Sequester Affecting Bonds

IRC Section 6431 gives issuers of most qualified tax credit bonds the option of having their interest costs paid directly by the federal government in lieu of allowing federal tax credits to bondholders. The option is exercised through an irrevocable election under IRC Section 6431(f)(3)(B) to receive reimbursement of interest payments on the bonds from the federal government, in which case no credit under IRC Section 54A will be allowed to holders of the bonds.

The IRS has announced an 8.7 percent sequester reduction applicable to Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds for which the bond issuer elected to receive a direct credit subsidy under IRC Section 6431. The sequester reduction applies to amounts claimed on Form 8038-CP and which results in a payment to the issuer on or after March 1, 2013. The sequestration reduction rate will be applied until the end of the fiscal year (September 30, 2013) or sooner if there is intervening congressional action, at which time the sequestration rate is subject to change.

Issuers should complete Form 8038-CP as prescribed by Form 8038-CP Instructions. Correspondence will alert affected issuers that part of their requested payment was subject to the sequester reduction. Issuers should use this correspondence to identify the portion(s) of amounts requested that were subject to the sequester reduction.

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