Someone Left the Crayons Out, and Now the Tax Lawyers Are Drawing Pictures (updated)

Timing, as they say, is everything. The tax-exempt bond rules are full of deadlines and sunsets, both before and after the issue date and before and after the project is finished. Click above for a diagram of how some of these rules work together. It’s by no means exhaustive, but certainly exhausting. Maybe you’ll find it helpful; it’s designed to be printed on 11 x 17 paper, for those who prefer the analog version, and it’s suitable for framing for those who have empty space on their office walls. We’ll update it from time to time. Enjoy.

Edited 9/26/2017 to adjust the portion of the graphic dealing with the single-issue window. 

SLGS! (For Now)








Treasury has re-opened the sale of SLGS, now that the debt limit has been lifted through December 8. The SLGS window likely will close again around December 8, unless Congress takes further action.

(Though the strictures of legal ethics and of logic would counsel us against insinuating that we had anything to do with it, we cannot help but notice the coincidence in timing between this announcement and Alexios’s post on Friday about #SLGSforever.)


SLGS Forever?


For those of you keeping track, the SLGS window has been closed since March 8, 2017. With the recent discussions in Washington regarding a three-month debt limit increase, it is possible that the SLGS window will soon reopen, at least for a short time. (For prior coverage of the history of the SLGS window opening and closing, see here)

Recent news reports from Washington suggest that a permanent fix may be in the works. President Trump, Senate Minority Leader Charles E. Schumer, and House Minority Leader Nancy Pelosi are in discussions to eliminate the need for future debt ceiling votes by Congress. These news reports should be read with a grain of salt, or better yet with an entire salt block.[1] Any such legislation would be a significant departure from historical practices. According to the Congressional Research Service, “Congress has always restricted federal debt.” Were the debt ceiling to be eliminated, Congress would presumably only have to pass appropriation bills.  With no debt ceiling, it appears there would be no need ever to close the SLGS window. SLGS FOREVER!

[1] Don’t get the salt anywhere near the SLGS, though, because it can kill them.

NABL Proposes “Enhanced Infrastructure Bonds” (or Build America Bonds 2.0)

The National Association of Bond Lawyers submitted eight legislative proposals to Treasury on August 22 with the stated purpose of improving the efficiency of tax-advantaged financing of much-needed public infrastructure projects (here is a link to the proposals).   The proposals would broaden the availability and simplify the existing forms of tax-exempt bonds as well as create new forms of tax-advantaged bonds.  One of the new forms would be Enhanced Infrastructure Bonds (“EIBs”), which could just as easily be called new and improved Build America Bonds (“BABs”).  EIBs and direct-pay BABs share many characteristics, including generating federal payments to the issuer while paying taxable interest to holders, with the differences intended to make EIBs an even more attractive financing option and to eliminate the shortcomings of BABs that were discovered over the course of issuing more than $185 billion of direct-pay BABs during the brief period they were available – April 2009 through December 2010.  The similarities and differences in EIBs and BABs are identified and explained below.

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Tax Policy by Tweet

One of the many recent targets of Twitter criticism from President Trump has been the internet retailer Amazon.  Presumably after being informed by his staff that jobs in the retail industry constitute a much more significant share of national employment than those in coal mining (or after hearing about it on CNN), Mr. Trump posted the following tweet on August 16:

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Treasury Clarifies Effective Date of Revised Definition of ‘Available Amount’

On July 18, 2016, the Treasury Department published final regulations on non-issue price arbitrage restrictions (the “Final Regulations”).  A copy of the Final Regulations is available here.  Since that time, the mid-afternoon naps of issuers, tax lawyers, and possibly Sean from Portlandia have been improved by reading my “comprehensive” blog post on the Final Regulations.

