On June 10, 2019, Senators Michael Bennet (D-CO) and Rob Portman (R-OH) introduced Senate Bill 1763 (the “Carbon Capture Bill”), which, if passed, would allow the issuance of exempt facility bonds for “qualified carbon dioxide capture facilities.” The Carbon Capture Bill has bipartisan support as this bill encourages continued use of carbon-generating natural resources by providing a new tax-exempt financing option for capital expenditures related to a green countermeasure – carbon capture and sequestration. If this sounds like Groundhog Day, that is because it is – this bill was also proposed in 2017. During its last time at bat, the bill was up for consideration while tax-exempt private activity bonds were also on the chopping block – so it was highly unlikely that it was going to pass. Now, with infrastructure and climate change on Congress’ mind, the Carbon Capture Bill seems like it might be a viable candidate. For more on how this would work, read on.
On May 22, 2019, the IRS issued IRS Notice 2019-39 (the “Original Notice”), which sought to bring efficiency and uniformity to guidance on the current refunding of certain bonds issued under current and future “targeted” tax-exempt bond programs. While the Original Notice set forth helpful guidance on the tax-exempt current refunding of bonds issued under a targeted bond program, it also created some confusion regarding the tax-exempt current refunding of build America bonds (which everyone was already doing), as Mike and Cindy noted last week.
The Original Notice included build America bonds within the scope of its guidance, which seemed odd because build America bonds were not subject to volume cap, although similar to the targeted bond programs, there was a deadline for issuing build America bonds on December 31, 2010. Additionally, because build America bonds already were required to satisfy the requirements for issuance of tax-exempt bonds, no ambiguity existed regarding the ability to currently refund build America bonds with tax-exempt bonds. This guidance seemed unnecessary and, if read in a certain light, could have led to absurd results.
After what the author suspects to be mild bond community uproar (comparatively mild, that is; even the most uproarious bond community uproar might seem tame to the layperson), the IRS went back, double-checked its answers, and corrected the Original Notice (as corrected, the “Corrected Notice”) found here. The IRS revised the sentence that mentions build America bonds to include the bracketed phrase as follows:
“In addition, the references in this notice to “original bonds” or “original Qualified Bonds” include [Tribal Economic Development Bonds issued as] tax-advantaged build America bonds under former § 54AA.”
This change makes it clear(er) that the reference to build America bonds in the Original Notice was not intended to refer to build America bonds generally, but rather to Tribal Economic Development Bonds that happened to have been issued under Section 7871(f) as build America bonds. You may recall that the American Recovery and Reinvestment Act (P.L. 111-5) created the Tribal Economic Development Bond as a type of bond that relaxed some of the restrictions that normally apply to Native American tribal governments when they want to issue tax-exempt bonds. Tribal Economic Development Bonds could also be issued as build America bonds as long as they met the additional requirements in Section 54AA. Tribal Economic Development Bonds issued as build America bonds were subject to volume cap and there was a deadline for this type of issuance (December 31, 2010), so the current refunding guidance in the Corrected Notice is helpful for these bonds.
Now that the IRS has corrected this notice, all can be right enough with the bond universe for the time being – although more guidance on spiking the subsidy on build America bonds and other direct pay bonds would always be welcome.
 It is interesting to note that in using initial capitals for “Tribal Economic Development Bonds” in the Notice the IRS did not hew to the capitalization convention in the statute, which they’ve religiously done in spelling out BABs as “build America bonds” and not “Build America Bonds.”
To promote the provision of disaster relief and the development (or redevelopment) of economically distressed areas, Congress will at times enact targeted bond programs that authorize the issuance of specialized tax-exempt bonds. Tax-exempt targeted bond programs frequently contain both a cap on the amount of tax-exempt bonds that can be issued under the program and an expiration date. For example, in response to Hurricane Katrina, Congress permitted the issuance of tax-exempt Gulf Opportunity Zone Bonds, which were subject to an aggregate volume cap of about $14.8 billion and which had to be issued before January 1, 2012.
Where a tax-exempt targeted bond program features volume cap limitations or issuance deadlines (or both) and is silent about whether bonds issued under the program can be currently refunded on a tax-exempt basis, uncertainty might exist as to whether program bonds can be currently refunded by tax-exempt bonds issued after the expiration of the program and, if such refunding bonds can be issued, whether they require additional volume cap. The IRS has previously rendered guidance on specific targeted bond programs to address these questions. To achieve efficiency and uniformity in this guidance for existing and future tax-exempt targeted bond programs that are silent regarding refunding matters, the IRS yesterday released Notice 2019-39. This Notice sets forth helpful guidance on the tax-exempt current refunding of bonds issued under a targeted bond program, but it also creates unwarranted confusion regarding the tax-exempt current refunding of Build America Bonds. For more on both of these aspects of the Notice, read on.
On May 3, 2019, the Internal Revenue Service released Private Letter Ruling 201918008. The IRS concluded
in that PLR that an issuer of exempt facility bonds used a reasonable method, under all the facts and circumstances, to determine whether the term of an operating agreement entered into with a private party exceeded 80% of the weighted average economic life of the bond-financed assets that are subject to that agreement. This PLR could have utility for certain exempt facility bonds and beyond. For more detail, read on.
