Congress is considering a complete rewrite of the 1603 grant program. Some of the changes being considered are very helpful while others would be extremely troubling. Please continue reading to get the full story ...
I thought I'd take this opportunity to do some "free-form" blogging. My intent is to alert you to some changes that may be afoot in Congress (if they can ever dig out from the snow).
Some of you readers may be aware that I spent 23 years in DC, both in and out of government. The mysterious ways of DC are less mysterious to me, which makes me somewhat dangerous! But I digress ...
It's fair to say that the 1603 grant program has been one of the most successful of any enacted in the stimulus bill. As of today (and since August 1), Treasury has paid out over $2.34 billion. More than that, Treasury has moved quickly to set up the program and provide guidance which, while not perfect, has generally been helpful to taxpayers. The program has some glitches, particularly resulting from Congress moving too quickly and not thinking through the ramifications of some of its decisions. On the whole, however, most people agree that the program has worked well.
I note this initially because Congress is considering a complete restructuring of the program. A combination of forces is pushing them to consider this (here's the inside baseball part). Supporters want to eliminate the requirement that construction begin before 2011, something we would all support. The "begin construction" requirement has caused a lot of wrinkled brows since 1603 was enacted (BTW - Treasury is about to issue new guidance that will simplify the requirement). However, to eliminate the requirement completely requires changes to 1603 itself. The problem is that 1603 is not within the jurisdiction of the tax-writing committees: House Ways & Means and Senate Finance. 1603 was written as a grant, which means it's an Appropriations Committee problem. Therefore, in order for the tax writers to amend it, they have to rewrite it to make it a tax provision. The bill is HR 4599.
As silly as it sounds, what I'm essentially saying is that in order to fix 1603, Congress has to break it. The way they propose to do that is to make it a refundable tax credit. Instead of applying directly to the good folks at Treasury, taxpayers would claim the funds on their tax returns. This creates some very interesting twists and turns. The good news in all of this is that, according to the sponsors, the rewrite is intended to preserve the favorable positions already taken by Treasury on issues such as recapture, which assets qualify (e.g. roads), etc. The rewrite would also eliminate the "begin construction" requirement, fix the "disqualified person" problem (proportionate disallowance instead of the death penalty), allow REITs to invest, and eliminate the requirement of independent CPA attestation. All of these changes would be welcome.
On the downside, the rewrite would first move the program to the IRS and away from Treasury. To date, the people at Treasury running the 1603 effort have made the program successful. It is unclear whether IRS would be so favorably disposed. It is the IRS after all.
But the most troubling change is how claimants would receive their funds. The bill treats the amount that would otherwise be paid as a grant as a payment of tax which can be refunded. It could be claimed as a refund on the claimant's tax return. However, as written, the refund would not be paid until 45 days after the tax return was due to be filed. This could mean that, instead of receiving the funds within 60 days as under 1603, the claimant may have to wait as long as 15 months. There would be no circumstance in which the waiting time would be shorter than 150 days (compared to the current 60).
In addition, we believe that the refunds could be subject to offset if money is owed to the IRS. Unlike 1603, the claims could not be made by project companies. They would have to be made by real taxpayers or entities (like partnerships) with real taxpayers. If any of these taxpayers owe other debts to the government, offset might be possible. Finally, recapture liability might actually be imposed up the ownership chain in appropriate circumstances (unlike 1603).
All of these changes could affect how lenders view the program and alter their willingness to lend against the "grants" in bridge financings. It has taken the lending community a few months to get used to 1603; at a minimum, lenders will need time to adapt to these changes as well. Certainly, in the case of a longer bridge (15 months potentially), their risk profile will be different. We (and they) simply don't know at this point.
The fate of this proposal is not certain. At present, its prospects appear to be good on the House side. The sponsors are trying to help but likely have not heard from those with concerns. The Senate is less clear (as always). Its support for 1603 was grudging in 2009, and whether it will be willing to eliminate the "begin construction" requirement or rewrite 1603 has yet to be tested. We will keep you apprised.
We hope this "free-form" explanation was helpful. Should you have any questions, please contact your favorite Stoel Rives attorney.