SECTION 2. BACKGROUND

Section 42(a) allows a 10-year tax credit for investment in qualified low-income buildings placed in service after December 31, 1986. If, at the close of any tax year in the compliance period, the amount of the qualified basis of any building with respect to the taxpayer is

less than the amount of the qualified basis at the close of the preceding tax year, § 42(j)(1) provides that the taxpayer’s tax for the tax year shall be increased by the credit recapture amount under § 42(j)(2).

Section 42(j)(6) provides that a taxpayer that disposes of a qualified low-income building or an interest therein may defer or avoid recapture by furnishing a bond to the Secretary in an amount satisfactory to, and for the period required by, the Secretary if it is reasonably expected that the building will continue to be operated as a qualified low-income building for the remainder of the building’s compliance period. Guidance on the amount of bond considered satisfactory by the Secretary and the period of the bond required by the Secretary under § 42(j)(6) is provided in Rev. Rul. 90–60, 1990–2 C.B. 3.

Section 7101 provides that a person required to furnish a bond under Title 26 may, in lieu thereof, deposit certain Treasury securities as provided in 31 United States Code (U.S.C.) § 9303.

Under 31 U.S.C. § 9303 if a person is required under a law of the United States to give a surety bond, the person may give a Government obligation as security instead of a surety bond. The obligation

January 11, 1999 14 1999–2 I.R.B.

(1) For original issue purchases, the taxpayer must:

(a) complete a Treasury Direct Tender Form (PD 5381) to

purchase non-competitively the security with the required value and term;

(b) select Debit Account Clearing House as the method of payment on the tender;

(c) submit the completed tender to the PD-DCS collateral desk to be entered via Public Debt’s electronic site (PD-DCS will not process any tender received that does not include an already established account number for a Treasury Direct Account);

(d) receive a Treasury Direct Statement of Account that displays both the form of registration and the par amount of Treasury securities pledged; and

(e) submit within 30 days from receipt a copy of the Treasury Direct Statement of Account to the Service at the address cited in section 3.01(6) of this revenue procedure as evidence that the collateral pledge account has been funded.

(2) For secondary market purchases, the taxpayer must:

(a) purchase a Treasury security of the correct term and value on the secondary market through a broker/dealer;

(b) instruct the broker/dealer to transfer the Treasury security or securities into an established Treasury Direct Account;

(c) receive a Treasury Direct Statement of Account that displays both the form of registration and the par amount of Treasury securities pledged; and

(d) submit a copy of the Treasury Direct Statement of Account to the Service as evidence that the collateral pledge account has been funded.

.04 Taxpayers may purchase any combination of eligible Treasury securities to provide the required amount of collateral. All Treasury Direct Accounts are structured so that:

(1) Maturing securities are automatically reinvested in the same type of instruments previously held. If a like reinvestment option is not available upon a security’s maturity, the proceeds are invested in the next offered 26 week Treasury bill. No interest accrues or is paid for any period between investments.

shall: 1) be given to the official having authority to approve the surety bond; 2) be in an amount equal at par value to the amount of the required surety bond; and 3) authorize the official receiving the obligation to collect or sell the obligation if the person defaults on a required condition. A “Government obligation” is defined as a public debt obligation of the United States Government whose principal and interest are unconditionally guaranteed by the Government.

Over the years, taxpayers have reported difficulty in obtaining surety bonds because of the relatively small pool of surety companies that offer surety bonds for low- income housing buildings. Consequently, this program is being established to allow taxpayers to pledge Treasury securities in lieu of a surety bond to secure the taxpayer’s liability for credit recapture under § 42(j). Upon furnishing Treasury securities, the taxpayer will be treated, solely for purposes of applying § 42(j), as if the taxpayer had not disposed of the interest and the taxpayer will be deemed to continue to own the disposedof-interest under the rules of § 42(c). The taxpayer will not, however, be treated as claiming any additional low-income housing credit for the disposed-of-interest for any period following the disposition. If the qualified basis of the taxpayer’s deemed interest in a qualified low-income building decreases after a disposition of the taxpayer’s interest in the qualified low-income building, the Treasury securities may be forfeited in whole or in part.