2016 Year-End Review

Despite an increase in the federal funds rate by the Federal Open Market Committee in December, municipal bond interest rates throughout 2016 were (and still are) extremely low when compared to historic rates.  As a result, the volume of municipal bond issues reached an all-time high in 2016.

As discussed below, the Treasury Department released a number of highly anticipated and significant proposed and final regulations during 2016.  In addition, to accommodate public-private partnerships, Treasury issued Revenue Procedure 2016-44, which allows issuers to enter into longer-term management contracts without resulting in private business use.  
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The New Issue Price Regulations – “Bought Deals,” Bored Bidders, and Other Problems

As you have heard, and as we noted last week, Treasury and the IRS recently released final regulations that tell issuers how to calculate the “issue price” of tax-advantaged bonds that are issued for money. The regulations don’t take effect until June 7, 2017, so we can spend some time luxuriating in their nuances and preparing for the new order of things until the appointed hour arrives. As ever, though the new regulations seem to carve out some discrete rules, interesting [sic] questions lurk in the margins.

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Final Issue Price Regulations Issued

The Treasury Department issued final “issue price” regulations on December 9, 2016 (T.D. 9801) (the “Issue Price Regulations”).  Below is a summary of the general and special rules for determining issue price under the Issue Price Regulations:

  • General Rule. The general rule, retained from the existing regulations, provides that issue price is determined by actual sales to the public of 10% of those bonds having the same credit and payment terms (generally, each maturity of an issue).
  • “Hold the Price” Bonds. For bonds offered to the public, issue price may instead be determined based on a certification from the underwriter, accompanied by supporting documentation such as a copy of the pricing wire, that states the price at which the bonds were initially offered to the public. However, the underwriter or underwriters must each agree not to sell the bonds at a higher price until the earlier of more than five business days after the sale date or 10% of the bonds have been sold to the public.
  • Competitive Sales. For bonds that have been sold in a competitive bidding process meeting specified requirements, including that at least three bids are received, the issuer may rely upon the reasonably expected initial offering price that is certified by the winning bidder.
  • Private Placements. For private placements to a single buyer, the issue price is the actual price paid by the buyer.

If more than one issue price rule could apply, the issuer may select which rule to apply but must do so on or before the issue date. Read below for additional information regarding the Issue Price Regulation.

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What Happens When the IRS and Issuer Agree to Disagree?

My last blog post was about how, as a result of a change in the Internal Revenue Code (the “Code”), the IRS will be altering the manner in which it audits many partnerships (and limited liability companies that are taxed as partnerships under the Code). In a nutshell, for tax years beginning on or after January 1, 2018, the IRS may assess a tax deficiency against certain partnerships rather than flowing the taxable income adjustment at the partnership level through to the individual partners and then collecting the additional tax from each individual partner.   This change in the Code was deemed to be a revenue raiser due to the increased efficiency in assessing the tax against the partnership rather than the individual partners.  This streamlined partnership audit process is similar to the IRS being permitted to settle an IRS audit involving tax-exempt bonds with the issuer or conduit borrower rather than having to assess a tax deficiency against the various bondholders and collecting the tax from each individual bondholder.   This got me thinking . . . what happens if the issuer or conduit borrower and IRS cannot agree to a resolution when the IRS believes the tax-exempt bonds are taxable?

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New Information Document Request (IDR) – What’s the Point?

On November 21, as most of us were preparing for a relaxing Thanksgiving holiday, the IRS publicly released two internal guidance memoranda (both available at TEGE-04-116-0028) addressed to “All TE/GE Examiners,” the first of which describes new procedures for the preparation and issuance of IDRs in connection with tax-favored bond audits and procedures for the enforcement of responses to those IDRs, and the second sets forth IDR “Best Practices.”  The announcement of the new procedures on the IRS website describes their purposes:

“The updated process will:

  • Provide for open and meaningful communication between the IRS and taxpayers.
  • Reduce taxpayer burden and provide consistent treatment of taxpayers.
  • Allow the IRS to secure more complete and timely responses to IDRs.
  • Provide consistent timelines for IRS agents to review IDR responses.
  • Promote timely issue resolution.”

A review of the new procedures, however, gives the clear impression that they are primarily designed to provide IRS agents increased leverage to force issuers and their counsel to respond more quickly to the often lengthy and burdensome IDRs that the IRS has been lately issuing, while imposing no pressure on the IRS to resolve audits more quickly.

