Tax





MSRB: Understanding Taxable Municipal Bonds

Introduction

Taxable municipal bonds are a growing segment of the municipal bond market. Consider using this publication to learn a bit about them before you approach an investment professional and tax advisor to find out more.

Learn:

The meaning of “taxable” in taxable municipal bonds
Reasons why taxable municipal bonds are less common than tax-exempt bonds
Ways to use the free Electronic Municipal Market Access (EMMA®) website to locate and research public taxable municipal bonds

Get started:

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New IRS Priorities Include Student Loan Bonds, Form 8038-G.

The Internal Revenue Service on Monday announced new compliance priorities for tax-exempt bonds involving student loan bonds and yield restrictions on Form 8038-G for government-issued municipal bonds.

Monday’s announcement came at the halfway mark of fiscal 2021 after only one other priority — arbitrage violations — had been announced since the Oct. 1 start of the federal fiscal year.

The strategy for focusing on student loan bonds will determine if the Internal Revenue Code Section 144(b) requirements are met, the IRS said.

“Failure to satisfy these requirements could result in the interest on the bonds being taxable to the bondholders,” the service said. “The treatment stream for this strategy is examinations.”

The decision by the IRS to return to auditing student loans after focusing on that area years ago was described as an “interesting” by Christie Martin of Mintz Levin in Boston, chair of the National Association of Bond Lawyers tax law committee.

Matthias M. Edrich, a partner at Kutak Rock in Denver and another member of the NABL tax law committee, also said he was surprised “since this segment already went through an audit focus not too many years ago.”

“Yield restriction and arbitrage rebate matters that might relate to student loans would presumably already be incorporated in the yield restriction and arbitrage rebate focus points,” Edrich said. “Is the IRS intending to examine other student loan aspects now, beyond the arbitrage bond rules?”

The IRS said its audits of Form 8038-G will “review bond proceeds yield restrictions after the statutory temporary period to determine whether proceeds are restricted to the yield of the issue.”

“If the issuer fails to yield-restrict the investments after the temporary period, the bonds will be deemed arbitrage bonds and taxable,” the service said. “Additionally, the interest paid to the bondholders will be taxable.”

Late last year the IRS said its initial fiscal 2021 focus involved potential arbitrage violations of Internal Revenue Code Section 148 by the investment of bond proceeds in higher-yielding investments beyond the allowable temporary period under Treasury Regulation (Treas. Reg.)1.148-2(e).

At that time, the IRS said other priorities for tax compliance and enforcement involving municipal bonds would be released in quarterly updates on the webpage of the Tax Exempt and Government Entities Division-Compliance Programs and Priorities.

Edrich recalled that he was disappointed last November when the IRS released its fiscal year 2021 program letter with the only reference to tax-exempt bonds contained in the accompanying TE/GE strategic goals publication.

“At the time I remember being disappointed with the lack of details concerning tax-exempt bonds, compared to program letters from prior years,” he said. “I think it is useful that the IRS has now published additional information about its bond-related examination focus.”

The IRS also said Monday that it would continue its fiscal 2020 IRS enforcement and compliance priorities, which were public safety and jail bonds, sinking fund overfunding, and variable rate bonds.

In regard to public safety bonds, the IRS is determining whether federal government use and management contracts cause excessive private business use that adversely affects the tax-exempt status of public safety bonds.

Last last month the Santa Cruz County Jail District in Arizona filed a public notice that the IRS has made a preliminary determination that its 2017 tax-exempt refunding bonds should be treated as retroactively taxable.

The March 10 IRS letter said the jail refunding bonds meet the private business use and private payments test because part of the facility is under contract to house federal prisoners.

In regard to sinking fund over-funding, the IRS is focusing on whether over-funding caused the bonds to be arbitrage bonds, which negatively impacts their qualification as Tax Credit Bonds.

And for variable-rate bonds, the IRS is determining whether the issuances complied with the rebate and yield restriction rules under IRC Section 148, the bond and investment yields were properly computed and rebate or yield reduction liability (if any) was correctly determined.

The IRS audits involving the fair market value of open market securities are determining arbitrage violations under IRC Section 148, specifically as to the fair market value requirements for yield restricted defeasance escrows under Treasury Regulation 1.148-5(d)(6).

The Internal Revenue Service Tax-Exempt Bonds unit closed around 200 fewer examinations in fiscal 2020 than had been expected because of the interruption caused by the pandemic.

New examinations were suspended between March 2020 and last July because of COVID-19.

As a result, the TEB unit closed nearly 300 cases instead of attaining its earlier goal of around 500 cases.

The earlier goal had been cited in a presentation to the National Association of Bond Lawyers more than in 2019 but was not mentioned when the IRS announced its 2020 achievements earlier this year.

The exams that TEB did close involved a combination of “compliance strategies and referrals, claims and other casework,” the IRS said in the February summary published by Edward Killen, the acting commissioner for Tax Exempt & Government Entities group.

The majority of those cases — 170 — involved compliance strategies that “resulted in a written advisory to the bond issuer, including issues such as private business use and issuance costs,” the February statement said.

By Brian Tumulty

April 05, 2021

SOURCEMEDIA




IRS Tax Exempt & Government Entities – Compliance Program and Priorities

The Tax Exempt and Government Entities (TE/GE) Fiscal Year 2021 Program Letter lists our priorities and how those align with the IRS Strategic Goals.

In fiscal year 2021, we’ll continue to pursue our compliance program described in our FY 2020 Program Letter, and use this webpage to share information about other compliance program initiatives at the end of each quarter during the fiscal year. We will also share our findings from recently completed compliance program initiatives.

Here in TE/GE, we protect the public interest by applying the tax law with integrity and fairness to all. We continue to move toward issue-based examinations and a compliance program that focuses on high risk issues using one or multiple treatment streams. A treatment stream is a single or a combination of compliance actions that we will implement to achieve an initiative’s goal. The idea is to respond with the right treatment stream to maintain high compliance across the TE/GE filing population. This approach makes efficient use of IRS knowledge and deploys the right resources to address noncompliance issues.

Our compliance program involves a thorough analysis of data to support the identification and evaluation of a compliance issue, a deliberate consideration of potential treatment streams, decisions about the resources to be deployed, identification of training, and tools needed, as well as a robust feedback mechanism to ensure all elements of an initiative are continuously improved. Our compliance program consists of six components that work together to promote tax law compliance by tax-exempt and government entities.

Read more.




TAX - IDAHO

Hoffman v. City of Boise

Supreme Court of Idaho, Boise, January 2021 Term - March 23, 2021 - P.3d - 2021 WL 1093947

Taxpayers brought action challenging city ordinances allocating tax increment financing (TIF) revenues for city urban renewal agency’s use in urban renewal districts.

The Fourth Judicial District Court dismissed complaint, and taxpayer appealed.

The Supreme Court held that ordinances did not violate state constitution.

Provision of state constitution prohibiting political subdivisions from incurring debts for which they have not funds to pay, unless voters approve otherwise, is primarily designed to protect taxpayers and citizens of political subdivisions who would bear consequences of subdivision incurring excessive indebtedness.

City ordinances allocating tax increment financing (TIF) revenues for city urban renewal agency’s use for urban renewal projects authorized by Idaho Local Economic Development Act (LEDA) did not violate state constitution provision prohibiting political subdivisions from incurring debts for which they lacked funds to pay, even if it was possible that expenditures might require city to raise taxes in future; ordinances did not entitle agency to any TIF revenues unless (1) combined property values for year were assessed within renewal districts, (2) levy rate for year was applied to that value, and (3) revenue collected by levy exceeded revenue that would have been collected by levy on base assessment value.




TAX - NEW YORK

Herkimer County Industrial Development Agency v. Herkimer

Court of Appeals of New York - March 25, 2021 - N.E.3d - 2021 WL 1132175 - 2021 N.Y. Slip Op. 01835

County industrial development agency brought action seeking declaration that real property taxes levied against it by village to collect unpaid water rents were void.

Village counterclaimed, seeking judgment declaring that agency was personally liable to village for certain unpaid water rents incurred by manufacturer that was agency’s tenant pursuant to bond financing sale-and-leaseback transactions.

The Supreme Court, Herkimer County, granted village’s motion to dismiss. Agency appealed. The Supreme Court, Appellate Division, affirmed as modified, and agency appealed.

The Court of Appeals held that agency was not liable to village for unpaid water rents.

County industrial development agency was not liable to village for unpaid water rents incurred by manufacturer that was agency’s tenant pursuant to bond financing sale-and-leaseback transactions, where law applicable to subject property provided for a lien upon the real property, and not personal liability by the owner, and contrary to village’s argument, village rule regulating how water meters were used to register consumption did not impose an additional remedy for nonpayment.




TAX - CALIFORNIA

City of Torrance v. Southern California Edison Company

Court of Appeal, Second District, Division 3, California - March 17, 2021 - Cal.Rptr.3d - 2021 WL 1015875 - 21 Cal. Daily Op. Serv. 2447 - 2021 Daily Journal D.A.R. 2433

City brought action against electrical utility, alleging that utility miscalculated municipal tax on electrical usage by applying annual credit relating to state-wide greenhouse gas emissions policy to reduce consumers’ tax base, and seeking declaratory relief and an order compelling utility to comply with the electricity tax ordinance.

The Superior Court sustained utility’s demurrer without leave to amend and entered judgment of dismissal, and city appealed.

The Court of Appeal held that:

Municipal electricity users’ tax imposed on the “charges made for such energy” was imposed on amount utility charged for electricity consumed and any ancillary services, and thus annual IA credit relating to state-wide greenhouse gas emissions policy did not affect the electricity users’ tax base and utility could not deduct that credit before applying the tax; ordinance defined “charges” to include “charges made for 1) metered energy, and 2) minimum charges for service, including customer charges, service charges, demand charges, standby charges and annual and monthly charges,” and did not include any deduction for credits.

Electric utility was not liable to city for municipal electricity users’ taxes that had not been paid by its consumers due to utility’s collection of the tax after mistakenly applying annual IA credit relating to state-wide greenhouse gas emissions policy to users’ accounts; city ordinance stated that while any such tax collected from a service user which has not been remitted is a debt owed to the city by the person required to collect and remit, the tax itself was a debt owed by the service user.

City, which brought action against electrical utility regarding collection of municipal tax on electrical usage, was entitled to opportunity to amend complaint to assert claim for unpaid taxes against any consumer that had underpaid its electricity user’s tax due to utility’s incorrect tax base calculations, as well as any other viable claims or defenses.




House Bill Would Restore Advance Refunding Bonds.

Legislation that would bring back a type of tax-exempt bond popular with state and local governments has been reintroduced in the House.

The Investing in Our Communities Act, introduced March 29 by Reps. C.A. Dutch Ruppersberger, D-Md., and Steve Stivers, R-Ohio, would restore advance refunding bonds, which states and local governments use to pay for community projects. Advance refunding bonds were eliminated by the Tax Cuts and Jobs Act.

Ruppersberger and Stivers have introduced legislation to restore advance refunding bonds before. The most recent bill has 21 cosponsors.

“County and state governments have served on the frontlines of the COVID-19 pandemic, facing historic revenue losses amid unforeseen costs, while still cutting paychecks to our teachers, law enforcement and public health workers,” Ruppersberger said in a release. “We must do everything we can to help them invest in projects that improve our communities, create jobs and, ultimately, reduce the need to raise taxes.”

“Municipal financing makes so much of daily life possible; from highways to telecommunications towers, municipal bonds allow for the delivery of services and connections for millions of Americans,” Stivers said. “By enhancing the status of tax-exempt bonds, we’re empowering state and local governments, and saving taxpayer money along the way.”

Ruppersberger and Stivers co-chair the House Municipal Finance Caucus.

The Lifting Our Communities Through Advance Liquidity for Infrastructure (LOCAL Infrastructure) Act (S. 479), introduced February 25 by Sen. Roger F. Wicker, R-Miss., and Senate Finance Committee member Debbie Stabenow, D-Mich., would also restore advance refunding bonds.

Reviving the bonds has been a priority of municipal finance groups.

In testimony submitted recently to the House Ways and Means Select Revenue Measures Subcommittee, the Municipal Bonds for America Council, organized by the Bond Dealers of America, explained that advance refunding allows state and local government issuers to refinance — and consequently benefit from lower interest rates — when the outstanding bonds aren’t currently callable.

TAX ANALYSTS

by FRED STOKELD

POSTED ON MAR. 30, 2021




Two New Hotels Open Their Doors in Opportunity Zones.

This week, two new hotels opened their doors in Opportunity Zones. Hyatt House extended-stay hotel opened for business in downtown…

CONTINUE READING »

OpportunityDb

March 30, 2021




Post-COVID Opportunity Zone Investing, with Greg Genovese.

What can Opportunity Zone investors expect from post-COVID market conditions? And how have Qualified Opportunity Funds evolved since program inception?

CONTINUE READING »

OpportunityDb

March 31, 2021




GFOA Publishes Best Practices on Issuing Taxable Debt: Arent Fox

The Government Finance Officers Association’s (GFOA) Executive Board approved several best practices and advisories this month, including GFOA’s Best Practice on Issuing Taxable Debt.

A link to the best practices is here.

The GFOA Taxable Debt Best Practice cites the globalization of the capital markets, the elimination of tax-exempt advance refunding in the Tax Cuts and Jobs Act of 2017, and tax-exempt financing tax rules, including restrictions on private business use of bond-financed facilities as having led to increased taxable municipal debt issuances.

The Best Practices contains good, common-sense advice, including:

The GFOA Taxable Debt Best Practice is a quick read and a good basic framework for issuers to start from when considering issuing taxable debt. It bears noting that many municipal bond professionals are cautiously optimistic that a Federal infrastructure bill will include various bond-friendly provisions, including reinstating tax-exempt advance refundings. If such a provision were enacted, issuers would not only be able to advance refund bonds in a low interest rate environment, but depending on the facts, might once again be able to do so on a tax-exempt basis.

March 25, 2021

© Arent Fox 2021




TAX - FLORIDA

Clay v. Commissioner of Internal Revenue

United States Court of Appeals, Eleventh Circuit - March 16, 2021 - F.3d - 2021 WL 968621

Taxpayers, who were members of Miccosukee Native American tribe, appealed after the United States Tax Court sustained income tax deficiency determination that had been issued against them, arising from unreported income received from per capita tribal casino revenue payments.

The Court of Appeals held that:

Miccosukee Settlement Act, which provided that none of the moneys paid or land conveyed to tribe under Act or settlement agreement with United States would be taxable under federal or state law, did not exempt from income taxation per capita tribal casino revenue payments that taxpayers, who were members of Miccosukee Native American tribe, received from tribe, even though taxpayers interpreted Act to empower tribe to collect and distribute money to members without members including it in taxable income determination; Act unambiguously exempted from taxation only “moneys paid” and “land conveyed” under particular section of agreement, and even if Act were interpreted as providing indefinite tax exemption for lands conveyed under it or agreement, casino’s land was not conveyed under Act or agreement.

