Peck, Shaffer & Williams LLP 1 Federal Income Tax Issues Matthias Edrich Erick Stowe January 30,...
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Transcript of Peck, Shaffer & Williams LLP 1 Federal Income Tax Issues Matthias Edrich Erick Stowe January 30,...
Peck, Shaffer & Williams LLP
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Federal Income Tax Issues
Matthias Edrich
Erick StoweJanuary 30, 2009
Peck, Shaffer & Williams LLP
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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
Peck, Shaffer & Williams LLP
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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.
Peck, Shaffer & Williams LLP
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Issuers
• State or Local Governmental Issuer– State, D.C., Possession or Political Subdivision– On Behalf Of/Constituted Authority– 63-20 Issuers– Indian Tribal Governments– Other
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Debt
– 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– 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 WharvesMass CommutingEnvironmental Enhancement of Hydroelectric Facilities
• Residential Rental FacilitiesWater FurnishingSewage FacilitiesSolid Waste FacilitiesLocal Furnishing of gas or electricityLocal District Heating or CoolingQualified Hazardous Waste FacilitiesHigh Speed Intercity Rail FacilitiesPublic Educational FacilitiesEnterprise 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– 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?– 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?– 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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A. Take Stock of Existing Bond Financings and Potential Issues ► May involve an outside consultant
B. Addressing of Issues Discovered
I. Bond Audit
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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
II. Ongoing Compliance Program
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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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Matthias Edrich and Erick Stowe
Presenters’ Information
Peck, Shaffer & Williams LLPSuite 17001801 BroadwayDenver, Colorado 80202
(303) 296-3996 Main(877) 296-0333 WATTS (Toll Free)(303) 296-0344 Facsimile
www.peckshaffer.com