• IRS Limits Use of Draw-Down Bonds for BABs: Makes Exception for Bank Qualified Bonds
  • November 26, 2010
  • Law Firm: Hunton Williams - Richmond Office
  • The IRS has -- at last -- provided guidance that generally prohibits the use of “drawdown bonds or loans” and similar structures where the bond proceeds will not be fully funded at closing to avoid the December 31, 2010 deadline for Build America Bond issuances, but importantly permits the use of draw-down structures for “bank qualified bonds” under Section 265(b)(3) of the Code. In recent months, the municipal bond market has been grappling with the implications of the pending deadlines for the American Recovery and Reinvestment Act of 2009 (“ARRA”). In particular, the authorization for Build America Bonds (“BABs”) and other types of bonds authorized by ARRA is set to expire on December 31, 2010. Certain existing IRS regulations suggested that issuers could maximize the benefits of BABs by issuing the bonds as “draw-down loans” prior to December 31, with only a portion of the proceeds immediately advanced and later portions advanced following December 31, since the date of the “issue” would be the date of the first draw-down. Similar rules apply for commercial paper, and it was thought that this analysis would permit the use of BABs to finance projects even when the full amount of the debt was not funded until after December 31.