Per capita tribal casino revenue payments that taxpayers, who were members of Miccosukee Native American tribe, received from tribe were not exempt from income taxation as land lease payments, even though taxpayers argued payments stemmed from lease for use of tribe’s lands; no lease ever existed, and casino’s financial statements specifically confirmed that “no rental payment [was] currently required for use of” tribe’s land, and while taxpayers asserted that revenue from leasing of undeveloped tribal lands had always been considered tax exempt, they did not identify any statutory exemption for lease payments, and instead cited only to revenue rulings that were either unrelated to leases or mentioned “rentals” in irrelevant context.




Differentiating Approaches and Delivering Value in Opportunity Zones, with Jon White.

Why are shovel-ready projects so crucial to a multi-asset Qualified Opportunity Fund strategy? And how can a fund be structured in order to allow investment from self-directed QOFs at the project level?

Jon White is president and managing director at Larson Capital, a real estate-focused private equity firm headquartered in St. Louis.

Continue reading.

OpportunityDb

By Jimmy Atkinson

March 22, 2021




TAX - LOUISIANA

Balbesi v. Lafayette-City Parish Consolidated Government

Court of Appeal of Louisiana, Third Circuit - December 30, 2020 - So.3d - 2020 WL 7768414 - 2020-61 (La.App. 3 Cir. 12/30/20)

Utilities customers brought a class action petition for declaratory judgment and damages against city-parish consolidated government and Lafayette Utilities System (LUS), challenging the constitutionality of annual transfers of utility’s revenues to the government known as in-lieu-of-tax (ILOT) payments.

The District Court granted summary judgment in favor of defendants dismissing customer’s claims. Customers appealed.

The Court of Appeal held that:

The Lafayette Utilities System (LUS) was a revenue-producing public utility that was exempt from ad valorem taxes as contemplated by the state constitution, because it operated to provide a public service.

In-lieu-of-tax (ILOT) payments made by Lafayette Utilities System (LUS) to city-parish consolidated government were not de facto ad valorem taxes, even though the ILOT transfers were referred to in bond ordinances as payments-in-lieu-of tax, and/or because they were placed into the City General Fund along with other tax revenue; payments were made from revenue generated by the utility, and payments were in no way related to the value of any property.




TAX - CALIFORNIA

LA Live Properties, LLC v. County of Los Angeles

Court of Appeal, Second District, Division 3, California - February 26, 2021 - Cal.Rptr.3d - 2021 WL 752539 - 21 Cal. Daily Op. Serv. 1930 - 2021 Daily Journal D.A.R. 1937

Corporate taxpayer brought action against county, seeking refund of property taxes that were paid on escape assessments allegedly levied by county without proper notice.

The Superior Court entered judgment for county. Taxpayer appealed.

The Court of Appeal held that county’s failure to comply with statutory procedural notice requirement did not render the tax a legal nullity that would excuse taxpayer from administrative remedy exhaustion requirement.

County assessor’s failure to comply with statutory procedural requirement of issuing notice of proposed escape assessment for property taxes 10 days before enrolling the escape assessments, by mailing the notices just five days before enrolling the escape assessments on real property owned by corporate taxpayer, did not render the escape assessments legally null, and therefore, taxpayer was not excused from requirement that it exhaust its administrative remedies before filing action in court for a tax refund; county’s apparent failure to timely comply with notice requirement could have been reversed through prescribed administrative channels, and taxpayer was not entitled to reversal when it had not made use of those channels.




Maryland’s Digital Ad Tax Under Pressure from Big Tech.

As expected, the Maryland law that created an online advertising tax is facing legal opposition from lobbying groups backed by Amazon, Google and Facebook. The groups argue the law violates the commerce clause.

After overriding a veto from Gov. Larry Hogan in February, the Maryland Legislature enacted a bill that would make Maryland the first state to tax digital advertising. A little less than a month later, lobbying groups backed by tech giants, including Amazon, Google and Facebook, are suing the state to strike down the bill.

The tax, which applies to revenue from digital ads displayed inside the state, is based on companies’ ad sales. These ads include banner advertisements, search engine advertisements, interstitial advertisements and other advertising services.

Companies like Google, Amazon and Facebook, according to a report by Sidley Law Firm, would be impacted as follows:

Continue reading.

KATYA MARURI, GOVERNMENT TECHNOLOGY | MARCH 18, 2021




With Veto Override, Maryland Becomes First U.S. State to Enact Digital Advertising Tax.

Amidst significant economic and legal concerns, on February 12, 2021, the Maryland Senate joined the House in voting to override Republican Gov. Larry Hogan’s veto of House Bill 732 (HB 732) to adopt a Digital Advertising Gross Revenues Tax (Tax), the nation’s first tax targeting digital advertising. The override was successful despite significant pushback from a coalition of more than 200 businesses and Republican legislators who sought to sustain the veto. HB 732 is intended to provide significant revenues to support education reforms in the state.

The Tax is likely to affect large technology-based and online companies that derive revenue from advertisements on their websites and platforms (rather than companies deriving their revenues entirely from subscription services). Thus such companies, as well as their owners and sponsors, should carefully consider the information below and the impact of the Tax on their business models.

The Tax

The Tax is not a net income tax; rather, it is imposed on the “annual gross revenues of a person derived from digital advertising services in the state.”1 “Digital advertising services” include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”2 The determination of annual gross revenues derived from services in Maryland ultimately subject to the Tax is calculated based on a fraction that compares the annual gross revenues derived from digital advertising services in Maryland to the annual gross revenues derived from digital advertising services in the United States.3

The Tax is imposed on a graduated rate scale, based on the taxpayer’s global annual gross revenues, as follows:

Initial Observations and Considerations

Despite the passage of HB 732 by the Maryland General Assembly, a number of significant questions have been raised as to the legality and economic impact of the Tax

The Tax is intended to apply to large technology-based and online companies with advertising-based revenue models (as opposed to companies with subscription-based revenue models). Thus, pending the outcome of expected legal challenges, such companies, as well as their owners and sponsors, will need to consider the impact of the Tax on their business models and their potential tax obligations to Maryland, while at the same time protecting any and all refund opportunities should any of the expected legal challenges that have been and likely will be filed against the Tax in the coming weeks and months prove successful.

________________________________________________

1 Md. Code, Tax-Gen. § 7.5-102(a). Citations are to the sections as proposed in HB 732.
2 Md. Code, Tax-Gen. § 7.5-101(d).
3 Md. Code, Tax-Gen. § 7.5-102(b).
4 Md. Code, Tax-Gen. § 7.5-103.
5 On February 18, 2021, the U.S. Chamber of Commerce, the Internet Association, NetChoice, and the Computer and Communications Industry Association filed suit in federal court in Maryland, asserting that the Tax is “illegal in myriad ways and should be declared unlawful and enjoined.”
6 The potential proliferation of digital advertising taxes at the state level is especially interesting considering the recent conflict between the United States and France over France’s digital services tax, as well as the calls for global negotiations to create a uniform system governing taxation of digital services.

February 19, 2021

Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.

© Sidley Austin LLP




New Hampshire v. Massachusetts: Potential for Remote Working Tax Uniformity - K&L Gates

As the coronavirus (COVID-19) pandemic wears on, many companies that adopted emergency work-from-home or work-from-anywhere policies are considering allowing employees to work remotely permanently, even after the threat of the pandemic has subsided. Many states addressed the personal income tax implications for employees who commuted across state lines pre-pandemic by adopting temporary COVID-19 tax policies; however, states generally have not yet announced how they will treat for tax purposes the expected shift to a post-pandemic remote workforce.

Some states’ temporary COVID-19 policies provided that employees would continue to have personal income tax obligations where their offices are located (Office States), even if they worked exclusively from a different state during the pandemic (Work State) and even if they were forced to do so pursuant to lockdown orders. However, many of these measures were adopted on an emergency basis with no expectation that the restrictions on employees’ ability to commute would last so long or that the pandemic would provide the final push in some sectors toward long-term work-from-anywhere policies. As a result, it now appears that some of these measures may create significant future challenges: (1) arguably, policies like these violate constitutional principles by imposing tax obligations on nonresidents who are no longer performing services in the Office State; (2) from a policy perspective, these kinds of policies run the risk of double-taxing nonresidents (i.e., by subjecting them to income tax on the same income—in both the Office State and the Work State); and (3) the Work State could lose certain benefits to which it may be entitled because of the Office State’s policies, resulting in possible harm to the Work State’s economy or robbing the Work State of tax revenue that may rightly be due to the Work State.

In an attempt to seek definitive guidance on the constitutionality of certain taxes on remote workers, New Hampshire filed a claim in the Supreme Court of the United States (SCOTUS) to challenge Massachusetts’ COVID-19 policy of imposing Massachusetts income tax on New Hampshire residents who worked at offices in Massachusetts pre-pandemic but have been working remotely in New Hampshire during the pandemic.1 New Hampshire asserts that SCOTUS has original jurisdiction over the dispute.2 Although SCOTUS has not yet agreed to hear the case, SCOTUS requested a brief from the U.S. Solicitor General.3 If SCOTUS exercises original jurisdiction over the case, the decision could address the constitutionality of “convenience of the employer” rules (COTE rules) that certain states implemented prior to the COVID-19 pandemic.

NEW HAMPSHIRE V. MASSACHUSETTS
In mid-October, Massachusetts adopted an emergency regulation setting forth its COVID-19 tax policies regarding remote workers.4 The regulation features a “status quo” approach designed not to impose new tax obligations on employers or employees solely as a result of COVID-19 remote work policies but to continue enforcing the same obligations on both employers and employees as existed pre-pandemic.5 Though some may view Massachusetts’ “status quo” formulation as a simple solution for employers and employees, New Hampshire asserts that Massachusetts’ policy is unconstitutional even as an emergency regulation and would have ongoing detrimental impacts on New Hampshire and its residents if Massachusetts adopts the approach permanently.6

New Hampshire argues that Massachusetts’ emergency regulation violates both the Commerce Clause and the Due Process Clause of the U.S. Constitution.7 Further, New Hampshire asserts that the emergency regulation harms the state of New Hampshire because New Hampshire does not impose an income tax on its residents.8 Rather, New Hampshire explains that it derives certain benefits from not imposing an income tax on its residents, which include “on average, higher per capita income, lower unemployment, and a competitive edge in attracting new businesses and residents.”9 Not surprisingly, Massachusetts rejects New Hampshire’s claims that Massachusetts’ emergency regulation is unconstitutional. Massachusetts argues that it maintained the status quo regarding tax obligations and thereby avoided uncertainty and spared employers the additional compliance burdens that would have come from deciphering complicated new requirements in the midst of the pandemic.10 Further, the emergency regulation explicitly states that Massachusetts does not adopt its policies permanently.11

Several amicus briefs have been filed on behalf of New Hampshire supporting both its substantive claims as well as its request that SCOTUS exercise original jurisdiction in the case.12

CONVENIENCE OF THE EMPLOYER RULES
If SCOTUS decides to rule on the substantive issues in New Hampshire v. Massachusetts, its ruling may have implications not only on Massachusetts’ emergency regulation but also on states that have implemented COTE rules.13 States that have adopted such rules generally impose income tax on nonresidents who would be subject to the state’s income tax if working from their employer’s office but who are instead working remotely, such as at a Work State, for convenience rather than out of necessity.14 Although COTE rules existed in several states prior to the COVID-19 pandemic, the practical effect of COTE rules may cause increasing concern in light of the challenges and the paradigm shift toward remote work that the pandemic has caused, particularly in respect of the impact such rules can have on their neighboring states.15

New Jersey, Connecticut, Hawaii, and Iowa, in an amicus brief, generally agree with New Hampshire’s position that Massachusetts’ emergency regulation is unconstitutional. Further, they assert that such emergency regulation essentially emulates a COTE rule, which they argue is also unconstitutional because imposing COTE rules may cause a Work State to either (1) lose significant revenue streams as a result of granting a credit for its residents against taxes paid to other states (including Office States), or (2) force the Work State to double-tax the same income to avoid losing tax revenue to which the Work State is entitled.16 Thus, such aggressive policies impact not only Work States that, like New Hampshire, do not impose income taxes on their residents, but also Work States that do impose income taxes and that stand to lose revenue to neighboring Office States.17

Tuesday, March 9, 2021

Copyright 2020 K & L Gates

_________________________________________________

Footnotes

1 See generally New Hampshire v. Massachusetts, No. 22O154 (U.S. filed Oct. 19, 2020).

2 See id., Bill of Complaint for Plaintiff at 5.

3 See id. (indicating that SCOTUS invited the acting Solicitor General “to file a brief in this case expressing the views of the United States”).

4 The Massachusetts’ emergency regulation is effective until 90 days after the state of emergency in Massachusetts is lifted. As of the date of expiration, the guidance indicates that the policies adopted in light of the pandemic will cease to be in effect and “the presence of an employee in Massachusetts, even if due solely to a Pandemic-Related Circumstance … will trigger the same tax consequences as under Massachusetts law more generally.” See Mass. Dep’t of Rev., TIR-20-15: Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic (Dec. 8, 2020); see also 830 MASS. CODE REGS. § 62.5A.3.

5 See 830 MASS. CODE REGS. § 62.5A.3 (providing the following example of sourcing nonresident income while working from home in another state: “[f]or example, if a non-resident employee is working from home full-time due to a pandemic-related circumstance but during the period January 1 through February 29, 2020 the employee worked five days a week, two of those days from an office in Boston and three of those days from home [in another state], 40 percent of the employee’s wages would continue to be Massachusetts source income”).

6 Though Massachusetts’ emergency regulation indicates that the regulation will expire 90 days after the state of emergency is lifted, New Hampshire fears that Massachusetts may continue to extend its policies and may eventually make such policies permanent. See Bill of Complaint for Plaintiff at 4, New Hampshire, No. 22O154.

7 See id., Bill of Complaint for Plaintiff at 25–32 (indicating that (1) Massachusetts’ emergency regulation fails all four Commerce Clause prongs that require that a state tax be (a) applied to an activity with a substantial nexus with the taxing state, (b) fairly apportioned, (c) nondiscriminatory to interstate commerce, and (d) fairly related to the services provided by the state; and (2) Massachusetts’ emergency regulation violates the fundamental requirements of due process, including because there is no connection between Massachusetts and the nonresidents on whom it imposes Massachusetts income tax other than the address of the nonresident’s employer).

8 See id. at 1 (asserting that “[t]he Commonwealth of Massachusetts has launched a direct attack on a defining feature of the State of New Hampshire’s sovereignty”).

