February 17, 2011 THE STATUS OF CERTAIN BOND TAX PROVISIONS POST-ARRA

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1 S U I TE CALIFORNIA STREET D E N V E R, C OLOR AD O F AC S I M I L E February 17, 2011 A TLANTA CHICAGO DES MOINES FAYETTEVILLE IRVINE KANSAS CITY LITTLE ROCK LOS ANGELES OKLAHOMA CITY OMAHA PHILADELPHIA RICHMOND SCOTTSDALE WASHINGTON WICHITA THE STATUS OF CERTAIN BOND TAX PROVISIONS POST-ARRA The purpose of this memorandum (this Memorandum ) is to describe the status of certain tax provisions subsequent to the end of calendar year 2010 that are of interest to the attorneys and clients of Kutak Rock LLP s public finance practice. Most of the tax provisions addressed below were either added to the Internal Revenue Code of 1986, as amended (the Code ), or amplified in the American Recovery and Reinvestment Act of 2009 ( ARRA ) and certain related legislation. One of the most immediate tax consequences of the expiration of the programs discussed below is that issuers should be careful to ensure that obligations previously issued under these provisions are not reissued without consulting with bond counsel. A reissuance of these types of obligations could result in significant adverse tax consequences to the bonds or to the issuers of such bonds. 1. Alternative Minimum Tax ARRA provided that interest on certain tax-exempt obligations issued in 2009 and 2010 was not treated as an item of tax preference and not included in adjusted current earnings of certain corporations for purposes of the federal alternative minimum tax. Interest on post-2010 new money governmental bonds, qualified 501(c)(3) bonds and certain private activity housing bonds will not be treated as an item of tax preference for purposes of the federal alternative minimum tax. Interest on new money governmental and qualified 501(c)(3) bonds will, however, be included in the adjusted current earnings of certain corporations for purposes of the federal alternative minimum tax. Interest on certain private activity housing bonds will not be included in the adjusted current earnings of corporations for purposes of the federal alternative minimum tax. Interest on most post-2010 non-housing, non-501(c)(3) private activity bonds will be treated as an item of tax preference for purposes of the federal alternative minimum tax.

2 Interest on some post-2010 housing private activity bonds will not be treated as an item of tax preference and not included in adjusted current earnings. See Housing Bond Rules, below. Refundings of certain non-amt private activity bonds issued in 2009 and 2010 will need to be analyzed carefully to determine whether or not the AMT status of interest on the refunding bond is different than the AMT status of interest on the refunded bond. 2. Bank Qualified Tax-Exempt Bonds ARRA made significant adjustments to the so-called bank-qualified ( BQ ) provisions of Section 265 of the Code that allow certain financial institutions to deduct a portion of their interest expense allocable to tax-exempt obligations. All ARRA provisions relating to the bank-qualification provisions expired as of January 1, The qualified small issuer limit goes back to its pre-arra limit of $10 million per calendar year. 501(c)(3) borrowers are no longer considered issuers for BQ purposes. Pool and composite issues will generally be tested at the pool and composite issue level rather than at the borrower level for compliance with applicable size limitations. ARRA s 2% de minimis provision applicable to bonds issued in 2009 and 2010 and purchased by banks has not been extended to bonds issued after December 31, There is limited BQ refunding ability for BQ bonds issued in 2009 and Build America Bonds ARRA created two types of Build America Bonds ( BABs ). The first and by far more popular type of BAB was the direct payment BAB that provided a direct payment interest subsidy to issuers equal to 35% of the coupon interest payable on the issue. The second type of BAB provided investors with a tax credit equal to 35% of the coupon interest on a given interest payment date. The ability to issue both tax credit BABs and direct payment BABs expired as of January 1, Various extension proposals may be decided in the first or second quarter of There is currently no refunding authorization for BABs. 4. Federal Home Loan Bank Guarantees Since July 30, 2008, the Code allowed taxexempt bonds to be guaranteed by a Federal Home Loan Bank without causing the bonds to be federally guaranteed within the meaning the federal guarantee prohibition. 2

3 For bonds issued after December 31, 2010, guarantees by Federal Home Loan Banks are no longer excepted from the federal guarantee prohibition provisions, except for renewals or extensions of guarantees of such bonds made prior to January 1, 2011 and after July 30, GO Zone Advance Refunding Bonds Under the Code, certain bonds issued by the states of Louisiana, Mississippi, and Alabama and political subdivisions of those states were eligible for an advance refunding in addition to the one advance refunding otherwise permitted under the Code. Expired as of January 1, However, other GO Zone bond authority continues through December 31, Housing Bond Rules The following housing bond provisions have expired as of January 1, 2011: The ability to use proceeds of qualified single family mortgage revenue bonds to refinance certain subprime loans; Special 2008 Housing Assistance Tax Act of 2008 volume cap increases and set-asides for issues of tax-exempt qualified mortgage issues and tax-exempt private activity bond issues financing qualified residential rental projects; Targeted area residence treatment for residences located in the Gulf Opportunity Zone, the Rita GO Zone or the Wilma GO Zone for purposes of the mortgage revenue bond rules; The ability to waive the first-time homebuyer requirement for certain Hurricane Katrina residences financed with proceeds of qualified mortgages; and More liberal mortgage revenue bond rules applicable to areas damaged in certain Midwest disasters occurring in However, interest on private activity housing bonds will continue not to be treated as an item of tax preference and will not be included in adjusted current earnings for purposes of the federal alternative minimum tax. 7. Midwestern Disaster and Hurricane Ike Bonds The provisions relating to the ability to finance certain property for areas damaged by Hurricane Ike and the 2008 Midwest severe storms, tornados and flooding continue through December 31, 2012 for both Hurricane Ike bonds and Midwestern disaster area bonds. Interest on Hurricane Ike bonds and Midwestern disaster area bonds is not a specific preference item for purposes of the federal alternative minimum tax, but is included in adjusted current earnings. 8. Qualified Tax Credit Bonds ARRA created new tax credit bond programs and expanded on existing tax credit bond programs. In addition, in response to the popularity of the direct pay build America bonds program, the Hiring Incentives to Restore Employment Act 3

