The Internal Revenue Service celebrated New Year’s Eve this year by issuing two rule-making notices of interest to the tax-exempt bond community, on the topics of public approval of private activity bonds and reissuance.

The first notice contains final regulations on the public approval requirement of section 147(f) of the Internal Revenue Code, 26 U.S.C. §147(f). You can access a copy of the final regulations here.

The final regulations on section 147(f) make several significant modifications to the proposed regulations, which were published by the Service on September 28, 2017 (read our prior analysis of the 2017 proposed regulations here). Some of the key highlights of the final regulations are as follows:

  • 7-Day Notice Period: The current regulations, at 26 C.F.R. §5f.103-2, require that the public notice be given at least 14 days before the date of the public hearing. The IRS had previously issued proposed regulations in 2008, shortening this requirement to 7 days, but went back to 14 days in the 2017 proposed regulations. The stated reason for this decision was a reference in the legislative history to a 14-day notice period. However, in response to comments to the 2017 proposed regulations, the IRS has determined to restore the 7-day notice period, as the statutory text makes no mention of a 14-day notice period.
  • Website Notices: The current regulations require that the notice must be published in a newspaper or announced by radio or television broadcast. The 2017 proposed regulations introduced website notices, but required that the issuer offer to residents without access to the Internet an alternative method for obtaining the information contained in the website notice. The final regulations drop this “alternative notice” requirement. Therefore, a notice that is published solely through the governmental unit’s website will satisfy the public notice requirement of section 147(f). The notice must appear in an area of the government’s website that is used to inform residents about events affecting the residents.
  • Deviations and Ability to Cure: The 2017 proposed regulations introduced the concept of insubstantial deviations, that is, deviations from the notice and public approval that are so minor as to not cause the notice and public approval to fail to meet the requirements of section 147(f). Additionally, for deviations that were substantial, the 2017 proposed regulations afforded issuers the opportunity to cure the resulting violation through a supplemental notice and hearing that met the requirements of the regulations. The final regulations largely implement these concepts as originally proposed.
  • Effective Date and Retroactive Use: The final regulations are generally effective April 1, 2019. However, the IRS in response to comments it received agreed to afford issuers the option of retroactively applying the “deviation” provisions (including the ability to cure) to any bond issued pursuant to a public approval that occurred prior to April 1, 2019. This presents an excellent opportunity for issuers of bonds with faulty public approvals to reduce their audit risk.

The second New Year’s Eve notice from the IRS contains proposed regulations on the reissuance of tax-exempt bonds, particularly qualified tender bonds. You can access a copy of the proposed regulations here. The proposed regulations follow the guidance previously provided by the IRS in Notices 88-130 and 2008-41, related to qualified tender bonds. Each of those Notices will be rendered obsolete once the regulations are finalized.

The proposed regulations are not intended as a departure from previous guidance. Thus, the proposed regulations, like the Notices before them, provide that the existence or exercise of a qualified tender right of a qualified tender bond will not, in and of itself, result in a reissuance for tax purposes. And, the terms “qualified tender bond” and “qualified tender right” carry meanings substantially similar to the definitions that were ascribed to these terms in the Notices.

The IRS is requesting that any comments to the proposed regulations or requests for a public hearing in connection with them be delivered by March 1, 2019.

 

On October 26, 2018, the IRS released a memorandum from its Office of Chief Counsel, confirming that issuers may issue tax-exempt bonds to advance refund taxable bonds without running afoul of the prohibition on tax-exempt advance refundings contained in the Tax Cuts and Jobs Act. The release of the memorandum follows the request in March by the National Association of Bond Lawyers for guidance on this issue, following public statements earlier in the year by IRS and Treasury officials in favor of the approach. Continue Reading IRS Releases Guidance on Use of Advance Refunding Bonds Post-TCJA

The Internal Revenue Service, Tax Exempt & Government Entities Division, has released its Fiscal Year 2019 Program Letter, a copy of which is available here. Among other things, the Program Letter identifies the compliance areas for the tax-exempt bond community that will be a priority for the IRS in the new fiscal year which began on October 1. Continue Reading IRS Announces Tax-Exempt Bonds’ Program Priorities for 2019 Fiscal Year

In an eagerly-awaited decision, the United States Supreme Court struck down today the “physical presence” standard in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill had long hamstrung states’ efforts to collect sales and use taxes on purchases by in-state residents of products sold by internet-only retailers. With Quill now history, states are free to impose sales and use tax collection responsibilities on out-of-state retailers who sell predominantly through the internet.

