Fees vs. Taxes

December 27, 2015

General Resources:

Colorado Union of Taxpayers Foundation v. City of Aspen (http://www.cobar.org/opinions/opinion.cfm?opinionid=9983&courtid=1):  Whether a $0.20 per bag fee imposed by stores is an unvoted tax or fee.  The court of appeals determined that the fee is a fee that does not violate constitutional debt limits because the primary purpose of the fee was to reduce waste, and the majority of the revenues was used to provide reusable bags to residents and visitors.  No part of the balance of the revenues was deposited to the City’s general fund for general governmental use.

Voluntary Closing Agreement Program (VCAP)

April 8, 2015

Scope of the VCAP Program

Under TEB VCAP, an issuer may request a closing agreement with respect to its bonds to resolve violations of sections 103, 54, 1397E, 1400N and related provisions of the Code. TEB VCAP is not available when:

  1. Absent extraordinary circumstances, the violation can be remediated under existing remedial action provisions or tax-exempt bond closing agreement programs contained in regulations or other published guidance.
  2. The bond issue is under examination. A bond issue is generally treated as under examination on the date a letter opening an examination on the bond issue is sent.
  3. The tax-exempt status of the bonds or qualified status of tax credit bonds is at issue in any court proceeding or is being considered by the IRS Office of Appeals.
  4. The Service determines that the violation was due to willful neglect.


Notice 2008-31 provides general information about the TEB VCAP.

I.R.M. 7.2.3 provides administrative information concerning the requirements for submitting the VCAP request.

Form 14429 is the form that is to be submitted as a cover letter to the VCAP request.

Certain Stock Purchases Treated as Asset Acquisitions (I.R.C. 338)

December 14, 2014

See also http://www.alliedbizgroup.com/resources/publications/asset-sale-vs-stock-sale.html.

See also http://www.bizquest.com/resource/basic_deal_structures__stock_purchase_vs_asset_p-23.html.

Instrumentality (Rev. Rul. 57-128)

June 13, 2014


The status of an entity as an “instrumentality” of a state or local governmental unit is relevant for the following purposes:

  • I.R.C. 141:  Private activity bonds test (see Treas. Reg. 1.141-1(b) definition of “governmental person”);
  • I.R.C. 170:  Deductions for contributions and gifts to or for the use of a state, a possession or any political subdivision of the foregoing (see I.R.C. 170(c)(1)) or an instrumentality of a state or an instrumentality of a political subdivision of a state if the contributions are made for exclusively public purposes (see Rev. Rul. 75-359);
  • I.R.C. 3121(b)(7) and 3306(c)(7):  Federal Insurance Contribution Act (FICA) taxes on the wages paid by an employer to employees with respect to employment.

The term “instrumentality” is not defined in the Code or regulations.

Revenue Ruling 57-128 sets forth the following factors to be taken into account in determining whether an entity is an instrumentality of one or more governments:

  1. Whether the organization is used for a governmental purpose and performs a governmental function;
    •  See GCM 39683 relating to a state bar association.  An entity may still be an instrumentality even if it performed private functions in addition to governmental functions.
  2. Whether the performance of the organization’s functions is on behalf of one or more states or political subdivisions;
    • See GCM 39683.  If the activities serve governmental functions as well as private functions, it is not clear whether the performance of those functions is on behalf of the state.
  3. Whether there are private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner;
  4. Whether control or supervision of the organization is vested in public authority or authorities;
    • See GCM 39683.  Control of purse strings may be insufficient if the control exists merely to ensure that expenditures are within the purposes of the act creating the entity.  However, appointment by Texas Supreme Court of members of the state bar means power to control is vested in a public authority.
  5. Whether express or implied statutory or other authority is necessary or exists for the creation and/or use of the organization; and
    • Does the entity need statutory authority to conduct its functions?  For example, to reprimand members or bring disbarment proceedings, in the case of GCM 39683 and the state bar.
  6. The organization’s degree of financial autonomy and the source of its operating expenses.

These criteria were developed under I.R.C. 3121(b)(7) and 3306(c)(7) which exclude from the definition of “employment” services performed in the employ of a state, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned thereby.

The status of an entity as an instrumentality does not automatically mean that the entity is also an on-behalf-of issuer (Click link to view topic) for purposes of I.R.C. 103(c)(1).  On-behalf-of issuer status is tested based on “constituted authority” status under Rev. Rul. 57-187 or on-behalf-of status under Rev. Proc. 63-20.  There are some PLRs in which the entity at issue is both an instrumentality (usually for purposes of proving that the entity is a governmental purpose of the private activity bond test) and an on-behalf-of issuer.

Rulings and Resources:

GCM 36088 (Nov. 18, 1974):  Whether a contribution for exclusively public purposes to a wholly-owned instrumentality of a state or of a political subdivision is a contribution to rather than merely for the use of such state or political subdivision for the purposes of I.R.C. 170(c)(1) and, therefore, is subject to the 50 percent limitation on deductions for contributions by individuals under I.R.C 170(b)(1)(A).  The memorandum distinguishes between wholly owned instrumentalities and integral parts of states or political subdivisions to hold that gifts to the later are gifts “to” the state or political subdivisions.

