Issues Re: Draw-Down Loans:
A. Information Reporting Requirements (1.149(e)-1(e)):
Generally, interest on a bond is included in gross income unless proper information reporting is accomplished with respect to the issue of which the bond is a part. In a draw-down situation, the relevant question becomes: “what is the issue?”
Under (e)(2), the issue is defined, for information reporting purposes only (!), as bonds issued during the same calendar year. However, under (e)(2)(ii)(B), if the bonds issued pursuant to a draw-down loan meets the requirements of the first sentence of (B) (equally and ratably secured under a single indenture, etc.), bonds may be treated as the same issue even if issued during different calendar years, so long as all amounts to be advanced pursuant to the draw-down loan are reasonably expected to be advanced within three years of the date of issue of the first bond.
Note the special information reporting rules described in IRS Notice 2011-63 for bonds and draw-down loan bonds that have volume cap assigned to them. The issue date for these bonds may be either the issue date of the bond or the issue date of the issue. If the election is made to use the issue date of the issue, the 8038 should include the phrase “FILED IN ACCORDANCE WITH NOTICE 2011-63 STATE AND LOCAL BONDS: VOLUME CAP AND TIMING OF ISSUING BONDS.”
B. What is the “issue” and “issue date” of bonds issued pursuant to a draw-down loan?
Section 1.150-1(c)(4)(i) states that bonds issued pursuant to a draw-down loan are treated as part of a single issue. The issue date of that issue is the first date on which the aggregate draws under the loan exceed the lesser of $50,000 or 5 percent of the issue price. Notice 2010-81 clarifies that this is the approach to use to determine the issue date of bank qualified (QTEO) and 2% de minimis bonds.
C. Are draws after 2010 on QTEO issued in 2009 or 2010 eligible for QTEO status ?
There has been discussion concerning what constitutes the issue date of bonds for determining BABs status or QTEO (bank qualification) status of draws made on such bonds after the ARRA provisions expired. In Notice 2010-81, the IRS determined that, for purposes of determining whether a draw qualifies for BABs treatment, the applicable “issue date” is the date of the actual draw (i.e., the date of the bond resulting from the draw). However, for purposes of determining whether such a draw qualifies for bank qualification under the ARRA rules, the IRS permits the issuer to use the issue date of the total issue (vs. issue date of the bond resulting from the draw). This means, if a draw-down loan and the related issue is properly issued in 2010, but a subsequent draw occurs in 2011, for purposes of determining that the draw falls within the ARRA QTEO rules, one looks to the issue date of the “issue,” and not the bond resulting from the draw. See the McGuire Woods discussion of Notice 2010-81 linked here.
D. In connection with a refunding/new money financing, may a draw-down for refunding establish the issue date, or does the draw-down need to be in respect of new money?
Some bond counsel have determined that the draw-down must be in respect of the new money portion. A draw to cover the refunding is not sufficient. The 5 percent or $50,000 test is calculated using the full issue price, however (not the portion of the issue price allocable to the new money project). Other bond counsel read the rule as permitting the initial draw with respect to the refunding without the need to draw on the new money portion as well.
E. When you make the first draw, and also pay all costs of issuance, those COI may exceed 2% of the first draw. Is this a problem?
This topic was discussed at the 2011 TSLI in Austin, Texas. A March 11 NABL Weekly Wrap had the following to report concerning the matter: “The panel also focused on the requirements for filing Form 8038 when a bond is set up for draw-downs, as in a construction finance situation, and has a volume cap, and addressed the broad concern about Notice 2010-81, issued late last year. Panel Chair Linda Schakel, noted that in a construction situation, when the drawdown is in increments, the costs of the issuance would exceed two percent. Co-panelists John Cross of the IRS Office of Tax Policy, and Clifford Gannett, manager of the TEB Division at IRS, reassured the audience that the IRS and Treasury are working to clarify this before the filing season to avoid amended returns.”
While it may be safest not to permit more than 2% of each draw to be used for costs of issuance, facts and circumstances may suggest that increased percentages from initial draws are acceptable. Factors to consider are whether a given draw will attempt to include the full 2% costs of issuance amount calculated based on the aggregate of all draws or whether the costs of issuance “overage” for a particular draw is small. One might also include a covenant in the tax document requiring consultation with bond counsel in the event all expected draws do not occur to facilitate timely final allocation of bond proceeds away from costs of issuance.
F. Issue date for QTEO draw-down bonds and Volume Cap: Conflicts in interpreting issue date?
From a recent IRS future guidance notice of December 2010: “Notice 2010-81 provided guidance regarding when State and local bonds are considered issued for purposes of various timing deadlines on issuing bonds. Issuers who entered into draw-down loans or commercial paper programs in 2010 before the release of Notice 2010-81 on November 23, 2010 or in earlier years and who acquired private activity bond volume cap under section 146 for the entire loan or program under the assumption that all of the bonds were issued in the year that draws under the loan or program exceeded $50,000 or larger, have expressed to the IRS and Treasury Department concerns that States have taken different approaches towards the treatment of such draws for volume cap purposes under section 146. States and issuers have indicated that changing the different approaches to volume cap in this area presents administrative difficulties. A complicating issue with respect to such volume cap awards is that the awards in 2008, 2009, and 2010 may include volume cap from the temporary $11 billion increase in annual private activity bond volume cap established under the Housing Assistance Tax Act of 2008 (See Notice 2008-79). That temporary volume cap is not available after 2010.”
Relevant Private Letter Rulings and other Publications:
PLR 200147015: The issue date of a bond pursuant to a draw down is the date the interest actually begins accruing. The total project issue will not be issued earlier than necessary for purposes of 1.148-10(a)(4) (overburdening the tax-exempt market). In this letter ruling, the IRS approved the issue date determination and draw-down structure where funds were going to be drawn down over a five-year period.
Rev Rul 89-70 (1989) 1989-1 CB 88: Draw-down note is considered issued, for purposes of 26 USCS § 265(b), on date that more than de minimis amount is first advanced under note; amount of draw-down note is its stated principal amount.