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.
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.
- A kinder, gentler Internal Revenue Service? Perhaps in response to the Trump Administration’s “less is more” approach to regulation, 2017 saw several announcements from the IRS that were favorably received by the municipal bond industry. In January the IRS published new guidance on management contracts involving bond-financed facilities, which reintroduced old concepts following a less-than-favorable response to a prior announcement. In June, new IRS regulations on the determination of issue price went into effect, and despite some initial headaches, the new regulations appear to be working well and have been incorporated by underwriters and bond counsel. In October, the IRS published new proposed regulations interpreting the public hearing requirement for private activity bonds, which as promised featured a long-hoped-for “remedial action” option. And finally, an early Christmas present for bond lawyers everywhere: in October the IRS announced that it was withdrawing its much-despised “political subdivision” proposed regulations.
- While the IRS appeared to get President Trump’s “less regulation” message, the SEC and MSRB continued their aggressive enforcement efforts. In March the SEC voted to formally propose amendments to Rule 15c2-12 to beef up required disclosures by municipalities in connection with bank loans. And in August, the MSRB issued a warning to municipal issuers to avoid involvement in the selection of underwriter’s counsel. All indications are that the SEC and MSRB will continue to aggressively police the municipal bond industry in 2018.
- The Pennsylvania budget situation continued to be a mess. Governor Wolf’s budget proposal featured a variety of tax increases, which were soundly rejected by the Republican-led legislature. A spending plan was quickly agreed to, but without the revenue needed to pay for it. The final spending plan again avoids broad-based tax increases (at the relief of many) in favor of one-time revenues from a securitization of Tobacco Settlement Funds, among other things.
- For local governments, high fixed costs and declining revenues continued to be a problem in 2017. Generating revenue through asset monetization remained an option for struggling municipalities faced with severe blight and new government mandates, including stormwater management.
- And finally, Tax Reform! The end of 2017 saw the passage of the Tax Cuts and Jobs Act, the first successful attempt at comprehensive tax reform since the passage of the 1986 Code. A number of versions of the bill were introduced, some of which would have been devastating on the municipal bond industry. We wrote about the impact of the final legislation on the municipal bond industry here.
To all our readers – thanks for visiting! And may you all have a happy and prosperous new year!
– Tim Horstmann
2018 will be a year of monumental tax law changes following the recent approval by the House and Senate of the Tax Cuts and Jobs Act. President Donald Trump is expected to sign the bill into law in the coming days. While the Act in its final form contains some provisions that hurt the tax-exempt municipal bond industry, many detrimental provisions included in prior versions of the bill were dropped. Continue Reading House, Senate Pass Tax Cuts and Jobs Act; Private Activity Bonds Saved
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.