Final Regulations Governing Qualified Zone Academy Bonds Released (T.D. 9495)

The IRS has issued final regulations on qualified zone academy bonds (QZABs). A QZAB is a taxable bond that is issued by a state or local government, the proceeds of which are used to improve certain eligible public schools. The regulations, which generally adopt temporary regulations released in 2007 (T.D. 9339), provide guidance on the maximum term, permissible use of proceeds and remedial actions for QZABs. In addition, the regulations address the repeal of the Code Sec. 1397E QZAB rules and the adoption of similar rules under Code Secs. 54A and 54E.

Code Sec. 1397E provides that an eligible taxpayer that holds a QZAB on a credit allowance date is entitled to a nonrefundable tax credit for each year in which the bond is held. The provisions of Code Sec. 1397E terminated in the fall of 2008 and are only applicable to bonds issued on or before October 3, 2008. However, state and local governments may continue to issue qualified zone academy bonds after October 3, 2008, under Code Secs. 54A and 54E.

Although generally not applicable to QZABs issued under Code Secs. 54A and 54E, the final regulations contain a limited reliance provision for such QZABs. Under this reliance provision, issuers and taxpayers may rely on the final regulations for QZABs that are issued under Code Secs. 54A and 54E except to the extent the final regulations conflict with other applicable guidance or rules. Furthermore, issuers of QZABs under Code Secs. 54A and 54E for which the issuer elects the federal direct payment subsidy option under Code Sec. 6431(f) may not rely on the remedial action provisions in Reg. §1.1397E-1(h). Remedial action guidance for such issuances will be released in the future.

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Wolters Kluwer Tax and Accounting

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