Notwithstanding repeated assurances from all corners that tax reform wouldn’t touch the exclusion from gross income of interest on tax-exempt bonds (here, here, and here), proposed legislation would touch it indeed, and quite profoundly. The opening statement in what is sure to be a long legislative discussion on tax reform came this morning, as the House Ways & Means Committee released the first draft of a tax reform bill, which was introduced as the Tax Cuts and Jobs Act. The high[sic]-lights, if the bill were enacted into law:
- No private activity bond issued after 2017 could be issued as a tax-exempt bond. This includes bonds issued for the benefit of 501(c)(3) organizations.
- No tax-exempt bond issued after 2017 could be issued to “advance refund” another bond.
- No tax credit bonds (regular tax credit bonds or direct pay) could be issued after 2017.
- No governmental bond issued after November 2, 2017 (!) could be used to finance a “professional sports stadium.”
Let’s take them in order, after the jump.
- No More PABs.
Under the bill, all private activity bonds (“PABs”) issued after 2017 are taxable bonds. The Internal Revenue Code presently allows certain PABs to be issued on a tax-exempt basis, even though more than 10% of the proceeds of these PABs finance facilities to which a private party (including a 501(c)(3) organization or the federal government) has a legal entitlement and more than 10% of the debt service on the PABs is paid from or secured by the private business use property financed by the PABs. These PABs include qualified 501(c)(3) bonds, bonds for low-income housing, bonds for airport terminal facilities and similar facilities (so-called “AMT bonds” for airports), sewage facility bonds and solid waste disposal facility bonds with excessive private business use and private payments, and all of the other qualified private activity bonds.
Existing PABs that qualify for tax exemption, and tax-exempt PABs issued before December 31, 2017, are safe under the bill. But, the bill doesn’t contain a transition rule that grandfathers future current refundings of these grandfathered bonds. This means that there could be no current refundings (or, of course, advance refundings) of your existing tax-exempt PABs (including your existing 501(c)(3) bonds). And you’d have to be very, very careful not to trigger a reissuance of the bonds, because a reissuance is treated as a current refunding for federal tax purposes.
- No more advance refundings.
Pretty simple. No tax-exempt bond issued after December 31, 2017 can be issued to advance refund another bond.
The bill does not address common techniques that can be used to achieve a similar economic result to an advance refunding (forward delivery agreements, draw-down structures, etc.) but that do not result in the issuance of advance refunding bonds. Because the bill doesn’t mention them, these techniques likely would still be available for the issuance of tax-exempt bonds that have a similar economic effect to advance refunding bonds.
- No more tax credit bonds.
Again, pretty simple. No bond issued after December 31, 2017 can be a tax credit bond. This includes both bonds issued with the subsidy delivered in the form of a tax credit to the bondholders and bonds issued with the subsidy delivered in the form of a direct payment to the issuer. A reminder that some of the 2009 Stimulus Act programs are still available even after the December 31, 2010 sunset date for most of those programs.
Existing tax credit bonds, including Build America Bonds, Recovery Zone Economic Development Bonds, and Qualified School Construction Bonds (whether true tax credit bonds or direct pay bonds), and those issued before December 31, 2017, would be grandfathered. There is no transition rule here, but this is less problematic because, in general, tax credit bonds cannot be refunded under current law anyway, or else the subsidy will be lost.
- No governmental use bonds for professional sports stadiums.
No governmental use bonds issued after November 2, 2017, can be issued on a tax-exempt basis for “professional sports stadiums.” Under current law, these bonds can be issued as governmental use bonds even though the private business use limit will be exceeded (e.g., the sports team often will have a lease for the stadium, which results in well more than 10% of the use of the stadium consisting of private business use). The bonds are not private activity bonds, however, if the private payment/security test limit will not be exceeded (i.e., if the bonds will be repaid by generally applicable taxes and any private payments that are available to the issuer from the team or with respect to the facility do not, after the payment of ordinary and necessary maintenance and operating expenses of the stadium, exceed 10% of the debt service on the bonds).
A governmental use bond is a bond issued for a “professional sports stadium” if it’s part of an issue any proceeds of which are used to finance or refinance capital expenditures allocable to a facility (or appurtenant real property) that, during any calendar year, is used as a stadium or arena for professional sports exhibitions, games, or training.
The release of this bill this morning is the beginning of what will certainly be a highly contentious round of legislative deliberations that may result in significant changes in these and other provisions, so no assurance can be given that the items described above will or will not survive into an enacted bill.