The Countdown to August 18, 2017 – Something You Should Know.

The IRS has over the past three years issued significant guidance on the safe harbors from private business use for management contracts, and we’ve been dutifully reporting on this guidance (here, here, here, and here).  This guidance has generally been well received, but some issues remain.  In addition to questions raised by Bob Eidnier in his post a few weeks ago (link above), the recent spate of IRS guidance raises a concern that is the subject of this post. By correlating the permitted length of management contracts with the economic lives of the managed property, some management contracts that are materially modified after August 18, 2017 might not fit within the New Safe Harbors (defined below) even if the term of the modified contract is unchanged from the prior iteration!! (Tax lawyers use exclamation points to try and keep people awake).

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New Proposed Legislation: PABs for Social Infrastructure and a Ban on Stadium Bonds

The new Congressional session is heating up, and we’ll cover two new pieces of proposed legislation below. For the first time in several years, we can avoid giving the usual disclaimer that any new piece of legislation is “likely going nowhere.” Tax reform appears to be a real possibility for the first time in many years, and it will probably involve expansions of some areas of the tax-exempt bond world and contractions of others. The two bills discussed below are an example of each.

The first bill would allow tax-exempt private activity bond financing for public buildings that have too much private involvement. The second bill goes in the other direction, and would forbid governmental bond financing for stadiums, which, as we’ll see, would have the effect of preventing tax-exempt financing of any kind for stadiums.

We are continuing to work with our industry-leading public policy group to study the many new legislative developments that are sure to arise, and we will use the blog to provide resources and reactions to them.

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What Makes a Bond “Green”?

Most people agree that a “bond” is a financial instrument pursuant to which a creditor (holder of the bond) lends money to a borrower (the issuer of the bond) over a specified period of time in exchange for a periodic interest payment. However, although I occasionally see headlines about green bonds being issued, it was not clear to me what made a bond “green”.  Since I like to drink clean water and breathe clean air, I thought it would be worth looking into.

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2017 – What lies ahead?

The year 2017 promises, and threatens, to be a potentially momentous one for public finance in the United States.  The Trump Administration and the 115th Congress may put in place tax reforms and infrastructure programs that will have transformative consequences for the financing of public projects in all sectors and at all levels.  These are only a few of the issues that state and local officials and public finance professionals will be following closely in the coming year:

  • Will income tax rates be reduced and, if so, will lower rates reduce the relative attractiveness of tax-exempt municipal bonds?
  • Will new restrictions be placed on the purposes for which tax-exempt bonds may be issued or on the manner in which they may be sold, or how their proceeds may be invested?
  • Will the new Administration pursue the trillion-dollar, ten-year infrastructure program that President Trump proposed during the campaign? Will Congress approve it?  If so, which categories of infrastructure improvements will be given priority?
  • How will any major infrastructure program be paid for? As a candidate, President Trump indicated that he would propose new tax credits as a funding method.  If enacted, would those tax credits enhance or undermine traditional municipal bond financing?
  • Will the Alternative Minimum Tax be eliminated and, if so, will that increase the relative attractiveness of “AMT Bonds” (e.g., exempt facility bonds) commonly issued to finance certain types of large infrastructure projects?

Squire Patton Boggs (US) LLP brings a unique combination of resources to these issues and national preeminence as both public policy and public finance experts.  Since the election, our teams have been immersed in the effort to monitor and analyze the potential significance of the new Administration and Congress for business and public clients in every sector.  Indeed, on November 10, 2016, we published a comprehensive post-election analysis (2016 Post-Election Analysis), sections of which addressed issues of importance to the public finance industry.  Our plan is to communicate with our clients regularly and with increasing frequency as executive, legislative and regulatory agendas emerge in the coming months.  We will be providing the best potential information and analysis our clients need to understand, affect and respond to developments in Washington.

With that introduction, please click through for our latest report, discussing the latest policy developments surrounding Congressional tax reform efforts, followed by a discussion of where key policymakers stand with regard to the tax exemption for interest on municipal bonds.

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Revenue Procedure 2017-13: Management Contracts – Still Trying To Get It Right

For the third time in less than three years, the IRS has issued major guidance – Revenue Procedure 2017-13 — on the safe harbor rules for management or service contracts to avoid private business use.  The new revenue procedure follows closely behind the total rewrite of the safe harbor rules that the IRS issued as Rev. Proc. 2016-44 in August 2016, which was the subject of several of our posts (here, here, and here).  A cynic might think the IRS was just looking for an excuse to renumber the management contract revenue procedure as 97-13 plus 20 years.  But in fact there are some important modifications in the new revenue procedure.  Click here to read about them.

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IRS Releases Interesting Private Letter Ruling on Build America Bonds

On January 13, 2017, the Internal Revenue Service released Private Letter Ruling 201702009.  The IRS held in this private letter ruling that the existence of unspent “available project proceeds” would not cause an issue of Build America Bonds (“BABs”) to lose their status retroactively when they are redeemed with the proceeds of tax-exempt bonds.[1]  The IRS further held that the issuer of the BABs would not lose any subsidy paid to it in respect of the BABs for the period that ends on the BABs’ redemption date.  This private letter ruling is most interesting for an opinion that the IRS expressly said that it was not giving but that is unavoidably implicit in the holding of the private letter ruling.

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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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