Notice 2010-28

Limitations for 2008” in Notice 2008–107
should use the amounts found in that table
(which can also be found in the Instructions to Form 2555 (2009)) to determine
their adjusted limitation for 2009.
SECTION 5. ELECTION TO APPLY
2010 ADJUSTED LIMITATIONS TO
2009 TAXABLE YEAR
For some locations, the limitation on
housing expenses provided in section 3 of
this notice may be higher than the limitation on housing expenses provided in the
“Table of Adjusted Limitations for 2008”
in Notice 2008–107. A qualified individual incurring housing expenses in such a
location during 2009 may apply the adjusted limitation on housing expenses provided in section 3 of this notice in lieu
of the amounts provided in the “Table of
Adjusted Limitations for 2008” in Notice
2008–107 (and as set forth in the Instructions to Form 2555 (2009)).
Treasury and the IRS anticipate that future annual notices providing adjustments
to housing expense limitations will make a
similar election available to qualified individuals that incur housing expenses in the
immediately preceding year. For example,
when adjusted housing expense limitations
for 2011 are issued, it is expected that taxpayers will be permitted to apply those adjusted limitations to the 2010 taxable year.
EFFECT ON OTHER DOCUMENTS
This notice supersedes Notice 2006–87,
2006–2 C.B. 766, Notice 2007–25, 2007–1
C.B. 760, Notice 2007–77, 2007–2 C.B.
735, and Notice 2008–107, 2008–50
I.R.B. 1265.
EFFECTIVE DATE
This notice is effective for taxable years
beginning on or after January 1, 2010.
However, as provided in section 5, a taxpayer may elect to apply the 2010 adjusted
housing limitations contained in section 3
of this notice to his or her taxable year beginning in 2009.
DRAFTING INFORMATION
The principal author of this notice is
Susan E. Massey of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact

2010–15 I.R.B.

Ms. Massey at (202) 622–3840 (not a tollfree call).

Stripping Transactions for
Qualified Tax Credit Bonds
Notice 2010–28
SECTION 1. INTRODUCTION
This notice describes regulations that
the Treasury Department and the Internal Revenue Service (IRS) expect to issue concerning both stripping transactions
for qualified tax credit bonds under section 54A of the Internal Revenue Code and
certain income tax accounting matters associated with holding and stripping these
bonds. Pending the promulgation and effective date of future administrative or regulatory guidance, this notice provides interim guidance on which taxpayers may
rely. In addition, this notice describes anticipated related information reporting requirements and solicits public comments
on the interim guidance and the information reporting requirements.
SECTION 2. BACKGROUND
Section 54A(a) provides that a taxpayer
that holds a qualified tax credit bond on
one or more credit allowance dates during any taxable year is allowed a tax credit
for such year in an amount equal to the
sum of the credits determined under section 54A(b) with respect to such dates.
Section 54A(d)(1) defines a qualified
tax credit bond to include the following
types of bonds if they meet applicable requirements: (1) qualified forestry conservation bonds, (2) new clean renewable energy bonds, (3) qualified energy conservation bonds, (4) qualified zone academy
bonds, and (5) qualified school construction bonds.
Section 54A(e)(1) provides that the
credit allowance dates for a qualified
tax credit bond are March 15, June 15,
September 15, and December 15 of any
year in which the bond is outstanding and
the last day on which the bond is outstanding.
Under section 54A(b)(2), the annual
credit on a qualified tax credit bond is
the product of the applicable credit rate

541

multiplied by the outstanding face amount
of the bond. Subject to special rules in
section 54A(b)(4) for short periods, section 54A(b)(1) provides that the amount of
credit for any credit allowance date is 25
percent of the annual credit on a qualified
tax credit bond.
For holders of new clean renewable
energy bonds and qualified energy conservation bonds, section 54C(b) and section
54D(b) limit the amount of the annual
credit otherwise determined under section
54A(b) to 70 percent of the amount so determined without regard to section 54C(b)
and section 54D(b).
Section 54A(c)(1) generally provides
that the credit allowed under section
54A(a) for any taxable year may not exceed the excess of (1) the sum of the
regular and the alternative minimum tax
liability of the taxpayer, over (2) the sum
of certain allowable credits. Under section 54A(c)(2), unused excess credits may
be carried forward for use in succeeding
taxable years.
Section 54A(f) provides that, for Federal income tax purposes, the credit determined under section 54A(a) is treated as
interest that is includible in gross income.
Section 54A(i)(1) provides that, under
regulations prescribed by the Secretary,
there may be a separation (including at
issuance) of the ownership of a qualified
tax credit bond and the entitlement to the
credit with respect to that bond. Section
54A(i)(1) further provides that, in case
of any such separation, the credit under
section 54A is allowed to the person who
on the credit allowance date holds the instrument evidencing the entitlement to the
credit and not to the holder of the bond.
Section 54A(i)(2) further provides that, in
the case of any such separation, the rules
of section 1286 are to apply to the qualified tax credit bond as if it were a stripped
bond and to the credit under section 54A
as if it were a stripped coupon.
SECTION 3. INTERIM GUIDANCE
AND RELIANCE
.01 IN GENERAL
Sections 3.02 and 3.03 of this notice
describe the substance of regulations that
the IRS and the Treasury Department expect to issue. Pending the promulgation
and effective date of future administrative

