On Jan. 13, 2014, the IRS released Notice 2014-9 (the Notice), which provides guidance on refunding (on a current basis only) tax-exempt bonds that have been issued as Recovery Zone Facility Bonds under Section 1400U-3 of the Internal Revenue Code (the Code).
The American Recovery and Reinvestment Act of 2009 authorized Recovery Zone Facility Bonds to be issued after its enactment through the end of 2010 to finance “recovery zone property” for use within certain “recovery zones.”
The term “recovery zone” includes certain areas designated by the issuer as having significant economic distress, poverty, unemployment, rate of home foreclosures or general distress. The term “recovery zone property” generally means depreciable property in a recovery zone if (A) such property was constructed, reconstructed, renovated or acquired by purchase after the date on which the designation of the recovery zone took effect; (B) the original use of which in the recovery zone commences with the taxpayer; and (C) substantially all of the use of which is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in the recovery zone.
The statutory provisions relating to Recovery Zone Facility Bonds are silent on the permissibility of the current refundings of these bonds. Under Notice 2014-9, however, Recovery Zone Facility Bonds may be currently refunded if the following requirements are met:
- The “issue price” of the current refunding issue is no greater than the outstanding stated principal amount of the refunded bonds. For refunded bonds originally issued with more than a de minimis amount of original issue discount or premium, the present value of the refunded bonds must be used in lieu of the outstanding stated principal amount to determine the maximum issue price of the current refunding issue; and
- The current refunding issue meets all applicable requirements for the issuance of tax-exempt private activity bonds including, without limitation, the requirement under Section 147(b) of the Code that the average maturity of the bonds issued as part of such issue be no longer than 120 percent of the average reasonably expected economic life of the facilities financed or refinanced with the net proceeds of such issue.
The Notice also provides that no further designation or further official state or local governmental action is required for the refunding bonds so long as the original refunded bonds satisfied the designation requirement under Section 1400U-3(b)(1)(C). Lastly, the Notice states that no inference should be drawn from the guidance provided therein that bonds issued to refund other types of bonds, such as build America bonds under Section 54AA of the Code, after their statutory deadline for issuance meet the qualifications for such types of bonds.