Among other things, the Final Regulations included substantial changes to the working capital financing rules.  One such change is to the definition of “available amount” in Section 1.148-6(d)(3)(iii)(A).  Very generally, tax-exempt bond proceeds can be used to finance working capital expenditures only to the extent that the working capital expenditures exceed the issuer’s “available amounts.”  Under the prior rules, available amounts excluded proceeds of the bond issue that would finance working capital, but included proceeds from the issuer’s other tax-exempt bond issues.  Bob Eidnier pointed out an unintended consequence of the prior rules in his blog post on the Final Regulations:

Under the prior rule, for example, an issuer with multiple working capital issues outstanding might have been required to invest the proceeds of one issue in Non-AMT Investments (or use the amounts to redeem bonds) in order for the other issue to satisfy the investment/redemption requirement.  This could have defeated the purpose of, or at least placed an unfair burden on, the working capital financings . . . .

To remedy this unintended consequence, the Final Regulations expanded the exclusions from available amounts to include proceeds of “any” issue.  Once effective, the modified definition in the Final Regulations makes it easier for issuers to finance working capital expenditures.

Generally, the Final Regulations apply to bonds sold on or after October 17, 2016; however, the Final Regulations (more specifically, Section 1.148-11(k)(1)) failed to include an effective date for the modified definition of available amount in Section 1.148-6(d)(3)(iii)(A).  Practitioners (and Sean) were left to wonder whether the Treasury erred in omitting an effective date or whether the error was intentional!  <cue Twilight Zone music>

Thankfully, fourteen (14) months later, the matter is resolved.  Earlier this week, the Treasury Department acknowledged the error and corrected the mistake by including Section 1.148-6(d)(3)(iii)(A) in the list of Regulations that apply to bonds sold on or after October 17, 2016.  The correction is available here.

Moving On Down – In the Right Direction

In contrast to the theme song, “Movin’ on Up”, from the 1970s sitcom The Jeffersons, sometimes “moving on down” is better in certain circumstances. For example, it is preferable when discussing the sequestration rate for direct pay bonds.  Since sequestration began during the fiscal year ending September 30, 2013, the sequestration rate (i.e., the portion that the Federal government will not pay) has generally been going down. The IRS just announced that the 6.6% haircut for the fiscal year ending September 30, 2018, will apply to all subsidy payments made by the Treasury Department that are processed on or after October 1, 2017.   The 6.6% sequestration rate is lower than the current 6.9% sequestration rate.  Continue Reading

Oh Great; More Issue Price Talk

Various industry groups and issuers from around the country have re-submitted comments applauding Treasury for including the proposed political subdivision regulations among those on the chopping block, following the President’s Executive Order 13789 to eliminate burdensome tax regulations. Not surprisingly, the style of most of those submissions has been simple and thematically consistent: “Good Job. Keep Going.”

There appears to be no appetite, though, for telling Treasury that it should have included the new issue price regulations as a “significant” regulatory project that deserved a second look. You’ll recall that Treasury did not even examine the new issue price regulations to see whether they meet the President’s criteria in the Executive Order. (In other words, the issue price regulations didn’t just escape the executioner’s blade; they were never captured.) Instead, everyone seems to be of the view that it’s better to live with the “devil that we know” rather than staring into the abyss of what might be proposed and adopted next.[1]

In some ways, that is an unfortunate position, even though it’s understandable. It’s understandable because market participants spent untold hours preparing to implement these new rules, and there is surely some pressure (at least unconscious and perhaps even conscious) not to have all of that time and money go to waste. Also, many participants are finding the transition into the new rules fairly smooth, especially for issues where on the sale date the first price at which 10% of each maturity is sold is the initial offering price, because in those situations there is no difference between the old rules and the new.  This will be the case in most situations for issuers that typically see healthy demand for their bonds. And it may be true that Treasury one day would seek to impose something even more onerous.

But it’s unfortunate because, as we have described before, it’s an open question whether the logic and approach of the rules actually helps to solve the problem that gave birth to the controversy in the first place. It would have been nice to at least have some acknowledgement from Treasury that it heard the comments about the rules and did not force the issue price rules to share the same “insignificant” distinction as the “Utility Allowances Submetering” regulations and the new rules on “Implementation of Statutory Amendments Requiring Modification of the Definition of Hard Cider.”