Rev. Rul. 75-359: Deductions for contributions and gifts.  I think this is the ruling described and revised by GCM 36088.

GCM 36781 (Jul. 6, 1976):  Whether the entity is conducting a governmental function. The entity is an urban league that is organized to aid in the development of a secure and exemplary American democracy by assisting communities to ameliorate conditions and to solve problems arising out of racial inequities within the American community and to work on problems and opportunities in the fields of job development and employment, education and youth incentives, housing, and health and welfare and that is exempt from federal income taxes under the 1954 Code as a 501(c)(3).  GCM concerned the exemption from federal excise taxes on communication services. [Not particularly helpful to common 103-related instrumentality fact patters.]

GCM 39683 (Jun. 14, 1987):  Whether the bar association is performing a governmental function.  Memorandum relates to unemployment tax liability.  Under Section 3306(c)(7), employment does not include services performed in the employ of a state, a political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned y one or more states or political subdivisions, and any service performed in the employ of any instrumentality of one or more states or political subdivisions to the extent that the instrumentality is, with respect to such services, immune under the Constitution of the Untied States from the tax imposed by Section 3301.  General Counsel concludes that the state bar is not a political subdivision because it does not possess any sovereign powers.   The powers to investigate and prosecute grievance actions and unauthorized practice suits are not traditional governmental powers but rather are customary powers of professional associations.  Then, General Counsel concludes that the bar is not a public corporation in the constitutional sense.  At least part of the purposes, functions and activities of the state bar are private and not governmental in nature, including encouraging cordial intercourse among its members, the protection of the professional interests of the members, etc.

PLR 200026013:  Concerns the status of the Authority as an instrumentality for purposes of I.R.C. 141 private activity bond tests, applying Rev. Rul. 57-128.  Authority is a membership corporation.  Members are all political subdivisions.  Persons serving on the board are required to be officers or employees of the members.  Each member has the power to remove (with or without cause) any of the directors that it appointed.  A removed director’s successor is appointed by the member that removed the director to serve the unexpired term.  The entity’s purpose is to coordinate the operation of electric generation resources.  The entity receives funding from its members.  The entity submits financial reports to its members.  No net earnings of the Authority may be paid or inure to the benefit of any private person.  Upon dissolution, any assets remaining after the entity satisfies its obligations are distributed ratably to its members.

PLR 200225010:  The issue addressed in this ruling is whether an Authority, which is a joint venture between tribes, is an “instrumentality” (within the meaning of Rev. Rul. 57-128) of its governmental/tribal members and therefore a “governmental person” for purposes of the private activity bond tests.

PLR 200510016: Whether (1) the Association’s income is exempt from taxation under I.R.C. 115, (2) the Association is an instrumentality for purposes of I.R.C. 3121(b)(7) and 3306(c)(7), under Rev. Rul. 57-128 and (3) the contributions made to the Association are deductible by the donors as charitable contributions under I.R.C. 170(c)(1).  Association was created by City for the purpose of carrying out the promotion of tourism for the City.  By promoting tourism in the City, the Association will contribute to the economic development of the City through increased tourism and visitation to the City and will increase the expenditure of tourist dollars at local businesses.

PLR 200524015:  That (1) Agency and Agency’s Subsidiary are instrumentalities under Rev. Rul. 57-128 for purposes of the private activity bond tests, (2) income of Agency and Agency’s Subsidiary is excludable from gross income under I.R.C. 115(l) and (3) Agency’s use of bond proceeds will not constitute use meeting either the private business tests of I.R.C. 141(b) or the private loan tests of I.R.C. 141(c).  Agency was formed by governmental entities to perform the functions of, or to carry out the purposes, of its members with a view towards maximizing the efficient acquisition, management and delivery of natural gas supplies and reducing operating costs of its members. (Keyword: Piggybacking Instrumentality.)

PLR 200718002:  A System is an instrumentality of the County under Rev. Rul. 57-128 for purposes of the private activity bond rules of I.R.C. 141 (i.e., the bond-financed facility is therefore used by a governmental person and not a private business user) as well as an on-behalf-of issuer (constituted authority under Rev. Rul. 57-187) of the County for purposes of issuing tax-exempt bonds (i.e., the System could issue tax-exempt bonds on behalf of the County).  County Board created System as a public corporation that will operate as a subsidiary of County to provide health care and related services to the general public and related education and research programs.  System is required to provide services to persons who are indigent.

PLR 200736022: [To come]

PLR 200836005:  Issues include (1) whether the entity’s income is exempt from taxation under I.R.C. 115, (2) whether the entity qualifies as an instrumentality for purposes of making charitable contributions to the entity under I.R.C. 170(c)(1) and (3) whether interest on bonds issued by the entity are excludible from gross income because the entity is a constituted authority under Rev. Rul. 57-187.

