SECTION 3. REFUNDABLE CREDIT

PAYMENT PROCEDURES FOR DIRECT PAY TAX CREDIT BONDS

3.1. In General

The IRS and the Treasury Department plan to implement the refundable credit payment procedures for Direct Pay Tax Credit Bonds in order to be able to process requests for refundable credit payments with respect to interest payments due on or after September 1, 2010, to enable issuers to begin issuing these bonds for qualified purposes. The IRS and the Treasury Department expect that Form 8038–CP, Return for Credit Payments to Issuers of Qualified Bonds, revised to take into account payment of the refundable credit payments with respect to Direct Pay Tax Credit Bonds, will be available on the IRS web site at http://www.irs.gov/app/pick- list/list/formsInstructions.html on or before June 25, 2010. Effective on its release, issuers of build America bonds, recovery zone economic development bonds, and Direct Pay Tax Credit Bonds are required to submit to the IRS the revised Form 8038–CP to request payment of a refundable credit. Revised Form 8038–CP will be processed on receipt for build America bonds and recovery zone economic development bonds. The IRS will be prepared to process the revised Form 8038–CP for Direct Pay Tax Credit Bonds no later than July 12, 2010, and to make timely refundable credit payments with respect to bond interest payment dates on Direct Pay Tax Credit Bonds that are on or after September 1, 2010. Issuers of Direct Pay Tax Credit Bonds with interest payment dates prior to September 1, 2010, may submit a single Form 8038–CP for the full amount of the refundable credit payment with respect to interest paid on those dates subject to the following: for purposes of the due date and the processing of Form 8038–CP, all such interest shall be deemed to have been paid on, and the first date treated as an interest payment date for such bonds shall be, September 1, 2010. A Form 8038–CP must be filed with respect to each issue of Direct Pay Tax Credit Bonds. Form 8038–CP may be filed only if the Direct Pay Tax Credit Bonds with respect to which the form is filed meet all the requirements for the allowance of the

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bond issuance premium in certain circumstances) will apply to determine a bond’s payment schedule and maturity date. Under § 1.163–13(e)(3)(i), in the case of a bond subject to certain contingencies, the rules in § 1.1272–1(c) (other than § 1.1272–1(c)(3) (relating to mandatory sinking funds)) will apply to determine the bond’s payment schedule and maturity date. For example, under § 1.1272–1(c)(5), an issuer is presumed to exercise a call option or combination of call options if the exercise would minimize the yield on the bond. Under § 1.163–13(e)(3)(ii), the issuer must determine the payment schedule by assuming that a pro rata portion of the bond will be called under a sinking fund provision. In addition, the rules in § 1.1275–2(h) (relating to remote and incidental contingencies) will apply to determine a bond’s payment schedule and maturity date.

Thus, for example, if a 17-year bond issued at a premium is callable by the issuer at par after 10 years, the issuer will be treated as if it called the bond on the first call date if calling the bond on the first call date would produce the lowest yield on the bond. If so, then for purposes of section 6431, the issuer would determine if the premium is de minimis based on a 10-year maturity date rather than a 17-year maturity date. By comparison, for example, if a bond is callable by an issuer only under a “make whole” call option which requires the issuer to pay a call premium in an amount that preserves the bond’s original yield to maturity, the issuer’s exercise of that call option generally will not produce a lower yield and the call option will be disregarded in determining whether the bond premium is de minimis .

The Treasury Department and the IRS are reviewing the definition of issue price in this area and also are considering whether further limitations or special rules may be necessary or appropriate with respect to the allowability and treatment of bond issuance premium on Direct Pay Tax Credit Bonds and Build America Bonds in various circumstances in light of the particular purposes of the limitations on bond issuance premium in this area. The Treasury Department and the IRS expect to address any such further limitations or special rules in future prospective administrative or regulatory guidance.