SECTION 3. BACKGROUND AND

GENERAL REQUIREMENTS

(1) Qualified Tax Credit Bonds

Section 54A(a) provides that a taxpayer that holds a qualified tax credit bond on one or more credit allowance dates of the

bond during the taxable year shall be allowed a credit against the taxpayer’s income tax for the taxable year equal to the sum of the credits determined under section 54A(b).

The credit amount for any credit allowance date is 25 percent of the annual credit determined with respect to the bond. The annual credit is determined by multiplying the applicable credit rate by the outstanding face amount of the bond. The applicable credit rate for the bond is the rate that the Secretary estimates will permit the issuance of the qualified tax credit bond with a specified maturity or redemption date without discount and without interest cost to the qualified issuer.

Section 54A(d) provides that a qualified tax credit bond means a QFCB that is part of an issue that meets the requirements of paragraphs (2) through (6) of section 54A(d). Paragraphs (2), (3), (4), (5), and (6) set forth requirements related to expenditures, reporting, arbitrage, maturity, and conflicts of interest, respectively.

Other definitions are set forth in section 54A(e). For example, the term “credit allowance date” means March 15, June 15, September 15, and December 15 of each year, as well as the last day on which the bond is outstanding. The term “available project proceeds” means the excess of the proceeds from the sale of the issue over the issuance costs financed by the issue (to the extent that such costs do not exceed 2 percent of such proceeds) plus the investment return from any investment of the excess.

Section 54A(f) provides that the credit amount determined in section 54A(a) is treated as interest that is includable in gross income.

Under section 54A(g), if an S corporation or a partnership allocates to its shareholders or partners (as the case may be) a credit allowed by section 54A, then the allocation is treated as a distribution.

Section 54A(i) permits, under regulations to be issued by the Secretary, the separation of the ownership of a qualified tax credit bond and the entitlement of the credit with respect to that bond. In the case of any such separation, the credit is allowed to the person who on the credit allowance date holds the instrument evidencing the entitlement to the credit and

not to the holder of the bond, and the rules of section 1286 apply to the qualified tax credit bond as if it were a stripped bond and to the credit under section 54A as if it were a stripped coupon.

(2) Qualified Forestry Conservation Bonds

Section 54B(a) defines a QFCB as any bond issued as part of an issue if—

(a) The bond is issued by a qualified issuer;

(b) The issuer designates the bond for purposes of section 54B (under section 54B(b), the maximum amount of QFCBs that may be designated by any issuer shall not exceed the limitation amount allocated to that issuer by the Secretary); and

(c) 100 percent of the available project proceeds of the issue are to be used for one or more qualified forestry conservation purposes.

Qualified issuer . Under section 54B(f), a State or any political subdivision or instrumentality thereof, or a 501(c)(3) organization (as defined in section 150(a)(4)), may be a qualified issuer of a QFCB.

Limitation on the amount of QFCBs designated. Section 54B(c) sets forth the QFCB National Limitation for the aggregate amount of bonds that may be designated under section 54B(a). No more than $500,000,000 of QFCBs may be designated under section 54B(a). Under section 54B(d), the Secretary shall make allocations of the QFCB National Limitation among qualified forestry conservation purposes in such manner as the Secretary determines appropriate so as to ensure that all of the QFCB National Limitation is allocated before the date that is 24 months after the date of enactment of the Act. The Secretary shall solicit applications for allocations of the National Limitation not later than 90 days after the date of enactment of the Act.

Qualified forestry conservation pur- pose. Under section 54B(e) the term “qualified forestry conservation purpose” means the acquisition by a State or any political subdivision or instrumentality thereof, or by a 501(c)(3) organization (as defined in section 150(a)(4)), from an unrelated person of forest and forest land meeting all the following qualifications:

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be adjacent to USFS Land. For purposes of this qualification, a parcel of land is adjacent to USFS Land if it—

tional Forest System as defined in 16 U.S.C. 1609(a);

any unit of the National Forest System, or

a unit of the National Forest System.

If at least one portion of the land acquired is adjacent to USFS Land, it is irrelevant that other non-contiguous acquired parcels are not adjacent to it.

tive fish habitat conservation plan approved by the United States Fish and Wildlife Service (USFWS).

isfy the disposition requirement in section 54B(e)(2).

Disposition requirement. The Code establishes a two-part requirement regarding the disposition of the acquired land. Section 54B(e)(2) provides, “At least half of the land acquired must be transferred to the United States Forest Service at no net cost to the United States, and not more than half of the land acquired may either remain with, or be conveyed to, a State.” The first part of this requirement means that the qualified issuer that acquired the land must transfer to the USFS at least half of the land acquired. The second part means that all of the acquired land that is not transferred to the USFS (land that necessarily is no more than half of the land acquired) either (a) if the qualifying issuer is not a State, must be transferred to one or more States, or (b) if the qualifying issuer is a State, must be retained by that State or conveyed to one or more other States. (For purposes of this requirement, “the land acquired” or “the acquired land” means land that the qualified issuer acquired using proceeds derived from issuance of the bonds or from receipt of the refund of the deemed payment, as described below.)

If the qualified issuer is not a State, the USFS and any State(s) involved may con

sult with each other as to the identification of land that the qualified issuer proposes to transfer to each of them. If the USFS and the State(s), however, do not agree, requests for allocation that correspond to the preferences of the USFS are expected to be favored. The transfers to the USFS and, if applicable, to one or more States must occur not longer after the qualified issuer acquires the land than is prescribed by the deadlines in Section 6(3)(e)(iii) of this notice.