9 See id.

10 See id., Brief in Opposition to Motion for Leave to File Complaint at 3.

11 See discussion supra note 4; but see discussion supra note 6.

12 See generally New Hampshire, No. 22O154 (Amicus briefs have been filed by Professor Edward A. Zelinsky, the Southeastern Legal Foundation, the Buckeye Institute, various states, and various taxpayer organizations.).

13 Certain states, including New York, Pennsylvania, Nebraska, Delaware, and Arkansas, tax nonresident income earned remotely due to COTE rules. See id., Brief of Profession Edward A. Zelinsky as Amicus Curiae in Support of Plaintiff’s Motion for Leave to File Bill of Complaint at 2; see generally id., Amicus Curiae Brief for States of New Jersey, Connecticut, Hawaii, and Iowa (indicating that the states lose significant amounts of revenue when neighboring states employ COTE rules).

14 See, e.g., 20 N.Y. COMP. CODES R. & REGS. § 132.18(a) (sourcing nonresident income to New York for days in which an employee worked out of state for convenience as opposed to necessity).

15 See generally New Hampshire, No. 22O154, Amicus Curiae Brief for States of New Jersey, Connecticut, Hawaii, and Iowa.

16 See id. at 18 (indicating that “[w]hen a State unconstitutionally taxes nonresidents working from home, it forces … [neighboring] States to choose between losing billions of dollars of revenue by allowing credits to offset such taxes, or double taxing their residents”).

17 See id.




NABL Suggests User Fee Structure to Reduce Costs for Governments.

SUMMARY BY TAX ANALYSTS

The National Association of Bond Lawyers has offered alternatives to significantly increasing the cost of user fees for private letter rulings, suggesting that state and local governments be charged a lower fee in general or that they pay a lower fee for routine ruling requests, such as those made under sections 103 and 141-150.

FULL TEXT PUBLISHED BY TAX ANALYSTS

March 1, 2021

William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue
Washington, DC 20224

Dear Mr. Paul,

Recently, the Internal Revenue Service issued Revenue Procedure 2021-1, 2021-1 I.R.B. 1 (January 4, 2021), setting forth the procedures and fees for private letter ruling requests and significantly increasing the general fee for private letter rulings from $30,000 to $38,000. At the same time that Rev. Proc. 2021-1 was released, the IRS issued a Counsel Statement and Invitation for Public Comment on PLR User Fee Increase (the “Counsel Statement”). The Counsel Statement explains that the increase in the PLR user fee was driven by a combination of the costing method, a decline in the number of overall rulings issued (which the IRS acknowledges may, in part, be a result of past increases in user fees) and an increase in the relative complexity of the rulings that are requested1. The Counsel Statement recognizes the critical role that private letter rulings play in the tax administration process and solicits public input on how the fee structure might better match the specific rulings requested.

The National Association of Bond Lawyers (“NABL”) fully agrees that the private letter ruling process plays a significant role in tax administration but observes that the significant size of the user fee, even before the recent increase, has discouraged taxpayers from seeking private letter rulings. In a letter dated November 4, 2019, and subsequent letters dated March 4, 2020, and September 18, 2020 (collectively, the “Prior Letters”), NABL suggested that the significant increase of the user fee over the years has resulted in a meaningful drop in the number of PLRs issued to state and local governments (a point consistent with the Counsel Statement). NABL further provided reasons why state and local governments should be a specific category of taxpayers that are subject to a lower user fee and recommended that the Internal Revenue Service reduce the user fee that is charged to state and local governments for PLRs. Copies of the Prior Letters are enclosed with this letter. NABL asks that this letter and the Prior Letters be considered as part of the comments submitted in response to the Counsel Statement.

If the Internal Revenue Service cannot agree to lower user fees generally for ruling requests for state and local governments, we urge that lower user fees be available for routine ruling requests. Examples of routine requests under Sections 103 and 141-150 of the Internal Revenue Code of 1986 would include all requests relating to extensions of deadlines or correction of inadvertent errors in filings and documentation and requests relating to tax elections not otherwise covered by the reduced user fee for certain requests under Treasury Regulations Section 301.9100. We observe that Chief Counsel attorneys in Branch 5 would be in a position to provide useful feedback regarding rulings provided in past years that have required fewer resources and should be eligible for reduced ruling fees.

These supplemental comments were prepared by an ad hoc task force comprising the individuals listed on Appendix A and were approved by the NABL Board of Directors. If NABL can provide further assistance, please do not hesitate to contact Jessica Giroux, Director of Governmental Affairs, in our Washington DC office, at (518) 469-1565 or at [email protected]

Sincerely,

Teri M. Guarnaccia
President, National Association of Bond Lawyers
Washington, DC

CC:
Allyson Belsome, Senior Manager, Tax-Exempt Bonds, Internal Revenue Service
Ursula S. Gillis, Chief Financial Officer, Internal Revenue Service
Helen M. Hubbard, Associate Chief Counsel, Financial Institutions and Products, Internal Revenue Service
Edward Killen, Acting Commissioner, Tax Exempt and Government Entities Division, Internal Revenue Service
Johanna Som de Cerff, Acting Branch Chief of Branch 5, Financial Institutions and Products, Internal Revenue Service
Kathryn Zuba, Associate Chief Counsel, Procedure and Administration, Internal Revenue Service

Enclosures:
NABL Letter to the IRS dated September 18, 2020
NABL Letter to the IRS dated March 4, 2020
NABL Letter to the IRS dated November 4, 2019

APPENDIX A
NABL AD HOC TASK FORCE

Rebecca Harrigal, Chair
Greenberg Traurig
2700 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
Telephone: 215-988-7836
Email: [email protected]

Christie Martin
Mintz Levin Cohn Ferris Glovsky and Popeo P.C.
1 Financial Center
Boston, MA 02111-2621
Telephone: 617-348-1769
Email: [email protected]

Brian P. Teaff
Bracewell LLP
711 Louisiana Street, Suite 2300
Houston, TX 77002
Phone: (713) 221-1367
Email: [email protected]

Matthias M. Edrich
Kutak Rock LLP
1801 California Street, Suite 3000
Denver, CO 80202
Phone: (303) 292-7887
Email: [email protected]

Michael G. Bailey
Law Office of Michael G. Bailey
701 Laurel Ave
Wilmette, IL 60091-2816
Telephone: 224-522-1989
Email: [email protected]

FOOTNOTES

1Arguably, the higher concentration of complex rulings is also a function, at least in part, of past increases in user fees. An increase in the costs necessary to obtain a private letter ruling may raise the threshold below which a taxpayer is willing to take a position without a private letter ruling, leaving only the more complex questions submitted for ruling requests.

END FOOTNOTES




TAX - PENNSYLVANIA

In re Coatesville Area School District

Supreme Court of Pennsylvania - January 20, 2021 - 244 A.3d 373

City and school district sought judicial review of county board of assessment’s grant of a partial real estate tax exemption in separate actions, which was based on charitable purposes of tax-exempt taxpayer’s property.

After the trial court issued identical orders under separate docket numbers affirming the board’s decision, city, school district, and taxpayer cross-appealed, school district filed a notice of intervention in city’s case, and appeals were consolidated.

Following remand by the Commonwealth Court, the Court of Common Pleas issued two essentially identical, but differently captioned decisions and orders. School district and taxpayer cross-appealed as to the ruling in district’s case, but not as to the identical simultaneous ruling with contained the city’s docket number.

The Commonwealth Court consolidated appeals and dismissed, holding that appeal of the trial court decision and order was precluded by unappealed essentially identical decision and order. School district and taxpayer appealed.

The Supreme Court held that:

Res judicata did not bar school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes, even though subject matter and sole issue of appeals were identical and deemed consolidated for disposition only, where appeal was not a recasting of an original cause of action to get a second bite at the apple, it was not clear that final judgment in city’s case was a prior judgment as required for application of res judicata, and claim preclusion would have served no salutary purpose.

Collateral estoppel did not bar school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes; there was no discrete subset issue within taxing districts’ overall claim that should have been foreclosed from resolution, but rather claim and legal issue were the same, whether property was correctly accorded 72 percent tax-exempt status.

Review of school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes would not have impermissibly created an irreconcilable conflict from any ruling other than an affirmance of trial court’s order, notwithstanding conflict, if any, with earlier final order in city’s case, which affirmed board’s assessment, since assessment figure ultimately reached in school district’s appeal would have been mandatory in relation to county assessment office.




Qualified Opportunity Zones: Delayed Timelines and Tracking Changes.

The opportunity zone program and its investors have not escaped the uncertainties and upheaval brought on by the pandemic. Christopher Hanewald of CBIZ & Mayer Hoffman McCann P.C. sorts out the guidance and outlines remaining questions.

_________________________________________________________________________________________

During the past year, world events, including those in our country and even within our own neighborhoods, have led to an endless barrage of changes requiring near-constant adaptation.

Businesses across all industries have been presented with the perfect storm of challenges: chasing rapid shifts in consumer behavior while untangling a web of new legislation enacted to blunt the economic impact of the Covid-19 pandemic.

While each industry faces its own unique challenges, real estate owners, investors, and managers have seen demographic trends reverse course overnight as a new work-from-home culture allows workers to leave high-priced city centers in favor of spacious suburbs or even across state lines. More specifically within the industry, opportunity zone organizers and investors have been left to reassess projects at all stages of development. Following creation of the qualified opportunity zone (QOZ) program in the Tax Cuts and Jobs Act, interested parties waited nearly two years before regulations were finalized by the Treasury and the IRS. As QOZ projects across the country sought to move forward with this new-founded clarity in 2020, most aspects of business were put on an indefinite delay as the pandemic took hold. Now, after 500 pages of final regulations, multiple IRS notices, and deadline delays in the last 15 months, it is time to take stock of what we know, what has changed, and finally review what we still wonder about.

Starting with the easy part—what we know. Except for changes implemented by the notices discussed below, the original QOZ framework remains mostly intact. Eligible gains (i.e., a gain treated as capital by the Internal Revenue Code) must be reinvested into a qualified opportunity fund (QOF) within 180 days. Exceptions do apply to the 180-day window for gains recognized by partners in a partnership.

Upon receipt of investor funds, the QOF must then turn its attention to its first applicable 90% testing date. While the timing of such testing date has been subject to changes, the manner in which a QOF satisfies the test remains the same: (1) invest at least 90% of the QOFs assets in qualified opportunity business property (QOZBP); or (2) invest at least 90% of the QOFs assets in stock or partnership interests of a qualified opportunity zone business (QOZB). The former requires a QOF to directly operate a trade or business while the latter permits a QOF to simply hold interests in a lower tier trade or business that satisfies QOZB requirements. QOFs must test their capital deployment on the last day of the first six-month period of the tax year and again on the last day of the tax year—reporting the results of those two tests on Form 8996 which is attached to the QOF’s tax return. Regardless of structure, the trade or business operated by the QOF or QOZB must meet tax code Section 162 trade or business requirements as supplemented by the QOZ final regulations—be wary of triple-net lease “businesses.”

QOZBs, on the other hand, are subject to the so-called 70% test, which requires a QOZB to have at least 70% of all its tangible property qualify as QOZBP. For property to qualify as QOZBP, such property must be: (1) acquired by purchase or lease after Dec. 31, 2017; (2) the original use of the property in the QOZ must have commenced with the QOZB or the QOZB must substantially improve the property; and (3) during 90% of the QOZB’s holding period of the tangible property, 70% of the use of the tangible property must have been in a QOZ. As a result of the lower testing threshold applicable to a QOZB, businesses are incentivized to utilize a two-tier operating structure in order to avail themselves of the 70% testing standard rather than operate an investment directly out of a QOF.

While the above only scratches the surface of QOZ operational requirements, it provides a baseline to begin discussing the changes implemented below:

The above mixture of delays and extensions is extremely taxpayer friendly. The extended 180-day investment window means that a taxpayer who recognized a capital gain realization event on or after Oct. 4, 2019, still can reinvest those eligible gains until March 31, 2021. Moreover, the reasonable cause delays for QOF testing requirements means that any QOF which was certified and accepted initial investments from taxpayers on or after June 30, 2019, will not be required to satisfy its first 90% test until Dec. 31, 2021. While these changes are certainly welcome, the constant stream of updates is increasing the complexity for a program that already has been deemed too complicated for some.

Now, a look ahead to identify what many QOZ organizers and advisors continue to wonder about. Despite more than $15 Billion of inflows to QOFs since the legislation’s inception, there is still a surprising amount of uncertainty in a number of areas. At the outset, the barebones legislation and first round of proposed regulations strongly favored the real estate industry. Definitions related to substantial improvement and working capital safe harbor plans enabled real estate developments to begin moving dirt early in 2019; whereas investors interested in operating businesses were left speculating about how regulations apply to them. The questions below represent a sampling of areas for which more guidance can be expected:

The above is by no means an exhaustive list of questions; however, they do represent areas in which significant uncertainty still exists. In addition to those questions, investors face external headwinds with the potential to alter the cost-benefit analysis of a potential QOZ investment. A new presidential administration brings with it the potential for an increase in capital gains rates—a drag on future investment returns as it relates to the initial eligible gain. Proposed legislation may seek to increase administrative reporting requirements for managers of QOFs, as the government makes a push to quantify the effect and benefits of the QOZ program. Finally, investors desiring a 10% basis step-up as a result of their investment will need to deploy capital before Dec. 31, 2021, in order to satisfy the 5-year holding requirements prior to the 2026 deadline when taxes on the original eligible gains are due. Interested parties will need to continue to monitor developments and work with their tax advisors to understand and navigate the ever-shifting landscape.

Bloomberg Law

March 12, 2021

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Christopher Hanewald is a strategic tax advisor with CBIZ & Mayer Hoffman McCann P.C.




COVID-19 Relief for New Markets Tax Credit Program and Opportunity Zone Program: Butler Snow

Five-Year Extension of New Markets Tax Credit Program

As we have all seen, the COVID-19 pandemic has created economic suffering for each and every one of our communities. However, for those severely distressed, low-income communities which were already struggling to entice new capital investment, the setback is even more severe. That said, the government has made efforts to support those areas most in need through a set of tax provisions attached to the Consolidated Appropriations Act of 2021 (Act). The Act, signed into law on December 27, 2020, includes a five-year, $25 billion extension of the New Markets Tax Credit (NMTC) program, which is the largest extension in the program’s history. Prior to this extension, the NMTC program was set to expire on December 31, 2020, after 20 years of success stories and strong bi-partisan support. Under the Act, the NMTC program will expire on December 31, 2025*.

The Act’s extension and enhancement of the NMTC program are a welcome response to the immediate economic crisis brought on by the pandemic. The additional $25 billion in credit allocation over the next five years will deliver vital resources to low-income and rural communities, supporting and growing businesses, creating jobs and increasing economic opportunity at a time when our underserved communities need it the most. According to the NMTC Coalition, the projected impact includes an estimated 255 new or improved healthcare facilities; 690 new manufacturing businesses; 275 mixed-use projects; and 775 investments in community facilities, including non-profits, Boys and Girls Clubs, and daycare centers. It is also expected that such significant backing to the NMTC program will generate nearly 600,000 jobs.

