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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. - PowerPoint PPT Presentation


  • Beginnings, Middles and EndsThe Tax Compliance Life Story of Your Bond Deal

    Daniel P. SmithDPS Legal Counsel

  • The Life Story of your Bond Deal is a Novel...Not a 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

  • Prologue

  • Private Letter Ruling 201114010

    Authority that owns municipal utility system qualifies as a political subdivision for purposes of section 103

  • 103 - state or local bonds1.103-1(a)-includes political subdivision1.103-1(b) - municipal corp. or delegated sovereign power (tax, eminent domain, police power)

  • Authority had all 3 sovereign powersAuthoritys eminent domain power not subject to approval or control of the City

  • Private Letter Ruling 201104020Authority created as public corporation to own piers, terminals and warehouse facilities does not qualify as a political subdivision.Authority also does not qualify as an on behalf of issuer

  • Authoritys eminent domain power was subject to consent of the City Council - not a political subdivisionRev. 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

  • This is the Double Whammy!

  • Management Agreement on municipal Exhibition and Convention facility does not result in private business use of the facilityPrivate Letter Ruling 201145005

  • Revenue Procedure 97-13 provides a safe harborTermCompensation MethodologyRelationship 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 analysisIncentive fee (revenue benchmark & net operating surplus/deficit benchmark)Term is 2 months longer than permissible 5 year term

  • BeginningsOnce upon a time, there was a bond issue . . .

  • Introduction of Characters

  • The Protagonist/Hero

  • Tax Counsel

  • The Trusted Sidekick

  • City/County Attorney

  • Antagonist/Villain

  • Setting the Stage for Action in The Tax Compliance Story of Your Bond Deal

  • Your Tax CertificateYour Tax ReturnYour Tax Records

  • Your Tax Certificate

  • 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 issuers expectations as of the issue date.Treasury Regulations Section 1.148-2(b)(ii) - Exceptions to certification requirementNo unspent gross proceeds other than BFDSF, orIssue price does not exceed $1 million

  • The two most important words in the Tax Certificate are . . .Two Words . ..



    And the reasonable expectations are about . . .

  • Private Use andArbitrage

  • Private UseVS.

  • 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).

  • And the reasonable expectations are also about . . .

  • Arbitrage

  • What is Arbitrage Anyway?Section 148 of the Code - For purposes of section 103, the term arbitrage bondmeans 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.

  • Its Really an Arbitrage CertificateTreasury Regulations Section 1.148-2(b)(2)(i) - An officer of the issuer responsible for issuing the bonds must, in good faith, certify the issuers expectations as of the issue date. The certification must state the facts and estimates that form the basis for the issuers expectations. The certification is evidence of the issuers expectations, but does not establish any conclusions of law or any presumptions regarding either the issuers actual expectations or their reasonableness.

  • A Reasonable Municipal Official =A Prudent Municipal Official An issuers 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 PrudenceThe issuers history of conduct concerning stated expectationsThe existence of covenants enforceable by bondholdersThe level of inquiry by the issuer into factual matters

  • Those Pesky Expectations AgainTreasury 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 issuers reasonable expectations as of the issue date regarding the amount and use of the gross proceeds of the issue.

  • After Your Tax Certificate comes . . .

  • Your Tax Return

  • Some Famous Returns

  • A Not-So-Famous Return. . . Hopefully

    Your Tax Return!!

  • IRS Information Returns Form 8038-GForm 8038-GCForm 8038

  • Miscellaneous Tax IssuesLine 39 - Section 265(b)(3)[BANK QUALIFICATION]Qualified Small IssuerNot a Private Activity BondDesignated by the Issuer

  • Line 40 - Penalty in lieu of arbitrage rebate

  • Line 43 - Written Procedures regarding non-qualified bondsHINT: YOU WANT TO BE ABLE TO CHECK THIS BOX!



  • Line 45 - ReimbursementSec. 1.150-2Official Intent60 Days

  • Read the Return!Under the penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. . .Bond Counsel signs the Return and sets forth his PTIN.

  • The 800 Pound GorillaWhat is his name?

  • Record Retention!

  • Existing Guidance?Not So MuchIRC Section 6001 - Every person liable for any tax imposed by this title, or the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules or regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

  • The Heavy HandIRC Section 7203 - Any person . . . required by this title or by any regulations made under the authority thereof to make a return, keep any records, or supply an information, who willfully fails to . . . keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with costs of prosecution.

  • Record Retention - RegulationsTreasury Regulations Section 1.6001-1(a) - Any person subject to [income] tax..., or any person required to file an information return with respect to income, shall keep such permanent records ... as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.

  • Section 1.6001-1(e) - Books and records required by this section shall be kept at all times available for inspection by authorized internal revenue off