April 12, 2010

or regulatory guidance, this notice provides interim guidance on which taxpayers may rely with respect to qualified tax
credit bonds issued under section 54A. For
further information regarding the effective
date and scope of application, see Section
7 of this notice.
.02 QUALIFIED TAX CREDIT
BONDS—TREATMENT OF THE
CREDIT BY HOLDERS
(a) Allowance of credit—(1) General
rule. In general, a taxpayer that holds a
qualified tax credit bond on one or more
credit allowance dates (as defined in section 54A(e)(1)) of the bond occurring during a taxable year is allowed as a credit
against income tax for the taxable year an
amount equal to the sum of the credits
determined under section 54A(b) with respect to those credit allowance dates. Unless otherwise specifically provided, for
purposes of this notice references to the
“allowance of a credit” or an “allowed
credit” mean the amount of the credit determined under section 54A(b) (as limited
by sections 54C(b) and 54D(b)) before application of the limitation under section
54A(c).
(2) Allowance of a credit treated as a
payment of stated interest on a taxable
bond. For Federal income tax purposes,
the allowance of a credit on a qualified tax
credit bond on a credit allowance date is
treated as a payment, in the amount of the
allowed credit, of stated interest on a debt
obligation the interest on which is includable in gross income. Thus, the allowance
of a credit on a bond that has not undergone
a stripping transaction is treated as a payment of qualified stated interest (within the
meaning of § 1.1273–1(c) of the Income
Tax Regulations) to the same extent that
a payment of stated interest in cash in the
same amount and on the same date would
have been so treated.
(3) Accounting method—(i) General
rule. In general, a holder’s regular method
of accounting determines when the holder
recognizes qualified stated interest income
from a qualified tax credit bond. Thus, if
the holder of a qualified tax credit bond
uses the cash receipts and disbursements
method of accounting, interest income in
the amount of the allowed credit is generally included in income on the credit
allowance date. If the holder of such a

April 12, 2010

bond uses an accrual method of accounting, this interest income is included in
income as it accrues over each accrual
period. See § 1.1272–1(b)(1)(ii) to determine the accrual periods and § 1.446–2(b)
to determine how qualified stated interest accrues over the accrual period (or
periods) to which it is attributable. (For
qualified tax credit bonds that have not
undergone a stripping transaction, because
of the regular quarterly credit allowance
dates, the maximum permitted length of
the accrual periods is three months.)
(ii) Other rules with respect to accounting for interest. Under certain circumstances, other rules may require the holder
of a bond (including a tax credit bond) to
adjust the amount of interest income that
the holder recognizes. See, e.g., section
171 (amortization of bond premium by a
bond purchaser); § 1.61–7(c) (purchaser’s
treatment of a bond purchased between interest payment dates); § 1.61–7(d) (seller’s
treatment of a bond sold between interest
payment dates); section 1272 (accrual of
original issue discount (OID) by a holder);
and Section 3.03 of this notice and section
1286 (treatment of stripping transactions).
(4) Examples. The following examples illustrate the application of this Section 3.02(a):
Example 1. Assume that, on December 15, 2011,
City X issues a qualified tax credit bond with a stated
principal amount of $12,000, a credit rate of 10%
compounded quarterly, and a maturity date of December 15, 2013. B purchases the bond at original issue
for $12,000 and thus has a $12,000 basis in the bond.
B is a calendar year taxpayer that uses the cash receipts and disbursements method of accounting. Under Section 3.02(a) of this notice and § 1.1273–1(c),
the allowance of the $300 tax credit on each credit
allowance date is treated as a payment of qualified
stated interest of $300 on those dates. On March 16,
2012, B sells the bond for $12,000. On March 15,
2012, the first credit allowance date occurring after
the issuance of the bond, B becomes entitled to a $300
tax credit and, with respect to that credit, must include
in income $300 of interest in 2012. No interest is includable in 2011.
Example 2. The facts are the same as in Example
1, except that B uses an accrual method of accounting. As in Example 1, B becomes entitled to a $300
tax credit on March 15, 2012. B, however, must include in income $50 of interest in 2011 and $250 of
interest in 2012 (based on a 30 day/360 day counting
convention).
Example 3—(i) The facts are the same as in Example 1, except that on March 16, 2012, B sells the
bond for $12,100 to C, a taxpayer that uses the cash
receipts and disbursements method and the calendar
year. C has not previously elected to amortize bond
premium under section 171. Under § 1.61–7(d), B
treats the entire $12,100 as sales proceeds. Because

542

B’s basis in the bond was $12,000, B has a $100 gain
on the sale. C has a $12,100 basis in the bond. Because C acquired the bond with premium of $100, C
may elect to amortize the $100 bond premium under
section 171.
(ii) Assume further that C holds the bond until its
retirement on December 15, 2013. C has $900 of tax
credits in 2012 and $1,200 in 2013. If C does not elect
to amortize the bond premium, C has $900 of interest
income in taxable year 2012 and $1,200 of interest income in taxable year 2013. In addition, C has a $100
loss in taxable year 2013. If C elects to amortize the
$100 of bond premium, the amortized portion of that
bond premium reduces C’s interest income in 2012
and 2013, and C does not have a $100 loss in taxable
year 2013.
Example 4. The facts are the same as in Example
3, except that B sells the bond to C on January 15,
2012, at a sales price of $12,100. (Based on the treatment of the credits under section 3.02(a)(2) of this
notice, there was $100 of accrued but unpaid interest with respect to the bond on the sale date.) Under
§ 1.61–7(d), B treats $100 of the sales price as the
receipt of interest accrued on the bond, includes this
amount in income in 2012, and treats the remaining
$12,000 as sales proceeds. Because B’s basis in the
bond is $12,000, B has no gain or loss on the sale of
the bond. On March 15, 2012, C becomes entitled to
the $300 credit. Under § 1.61–7(c), the amount of interest income included by C with respect to the credit
is $200, and C’s basis in the bond is $12,000.

