I Know It When I See It – What is a Capital Expenditure?

Window with a view.

According to Wikipedia, the fount of all knowledge, the phrase “I know it when I see it” is a colloquial expression by which a speaker attempts to categorize an observable fact or event, although the category is subjective or lacks clearly defined parameters.   This phrase was famously used in a U.S.  Supreme Court decision to describe the threshold test for obscenity.  (See Jacobellis v. Ohio, 378 U.S. 184 (1964)).  Although this blog post will, unfortunately, likely not become as well known as the Jacobellis case, it will discuss, “What is a Capital Expenditure?”  My guess is that a lot of tax-exempt bond advisors use intuition when determining that certain expenditures qualify as “capital expenditures” for tax-exempt bond purposes.   In other words, they know a capital expenditure when they see one.   However, the question as to what constitutes a “capital expenditure” under the tax-exempt bond rules may be difficult to answer at times.

Treas. Reg. Section 1.150-1(b) defines “capital expenditure” as: 

any cost of a type that is properly chargeable to capital account . . . under general Federal income tax principles. For example, costs incurred to acquire, construct, or improve land, buildings, and equipment generally are capital expenditures. 

Without the example provided, I am not sure I would know what type of expenditure is “chargeable to  capital account.”  Luckily, the example makes it clear that both the acquisition of a building and the construction of a building clearly qualify as capital expenditures.   However, it becomes more difficult to determine whether an expenditure “improves” a building.  For example, does a replacement of windows in a building “improve” a building or merely “maintain” the building under general Federal income tax principles?  Does it matter if some of the old windows were cracked, or that the new windows are more energy efficient?

Fortunately, the IRS has some helpful guidance on this topic on its website: “Tangible Property Regulations – Frequently Asked Questions”[1].  According to this guidance, an improvement to property, which would be required (or in the tax-exempt bond world, allowed) to be capitalized, occurs if one of the three following conditions are met:

  • The expenditure qualifies as a “betterment,” which is (thankfully) further described to include (i) amounts paid to fix a material defect that arose before acquisition or during construction of the property, (ii) amounts paid for a material addition to the property, such as a physical enlargement or material increase in capacity, or (iii) amounts paid to materially increase productivity, strength, quality or output of the property.
  • The expenditure is used to “restore” the tangible property, which again is (thankfully) further described to include the following examples: (i) amounts paid to restore property after it has been damaged (e.g., by a hurricane); and (ii) amounts paid to restore property to its ordinary operating condition after it has deteriorated to a state of disrepair or after the end of its class life.
  • The expenditure is used to “adapt” the tangible property to a new or different use (e.g., converting a manufacturing facility to a showroom). 

Given the difficulty, at times, of distinguishing between an improvement and maintenance, the tangible property regulations provide a few safe harbors.  One such safe harbor permits a taxpayer to elect to capitalize repair and maintenance costs if such costs are treated by the taxpayer as capital expenditures for financial accounting purposes. 

So, when you are looking through that brand new, energy efficient window, do you see a capital expenditure? 

[1] This guidance is a summary of the various Internal Revenue Code (“IRC”) provisions and Treasury Regulations addressing current expenses (under Section 162 of the IRC), depreciation (under Sections 167 and 168 of the IRC), and capitalization (under Sections 263 and 263A of the IRC).

Continue Reading

Toll-Free Telephone TEFRA Hearings Available Permanently

The IRS will permanently allow state and local governments to hold public hearings using a toll-free telephone number to satisfy the TEFRA hearing requirement for private activity bonds.[1] No in-person option will be required to satisfy the TEFRA public hearing requirement, but state and local governments must continue to follow applicable local laws, which may require public meetings to be held in person.

Continue Reading

“Administrative History?” – President Releases Guidebook for Infrastructure Law

Following in the footsteps of pioneers such as Matthew Lesko, the White House has released a guidebook to the funding available under the Infrastructure Investment and Jobs Act. (It should be at least somewhat more authoritative than Gobs and Gobs of Free Stuff,[1] at least as it pertains to the legislation in question.)

The approach in the Infrastructure Investment and Jobs Act to providing funding for state and local infrastructure focused on grants and direct aid, and new borrowing programs were somewhat limited. While its precedential status in the courts remains an open question, the guidebook is an essential tool for state and local governments in determining whether their projects are eligible for federal funds and, if so, how much money they can get. The guidebook weighs in at a doorstop-y 465 pages, but the real star of the show is the sortable spreadsheet of programs, which is available here: https://www.whitehouse.gov/build/. We are known here for our unrepentant bias in favor of spreadsheets, but the efficiency of the spreadsheet of programs will be obvious to even the most ardent skeptic.


[1] 3rd ed. (August 1, 1996).

