IRS Releases New Guidance to Facilitate Opportunity Zone Program

The Opportunity Zone program was created by the 2017 Tax Cuts and Jobs Act and is intended to increase investment in areas designated as Opportunity Zones (i.e., economically distressed communities).  The general idea behind the program (which we have previously written about here) is that investors are able to defer paying tax on gains from selling property by investing the proceeds from the sale into an Opportunity Zone Fund.

The IRS recently issued much needed guidance on how the Opportunity Zone program will work.  Specifically, the IRS released anxiously-awaited proposed regulations, along with Rev. Rul. 2018-29, and a draft Form 8996 (that entities will need to file with the IRS to certify that they qualify as a Qualified Opportunity Fund).

Our colleague, Steve Mount, has been at the forefront of the Opportunity Zone program from its inception.  He has written yet another insightful article in Bloomberg’s Tax Management Real Estate Journal describing the new guidance in more detail.     Click here to read the article.   You can read Steve’s earlier articles on Opportunity Zones here and here.

IRS: You Can Still Issue Tax-Exempt Bonds to Advance Refund Most Taxable Bonds, Including BABs

For those who still had doubts, the IRS has now made it crystal clear: You can still issue tax-exempt bonds to advance refund most taxable bonds.  In other words, the much-lamented “repeal of tax-exempt advance refunding bonds” in the Tax Cuts and Jobs Act from December 2017 isn’t ironclad. The repeal prevents the issuance of tax-exempt bonds to advance refund only (1) other tax-exempt bonds and (2) a very limited subset of taxable bonds. The IRS expressed this conclusion in Chief Counsel Advice Memorandum 201843009, dated August 31 and released on October 26.

Following the logic of this guidance, the only taxable bonds that can’t be advance refunded with tax-exempt bonds are taxable bonds that:

One way to force a tax-advantaged taxable bond to lose its tax advantage is to “legally defease” it, which happens in almost all advance refundings once the issuer deposits Treasury securities acquired with proceeds of the advance refunding bonds into the refunding escrow on the issue date. Perhaps the only exception – certain governmental bonds cannot be legally defeased under state law.[1]

That’s the bottom line. Read on for a little more about this guidance and the history behind it.

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In Need of More Research – The Congressional Research Service’s Error-Filled Report on Private Activity Bonds (and, Specifically, Qualified 501(c)(3) Bonds)

As readers of this blog know, the version of the Tax Cuts and Jobs Act that was passed by the House of Representatives would not have allowed any private activity bond (including any qualified 501(c)(3) bond) to be issued as a tax-exempt bond after December 31, 2017.  The version of the Tax Cuts and Jobs Act passed by the Senate, and the version ultimately enacted into law, did not include this repeal of tax-exempt private activity bonds.   

We’ve previously explored (here) why the House wanted to eliminate tax-exempt private activity bonds and debunked the purported policy bases that were articulated by members of the House in support of the repeal of tax-exempt private activity bonds.  The need for exploration and debunking remains, in light of both the Republicans’ insatiable desire to enact tax cuts and the release by the Congressional Research Service of its report titled “Private Activity Bonds: An Introduction,” which appears to have been drafted to afford a policy rationale to eliminate the income tax exemption for interest paid on certain private activity bonds (which elimination would, of course, be used to cover the cost of income tax rate reductions).[1]  To discover the errors in CRS’s report, hit the jump.

Annie Belle still wants to know why.

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A Reshuffling of the 8038 Deck

The IRS recently released a new Form 8038-G, which is the information return for issues of tax-exempt governmental bonds, and a new Form 8038, which is the information return for tax-exempt private activity bonds.  In addition, the IRS has released draft instructions for each form.  The revised forms are in part a response to changes made to the Internal Revenue Code by the Tax Cuts and Jobs Act (P.L. 115-97), which was signed into law on December 22, 2017 (“TCJA”).  Keep reading for more information on the new forms, the fate of some old forms, and some gratuitous commentary.

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“Tax Reform 2.0” Released, Bonds are Untouched (So Far)

Hope you all had a nice summer – the blog is officially back from summer break. The Hutchinsons had a good one; we took Charlie to visit his grandparents at the beach in Pensacola, FL, where he went to Waffle House for the first time, and to visit his great-grandparents in Clinton, MS, where he went to Waffle House for the second time.