(b) Limitation based on amount of
tax—(1) In general. The credit allowed
under section 54A(a) and this Section
3.02 is subject to the limitation in section
54A(c)(1) based on the taxpayer’s income
tax liability.
(2) Carryover of unused credit—(i) In
general. Under section 54A(c)(2), if the
credit allowable for the taxable year under section 54A(a) exceeds the limitation
imposed for the taxable year by section
54A(c)(1), the excess credit (an excess
credit) is carried to the succeeding taxable
year and added to the credit allowable under section 54A(a) (as adjusted by sections
54C(b) and 54D(b)) for the succeeding
taxable year (determined before the application of the limitation for the succeeding
taxable year under section 54A(c)(1)).
(ii) No time limit on carryovers of excess credits. An excess credit under section 54A(c)(2) can be carried forward to
succeeding taxable years and used in a succeeding year to the extent that the excess
credit does not exceed the limitation for
that taxable year. Any allowed credit, including any excess credit from a prior year,
however, must be taken for the first taxable
year in which, and to the extent that, the allowed credit, including the excess credit,
does not exceed the limitation under sec-

2010–15 I.R.B.

tion 54A(c)(1) and Section 3.02(b)(2)(i) of
this notice.
(c) Qualified tax credit bonds and corporate earnings and profits—(1) Adjustments to earnings and profits. A corporation generally adjusts its earnings and profits in accordance with its method of accounting. See § 1.312–6. For this purpose, a corporation increases its earnings
and profits for interest income (including
interest described in section 54A(f)). A
corporation reduces its earnings and profits when, and to the extent that, it would
have reduced its earnings and profits had
it satisfied its tax liability with cash rather
than reducing that liability with tax credits
from qualified tax credit bonds.
(2) RICs and REITs. If, under section
853A or section 54A(h), a regulated investment company or a real estate investment trust, respectively, distributes with
respect to its stock a tax credit from a qualified tax credit bond or from a stripped
credit coupon from a qualified tax credit
bond (including a credit passed through
from a partnership or trust), then the earnings and profits of the regulated investment company or real estate investment
trust are reduced when, and to the extent
that, the earnings and profits would have
been reduced if the distribution had consisted of cash in the amount of the credit.
.03 QUALIFIED TAX CREDIT
BONDS—TREATMENT OF
STRIPPING TRANSACTIONS
(a) Overview. This Section 3.03 addresses stripping transactions involving qualified tax credit bonds. Section
54A(i)(1) provides generally that, under
regulations, there may be a separation,
including at issuance, of the ownership of
a qualified tax credit bond and the entitlement to a credit under section 54A with
respect to the bond. In the case of any
such separation, the credit is allowed to
the person who on the credit allowance
date holds the instrument evidencing the
entitlement to the credit and not to the
holder of the bond. Section 54A(i)(2)
further provides that, in the case of such a
separation, the rules of section 1286 are to
apply to the qualified tax credit bond as if
it were a stripped bond and to the credit as
if it were a stripped coupon.
(b) Definitions. The following definitions apply for purposes of this Section 3:

2010–15 I.R.B.

(1) Credit coupon means the right to
receive a tax credit under section 54A with
respect to a qualified tax credit bond on a
credit allowance date.
(2) Issue means issue as defined in
§ 1.150–1(c) except that, in applying that
definition for purposes of this Section
3.03, the only bonds taken into account
are qualified tax credit bonds as defined in
section 54A(d)(1).
(3) Stripping transaction means a transaction that results in the separation in
ownership between any credit coupon
with respect to a qualified tax credit bond
for any credit allowance date that has
not yet occurred and any right to receive
cash (whether stated principal or stated
interest) that has not yet become payable.
Notwithstanding the preceding sentence,
the term stripping transaction does not
include a transaction with respect to a
particular bond in which the post-transaction future rights (that is, rights to cash
that is not yet payable and credits whose
credit allowance dates have not yet occurred) reflect a pro rata division of all the
pre-transaction future rights.
(4) Stripped credit coupon means a
credit coupon with respect to a qualified
tax credit bond if the bond has undergone
a stripping transaction.
(c) Strippable Issue. For purposes of
this notice, the term “strippable issue”
means an issue of qualified tax credit
bonds that complies with all of the following requirements:
(1) Designation requirement. The issuer on or before the date of issue includes a statement in the bond documents
(as defined in § 1.150–1(b)) that the issue
of qualified tax credit bonds is strippable.
For an issue of qualified tax credit bonds
that is issued before March 31, 2010, this
designation may be effected on or before
May 17, 2010.
(2) Identification requirement. On an
information return filed with the IRS under section 54A(d)(3), the issuer identifies
the issue of qualified tax credit bonds as
a strippable issue. Except as provided in
the next sentence, the identification must
be on the first information return filed under section 54A(d)(3) with respect to the
issue of qualified tax credit bonds. For an
issue of qualified tax credit bonds that is issued before March 31, 2010, the identification may instead be on an amended information return filed before May 17, 2010.

