Chairman Kevin Brady of the U.S. House of Representatives, Committee on Ways and Means today introduced the “Tax Cuts and Jobs Act,” H.R. 1, and it does not contain good news for municipal issuers of tax-exempt bonds and private sector entities able to borrow on a tax-exempt basis.

Among other things, H.R. 1 would eliminate municipalities’ ability to issue advance refunding bonds, i.e. refunding bonds where the refunding occurs more than 90 days after the date of issuance. Congress already had heavily restricted the issuance of advance refunding bonds through the enactment of the 1986 Internal Revenue Code, which limited governmental and 501(c)(3) bond issues to a single advance refunding. Beginning in 2018, advance refundings could not be issued on a tax-exempt basis.

H.R. 1 would also eliminate all private activity bonds, currently authorized under sections 142 (exempt facility bonds), 143 (certain mortgage bonds), 144 (small issue bonds), and 145 (501(c)(3) bonds). Again, beginning in 2018, all such private activity bonds could not be issued on a tax-exempt basis.

The bill would also eliminate municipalities’ ability to issue bonds to finance professional sports stadiums – a controversial ability in its own right that seems unlikely to generate the kind of opposition that may be seen on the other proposals (unless you’re Jerry Jones).

These proposals, if enacted, would apparently not affect existing bonds issued and outstanding prior to the effective date. However, preliminary analysis suggests that any change in the terms of an existing bond resulting in a “reissuance” for tax purposes would result in a loss of tax-exempt status, if the reissued bond fell within one of the disfavored categories.

With H.R. 1 just being introduced today, it remains to be seen what becomes of it. However, the Trump Administration and Congressional Republicans have made it clear that they want to pass this bill before the end of 2017. Municipalities, 501(c)(3) organizations, and other private businesses affected by it may have to move fast if they want to push for changes to the bill.

There was a collective sigh of relief from bond lawyers across the country today, as the Department of the Treasury announced that it intends to withdraw in their entirety the regulations proposed by the IRS on political subdivisions, originally published on February 23, 2016. A copy of Treasury’s press release announcing the decision can be accessed here.

The political subdivision regulations were met with immediate criticism from municipal finance professionals. The criticism directed at IRS representatives attending the 2016 Tax and Securities Law Institute sponsored by the National Association of Bond Lawyers was particularly animated. Treasury in its announcement appears to have admitted that the proposal was flawed, stating that the “regulations would have been costly and burdensome.”

While this news is a welcome development, municipal issuers and their advisors should be aware that the definition of a “political subdivision” may be the topic of proposed regulations in the future. In a report prepared by Treasury in connection with the announcement, it was noted that Treasury and the IRS “will continue to study the legal issues relating to political subdivisions,” and “may propose more targeted guidance in the future.”

 

 

In a Notice of Proposed Rule Making published September 28, 2017, the IRS announced new proposed regulations on the public approval requirement of section 147(f) of the Internal Revenue Code, 26 U.S.C. §147(f). A copy of the Notice can be accessed here. The announcement should not come as a surprise – IRS representatives announced earlier this year at the annual Tax and Securities Law Institute sponsored by the National Association of Bond Lawyers that the finalization of regulations interpreting section 147(f) was a regulatory priority for the agency. Continue Reading IRS Proposes New Regulations on Public Approval Requirement for Private Activity Bonds

The Pennsylvania General Assembly continues to battle over revenue sources while the state remains without a complete state budget. And when it seems impossible, things actually continue to worsen with the House and Senate scheduled sessions to begin this afternoon. Over the weekend, the idea of a storage tax was discussed and it now seems to be more of a reality than a week ago.  And this tax is allegedly to replace a Marcellus Shale production tax.  This means the new targets for tax revenue are those who provide and use warehousing services and storage of items (“items” as defined by the proposed language seems to encompass almost anything) as well as anyone in the logistics business.  In essence, this tax would impose a 6% sales tax and have broad and expensive impact on almost every business. And the idea appears to be moving quickly through the capitol.

As covered in the media, the Pennsylvania General Assembly approved a budget spending bill without revenue sources at the end of June, and Governor Wolf allowed it to become law without his signature. Since then, lawmakers have fought over how to come-up with the $2.2 billion to pay for it.  Recently, the Republican-controlled Senate passed a revenue package that included more than $500 million in new taxes, including an extraction tax on shale gas drillers, new and increased taxes on consumer utilities such as electric, natural gas, telephone and expansion of the sales tax to online retailers. Also, the Senate plan would borrow against the tobacco settlement fund and include revenue from expanded gambling. Governor Wolf supported the Senate plan.

Most recently, the Senate rejected the House GOP’s no-new tax revenue plan that relied heavily on fund transfers and the sale of future tobacco settlement fund payments. Similar to the Senate plan, it included revenue from expanded gambling. Last week, it was expected that a conference committee process would begin soon.  This would be the most recent effort to settle the differences and write a new revenue bill.  However, the chambers and parties within them have strong positions on what should and should not be included for raising revenue.

The now fast moving issue that arose on Friday night during budget discussions in the Pennsylvania General Assembly involves a Storage Tax.  And, as of today, there remains uncertainty as to whether or not the language is written to reflect the intent of the tax.  This potential tax has been raised before during this year and in prior years under prior governors, but it was eventually pulled from the table.  However, it is now alive again and during a time of critical need for resolution on how to find revenue to support the already passed spending plan.  At this juncture, we believe there are a number of legislators opposed to the idea, including many in the south central caucus.  However, the idea appears to have enough support that it continued to be discussed through the weekend with potential for momentum beginning on Monday.

If this tax is passed, it will have a significant and expensive impact on many Pennsylvania businesses.   The draft language is very concerning because it appears to impact all businesses that provide warehousing and storage space as well as those who pay for storage space and warehousing services in PA.  Also significant is that it provides full discretion to the Commonwealth to implement, and, we expect the Department of Revenue to apply it very broadly in order to raise much needed revenue.

Some have argued in the past that a broad storage tax will result in layoffs and storage and distribution businesses closing and selecting other states to establish their business.  Others argue that a storage tax would result in consumers being double taxed when they purchase goods at the store and also when distribution centers pass along the storage tax to their consumers.  And, this tax would work against any efforts the Commonwealth or municipalities within it make to attract businesses to locate or expand in Pennsylvania because competing states could immediately look at least “6% cheaper” for doing business.  For example, it does not seem logical that Amazon, which is looking for a second headquarters in North America, would even consider a proposal from the Commonwealth if this tax is a reality and applicable to their business.

Clearly this will be very detrimental to the warehouses and trucking hubs that line Interstates as well as their clients.    In fact, this could affect the national supply chain that some argue already exists in Pennsylvania’s warehouse industry.  And, we expect it will also be very bad for business in the energy, gas industries such as refineries, those who are wet gas midstream operators and/or in the business of ordinary storage of gasoline, etc. as well as increase costs for Pennsylvania’s agriculture industry and food distributors.

Please contact us should you wish to discuss in detail.  We believe time is of the essence as the General Assembly works on closing the gap between its spending plan and funding sources.   We recognize the challenges for the state to find revenue. But we also know our clients and the challenges they already face with increased costs of doing business in PA.  McNees Wallace & Nurick’s Government Relations and State and Local Tax practice groups are working to help clients who oppose a storage tax.  Please contact us should you have interest in talking with legislators regarding the impact of a storage tax on your business.

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.