Abusive Arbitrage Devices – It’s Time to Get Reacquainted (1/3)

(Episode 1 – Background and Arbitrage Basics)

Sometimes it is a good exercise to remind ourselves of some basic rules governing tax-exempt bonds.  One such rule is that bonds are taxable arbitrage bonds if an “abusive arbitrage device” is used in connection with the bonds.  An abusive arbitrage device is any action that has the effect of: (1) enabling the issuer to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage; and (2) overburdening the tax-exempt bond market.[1]  (Keep in mind that an “abusive arbitrage device” is only one specific type of “arbitrage bond.”  We chose to cover abusive arbitrage devices because they are of renewed relevance and they touch on many arbitrage concepts.)  The first element of an abusive arbitrage device has been difficult (to the point of impossibility) to satisfy since Mad Men first aired.[2]  However, the Federal Reserve’s hawkish monetary policy has now made it much easier to exploit the difference between tax-exempt and taxable interest rates.  Thus, it’s time to get reacquainted (or acquainted, depending on where you are in your career) with the concept of abusive arbitrage devices.  The Public Finance Tax Blog is here to help, with a three-part mini-series of posts on this topic.

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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.

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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.

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“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]

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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.

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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. 

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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?

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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, 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!