Even When it Comes to the Mundane Forms 8038, the One Constant is Change

To all of our readers, Belated Happy New Year!  We will ring in 2022 with some belated news.  Back in November of 2021, the IRS once again issued a memorandum that extends the ability to use an electronic or digital signature on Form 8038 (Tax-Exempt Private Activity Bond Issues), Form 8038-G (Tax-Exempt Governmental Obligations) and Form 8038-GC (Small Tax-Exempt Governmental Obligations).  This current extension will remain in effect until October 31, 2023.  (I have no idea why Halloween (of 2023) was selected as the deadline, but it should be easy to remember!).  In additional good news, when announcing this most recent extension on its website, the IRS stated that it is considering further extensions, but needs to balance the convenience of electronic signatures against the possibility of identity theft and fraud.   This enquiring mind is curious as to who is filing fraudulent Forms 8038, and what benefit are they getting by doing so? Continue Reading

Telephonic TEFRA hearings are now available through March 31, 2022

On November 4, 2020, we all thought that the COVID-19 pandemic was going to be long over by now. We certainly did not think we were going to get so far down the Greek alphabet of variants of this virus. And, this author certainly did not think that she was going to have to keep looking up what the next letter of the Greek alphabet is.  Now we are at mu, and there does not seem to be an end in sight.

It seems like when the IRS issued Revenue Procedure 2020-49, it thought that the COVID-19 pandemic was going to be over by now too.  As a reminder, on November 4, 2020, the IRS issued Revenue Procedure 2020-49, which allowed telephonic TEFRA hearings to continue through September 30, 2021.  Specifically, during this period, a governmental unit can meet the TEFRA requirement that the public hearing be held in a convenient location for affected residents by affording the general public access to the hearing by toll-free telephone call.[1]

With September 30th right around the corner, public finance tax attorneys were starting to get nervous[2] about whether these hearings were going to have to be in-person as cases are back on the rise.  We can all breathe a sigh of relief because yesterday the IRS has further extended the period during which telephonic TEFRA hearings can be held in lieu of in-person TEFRA hearings until March 31, 2022 through issued Revenue Procedure 2021-39.

Hopefully this will be the last extension that we need, and we won’t have variants that start sounding like sororities.

[1] The authors of this blog are still explaining to people what constitutes a toll-free number.

[2] More nervous than we usually are.

A “Good” Tax-Advantaged Bond Bill Tells Issuers Whether They Can Refund – A Case Study

This is the second in a series of posts about neutral principles that make for “good” tax-advantaged bond legislation.

We pick up our series as the Senate prepares for a final vote on a bipartisan infrastructure bill in the coming days. In the last post, we stated the general rule that a good piece of tax-advantaged bond legislation tells issuers how and when they can refund bonds issued under any new bond program. Here’s an example in current law to illustrate the point.

Continue Reading

A “Good” Tax-Advantaged Bond Bill Tells Issuers Whether They Can Refund

This is the first in a series of posts about neutral principles that make for “good” tax-advantaged bond legislation. 

A good muni bond tax bill deals with refundings. For new programs, it provides the terms and conditions under which the new bonds may be refunded. 

Over the long life of a project and the bonds that finance it, prevailing market interest rates are almost certain to be more favorable at some point than they were when the bonds were issued.[1] Refinancing transactions thus have always been a part of life in our corner of the world. And so the clock will begin to tick as soon as the bonds under a new bond program are issued, and once the issuer can call the bonds, our phones will begin to ring with the question: Can we refund?

A good tax-advantaged bond program will tell issuers in clear language whether and how they can refund bonds under the program.

Continue Reading

What makes a “good” muni bond tax bill?

Do you feel it? Good vibes for tax-advantaged bond legislation permeate the air around us. White smoke emerged from the White House on June 24, signifying that the President and key Senate leaders had reached a deal on an infrastructure bill. The deal includes “public private partnerships, private activity bonds, direct pay bonds and asset recycling for infrastructure investment.” Hey, that’s us![1]

It feels downright 2009ish. The prospect of new bond legislation has us thinking: Is there a right or wrong way to write a tax-advantaged bond bill?

Continue Reading

RECORDING NOW AVAILABLE: “Biden Unveils Script for The American Jobs Plan and a Leading Role Goes to Infrastructure – What Does It Mean to the Transportation Industry?”

Was your schedule incredibly busy on April 8th?  Was your schedule so busy that you missed the Squire Patton Boggs webinar on what President Biden’s American Jobs Plan and what it means for the transportation industry? If it was, and you’re disappointed that you missed former Secretary of Transportation Rodney E. Slater, former Republican Congressman and former Chairman of the House Transportation and Infrastructure Committee Bill Shuster, the former Chairman of the House Democratic Caucus Joe Crowley, and former Vice-Chairman of the House Republic Conference Jack Kingston discuss their insights and perspectives on President Biden’s American Jobs Plan and how it could affect the transportation industry with Jane Garvey, North America Chairman of Meridiam Infrastructure, Robert (Bob) Poole, Director of Transportation Policy, Reason Foundation, and Robert (Rob) Puentes, President and CEO of the Eno Center for Transportation we have some good news!  You can watch the recording of the webinar here!

During the webinar a Wall Street Journal article regarding how the private section is helping fund infrastructure developments through Public-Private Partnerships (P3) financing is discussed.  We are including the article here for your reference as you watch!

Moving on from LIBOR (Update)

Amid the world’s turmoil, we can take comfort in the persistent march of long-foretold events. Keeping to their pre-pandemic promises (at least partially), the Federal Reserve and U.K. regulators[1] of LIBOR have reaffirmed their plans to cease publication of the one-week and two-month LIBORs by the end of 2021. Issuers, holders, and counterparties are slowly and grudgingly waking up to this reality. How are they responding? Continue Reading