Transcript Document

Federal Income Tax Issues
Matthias Edrich
Erick Stowe
January 30, 2009
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Peck, Shaffer & Williams LLP
Presenters
• Matthias Edrich, is a second year associate
of Peck Shaffer with a focus on transaction
structure, documents, disclosure and tax
matters
• Erick Stowe, more than 30 years’ practice in
public finance, partner at Peck Shaffer with
a focus on tax matters
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Basic Tax Rule
Interest on debt of a state or political subdivision is
excluded from federal gross income unless the
debt is a private activity bond (that is not a
qualified private activity bond) and unless the debt
is an arbitrage bond.
There are also some technical rules that must be met.
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Issuers
• State or Local Governmental Issuer
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State, D.C., Possession or Political Subdivision
On Behalf Of/Constituted Authority
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Indian Tribal Governments
Other
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Debt
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Valid Exercise of Borrowing Power
Nonrecourse, Conduit or Revenue Financings
Debt Must Be Incurred
May be Lease or Installment Sale in Form -Interest Must Be Separately Stated
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Private Activity Bonds
• Use of Proceeds
– Governmental Bond
– Qualified Private Activity Bond
• Private Business Use Test
• Private Loan Test
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Private Activity Bonds
• Two-Part Private Business Test:
– More Than 10% Private Business Use
AND
– More Than 10% Private Payment or Security
• Reasonable Expectations
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Private Business Use?
• Use By a “Nongovernmental Person”
– Federal Government
– Section 501(c)(3) Organization
– Other Private Entity (Corporation, Partnership,
LLC)
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Private Business Use?
• Use Includes
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Ownership
Lease/Sublease
Certain Management/Services Contracts
Certain Sponsored Research Agreements
Certain Output Contracts
“Special Legal Entitlement”
“Special Economic Benefit”
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Private Business Use?
• Exceptions
– “General Public Use”
– Short, Incidental and Temporary Use
• Measuring Private Business Use
– Generally Measured Over Time
– Allocation for Mixed Use Facilities
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Private Payment Test
• Measure Private Payments
– Present Value (PV) of all Private Payments over
Term of Bonds
– All private Payments Benefiting Issuer
– Limited to the Amount of Private Use
– Excludes Operating Expenses
– Generally applicable taxes are not private
payments
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Private Loan
• Alternative to Private Business Test
• Measure Loans
– In Amounts More Than the Lesser of
• 5% of the Bond Proceeds or
• $5 million
• Used to Make or Finance Loans to
Nongovernmental Persons
• Tax Assessment Exception
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Qualified Private Activity Bonds
• 501(c)(3) Bonds
• Small Issue (Maximum $10 million) for
Manufacturing and 1st Time Farmers
• Acquisition of Non-Government Output Facility
Bonds
• Student Loan Bonds
• Qualified Redevelopment Bonds
• Low- and Moderate-Income Single Family
Mortgage Bonds
• Exempt Facilities
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PABs – Exempt Facility Bonds
• Airports
Docks and Wharves
Mass Commuting
Environmental Enhancement of Hydroelectric Facilities
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Residential Rental Facilities
Water Furnishing
Sewage Facilities
Solid Waste Facilities
Local Furnishing of gas or electricity
Local District Heating or Cooling
Qualified Hazardous Waste Facilities
High Speed Intercity Rail Facilities
Public Educational Facilities
Enterprise Zone Facilities
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Requirements For All Bonds
• Reimbursement Rules
– Declaration of Official Intent By Issuer of
Bonds (or 501(c)(3) Organization) Specifying
Project and Principal Amount
– Can Reimburse Costs Paid No More Than 60
Days Before Declaration of Intent (Exceptions
for Preliminary Expenditures and De Minimis
Amount)
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Requirements For All Bonds
• Reimbursement Rules
– Reimbursement Within 18 Months of Later of
Date Expenditure Paid or Project Placed In
Service (Overall 3 Year Limit From Date
Expenditure Paid)
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Requirements For All Bonds
• Bonds Must Be In Registered Form
• Federal Guarantee Restriction
– Exceptions For Housing Bonds, Refunding
Escrows, Certain Agency Guarantees
• Information Reporting
– Form 8038, Form 8038-G, Form 8038-GC
– Filing Deadlines, Late Filing
– Source of Information
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Arbitrage – Basic Rule
• Proceeds of an issue cannot be invested at
above the yield on the bonds except during
temporary periods, as part of a reasonable
reserve, as part of a minor portion, and
arbitrage earnings must generally be
rebated.
