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Due to the automatic
spending cuts (the “sequester”) that went
into effect on Friday, March 1st,
2013, Federally Subsidized Bond payments
will be cut by $171 million according to the
Office of Management and Budget. This
includes Build America Bonds (“BABs”),
Qualified Zone Academy Bonds (“QZABs”),
Qualified School Construction Bonds
(“QSCBs”), and Qualified Energy Conservation
Bonds (“QECBs").
The Internal Revenue
Service issued guidance on Monday, March 4th
that the exact percentage of cuts for BABs
and other direct-pay bonds will be 8.7%. The
IRS will process BAB payments manually for
two to three weeks in order to factor in the
8.7% sequestration cuts, but it is working
to ensure this does not delay the payment
process. The IRS hopes to get the processing
of the subsidy payments with the cuts
automated again within four to six weeks.
Issuers must continue to submit Forms
8038-CP for the full amount of their subsidy
payments. According to
Bond
Buyer, during the two-week period when
payments are being manually calculated,
issuers will receive a letter from the IRS
acknowledging their forms were received. The
request will then be processed, and payments
will be sent to the issuer with another
letter detailing why the payment was
reduced. This suggests that you may not
receive an advance notice that the subsidy
payment will be reduced.
After the IRS returns to automated
processing, only one letter will be sent to
the issuer acknowledging the form was
received and stating how much the payment
will be reduced.
Issuers of federally
subsidized bonds affected by sequestration
may be able to pay their bonds off early –
prior to maturity – by utilizing
Extraordinary Redemption Provisions included
in many bond issues.
It
is unclear how long the sequestration will
last, and what the impact to issuers will
be. Issuers should plan on reductions and/or
delays in payments should the sequestration
continue for an extended period of time.
For
more information on the effects of the
sequestration on federally subsidized bonds
payments, go to:
http://www.bondbuyer.com/issues/122_43/omb-details-sequester-impact-bab-payments-delayed-six-weeks-1049280-1.html
IRS Memo regarding
Sequestration
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