543

(3) Registration requirement. The issue
of qualified tax credit bonds is issued in
registered form. For this purpose, registered form means that all rights to stated
principal, stated cash interest, and tax
credits under the bond may be transferred
only through book entry on the registration
books of the issuer or an agent or nominee
(or chain of nominees) for this purpose.
In addition, a bond is not considered to
be in registered form unless book entries
are maintained (by the issuer, an agent,
or nominee) in a manner that makes all
the entries available for inspection upon
request by the Commissioner or his designees.
(4) CUSIP number requirement. A
CUSIP number is assigned to the issue
of qualified tax credit bonds, a separate
CUSIP number is assigned to all rights
to receive tax credits on each credit allowance date with respect to the issue,
and at least one separate CUSIP number
is assigned to all rights to receive cash
(whether stated principal or stated interest)
with respect to the issue.
(d) Allowance of the tax credit to a
holder of a stripped credit coupon. A taxpayer who holds a stripped credit coupon
on a credit allowance date is allowed the
tax credit only if all of the following requirements are satisfied:
(1) Strippable issue. The bond is part
of a strippable issue within the meaning of
paragraph (c) of this Section 3.03.
(2) Stripped credit coupons.
The
stripped credit coupon is either a whole
credit coupon or a proportional share of
a whole credit coupon. Thus, if a person
holds any other division of a whole credit
coupon, including any direct or indirect
division or modification of a whole credit
coupon effected through a partnership,
trust, or other investment arrangement
that, in substance, causes the person to
hold a variable share of the whole credit
coupon, then no tax credit is allowed with
respect to that interest in the credit coupon.
For example, if a person holds an interest
in a partnership or a share of a trust that effects any division of a whole credit coupon
held by the partnership or trust other than
a proportional division, then that person
(and any other person to whom the person
directly or indirectly passes the credit) is
not entitled to a tax credit with respect to
the person’s allocable share or beneficial

April 12, 2010

interest in that division of the whole credit
coupon.
(3) Broker accounts. The taxpayer
holds the stripped credit coupon in an account with—
(i) A broker as defined in section
6045(c)(1); or
(ii) Any other person to the extent provided by the Commissioner in published
guidance.
(e) Treatment of a stripping transaction
involving a qualified tax credit bond—(1)
In general. Except to the extent that a
provision of this Section 3.03 explicitly
provides otherwise, subsections (a), (b),
and (e) of section 1286 apply to stripping
transactions involving qualified tax credit
bonds. In applying these provisions of
section 1286, the allowance of a credit is
treated in the same manner as a cash payment of stated interest on the credit allowance date. See Section 3.02(a)(2) of
this notice.
(2) Aggregation and other rules. If, on a
single date, a taxpayer purchases (including a purchase under section 1286(b)(4)),
as part of a single transaction or series of
related transactions, more than one component (stated principal, stated cash interest, or credit coupons) of a qualified tax
credit bond that has been subject to a stripping transaction, then, for purposes of sections 1271 through 1286 and the regulations thereunder, the taxpayer must treat
the components so purchased as a single
debt instrument (the aggregated debt instrument) that was newly issued on the purchase date. Notwithstanding the prior sentence, none of the payments on the aggregated debt instrument is treated as qualified stated interest under § 1.1273–1(c).
If, in a manner described in the first sentence of this Section 3.03(e)(2), the taxpayer purchases all of the then-outstanding
components of a qualified tax credit bond,
then the resulting aggregated debt instrument is treated as of the purchase date as if
it had not been subject to a previous stripping transaction, and thus the second sentence of this Section 3.03(e)(2) does not
apply.
(f) Examples. The rules in this Section
3.03 are illustrated by the following examples.
Example 1—(i) Facts. On December 15, 2011,
City X issues an issue of qualified school construction
bonds as a single bond with a stated principal amount