The NMTC program is designed to encourage capital investment in low-income areas that have traditionally had inadequate access to capital. Established by Congress in 2000, the NMTC program permits institutional investors to receive a credit against federal income taxes for making equity investments in financial intermediaries known as Community Development Entities (CDEs). For every $1 invested into a CDE, a 39% tax credit is generated over a seven-year period. CDEs that receive NMTC allocation authority use the capital raised to make investments in, or loans to, businesses located in low-income and marginalized communities. The resulting subsidy to a project generated from the monetized NMTCs can amount to as much as 20% – 25% of the total project costs.

The NMTC program has proven to be an effective means of rebuilding economically distressed communities by targeting projects that support job creation, drive economic growth or provide essential services. The five-year extension will only further the economic development impact of the NMTC program and help sustain and rebuild those communities devastated by the effects of COVID-19. Any developers that are considering constructing a new project or rehabilitating an existing project in a low-income area should consider pursuing NMTCs given the significant amount of allocation that will become available over the next five years.

*Last week, members of Congress introduced House and Senate versions of the New Markets Tax Credit Extension Act of 2021 (H.R. 1321/S. 456). If passed, the legislation would make the NMTC program permanent at $5 billion in credit allocation a year.

COVID-19 Relief Extension for Opportunity Zones

The ongoing pandemic has impacted all facets of the economy, including Opportunity Zones (OZs). The resulting uncertainty weighs on investors, qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) alike. Thankfully, the Internal Revenue Service recently issued guidance providing additional relief for QOZBs, QOFs and investors due to the COVID-19 pandemic. Notice 2021-10 generally extends the relief already in effect pursuant to Notice 2020-39, which expired on December 31, 2020. Details of the relief provisions included in Notice 2021-10 are outlined below.

The OZ program, established by the Tax Cuts and Jobs Act of 2017, is a community development program aimed at stimulating economic development and job creation by providing tax incentives for long-term investments in low-income communities across the United States. There are three main tax incentives used to encourage investment in OZs: (i) deferral of taxes on capital gains if such capital gains, or portion thereof, are reinvested in a QOF; (ii) elimination of taxes on a portion of capital gains if such capital gains remain invested in a QOF for a specified period of time; and (iii) elimination of taxes on post-acquisition appreciation with respect to investments in QOFs held for at least 10 years. OZ investors who may have initially been intimidated by the timelines for deployment and development of an active trade or business may now wish to reconsider given the additional time made available by this relief.

Butler Snow LLP

by Anna Watson

March 5, 2021




Opportunity Zones: The Early Evidence - Brookings Podcast

In an effort to spur economic development in distressed and left-behind communities, the 2017 Tax Cuts and Jobs Act created more than 8,700 Opportunity Zones across the country and offered favorable capital gains tax treatment to investments in those low-incomes communities. Although Opportunity Zones are still young, they are already stimulating rigorous research.

To share, discuss, and critique that work, the Hutchins Center on Fiscal and Monetary Policy at Brookings convened a virtual conference on Wednesday, February 24. Ed Glaeser of Harvard gave opening remarks, followed by a presentation from Kenan Fikri of the Economic Innovation Group. There were then four sessions, organized by topic, each containing several paper presentations and discussant responses.

Listen to the podcast.




OZworks Group, a Community for OZ Stakeholders, with Chris Cooley.

Can an online membership platform bring different Opportunity Zone stakeholders together and help make the OZ initiative a bigger success?

Chris Cooley is director and lead connector at OZworks Group. He has extensive experience consulting in the collaborative workspace industry, both nationally and internationally.

Listen to my conversation with Chris.

OpportunityDb

By Jimmy Atkinson

March 17, 2021




SIFMA: Tax Tools to Help Local Governments

SUMMARY

Submission for the Record by SIFMA before the House Ways & Means Select Revenue Measures Subcommittee in the hearing: “Tax Tools to Help Local Governments.”

SIFMA and its member firms strongly support increased investment in this country’s infrastructure, which will help spur job creation and economic growth. To that end, we believe it is critical to support the great work states and localities do in building and maintaining our infrastructure.

Download PDF.




States Expected Covid-19 to Bring Widespread Tax Shortfalls. It Didn’t Happen.

Tax revenues came in only slightly lower for U.S. states, contrary to projections for major declines

States have avoided a Great Depression-scale cash crisis.

Despite the pandemic’s crushing toll on the economy, total state tax revenues were roughly flat in 2020 from the year before, according to the State and Local Finance Initiative at the Urban Institute, a Washington, D.C., think tank.

Last spring, stores shut down to contain the spread of Covid-19 and unemployment skyrocketed. People spent less money on everything from shoes to restaurants to salons. Sales tax collections fell billions of dollars short of forecasts.

But widespread federal intervention buoyed households, businesses and financial markets and helped avert analysts’ doomsday projections for state revenues. The stable employment environment for the country’s most affluent workers also brought in stronger than expected tax revenue.

Continue reading.

The Wall Street Journal

By Heather Gillers and Peter Santilli

March 10, 2021




Ways and Means Holds Hearing on State and Local Tax Tools.

MBFA to Submit Comments in Support of Muni Priorities

The House Committee on Ways and Means today hosted a hearing titled, “Tax Tools to Help State and Local Governments.” The hearing featured witnesses from all levels of state and local government, representing a swath of the Public Finance Network (PFN) in which the BDA participates, and focused on municipal bonds in the context of infrastructure financing and investment.

This hearing is the first in an expected series of hearings this spring leading up to the introduction of an infrastructure package.

The Municipal Bonds for America Council (MBFA) plans to submit a statement for the record in the coming days.

BDA and MBFA Priorities Featured

While the hearing covered many state and local tax issues, municipal bonds were the centerpiece of the discussion. The Committee, while acknowledging their jurisdiction may be limited in the broader infrastructure debates, focused on many tax issues including a deep dive on municipal bonds provisions laid out in the 116th Congress H.R. 2 the Moving Forward Act.

Many BDA and MBFA priories were discussed.

These include:

Bond Dealers of America

March 12, 2021




TAX - FLORIDA

Emerson v. Hillsborough County

Supreme Court of Florida - February 25, 2021 - So.3d - 2021 WL 732664

Opponents brought declaratory judgment action, seeking to invalidate amendment to county charter that enacted a one percent sales transportation surtax and directives for allocating the tax proceeds.

The County Court invalidated portions of the charter related to the allocation and use of tax proceeds, but upheld the validity of the surtax itself. Both the county and the opponents appealed.

The Supreme Court held that:

Core provisions of county charter amendment that established both a transportation surtax and directives for allocating the tax proceeds directly clashed with surtax statute’s assignment to county commissions of authority to direct the application of surtax revenues to various permitted uses, and thus, were unconstitutional.

Statutory provision that authorized charter limitations on the broad general legislative powers granted to county commissions did not operate to defeat specific provisions of the surtax statute that assigned to county commissions authority to direct the application of surtax revenues to permitted uses; the power to allocate the proceeds of the surtax did not fall within the scope of unenumerated powers of local self-government, but rather, was a specific power conferred directly on the county commission, as distinct from the county, in a statute that authorized the enactment of the surtax, but not the allocation of funds, by charter amendment.

One percent tax levy in amendment to county charter could not be severed from the otherwise unconstitutional provisions that clashed with the surtax statute’s assignment of authority to county commissions to direct the application of surtax revenues, and thus, the charter provision was unconstitutional in its entirety; the portions of the amendment that violated the authority of the county commission under the surtax statute was not functionally independent from the portion of the amendment that imposed a transportation surtax, and thus, the unconstitutional provisions were not merely ancillary to the surtax, but were integral to the overall purpose of the surtax initiative.




TAX - NEW JERSEY

Washington Shopping Center, Inc. v. Washington Township

Tax Court of New Jersey - March 2, 2021 - N.J.Tax - 2021 WL 816739

Landowner filed property tax appeal, challenging township’s tax assessments on its improved shopping center property for three tax years.

The Tax Court held that:




The Wayfair Case and Covid Sparked a State Sales Tax Bonanza.

A boom in online commerce and a favorable court decision combine to fill depleted treasuries.

Rachel Ramos, who sells graphic T-shirts on Etsy from her home in Fort Worth, was considering closing her shop before she saw business unexpectedly boom last May. The shop brought her $25,000 from May through December, compared with $11,000 the entire previous year. She’s saving that money to buy a house for her and her two children. “This kept me from having to struggle as a single mother,” she says.

A less obvious, indirect recipient of her windfall: the states where her customers live, which can use taxes on her T-shirt sales to help plug the holes in their budgets.

When much of the country went into quarantine last year, Americans holed up at home took to their laptops to buy just about everything online, from groceries to home goods to electronics. As they drove a surge in online retail, shoppers were also unknowingly helping to keep their state finances afloat—thanks to a 2018 Supreme Court decision in South Dakota v. Wayfair.

Continue reading.

Bloomberg Businessweek

By Danielle Moran

March 5, 2021




TAX - LOUISIANA

Crescent City Property Redevelopment Association, LLC v. Muniz

Court of Appeal of Louisiana, Fourth Circuit - February 10, 2021 - So.3d - 2021 WL 501092 - 2020-0421 (La.App. 4 Cir. 2/10/21)

Tax sale purchaser filed petition to quiet title and annul tax sales against city and record owners which included prior and subsequent tax sale purchasers, seeking a judgment of absolute unconditional ownership.

The District Court granted motions for partial summary judgment. Tax purchaser appealed.

The Court of Appeal held that:




TAX - FLORIDA

PBT Real Estate, LLC v. Town of Palm Beach

United States Court of Appeals, Eleventh Circuit - February 22, 2021 - F.3d - 2021 WL 671583

Condominium owner brought § 1983 action in state court against town, alleging that special property tax assessments imposed on real property owners to fund town’s relocation of electrical, telephone, and cable television utilities underground violated the Due Process Clause, and the Equal Protection Clause, and asserting claims under Florida law.

Action was removed to federal court. The United States District Court dismissed the state-law claims, and granted summary judgment in favor of town on the remaining claims. Owner appealed.

The Court of Appeals held that:

Town’s property tax assessment resolution, authorizing special assessment to fund town’s relocation of electrical, telephone, and cable television utilities underground was not arbitrary and capricious and was rationally related to town’s legitimate purpose of improving safety, reliability, and aesthetics of all property in special assessment area, and thus, did not violate substantive due process rights of condominium owner, notwithstanding that utilities servicing area where condominium was located had been undergrounded years earlier, which was financed privately.

Town’s imposition of special property tax assessment to fund town’s relocation of electrical, telephone, and cable television utilities underground, which exempted real property owners who had previously been subject to special assessments for undergrounding utilities, did not violate condominium owner’s equal protection rights; although utilities servicing area where condominium was located had already been undergrounded through private financing, exempted owners were not similarly situated to condominium owner because their utility lines were undergrounded pursuant to project funded by special assessments, not private funding.

Condominium owner stated plausible claim for unconstitutional tax in violation of Florida constitution and Florida tax laws based on allegations that town imposed special property tax assessment on condominium owner and other real property owners to fund town’s relocation of electrical, telephone, and cable television utilities underground, but that the assessment conferred no special benefit to condominium owner because utilities servicing area where condominium was located had already been undergrounded, where complaint also incorporated general allegations, which included citations to the Florida constitution and tax laws.




Who Benefits from Federal Housing Tax Credit Changes?

On Dec, 21, 2020, Congress passed the Consolidated Appropriations Act, a year-end measure that includes a $1.4 trillion omnibus spending bill and a $900 billion Covid-19 relief bill.

Among many other things, the act fixed the 4% low-income housing tax credit (LIHTC) applicable percentage at a minimum of 4%. This comes after years of advocacy by LIHTC stakeholders and is expected to generate millions more in equity investments for affordable housing and lead to the production and preservation of tens of thousands more affordable units, with some estimating that an additional 126,000 affordable rental homes will be created or preserved over the next decade as a result of 4% fixed rate.

Before the act, the rate had always floated and was tied to the federal borrowing rate. During the 2020 fiscal year, the rate dropped as low as 3.07% as a result of cuts to the federal borrowing rate in response to the pandemic.

Fixing the LIHTC rate to 4% has positive implications for the growth of the affordable housing market. Given that historically the floating rate was lower than 4%, the higher fixed rate creates an added incentive for equity investors to invest in LIHTC projects.

But what does this mean for developers and existing projects that have secured LIHTC bond funding in 2020, but have drawdowns carrying over to 2021? Will those projects benefit from this new rate floor?

According to the act, whether a project will benefit from the new fixed 4% rate is based on several factors:

It is unclear how the IRS will handle projects with undisbursed 2020 bond proceeds and whether those projects can quality for the 4% fixed rate.

Further guidance from the IRS and Congress will be needed on this issue in the form of a statement from the IRS or a “Blue Book” report from the Joint Committee on Taxation. However, this could take some time — “Blue Book” reports, for example, have taken between nine months and two years to be issued in the past. So, what should project sponsors and developers do in the interim?

The answer to how treat tax-exempt bonds that were allocated in 2020 with undisbursed proceeds in 2021 may come down to the how the IRS chooses to define “issuance.”

In the past, the IRS has defined “issuance” to mean when the proceeds were drawn down. This definition was designed in part to foil the efforts of projects that rushed to secure bond financing ahead of enactment of impending laws that would have unfavorable effects on tax-exempt bonds.

If the IRS retains this definition of “issuance,” bonds issued at a floating rate below 4% in 2020 that carried undrawn funds into 2021 could be considered “issued” in 2021 and would technically be considered eligible for the 4% fixed rate. But it’s hard to say whether the IRS will take the same position it did in light of the more favorable effects of the current act.

If, instead, it were to ascribe the traditional meaning to the word “issuance,” then the fixed rate would only apply to bonds that are literally sold in 2021. Alternatively, the IRS could take a hybrid approach to defining “issuance,” allowing for a 4% fixed rate to apply to bonds that were issued in 2020 but were drawn down exclusively in 2021.

Given the uncertainty of the IRS’s approach, Sheehan Phinney is not issuing any opinions on whether 2020 bonds qualify for the 4% floor rate without further guidance from the IRS or Congress.

Another consideration is found in Section 42(m)(2)(d) of the Internal Revenue Code, which requires that the governmental unit issuing the bonds make a determination that the project financed with tax-exempt bonds meets the requirements of the state’s Qualified Allocation Plan, and that only the amount of tax credits needed for project feasibility will be applied to the project.

Essentially, the state agency issuing the bonds needs to find that the project needs the credits. So, what would happen if the parties to a project had closed a deal at a 2020 floating rate and then went back to the state to request a 4% rate?

