The IRS recently released a new Form 8038-G, which is the information return for issues of tax-exempt governmental bonds, and a new Form 8038, which is the information return for tax-exempt private activity bonds. In addition, the IRS has released draft instructions for each form. The revised forms are in part a response to changes made to the Internal Revenue Code by the Tax Cuts and Jobs Act (P.L. 115-97), which was signed into law on December 22, 2017 (“TCJA”). Keep reading for more information on the new forms, the fate of some old forms, and some gratuitous commentary.
Hope you all had a nice summer – the blog is officially back from summer break. The Hutchinsons had a good one; we took Charlie to visit his grandparents at the beach in Pensacola, FL, where he went to Waffle House for the first time, and to visit his great-grandparents in Clinton, MS, where he went to Waffle House for the second time.
Back to business. The House Ways and Means Committee released three bills yesterday, which comprise something along the lines of “Tax Reform 2.0.” So far, the bills don’t mention tax-advantaged bonds in any way. However, as Congress hunts for revenue to pay for the permanent extension of various tax benefits in Tax Reform 1.0 (the Artist Formerly Known as the Tax Cuts and Jobs Act), we must all continue to monitor the legislative process. The rationale that Congress offered for eliminating tax-exempt private activity bonds last year is so thin that a cynic could infer that the real rationale was to raise revenue to pay for other provisions.
Happy Birthday to Us!
Thanks to all of you who have listened to us rant and ramble over the years. We hope that you continue to visit us and that you find value here (or at least are occasionally bemused by our strained cultural references and bad jokes). If you like it here, consider telling a friend or colleague about us, and encourage them to subscribe. If you find us annoying (but are masochistic enough to continue to read – why do you hate yourself?), please click here to send Mike Cullers your hate-mail. (Don’t hold back! Mike is tough, and he can take it.) If you don’t mind paying overseas shipping, we have some gift ideas for us (or, heck, for your loved ones, too).
The IRS has released another “issue snapshot,” which deals with qualified mortgage bonds (or, as they are often called in our lingo, single-family housing bonds). An issuer uses the proceeds of qualified mortgage bonds to make loans to private homeowners. Because of the private loan limitation, the bonds are private activity bonds. To be tax-exempt, then, the bonds must meet all of the requirements for qualified mortgage bonds (which recapitulate most of the other tax-exempt bond requirements, filtered through a fish-eye lens). Private activity bonds involving loan programs (such as single-family housing bonds or student loan bonds) rather than project financing raise the question of what to do when the issuer receives repayments of the loans made with the proceeds of the bond issue – can they be used to originate more loans, or must they be used to pay down bonds?
This new issue snapshot analyzes this issue, walking through the mechanics of a refunding of single-family housing bonds where the issuer has on hand repayments of some of the mortgage loans (often referred to as “replacement refunding” transactions). The issue snapshot also describes how long the refunding bonds can be outstanding without getting more volume cap. For most bonds subject to volume cap, refunding bonds don’t need additional volume cap as long as the amount of the refunding bond doesn’t exceed the amount of the refunded bond. For qualified mortgage bonds, there’s an additional back-stop – you can’t go longer than 32 years from the issuance date of the original mortgage bond without getting more volume cap. (The 32-year rule is intended as a rough-justice substitute for the fact that there isn’t truly a bond-financed “asset” with a “useful life,” in qualified mortgage bond financings in the same way that one exists in, say, a solid waste disposal facility financing; the typical length of a residential mortgage is around 30 years.) In addition, in general, mortgage repayments can be used to originate new mortgage loans only within 10 years after the issuance date of the original mortgage bond.
The issue snapshot contains “Issue Indicators or Audit Tips” for examining agents (and, by extension, us), which are worth a read. The full list of issue snapshots can be found here; the aspects regarding tax-exempt bonds continue to form quite an eclectic mix.
When you enter into a closing agreement with the IRS to fix a problem with a tax-exempt bond issue, the IRS will often require a penalty payment in an amount relating to the “taxpayer exposure” on some or all of the bond issue. Taxpayer exposure “represents the estimated amount of tax liability the United States would collect from the bondholders if the bondholders were taxed on the interest they realized from the bonds during the calendar year(s) covered under the closing agreement,” as section 220.127.116.11.3.1.1 of the Internal Revenue Manual says. To make this estimate of the tax that the IRS would’ve collected on the bonds, one must choose an appropriate hypothetical tax rate. In the past, the IRS has typically used 29% as tax rate, representing the IRS’s approximation of the average investor’s highest tax bracket.