April 12, 2010

of $12,000, a credit rate of 10% compounded quarterly, and a maturity date of December 15, 2013. Assume that none of the interest on the bond is payable
in cash. (That is, there is no supplemental cash interest coupon.) X, on or before the date of issue, includes
in the bond documents a statement that the issue is
strippable and issues the issue in registered form. X
obtains 10 CUSIP numbers with respect to the issue
(1 CUSIP number for the $12,000 issue of qualified
school construction bonds, a separate CUSIP for the
credit coupons for each of the 8 credit allowance dates
through the scheduled maturity of the issue, and 1
CUSIP number for the scheduled principal payment
at maturity). On the first information return that X
files with the IRS with respect to this issue under section 54A(d)(3), X indicates that the issue is a strippable issue of qualified school construction bonds.
(ii) Analysis. X’s issue of qualified school construction bonds is a strippable issue because it satisfies the requirements of Section 3.03(c)(1) through
(4) of this notice.
Example 2. The facts are the same as in Example 1, except that, on December 15, 2011, X sells the
$12,000 bond to Y. Y sells on December 15, 2011,
a $6,000 pro rata portion of the bond to A, a cash
method, calendar year taxpayer, and a $6,000 pro rata
portion of the bond to B, an accrual method, calendar year taxpayer. (Thus, Y’s sales to A and B do
not constitute a stripping transaction, because they effect a pro rata division of the future rights under the
bond.) The purchase prices paid by A and B were
$6,000 each. On March 15, 2012 (and all subsequent
credit allowance dates), subject to the limitations contained in section 54A(c)(1) and Section 3.02(b)(1) of
this notice, A and B are each entitled to claim a $150
tax credit.
Example 3—(i) Facts. The facts are the same as
in Example 2, except that, on December 15, 2011, A
sells the December 15, 2013, credit coupon of $150 to
C, a cash method calendar year taxpayer for $123.75
(its fair market value). After the sale, A holds the
right to receive $6,000 at maturity as well as the first
7 credit coupons (the “8 retained components”), and
C holds only the December 15, 2013, credit coupon.
(ii) Application of definitions. The sale is a
stripping transaction within the meaning of Section
3.03(b)(3) of this notice. The credit coupon held
by C and the 7 credit coupons retained by A are all
stripped credit coupons. The treatment of B’s bond
is not affected by the sale.
(iii) A’s treatment of the sale. Under Section
3.03(e)(1) of this notice, section 1286(b) applies to
this stripping transaction. Section 1286(b)(4) treats
A as having purchased the 8 retained components on
the date on which A sells the December 15, 2013,
credit coupon to C. Under Section 3.03(e)(2) of this
notice, the 8 retained components must be treated as
an aggregated debt instrument that is newly issued
on the date of the sale of that credit coupon.
Prior to the sale of the credit coupon, A’s basis
in the unstripped $6,000 bond is A’s purchase price
of $6,000. Because no interest is treated as having
accrued on the bond prior to the sale, A is not required to include an amount in income under section
1286(b)(1)(A), and thus no amount needs to be added
to A’s basis under section 1286(b)(2). Pursuant to
section 1286(b)(3), A must allocate its basis in the

544

bond ($6,000) between the credit coupon that A sold
and A’s aggregated debt instrument, based on their
respective fair market values. Assume that, on the
date of the sale, the fair market value of A’s aggregated debt instrument is $5,877.10 and the fair market
value of the December 15, 2013, credit coupon sold
by A is $123.75 (total fair market value of $6,000.85).
Based on these fair market values, A’s basis in the aggregated debt instrument is $5,876.27 ($6,000 basis x
[$5,877.10 / $6,000.85]) and A’s basis in the December 15, 2013, credit coupon is $123.73 ($6,000 basis
x [$123.75 / $6,000.85]). As a result, A realizes a gain
of $0.02 on the sale of the December 15, 2013, credit
coupon (amount realized of $123.75, minus basis of
$123.73).
(iv) A’s treatment of the aggregated debt instrument. Under section 1286(b)(4), A is treated as purchasing the aggregated debt instrument for $5,876.27.
The purchase is treated as taking place on the date
of the sale to C, and the purchase price is equal to
the portion ($5,876.27) of A’s $6,000 basis that is
allocated to the aggregated debt instrument. Under
Section 3.03(e)(2) of this notice, A must treat the
aggregated debt instrument as newly issued on that
date for $5,876.27. Thus, the aggregated debt instrument has an issue price of $5,876.27. Under Section
3.03(e)(2) of this notice, no payment on the aggregated debt instrument is qualified stated interest under § 1.1273–1(c). As a result, the stated redemption
price at maturity of the aggregated debt instrument is
$7,050 ($6,000 + [7 × $150]). The aggregated debt
instrument, therefore, has OID of $1,173.73 ($7,050
- $5,876.27). Although A generally uses the cash receipts and disbursements method of accounting, A
must include the OID in income as it accrues on a
constant yield basis over the term of the aggregated
debt instrument in accordance with section 1272 and
the regulations thereunder.
(v) C’s treatment of the stripped tax credit
coupon. Under Section 3.03(e)(1) of this notice,
section 1286(a) applies to C’s purchase of the
December 15, 2013, stripped credit coupon. Section
1286(a) requires C to treat the purchase of this
stripped credit coupon as the purchase of a zero
coupon bond that is issued on the date of purchase
(December 15, 2011). The stripped credit coupon
has a stated redemption price at maturity of $150
and an issue price of $123.75, resulting in OID of
$26.25 ($150 - $123.75). The term of the stripped
credit coupon begins on December 15, 2011, and
ends on December 15, 2013. Although C generally
uses the cash receipts and disbursements method of
accounting, C must include the OID in income as
it accrues on a constant yield basis over that term
in accordance with section 1272 and the regulations
thereunder.
C’s basis in the stripped credit coupon is increased
by the amount of OID that is included in C’s income.
As a result, C’s basis in the stripped credit coupon
on the December 15, 2013, credit allowance date will
be $150. On that date, C will become entitled to the
$150 of credit. Thus, C does not have any gain or loss
when the coupon matures and C becomes entitled to
the $150 tax credit.

