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.

“Issue Snapshots” and The Wayback Machine

The IRS recently sent out an email (to those of you brave enough to willingly put yourselves on a government email list – rather like those intrepid souls who voluntarily follow @CIA on Twitter), regarding its “Issue Snapshots” webpage. The email lists the latest Snapshots, but the full list can be found at the bottom of the page here.

The IRS says that Issue Snapshots are not “official pronouncements of law or directives” (unclear what the difference between those two things is for this purpose). Issue Snapshots “cannot be used, cited or relied upon” as either “law or directives.” They are intended to “provide an overview of an issue and are a means for collaborating and sharing knowledge among IRS employees.” In essence, we are being allowed a window into the IRS’s employee education program. Although the Snapshots may lack the comedic content of certain other employee training programs, and although some of them are rather untimely against the backdrop of recent legislative changes, they are an interesting glimpse into topics that the IRS thinks are worthy of clarifying for its employees. They may also provide hints as to likely future audit targets (the Issue Snapshots usually contain a section ominously called “Issue Indicators or Audit Tips”).

The Issue Snapshots are the latest example of a long tradition of the IRS making its internal educational documents public.  You can also review the IRS’s current Tax-Exempt Bonds Training Materials (Phases I, II, and III), which provides a more comprehensive overview of various topics.

You can also find prior employee training manuals that are no longer on the IRS website. This miracle is possible because of that most marvelous (or terrifying, depending on how your perspective changes from one situation to the next) tool: The Wayback Machine, available at There’s even an app.  The Wayback Machine periodically “crawls” across the entire known internet, archiving various websites periodically.  As an example, here are the Continuing Professional Education texts from 2003. The 2003 texts were the most current ones available for a number of years. (Caution, though; there’s no telling why the IRS removed any particular text. One possible inference is that the IRS wanted to move away from the position described in a particular instructional text.)

Your ability to actually click around and view different parts of a particular website that has been saved by The Wayback Machine will vary from site to site. (One fun exercise, particularly for our readers at law firms, is to search for your website’s URL and select the earliest saved version. Interesting outfits and hairdos abound. Our firm’s Y2K preparation materials are a particularly interesting relic.)



Save the Crew (Part Two)!

Last week, we posted a story about the lawsuit brought by the Ohio Attorney General under Ohio’s “Art Modell Law” to prevent Major League Soccer’s Columbus Crew from moving to Austin, Texas.  We wondered aloud whether other states might enact similar laws if Ohio can succeed in preventing the Crew’s departure.  Readers might have wondered (aloud or otherwise) whether Ohio’s efforts to enforce the Art Modell Law would inhibit professional sports leagues from expanding to Ohio.

The answer, at least for now, appears to be “no.”  Major League Soccer announced on May 29 that Cincinnati has been awarded an expansion team, FC Cincinnati, which will commence play in 2019.  The stadium in which FC Cincinnati will play will be financed, in part, with taxpayer funding, which will bring the team within the scope of the Art Modell Law.  The law didn’t impede MLS expansion in Ohio, and it just might leave Ohio with two MLS teams, rather than one.

Save the Crew!

The Tax Cuts and Jobs Act, as introduced in the House of Representatives on November 2, 2017, would have prohibited the issuance after that date of tax-exempt bonds to finance a professional sports stadium.  The Tax Cuts and Jobs Act, as enacted, did not contain this prohibition.

Even if it had, it would likely not have ended the financial assistance that state and local governments lavish upon top-level professional sports franchises to keep those franchises in their current cities or to induce them to relocate.  Major League Baseball, Major League Soccer, the National Basketball Association, the National Football League, and the National Hockey League each hold a monopoly in the United States on the allocation of top-level professional franchises in their respective sports.  As long as these monopolies exist, state and local governments will afford the leagues financial assistance to claim one of the artificially limited number of franchises, regardless of whether tax-exempt bonds can be used to finance the stadiums in which the franchises play.

Is there anything state and local governments can do to ensure that one of these franchises, after having received public benefits and financial assistance, will not relocate?  Read on after the jump.

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Reflections on US Tax Reform from Our Tax and Public Policy Colleagues

Our tax and public policy colleagues have prepared a newsletter that illustrates some of the key take-home points for businesses based on our experience of the first few months after US tax reform. While US tax reform may not have been all that the business community hoped for, it has given taxpayers, both in the US and around the world, plenty to ponder, analyze and consider with respect to planning. With the benefit of having seen US tax reform “in action” over the last few months, they set out some of the key issues and challenges, as well as the potential opportunities, most commonly encountered by multinationals with US business interests, such as banks and underwriters of municipal bonds.

While it’s not strictly public finance tax, we (grudgingly) acknowledge that there are other tax topics and other aspects of US tax reform worth considering. Click through to read the analysis.


Oyez! The Supreme Court Hears Oral Arguments in Wayfair, and Now We Play the Waiting Game

On April 17, 2018, the U.S. Supreme Court heard oral arguments in the case of South Dakota v. Wayfair, IncWayfair 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.  Click here and here for background on this issue and its importance to state and local governmental units, and click here for SCOTUSblog’s analysis of the oral arguments in Wayfair. 

The Court’s decision in Wayfair is expected by late June.  Until then, we are left to speculate as to how the Court will rule.  It is clear from the oral arguments that the Court is divided and that Wayfair could be a 5 – 4 decision.  It most likely will not, however, be a 5 – 4 decision along the ideological lines to which we’ve grown accustomed, with the Court’s liberal justices (Ginsburg, Breyer, Sotomayor, and Kagan) split from the conservative justices (Thomas, Roberts, Alito, and Gorsuch) and Justice Kennedy providing the deciding vote.

Based on (i) questions posed and comments made during oral argument (Kennedy, Ginsburg, and Gorsuch), (ii) having openly invited a challenge to Quill (Kennedy), and (iii) having previously expressed skepticism of/hostility towards the dormant commerce clause (Thomas and Gorsuch), there are likely four votes in favor of overruling Quill – Justices Kennedy, Thomas, Ginsburg, and Gorsuch.  It appeared at oral argument that Justices Roberts, Alito, Sotomayor, and Kagan were inclined to preserve the Quill decision.  These are not the typical Supreme Court blocs.

Justice Breyer expressed at oral argument that he saw the merits of both sides in Wayfair, and he has emerged as the swing vote in this case.  Which ideologically diverse group will prevail upon Breyer?  The fantasy gaming crowd at FantasySCOTUS (yes, that is a thing) believes that Justice Breyer will side with Justices Roberts, Alito, Sotomayor, and Kagan to uphold QuillAre the fantasy gamers selling the Notorious RBG short?  We’ll find out this June.    

Kicking the Sequestration Can Down the Road

This past summer, I wrote a blog post showing how the sequestration rate, which reduces federal subsidy payments to issuers of “Direct Pay Bonds” (defined below), has generally been decreasing since the spending cuts enacted by the Budget Control Act of 2011 (“BCA”) began on March 1, 2013.  As a reminder, sequestration refers to the automatic, across-the-board spending cuts that apply to many of the federal government’s programs, projects and activities.  Issuers of “Direct Pay Bonds” (i.e., Build America Bonds, Recovery Zone Economic Development Bonds and all qualified tax credit bonds that were issued on a direct payment rather than a tax credit basis), who are entitled to receive federal government subsidies tied to the interest paid on these bonds, have been negatively impacted by these spending cuts.  The higher the sequestration rate, the lower the subsidy. Continue Reading