4 allowed certain qualified tax credit bonds to be issued as direct federal subsidy payment bonds, with subsidy payment formulas that are primarily dependent upon (1) the type of bond issued, and (2) the structure of the bond s maturity terms. (a) New Clean Renewable Energy Bonds ( New CREBs ). Allocations of New CREB volume cap have been made or will be made solely by the Internal Revenue Service (the Service ). Allocations are required to be used within three years of the date of the allocation letter. New CREBs may be issued as direct payment obligations or as tax credit bonds. There is currently no refunding authorization for New CREBs. (b) Qualified Energy Conservation Bonds - ( QECBs ). Remaining unused pre-2011 volume cap allocations may be carried forward indefinitely until used. QECBs may continue to be issued as direct payment obligations or as tax credit bonds. Consult with bond counsel regarding ALL QECB volume cap awards, which in most instances will depend upon state law. There is currently no refunding authorization for QECBs. (c) Qualified Forestry Conservation Bonds ( QFCBs ). No changes. QFCBs may not be issued as direct payment obligations. (d) Qualified School Construction Bonds ( QSCBs ). No new volume cap allocations. QSCBs may continue to be issued as direct payment obligations or as tax credit bonds. Remaining unused pre-2011 volume cap allocations may be carried forward indefinitely until issued. Issuers who were not originally awarded QSCB volume cap directly by the Service should consult with bond counsel regarding carry-forward procedures, which in many instances may depend upon state law. 4

5 (e) There is currently no refunding authorization for QSCBs. Qualified Zone Academy Bonds ( QZABs ). Remaining allocations of pre-2011 volume cap may be carried forward (subject to a 2-year carryforward limitation). QZABs issued pursuant to pre-2011 volume cap may continue to be issued as direct payment obligations or as tax credit bonds. Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, there is an additional national volume cap amount of $400 million for QZABs for calendar year However, any bonds issued pursuant to 2011 volume cap may not be issued as direct payment obligations. Consult with bond counsel regarding ALL QZAB volume cap awards, which in most instances will depend upon state law. There is currently no refunding authorization for QZABs. 9. Recovery Zone Bonds ARRA created two types of recovery zone bonds. The first type of recovery zone bond (recovery zone economic development bonds) provided a direct payment interest subsidy to the issuer of the bond equal to 45% of the coupon interest payable on the issue. The second type of recovery zone bond (recovery zone facility bonds) was exempt facility tax-exempt private activity bonds. The ability to issue both recovery zone economic development bonds and recovery zone facility bonds expired as of January 1, There is currently no refunding authorization for either recovery zone economic development bonds or recovery zone facility bonds. 10. Small Issue Manufacturing PABs ARRA liberalized certain limitations applicable to small issue manufacturing private activity bonds ( Small Issue Manufacturing PABs ). Specifically, ARRA allowed proceeds of Small Issue Manufacturing PABs to be used to finance facilities for the creation of certain intangible property and liberalized the amount of proceeds of Small Issue Manufacturing PABs that could be used to finance functionally related and subordinate property. Expired as of January 1, There is currently no refunding authorization for small issue bonds issued under the liberal definitions. 5

6 11. Tribal Economic Development Bonds ( TEDBs ). ARRA created TEDBs, which are a type of tribal governmental tax-exempt bond. TEDBs are not, however, subject to the essential governmental function test that ordinarily must be satisfied with respect to tax-exempt tribal governmental obligations. TEDBs issued pursuant to 2009 TEDB allocations must be issued by June 30, TEDBs issued pursuant to 2010 TEDB allocations must be issued by December 31, There is currently no refunding authorization for TEDBs. KUTAK ROCK LLP This memorandum was prepared by the following attorneys of Kutak Rock LLP. Questions, comments or corrections to this memorandum or about the matters covered in this memorandum may be addressed to: Kevin L. Barney Chicago (312) kevin.barney@kutakrock.com Mitchell J. Bragin Washington D.C. (202) mitchell.bragin@kutakrock.com David A. Caprera Denver (303) david.caprera@kutakrock.com Larry L. Carlile Denver (303) larry.carlile@kutakrock.com Anthony V. Giancana Scottsdale (480) anthony.giancana@kutakrock.com John K. McGill Omaha (402) johnk.mcgill@kutakrock.com Darren C. McHugh Denver (303) darren.mchugh@kutakrock.com Rene A. Moore Denver (303) rene.moore@kutakrock.com Mark F. Selvidge Oklahoma City (405) mark.selvidge@kutakrock.com Shawn M. Willette Denver (303) shawn.willette@kutakrock.com This memorandum was prepared for the general informational use of the clients and attorneys of Kutak Rock LLP and reflects our understanding of the matters addressed herein as of the date of this memorandum. The views on the topics presented may change as our experience with the subject matter covered herein deepens. Therefore, this memorandum is not intended as tax advice for any specific transaction and is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter described or addressed herein. 6