Also, there’s no guarantee that even if the new issue price regulations remain, they won’t be replaced with something worse. Withdrawing the issue price regulations wouldn’t lead to a vacuum; it would leave us with rules that arguably do just as well as the new rules to tackle the problems originally intended to be addressed by the new rules.

And something else, too. The literature addressing the relationship between stakeholders and regulators  is surely so full of turgid prose that it needs no help from a fourth-rate blogger, but it is odd, isn’t it, that the reaction to these regulations shows a perverse relationship between the complexity and compliance cost of regulations and the likelihood of pushback down the line: It could be that the more work that it takes to comply with a set of administrative regulations, the less likely that stakeholders are to push back and demand that the agency repeal those regulations, even when presented with a golden, seemingly once-in-a-career opportunity. The President’s Executive Order seems to be a unicorn event, and it may be that the fears of “something worse” coming along could be unfounded because of the President’s slow pace of appointing high-level policy leaders at the agencies. (Note also that this fear doesn’t seem to have stopped opponents of the proposed political subdivision regulations.)


Nuts and Bolts

In actual deals, most firms appear to be using the NABL and SIFMA models, with the expected small tweaks that flow from each firm’s particular preferences. A couple of examples that seem to crop up repeatedly: The NABL model issue price certificate contains a sentence that requires a lead underwriter to certify that in a hold the offering price situation all of the other entities that fall into the umbrella definition of an “underwriter” not only agreed to hold the offering price, but also actually held the offering price. We’ll have more to say about this later, but the existence of this sentence appears to come from a classic case of “if the Preamble is unclear, then (and only then) consult the text of the regulations.” In addition, as lead underwriters make preparations and prepare documents to ensure that they can give the issue price certifications that the NABL model requires, materials and certificates that never would have come across bond counsel’s desk are now coming to light. The feeling by bond counsel that they must “look behind” the underwriter’s certificate and examine these materials (which is certainly understandable) seems to be at odds with the way that the new issue price regulations changed the approach of prior issue price proposed regulations that would have required additional diligence by issuers and their counsel regarding issue price matters.

In addition, some counsel have made small changes to offering document disclosures regarding bonds sold with original issue premium and discount. It has typically been the practice of most bond counsel to delete the disclosure regarding OIP and OID in the “Tax Matters” section when all of the bonds were sold at par. In situations where the language remains because some or all of the bonds are sold at a premium or discount, the language often refers readers to the prices in the Official Statement. However, to account for situations where the issue price of some of the bonds does not correspond to the initial offering price and results in OIP or OID based on actual sales (or where the issue price isn’t known on the date that the disclosure is finalized), the language can be softened to say to the reader that certain of the bonds “may” have been sold with OIP or OID. Interestingly, this possibility already existed before the new issue price regulations in a situation where the issuer relied on reasonable expectations to set the offering price and the actual sales (which has always determined whether the bondholder has OIP or OID) resulted in a different price. This is one of several examples of bugs that have always existed in the system but that are only being revealed on the occasion of the new rules, even if the changes in the rules don’t directly relate to those bugs. This sort of change to the disclosure reflects the way in which the new issue price rules, at least the “general rule” conform the issue price rules with OID rules.

[1] After all, stranger proposals than the one in the final regulations have been proposed before.

PLR 201726007 – Insights into the Facts & Circumstances Test for Private Business Use after Rev. Proc. 2017-13

The IRS recently released PLR 201726007, the first private letter ruling to interpret the revised management contract safe harbor in Rev. Proc. 2017-13. On one level, the PLR is quite straightforward – it concludes that a teaching agreement between a hospital and a school to provide clinical practice for pharmacy students does not result in private business use. On another level, it’s somewhat surprising that such a PLR was issued and the analysis takes some interesting turns. Read below for more information.

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