In January, the Supreme Court granted a writ of certiorari in the case of South Dakota v. Wayfair (discussed here). Wayfair, which will be argued before the Court on April 17, is a direct challenge to Quill Corp. v. North Dakota, in which the Supreme Court held that a vendor does not have to collect and remit the sales/use tax owed on sales made to customers who reside in a given state unless the vendor has a physical presence in that state (we have discussed this issue here and here).
On February 13, the Trump Administration released its proposal to finance improvements of the nation’s infrastructure. This proposal promotes the use of public-private partnership (“P3”) arrangements to fund these improvements by expanding exempt facility bonds (a type of tax-exempt private activity bond that can be used to finance a list of specific types of projects, such as airports, sewage facilities, etc.) so that tax-exempt bonds can be used more easily in conjunction with P3 arrangements. For example, many public infrastructure projects, such as convention centers, courthouses, and fiber optic networks, do not fit within the patchwork list of projects that qualify for private activity bond financing, and so they cannot be financed with tax-exempt bonds if the bonds would exceed the private activity limits.
The day after the Trump Administration released its proposal, House Ways and Means Chairman Kevin Brady made it clear that he does not support an expansion of tax-exempt private activity bonds($). If the scope of exempt facility bonds is not expanded to facilitate the more ready use of tax-exempt bonds in P3 financing structures, and Chairman Brady’s resistance could make this a likely outcome, P3 arrangements that wish to include tax-exempt bond financing will need to satisfy current law. One way to accomplish this objective is for the private party in the P3 arrangement not to be the owner or long-term lessee of the tax-exempt bond-financed property but instead to use this property under a management contract that complies with Revenue Procedure 2017-13 (which we have analyzed here, here, and here).
What if the P3 arrangement contemplates that the private party will hold attributes of ownership in the subject property that will result in excessive private business use of the bonds that would finance that property, so that the qualified management contract approach is not a solution? One technique, which is often used to allow the use of tax-exempt bonds to finance professional sports stadiums (which, since the Tax Reform Act of 1986, have not been among the list of projects that can be financed with exempt facility bonds), presents a potential alternative solution.
Last week’s NABL Tax and Securities Law Institute included a discussion featuring John Cross (Associate Tax Legislative Counsel – Treasury) and Vicky Tsilas (Chief Branch 5 — IRS General Counsel’s Office) of whether tax-exempt bonds can be issued to advance refund taxable bonds, including build America bonds (BABs) despite the prohibition of tax-exempt advance refundings by the 2017 tax legislation. The prohibition, set forth in Internal Revenue Code (Code) section 149(d)(1), states: “Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond issued to advance refund another bond.” The Code provides that “[t]he term ‘bond’ includes any obligation.” Code section 150(a)(1). Thus the question is whether a taxable bond is a “bond” as that term is used in the advance refunding prohibition. BABs are included in the question because interest on BABs is included in gross income under Code section §54AA(f)(1). So with this statutory backdrop, can tax-exempt bonds be issued to advance refund taxable bonds?
Notwithstanding all the doom and gloom around these parts about “the bill formerly known as the Tax Cuts and Jobs Act” (final name pending conclusion of sponsorship negotiations), the final legislation created a new tool for economic development in low-income communities, called the “Opportunity Zone” program. The program provides incentives for taxpayers to invest in low-income communities by allowing them to defer and potentially avoid gain on the sale of stock or other property if they reinvest their gains in a low-income community through an “Opportunity Fund.” But, state governors must act soon to designate eligible census tracts as Opportunity Zones, or they may lose the opportunity forever.
Our colleague Steve Mount has written a comprehensive analysis of the new program for BNA’s Tax Management Real Estate Journal; you should download it from the Squire Patton Boggs website by clicking here. Click through for a brief summary of the program here, and be sure to download Steve’s article for the full details on this new program.
Public finance tax lawyers have been acutely aware of the direct effects of the 2017 tax legislation, especially the elimination of tax-exempt advance refundings, but some of the indirect effects have begun to appear only recently. One of those is the triggering of bank rate adjustments resulting from the drop in the corporate tax rate. As frequently touted by the President, the legislation reduced the maximum corporate tax rate from 35% to 21%. The effect of this rate reduction on bond interest rates is more pronounced because of the popularity of bank placements of tax-exempt bonds in recent years. For a number of reasons, including to remain competitive, many banks have been willing to forego or reduce the interest rate increase to which they are entitled under the bank loan documents. This is obviously good news for bond obligors but the tax consequences – namely, a potential reissuance – must be kept in mind.