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Arbitrage – Basic Questions
• Arbitrage- - Can you earn it?
– Temporary Periods
– Minor Portion ($100,000)
– Invested at yield not materially higher
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Arbitrage
• Definition of Gross Proceeds
– Sale Proceeds
– Investment Proceeds
– Replacement Funds (Sinking Fund, Pledged
Fund, Negative Pledge)
– Transferred Proceeds
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Arbitrage
• Temporary Periods
– Construction or Other Capital Projects (3-Year)
• Must expect to satisfy “Expenditure Test”
– Bona Fide Debt Service Fund
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Arbitrage
• Temporary Periods
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Construction (3 years)
Refunding Escrow (30 days)
Investment Income (1 Year)
Replacement Proceeds (30 Days)
Working Capital (13 Months)
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Arbitrage
• Yield
– General Calculation Method
– Initial Offering Price
– Guarantee Fees
– Costs of Issuance
• Materially Higher
– Generally 1/8 of 1%
– Acquired Program Investment 1.5%
– Replacement Proceeds and Restricted Escrows 1/1000 of 1%
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Reasonably Required Reserve Fund
• Sizing Limits
– MADS, 125% AADS, 10% issue
– Funding limit: 10% of issue
• “Reasonably Required”
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Rebate – Basic Rules
• Rebate- - Can you keep it?
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Small Issuer Exception
6 month Exception (includes refundings)
18 Month Exception
2-Year Construction Exception
• Calculation Periods
• Yield Reduction Payments
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Rebate – Basic Rules
• Rebate- - Can you keep it?
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Small Issuer Exception
6 month Exception (includes refundings)
18 Month Exception
2-Year Construction Exception
• Calculation Periods
• Yield Reduction Payments
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Voluntary Closing Agreement Program
• If ongoing post-issuance compliance efforts
have not prevented violation of rules
applicable to qualified 501(c)(3) bonds,
voluntary closing agreement program
(“VCAP”) is available in some situations
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CONCLUSION
Where Do We Go From Here?
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I. Bond Audit
A. Take Stock of Existing Bond Financings
and Potential Issues
► May involve an outside consultant
B. Addressing of Issues Discovered
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II. Ongoing Compliance Program
A. Designate Responsibility for Monitoring
Compliance with Conditions Required
to Maintain Tax Exemption of Interest
on Bonds
► May be internal responsibility, external
responsibility or combination
► Centralized responsibility
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B. Rebate/Spend-Down Monitoring
C. Tracking of Bond Proceeds
► Must know how bond proceeds were
spent, what portions of facilities
bond-financed
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D. Review of Management Contracts/Research
Agreements by Bond Counsel to Ensure
Compliance with Qualified Management
Contract Rule
E. Special Care for Investment of Bond
Proceeds to Address IRS Concerns With
Yield-Burning
► Involve Bond Counsel in process of
bidding GICs
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F. Keep Records With Respect to Expenditures
and Investment of Bond Proceeds Until
3-6 Years Following Retirement of Bonds
► Don’t rely on others for record-keeping
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Presenters’ Information
Matthias Edrich and Erick Stowe
Peck, Shaffer & Williams LLP
Suite 1700
1801 Broadway
Denver, Colorado 80202
(303) 296-3996 Main
(877) 296-0333 WATTS (Toll Free)
(303) 296-0344 Facsimile
[email protected]
[email protected]
www.peckshaffer.com
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