








  OVERVIEW FOR

  GOVERNMENTAL ISSUERS, 501(c)(3) BORROWERS,

  ECONOMIC DEVELOPMENT PROFESSIONALS, LOCAL SCHOOL DISTRICTS,

  INVESTMENT BANKERS AND FINANCIAL INSTITUTIONS OF

  THE TAX-EXEMPT AND TAX CREDIT

  BOND PROVISIONS IN THE

  AMERICAN RECOVERY AND REINVESTMENT

  ACT OF 2009










  BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC




  MARCH 10, 2009


  2

  Overview

  Tax-Exempt and Tax Credit Bond Provisions in

  The American Recovery and Reinvestment Act of 2009

  The following is a summary of certain provisions of The American Recovery and Reinvestment
  Act of 2009 (the "Act") as they relate to public finance and economic development matters. The
  Act does not in all circumstances provide absolute clarity of interpretation and application. As a
  result, many of the topics discussed will require further guidance in the form of administrative
  action by or interpretive guidance from the Department of the Treasury or the Internal Revenue
  Service. References to the Code are to the Internal Revenue Code of 1986, as amended.

  Included in the Act are provisions providing a number of new financing options for
  governmental issuers and 501(c)(3) borrowers; provisions making the investment in
  governmental and 501(c)(3) bonds more attractive to financial institutions; and provisions
  providing additional alternatives to finance economic development projects.

  Temporary Repeal of AMT for Private Activity Bonds

  For 2009 and 2010, interest on private activity bonds such as IDB's and exempt facility bonds,
  will not be treated as a preference item for purposes of the alternative minimum tax. In addition,
  interest on such bonds and on governmental and 501(c)(3) bonds issued in 2009 and 2010 will
  not be included in the current earnings adjustment under the corporate alternative minimum tax.

  Refunding bonds are normally treated as issued on the issue date of the original bonds being
  refinanced. This rule will not apply to refunding bonds issued to currently refund any bonds
  originally issued in 2004 through 2008 (or refunding bonds issued during this period of time).
  These bonds will be treated as issued on their actual issue date and will benefit from the
  temporary repeal of the AMT for private activity bonds. Since most bonds issued between 2004
  and 2008 cannot be currently refunded, this provision is expected to have limited application.

  These provisions are expected to result in a decrease in interest rates on private activity bonds.

  Qualified Small Issue Bonds, i.e. IDB's, issued in 2009 and 2010

  The definition of "manufacturing facilities" for purposes of the qualified small issue bond
  provisions is expanded to include facilities used in the production of intangible property, e.g.,
  any patent, copyright, formula, process, design, pattern, know how, or format, including the
  creation of computer software, intellectual property or other similar items. Under prior law, a
  "manufacturing facility" was defined as a facility used in the manufacturing or production of
  tangible property.

  The scope of "manufacturing facility" is also amended to replace the 25 percent allowance for
  directly related and ancillary property with an unlimited allowance for functionally related and
  subordinate property located on the same site as the manufacturing facility.

  3

  Governmental Taxable Bond Option for 2009 and 2010 – "Build America Bonds"

  A governmental issuer may elect that any bond (other than a private activity bond) that would
  normally qualify for tax exemption can instead be issued as a taxable bond with a tax credit to
  the holder equal to 35% of the interest on the bonds. The interest received is included in the
  taxpayer's gross income. If the allowable credit exceeds the limitation, it may be carried forward
  to the succeeding tax year.

  The governmental issuer may also elect to receive direct payments from the federal government
  in the amount of the credit (i.e., 35%), in lieu of the credit being provided to the bondholders.
  This refundable credit provision applies only to bonds where 100 percent of the available project
  proceeds (i.e., sale proceeds less up to 2 percent costs of issuance and less amounts deposited in
  a reasonably required reserve fund) are used for capital expenditures and the issuer of such bonds
  makes an irrevocable election to receive such credit.

  The bonds are not treated as if federally guaranteed.

  See Exhibit A.

  Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds

  A new category of taxable governmental bonds called Recovery Zone Economic Development
  Bonds (similar to Build America Bonds) is created with authority for issuing $10 billion of such
  bonds in 2009 and 2010 to finance economic development projects in designated Recovery
  Zones (as hereinafter described). The federal government will provide local governmental
  issuers, i.e. cities and counties but not states, with direct payments equal to 45% of the interest
  on such bonds. Holders of these bonds will receive a taxable interest rate but will not receive a
  credit, Proceeds may be used for economic development purposes including job training and
  educational programs.