Theoretically, the parties would need to re-evaluate the sources of financing and the state agency would need to revise its assessment of how much credit authority is needed.

The best solution seems to be that the project sponsor must take a position to either ask the state agency to reevaluate the project at a 4% fixed rate and leave it up to the state agency or to stick with the floating rate it was awarded previously.

Peter Beach and Jaclyn Fisher | February 19, 2021




Michigan Court Upholds Tax Exemption for Fitness Center Management.

SUMMARY BY TAX ANALYSTS

The Michigan Court of Appeals determined that a company hired to manage a nonprofit foundation’s fitness center was not liable for the state lessee-user tax, because the foundation retained final control of the center’s operations and the management company acted only as the foundation’s agent.

FULL TEXT PUBLISHED BY TAX ANALYSTS

POWER WELLNESS MANAGEMENT, LLC,
Petitioner-Appellee,
and
CHELSEA HEALTH & WELLNESS FOUNDATION,
doing business as 5 HEALTHY TOWNS FOUNDATION,
Intervenor-Appellee,
v.
CITY OF DEXTER,
Respondent-Appellant.

STATE OF MICHIGAN
COURT OF APPEALS

March 4, 2021

Tax Tribunal
LC No. 18-001383-TT

Before: SWARTZLE, P.J., and RONAYNE KRAUSE and RICK, JJ.

PER CURIAM.

Respondent, City of Dexter, appeals as of right the Michigan Tax Tribunal’s order granting summary disposition under MCR 2.116(C)(10) in favor of petitioner, Power Wellness Management, LLC (the management company), and intervenor, Chelsea Health and Wellness Foundation (the foundation).1 Respondent asserts that the lessee-user tax imposed by MCL 211.181(1) should apply to the management company because it operates an otherwise tax-exempt fitness center under a management agreement with the foundation. The tax tribunal ruled that the lessee-user tax was inapplicable. We affirm.

I. PERTINENT FACTS

The subject property, the Dexter Wellness Center (the center) is owned by the foundation and is used as a fitness center. A panel of this Court previously determined that the center was exempt from ad valorem property tax2 under MCL 211.7o. Chelsea Health & Wellness Foundation v Scio Twp, unpublished per curiam opinion of the Court of Appeals, issued October 12, 2017 (Docket No. 332483). The foundation hired the management company to manage the operations of the fitness center. The management company is in the business of operating fitness centers, providing this service to 28 locations, 90 to 95% of which are owned by nonprofit entities like the foundation. The relationship between the foundation and the management company is governed by a Management Agreement. The Management Agreement provides that the management company operates essentially all aspects of the fitness center in exchange for a fee. The management company cannot profit from any revenue generated by the center and is not exposed to any potential losses. Although a portion of the management company’s fee is subject to reduction if it fails to meet certain performance standards, the fee can never exceed the agreed-upon amount. The foundation also reimburses the management company for all costs incurred in the operation of the center. The Management Agreement does not provide for any payment of rent, money, or other consideration by the management company to the foundation. The foundation retains oversight of all the management company’s activities, has access to the fitness center at all times, and can terminate the Management Agreement at any time.

Respondent assessed the lessee-user tax under MCL 211.181(1) to the management company for 2018, asserting that it used the fitness center for its business purposes. Petitioners appealed to the tax tribunal. The tax tribunal granted petitioners’ motion for summary disposition under MCR 2.116(C)(10), finding that no issue of material fact existed and concluding that the management company was not subject to the lessee-user tax. On appeal, respondent argues that the tax tribunal erred by granting summary disposition to petitioners because the foundation has made the center available to the management company to use in connection for a business conducted for profit, an arrangement that should create liability under the lessee-user tax, MCL 211.181(1). We disagree.

II. STANDARD OF REVIEW

This Court’s review of tax tribunal decisions “is limited to deciding if the tribunal’s factual findings are supported by competent, material, and substantial evidence.” Kalamazoo v Richland Twp, 221 Mich App 531, 535; 562 NW2d 237 (1997). “Substantial evidence is any evidence that reasonable minds would accept as adequate to support the decision; it is more than a mere scintilla of evidence but may be less than a preponderance of the evidence.” Barak v Oakland Co Drain Comm’r, 246 Mich App 591, 597; 633 NW2d 489 (2001) (quotation marks and citation omitted). “In the absence of fraud, this Court reviews the [tax tribunal’s] decisions to determine whether the tribunal erred in applying the law or adopted the wrong principle.” Kalamazoo, 221 Mich App at 535. Summary disposition is permitted under MCR 2.116(C)(10) when, “except as to the amount of damages, there is no genuine issue as to any material fact, and the moving party is entitled to judgment or partial judgment as a matter of law.” Radtke v Everett, 442 Mich 368, 374; 501 NW2d 155 (1993) (brackets omitted). “A court reviewing such a motion must consider the pleadings, affidavits, depositions, admissions, and any other evidence in favor of the party opposing the motion, and grant the benefit of any reasonable doubt to the opposing party.” Kalamazoo, 221 Mich App at 536. “This Court is liberal in finding genuine issues of material fact.” Jimkoski v Shupe, 282 Mich App 1, 5; 763 NW2d 1 (2008).

III. ANALYSIS

The lessee-user tax imposed by MCL 211.181(1) is assessed in lieu of the general ad valorem property tax provided for under the General Property Tax Act. Nomads, Inc v Romulus, 154 Mich App 46, 52; 397 NW2d 210 (1986)3; see also MCL 211.1 et seq. As indicated, a panel of this Court previously held that the property at issue was not subject to ad valorem property tax.4 As a result, the taxing authority sought to impose the lessee-user tax. The lessee-user tax is not an ad valorem tax on realty, but instead is a specific or excise tax5 on the lessee or user. Nomads, Inc, 154 Mich App at 53. “It is intended to ensure that lessees of tax-exempt property will not receive an unfair advantage over lessees of privately[-]owned property.” Id. (quotation marks and citation omitted). MCL 211.181(1) provides:

Except as provided in this section, if real property exempt for any reason from ad valorem property taxation is leased, loaned, or otherwise made available to and used by a private individual, association, or corporation in connection with a business conducted for profit, the lessee or user of the real property is subject to taxation in the same amount and to the same extent as though the lessee or user owned the real property. [Emphasis added.]

This Court has had several previous occasions to address the interpretation and application of MCL 211.181. In Nomads, Inc, 154 Mich App at 49, the petitioner operated a travel club, which was organized as a nonprofit corporation under state law, and was granted tax-exempt status by the Internal Revenue Service. The travel club leased land from the Wayne County Road Commission and constructed an aircraft hangar, an office, and maintenance facilities on this land. Id. The travel club owned and operated an airplane for use by club members. Id. at 50. The respondent assessed the lessee-user tax under MCL 211.181. Id. The tax tribunal upheld respondent’s assessment, reasoning:

Petitioner (the club) does not take a profit, but that is because it is a cooperative operation [sic] whereby the savings inure to the direct benefit of Petitioner’s members. This is, in our opinion, a form of profit which the members individually enjoy by virtue of the operation of our business. [Id. at 54 (alteration in original; quotation marks omitted).]

We reversed the tax tribunal’s decision, determining that the rules of statutory construction required the phrase “business conducted for profit” to be construed narrowly. Id. at 54-55. Regarding the phrase “business conducted for profit,” we observed the following:

The qualifying language is not an exemption; rather it defines the taxpayers on whom the lessee-user tax is imposed, i.e. lessees of tax-exempt property used in connection with business conducted for profit. . . . [T]he pertinent language set forth in subsection (1), i.e., “business conducted for profit,” must be strictly construed in favor of the petitioner taxpayer. We conclude that the Tax Tribunal erred in giving the language in question a broad interpretation. We therefore conclude, resolving the uncertainty in the language in favor of petitioner, that petitioner is not subject to the lessee-user tax. [Id. at 55.]

This statutory language was also at issue in Kalamazoo, 221 Mich App at 532. In Kalamazoo, the petitioner formed an entity, the Kalamazoo Municipal Golf Association (KMGA), to operate and maintain a golf course on land that was owned by the City of Kalamazoo, but situated in Richland Township. Id. The land was exempt from taxation under MCL 211.7m. Id. at 533. Richland Township assessed a tax liability to KMGA under the lessee-user statute, MCL 211.181(1). Id. The Richland Township Board of Review determined that the management agreement between KMGA and the City of Kalamazoo — which provided that KMGA and its employees were independent from the City of Kalamazoo and indemnified the city for claims made involving the golf course — subjected KMGA to taxation under the lessee-user statute. Id. The tax tribunal agreed that KMGA was a private association operating the golf course for profit and held that the lessee-user tax applied. Id. at 533-534. On appeal, we determined that the tax tribunal erred as a matter of law when it found that the golf course was used in connection with a “business conducted for profit.” Id. at 536-537.6 We concluded that the terms of the agreements were not inconsistent with KMGA’s nonprofit status. Id. at 537. Accordingly, the tax tribunal’s finding “that the KMGA operated a for-profit business was not supported by competent, material, and substantial evidence.” Id. We reasoned:

[T]he agreements required the KMGA to provide to the general public open golf, league, and tournaments at reasonable times, to operate food and golf-equipment concessions, and to maintain the golf course to a specified standard. In addition, . . . the agreements provided Kalamazoo with extensive oversight of the KMGA’s operation of Eastern Hills. . . .

[T]he obligations of the KMGA were reasonably related to public purposes. The broader purpose of the lessee-user tax is to eliminate the unfair advantage that private-sector users of tax-exempt property would otherwise wield over their competitors leasing privately owned property. [Id. at 539.]

Importantly, in Kalamazoo, the city did not merely privatize the operation of the golf course. Id. Rather, it maintained an agreement with KMGA that retained substantial oversight over the operations, with the purpose of ensuring that affordable golf services were made available to the general public. Id. Therefore, we held that KMGA was not operating a “business conducted for profit.” Id.

In the instant case, the tax tribunal’s finding that the fitness center was not leased, loaned to, or made available to the management company and used in connection with a for-profit business is supported by substantial, material, and competent evidence. The foundation retained final control of the operation of the fitness center and the management company acted only as the foundation’s agent. The management company was paid a fee for its services. Although the fee could have been reduced if it failed to meet certain performance benchmarks, it was not possible for the management company to participate in any revenue or profit sharing. Likewise, the management company did not have any exposure to losses. Despite the comprehensive nature of the services that the management company provided, the boundaries of the Management Agreement made clear that the management company could not exercise autonomy over the operations of the fitness center. Further, despite respondent’s claim to the contrary, the management company’s access to the facility was not exclusive. The Management Agreement clearly stated that the foundation could access the facility at any time and the management company was required to obtain permission from the foundation to allow any outside groups to use the facility.

Given the facts of this case, there is no reason to believe that this arrangement implicated the purpose behind the lessee-user statute, i.e., preventing a for-profit enterprise from using exempt property to gain an unfair advantage over competitors. See id. In conclusion, the tax tribunal’s finding that the fitness center was not leased, loaned to, or made available to the management company and used in connection with a for-profit business was supported by substantial, material, and competent evidence. Therefore, the tax tribunal did not err by determining that the lessee-user tax imposed by MCL 211.181(1) was not applicable or by granting petitioners’ motion for summary disposition under MCR 2.116(C)(10).

Respondent also argues that the management agreement was in substance a lease of the facility. Because respondent failed to identify this issue in its statement of questions presented, it is waived and we need not consider it. See MCR 7.212(C)(5); Busch v Holmes, 256 Mich App 4, 12; 662 NW2d 64 (2003). However, even if the issue were properly before this Court, it fails on the merits. Christopher Renius, the assessor for the City of Dexter, testified in his deposition that there was no lease between Power Wellness and Chelsea Health. There is no evidence that Power Wellness made any payments to Chelsea Health. The taxing authority has the burden of proving that a tax statute applies. Kalamazoo, 221 Mich App at 536-538. Consequently, in order to avoid summary disposition, respondent needed to present evidence indicating that there was a lease. Radtke, 442 Mich at 374. Because respondent did not present such evidence, it has failed to meet its burden of proof, so its argument that there was a lease fails to avoid summary disposition. Petitioner, being the prevailing party, may tax costs pursuant to MCR 7.219.

Affirmed.

Brock A. Swartzle

Amy Ronayne Krause

Michelle M. Rick

FOOTNOTES

1This case is part of an ongoing dispute between the parties involving the City of Dexter’s (and previously Scio Township’s) efforts to assess tax on the subject property. This dispute has been before this Court on two previous occasions. See Chelsea Health & Wellness Foundation v Scio Twp, unpublished per curiam opinion of the Court of Appeals, issued October 12, 2017 (Docket No. 332483), and Dexter v Chelsea Health & Wellness Foundation and Power Wellness Management LLC, unpublished per curiam opinion of the Court of Appeals, issued December 29, 2018 (Docket No. 342364).

2“Ad valorem” means “proportional to the value of the thing taxed.” Black’s Law Dictionary (11th Ed).

3This case was decided before November 1, 1990, and, therefore, it is “not binding precedent, MCR 7.215(J)(1), [but it] can be considered persuasive authority,” In re Stillwell Trust, 299 Mich App 289, 299 n 1; 829 NW2d 353 (2012).

4See Chelsea Health & Wellness Foundation, unpub op, p 18.

5An excise tax is “[a] tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).” Black’s Law Dictionary (11th ed). A specific tax is “[a] tax imposed as a fixed sum on each article or item of property of a given class or kind without regard to its value.” Black’s Law Dictionary (11th ed).

6Although we concluded that the tax tribunal incorrectly found that the property was being used in connection for a business purpose, we ultimately affirmed the tax tribunal’s decision because it reached the correct result, that KMGA was exempt from taxation, for the wrong reason. Kalamazoo, 221 Mich App at 537-538.

END FOOTNOTES




California Court Rules Against Church in Special Property Tax Case.

DATED FEB. 26, 2021

Citations: Valley Baptist Church v. City of San Rafael; A156171; Marin County Super. Ct. No. CIV1703328

SUMMARY BY TAX ANALYSTS

In Valley Baptist Church v. City of San Rafael, the California Court of Appeal, First Appellate District, reversed a superior court’s judgment in favor of Valley Baptist Church, finding that a religious exemption authorized by article XIII, section 3(f) of the California Constitution does not apply to non-ad-valorem special property taxes such as San Rafael’s Paramedic Services Special Tax that was approved by the city’s voters.

FULL TEXT PUBLISHED BY TAX ANALYSTS

VALLEY BAPTIST CHURCH,
Plaintiff and Respondent,
v.
CITY OF SAN RAFAEL,
Defendant and Appellant.

Filed 2/26/21

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE

(Marin County Super. Ct. No. CIV1703328)

Trial Judge: The Honorable Stephen P. Freccero

Counsel:
Colantuono, Highsmith &Whatley, Michael G. Colantuono, Jon R. di Cristina, Conor W. Harkins; City of San Rafael, Robert F. Epstein and Lisa A. Goldfien for Defendant and Appellant.