The requirement that the transfer to the USFS be made “at no net cost to the United States” means that the transferor must cover all costs directly incident to the transfer of the land to the USFS (for example, any survey costs, title insurance, transfer taxes, recordation fees, etc.), but not indirect costs to the Department of Agriculture such as USFS salary and overhead and expenses for travel, legal review, and clearance.

Election to receive cash instead of using the allocation to designate QFCBs. Under section 54B(h)(1), if a qualified issuer receives an allocation of the QFCB National Limitation, then, without regard to whether the issuer is subject to tax under Chapter 1 of the Code, the issuer may elect to be treated as having made a payment (the “deemed payment”) against that tax, for the taxable year preceding the taxable year in which the allocation is received, in an amount equal to 50 percent of the amount of the allocation. Under section 54B(h)(2)(A), the Secretary shall not use the deemed payment of tax as an offset or credit against any tax liability of the issuer but shall refund the deemed payment to the issuer. Under section 54B(h)(2)(B), except as provided in section 54B(h)(3), the deemed payment shall not be taken into account in determining any amount of interest under the Code.

Section 54B(h)(3) provides that an election to be treated as making a deemed payment shall not take effect unless the qualified issuer certifies to the Secretary that any payment of the tax refunded to the issuer will be used exclusively for one or more qualified forestry conservation purposes.

Failure to use all of the refund or all of available project proceeds for a qualified forestry conservation purpose. If the qualified issuer fails to use any portion of the refund for a qualified forestry conservation

purpose (either because the issuer fails to purchase land described in section 54B(e) or because the issuer fails to dispose of the acquired land in a manner that satisfies section 54B(e)(2)), then the issuer shall be liable to the United States in an amount equal to that portion, plus interest at the overpayment rate under section 6621, for the period from the date the portion was refunded to the date the amount is paid to the United States. Any such amount shall be assessed and collected in the same manner as tax imposed by Chapter 1, except that subchapter B of Chapter 63 (relating to deficiency procedures) shall not apply in respect of such assessment or collection.

If a qualified issuer issues QFCBs and, within the expenditure period defined by section 54A(d)(2)(B)(ii) and (iii), fails to use 100 percent of the available project proceeds to acquire land described in section 54B(e), some of the bonds must be redeemed within 90 days after the end of the expenditure period. The bonds to be redeemed are nonqualifying bonds determined in the same manner as under section 142. See section 54A(d)(2)(B)(i). If a qualified issuer issues QFCBs and uses some or all of the available project proceeds to acquire land described in section 54B(e) but some portion of the land so acquired is not disposed of in a manner that satisfies section 54B(e)(2), then, in the same manner as under section 142, a portion of the QFCBs is treated as nonqualifying, and the issuer is treated as if the tax credits allowed under section 54A with respect to the non-qualifying portion of the QFCBs are a refund of the deemed payment under section 54B(h) that was not used for a qualified forestry conservation purpose. The treatment of such a refund is set forth in section 54B(h)(3)(A) (last two sentences). This treatment also applies to all tax credits allowed with respect to nonqualifying QFCBs. For this purpose, each credit allowance date is treated as the beginning of a period for which overpayment interest is to be assessed.

Just as the amount of available project proceeds includes investment return from investment of the net proceeds from the sale of an issue, in the case of a qualified issuer that has made the election under section 54B(h), the amount that must be used for qualified forestry conservation purposes includes any investment return from investment of the money received

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requirements for the Expression of Interest.

ous government agencies need sufficient time to determine whether the proposed land acquisitions and dispositions satisfy all applicable requirements. Although prior informal consultation generally will enable applicants to anticipate most of the requirements that they must meet, materials reflecting a complete application are needed for government officials to perform a thorough evaluation. The due date for the Pro Forma application is designed to provide applicants with ample opportunity to revise and refine their applications to address any additional concerns raised and suggestions presented. The complete Pro Forma application must be filed with the IRS, the USFS, and any affected State not later than February 18, 2009. Section 7 of this notice describes the requirements for the Pro Forma application.

issues have been resolved, a complete draft of the Final Application must be provided to the USFS and to all States involved, for them to provide the required certifications. At this stage of the process, there should have been sufficient consultation and exchange of information so that the USFS and the States have the limited task of confirming that the materials submitted for certification conform in all respects to pre-existing understandings with the applicants. After that confirmation, the USFS and the States will provide to the applicants the certifications that must be incorporated into the applicant’s Final Application. The draft of the Final Application must be filed with the USFS and any affected State not later than March 1, 2010, and a copy must simultaneously be filed with the IRS. Section 8 of this notice describes the requirements for the draft of the Final Application.

nal Application is an applicant’s last step in establishing its eligibility for an allocation of the QFCB National Limitation. If the applicant chooses to make the election under section 54B(h), that election is made as part of the Final Application. The original of the Final

as a refund. The requirements, however, that all available project proceeds (including any investment return), or the entire refund (including any investment return), must be used for qualified forestry conservation purposes is not violated by use of some or all of the investment return to pay for one or more surety bonds required by Section 6(3)(e)(vi) of this notice.

Between the time a qualified issuer receives either proceeds from the sale of QFCBs or a refund of a deemed payment under section 54B(h) and the time the land described in section 54B(e) is acquired, the qualified issuer must give a surety bond that complies with 31 USC 9304–9308. The bond must cover the full amount of the proceeds (or the refund) that was received by that qualified issuer and all investment return on those funds. Alternatively, as is provided by 31 CFR Part 225, the qualified issuer may pledge Government obligations (securities whose principal and interest are unconditionally guaranteed by the United States Government) in lieu of a surety bond. If that is done, it is permissible for the qualified issuer to use the proceeds (or the refund) to acquire the Government obligations. No other alternative will be acceptable.