  An additional new category of tax-exempt private activity exempt facility bonds, called
  Recovery Zone Facility Bonds, is created with authority for issuing $15 billion of such bonds.
  These bonds are available to finance the construction, reconstruction, renovation or acquisition
  by purchase of depreciable property located in a Recovery Zone and used in the active conduct
  of a qualified trade or business. Recovery Zone Facility Bonds are exempt facility bonds under
  the Code if 95% or more of the net proceeds are used for Recovery Zone property and the issuer
  designates the bonds for this purpose. Depreciable property must be acquired by purchase after
  the date of designation of a Recovery Zone; original use in the Recovery Zone must commence
  with the taxpayer; and substantially all of the property must be used in the Recovery Zone. All
  current rules for exempt facility bonds apply except for state volume cap limitation and the
  restriction on acquisition of existing property. A qualified trade or business is any trade or
  business except (a) rental property used for residential rental property and (b) private or
  commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities,
  racetracks or other facilities used for gambling, or any stores the principal business of which is
  the sale of alcoholic beverages for consumption off premises.

  Recovery Zones are areas designated by state and local governments as having significant
  poverty, unemployment or home foreclosure or being economically distressed by reason of

  4

  military base realignment or closure. They also include areas designated as Empowerment
  Zones and Renewal Communities.

  The volume caps for these two types of bonds will be allocated on the basis of each state's
  proportional declines in employment in 2008.

  Provisions Relating to Bonds held by Financial Institutions

  The administrative safe harbor under which corporations generally may invest up to two percent
  of their assets in tax-exempt bonds without a portion of their interest expense deduction being
  disallowed under Section 265 of the Code is extended to apply to financial institutions. Such
  interest will, however, be a financial institution preference item, resulting in disallowance of
  20% of the interest deduction allocable to the bonds. This applies only to tax exempt bonds
  issued in 2009 and 2010, with refunding bonds treated as issued on the issue date of the original
  non-refunding bonds being refinanced.

  For bonds issued in 2009 and 2010, the $10 million annual issuance limitation on issuers of bank
  qualified bonds is increased to $30 million; 501(c)(3) borrowers and governmental conduit
  borrowers are treated as direct issuers for purposes of the Section 265(b)(3) qualification
  requirements; and individual borrowers in a pool or composite issue are treated as if they were
  separate issuers for purposes of the Section 265(b)(3) qualification requirements.

  These provisions are expected to increase the investment by financial institutions in bank
  qualified tax-exempt bonds and to also reduce the interest rate on such bonds.

  Governmental issuers and 501(c)(3) borrowers issuing less than $30 million in each of the
  calendar years 2009 and 2010 will be able to benefit from the "bank qualified" provisions of the
  Code.

  Tax Credit Bonds for Schools

  A new category of tax credit bonds to be issued in 2009 and 2010 is created to finance the
  construction, rehabilitation, and repair of public school facilities or for the acquisition of land on
  which a public school facility will be constructed.

  Must be issued by the state or local government within the jurisdiction of which the school is
  located.

  These bonds are subject to a national limit of $11 billion each year with this amount being
  allocated among the states and large school districts by a complex specified formula.

  Carryover of unused allocation is allowed.

  May invest construction fund during three year temporary period without regard to yield
  restriction.

  Subject to same requirements as other existing tax credit bonds.

  5

  See Exhibit A.

  Qualified Zone Academy Bonds

  Provides authority increased to $1.4 billion of these bonds in 2009 and 2010.

  Tribal Economic Development Bonds

  Subject to a nation-wide cap of $2 billion, Indian tribal governments are authorized to issue tax-
  exempt bonds to finance any purpose that could be financed by a state or local government under
  Section 103(a) of the Code, other than certain gaming facilities and facilities located outside the
  tribe's reservation, without regard to the "essential governmental function" requirement normally
  applicable to tribal bonds.

  Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds

  An additional $1.6 billion of Clean Renewable Energy Bonds is authorized for certain qualified
  renewable energy projects.