Pacific Justice Institute, Ray D. Hacke, Kevin T. Snider for Plaintiff and Respondent.

The voters of the City of San Rafael approved by a two-thirds vote of the electorate a Paramedic Services Special Tax (Paramedic Tax) in 2010 to defray the cost of paramedic services within city boundaries. In September 2017, Valley Baptist Church (Valley Baptist) filed the instant action challenging the constitutionality of the Paramedic Tax as applied to a place of worship. Specifically, Valley Baptist argued that it is exempted from payment of all property taxes under article XIII, section 3(f) of the California Constitution, including the Paramedic Tax. This appeal presents a novel question of constitutional interpretation: whether the religious exemption authorized by article XIII, section 3(f) extends to non ad valorem special property taxes such as the Paramedic Tax.1 We conclude that it does not, and therefore reverse the trial court’s judgment.

I. FACTUAL AND PROCEDURAL BACKGROUND

The facts relevant to this matter are not meaningfully in dispute. On November 2, 2010, voters of the City of San Rafael (City) enacted Ballot Measure I, a measure imposing an annual special tax up to a maximum of 14 cents per square foot on all nonresidential structures in the City to fund paramedic services. (San Rafael Ord. Nos. 1891 & 1958; see also San Rafael Mun. Code, §3.28.040.) An annual special tax up to a maximum of $108 on each residential unit in the City was also raised for similar reasons. (San Rafael Ord. No. 1891; see also San Rafael Mun. Code, § 3.28.050.) The stated purpose of Measure I was to “fully fund” the City’s paramedic service program. (San Rafael Ord. No. 1891; see also San Rafael Mun. Code, §§ 3.28.020, 3.28.040, 3.28.050.)

Originally approved by City voters in 1979, the Paramedic Tax applied only to residential property. In 1988, the voters extended the Paramedic Tax to cover nonresidential structures as well. The rationale for this change was explained by then-Fire Chief Robert Marcucci as follows: “Many of our calls for service are attributed to non-residential occupancies, but they are not funding any portion of the Paramedic Budget. It could be stated that residential units are subsidizing Paramedic calls which occur in non-residential occupancies. Though some non-residential occupancies generate monies for the City in the form of Business License Fees and Sales Tax, these funds basically support the Fire Department and other City Departments, not the Paramedic Program.”

In 2015-2016, the City examined its tax rolls and determined that nonresidential properties that were designated as “subject to exemption” by the Assessor had been inadvertently omitted from the Paramedic Tax assessment, even though residential properties similarly designated were being charged. City officials rectified this oversight prospectively and sought to collect a portion of the Paramedic Tax that had gone unpaid. One of the property owners which received notice of the Paramedic Tax levy was Valley Baptist.

Valley Baptist is a nonprofit religious organization that operates a church on property within city boundaries. The two buildings on the property are used by Valley Baptist exclusively for religious worship. In October 2016, Valley Baptist received a letter from the City indicating that Valley Baptist had not been correctly assessed for the Paramedic Tax. The City requested payment of past due special taxes for fiscal years 2013-2014, 2014-2015, and 2015-2016 in the amount of $13,644. Valley Baptist objected to the City’s request, arguing that as a religious institution it was exempted from payment of the Paramedic Tax under the California Constitution. (See art. XIII, § 3(f) [exempting “[b]uildings, land on which they are situated, and equipment used exclusively for religious worship” from “property taxation”].) Valley Baptist eventually paid the amount due under protest.

In September 2017, Valley Baptist filed the instant action for declaratory relief and damages in Marin County Superior Court. The complaint sought a declaration that the Paramedic Tax was unconstitutional as applied to Valley Baptist and that Valley Baptist was therefore exempt from payment of the special tax. The complaint additionally sought a refund of any monies paid by Valley Baptist under the Paramedic Tax.

The City filed a motion for judgment on the pleadings in March 2018, which, after briefing and hearing, the trial court denied. In reaching its decision, the trial court explained: “The parties have not cited (and the court has been unable to find) any case which has addressed the issue of whether constitutional religious exemptions from property taxation apply to special taxes. In this case, the court discerns no legal basis for concluding that the special tax at issue is not a form of property taxation.” The matter proceeded to a bench trial.

Valley Baptist renewed its argument that the trial court should declare that the Paramedic Tax was unconstitutionally applied to the church and that Valley Baptist is exempt from paying the tax. The City maintained that the Paramedic Tax is an excise tax imposed on property owners to fund a service they require and is therefore not subject to the constitutional exemption from property taxation. The City additionally asserted that Valley Baptist is not exempt under the state constitution from non-ad valorem special property taxes.2

The trial court issued a tentative statement of decision in which it determined that Valley Baptist was constitutionally exempt from payment of the Paramedic Tax. The trial court began by considering at length whether the Paramedic Tax should be deemed a property tax or an excise tax, concluding it was best described as a property tax because it “is imposed upon the mere ownership, and not the use, of property.” It reasoned that “[a]lthough the tax is clearly meant to fund a city service, it is imposed on owners regardless [of] whether they use those services” or whether the structure is occupied or used by a tenant.3

The trial court then rejected the City’s argument that the religious exemption from property taxation, found in article XIII, section 3(f), is limited to ad valorem property taxes. The court determined that “[a] special tax ‘assessed by any agency upon any parcel of property or upon any person as an incident of property ownership’ (art. [XIII D], § 3(a)(2)), such as the Paramedic Tax, falls within the plain meaning of ‘property taxation’” for purposes of the article XIII exemptions. The court observed that article XIII D, added by the voters under Proposition 218 in November 1996, “’allows only four types of local property taxes: (1) an ad valorem property tax; (2) a special tax; (3) an assessment; and (4) a fee or charge.’” (quoting Neilson v. City of California City (2005) 133 Cal.App.4th 1296, 1307). Had the Legislature intended the exemption “’from property taxation’” to apply only to ad valorem property taxes, the court reasoned, “it could have made that clear when it added the provision for special taxes or when it added section 3(a) of article XIII D.” It therefore found the Paramedic Tax invalid as applied to Valley Baptist and determined that Valley Baptist was entitled to a refund, with applicable interest, of the special taxes that had already been paid.

The trial court adopted its statement of decision on November 7, 2018 and issued a related judgment. On November 21, 2018, the City filed notice of its intention to move for a new trial and/or to vacate the judgment. While the City’s post-trial motions were pending, the City adopted an amendment to the Paramedic Tax on December 3, 2018 (Ordinance). The Ordinance, which states that it is “declaratory of existing law,” codified the City’s process for exempting taxpayers from all or a portion of the Paramedic Tax based on low or non-occupancy of the property in question.

The City’s post-trial motions challenged the trial court’s two legal conclusions in the case — that the Paramedic Tax is a property tax and that the religious exemption under article XIII, section 3(f) applies to special property taxes. The City additionally urged the court to reconsider its conclusion that the Paramedic Tax is a property tax based on the Ordinance, which expressly allows for avoidance or reduction of the Paramedic Tax for vacant or otherwise underutilized structures. The trial court rejected the City’s arguments and denied its post-trial motions on January 4, 2019. This appeal followed.

II. DISCUSSION

A. Standards of Review and Constitutional Interpretation

The trial court’s determination that Valley Baptist is exempt from a duly enacted special property tax under article XIII, section 3(f) was based upon its “plain meaning” review of that exemption and other taxation articles added by later initiative measures. We review such questions of law and constitutional interpretation de novo. (Crawley v. Alameda County Waste Management Authority (2015) 243 Cal.App.4th 396, 403 (Crawley); see Apartment Assn. of Los Angeles County, Inc. v. City of Los Angeles (2001) 24 Cal.4th 830, 839 (Apartment Assn.).)

Our task on appeal is “to determine and effectuate the intent of those who enacted the constitutional provision at issue.” (Crawley, supra, 243 Cal.App.4th at pp. 409-410.) “’The principles of constitutional interpretation are similar to those governing statutory construction.’” (Richmond v. Shasta Community Services Dist. (2004) 32 Cal.4th 409, 418; Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735 (Lungren).) “[W]e begin by examining the constitutional text, giving the words their ordinary meanings.” (Crawley, at pp. 409-410; see S.B. Beach Properties v. Berti (2006) 39 Cal.4th 374, 379 (Berti); Lungren, supra, 45 Cal.3d at p. 735.) “If the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent of the Legislature (in the case of a statute) or of the voters (in the case of a provision adopted by the voters).” (Lungren, at p. 735.) But “[l]iteral construction should not prevail if it is contrary to the legislative intent apparent in the statute.” (Ibid.) Moreover, when “’the language permits more than one reasonable interpretation, . . . the court looks “to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.” ‘” (Berti, at p. 379.)

When the language of an initiative measure is ambiguous, “’we refer to other indicia of the voters’ intent, particularly the analyses and arguments contained in the official ballot pamphlet.’” (Robert L. v. Superior Court (2003) 30 Cal.4th 894, 901.) In addition, “[a]pparent ambiguities in a constitutional provision ‘frequently may be resolved by the contemporaneous construction of the Legislature or of the administrative agencies charged with implementing the new enactment.’” (Heckendorn v. City of San Marino (1986) 42 Cal.3d 481, 488 (Heckendorn).)

Our consideration of Valley Baptist’s tax exemption claim is also guided by the long-established principle that “[c]onstitutional provisions and statutes granting exemption from taxation are strictly construed to the end that such concession will be neither enlarged nor extended beyond the plain meaning of the language employed.” (Cedars of Lebanon Hosp. v. County of Los Angeles, et al. (1950) 35 Cal.2d 729, 734 (Cedars of Lebanon); see also Alpha Therapeutic Corp. v. Franchise Tax Bd. (2000) 84 Cal.App.4th 1, 5 (Alpha Therapeutic) [“’Statutes granting exemption from taxation must be reasonably, but nevertheless strictly, construed against the taxpayer.’”].) Taxpayers have the burden of showing that they clearly come within the exemption. (Alpha Therapeutic, at p. 5; Cedars of Lebanon, at p. 734.) Thus, “'[a]n exemption will not be inferred from doubtful statutory language.’” (Alpha Therapeutic, at p. 5; see ibid. [“[a]ny doubt must be resolved against the right to the exemption.”].)

B. Article XIII

In the November 1974 election, voters approved revisions to article XIII of the California Constitution, which dealt with the taxing powers of state and local government. (Prop. 8, as approved by voters, Gen. Elec. (Nov. 5, 1974); see 1 Flavin, Taxing Cal. Property (4th ed. 2019), § 6:3 (Taxing California Property).). Section 1 provides in relevant part: “Unless otherwise provided by this Constitution or the laws of the United States . . . [¶] . . . [a]ll property is taxable and shall be assessed at the same percentage of fair market value.” (Art. XIII, § 1, subds. (a) & (b) [“All property so assessed shall be taxed in proportion to its full value.”]. Section 1 establishes the principle of uniform assessment and taxation and confirms the Legislature’s power to tax all forms of property.4 (See Grodin et al., The California State Constitution (2d ed. 2016) at p. 312 (Grodin).).

Article XIII, section 3 exempts from “property taxation” various forms of property, including “[b]uildings, land on which they are situated, and equipment used exclusively for religious worship.” (Art. XIII, § 3(f); see Rev. & Tax. Code, § 206.) In addition, section 4 permits the Legislature to exempt from “property taxation” other kinds of property, including “[p]roperty used exclusively for religious, hospital, or charitable purposes” by nonprofit organizations. (Art. XIII, § 4, subd. (b).) The Legislature has adopted a statutory welfare exemption in accordance with this authorization. (See Rev. & Tax. Code, § 214.)

Article XIII does not disclose whether places of worship are exempted from special property taxes under section 3(f). There is no mention of a “special property tax” in article XIII because, as we explain below, such category of taxation did not come into existence until the passage of Proposition 13 in 1978. We must therefore look to other extrinsic aids, including the ballot materials and history of article XIII and its legislative antecedents, to determine if the voters intended to exempt places of worship from this type of taxation. We begin with the historical context in which the religious exemption arose.

i. History of the Religious Exemption in California

“California’s first constitution, adopted in 1849, broadly stated that ‘Taxation shall be equal and uniform . . .’ California’s first Legislature nevertheless exempted property used for churches, cemeteries, libraries, and scientific institutions.” (Property Tax Exemptions at pp. 944-945, footnotes omitted.) In 1868, the California Supreme Court struck down these exemptions, concluding that they conflicted with the state constitutional requirement that all taxation be equal and uniform. (People v. McCreery (1868) 34 Cal.432 (McCreery).)

The constitutional provision at issue stated: “’Taxation shall be equal and uniform throughout the State. All property in this State shall be taxed in proportion to its value, to be ascertained as directed by law.’” (McCreery, supra, 34 Cal. at p. 448.) Noting that “the section, as adopted, limited a property tax to an ad valorem tax on all property” (id. at p. 452, italics omitted), the McCreery court determined that the Legislature was without power to create exemptions for certain types of property (id. at pp. 453-459): “If the power exists in the Legislature to exempt growing crops, mining claims and other property mentioned, the exemption may be carried still further, until property of one class is made to bear the whole burden of taxation. The exemption, so far as it includes private property, is in plain violation of the command of the Constitution.” (Id. at p. 457).

The state constitution was amended in 1879, omitting the “equal and uniform” requirement for ad valorem taxation and exempting growing crops, public schools, and government-owned property. (Property Tax Exemptions at p. 945.) Further amendment to the constitution in 1894 exempted public libraries, free museums, fruit and nut-bearing trees, and grapevines. (Ibid.) “This began an ever-expanding series of constitutional amendments and legislative enactments to exempt or exclude property from taxation. Early in this century additional exemptions were added for churches in 1900, veterans in 1911, vessels and colleges in 1914, orphanages in 1920, and immature trees and cemeteries in 1926.” (Ibid.) While the constitutional exemption was self-executing, the Supreme Court concluded that the Legislature had the power to enact legislation providing reasonable regulations for its exercise. (Chesney v. Byram (1940) 15 Cal.2d 460, 463-472.)

In 1944, the voters approved a constitutional amendment permitting the Legislature to exempt from taxation all or any portion of property used exclusively for religious, hospital or charitable purposes if certain conditions were met. (Property Tax Exemptions at p. 946; see art. XIII, § 4, subd. (b).) The Legislature did so. (See Rev. & Tax. Code, § 214 [statutory welfare exemption].) In Cedars of Lebanon, supra, 35 Cal.2d 729, the Supreme Court considered the scope of the welfare exemption in a case involving several nonprofit hospitals seeking a refund of property taxes levied against certain buildings used to support their hospital operations. (Id. at pp. 731-733.) The court held that property used for a nursing school and to house essential hospital staff qualified for the tax exemption. (Id. at pp. 738-740.)

