Taxable Advance Refundings (I.R.C. 149)

October 29, 2018

See Chief Counsel Advice 201843009 which concludes that “section 149(d), as amended by § 13532 of the 2017 Act, does not preclude the issuance of tax-exempt bonds to advance refund non-tax-advantaged, taxable bonds under the facts described below.  There will not be two sets of tax-advantaged bonds outstanding for the same project or activity.”

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General Rules Regarding Inclusion (I.R.C. 451)

September 29, 2018

September 28, 2018: Note that Notice 2018-80 announces the Treasury Department’s intent to not require current inclusion of market discount under I.R.C. 451(b). Market discount under I.R.C. 1276 is usually deferred until the bond is sold. Questions had arisen regarding the impact on this rule by the new provisions of 451 introduced as part of the TCJA.


Registration Requirement (149(a))

February 12, 2018

PLR 201806007 (Nov. 9, 2017):  A certain registration system of loans was deemed to be a book-entry system that satisfies the registration requirement of section 149(a) and is in registered form under section 5f.103-1(c)(1)(ii).


Opportunity Zones (I.R.C. 1400Z-1, etc.)

January 19, 2018

From the Senate Amendment summary stated in the Conference Report for the Tax Cuts and Jobs Act, H.R. 1:

The provision provides for the temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.

The provision allows for the designation of certain low-income community population census tracts as qualified opportunity zones, where low-income communities are defined in Section 45D(e). The designation of a population census tract as a qualified opportunity zone remains in effect for the period beginning on the date of the designation and ending at the close of the tenth calendar year beginning on or after the date of designation.

Governors may submit nominations for a limited number of opportunity zones to the Secretary for certification and designation. If the number of low-income communities in a State is less than 100, the Governor may designate up to 25 tracts, otherwise the Governor may designate tracts not exceeding 25 percent of the number of low-income communities in the State. Governors are required to provide particular consideration to areas that: (1) are currently the focus of mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity; (2) have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and (3) have recently experienced significant layoffs due to business closures or relocations.

The provision provides two main tax incentives to encourage investment in qualified opportunity zones. First, it allows for the temporary deferral of inclusion in gross income for capital gains that are reinvested in a qualified opportunity fund. A qualified opportunity fund is an investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property. The provision intends that the certification process for a qualified opportunity fund will be done in a manner similar to the process for allocating the new markets tax credit. The provision provides the Secretary authority to carry out the process.

If a qualified opportunity fund fails to meet the 90 percent requirement and unless the fund establishes reasonable cause, the fund is required to pay a monthly penalty of the excess of the amount equal to 90 percent of its aggregate assets, over the aggregate amount of qualified opportunity zone property held by the fund multiplied by the underpayment rate in the Code. If the fund is a partnership, the penalty is taken into account proportionately as part of each partner’s distributive share.

Qualified opportunity zone property includes: any qualified opportunity zone stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property.

The maximum amount of the deferred gain is equal to the amount invested in a qualified opportunity fund by the taxpayer during the 180-day period beginning on the date of sale of the asset to which the deferral pertains. For amounts of the capital gains that exceed the maximum deferral amount, the capital gains must be recognized and included in gross income as under present law.

If the investment in the qualified opportunity zone fund is held by the taxpayer for at least five years, the basis on the original gain is increased by 10 percent of the original gain. If the opportunity zone asset or investment is held by the taxpayer for at least seven years, the basis on the original gain is increased by an additional 5 percent of the original gain. The deferred gain is recognized on the earlier of the date on which the qualified opportunity zone investment is disposed of or December 31, 2026. Only taxpayers who rollover capital gains of non-zone assets before December 31, 2026, will be able to take advantage of the special treatment of capital gains for non-zone and zone realizations under the provision.

The basis of an investment in a qualified opportunity zone fund immediately after its acquisition is zero. If the investment is held by the taxpayer for at least five years, the basis on the investment is increased by 10 percent of the deferred gain. If the investment is held by the taxpayer for at least seven years, the basis on the investment is increased by an additional five percent of the deferred gain. If the investment is held by the taxpayer until at least December 31, 2026, the basis in the investment increases by the remaining 85 percent of the deferred gain.

The second main tax incentive in the bill excludes from gross income the post-acquisition capital gains on investments in opportunity zone funds that are held for at least 10 years. Specifically, in the case of the sale or exchange of an investment in a qualified opportunity zone fund held for more than 10 years, at the election of the taxpayer the basis of such investment in the hands of the taxpayer shall be the fair market value of the investment at the date of such sale or exchange. Taxpayers can continue to recognize losses associated with investments in qualified opportunity zone funds as under current law.

The Secretary or the Secretary’s delegate is required to report annually to Congress on the opportunity zone incentives beginning 5 years after the date of enactment. The report is to include an assessment of investments held by the qualified opportunity fund nationally and at the State level. To the extent the information is available, the report is to include the number of qualified opportunity funds, the amount of assets held in qualified opportunity funds, the composition of qualified opportunity fund investments by asset class, and the percentage of qualified opportunity zone census tracts designated under the provision that have received qualified opportunity fund investments. The report is also to include an assessment of the impacts and outcomes of the investments in those areas on economic indicators including job creation, poverty reduction and new business starts, and other metrics as determined by the Secretary.

(See the Conference Report for a further discussion.)

Novogradac has published an informative client alert regarding opportunity zones:  https://www.novoco.com/sites/default/files/atoms/files/client_alert_opportunity_zone_updated_011118.pdf

February 8, 2018, the Internal Revenue Service published Rev. Proc. 2018-16 describing procedures for designating Qualified Opportunity Zones.


Establishment Clause

October 14, 2017

Gaylor v. Mnuchin, DC Wisc. (Oct. 12, 2017):  “A federal district court has once again decided that the exemption for housing allowances provided to ministers under Code Sec. 107(2) violates the Establishment Clause. The court determined that the purpose and effect of the statute was to provide financial assistance to ministers without any consideration for similarly situated secular employees. Therefore, the statute has no secular purpose and could not be justified on secular grounds.” (CCH)


Overall Limitation on Deductions (I.R.C. 68)

June 10, 2017

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


Trust Classification (I.R.C. 7701)

April 18, 2016

General Discussion:

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.