, and January 31, 2010, 834 BABs were issued in 47 states, with a total par amount of nearly $71 billion. BABs have become an important type of financing for states and local governments.
In January and February 2010, the IRS released the following new forms and other documents pertaining to BABs:
- Form 14127: Direct Pay Bonds Compliance Check Questionnaire
The IRS has announced that it has begun sending this form, along with a cover letter, to every issuer of BABs. A "compliance check" is neither an audit nor an investigation, but rather is a review by the IRS to determine adherence to certain tax requirements. The questionnaire contains six questions, some multi-part, pertaining to: premium issued on the BABs, records of the issuer related to secondary market trades of the BABs, written procedures pertaining to tax law compliance and the issuer's tax record policies. Issuers that receive the questionnaires are required to provide the requested information to the IRS.
It is unclear how the IRS plans to use the information obtained through the new compliance questionnaire. Information provided by issuers could have important consequences for the issuer, and could lead to further inquiries by the IRS. Prior to completing the questionnaire and submitting it to the IRS, all issuers should consult with nationally recognized bond counsel. In addition, issuers that have issued BABs are encouraged to review the questionnaire now and begin to develop answers to the questions, together with their bond counsel. For example, some clients may want to begin developing written procedures of the type mentioned in the questionnaire.
Please click here for Form 14127 and cover letter.
- Form 8038-B: Information Return for Build America Bonds and Recovery Zone Economic Development Bonds
Since February 2009, the IRS required issuers of BABs to file Form 8038-G with each BAB issuance. Beginning February 2010, issuers of BABs must file a new Form 8038-B with each BAB issuance. Bond counsel will assist each issuer with this form at the time the BABs are issued.
Please click here for Form 8038-B and instructions.
- Form 8038-CP: Return for Credit Payments to Issuers of Qualified Bonds
No later than forty-five days prior to each interest payment date, the IRS requires issuers to file a Form 8038-CP with the IRS. The IRS will use this form to pay the issuer its 35 percent interest subsidy on the next interest payment date. Effective January 2010, a new Form 8038-CP must be used.
Please click here for Form 8038-CP and instructions.
- Frequently Asked Questions on Build America Bonds and Recovery Zone Economic Development Bonds
This document was released in February 2010 and is not an IRS form, but rather is a FAQ for use by BAB issuers, investors and others interested in learning about BABs.
Please click here for FAQ.
- Frequently Asked Questions on Filing Requirements for Build America Bonds and Recovery Zone Economic Development Bonds
This document was released in February 2010 and is not an IRS form, but rather is a FAQ for use by BAB issuers and others interested in learning about the filing requirements of BABs. These filing requirements include both the Form 8038-B which must be filed upon issuance of the BABs, and the Form 8038-CP which must be filed prior to each BAB interest payment date.
Please click here for FAQ.
If you have any questions regarding this article or its possible impact on your activities and operations, please contact your Sherman & Howard attorney or one of the attorneys in our Public Finance Group.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.
© 2010 Sherman & Howard L.L.C. February 25, 2010