2010–15 I.R.B.

SECTION 4. INFORMATION
REPORTING REQUIREMENTS
RELATED TO TAX CREDIT BONDS
.01 IN GENERAL
Qualified tax credit bonds—in particular, stripping transactions involving
these bonds—raise significant tax compliance and tax administration issues. The
Treasury Department and the IRS plan to
implement and maintain a robust system
of information reporting in this area to
facilitate tax compliance and strengthen
tax administration.
Section 54A(d)(3) requires issuers of
qualified tax credit bonds to submit information reports regarding the bonds similar to the reports required under section
149(e).
Section 6049(d)(9)(A) provides that,
for purposes of the information reporting requirements under section 6049(a)
regarding payments of interest, the term
interest includes amounts includible in
gross income under section 54A, and those
amounts are treated as paid on the credit
allowance date.
Under section 6049(d)(6), section
6049(a) generally requires OID on any
obligation to be reported as if it were paid
at the time that the OID is includible in income under section 1272. This provision
governs section 6049 information reporting when a tax credit under a qualified tax
credit bond is included in an instrument’s
stated redemption price at maturity, and
thus contributes to OID. (This occurs when
the allowance of the credit is not treated
as a payment of qualified stated interest
on an instrument, for example, when a
stripped credit coupon is part of an aggregated debt instrument that is subject to the
second sentence of Section 3.03(e)(2) of
this notice.)
Section 6049(b)(2)(B)(i) and section
6049(b)(4) generally exempt from information reporting interest that is paid to
certain persons. Section 6049(d)(9)(B),
however, generally makes this exemption
inapplicable for interest on qualified tax
credit bonds that is treated as paid to the
following entities: (i) corporations; (ii)
dealers in securities or commodities required to register under the laws of the
United States, any State, the District of
Columbia or any United States possession; (iii) real estate investment trusts

2010–15 I.R.B.

(as defined in section 856); (iv) entities
registered at all times during the taxable
year under the Investment Company Act
of 1940; (v) common trust funds (as defined in section 584(a); and (vi) trusts
exempt from tax under section 664(c).
Notwithstanding the preceding sentence,
the exemption continues to apply to interest that is covered by an express regulatory
exception.
Section 6049(d)(9)(C) provides broad
authority to the Treasury Department to issue regulations as necessary or appropriate to carry out the purposes of section
6049(d)(9), including regulations that require more frequent or more detailed reporting.
The Treasury Department and the IRS
will attempt to ensure that both the IRS
and investors receive accurate information
about interest income (including OID) that
is includable in income as a result of holding qualified tax credit bonds and components stripped from these bonds. The Treasury Department and the IRS will also seek
to ensure that tax credits from qualified
tax credit bonds (including tax credits from
stripped credit coupons) are claimed only
when the claimant is entitled to those credits.
To these ends, the Treasury Department
and the IRS anticipate implementing the
integrated system of information reporting
that is described below in this Section 4.
This may involve implementing new requirements. Revised forms and, if necessary, regulations will be issued to implement these information reporting requirements. For example, when a taxpayer
holds a stripped credit coupon in an account with a broker as defined in section
6045(c)(1) (see Section 3.03(d)(3) of this
notice), future guidance is expected to require the broker to compute, and report to
the holder of the stripped credit coupon
and to the IRS, the OID that accrues on that
coupon under Section 3.03(e) of this notice
and section 1286(a)-(b).
This system of information reporting
will be subject to the same penalties that
apply generally with respect to the failure
to accurately file required forms. These
include but are not limited to the penalties under sections 6049, 6721, and 6722
(which are applied to issuers, issuers’
agents, and independent intermediaries)
and the penalty under section 6694 and

545

Rev. Proc. 2009–11, 2009–3 I.R.B. 313
(which is applied to paid preparers).
As the forms and instructions to be
used to implement the integrated information reporting system become available for use or for review in draft form,
the IRS plans to publish them on its
web site at http://www.irs.gov/app/picklist/list/formsInstructions.html
and
http://www.irs.gov/app/picklist/list/draftTaxForms.html, respectively.
Taxpayers wishing to provide comments to the
IRS on draft tax forms can do so on the
IRS web site at http://www.irs.gov/formspubs/page/0,,id=10179,00.html.
.02 INFORMATION RETURNS UNDER
SECTION 54A(d)(3)
Section 54A(d)(3) requires issuers of
qualified tax credit bonds to file information returns. Although Form 8038 is now
used for this purpose, the IRS intends to
publish a new form (Form 8038–TC) to be
used in this situation. As is provided by
Section 3.03(c)(2) of this notice, the issuer
of a strippable issue is now required, as
part of this reporting obligation, to identify the issue as a strippable issue and to
provide all of the CUSIP numbers that
Section 3.03(c)(4) of this notice requires.
Issuers must provide this information on
Form 8038 or an attachment thereto until
the new Form 8038–TC becomes available
and thereafter on this new form.
.03 REPORT OF A TAXPAYER
CLAIMING A TAX CREDIT ON AN
INCOME TAX RETURN
If a taxpayer claims on its income tax
return a tax credit authorized by section
54A, the taxpayer is required to include
Form 8912 as part of the return. The
IRS and Treasury Department anticipate
that the information required on this form
will be modified to include not only the
type of tax credit bond and the amount of
credit claimed but also the tax identification number of the issuer of the bond and
the CUSIP number for the qualified tax
credit bond (or the stripped credit coupon)
that is the basis of the credit being claimed.
.04 TAX CREDIT ALLOWANCE
INFORMATION RETURN
Under section 6049, the IRS expects to
publish a new form, Form 1097–BTC, to