The decision is a major victory for state and local governments, who have argued for years that the growth of the internet marketplace since Quill was decided has cost them billions of dollars in unpaid sales and uses taxes.

Our colleagues in the State and Local Tax practice group discuss the Court’s decision at length in their blog, Adding Value (which you should subscribe to!). You can read their analysis here.

 

On April 11, 2018, the Internal Revenue Service published Revenue Procedure 2018-26, a copy of which can be accessed here, which provides new guidance to issuers on the availability of remedial actions to preserve the tax-advantaged status of their bonds in the face of a violation of the tax rules. Rev. Proc. 2018-26 applies to tax-advantaged bonds generally, i.e. traditional tax-exempt bonds under section 103 of the Code, as well as federally taxable bonds that carry with them tax credit or direct pay subsidy benefits. Continue Reading IRS Issues Guidance on Remedial Actions for Tax-Advantaged Bonds

On March 29, 2018, the National Association of Bond Lawyers (NABL) formally requested guidance from the IRS regarding the ability of municipal issuers to issue tax-exempt advance refunding bonds to refund taxable bonds after the enactment of the Tax Cuts and Jobs Act (TCJA). The request comes on the heels of public statements by Treasury and IRS representatives regarding their belief that notwithstanding the passage of TCJA, municipal issuers may continue to issue tax-exempt advance refunding bonds to refund taxable bonds, so long as the taxable bonds to be refunded are not tax-advantaged bonds such as Build America Bonds, and the refunding otherwise complies with the requirements of section 149 of the Code and the regulations thereto. Continue Reading NABL Requests IRS Guidance on Tax-Exempt Advance Refundings of Taxable Bonds

On February 12, 2018 the Trump Administration released its long-awaited Infrastructure Plan. A copy of the legislative outline for the Plan can be accessed here. The Plan calls for $1.5 Trillion in new infrastructure investment over the next ten years – although only $200 Billion of that will be in the form of new federal spending.

Included in the $200 Billion of new federal spending is a $6 Billion expansion of tax-exempt Private Activity Bonds. The Plan would:

  • Broaden the types of projects which qualify for financing through PAB’s: The Plan would add several new types of projects which would qualify for tax-exempt financing, including stormwater and flood control projects, rural broadband service facilities, and environmental remediation projects for Brownfield and Superfund sites, as well as expand the types of projects permitted to be financed under existing project categories.
  • Liberalize governmental ownership requirements: Under current law, certain PAB-financed projects must be owned by the government; an existing safe harbor permits certain leases with a term of up to 80% of the economic life of the project. The Plan would modify the safe harbor to permit leases with a term of up to 95% of the economic life of the project.
  • Remove volume caps: The Plan would remove existing volume caps on PAB issuance imposed under Sections 142 and 146 to permit unlimited volume of PAB’s issued for public purpose infrastructure projects.
  • Add new remedial action provisions: The Plan would amend the change-in-use provisions contained in Section 150 of the Code (and apparently overturn existing Treasury regulations on remedial action) to preserve the tax-exempt status of governmental bonds, specifically with regard to leases of projects of projects financed by governmental bonds.
  • Eliminate the AMT penalty for purchasers of PAB‘s: The Plan would eliminate PAB’s as an item of tax preference for purposes of the Alternative Minimum Tax imposed on individuals.

The Plan put forth by the Administration is simply an outline of what it would like to see in legislation that has yet to be drafted. There is no guarantee that all of the above-described proposals will make their way into an actual bill, let alone be approved by Congress. We expect that there will be much discussion and debate in the coming weeks and months as Congress considers the Administration’s Plan and prepares formal legislation on the topic.

Stay tuned for more updates as the story unfolds!

On December 20, 2017 Congress passed the Tax Cuts and Jobs Act (TCJA).  The legislation was signed by President Trump on December 22, 2017 and many key provisions of the law became effective on December 31, 2017.

The purpose of the TCJA was to stimulate economic growth through a major overhaul of the Internal Revenue Code.  One of the signature elements of the TCJA is the reduction of the federal corporate tax rate from 35% to 21%.  While this may be good news to the business community generally, the rate reduction presents potential unique problems for conduit borrowers, such as 501(c)(3) organizations, and lenders under tax-exempt bank loan structures. Continue Reading Review and Analysis of Tax-Exempt Loan Documents Following Tax Cuts and Jobs Act

As we prepare to say goodbye to 2017 and welcome a new year, we thought we’d take a moment and revisit some of our favorite stories from the last twelve months that we’ve followed on the McNees Public Sector Blog.

To all our readers – thanks for visiting! And may you all have a happy and prosperous new year!

– Tim Horstmann