Back to business. The House Ways and Means Committee released three bills yesterday, which comprise something along the lines of “Tax Reform 2.0.” So far, the bills don’t mention tax-advantaged bonds in any way. However, as Congress hunts for revenue to pay for the permanent extension of various tax benefits in Tax Reform 1.0 (the Artist Formerly Known as the Tax Cuts and Jobs Act), we must all continue to monitor the legislative process. The rationale that Congress offered for eliminating tax-exempt private activity bonds last year is so thin that a cynic could infer that the real rationale was to raise revenue to pay for other provisions.

The bills are numbered H.R. 6760, H.R. 6757, and H.R. 6756.

Happy Birthday to Us!

Today is our fourth birthday.

Thanks to all of you who have listened to us rant and ramble over the years. We hope that you continue to visit us and that you find value here (or at least are occasionally bemused by our strained cultural references and bad jokes). If you like it here, consider telling a friend or colleague about us, and encourage them to subscribe. If you find us annoying (but are masochistic enough to continue to read – why do you hate yourself?), please click here to send Mike Cullers your hate-mail. (Don’t hold back! Mike is tough, and he can take it.) If you don’t mind paying overseas shipping, we have some gift ideas for us (or, heck, for your loved ones, too).

IRS Releases New “Issue Snapshot” on Single-Family Housing Bonds

The IRS has released another “issue snapshot,” which deals with qualified mortgage bonds (or, as they are often called in our lingo, single-family housing bonds). An issuer uses the proceeds of qualified mortgage bonds to make loans to private homeowners. Because of the private loan limitation, the bonds are private activity bonds. To be tax-exempt, then, the bonds must meet all of the requirements for qualified mortgage bonds (which recapitulate most of the other tax-exempt bond requirements, filtered through a fish-eye lens). Private activity bonds involving loan programs (such as single-family housing bonds or student loan bonds) rather than project financing raise the question of what to do when the issuer receives repayments of the loans made with the proceeds of the bond issue – can they be used to originate more loans, or must they be used to pay down bonds?

This new issue snapshot analyzes this issue, walking through the mechanics of a refunding of single-family housing bonds where the issuer has on hand repayments of some of the mortgage loans (often referred to as “replacement refunding” transactions). The issue snapshot also describes how long the refunding bonds can be outstanding without getting more volume cap. For most bonds subject to volume cap, refunding bonds don’t need additional volume cap as long as the amount of the refunding bond doesn’t exceed the amount of the refunded bond. For qualified mortgage bonds, there’s an additional back-stop – you can’t go longer than 32 years from the issuance date of the original mortgage bond without getting more volume cap. (The 32-year rule is intended as a rough-justice substitute for the fact that there isn’t truly a bond-financed “asset” with a “useful life,” in qualified mortgage bond financings in the same way that one exists in, say, a solid waste disposal facility financing; the typical length of a residential mortgage is around 30 years.) In addition, in general, mortgage repayments can be used to originate new mortgage loans only within 10 years after the issuance date of the original mortgage bond.

The issue snapshot contains “Issue Indicators or Audit Tips” for examining agents (and, by extension, us), which are worth a read. The full list of issue snapshots can be found here; the aspects regarding tax-exempt bonds continue to form quite an eclectic mix.

IRS Revises Rate for “Taxpayer Exposure” Penalty Calculations

When you enter into a closing agreement with the IRS to fix a problem with a tax-exempt bond issue, the IRS will often require a penalty payment in an amount relating to the “taxpayer exposure” on some or all of the bond issue. Taxpayer exposure “represents the estimated amount of tax liability the United States would collect from the bondholders if the bondholders were taxed on the interest they realized from the bonds during the calendar year(s) covered under the closing agreement,” as section of the Internal Revenue Manual says. To make this estimate of the tax that the IRS would’ve collected on the bonds, one must choose an appropriate hypothetical tax rate. In the past, the IRS has typically used 29% as tax rate, representing the IRS’s approximation of the average investor’s highest tax bracket.

On July 16, the IRS modified this hypothetical tax rate for interest on tax-exempt bonds accruing in tax years after 2017, in a memorandum from Christie Jacobs, the Director of the Indian Tribal Governments and Tax-Exempt Bonds section of the IRS.  Continue Reading

The “Opportunity Zone” Program – Moving Forward

The 2017 tax reform legislation created a new federal subsidy for investment in low-income communities, known as the “Opportunity Zone” program. (We previously covered it on the blog here.) The program allows taxpayers to defer gain from the sale of assets by investing the proceeds into an “Opportunity Fund,” which is a fund that invests in low-income communities that have been designated as “opportunity zones.”

