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Beginnings, Middles and Ends. The Tax Compliance Life Story of Your Bond Deal Daniel P. Smith DPS Legal Counsel. The Life Story of your Bond Deal is a Novel... Not a Short Story.
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Beginnings, Middles and Ends • The Tax Compliance Life Story of Your Bond Deal • Daniel P. Smith • DPS Legal Counsel
The Life Story of your Bond Deal is a Novel...Nota Short Story
“Tax-advantaged bonds . . . issued by or on behalf of state and local governments, are subject to applicable federal tax requirements both at the time of issuance and for so long as the bonds remain outstanding.” -- Internal Revenue Service
Private Letter Ruling 201114010 • Authority that owns municipal utility system qualifies as a political subdivision for purposes of section 103
103 - state or local bonds • 1.103-1(a)-includes political subdivision • 1.103-1(b) - municipal corp. or delegated sovereign power (tax, eminent domain, police power)
Authority had all 3 sovereign powers • Authority’s eminent domain power not subject to approval or control of the City
Private Letter Ruling 201104020 • Authority created as public corporation to own piers, terminals and warehouse facilities does notqualify as a political subdivision. • Authority also does notqualify as an “on behalf of issuer”
Authority’s eminent domain power was subject to consent of the City Council - not a political subdivision • Rev. Rul 57-187 - “on behalf of issuer” must be controlled by the political subdivision - The Authority was not controlled because a majority of board members were elected in a general election and none could be removed by the City Council
Private Letter Ruling 201145005 • Management Agreement on municipal Exhibition and Convention facility does not result in private business use of the facility
Revenue Procedure 97-13 provides a safe harbor • Term • Compensation Methodology • Relationship b/n service provider and qualified user
Safe harbor is not met in this ruling, yet the management agreement is “blessed” by the IRS based on a “facts and circumstances” analysis • Incentive fee (revenue benchmark & net operating surplus/deficit benchmark) • Term is 2 months longer than permissible 5 year term
Setting the Stage for Action in The Tax Compliance Story of Your Bond Deal
Your Tax Certificate • Your Tax Return • Your Tax Records
The Tax Certificate is the first significant tax document in your bond deal - sometimes also called the “Arbitrage Certificate” or the “Non-Arbitrage Certificate.”
“The Certificate” is Required . . . Usually • Treasury Regulations Section 1.148-2(b)(i) - An officer of the issuer responsible for issuing the bonds must, in good faith, certify the issuer’s expectations as of the issue date. • Treasury Regulations Section 1.148-2(b)(ii) - Exceptions to certification requirement • No unspent gross proceeds other than BFDSF, or • Issue price does not exceed $1 million
Two Words . .. • The two most important words in the Tax Certificate are . . .
REASONABLE EXPECTATIONS!And the “reasonable expectations” are about . . .
Private Use VS.
Treasury Regulations Section 1.141-2(d)(1) - An issue is an issue of private activity bonds if the issuer reasonably expects, as of the issue date, that the issue will meet either the private business tests or the private loan financing test.
Treasury Regulations Section 1.141-2(d)(2)(i) - In general, the reasonable expectations test must take into account actions over the entire stated term of an issue.
Treasury Regulations Section 1.141-2(d)(2)(ii)- An action that is reasonably expected, as of the issue date, to occur after the issue date and to cause either the private business tests or the private loan financing test to be met may be disregarded for purposes of those tests if the following four specific criteria are met.
The issuer reasonably expects, as of the issue date, that the financed property will be used for a governmental purpose for a substantial period before the action.
The issuer is required to redeem all nonqualifying bonds (regardless of the amount of disposition proceeds actually received) within 6 months of the date of the action.
The issuer does not enter into any arrangement with a nongovernmental person, as of the issue date, with respect to that specific action.
The mandatory redemption of bonds meets all of the conditions for remedial action under Section 1.141-12(a).
What is Arbitrage Anyway? • Section 148 of the Code - For purposes of section 103, the term “arbitrage bond”means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly (1) to acquire higher yielding investments, or (2) to replace funds which were used directly or indirectly to acquire higher yielding investments.
It’s Really an Arbitrage Certificate • Treasury Regulations Section 1.148-2(b)(2)(i) - An officer of the issuer responsible for issuing the bonds must, in good faith, certify the issuer’s expectations as of the issue date. The certification must state the facts and estimates that form the basis for the issuer’s expectations. The certification is evidence of the issuer’s expectations, but does not establish any conclusions of law or any presumptions regarding either the issuer’s actual expectations or their reasonableness.
A Reasonable Municipal Official =A Prudent Municipal Official • An issuer’s expectations are reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations or take those same actions, based on all the objective facts and circumstances.
Factors Showing Prudence • The issuer’s history of conduct concerning stated expectations • The existence of covenants enforceable by bondholders • The level of inquiry by the issuer into factual matters
Those Pesky Expectations Again • Treasury Regulations Section 1.148-2(b)(1) - Except as provided in paragraph (c) of 1.148-2 [i.e., “deliberate actions” - see “Middles” below], the determination of whether an issue consists of arbitrage bonds under section 148(a) is based on the issuer’s reasonable expectationsas of the issue date regarding the amount and use of the gross proceeds of the issue.