April 12, 2010

inform both the IRS and any recipient of a
credit under section 54A of the amount of
the tax credit that the credit recipient has
received for each credit allowance date.
The amount to be reported is the amount
of the allowed credit to which the recipient is entitled within the meaning of Section 3.02(a)(1). It is anticipated that this
form will be used in two distinct situations.
First, it will have to be filed by, or on behalf of, the issuer. Second, a filing will also
be required of each broker or intermediary
that is not acting on behalf of the issuer (an
independent intermediary).
As for the issuer requirement, the
principles under section 6049(d)(4) are
expected to apply to limit this requirement
to the last responsible person or intermediary acting on behalf of the issuer.
The requirement for independent intermediaries is expected to apply whenever
such an intermediary serves as an agent or
nominee with respect to a credit or the intermediary receives a credit and passes it
on either to another independent intermediary or to the taxpayer that will ultimately
claim the credit. (Examples of independent intermediaries include a broker that is
not reporting on behalf of the issuer, a partnership, a trust, an estate, and a regulated
investment company or real estate investment trust that distributes tax credits with
respect to its stock under section 853A or
section 54A(h)).
It is anticipated that this form will operate in the following fashion—

•

•

The information required by the form
will include not only the amount of the
credit transferred to the recipient but
also the bond issuer’s tax identification
number and the CUSIP number for the
qualified tax credit bond (or stripped
credit coupon) that is the basis for the
credit being transmitted.
Effective starting with credits received
in 2010, responsible persons under section 6049 will be required to submit
a form to the IRS annually after the
close of the calendar year. The form
will include the total amount of tax
credits for which the responsible persons served as a responsible person
during the taxable year with respect
to each independent intermediary and
each holder of a tax credit bond or
stripped credit coupon. The form will

April 12, 2010

•

•

require the CUSIP number of the bond
(or the stripped credit coupon) generating that tax credit and the tax identification number of the issuer of the bond
that underlies the tax credit.
Effective starting with credits received
in 2011, responsible persons under
section 6049 will be required to send
this form to the credit recipient quarterly within 30 to 60 days following
the credit allowance date to which the
tax credit relates.
The form will require that the entity
generating the form indicate whether
the entity is the bond issuer (including
a person acting on behalf of the bond
issuer) or whether it is an independent
intermediary and thus is not only the
generator of a form but also the recipient of such a form from another independent intermediary or from the bond
issuer (including a person acting on behalf of the bond issuer).

independent intermediary) and distributes
with respect to its stock some or all of those
credits, then when that entity reports under
section 6042 dividends paid to its shareholders, the entity must include distributed
tax credits that are treated as dividends.
SECTION 5. REQUEST FOR
COMMENTS
The Treasury Department and the IRS
solicit comments generally on the expected regulations that are described in
Section 3 of this notice, other aspects of
stripping transactions under section 1286
on which guidance is needed, and the
various anticipated information reporting
requirements that are described in Section
4 of this notice.
In particular, the Treasury Department
and the IRS solicit comments regarding—

•

.05 REPORT FOR INCOME FROM
INTEREST, ORIGINAL ISSUE
DISCOUNT, OR DIVIDENDS
(a) For qualified tax credit bonds, information reporting for interest and OID
under section 6049 will be expanded.
Responsible persons under section 6049
will generally be required annually to provide the IRS and the holder of a qualified
tax credit bond or stripped credit coupon
with an information return indicating the
amount of interest income paid (or treated
as paid for purposes of section 6049) to
the holder during that annual period with
respect to any qualified tax credit bond.
As stated above, when a taxpayer holds a
stripped credit coupon in an account with
a broker as defined in section 6045(c)(1)
(see Section 3.03(d)(3) of this notice),
future guidance is expected to require
the broker to compute, and report, the
OID on that coupon that accrues under
Section 3.03(e) of this notice and section
1286(a)-(b). An analogous requirement
may apply to any other stripped component from a qualified tax credit bond.
(b) It is expected that if a regulated investment company or a real estate investment trust receives tax credits allowed by
section 54A (either because it holds a qualified tax credit bond or stripped coupon
or because it received the credits from an

546

•

•

Systems challenges, time needed to
implement systems changes to enable
affected parties to comply with the
anticipated information reporting requirements, and alternative approaches
to alleviate systems challenges consistent with the overall objectives for
information reporting in this area;
The application of the principles in
this notice to tax credit Build America
Bonds under section 54AA and any
additional rules that may be necessary
to accommodate that application; and
Whether any particular guidance is
needed to limit potential duplicative
claims of entitlement to tax credits
(e.g., specifying that credits are allowable only to record holders as of
a particular time in a particular time
zone on a credit allowance date).

