One Big Act: Tax-Exempt Bonds Avoid Annihilation

Artist’s rendering of the elimination of tax exemption

On July 4, 2025, the president signed into law the so-called “One Big Beautiful Bill Act” (the “OBBBA”). While technically no longer a bill and its beauty is in the eye of the beholder, the OBBBA certainly is big. Even before the almost-1,000-page OBBBA took shape, the public finance community was on alert about lawmakers entertaining possibly peeling away or even eliminating the tax exemption of interest on municipal bonds in an effort to pay for the extension of the 2017 Tax Cuts and Jobs Act (the “TCJA”). Understandably so, because in 2017, to help offset the costs of the TCJA, lawmakers proposed eliminating tax exemption for qualified private activity bonds entirely and ultimately ended up scrapping tax-exempt advance refundings. Fortunately, tax-advantaged bonds survived the OBBBA intact and, in fact, have expanded in areas[1].

Space: The Latest Frontier

The OBBBA expands the airport category of exempt facility bonds under Section 142 of the Code to include spaceports[2]. A spaceport is defined as “any facility located at or in close proximity to a launch site or reentry site used for (A) manufacturing, assembling, or repairing spacecraft, space cargo, other facilities described in this paragraph, or any component of the foregoing, (B) flight control operations, (C) providing launch services and reentry services, or (D) transferring crew, spaceflight participants, or space cargo to or from spacecraft.” Space cargo includes “satellites, scientific experiments, other property transported into space, and any other type of payload, whether or not such property returns from space.” Spacecraft means “a launch vehicle or reentry vehicle[3].” Other terms take their meaning from existing definitions in Title 51 of the U.S. Code concerning “National and Commercial Space Programs” which was enacted in 2010. Section 142 will generally treat spaceports like airports with a few notable exceptions:

What are the Odds that FanDuelDraftKingsBet365 Can Save Tax-Exempt Bonds?

By Michael Cullers on March 27, 2025 Posted in General, Legislation, Tax Reform

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A document leaked earlier this year and attributed to the House Ways and Means Committee included the repeal of tax-exempt bonds[1] as a source of revenue to help defray the cost of extending the provisions of the Tax Cuts and Jobs Act that otherwise will expire at the end of 2025. Apoplexy ensued.

This consternation is fueled by the notion that Congress has the untrammeled authority to prevent states, and the political subdivisions thereof, from issuing obligations the interest on which is excluded from gross income for federal income tax purposes. This notion appears to ignore a line of precedent that culminated in making Bet365, DraftKings, FanDuel, et al. indistinguishably omnipresent.

Curious? Read on after the break.

IRS Releases Latest Management Contract Private Letter Ruling

By Robert Radigan on February 18, 2025 Posted in Management contracts/Rev. Proc. 97-13/Rev. Proc. 2016-44/Rev. Proc. 2017-13, Private Business Use

On February 7, 2025, the IRS released Private Letter Ruling No. 202506001 in which it concluded that a management contract providing an incentive fee equal to a percentage of gross revenues of a managed hotel and contingent on two metrics, one of which is a variant of net profits, did not constitute the sharing of net profits and so did not result in private business use.

Under the terms of the management contract at issue, the service provider receives a “base fee” and an “incentive fee” each equal to a percentage of gross revenues of the managed facility. This arrangement is not particularly notable. What is notable is that the incentive fee is triggered only if two conditions are met: (1) if revenue per room exceeds an industry average, and more interestingly, (2) if the annual excess of gross receipts over operating expenses of the hotel meets a specified percentage. In concluding that the incentive fee does not constitute sharing of net profits under the facts and circumstances, the IRS reasoned that any increases or decreases in net profits do not result in proportional increases or decreases in the incentive fee. The incentive fee (if there is one) is fixed and predetermined. The IRS also noted that the timing of the payment of the incentive fee does not take into account net profits in that it is paid annually from a regularly funded operating account. Finally, the IRS noted that the incentive fee is “further distanced from net profits” due to the existence of the second metric which is not based on net profits.

Private Letter Ruling 202506001 is reminiscent of Private Letter Ruling 201145005 which also considered a management contract with an incentive fee contingent on a variant of net profits. The IRS determined there that that management contract was outside the safe harbor of Revenue Procedure 1997-13 but that its incentive fee did not represent a sharing of net profits.

Final Reissuance Regulations Released (Finally)

By Robert Radigan on January 10, 2025 Posted in Reissuance

On December 30, 2024, the IRS and Treasury Department released final regulations regarding the reissuance analysis of tax-exempt bonds which finalize proposed regulations issued in 2018 (with some technical corrections). The final regulations are significant in that, firstly, they are intended to coordinate prior guidance in Notices 88-130 and 2008-41 regarding qualified tender bonds with Treasury Regulations § 1.1001-3 to determine when a tax-exempt bond is retired; and secondly, Notice 88-130 first promised these final regulations in July 1988—over 36 years ago (when hairstyles and tender bonds needed regulating). The final regulations amend § 1.1001-3 to incorporate and reference newly added § 1.150-3 which provides three general rules for when a tax-exempt bond is retired:

(1) a significant modification occurs under § 1.1001-3,

(2) the issuer or its agent acquires the bond in a manner that extinguishes the bond, or

(3) the bond is otherwise redeemed.

