The ability of school districts to raise additional revenue through means other than tax increases just got a bit more difficult. In an eagerly awaited decision, the Pennsylvania Supreme Court has upheld the ability of taxpayers to challenge on constitutional grounds the practice in certain school districts of engaging in selective assessment appeals – that is, appealing the assessments of only certain classes of properties (commercial properties), while not appealing the assessments of other (residential) properties.

McNees’ Paul Morcom, of the State and Local Tax Practice Group, has the details on this important decision, at the McNees PA Tax Blog, Adding Value.

On June 7, 2017, new IRS regulations that change the way state and local governments issue tax-exempt bonds went into effect. The new rules change the way municipal issuers determine the issue price of tax-exempt bonds they issue, and amend existing IRS regulations under section 148 of the Internal Revenue Code. The new rules have produced immediate changes to many common documents used by municipal issuers and their advisors in municipal bond transactions.

Continue Reading New IRS Regulations Change the Game for Municipal Bond Issuers

The National Association of Bond Lawyers (NABL) and the Securities Industry and Financial Markets Association (SIFMA) recently released model issue price documents in connection with the soon-to-be effective Treasury Regulations on establishing the issue price of a tax-exempt bond issue. NABL’s model documents can be accessed here; SIFMA’s documents can be accessed here.

These model documents have been issued in response to the finalized Treasury Regulations on issue price, published by the Department of the Treasury on December 9, 2016.  The final regulations – which become effective on June 7, 2017 – retain the existing rule that in general, the issue price of a series of bonds is the first price at which a substantial amount (10%) of the bonds is sold to the public. The regulations add two special rules, however, which may be selected by the issuer in connection with the determination of the issue price: a special rule for competitive sales, and a special rule where the underwriter or underwriters agree to “hold the price” on the initial sale of the bonds to a price that is not higher than the initial offering price.

The model documents published by SIFMA and NABL provide a uniform solution for underwriters and issuers to ensure compliance with the final regulations, in particular in determining which of the three rules for determining issue price apply, and ensuring that the requirements for application of the rule are met. It is expected that both SIFMA and NABL will finalize these forms in the coming weeks after receipt of any comments from the public. Professionals working in the public finance industry should carefully review the forms now to get familiar with their requirements in advance of the effective date for the final regulations.

 

 

 

On Tuesday, February 7th, Governor Wolf presented his 2017 budget address to a joint session of the Pennsylvania General Assembly.   The Governor’s proposal includes a $1 Billion increase in the tax burden on Pennsylvania businesses and individuals. While the Governor stated that he was proposing no “broad-based tax increases,” his budget does raise revenues significantly while not addressing pension liability. We are currently analyzing the specifics of the Governor’s budget proposal and will provide more information in future posts. For now, however, here are some high level takeaways on the tax front:

Continue Reading Governor Wolf Calls for Major Business Tax Increases in 2017 Budget Proposal

Just a few short months after essentially re-writing the rules on management contracts for bond-financed property, the IRS is at it again. On January 17th the IRS gave advance notice of the publication of Revenue Procedure 2017-13. While Rev. Proc. 2017-13 won’t officially be published until February 6th, the IRS has made a copy of the new guidance available immediately for review.

Continue Reading IRS Announces Additional Guidance on Management Contracts for Bond-Financed Facilities

In this podcast, McNees Public Finance attorney Tim Horstmann discusses the recent announcement by the Internal Revenue Service of a major change in its treatment of management contracts entered into by governmental entities and nonprofit associations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.

View the podcast here.

Prefer text? You can read an article that Mr. Horstmann authored for The Legal Intelligencer about this development here.

The Internal Revenue Service, in Revenue Procedure 2016-44, has loosened the restrictions on safe harbors for management contracts entered into by governmental issuers of tax-exempt bonds in connection with facilities financed by such bonds. The revenue procedure, which will be published in the Internal Revenue Bulletin on September 6, 2016, is a welcome development for issuers considering a management contract, especially in connection with a public-private partnership, although restrictions still remain.

Rev. Proc. 2016-44 follows on several prior official publications from the IRS on the topic of management contracts, and significantly, dispenses with the rigid, formulaic rules set forth in the prior official guidance, instead applying a “principles-based approach” that is focused on the following factors: (1) issuer control over projects, (2) issuer bearing of risk of loss, (3) the economic lives of managed projects, and (4) consistency of tax positions taken by the service provider.

In addition, the management contract must continue to satisfy compensation requirements that have long been a hallmark of official IRS guidance on this topic; and the service provider also must not have a role or relationship with the issuer that limits the issuer’s ability to exercise its rights under the management contract.

A management contract that satisfies each of these safe harbor requirements is deemed to not create “private business use” of the tax-exempt bond-financed property. However, the mere failure of a contract to qualify for the safe harbor does not automatically lead to a finding that private business use has occurred. Rather, the contract must be further tested under the general private business use rules in the Code and regulations to determine whether private business use has occurred – and if so, whether that private business use will result in the tax-exempt bonds that financed the property being declared taxable private activity bonds.

Under Rev. Proc 2016-44 a management contract must provide that the issuer retain a “significant degree of control over the use of the managed property.” The IRS explains that this requirement is met if the contract requires that the issuer approve the annual budget, capital expenditures, dispositions of property, rates charged, and the types of services provided.

The management contract must also provide that the issuer bear the risk of loss if the managed property is damaged or destroyed. The issuer can, however, obtain insurance against such loss, and impose penalties on the service provider if the provider failed to meet the standards set forth in the contract, resulting in the loss.