  An additional $2.4 billion of Qualified Energy Conservation Bonds is authorized to finance
  governmental programs and initiatives designed for qualified conservation purposes including
  the reduction of greenhouse gas emissions and technologies to reduce energy consumption in
  buildings.

  Davis Bacon Requirements

  The Davis Bacon prevailing wage requirements generally applicable to certain contracts with the
  federal government would be made applicable to projects financed with the proceeds of (a) Clean
  Renewable Energy Bonds, (b) Qualified Energy Conservation Bonds, (c) Qualified Zone
  Academy Bonds, (d) Qualified School Construction Bonds, and (e) Recovery Zone Economic
  Developments Bonds. This provision may have a "chilling effect" on the issuance of these bonds
  in many jurisdictions. The Act is silent as to whether failure to comply with these standards will
  result in an adverse effect on the tax-favored status of tax credit bonds or the tax exemption of
  tax-exempt bonds authorized by the Act.

  6

  Exhibit A

  Tax Credit Bonds

  In lieu of interest, holders of qualified tax credit bonds receive a tax credit that accrues quarterly
  against the holders' federal income tax. A taxpayer who holds a qualified tax credit bond on one
  or more credit allowance dates of the bond during the taxable year is allowed a credit against the
  taxpayer's income tax for the taxable year. In general, the credit amount for any credit allowance
  date is 25% of the annual credit determined with respect to the bond. The annual credit is
  determined by multiplying the applicable credit rate by the outstanding face amount of the bond.
  Unused credits may be carried forward to succeeding taxable years.

  The amount of the credit allowed to a holder during any taxable year must be included in the
  holders' gross income for that taxable year.

  The applicable credit rate for the bond is the rate that the Secretary of the Treasury establishes on
  the date of issuance of a tax credit bond that will permit the issuance of the qualified tax credit
  bond with a specified maturity or redemption date without discount and without interest cost to
  the qualified issuer.

  The market for tax credit bonds is a new and developing market made up primarily of large
  institutional investors. Many of these investors are not currently in need of tax credits resulting
  in a limited market for these bonds at this time.

  The foregoing has been prepared for the information of clients and friends of Baker, Donelson,
  Bearman, Caldwell & Berkowitz, PC. It is general in nature and based on authorities that are
  subject to change. It is not meant to provide legal advice with respect to any specific matter and
  should not be acted on without professional counsel. If you have any questions or require any
  further information regarding these or other related matters, please contact:

  Jackson, Mississippi
  Stephen C. Edds

  601-969-4660 sedds@bakerdonelson.com

  Wilton J. Johnson

  601-969-4662 jjohnson@bakerdonelson.com

  Sue H. Fairbank

  601-969-4659 sfairbank@bakerdonelson.com

  Jennifer R. Crowson

  601-969-4665 jcrowson@bakerdonelson.com

  William S. Mendenhall

  601-969-4647 bmendenhall@bakerdonelson.com

  Memphis, Tennessee
  Anne Mathes

  901-577-2225

  amathes@bakerdonelson.com

  Jennifer Brunetti

  901-577-8246

  jbrunetti@bakerdonelson.com

  Lodie Biggs

  901.579.3131

  lbiggs@bakerdonelson.com

  Nashville, Tennessee
  Pete Ezell

  615-726-5721

  pezell@bakerdonelson.com

  David White

  615-726-5776

  djwhite@bakerdonelson.com

  John F. Rogers, Jr.

  615.726.7365

  jrogers@bakerdonelson.com

  7

  Chattanooga, Tennessee
  Louann Smith

  423-209-4216

  lpsmith@bakerdonelson.com

  Jim Levine

  423.209.4133

  jlevine@bakerdonelson.com

  Knoxville, Tennessee
  Ashley Lowe

  865.549.7207

  alowe@bakerdonelson.com


  Atlanta, Georgia
  Nedom Haley

  404-221-6505

  nhaley@bakerdonelson.com

  Mark A.B. Carlson

  404.589.3400

  mcarlson@bakerdonelson.com

  Linda Klein

  404.221.6530

  lklein@bakerdonelson.com

  Birmingham, Alabama
  Murphy McMillan

  205-244-3825

  mmcmillan@bakerdonelson.com

  New Orleans, Louisiana
  Adam Zuckerman

  504.566.5210

  azuckerman@bakerdonelson.com

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