Article by John A. Janicik , David Narefsky , Joanna K. Horsnail , Lorraine M. Tyson and Joseph B. Organ

Originally published April 13, 2009

Keywords: Treasury Department, Notice 2009-26, Build America Bonds, tax-exempt governmental bonds, Direct Payment, tax credit, American Recovery and Reinvestment Act of 2009, ARRA

On April 3, 2009, the Treasury Department released Notice 2009-26, which provides guidance on the "Build America Bond" provisions of the American Recovery and Reinvestment Act of 2009.  Build America Bonds are a new financing tool through which state and local governments can elect to issue taxable tax-credit bonds in lieu of tax-exempt bonds for governmental purposes and expand the universe of investors in municipal bonds.  These bonds can be issued before January 1, 2011.

Overview of Build America Bonds

Build America Bonds must otherwise qualify as tax-exempt governmental bonds under the Internal Revenue Code of 1986, as amended.  Build America Bonds are available only for governmental bonds and not for private activity bonds (i. e., bonds whose proceeds are loaned to or used by nonprofit organizations or for-profit corporations).  Proceeds of tax-exempt governmental bonds, and therefore Build America Bonds, can be used for government capital projects, including, but not limited to public buildings, courthouses, schools, roads and transportation infrastructure. 

State or local governments issuers can choose to issue one of two types of Build America Bonds:

  • Build America Bonds (Direct Payment) — where a state or local government issuer receives payments from the Treasury Department equal to 35 percent of the interest payments on such bonds (Note:  The proceeds of such bonds can only be used for capital expenditures, debt service reserve funds and costs of issuance); or
  • Build America Bonds (Tax Credit) — where the bondholders receive a tax credit equal to 35 percent of the interest on such bonds. (Note: The proceeds of such bonds can be used for the same purposes as regular tax-exempt governmental bonds, including to finance working capital.) 

Notice 2009-26 Highlights

  • State or local government issuers ("Issuers") must indicate on their books and records if they plan to issue Build America Bonds and whether they are issuing Build America Bonds (Direct Payment) or Build America Bonds (Tax Credit) before such bonds are issued.
  • Issuers must report the issuance of Build America Bonds on IRS Form 8038-G, Information Return for Tax-Exempt Governmental Obligations, in accordance with the instructions set forth in Notice 2009-26 and the instructions for Form 8038-G.
  • For the Build America Bonds (Direct Payment), Issuers must submit the new Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, which is available on the IRS' web site, The Form 8038-CP can be filed as soon as 30 days after the Form 8038-G is filed.
    • The IRS will be prepared to accept Forms 8038-G and 8038-CP by May 1, 2009, and the Treasury Department will begin mailing checks to Issuers beginning on or after July 1, 2009.
    • For fixed-rate bonds, Issuers must file their Form 8038-CP at least 45 days, but not more than 90 days, before the relevant interest payment date. The Issuer will receive the federal payments on the relevant interest payment date.
    • For variable-rate bonds, Issuers will receive payments from the federal government on a quarterly basis, based on the interest they paid in that quarter.  Issuers must file Form 8038-CP on or before the 45th day after their last interest payment during the quarter.

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