On July 16, the IRS modified this hypothetical tax rate for interest on tax-exempt bonds accruing in tax years after 2017, in a memorandum from Christie Jacobs, the Director of the Indian Tribal Governments and Tax-Exempt Bonds section of the IRS. Continue Reading
The 2017 tax reform legislation created a new federal subsidy for investment in low-income communities, known as the “Opportunity Zone” program. (We previously covered it on the blog here.) The program allows taxpayers to defer gain from the sale of assets by investing the proceeds into an “Opportunity Fund,” which is a fund that invests in low-income communities that have been designated as “opportunity zones.”
A few weeks after Congress enacted the program, our colleague Steve Mount wrote a complete analysis of the legislative provisions. Steve has written another piece for Bloomberg’s Tax Management Real Estate Journal, tackling the questions about the program that linger. As Steve describes, three things need to happen to get the Opportunity Zone program going: (1) each state (and the District of Columbia and certain territories) needed to nominate O Zones within their jurisdictions and have them certified by the Treasury Department; (2) Treasury needed to promulgate rules on how to certify an O Fund; and (3) the IRS needed to issue guidance on several of the basic requirements of the Opportunity Zone statute. We’ve gotten (1) and (2), but we await (3). Steve’s piece follows a very helpful Q&A format. Read it here.
Yes, you read that correctly. On June 21, 2018, the United States Supreme Court handed down its decision in South Dakota v. Wayfair, Inc.  (We’ve discussed the background to Wayfair here, here, here, and here.) The Court, by a 5 – 4 majority, held that a vendor need not have a physical presence in a state in order to have a “substantial nexus” with the state under the Commerce Clause that could obligate the vendor to collect sales or use taxes on sales made to customers who reside in the state and to remit those taxes to the state. Consequently, the Court overruled its prior holdings in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that a vendor must have a physical presence in a state to be required to collect sales/use taxes on sales made to residents of that state.
To learn what three things you should know about Wayfair and its effect on remote (read: Internet-based) vendors, read on after the jump.
The Minutemen’s seminal album Double Nickels on the Dime includes the song “The Big Foist,” which opens with the lyrics, “A richer understanding of what’s already
understood.” These lyrics are called to mind (my mind, at least) on occasions such as the Treasury Department’s publication today of proposed regulations (“Proposed Regulations”) that clarify the definition of “investment-type property” for purposes of complying with the arbitrage yield restriction and rebate requirements set forth in Section 148 of the Internal Revenue Code.
As a general matter, if proceeds of a bond issue are reasonably expected to be used (or are intentionally used) to acquire “investment property” that has a materially higher yield than the yield of the bond issue, then the bond issue is comprised of taxable arbitrage bonds, rather than tax-exempt bonds. Investment property includes, among other things, “investment-type property.” The current regulations define investment-type property as any property “that is held principally as a passive vehicle for the production of income” and that is not a specifically defined type of investment property (i.e., securities, obligations, annuity contracts, and certain residential rental property for family units). The Proposed Regulations make clear that investment-type property:
does not include real property or tangible personal property (for example, land, buildings, and equipment) that is used in furtherance of the public purposes for which the tax-exempt bonds are issued. For example, investment-type property does not include a courthouse financed with governmental bonds or an eligible exempt facility under [Internal Revenue Code] section 142, such as a public road, financed with private activity bonds.
This conclusion is obvious from the legislative history of Section 148, which Treasury cites in the preamble to the Proposed Regulations. It’s also obvious from the canon of statutory and regulatory construction that a general item in a list must be read in light of the specific items that precede it. Although an obvious conclusion, Treasury is to be commended both for allowing issuers of tax-exempt bonds to rely on the Proposed Regulations before they become final and for using an Oxford comma in the above-quoted parenthetical.
If Treasury is inclined to publish proposed regulations to clarify that which is already clear, perhaps Treasury can provide guidance on whether tax-exempt bonds can be issued to advance refund taxable (but not tax-advantaged) bonds.
