Qualified Zone Academy Bonds (I.R.C. 54E)

March 3, 2016

Private Business Contribution Requirement

Under Section 54E(a)(3)(B), the issuer must certify that it has written assurances that the “private business contribution” requirement will be met with respect to the academy.  The private business contribution requirement is described in Section 54E(b) of the Code.  Under that section, the requirement is met with respect to any issue if the eligible local education agency that established the qualified zone academy has written commitments from private entities to make “qualified contributions” having a “present value” (as of the date of issuance of the issue) of not less than 10% of the “sale proceeds” (see Treas. Reg. 1.1397E-1(a)(2)(ii)(B)) of the issue.

A “qualified contribution” is any contribution (of a type and quality acceptable to the eligible local education agency) of:

  1. equipment for use in the qualified zone academy (including state-of-the-art technology and vocational equipment);
  2. technical assistance in developing curriculum or in training teachers in order to promote appropriate market driven technology in the classroom;
  3. services of employees as volunteer mentors;
  4. internships, field trips or other educational opportunities outside the academy for students; or
  5. any other “property” or service specified by the eligible local education agency.

Treas. Reg. 1.1397E-1(c)(3) explains that cash received with respect to a qualified zone academy from a private entity (other than cash received indirectly from a person that is not a private entity as part of a plan to avoid the requirements of section 1397E [and 54E]) constitutes a “qualified contribution” only if it is to be used to purchase any property or service described in the list above.  Services of employees of the eligible local education agency do not constitute qualified contributions.

To determine the present value (as of the date of issuance of the issue) of qualified contributions from private entities, the issuer must use a “reasonable” discount rate.  The credit rate is a reasonable discount rate.

I.R.C. 1397E applies to obligations issued on and before October 3, 2008.  That section provides a five-year expenditure requirement for 95 percent of the sale proceeds of the bonds.  If less than 95 percent are spent by the end of five years, the issuer must redeem nonqualified bonds.

Refundings

Can QZABs be refunded on a current refunding basis?  See Treas. Reg. 1.1397E-1(h)(9)(i).  Except in certain interim refinancing circumstances, it appears that refundings, even on a current refunding basis, are not permitted.  See also Section 6.4 of Notice 2010-35 regarding refundings of qualified tax credit bonds that are direct pay bonds.

Volume Cap

See Notice 2015-11 for a summary of volume cap amounts available for QZABs, including the new volume cap for 2014.  See Notice 2016-20 for guidance regarding volume cap for 2015 and 2016.  Volume cap may be carried forward for two years.  As described in the notice, QZABs may no longer be issued as direct pay bonds.

References

See Joint Committee on Taxation report of 2011 regarding a description of the changes from I.R.C. 1397E to I.R.C. 54A and I.R.C. 54E.

FAQ | QZAB from the Department of Education.


Qualified School Construction Bonds (I.R.C. 54F)

March 3, 2016

Volume Cap Allocations

According to statements by Aviva Roth (who, as of May 2010 is no longer at TEB) at the 2009 Bond Attorneys Workshop in Phoenix, QSCB allocations from the IRS to large local school districts cannot be carried forward by such large local school districts. The allocations must be transferred to the state. The state will then be able to carry forward the allocation.  Section 54F(e) of the Code states that an allocation to the State may be carried forward to a subsequent year if not used.  It is not sure how such allocation carryforward is put into practice.

Qualified Purposes

All QSCB expenditures after costs of issuance (not exceeding two percent) must be used for capital expenditures for construction, rehabilitation or repair of the school facility or to acquire land on which the facility is to be constructed with proceeds of the QSCBs.  In a separate publication (Notice 2009-35) and also in an IRS Q&A from 2010 (http://www.irs.gov/pub/irs-tege/tc_and_stcb_q-a._09-07-10_1.5.pdf), the IRS has indicated that QSCB proceeds can also be used for “equipment or furniture” so long as the equipment of furniture is used in the portion of the public school facility that is being constructed, rehabilitated or repaired with part of the QSCB proceeds.

Refundings

Bonds that refund QSCBs (or reissued bonds) will not retain the status as qualified tax credit bonds.  Legislation or guidance will be needed to determine whether, e.g., a current refunding bond can remain a QSCB.  The statute and notices provide that refundings are not permitted purposes for QSCBs (except in very limited cases).