IRS Guidance Regarding Issue Date for Draw Down Loans
In November 2010, the IRS released Notice 2010-81 (the “Notice”) relating to “Build America Bonds and Other State and Local Bonds: Timing of Issuing Bonds.” The Notice divides the treatment of issue date for drawdown loan purposes into two categories:
- Draw down loans for which the statute specifies an issue date for a bond; and
- Draw down loans for which the statute specifies an issue date for an issue.
Build America Bonds (and similar bonds), which depend on the issue date for a bond, must therefore be drawn down by December 31 to retain treatment as build America bonds.
Bonds relying on the non-AMT provision in ARRA are bonds subject to the issue date for a bond rule in that Section 56(g)(4)(B)(iv) refers to “bond” issue. Therefore, draws before January 1, 2011 would be non-AMT, while draws after December 31, 2010 would be subject to AMT.
Section 265, on the other hand, which depends on the issue date for an issue, will be covered by the law applicable when an amount at least equal to the lesser of $50,000 or 5% of the bonds are drawn down.
Harbor Bancorp “Issue Date” Case
In the Harbor Bancorp case (105 T.C. No. 260), the tax court addresses whether bonds were issued on December 31, 1985 or in 1986. The court cites Treas. Reg. 1.103-13(b)(6), which states that ‘”Date of issue” is defined as the date on which there is a physical delivery of the evidence of indebtedness in exchange for the amount of the issue price. For example, obligations are issued when the issuer physically exchanges the obligations for the underwriter’s (or other purchaser’s) check.’ In Harbor Bancorp, on December 31 the parties drew up documents evidencing the indebtedness, but the obligations did not have substance behind them until February 1986 when actual funds were transferred from the bondowners. The court concluded that “mere” documents evidencing the indebtedness are not necessarily enough if the facts and circumstances show that the exchange hasn’t truly occurred. “Neither the share drafts nor the investment agreements had substance behind them. These items fell embarrassingly short of representing actual payment for the Bonds within the meaning of the Commissioner’s regulations. Accordingly, the date of issue of the Bonds was not December 31, 1985, but rather February 20, 1986, when actual funds were transferred from Security Pacific Bank to Chase Manhattan Bank and subsequently to Heritage, to the credit of the developer partnerships and then to Unified. Because the Bonds were issued after December 31, 1985, section 148(f) applies.”
Matthews & Wright “Issue Date” Case
In SEC v. Matthews & Wright proceedings from the mid-1980s, the SEC found that $300 million of tax-exempt multifamily rental housing for the Territory of Guam had not been “issued” when claimed by the parties in late 1985 because payment had been made in the form of a check by a credit union which had insufficient funds to cover the check. The finding in that case was that the bonds were truly issued in 1986 when the funds to honor the check were available. The issue in that case was that the underwriter retained positive arbitrage earnings and the bonds from the construction escrow, which would have been permitted under pre-1986 rules but not under post-1985 rules) were declared taxable arbitrage bonds.
Draw Down Bond Concern
Assume the issuer would like to issue a series of bonds in December 2010 and another series of bonds in January 2011, and the bonds are sold pursuant to the same offering document. Also also that both series of bonds are sold to the same purchaser, but that one series is delivered in December 2010 and the other in January 2011. The series are being issued in separate years in order to achieve “qualified tax-exempt obligation” status (I.R.C. 265(b)(3)) for each series. For purposes of 103 and 141-150, under Treas. Reg. 1.150-1(c), the series are treated as a single issue. It is not clear that this treatment, however, flows to the I.R.C. 265(b)(3) designation limitations. I.e., despite the single issue treatment under sections 103 and 141-150, are they nevertheless separate designations for I.R.C. 265(b)(3) purposes? There would be a concern in this situation that both series are treated as a draw down bond even for I.R.C. 265(b)(3) purposes with an issue date/designation date in the same year. To avoid this issue, bond counsel might still allow sale pursuant to the same offering document and sale on the same date as long as the purchasers in negotiated deals are different (i.e., not the same purchaser, who might agree to buy the 2011 series when issued). This matter is not relevant in a competitive transaction since there the facts more clearly indicate that a draw down structure is not contemplated.
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