With the flurry of news regarding how tax-exempt bonds were affected by the Tax Cuts and Jobs Act (“TCJA”), some of you may have missed what else was included in the TCJA. Here are six things a 501(c)(3) organization should know (other than that TCJA did not eliminate tax-exempt qualified 501(c)(3) bonds):
- Fewer individuals will be claiming itemized deductions, so fewer people will get a tax benefit from making a charitable contribution, which could cause a decline in such contributions.
- The estate tax exclusion amount is raised through 2025 to $10 million, so fewer people will have an incentive to make charitable bequests. Because of inflation adjustments, the actual dollar amount of the exclusion in 2018 is expected to be about $11 million.
- There will no longer be a charitable deduction for college athletic seating rights. I suspect that Buckeye ticket sales will be unaffected.
- Unrelated business taxable income (“UBTI”) must now be calculated separately for each unrelated trade or business activity. Because losses from an unprofitable trade or business can’t be used to offset income from a profitable one, the result will be more UBTI. Also, organizations will need to determine which unrelated trade or business activities are separate trades or businesses.
- There is a 21% excise tax imposed on remuneration exceeding $1 million paid by tax-exempt employers to a “covered employee” or on “excess parachute payments.” Covered employees are generally individuals who are or were one of the five highest paid employees, and excess parachute payments are certain large severance payments.
- Colleges and universities with endowments exceeding $500,000 per student will generally owe an excise tax of 1.4% on their net investment income.
For more details, see this alert from our SPB colleagues.
A few months ago, I wrote a blog post about a hospital that had its Section 501(c)(3) status revoked by the IRS. In that case, the IRS found that the hospital had committed willful and egregious violations of the Patient Protection and Affordable Care Act (the “ACA”). For example, the hospital was not conducting a community health needs assessment every three years as required by the ACA, and was not shy about telling the IRS that the hospital had neither the financial wherewithal nor the employees to conduct a needed assessment every three years. Continue Reading
On January 12, 2018, the U.S. Supreme Court announced its grant of certiorari in the case of South Dakota v. Wayfair, Inc. The oral argument for this case has not yet been scheduled, but it will most likely be held in April 2018, with a decision rendered by the end of the Court’s term in June 2018. Wayfair is a direct challenge of the Court’s holding in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that, under the dormant Commerce Clause, a remote/online vendor does not have to collect and remit sales/use tax on sales made to customers who reside in a given state unless the vendor has a physical presence in that state. This issue (which we have discussed at some length here and here) is of no small moment to states and political subdivisions that levy a sales/use tax – according to estimates by the Government Accountability Office, Quill caused sales/use tax losses of between $8,500,000,000 and $13,400,000,000 in 2017, alone.
We will have more on this as it develops. In the meantime, please enjoy the first ever Public Finance Tax Blog quiz. Can you identify which of the two flags, below, is the state flag of South Dakota, and which is the state flag of North Dakota? The answer is after the jump.
Last week, all of my dreams came true when I had the good fortune of going to Walt Disney World with my family. In addition to watching my kids train to be Jedi Knights, I had the opportunity to meet a number of Disney characters, including Cinderella. In so doing, I was reminded that although tax reform eliminated tax-exempt advance refunding bonds issued after December 31, 2017 (discussed here and here), it did nothing to curb the use of so-called “Cinderella Bonds” to advance refund outstanding tax-exempt bonds. Heartened by this realization, I resolved to write this post to discuss the topic.
Happy New Year to all. When we last spoke, we were all breathing a sigh of relief that tax-exempt private activity bonds were spared the sword in the final tax reform legislation, and we poured out a little eggnog for our old friend, the tax-exempt advance refunding bond, gone too soon.
But based on comments from House Ways & Means Committee Chairman Kevin Brady, and the insights of those who hear the whispers in D.C., tax-exempt private activity bonds aren’t safe yet. Indeed, the House leadership likely hasn’t changed its mind about tax-exempt private activity bonds in the short time between November 2, when the Ways and Means committee released its proposal, and the enactment of the Tax Cuts and Jobs Act.
The question is: why?
Although it would be easy to view the House’s proposal to eliminate tax-exempt private activity bonds as an aggressive opening offer, a chit to be traded away as the two chambers bargained to get to the final bill, rather than a serious and continuing policy view, we ought to take the House at its word and address the House’s rationale.
The problems (“problems”) that the House bill cites as the reason for getting rid of tax-exempt private activity bonds are not new insights. Like the Moog synthesizer, people have been making these noises since the ‘60s. The law already recognizes the potential that tax-exempt private activity bonds may inappropriately transfer the benefits of tax-exempt financing to private entities. In response to the proliferation of tax-exempt private activity bonds in the past, the legislative answer has never been “eliminate them entirely.” Surely that should not be the response now, when there have been no significant changes in the landscape to justify it. Things are better on this front than they were in 1986, not worse.