Your 2024 Election Guide – Separate Issue Election and/or Multipurpose Issue Allocation (an Election of Sorts)?

By Cynthia Mog on July 10, 2024 Posted in Uncategorized

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While probably not the most consequential election in 2024, a bond issuer might need to decide whether to make a separate issue election under Reg. §1.150-1(c)(3) and/or a multipurpose issue allocation under Reg. §§1.148-9(h) and 1.141-13(d).[1] To ensure that issuers (and conduit borrowers)[2] are a fully informed electorate, this 2024 Election Guide will explain the who, what and why of each type of election or allocation (but not necessarily in that order).

Separate Issue Election

Who qualifies? An issuer issuing tax-exempt bonds that have more than one purpose (e.g., new money and refunding) – but only if the proceeds, investments and bonds of the aggregate issue are allocated between each of the separate purposes using a reasonable, consistently applied method. It should be noted, however, that if a refunding is one of the separate purposes, certain multipurpose issue allocation criteria (discussed below) must also be met.

How To Protect Against Harmful SLGS This Spring

By Robert Radigan on March 19, 2024 Posted in SLGS

On March 4, 2024, the Treasury Department published a final rule that amends the regulations concerning State and Local Government Series securities (SLGS). Among other changes, the updated regulations notably: (1) require that the maturity lengths of Time Deposit SLGS be no longer than reasonably necessary for the underlying governmental purpose of the investment and that the Issuer certify to such in a new “duration certification”; (2) add to the non-exhaustive list of impermissible transactions; (3) increase to 14 days the minimum holding period for requesting early redemption; (4) require that the Issuer provide a maturity date at the start of a subscription rather than by completion of the subscription; (5) require a new “eligibility certification” by the Issuer as to its eligibility to purchase SLGS; and (6) require notice of five business days for redemptions of Demand Deposit SLGS of $500 million or more. The updated regulations take effect August 26, 2024.

When does 10% PBU really mean 5% PBU?

By Cynthia Mog on February 20, 2024 Posted in Uncategorized

When the Internal Revenue Code (“IRC”) says it does. (For those of you that want to remind yourselves of how a bill becomes a law, such as the IRC, see this video from Schoolhouse Rock).

As you may know, issuers of governmental-use bonds are generally permitted to use up to 10% of the tax-exempt bond proceeds of an issue for private business use (“PBU”) before the tax-exempt bonds run the risk of being characterized as taxable private-activity bonds (“PABs”). If the PBU exceeds 10%, then the issuer will also need to determine whether the private security or payment (“Private Payment”) test is met in order to determine if the bonds are PABs. (Remember, meeting the 10% PBU and Private Payment tests is generally a bad thing). However, because nothing is simple in the tax world, there is a second PBU/Private Payment threshold that you may not be as familiar with – the 5% unrelated or disproportionate test.[1]

House Passes $78 Billion Tax Bill that Includes Affordable Housing Help

By Squire Patton Boggs on February 6, 2024 Posted in Blog Announcements, Breaking News, Legislation, Shameless Self-Promotion

On Wednesday, January 31, 2024, the U.S. House of Representatives passed the bill called the Tax Relief for American Families and Workers Act. Contained in this bill is a significant reduction to the required amount of Section 142(d) Qualified Residential Project Bonds that must be issued to obtain the 4% Low Income Housing Tax Credit. The author of this blog post co-authored a blog post [1] with Robert Labes on this very topic!

Click here to access the blog post and other insights regarding Global Projects and Infrastructure! And stay tuned for more on this and other developments in affordable and workforce housing tax issues in the coming weeks!

[1] Kind of like Russian nesting dolls.

Love Me Tender [Bonds] – An Overview

By Cynthia Mog on October 31, 2023 Posted in Uncategorized

The famous song, Love Me Tender, by Elvis Presley, includes lyrics such as “We’ll never part” and about being together “ ’Til the end of time.” In contrast to Elvis’ wish, the issuer of tax-exempt bonds that makes a tender offer is hoping the exact opposite happens to the relationship between the bondholder and tax-exempt bond. In other words, the issuer hopes that economics drive a wedge between the two.

Keep Your Paws Off My Positive Arbitrage – “With the Same Power Comes More Responsibility” (3/3)

By Natalie Vicchio on July 3, 2023 Posted in General

The time has come, friends. The Rebate Series ends with this post. At least for a little while. So far we’ve covered the basics of arbitrage and rebate and two key timing-based spending exceptions: the 6-Month Exception and the 18-Month Exception. This party bus now comes to a halt with the Two-Year Spending Exception, the last and longest of the timing-based exceptions to the rebate requirement. If you’ve made it this far, thank you. If this is your first rebate-related post, please read the previous posts setting the stage.