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How did arbitrage “rebate” get its name?

‘I meant by “impenetrability” that we’ve had enough of that subject, and it would be just as well if you’d mention what you mean to do next, as I suppose you don’t mean to stop here all the rest of your life.’

‘That’s a great deal to make one word mean,’ Alice said in a thoughtful tone.

‘When I make a word do a lot of work like that,’ said Humpty Dumpty, ‘I always pay it extra.’

‘Oh!’ said Alice. She was too much puzzled to make any other remark.

‘Ah, you should see ’em come round me of a Saturday night,’ Humpty Dumpty went on, wagging his head gravely from side to side, ‘for to get their wages, you know.’[1]

Rick Weber of Norton Rose Fulbright is the Editor-in-Chief of The Bond Lawyer, NABL’s quarterly journal. He writes a wonderful column on language that introduces each issue, and in the Summer 2016 issue, he posed the following question: When issuers are required to pay arbitrage profits earned on investments of tax-exempt bond proceeds to the federal government, why is it called “rebate,” when the arbitrage profits were not the federal government’s money in the first place? “In order to have a “return” or “refund” or “pay-back” of funds to the US government,” Weber notes, “the funds must start there.” We venture an explanation below.

(Before we begin, a hearty “thank you” to our retired partner Jack Browning, who remains a boundless source of knowledge and wisdom, the elucidator-in-chief of hopelessly opaque topics like single family mortgage bonds, and a dear friend, for collaborating with me on this effort.)

These days, there are literally a million examples of words in the dictionary that mean the opposite of what they originally meant. “Rebate,” as used in this context, is one of them. What we now call “rebate” was once the payment of excess earnings on investments of tax-exempt single family mortgage bond proceeds that issuers made to the federal government instead of giving mortgagors a rebate on their mortgage interest payments.

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An Open Letter to the IRS on Revenue Procedure 2016-44

Dear Internal Revenue Service:

At the Bond Attorneys’ Workshop this past October, certain of your officials indicated that you will be considering the issuance of clarifications and amendments of Revenue Procedure 2016-44 to address concerns that have been raised about particular provisions of this Revenue Procedure (which, by and large, is an excellent piece of guidance regarding which management contracts will not result in private business use of facilities financed by tax-exempt bonds).  These officials indicated that there was no intent to change any law under the safe harbors from private business use for management contracts and that continuity was intended between Revenue Procedure 2016-44 and the safe harbors set forth in Revenue Procedure 97-13 (which is superseded by Rev. Proc. 2016-44).

When you issue these clarifications and amendments of Rev. Proc. 2016-44, please don’t forget to address the concern raised by The Public Finance Tax Blog on September 27, 2016.

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An inconvenience of qualified equity

Like me, at some point in your childhood, you were probably told not to “look the gift horse in the mouth.” After reading this blog post, the same could be said to me.  We have written in great detail (see herehere, and here) about the increased flexibility afforded issuers by the recently promulgated Final Treasury Regulations governing, among other things, allocating proceeds of tax-exempt bonds and other sources to projects that involve both qualified and private uses (the “Allocation and Accounting Regulations”).  The Allocation and Accounting Regulations permit “qualified equity” to be allocated first to private business use and then to governmental use.  As discussed in the prior posts, “qualified equity” is essentially defined as amounts other than tax-exempt proceeds.  However, there are timing and other restrictions on what is eligible to be considered “qualified equity.”[1]  These restrictions have led to an inconvenience that is the topic of this blog.

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What’s in your Partnership Agreement? Why Non-Taxpaying Entities Should Care About Allocations of Taxable Income.

Even before the advent of P3s (public-private-partnerships), it was not uncommon for a governmental entity or a 501(c)(3) to enter into a joint venture with a for-profit, taxpaying entity. Sometimes these joint ventures take the form of either a state law partnership or a state law limited liability company (“LLC”).  Most LLCs are taxed as partnerships for federal income tax purposes, which generally means that they are pass-through entities.  In other words, the partnership itself does not pay tax on its taxable income (like a corporation would).  Rather the taxable income flows through to the partners who are required to pick up their respective distributive shares of the partnership’s items of income and loss on their own separate federal income tax returns.

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