Read the following for a good description of the Pease limitation on deductions established under I.R.C. 68: https://www.scottkays.com/article/2015/04/09/pease-limitation-explained
Section 301.7701-4(c)(1) of the regulations (part of the “Sears Regulations”) provides that an investment trust that has multiple classes of ownership interests is ordinarily classified as a business entity under section 301.7701-2. An investment trust that has multiple classes of ownership interest, however, is classified as a trust for tax purposes if (1) there is no power under the trust agreement to vary the investment of the certificate holders, and (2) the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interest is incidental to that purpose.
See TAM 200512020, describing the use of a trust purportedly to accomplish the stripping of interest from underlying securities. The trust, through a side agreement, provided multiple classes of ownership interest.
Why are trust arrangements that are commonly used in connection with certificated municipal lease financings not classified as business entities under the Sears Regulations? See Announcement 84-62 (Jan. 1, 1984). Although a “grantor trust” is used in these financings, the grantor trust rules are not applicable. The IRS announced in Ann. 84-62 that the multiple-class investment trusts do not apply to certain state and local government financing arrangements. “The financing arrangements, which are an alternative to the direct issuance of serial and/or term obligations by state and local government obligors, are used to satisfy exceptions to debt limitations imposed under state law. […] The substance of these financing arrangements is the same as if a state or local government obligor directly issued a series of separate debt obligations. Under such arrangements, the trustee serves in the same capacity as an indenture trustee in a typical secured bond issue by making payments from the state or local government obligor to the COPs owners.” Darrell R. Larsen, American Bar Association, Secondary Market Tax-Exempt Asset Securitization for Sponsors, Investors, Other Market Participants and their Counsel.
Private Business Contribution Requirement
Under Section 54E(a)(3)(B), the issuer must certify that it has written assurances that the “private business contribution” requirement will be met with respect to the academy. The private business contribution requirement is described in Section 54E(b) of the Code. Under that section, the requirement is met with respect to any issue if the eligible local education agency that established the qualified zone academy has written commitments from private entities to make “qualified contributions” having a “present value” (as of the date of issuance of the issue) of not less than 10% of the “sale proceeds” (see Treas. Reg. 1.1397E-1(a)(2)(ii)(B)) of the issue.
A “qualified contribution” is any contribution (of a type and quality acceptable to the eligible local education agency) of:
- equipment for use in the qualified zone academy (including state-of-the-art technology and vocational equipment);
- technical assistance in developing curriculum or in training teachers in order to promote appropriate market driven technology in the classroom;
- services of employees as volunteer mentors;
- internships, field trips or other educational opportunities outside the academy for students; or
- any other “property” or service specified by the eligible local education agency.
Treas. Reg. 1.1397E-1(c)(3) explains that cash received with respect to a qualified zone academy from a private entity (other than cash received indirectly from a person that is not a private entity as part of a plan to avoid the requirements of section 1397E [and 54E]) constitutes a “qualified contribution” only if it is to be used to purchase any property or service described in the list above. Services of employees of the eligible local education agency do not constitute qualified contributions.
To determine the present value (as of the date of issuance of the issue) of qualified contributions from private entities, the issuer must use a “reasonable” discount rate. The credit rate is a reasonable discount rate.
I.R.C. 1397E applies to obligations issued on and before October 3, 2008. That section provides a five-year expenditure requirement for 95 percent of the sale proceeds of the bonds. If less than 95 percent are spent by the end of five years, the issuer must redeem nonqualified bonds.
Can QZABs be refunded on a current refunding basis? See Treas. Reg. 1.1397E-1(h)(9)(i). Except in certain interim refinancing circumstances, it appears that refundings, even on a current refunding basis, are not permitted. See also Section 6.4 of Notice 2010-35 regarding refundings of qualified tax credit bonds that are direct pay bonds.
See Notice 2015-11 for a summary of volume cap amounts available for QZABs, including the new volume cap for 2014. See Notice 2016-20 for guidance regarding volume cap for 2015 and 2016. Volume cap may be carried forward for two years. As described in the notice, QZABs may no longer be issued as direct pay bonds.
See Joint Committee on Taxation report of 2011 regarding a description of the changes from I.R.C. 1397E to I.R.C. 54A and I.R.C. 54E.
FAQ | QZAB from the Department of Education.
Volume Cap Allocations
According to statements by Aviva Roth (who, as of May 2010 is no longer at TEB) at the 2009 Bond Attorneys Workshop in Phoenix, QSCB allocations from the IRS to large local school districts cannot be carried forward by such large local school districts. The allocations must be transferred to the state. The state will then be able to carry forward the allocation. Section 54F(e) of the Code states that an allocation to the State may be carried forward to a subsequent year if not used. It is not sure how such allocation carryforward is put into practice.
All QSCB expenditures after costs of issuance (not exceeding two percent) must be used for capital expenditures for construction, rehabilitation or repair of the school facility or to acquire land on which the facility is to be constructed with proceeds of the QSCBs. In a separate publication (Notice 2009-35) and also in an IRS Q&A from 2010 (http://www.irs.gov/pub/irs-tege/tc_and_stcb_q-a._09-07-10_1.5.pdf), the IRS has indicated that QSCB proceeds can also be used for “equipment or furniture” so long as the equipment of furniture is used in the portion of the public school facility that is being constructed, rehabilitated or repaired with part of the QSCB proceeds.
Bonds that refund QSCBs (or reissued bonds) will not retain the status as qualified tax credit bonds. Legislation or guidance will be needed to determine whether, e.g., a current refunding bond can remain a QSCB. The statute and notices provide that refundings are not permitted purposes for QSCBs (except in very limited cases).
Disallowance of Deduction in Certain Cases and Special Rules
Under I.R.C. 170(f)(8), no charitable deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a “contemporaneous written acknowledgment” (CWA) of the contribution by the donee organization. This CWA is typically the letter provided by the entity receiving the donation.
A CWA must meet certain content requirements and be provided contemporaneously, which means on or before the earlier of (a) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (b) the due date (including extensions) for filing the return.
There is a statutory exception to the CWA rule – which means the CWA does not need to be provided if the exception is met. The exception, however, relies on regulations to be promulgated.
Regulations were proposed (REG-138344-13) with respect to this exception, but were criticized as being too burdensome and requiring reporting that could disincentivize charitable giving. The regulations would have permitted the donee organization to report the donation on the donee’s Form 990. The proposed regulations were withdrawn in January 2016. Unless other regulations are substituted, the statutory exception to CWA cannot be used.
Private Letter Rulings
PLR 201425013: Two exemptions revoked or denied. A 501(c)(4) organization renting tables and chairs is not eligible for exempt status. A 501(c)(6) benefitting only one industry segment is not eligible for exempt status.
PLR 201507025 (Nov. 18, 2014): IRS issued final adverse determination revoking Code Sec. 501(c)(4) org.’s exempt status, where org. didn’t operate exclusively for promotion of social welfare. The activities of the organization were to research, develop and distribute, free of charge, computer software that facilitates uncensored and secure communications by human rights activists, journalists, and civil society.
Notice 2015-83 modified Notice 2012-48 regarding the process for allocation of the available amount of national bond volume limitation authority for tax-exempt tribal economic development bonds under I.R.C. § 7871(f). The notice provides a special rule for bonds issued under a “draw-down” loan structure in which the lender advances funds for the loan on different dates. The notice allows additional time to use allocated volume cap for issuance of draw-down bonds if the issuer meets certain requirements.