Cedars of Lebanon also considered whether the hospitals should be exempt from a levy under the Los Angeles County Flood Control Act. Although denominated a “tax,” a long line of cases reaching back to 1917 had concluded that the levy was actually a special assessment “against the real property of the district on the basis of benefits to be received.” (Cedars of Lebanon, supra, 35 Cal.2d at p. 747.) The Supreme Court concluded: “It is well settled that exemptions of private property from taxation do not extend to special assessments, levied upon the basis of equivalent benefit, unless specifically so provided.” (Cedars of Lebanon, at p. 747.) It rejected the hospitals’ argument that the flood control levy was a “tax” for purposes of the welfare exemption because it was calculated on an ad valorem basis, explaining: “the character of a levy as a tax or an assessment depends upon whether it is exacted in compensation for a benefit to the property upon which it is made a charge, and its classification is not affected by the method adopted for collection.” (Id. at p. 748.) Thus, Cedars of Lebanon established that certain property-related exactions such as special “assessments” are not property taxes subject to exemption by religious or nonprofit organizations.5

In Estate of Simpson (1954) 43 Cal.2d 594 (Estate of Simpson), the Supreme Court reaffirmed the longstanding principle that “[t]he constitutional exemptions from taxation refer only to property taxes,” and not other forms of taxation such as local assessments or excise taxes. (Id. at pp. 597-598.) The court addressed whether certain death benefits paid out by a county retirement system were exempt from the inheritance tax. A statutory exemption provided that such benefits were “’exempt from taxation, whether state, county, municipal, or district.’” (Id. at p. 596.) The Supreme Court determined the exemption did not apply, concluding “[t]he inheritance tax is not a tax on the property itself, but is an excise imposed on the privilege of succeeding to property upon the death of the owner.” (Id. at p. 597-598; see also Ingels v. Riley (1936) 5 Cal.2d 154, 159-160, 163 [holding that a motor vehicle license fee was an excise tax charged for use of vehicles on highways, and not a property tax subject to the constitutional exemption for veterans].)

The Simpson court explained that “[o]ur constitutional requirement of uniformity and equality of taxation has always been construed to apply to direct property taxes (now art. XIII, § 1) and to have no bearing upon an excise or privilege tax . . . or license fees assessed for the right to carry on certain businesses.” (Estate of Simpson, supra, 43 Cal.2d at p. 597.) In addition, “[l]ocal assessments do not come within the meaning of the word ‘tax’ as used in the constitutional provision exempting lands of the state from taxation.” (Ibid.) Rather, “[t]he constitutional exemptions from taxation refer only to property taxes” such as “property used for religious, hospital and charitable purposes” and “church property.” (Id. at pp. 597-598.)6

The settled principle that a tax exemption provision must be strictly construed against the taxpayer also mandated this result. Because “principles of statutory construction require any doubt be resolved against the right to the exemption,” the Supreme Court concluded it “would not be justified in holding the exemption from taxation clause to apply beyond the limits of property taxation, and if further extension is deemed appropriate so as to include excise or privilege taxes, such as the state inheritance tax, the act should be so clarified by the Legislature in unmistakably clear language.” (Id. at pp. 602-603.)

Several principles can be gleaned from the foregoing history. First, constitutional exemptions to property taxation applied only to direct property taxes and not to other forms of taxation such as an excise or use tax. Second, since the first state constitution of 1849, the only form of “property taxation” was the ad valorem property tax, a general tax levied in proportion to the assessed value of property. Third, although certain exactions may be property-related, such as a special assessment for flood control improvement, long-standing precedent established that these exactions were not “property taxes” subject to exemption by religious or nonprofit organizations. Finally, exemptions from property taxation must be strictly construed against the right to the benefit, and any intent to extend the tax exemption must be conveyed in “unmistakably clear language.” (Estate of Simpson, supra, 43 Cal.2d at p. 603.) Against this backdrop, we examine article XIII’s ballot materials to determine if the voters expressed a clear intent to extend the religious exemption to a species of taxation that had not yet been devised — the non-ad valorem special property tax.

ii. Proposition 8

Proposition 8 was placed on the ballot by the Legislature for the express purpose of “amending, adding, and repealing various articles and sections” of the state Constitution, including article XIII. (Ballot Pamp., Gen. Elec. (Nov. 5, 1974), text of Prop. 8, preamble, p. 72.) No argument was offered in opposition to Proposition 8. The argument in favor described the proposal as follows: “Proposition 8 revises article XIII of our Constitution. . . . [I]t makes only technical changes in the Constitution and clarifies the meaning of existing sections. [¶] . . . This measure originated in the Constitution Revision Commission. The Commission’s recommendations were further refined by a blue ribbon ‘task force’ made up of staff from both Houses of the Legislature, the Department of Finance, and a group of outside experts. The result was this non-controversial measure which was adopted by both Houses of the Legislature with only one dissenting vote. [¶] The purpose of this amendment is not to make a change in our present tax structure, but to make the Constitution more readable and workable. . . . This means that the essence of the article is retained, but made more understandable.” (Ballot Pamp., Gen. Elec. (Nov. 5, 1974), argument in favor of Prop. 8, p. 31.)7

In contrast, the analysis by the Legislative Analyst set forth in the ballot materials did acknowledge that some changes were made by the proposal. As relevant here, it identified among the “more significant” differences the following: “The present Constitution exempts from property taxation churches and other places of religious worship, except that if the church pays rent to the owner of the property, the exemption does not apply. This proposition changes this rule so that the exemption will apply to a place of religious worship whether it is rented or owned.” (Ballot Pamp., Gen. Elec. (Nov. 5, 1974), analysis of Prop. 8 by Legis. Analyst, p. 30.) The authorized legislative history for Proposition 8 confirms that this was the only change to the religious exemption, which was otherwise “retained.” (Constitutional Revision Task Force, Proposed Revision of Article XIII California Const., Assem. J. (May 16, 1974) Appen. at p. 13246 (Task Force Report); see also 1 Taxing Cal. Property § 6:3 [noting Legislature adopted the Task Force Report “’as part of the public record and as a statement of legislative intent’”], citing Stats. 1974, ch. 870, § 78.) Similarly, the “substance” of the constitutional authorization for the welfare exemption was also “retained,” with only minor changes. (Task Force Report at p. 13255 [noting only that specific types of owners were “broadened to the more generic categories of nonprofit corporations and charitable trusts”].)

The thrust of this legislative history is that, as a general matter, Proposition 8 was not intended to make significant substantive alterations to California’s property tax structure, and more specifically, the religious exemption remained largely unchanged from its pre-1974 incarnations. “In the absence of evidence of a contrary legislative or popular intent, terms used in a constitutional amendment are normally construed in light of existing statutory definitions or judicial interpretations in effect at the time of the amendment’s adoption.” (Heckendorn, supra, 42 Cal.3d at p. 487.) Given the history and judicial interpretation of the religious exemption detailed above, it seems clear that the religious exemption from “property taxation” as adopted in 1974 was intended to apply solely to general ad valorem property taxes.

Indeed, Valley Baptist concedes the point that when article XIII was enacted in 1974, the only mode of property taxation extant in California was the ad valorem property tax. This conclusion is further supported by the structure of the 1974 revision of article XIII. As stated above, section 1 of article XIII broadly declares that “ [a]ll property is taxable and shall be assessed at the same percentage of . . . full value” — i.e., on an ad valorem basis. (See also Rev. & Tax. Code, § 2202 [“’Ad valorem property taxation’ means any source of revenue derived from applying a property tax rate to the assessed value of property.”].) By adopting exemptions from “property taxation” several sections later in the same article, one may reasonably conclude that the voters intended to provide exemptions solely from ad valorem property taxation. Accordingly, were we construing sections 3 and 4 of article XIII shortly after their adoption in 1974, we might very well have concluded that the intent of the Legislature and the electorate to create exemptions from ad valorem property taxation was apparent on the face of the provision and consistent with the plain meaning of the term “property taxation.”

Moreover, since its adoption in 1974, article XIII has only been amended twice, and not in any way relevant to the religious exemption. For example, section 3 of article XIII exempts up to $1000 of the assessed value of property from “property taxation” if the owner is an active or honorably discharged member of the armed forces, or the parent or unmarried spouse of a deceased veteran. (Art. XIII, § 3(o), (p) & (q).) Proposition 93, a legislatively referred constitutional amendment approved by the voters on November 8, 1988, deleted certain residency requirements for the veterans’ property tax exemption which conflicted with recent United States Supreme Court precedent. (Ballot Pamp., Gen. Elec. (Nov. 8, 1988), analysis of Prop. 93 by Legis. Analyst, pp. 60-61 & p. 123 [text of provision]; Art. XIII, § 3(o), (p) & (q).) The amendments enacted by Proposition 93 did not impact the scope of the religious exemption or redefine the term “property taxation.”

The second amendment to article XIII was adopted under Proposition 160 on November 3, 1992 as a legislatively referred constitutional amendment. Proposition 160 amended section 4(a) of article XIII, permitting the Legislature to expand the state’s disabled veterans’ exemption to include the homes of unmarried surviving spouses of persons who died while on active military duty as a result of a service-related injury or disease. (Ballot Pamp., Gen. Elec. (Nov. 3, 1992), analysis of Prop. 160 by Legis. Analyst and arguments for and against, pp. 28-31, p. 68 [text of provision]; art. XIII, § 4(a).) No alteration was made to the scope of the religious exemption or to the definition of “property taxation.”

In short, there is nothing in article XIII — either in the text of the article itself or in ballot materials adopting or revising its provisions — that indicates the religious exemption under section 3(f) was intended to cover special property taxes. Nevertheless, the trial court here concluded that a special property tax “falls within the plain meaning” of property taxation for purposes of article XIII, section 3. The trial court reached this conclusion after analyzing the religious exemption in view of later-enacted voter initiatives — most predominately Propositions 13 and 218 — whose constitutional provisions have extensively altered property-related taxation in this state.

We thus turn to an examination of Propositions 13 and 218 to determine if the constitutional articles added by these initiative measures evince a clear intent by the electorate to extend the scope of article XIII exemptions to special property taxes. Indeed, Valley Baptist urges us to adopt this approach, arguing that the passage of Propositions 13 and 218 “present the sort of changed conditions” we must account for “in construing article XIII, § 3(f).”

C. Later-Enacted Tax Initiative Measures

Over the course of several decades, voters have enacted a series of constitutional initiative measures aimed at increasing voter control over the ability of state and local government to raise revenue. (See Wilde v. City of Dunsmuir (2020) 9 Cal.5th 1105, 1112.) “The series of reforms began with Proposition 13, a ballot initiative passed in 1978 to cap increases in property taxes and assessments, as well as other state and local taxes. Then, in 1996, voters passed Proposition 218, which further curbed state and local government authority to generate revenue through taxes and other exactions. Finally, in 2010, voters approved Proposition 26, which expanded the reach of these limitations by broadening the definition of ‘tax’ to cover ‘any levy, charge, or exaction of any kind imposed by a local government,’ subject to several specified exceptions.” (Ibid.)

i. Proposition 13

Article XIII A, adopted in June 1978 as an initiative measure popularly known as Proposition 13, “significantly altered the system of real property taxation in this state.” (Board of Supervisors v. Lonergan (1980) 27 Cal.3d 855, 857.) Proposition 13 added article XIII A to the California Constitution “’to assure effective real property tax relief by means of an “interlocking ‘package’” ‘ of four provisions. [Citation.] The first provision capped the ad valorem real property tax rate at 1 percent (art. XIII A, § 1); the second limited annual increases in real property assessments to 2 percent (art. XIII A, § 2); the third required that any increase in statewide taxes be approved by two-thirds of both houses of the Legislature (art. XIII A, § 3); and the fourth required that any special tax imposed by a local government entity be approved by two-thirds of the qualified electors (art. XIII A, § 4).” (Citizens for Fair REU Rates v. City of Redding (2018) 6 Cal.5th 1, 10 (Citizens for Fair REU Rates).)

Section 4 of article XIII A provides in full: “Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.” (Art. XIII A, § 4, italics added.) Section 4 thus “prohibits the imposition of a special tax that is an ad valorem tax on real property.” (Heckendorn, supra, 42 Cal.3d at pp. 486, 489; see City of Camarillo v. County of Ventura (1994) 26 Cal.App.4th 1351, 1355 [“Special taxes are not ad valorem property taxes.”].)

Following the passage of Proposition 13, a new type of constitutionally authorized property-related taxation was recognized — the non-ad valorem special property tax. In Heckendorn, supra, 42 Cal.3d 481, the Supreme Court upheld a special tax to fund police and fire protection based on parcel size which had been approved by the requisite two-thirds vote. (Id., at pp. 483-484, 486-489.) Significantly, the high court concluded that the special parcel tax at issue was not an ad valorem property tax and was therefore authorized under article XIII A, section 4. (Id., at pp. 486-487; see also Digre, supra, 205 Cal.App.3d at p. 110 [“the non-ad valorem special property tax appears as a new entity in Heckendorn”].) Thereafter, in Neilson, supra, 133 Cal.App.4th 1296, the Court of Appeal upheld the constitutionality of a flat-rate special parcel tax enacted by a two-thirds vote to fund several specific municipal objectives. (Id. at p. 1310.) After finding that the parcel tax was a special rather than a general tax, the Neilson court rejected the claim that taxes imposed on the basis of property ownership must be levied as an ad valorem tax. The court held: “[T]he California Constitution does not prohibit a tax on the mere ownership of real property if the tax is a special tax and not an ad valorem tax.” (Id. at pp. 1301, 1308, citing art. XIII D, § 3.)

Article XIII A does not reference the article XIII exemptions from property taxation, including the religious exemption. Nor was any mention made of religious exemptions to property taxation in the official title and summary to Proposition 13 or in the analysis prepared by the Legislative Analyst. (Ballot Pamp., Primary Elec. (June 6, 1978) pp. 56-60.) While proponents of Proposition 13 argued to the voters that the measure “DOES NOT remove tax exemptions for churches or charities” (Id. at p. 58), nothing about this statement suggests that these existing tax exemptions would be extended to include the new special taxes authorized by section 4 of article XIII A.

On the contrary, the ballot materials seem to describe special taxes as distinct from the ad valorem “property taxes” subject to exemption. For example, according to the statement of the Legislative Analyst, Proposition 13 “would: (1) place a limit on the amount of property taxes that could be collected by local governments, (2) restrict the growth in the assessed value of property subject to taxation, (3) require a two-thirds vote of the Legislature to increase state tax revenues, and (4) authorize local governments to impose certain nonproperty taxes if two-thirds of the voters give their approval in a local election.” (Id. at p. 56, italics added.) Similarly, the proponents of the ballot measure stated that the initiative “[l]imits property tax to 1% of market value . . . and requires all other tax raises to be approved by the people.” (Id. at p. 58.)