The Opportunity Zone program was created by the 2017 Tax Cuts and Jobs Act (which we have previously written about here, here and here), to allow investors the “opportunity” to defer paying tax on gains from selling property by investing the proceeds from the sale into an Opportunity Zone Fund.
The IRS issued a first round of proposed regulations on October 19, 2018. The IRS has now issued a second, far lengthier, round of proposed regulations, which provide much needed additional guidance. These proposed regulations both describe and clarify the provisions of Code Section 1400Z-2, while also updating by partially withdrawing the previously proposed regulations.
These days, your inbox surely is besieged by superficial coverage of the Opportunity Zone program by various folks looking to drum up business. Care for a contrast?
Our colleague, Steve Mount, has been continuously following the Opportunity Zone program. He has written an analysis of these new regulations in Bloomberg’s Tax Management Real Estate Journal. Click here to read the article. Steve’s earlier studies of the program, which provide the insights behind these rules, can be read here, here and here.
Treasury will accept comments on the new set of proposed regulations until June 14, 2019 and topics will be discussed at a public hearing on the new proposed regs, which is scheduled for July 9, 2019 at 10 a.m.
On April 3, 2019, the IRS published Rev. Proc. 2019-17, which provides that multifamily housing projects (or, for those of you who prefer Grey Poupon, “qualified residential rental projects”) won’t violate the general public use requirement even if the landlord offers units of the project to certain specific groups. Congress had made this point clear for low-income housing tax credits (“LIHTC”), which are often used in connection with tax-exempt multifamily housing bonds. Multifamily housing bonds have their own, separate general public use requirement, and there wasn’t a similar provision allowing group preferences in those rules. This disconnect had stopped many of these deals cold. Rev. Proc. 2019-17 puts the two sets of rules in sync.
On April 3, 2019, the Internal Revenue Service issued Rev. Proc. 2019-17, which provides that a qualified residential rental project will not fail the public use element of Internal Revenue Code Section 142(d), and therefore can be financed with exempt facility bonds (assuming, of course, that other requirements are satisfied), if the project contains units that are reserved for, or are prioritized for, certain, specified groups (such as veterans).
We will soon post an analysis of this very helpful guidance.
 Like pretty much everything else life, when it comes to tax-exempt bonds, there are always “other requirements.”
This Thursday and Friday, the National Association of Bond Lawyers, under the newly created “NABL U” umbrella, will be holding “The Institute” (formerly known as the Tax and Securities Law Institute) in Bonita Springs, FL. Those attending will be treated to in-depth discussions of lingering questions from the Tax Cuts and Jobs Act, the just-now-effective amendments to SEC Rule 15c2-12, and the Opportunity Zone program.
I’ll be leading a panel on various and sundry topics relating to private activity bonds. We’ll have two sessions, one on Thursday at 4:15 (guaranteeing that the first glass of the happy hour that follows will taste sweeter than usual), and then another on Friday at 11:45 am. I wanted to let you all know that John Cross, Associate Tax Legislative Counsel at Treasury, will be joining us for the Friday session. Recent developments that we’ll be spending time on include remaining issues from the final TEFRA regulations, the recent IRS private letter ruling regarding allocations of equity to nonqualified uses of private activity bonds (or as some of you may know it colloquially, the “airport wine shop” ruling), and the ongoing saga of group preferences in housing and the public use requirement.
You’ll also get to hear our colleagues Sandy MacLennan and Ryan Callender. Sandy will be on the 15c2-12 panel, and Ryan will be on an ethics panel examining the role of bond counsel and ethics in the digital age. Hope to see y’all there.
You have been waiting all weekend to hear the news, so we will get straight to the point. It took three years, but the IRS finally corrected the brain-melter that we posted a few days ago, making fairly comprehensive changes to Part 4, Chapter 81, Section 6 of the Internal Revenue Manual (IRM 4.81.6), titled “Closing Agreements,” on February 20, 2019. Exciting, is it not?
As we’ve discussed before, the Internal Revenue Manual provides detailed rules for calculating the taxpayer exposure that must be paid on an issue that is taken into VCAP or that is ensnared in an audit that reveals a problem with the bonds. Once the issuer calculates the taxpayer exposure amount for each affected year, the issuer must be future-valued forward in time or present-valued back in time to the date on which the issuer enters into a closing agreement with the IRS to fix the problem with the bonds.
The IRS rewrote the example from the weekend into the imperative mood, making it somewhat less incomprehensible.
Here’s a little puzzle for you, from that eternal font of delight, the Internal Revenue Manual. The Internal Revenue Manual illustrates how an issuer should present-value or future-value penalty amounts in a VCAP or in an audit:
[A] closing agreement expected to be executed on January 15, 2016 includes amounts corresponding to future tax years 2015 through 2026. The amounts representing estimated tax payments due on the assumed April 15 tax payment dates for years 2012 through 2015 would be present valued at the short-term AFR; the amounts assumed to be due on the April 15 tax payment dates for years 2019 through 2024 would be present valued at the mid-term AFR; and the amounts assumed to be due on the April 15 tax payment dates for years 2025 and 2024 would be present valued at the long-term AFR. The applicable AFRs in effect on January 15, 2016 would be the rates used in these present value computations.” (IRM 126.96.36.199.3.9 (01-28-2016)).
If you are just as perplexed as we have been, then you’re in good company. Come back Monday for the solution.
As always, have a great weekend.