 Not using an Oxford comma? You should. You’d join the good company of my colleagues, Rob Lowe, and Neil deGrasse Tyson. Had I not used an Oxford comma, you could be left with the impression that I work with Messrs. Lowe and deGrasse Tyson; the Oxford comma makes clear that I do not. You’re welcome.
The IRS recently sent out an email (to those of you brave enough to willingly put yourselves on a government email list – rather like those intrepid souls who voluntarily follow @CIA on Twitter), regarding its “Issue Snapshots” webpage. The email lists the latest Snapshots, but the full list can be found at the bottom of the page here.
The IRS says that Issue Snapshots are not “official pronouncements of law or directives” (unclear what the difference between those two things is for this purpose). Issue Snapshots “cannot be used, cited or relied upon” as either “law or directives.” They are intended to “provide an overview of an issue and are a means for collaborating and sharing knowledge among IRS employees.” In essence, we are being allowed a window into the IRS’s employee education program. Although the Snapshots may lack the comedic content of certain other employee training programs, and although some of them are rather untimely against the backdrop of recent legislative changes, they are an interesting glimpse into topics that the IRS thinks are worthy of clarifying for its employees. They may also provide hints as to likely future audit targets (the Issue Snapshots usually contain a section ominously called “Issue Indicators or Audit Tips”).
The Issue Snapshots are the latest example of a long tradition of the IRS making its internal educational documents public. You can also review the IRS’s current Tax-Exempt Bonds Training Materials (Phases I, II, and III), which provides a more comprehensive overview of various topics.
You can also find prior employee training manuals that are no longer on the IRS website. This miracle is possible because of that most marvelous (or terrifying, depending on how your perspective changes from one situation to the next) tool: The Wayback Machine, available at http://web.archive.org. There’s even an app. The Wayback Machine periodically “crawls” across the entire known internet, archiving various websites periodically. As an example, here are the Continuing Professional Education texts from 2003. The 2003 texts were the most current ones available for a number of years. (Caution, though; there’s no telling why the IRS removed any particular text. One possible inference is that the IRS wanted to move away from the position described in a particular instructional text.)
Your ability to actually click around and view different parts of a particular website that has been saved by The Wayback Machine will vary from site to site. (One fun exercise, particularly for our readers at law firms, is to search for your website’s URL and select the earliest saved version. Interesting outfits and hairdos abound. Our firm’s Y2K preparation materials are a particularly interesting relic.)
Last week, we posted a story about the lawsuit brought by the Ohio Attorney General under Ohio’s “Art Modell Law” to prevent Major League Soccer’s Columbus Crew from moving to Austin, Texas. We wondered aloud whether other states might enact similar laws if Ohio can succeed in preventing the Crew’s departure. Readers might have wondered (aloud or otherwise) whether Ohio’s efforts to enforce the Art Modell Law would inhibit professional sports leagues from expanding to Ohio.
The answer, at least for now, appears to be “no.” Major League Soccer announced on May 29 that Cincinnati has been awarded an expansion team, FC Cincinnati, which will commence play in 2019. The stadium in which FC Cincinnati will play will be financed, in part, with taxpayer funding, which will bring the team within the scope of the Art Modell Law. The law didn’t impede MLS expansion in Ohio, and it just might leave Ohio with two MLS teams, rather than one.
The Tax Cuts and Jobs Act, as introduced in the House of Representatives on November 2, 2017, would have prohibited the issuance after that date of tax-exempt bonds to finance a professional sports stadium. The Tax Cuts and Jobs Act, as enacted, did not contain this prohibition.
Even if it had, it would likely not have ended the financial assistance that state and local governments lavish upon top-level professional sports franchises to keep those franchises in their current cities or to induce them to relocate. Major League Baseball, Major League Soccer, the National Basketball Association, the National Football League, and the National Hockey League each hold a monopoly in the United States on the allocation of top-level professional franchises in their respective sports. As long as these monopolies exist, state and local governments will afford the leagues financial assistance to claim one of the artificially limited number of franchises, regardless of whether tax-exempt bonds can be used to finance the stadiums in which the franchises play.
Is there anything state and local governments can do to ensure that one of these franchises, after having received public benefits and financial assistance, will not relocate? Read on after the jump.