Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued temporary and proposed regulations on qualified zone academy bonds ("QZABs"). The regulations provide guidance to state and local governments that issue QZABs and to banks, insurance companies and other taxpayers that hold such bonds. The regulations also provide guidance on the maximum term, permissible use of proceeds and remedial actions for QZABs. Previously proposed regulations that were published on March 26, 2004, have been withdrawn. The withdrawn proposals had been issued prior to the enactment of the Tax Relief and Health Care Act of 2006 (P.L. 109-432), which contained amendments to the QZAB provisions under Code Sec. 1397E.
The text of the temporary regulations also serves as the text of the proposed regulations. Final regulations are revised to provide cross references to the temporary regulations.
Background
Under Code Sec. 1397E, an eligible taxpayer (financial institutions, including banks, insurance companies and corporations actively engaged in the business of lending money) that holds a QZAB on a credit allowance date is entitled to a nonrefundable tax credit for each year in which the bond is held. A QZAB is a taxable bond that is issued by a state or local government, the proceeds of which are used to improve certain eligible public schools. Bond issues are subject to both maximum term limitations and maximum amount limitations. Subsequent to the issuance of the 2004 proposed QZAB regulations, the Tax Relief and Health Care Act of 2006 ("2006 Act") amended Code Sec. 1397E by adding certain requirements in order for a bond to be a QZAB.
Temporary Regulations
The new temporary regulations provide that the maximum term for a QZAB is determined based on the first day on which there is a binding contract in writing for the sale or exchange of the bond. The IRS also noted that, at the present time, the Treasury Department is going to continue its current practice of publishing the credit rate and maximum term for QZABs on the Bureau of Public Debt's website for State and Local Government Series securities at: http://www.publicdebt.treas.gov.
The temporary regulations also provide guidance with respect to the "95-percent test" in Code Sec. 1397E(d)(1). This test requires, in part, that at least 95 percent of the bond proceeds be used for a qualified purpose with respect to a qualified zone academy. The regulations also retain, with certain modifications relating to amendments contained in the 2006 Act, two remedial actions contained in the withdrawn proposals that may be taken in certain circumstances if the 95-percent test is not met.
In addition, the temporary regulations provide guidance regarding the arbitrage investment restrictions contained in Code Sec. 148 applicable to tax-exempt state or local governmental bonds under Code Sec. 103. These restrictions were made applicable to QZABs under the 2006 Act.
Finally, the temporary regulations, reflecting Code Sec. 1397E(h), require that issuers of QZABs file information returns with the IRS similar to those required under Code Sec. 149(e) regarding tax-exempt state or local bonds. The IRS will prescribe the forms to be used by QZAB issuers.
Proposed Regulations
Written or electronic comments and requests for a public hearing on the proposed regulations must be received by the IRS by October 15, 2007. Submissions should be sent to: CCA:LPDR (REG-121475-03), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CCA:LPDR (REG-121475-03), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC., or sent electronically, via the Federal eRulemaking Portal at http://www.regulations.gov/(IRS REG-121475-03).
T.D. 9339, 2007FED ¶47,046
Proposed Regulations, NPRM REG-121475-03, 2007FED ¶49,752
Other References:
Code Sec. 1397E
CCH Reference - 2007FED ¶32,406
CCH Reference - 2007FED ¶32,406M
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