A few weeks after Congress enacted the program, our colleague Steve Mount wrote a complete analysis of the legislative provisions. Steve has written another piece for Bloomberg’s Tax Management Real Estate Journal, tackling the questions about the program that linger.  As Steve describes, three things need to happen to get the Opportunity Zone program going: (1) each state (and the District of Columbia and certain territories) needed to nominate O Zones within their jurisdictions and have them certified by the Treasury Department; (2) Treasury needed to promulgate rules on how to certify an O Fund; and (3) the IRS needed to issue guidance on several of the basic requirements of the Opportunity Zone statute. We’ve gotten (1) and (2), but we await (3). Steve’s piece follows a very helpful Q&A format. Read it here.

It’s Unanimous – All Nine U.S. Supreme Court Justices Agree that Quill Corp. v. North Dakota was Wrongly Decided, and Five Vote to Overrule It in South Dakota v. Wayfair, Inc.

Yes, you read that correctly.  On June 21, 2018, the United States Supreme Court handed down its decision in South Dakota v. Wayfair, Inc. [1]  (We’ve discussed the background to Wayfair here, here, here, and here.)  The Court, by a 5 – 4 majority, held that a vendor need not have a physical presence in a state in order to have a “substantial nexus” with the state under the Commerce Clause that could obligate the vendor to collect sales or use taxes on sales made to customers who reside in the state and to remit those taxes to the state.  Consequently, the Court overruled its prior holdings in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that a vendor must have a physical presence in a state to be required to collect sales/use taxes on sales made to residents of that state.

To learn what three things you should know about Wayfair and its effect on remote (read: Internet-based) vendors, read on after the jump.

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A Richer Understanding of What’s Already Understood – Treasury Issues Proposed Regulations to Clarify the Meaning of “Investment-Type Property” in an Already Obvious Way

The Minutemen’s seminal album Double Nickels on the Dime includes the song “The Big Foist,” which opens with the lyrics, “A richer understanding of what’s already

understood.”  These lyrics are called to mind (my mind, at least) on occasions such as the Treasury Department’s publication today of proposed regulations (“Proposed Regulations”) that clarify the definition of “investment-type property” for purposes of complying with the arbitrage yield restriction and rebate requirements set forth in Section 148 of the Internal Revenue Code.

As a general matter, if proceeds of a bond issue are reasonably expected to be used (or are intentionally used) to acquire “investment property” that has a materially higher yield than the yield of the bond issue, then the bond issue is comprised of taxable arbitrage bonds, rather than tax-exempt bonds.  Investment property includes, among other things, “investment-type property.”  The current regulations define investment-type property as any property “that is held principally as a passive vehicle for the production of income” and that is not a specifically defined type of investment property (i.e., securities, obligations, annuity contracts, and certain residential rental property for family units).  The Proposed Regulations make clear that investment-type property:

does not include real property or tangible personal property (for example, land, buildings, and equipment) that is used in furtherance of the public purposes for which the tax-exempt bonds are issued.  For example, investment-type property does not include a courthouse financed with governmental bonds or an eligible exempt facility under [Internal Revenue Code] section 142, such as a public road, financed with private activity bonds.

This conclusion is obvious from the legislative history of Section 148, which Treasury cites in the preamble to the Proposed Regulations.  It’s also obvious from the canon of statutory and regulatory construction that a general item in a list must be read in light of the specific items that precede it.  Although an obvious conclusion, Treasury is to be commended both for allowing issuers of tax-exempt bonds to rely on the Proposed Regulations before they become final and for using an Oxford comma in the above-quoted parenthetical.[1]

If Treasury is inclined to publish proposed regulations to clarify that which is already clear, perhaps Treasury can provide guidance on whether tax-exempt bonds can be issued to advance refund taxable (but not tax-advantaged) bonds.


[1] Not using an Oxford comma?  You should.  You’d join the good company of my colleagues, Rob Lowe, and Neil deGrasse Tyson.  Had I not used an Oxford comma, you could be left with the impression that I work with Messrs. Lowe and deGrasse Tyson; the Oxford comma makes clear that I do not.  You’re welcome.