Financing School Construction: The Tax Consequences of Stripping

Larry L. Carlile, Ann A. Hered, Thane R. Hodson and Carol J. Mihalic

Municipal Finance Journal, 2009, vol. 30, issue 2, 71 - 79

Abstract: A qualified school construction bond (QSCB) is a tax credit bond within the meaning of Section 54A of the Internal Revenue Code. Rather than earn tax-exempt interest, the holder of a tax credit bond earns tax credits against the holder’s federal income tax. Under Section 54A(i) of the Code, a taxpayer’s entitlement to the tax credits may be separated or “stripped” from the ownership of the tax credit bond. In such a case, the principles of Section 1286 of the Code relating to the tax treatment of stripped bonds and coupons apply. The purpose of this memorandum is to summarize certain federal income tax issues related to the stripping of tax credits from QSCBs. As of yet, the Internal Revenue Service has not issued any guidance with respect to the stripping of tax credits under Section 54A of the Code.

Date: 2009
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