Comments should be submitted
in writing and can be e-mailed to
[email protected]
(include “Notice 2010–28” in the
subject line) or mailed to Office of
Associate Chief Counsel (Financial
Institutions and Products), Re: Notice
2010–28, CC:FIP:B5, Room 3547, 1111
Constitution Avenue, NW, Washington
DC 20224. The due date for the public
comments is May 24, 2010. Comments
that are submitted will be made available
to the public.

2010–15 I.R.B.

SECTION 6. OMB NUMBER UNDER
THE PAPERWORK REDUCTION
ACT
The information collection contained in
this notice has been approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction
Act (44 U.S.C. chapter 35) under control
number 1545–2167. Under the Paperwork
Reduction Act, an agency may not conduct
or sponsor and a person is not required to
respond to a collection of information unless it displays a valid OMB control number.
The collection of information in this
notice is in Section 3.03(c). The information is required in order to inform the
IRS and holders of qualified tax credit
bonds whether the credit coupons relating
to those bonds may be stripped. The collections of information are required for the
issuer to enjoy the benefit of having these
bonds treated as part of a strippable issue.
The likely respondents are states or local
governments and certain other eligible issuers of qualified tax credit bonds.
We estimate the total number of respondents to be 1,000 and the total annual responses to be 1,000. We estimate it will
take 1 hour to comply. Estimates of the annualized cost to respondents for the hour
burdens shown are not available at this
time.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue law.
Generally, tax returns and return information are confidential, as required by section
6103.
SECTION 7. EFFECTIVE DATE
.01 The effective date of this notice is
March 23, 2010.
.02 The interim guidance in Sections
3.02 and 3.03 of this notice applies to—
(1) Stripping transactions (as defined in
Section 3.03(b)(3) of this notice) that occur
on or after the effective date of this notice;
and
(2) Taxable years ending on or after the
effective date of this notice for holders of
qualified tax credit bonds and of cash or
credit coupons stripped from qualified tax
credit bonds.

2010–15 I.R.B.

.03 Taxpayers may choose to apply the
interim guidance in Section 3.02 of this
notice consistently to taxable years ending
before the effective date of this notice.
.04 The IRS and the Treasury Department anticipate that the date of applicability of the expected regulations described in
this notice will be March 23, 2010. If, and
to the extent, the expected regulations differ from the interim guidance in this notice, the different provisions of the final
regulations will be applied without adverse
retroactive effect.
SECTION 8. DRAFTING
INFORMATION
The principal authors of this notice are
Aviva Roth and Timothy Jones of the Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this notice, contact
Timothy Jones at (202) 622–3980 (not a
toll-free call). For questions on earnings
and profits, contact Russell P. Subin at
(202) 622–7790 (not a toll-free call).

Life Insurance Reserves —
Actuarial Guideline XLIII
Notice 2010–29
SECTION 1. PURPOSE
This notice provides interim guidance
to issuers of variable annuity contracts
on issues that arise under §§ 807 and 816
of the Internal Revenue Code (Code) as
a result of the adoption by the National
Association of Insurance Commissioners
(NAIC) of Actuarial Guideline XLIII,
Commissioners’ Annuity Reserve Valuation Methodology (CARVM) for Variable
Annuities (AG 43).
SECTION 2. BACKGROUND
Overview
.01 A life insurance company is required to account for its obligations to
policyholders using reserve methods of
accounting. Statutory Accounting Principles (SAP) govern the preparation of
the company’s annual statement, which is
filed with the relevant state insurance regulators. Generally Accepted Accounting
Principles (GAAP) govern the preparation

547

of an insurer’s financial statements, which
are provided to shareholders, bondholders,
banks and rating agencies. GAAP differs
in some respects from SAP.
.02 Clear reflection of the income of a
life insurance company for federal income
tax purposes requires an appropriate measurement of the company’s life insurance
reserves. Tax accounting rules used to
compute the taxable income of a life insurance company differ in some respects from
SAP or GAAP, including with respect to
the computation of life insurance reserves.
.03 Although all insurance companies
are required by the respective states in
which they do business to maintain reserves, not all reserves that a company
maintains (or is required to maintain) qualify as “life insurance reserves” for Federal
income tax purposes.
Use and Computation of Life Insurance
Reserves
.04 Under § 816(a), an insurance company is a life insurance company if the
sum of (1) its life insurance reserves, plus
(2) unearned premiums, and unpaid losses
(whether or not ascertained), on noncancellable life, accident, or health policies
not included in life insurance reserves,
comprise more than 50 percent of its total
reserves.
.05 Section 816(c) defines “total reserves” as the sum of (1) life insurance
reserves, (2) unearned premiums, and unpaid losses (whether or not ascertained),
not included in life insurance reserves, and
(3) all other insurance reserves required
by law.
.06 Section 816(b) defines “life insurance reserves” as amounts that are (1)
computed or estimated on the basis of recognized mortality or morbidity tables and
assumed rates of interest, and (2) set aside
to mature or liquidate, either by payment
or reinsurance, future unaccrued claims
arising from life insurance, annuity, and
noncancellable accident and health insurance contracts (including life insurance
or annuity contracts combined with noncancellable accident and health insurance)
involving, at the time with respect to which
the reserve is computed, life, accident, or
health contingencies. Reserves generally
must be required by law to qualify as life
insurance reserves. See also § 1.801–4(d)
and (e) (setting forth reserves that qualify,

April 12, 2010