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.
Update: The President signed the Tax Cuts and Jobs Act into law on December 22, 2017. On that same date, he also executed the Continuing Resolution passed by Congress that permits the federal government to make expenditures through January 19, 2018. This Continuing Resolution also suspends the application of the PAYGO law in respect of the annual deficits that will accrue as a result of the enactment of the Tax Cuts and Jobs Act. Thus, the full sequestration that otherwise could have applied to the subsidies on direct payment tax credit bonds (such as Build America Bonds, Recovery Zone Economic Development Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, and Qualified Energy Conservation Bonds), as discussed below, will not take effect. Direct payment tax credit bonds do, however, remain subject to sequestration under the Budget Control Act of 2011. Subsidies on direct payment tax credit bonds are reduced pursuant to that sequestration by 6.6% for the fiscal year ending September 30, 2018.
If action-adventure films with titles such as The Librarian, The Accountant, and The Mechanic can be greenlit, then surely there is a place for The Parliamentarian. Skeptical? Read this plotline before dismissing the idea.
Over the last six weeks, my colleagues have posted numerous insightful posts about the various tax bills’ impact on tax-advantaged bonds (see here, here and here). For our readers who have been entirely consumed by those provisions of the bill, I thought it would be helpful to highlight some of the other provisions of the joint House/Senate tax bill released on December 15. Thus, below is a very brief summary of some of the other noteworthy provisions in the 503 page joint tax bill.
Those receiving gifts in their stockings this holiday season: Continue Reading
Signaling the end of our six-week ride in a runaway cement mixer, the Conference Committee for the Tax Cuts and Jobs Act has released its Conference Report, which represents a compromise version of the House and Senate-passed versions of the Act. Each chamber has the votes to enact the compromise bill; they’ll do it, and the President will sign it early next week. The Conference Report follows the Senate approach by preserving tax-exempt private activity bonds and governmental use bonds that are issued to finance professional sports stadiums, but it eliminates tax-exempt advance refunding bonds and tax credit bonds issued after December 31, 2017 – no transition relief. The Conference Report takes a solomonic approach to the alternative minimum tax, repealing it for corporations but not for individuals (though the exemption amount is increased for individuals). This should increase the attractiveness to corporate bondholders of tax-exempt private activity bonds that presently are subject to AMT.
White smoke rises in the east! Later today (Friday), it is expected that the House-Senate Conference Committee will release a final draft of the Tax Cuts and Jobs Act. Consistent with what was in both the Senate version (discussed here) and the House version (discussed here), it is further expected that the draft released by the Conference Committee will eliminate tax-exempt advance refunding bonds. In a misconception akin to an economic “epiphany” scribed on the back of a cocktail napkin, the House indicated that the elimination of tax-exempt advance refunding bonds will raise revenue because the federal government will no longer be extending a subsidy to two issues of tax-exempt bonds that are outstanding simultaneously to finance the same project. According to the Joint Committee on Taxation, eliminating tax-exempt advance refunding bonds would save $16.8 billion over the next 10 years. Aside from the savings identified by the Joint Committee on Taxation, the Senate could not be bothered to provide an explanation for the elimination. We discuss the proposed elimination of advance refunding bonds and scrutinize the purported savings here.