The “economic lives” requirement is perhaps the most noteworthy aspect of Rev. Proc. 2016-44. This requirement is met if the contact has a term (including all renewal options) no greater than the lesser of (1) 30 years, or (2) 80% of the economic life of the managed property. Prior IRS guidance only outlined safe harbors for contracts of up to 15 years. The ability to enter into contracts of up to 30 years and still qualify for a safe harbor will be especially attractive in public-private partnerships, which generally have much longer terms than other management contracts.

The management contract also may not permit the service provider to take a tax position that is inconsistent with its role as a service provider. This restriction appears intended to prevent the service provider from realizing tax benefits generally reserved to property owners, such as depreciation.

In addition to these general principles set forth in Rev. Proc. 2016-44, the restrictions on compensation seen in prior guidance remain. Most importantly, these contracts still may not permit compensation based on net profits – or shift responsibility for net losses to the service provider. Compensation may include incentive payments for meeting service goals (although such goals cannot be tied to net profits or net losses). Of course, fixed fee compensation based on services provided remains permissible.

Finally, the service provider must not have a role or relationship with the issuer that limits the issuer’s ability to exercise its rights under the management contract, based on all of the facts and circumstances. This rule substantially limits circumstances in which the service provider and issuer may have common ownership or control.

The rules announced in Rev. Proc. 2016-44 apply equally to governmental issuers of tax-exempt bonds and qualified 501(c)(3) organizations that have availed themselves of tax-exempt bonds to finance their facilities. The new rules announced in the revenue procedure apply to any management contract entered into on or after August 22, 2016; issuers may elect to apply the new rules to any contract entered into prior to that date. If an issuer still wishes to apply the safe harbor rules in prior guidance, it may do so for any contract entered into before February 18, 2017.

Issuers and 501(c)(3) organizations that are considering a management contract should consult counsel to determine the tax implications of the contract before signing it.

Nearly two years after Harrisburg Mayor Eric Papenfuse first proposed it, the Harrisburg School District has approved a new, ten-year tax abatement program for residential and commercial development in the city.

As reported by The Patriot News:

The program would provide a 100-percent tax break for 10 years to improvements on residential properties citywide. It also would provide at least a 50-percent tax break for improvements or new construction for commercial properties for a decade. Depending on the number of permanent jobs created, commercial developers could earn a higher tax break of up to 100 percent.

The tax abatement program that is being considered in Harrisburg is authorized under the Local Economic Revitalization Tax Assistance Act, or LERTA. LERTA is available to municipalities throughout the Commonwealth and is intended to spur the development and redevelopment of qualified parcels of real estate by offering targeted real estate tax exemptions on new construction. The program only exempts from taxation the value of the new construction; the owner continues to pay all existing real estate taxes. No other taxes (federal, state or local) are affected by the program.

To take advantage of the program, each taxing authority in the jurisdiction must separately designate the particular area as a LERTA zone. For Harrisburg, that means the City, the School District, and the County governmental bodies each much approve it. It’s not an all-or-nothing proposition; each taxing authority is autonomous and exercises independent authority in determining whether to create a LERTA zone. Thus, to achieve complete tax abatement of a particular property in the City, all three of the taxing bodies must separately approve the creation of a LERTA zone that includes the property.

The ten-year abatement being considered in Harrisburg is the longest-term benefit that can be granted under LERTA – although shorter terms can be used.  The governmental bodies can also provide for any portion of the new construction to be exempt. The most common exemption schedules include: a complete, 100% exemption for each year of the LERTA designation; or a staggered “phase in” of the taxes on the value of the new construction (e.g., 100% exempt in year 1, 90% exempt in year 2, etc.).

With the School District’s approval of Papenfuse’s 10-year abatement plan, all that remains now is for the Dauphin County Commissioners to approve it.  The abatement program could start as early as 2017.

We previously reported on Mayor Eric Papenfuse’s controversial plan to triple the local services tax in the City of Harrisburg (a tax that overwhelmingly affects commuters, not residents). After securing the needed sign-off from the Commonwealth Court in January, Papenfuse’s plan was stalled by City Council as it worked through numerous other changes proposed to the City’s Financial Recovery Plan.

But now the plan has finally been approved.  Workers paying the tax should expect to see the higher tax on their paystubs soon.  Perhaps worst of all, the tax was approved retroactively back to January 1 – meaning that taxpayers will either have to make up the difference going forward, or pay a larger, lump sum bill from their first paycheck for the January-April period when the new, higher tax is collected.

As 2015 winds down and we prepare to welcome 2016, many smaller municipalities, municipal authorities, and other public entities may be putting the final touches on last-minute financings, or preparing for new financings in early 2016. In many of these issuances, the term “bank-qualified” will be used.

For such issuers, bank qualification is a means to enhance the attractiveness of the entity’s tax-exempt debt when placed with a bank or other financial institution, regardless of whether the debt is to be publicly offered or placed privately.

Tax-exempt debt is bank-qualified if it meets the requirements for such debt under Section 265 of the Internal Revenue Code. Because certain of the requirements under Section 265 reset each calendar year, there is often a rush to close transactions by Dec. 31, or as soon as possible after the first of the year.

Interested to know more about bank-qualified tax-exempt obligations?  I recently wrote an overview of the topic, which was published in the December 15, 2015 edition of The Legal Intelligencer. Read more here.