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ORRICK TAX TALK

What Every Issuer and Borrower Needs to Know
About State and Local Municipal Bonds

A new educational video series by Orrick, the parent firm of BLX, focusing on the tax-exempt bond rules and the related complexities

In the series of eleven videos, Orrick Tax Partners Ed Oswald and Larry Sobel discuss the tax rules and regulations relevant to issuers and borrowers of tax-exempt bonds.

For a preview of the Tax Talk video series, please watch below.

To access the videos, simply click on the topic you wish to view:

1. The ABC’s of Governmental Bonds

This video provides an introduction to governmental bonds, including who can issue governmental bonds, what types of projects may be financed with governmental bonds, and other basic tax rules relating to governmental bonds.

2. The ABC’s of 501(c)(3) Bonds

In this video, Orrick’s Ed Oswald and Larry Sobel discuss the ABCs of 501(c)(3) Bonds. 501(c)(3) bonds are a popular category of financing used in healthcare, education, and cultural institution financings under a conduit loan structure. The video includes a discussion of the additional regulatory requirements for 501(c)(3) bonds not otherwise applicable to governmental bonds.

3. Private Business Use

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Private Business Use. Under IRS regulations, tax-exempt bonds are subject to strict private business use limitations which vary depending on whether the bonds are governmental bonds or 501(c)(3) bonds. The discussion covers certain uses and activities that frequently occur in tax-exempt bond financed facilities and the private business use implications of such activities. In addition, certain exceptions to the private business use rules are reviewed.

4. Private Payments

In this video, Orrick’s Ed Oswald and Larry Sobel discuss the Private Payment, Private Security Test. This test is one of the more complex rules regarding tax-exempt bonds and looks at all payments, both direct and indirect, by private parties that may be a user of the bond-financed facility. The discussion covers the limitations set forth in Treasury regulations regarding the amount of debt service on the bonds that may be secured by payments and/or securities of the private user.

5. Management Contracts

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Management Contracts. It is very common for organizations to outsource certain activities to non-employee based service providers that can perform the services in a more efficient way. Outsourcing is not a problem provided that the contract meets certain IRS safe harbor rules. Structuring management contracts to be safe harbor compliant is important for issuers and borrowers of tax-exempt debt, in order to avoid generating private business use. Ed and Larry review the safe harbors currently available to organizations until August 2017 (after which date new safe harbor requirements will apply) and describe the types of contracts that do and that do not create private business use.

6. Sponsored Research Contracts

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Sponsored Research Contracts. With increasing frequency, colleges and universities, medical schools, and hospitals are undertaking more research for outside parties such as industry members or the federal government, or "sponsored research." Third parties are approaching these institutions because they have the capital facilities and expertise to perform the research that is being required. Research sponsored by an outside party can give rise to private business use if it does not satisfy one of the two allowable safe harbors provided by the IRS because the contract will be viewed as providing special legal entitlement to the sponsoring party. Ed and Larry review the safe harbors available and discuss how to measure or calculate private business use with respect to sponsored research contracts.

7. Private Activity Bonds

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Private Activity Bonds. Private activity bonds are a specific type of municipal bond where the proceeds (and the facilities financed with those proceeds) are used by private entities instead of being used by a governmental unit. Private activity bonds include qualified 501(c)(3) bonds, exempt- facility bonds, single-family mortgage revenue bonds, small-issue manufacturing facility bonds, student loan bonds, qualified redevelopment bonds, and enterprise zone facility bonds. In this video, Ed and Larry discuss the characteristics of and restrictions related to private activity bonds.

8. Tax Credit Bonds

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Tax Credit Bonds. Unlike traditional tax-exempt bonds, the interest on which is excludable from federal taxable income, tax credit bonds are a type of taxable bond that offers the holder a federal tax credit on one or more of the quarterly credit allowance dates. Tax credit bonds are used for school financings and renewable energy, with the general thinking that these 2 areas should receive a deeper subsidy than traditional tax-exempt bonds, and can be powerful tool under the right circumstances. Watch this video to learn more about the subsidies and restrictions relating to tax credit bonds.

9. Post-Issuance Tax Compliance

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Post-Issuance Tax Compliance. Post-issuance tax compliance is a concept that deals with certain regulatory requirements that have been around for a long time but have only more recently been a primary focus of the IRS. These requirements relate mainly to how facilities financed with tax-exempt bonds are being used and are applicable over the term of the bonds plus the term of any refinancing. Because these are complex rules which are applicable for a long period of time, issuers and borrowers of tax-exempt debt will need to put in place an effective program to ensure compliance. Watch this video to learn about the components that should be part of a successful post-issuance tax compliance program.

10. Change in Use/VCAP

In this video, Orrick’s Ed Oswald and Larry Sobel discuss Change in Use and VCAP. Sometimes, an issuer or borrower of tax-exempt bonds may seek to change the use of bond financed property during the life of that property, which could include selling the property. This would constitute a "deliberate act" to move a bond finance property from compliant to non-compliant in relation to certain IRS rules. Certain "deliberate acts" are permitted, however, as long as the issuer or borrower takes advantage of certain self-help rules to help them fix the corresponding tax problem. Listen to this video to learn about self-help rules and the Voluntary Closing Agreement Program as related to change in use of tax-exempt bond financed property.

11. IRS Audits

In this video, Orrick’s Ed Oswald and Larry Sobel discuss IRS Audits. The IRS Tax-Exempt Bonds audit program is very active with 300-400 bond issues being audited at any time, with tax problems occurring in as many as 50% of the audits. These tax problems range from major to minor violations and issuers and borrowers should formulate informed responses when dealing with the IRS during an audit. Listen to this week’s video to learn more about the two types of Tax-Exempt Bonds audits: targeted (specific and unique to the transaction) and random (market segment approach, identifying certain types of deals or industries to focus on). In addition, Larry and Ed walk you through the process that issuers and borrowers can expect during and IRS audit of tax-exempt bonds.

If your organization utilizes tax-exempt bond financing, this series is relevant to you. Be sure to watch today to improve your organization’s best practices relating to tax-exempt bond compliance and to help safeguard against the risks associated with noncompliance.

WORKSHOP

Please join BLX and Orrick at our 5th annual Post-Issuance Compliance Workshop at the Vdara Hotel in Las Vegas, November 9-10, 2017. For additional details, please check our Post-Issuance Compliance Resources page.

For questions about the workshop or BLX, please email: rkronman@blxgroup.com or call 213 612 2465.

BLX Group  |  YOUR RESOURCE FOR POST-ISSUANCE COMPLIANCE

BLX Group does not offer legal services

© 2017 BLX Group

©2017 BLX Group