PLR 201220005, February 3, 2012:  Public corporation established to support state’s schools for the vision and hearing impaired qualifies as an “instrumentality of the state” contributions to which are deductible under I.R.C. 170(c)(1).

PLR 201308010 (Nov. 20, 2012):  The Internal Revenue Service applies the six factors in Rev. Rul. 57-128 to economic development corporations created by City.  Ruling relates to determining whether services provided to the corporations are “employment” under FICA.

PLR 201411018 (Aug. 9, 2013):  The Internal Revenue Service applies the six factors in Rev. Rul. 57-128 to a state university or community college and concludes that the university/college is an instrumentality of the state for purposes of I.R.C. 141 private activity bond tests and is eligible to receive charitable contributions under I.R.C. 170(c)(1) (“A state, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes”).


Debt vs. Equity

April 29, 2013

(This post will be updated from time to time, as needed.  Many of my readers are likely to have more and better insight into specific debt versus equity matters regarding bonds.  If you have any comments, please leave a comment using the “reply” feature below.)

General Information

debt-consolidation-funny-pictureWhether an obligation is considered debt for federal income tax purposes depends on the terms of the obligation instrument and all surrounding facts and circumstances.  In Notice 94-47, the Internal Revenue Service describes several factors listed below that may be considered in making this determination.  No particular factor is conclusive in making a determination of whether the obligation constitutes debt or equity, and the weight given to any factor depends on the facts and circumstances and the overall effect of an instrument’s debt and equity features.

  1. Whether there is an unconditional promise on the part of the issuer to pay a sum certain on demand or at a fixed maturity date that is in the reasonably foreseeable future (“yes” indicates debt);
  2. Whether holders of the instruments possess the right to enforce the payment of principal and interest (“yes” indicates debt);
  3. Whether the rights of the holders of the instruments are subordinate to the rights of general creditors (“no” indicates debt);
  4. Whether the instruments give the holders the right to participate in the management of the issuer (“no” indicates debt);
  5. Whether the issuer is thinly capitalized (“no” indicates debt);
  6. Whether there is identity between holders of the obligations and stockholders of the issuer (“no” indicates debt);
  7. The labels placed upon the instruments by the parties;
  8. Whether the instruments are intended to be treated as debt or equity for non-tax purposes, including regulatory, rating agency or financial accounting purposes.

Notice 94-47 was issued in part to address transactions being completed in which the obligations were structured to look like debt for federal income tax purposes but as equity for regulatory, rating agency or financial accounting purposes (see factor 8 above).  Rev. Rul. 85-119, 1985-2 C.B. 60 was used as authority or guidance in treating such obligations as debt.  The IRS cautions that the ruling should be analyzed narrowly and indicates that it does not feel bound by any arrangements that do not mirror the facts in the ruling.

See also L. Howard Adams, “What Role for Equity in Applying Factors for Distinguishing Debt?,” Tax Notes, March 4, 2013, for a good discussion of factors relevant to determining the debt/equity status of obligations.

Excludable, Includable, Included

January 1, 2013


Statements in transaction documents oftentimes include covenants that are triggered when interest on bonds is no longer excludable from gross income for federal income tax purposes of the registered owners of the bonds.  The covenants may frequently be stated in the inverse – such that the covenant is triggered when interest is included or even includable in gross income.  Is it critical that such covenants be written in terms of interest not being excludable from rather than being included or includable in gross income?


I.R.C. 103(a) states that gross income does not include interest on any State or local bond.  The inverse of this statement would be that interest is included in gross income.  This suggests that the proper phraseology of tax covenants ought to refer to inclusion in gross income.

The use of the term “included” means that interest is actually included in gross income.  This term is appropriate only if there are no other circumstances outside of I.R.C. 103 and 141 to 150 that would not prevent such inclusion.  If there are other circumstances, those circumstances may invalidate the effect of the meaning of the covenant.  For instance, even though an event may have happened that, under I.R.C. 103, causes the inclusion, the default condition technically goes away if, under another provision of the Code, interest is excluded.  Under what circumstances could interest be excluded from gross income for federal income tax purposes outside of the I.R.C. 103 realm?  I.R.C. 149(c) suggests that there are no other sources of exemption.  For bonds issued after 1983, this section of the Code provides that the exemption requirements under Part IV (Tax Exemption Requirements for State and Local Bonds) must be satisfied as a condition to exemption.

Use of the term “includable” suggests that there is some discretion in including the interest.  As discussed above, there are no other actual sources of exemption from federal income tax of interest on State or local bonds.  Therefore, if interest is not excluded under I.R.C. 103, interest is absolutely included (versus “includable”) in gross income.

There does not appear to be a meaningful difference in phrasing a covenant using the term “included” or “excludable.”

Protected: Audit of Village Center Community Development District Bonds

November 3, 2012

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