The Supreme Court also drew a distinction between “property taxation” and special taxes in several opinions following the enactment of Proposition 13. For example, in upholding the constitutionality of Proposition 13, the Supreme Court described the four provisions of article XIII A as an interrelated package intended “to assure effective real property tax relief,” stating: “Since the total real property tax is a function of both rate and assessment, sections 1 and 2 unite to assure that both variables in the property tax equation are subject to control. Moreover, since any tax savings resulting from the operation of sections 1 and 2 could be withdrawn or depleted by additional or increased state or local levies of other than property taxes, sections 3 and 4 combine to place restrictions upon the imposition of such taxes.” (Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 231, some italics added; see also Rider v. County of San Diego (1991) 1 Cal.4th 1, 7 [quoting Amador Valley]; Huntington Park Redevelopment Agency v. Martin (1985) 38 Cal.3d 100, 105 [“The purpose of section 4 is to prevent the government from recouping its losses from decreased property taxes by imposing or increasing other taxes,” italics added]; Heckendorn, supra, 42 Cal.3d at pp. 488-489 [quoting Huntington Park].) Thus, judicial construction of the terms “property tax” and “special tax” did not regard these concepts as overlapping (at least until the passage of Proposition 218, discussed below).

If special taxes under Proposition 13 were intended for inclusion under the religious exemption provisions of article XIII, it was not made apparent by the text of article XIII A or its accompanying ballot materials. “’We cannot presume that . . . the voters intended the initiative to effect a change in law that was not expressed or strongly implied in either the text of the initiative or the analyses and arguments in the official ballot pamphlet.’” (People v. Valencia (2017) 3 Cal.5th 347, 364.) Proposition 13 therefore does not supply the basis for extending the religious exemption to special property taxes.

ii. Proposition 218

California’s voters approved Proposition 218 in 1996, adding articles XIII C and XIII D to the California Constitution. Proposition 218 “was aimed at the perceived abuses committed by local governments in their attempts to raise revenue in the aftermath of Proposition 13. Article XIII D is particularly aimed at special benefits assessments and other levies incident to property ownership, which levies are not considered taxes and thus are not limited by section 4 of Article XIII A.” (Grodin, at p. 405.) Article XIII C was intended to settle litigation over the definition of a “special tax” and to require voter approval before any tax was passed by local government. (Id. at pp. 398-399.)

“As enacted, article XIII C provided that ‘[a]ll taxes imposed by any local government shall be deemed to be either general taxes or special taxes.’ (Art. XIII C, § 2, subd. (a).) Local governments may not impose, increase, or extend: (1) any general tax, unless approved by a majority vote at a general election; or (2) any special tax, unless approved by a two-thirds vote. (Art. XIII C, § 2, subds. (b), (d).).” (Citizens for Fair REU Rates, supra, 6 Cal.5th at p. 10-11.) Article XIII C defines a special tax as “any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund.” (Art. XIII, § 1, subd. (d).)8

Article XIII D circumscribes the ability of local governments to impose or increase property-related taxes, assessments or fees. Pursuant to article XIII D, “[n]o tax, assessment, fee, or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (1) [t]he ad valorem property tax imposed pursuant to Article XIII and Article XIII A[;] [¶] (2) [a]ny special tax receiving a two-thirds vote pursuant to Section 4 of Article XIII A[;] [¶] (3) [a]ssessments as provided by this article[; and] [¶] (4) [f]ees or charges for property related services as provided by this article.” (Art. XIII D, § 3, subd. (a).)

Thus, Proposition 218 confirmed that local government can impose a non-ad valorem special tax “upon any parcel of property or upon any person as an incident of property ownership” if the tax is approved by a two-thirds vote of the electorate. (See art. XIII A, § 4 [permitting non-ad valorem special taxes subject to a two-thirds vote]; art. XIII D, § 3, subd. (a)(2) [permitting special taxes imposed as an incident of property ownership if adopted pursuant to section 4 of article XIII A]; Neilson, supra, 133 Cal.App.4th at p. 1308.) Stated another way, Proposition 218 confirmed that a non-ad valorem special tax is a “property tax” when it is based on the mere ownership of real property.

Because section 3(a) of article XIII D permits the adoption of a special property tax, the trial court below concluded that such tax falls within the plain meaning of “property taxation” for purposes of the article XIII exemptions. However, both the text of Proposition 218 and the ballot materials are silent on the question of property tax exemptions, including the religious exemption. (See Ballot Pamp., Gen. Elec. (Nov. 5, 1996), analysis by Legis. Analyst, pp. 72-75, 108-109; see generally art. XIII C & art. XIII D.) Absent from the constitutional text or the legislative materials is any indication that the voters intended to expand the scope of article XIII’s religious exemption to cover a new form of property taxation recognized in Proposition 218. While the trial court’s reading of these constitutional provisions is certainly plausible, it is by no means apparent from a “plain reading” of article XIII D that it was intended to effectuate a sweeping change of article XIII’s religious exemption.

On the contrary, Proposition 218 did alter another longstanding exemption, one exempting state and local governments from payment of special assessments. Under prior law, “publicly owned and used property that is exempt from property taxation [was] impliedly exempt from special assessments.” (Loyola Marymount Univ. v. L.A. Unified School Dist. (1996) 45 Cal.App.4th 1256, 1268.) “The rationale behind a public entity’s exemption from property taxes and special assessments [was] to prevent one tax-supported entity from siphoning tax money from another such entity”. (San Marcos, supra, 42 Cal.3d at p. 161; see also Inglewood v. County of Los Angeles (1929) 207 Cal. 697, 703 [holding there is an implied exception of public property from special assessments].)

Proposition 218 severely curtailed this implied constitutional exemption, doing so expressly. (See art. XIII D, § 4, subd. (a) [“Parcels within a district that are owned or used by any agency, the State of California or the United States shall not be exempt from assessment unless the agency can demonstrate by clear and convincing evidence that those publicly owned parcels in fact receive no special benefit.” (italics added)]; see Ballot Pamp., Gen. Elec. (Nov. 5, 1996), analysis of Legis. Analyst, p. 74 [under the measure “local governments must charge schools and other public agencies their share of assessments. Currently, public agencies generally do not pay assessments.”].) Thus, the drafters of Proposition 218 understood how to alter the scope of an exemption in “unmistakably clear language.” (See Estate of Simpson, supra, 43 Cal.2d at p. 603.)

The trial court below reasoned that if Proposition 218 had intended the exemption from “property taxation” to apply only to ad valorem property taxes, “it could have made that clear when [adding] the provision for special taxes or when [adding] section 3(a) of article XIII D.” But that turns the rule of strict construction on its head. An intent to extend the benefits of a constitutional or statutory tax exemption must be clearly expressed or strongly implied by the text of the provision or its legislative materials, and any doubt must be resolved against the assertion of the tax exemption. (Cedars of Lebanon, supra, 35 Cal.2d at p. 734; Alpha Therapeutic, supra, 84 Cal.App.4th at p. 5.) Here, Valley Baptist has failed to meet its burden of showing that the limitations imposed under article XIII D, section 3 for the imposition of taxes, charges, and assessments also impliedly exempted places of worship from paying special property taxes.9 In sum, nothing in Proposition 218 evinces an intent by the electorate to affect the scope of the religious exemption in section 3(f) of article XIII.

D. Other Indicia of Constitutional Intent

i. Legislative Interpretation
Contemporaneous interpretation by the Legislature provides further support for the conclusion that the article XIII exemptions from property taxation apply solely to ad valorem taxes. (See Heckendorn, supra, 42 Cal.3d at p. 488 [“[a]pparent ambiguities in a constitutional provision ‘frequently may be resolved by the contemporaneous construction of the Legislature”]; see also Greene v. Marin County Flood Control & Water Conservation Dist. (2010) 49 Cal.4th 277, 290-291 (Greene) [“[W]hen the Legislature has enacted a statute with the relevant constitutional prescriptions clearly in mind. . . . the statute represents a considered legislative judgment as to the appropriate reach of the constitutional provision’” and is subject to “’significant weight and deference’”].) Shortly after the passage of Proposition 13, the Legislature adopted Government Code section 53978, which expressly authorized a special tax for police and fire protection. (See Stats. 1979, ch. 397, § 1.)

The statute provides in pertinent part: “Any local agency which provides fire protection or prevention services . . . or which provides police protection services, may, by ordinance, determine and propose for adoption a special tax for fire protection and prevention provided by the local agency, or a special tax for police protection services provided by the local agency, or both of such special taxes if both such services are provided by the local agency, other than ad valorem property taxes, pursuant to this section . . . Such proposition shall be submitted to the voters of the affected area or zone, or of the district, and shall take effect upon approval of two– thirds of the voters voting upon such proposition. The local agency which fixes such a special tax shall not, however, impose such tax upon a federal or state governmental agency or another local agency.” (Gov. Code, § 53978, subd. (a), italics added.) Moreover, the special tax authorized by the statute “shall be levied on a parcel, class of improvement to property, or use of property basis, or a combination thereof.” (Id., subd. (b).)

Through its enactment of Government Code section 53978, the Legislature not only authorized a special property tax, it also expressly exempted public agencies from payment of the tax. But public agencies are already exempted from “property taxation” under article XIII. (See art. XIII, subd. 3(a) & (b).). That the Legislature felt it necessary to exempt those agencies from the special tax authorized by Government Code section 53978 is highly persuasive evidence that it continued to view the exemptions from property taxation in article XIII as limited to ad valorem property taxes. (Compare Heckendorn, supra, 42 Cal.3d at p. 488 [finding the Legislative construction of special tax in Government Code section 53978 of “’very persuasive significance’” when concluding that a parcel tax adopted pursuant to that statute was a permissible special property tax]; see also Greene, supra, 49 Cal.4th at p. 291 [finding Government Code section 53753, enacted specifically to address the balloting scheme for assessments adopted under article XIII D, section 4, was persuasive on the question whether such ballots must be voted on in secret in accordance with article II, section 7].) In short, if public agencies were already exempt from special taxes under article XIII, section 3(f), there would have been no need to include the specific exemption in Government Code section 53978. (See People v. Leiva (2013) 56 Cal.4th 498, 506 [ “[W]henever possible, significance must be given to every word [in a statute] in pursuing the legislative purpose, and the court should avoid a construction that makes some words surplusage.”].)

ii. Agency Construction
The State Board of Equalization (SBE) reached the same conclusion forty years ago, opining that the City of Palmdale was not required to exempt a church from paying a special tax levied pursuant to Government Code section 53978 to finance fire protection services. (State Bd. of Equalization, legal opn. of counsel, Hope Lutheran Church — Exemption from Special Tax Oct. 17, 1980 (SBE Opinion).)10 The SBE Opinion cited long-standing precedent in concluding that, while the state could grant a church exemption without running afoul of the Establishment Clause (Walz v. Tax Commission (1970) 397 U.S. 664 (Walz)), “[t]here is no requirement that state or local government exempt churches from paying taxes under the Free Exercise Clause of the United States Constitution or the California Constitution.” (SBE Opinion at p. 1.) Rather, “[c]hurches may be required to bear their fair share of a tax so long as the tax or fee is not exacted for the privilege of exercising their religion.” (Id. at p. 2, citing Watchtower Bible and Tract Society Inc., v. County of Los Angeles, et al., (1947) 30 Cal.2d 426 (Watchtower).) Noting that statutes granting tax exemptions must be strictly construed and that the authorizing statute exempted only governmental agencies from the special tax, the SBE opinion concluded that such a special tax could be levied against church property. (Ibid.)

Implicit in the SBE opinion is the conclusion discussed above that the article XIII exemptions do not extend to special property taxes. Thus, any exemptions from such special taxes are limited to those expressly authorized elsewhere. The related Tax Annotation makes this inference explicit, stating: “The church exemption applies to ad valorem property taxes and does not prevent collection by a local governmental agency of a special tax imposed for fire protection or prevention services.” (Property Tax Annotations, Annotation 230.0040, Special Taxes (Oct. 17, 1980).) The trial court here dismissed the SBE opinion, finding it distinguishable because the tax at issue in that case was authorized by a statute providing only a single exemption for public agencies. But that is precisely the point. If section 3(f) of article XIII exempts churches from non-ad valorem property taxes, the church in the SBE opinion would have been exempt from the Government Code section 53978 special tax regardless of the specific exemptions otherwise contained in the statute. It was not.

Of course, “[c]ourts must . . . independently judge the text of the statute [or constitutional provision].” (Yamaha, supra, 19 Cal.4th at p. 7.) However, the SBE has special expertise in the area of property taxation, and thus its interpretation of the meaning and legal effect of related statutes and constitutional provisions “’is entitled to consideration and respect by the courts.’” (See California State Teachers’ Retirement System v. County of Los Angeles (2013) 216 Cal.App.4th 41, 52, fn.3, quoting Yamaha.) This is especially true in the present case because the SBE adopted its special tax guidance in 1980, shortly after Proposition 13 added section 4 of article XIII A to the California Constitution, and the Legislature adopted Government Code section 53978. (See Yamaha, at p. 13 [increased deference warranted where “the agency’s interpretation was contemporaneous with legislative enactment of the statute being interpreted”].) Even more persuasive is the fact that the SBE has consistently maintained its position with respect to the constitutional provisions here at issue for four decades. (Ibid. [greater weight to be given where “the agency ‘has consistently maintained the interpretation in question, especially if [it] is long-standing’”].) Under the circumstances, we conclude that the SBE’s special tax interpretation is entitled to deference.

“Yet another factor we may consider is the fact that courts should apply a presumption that the Legislature is aware of a consistent and very long-standing administrative interpretation, and thus, the reenactment of the statute being interpreted with no modification designed to make it clear that the agency’s interpretation is wrong is a strong indication that the administrative practice was, and is, consistent with underlying legislative intent.” (Yamaha Corp. of America v. State Bd. of Equalization (1999) 73 Cal.App.4th 338, 353; accord In re Dannenberg (2005) 34 Cal.4th 1061, 1082.) The SBE issued its special tax exemption opinion and related annotation in 1980.

As discussed above, the Legislature amended section 3 of article XIII eight years later in 1988 to revise the veterans’ tax exemption from “property taxation,” and this legislatively referred constitutional amendment was subsequently approved by the voters as Proposition 93. (See art. XIII, § 3; (Ballot Pamp., Gen. Elec. (Nov. 8, 1988), analysis of Prop. 93 and arguments thereto, pp. 60-61). Similarly, Proposition 160 amended section 4(a) of article XIII in 1992, permitting the Legislature to expand the state’s disabled veterans’ exemption from “property taxation” to include the homes of unmarried surviving spouses of persons who died while on active military duty as a result of a service-related injury or disease. (Ballot Pamp., Gen. Elec. (Nov. 3, 1992), analysis of Prop. 160 and arguments thereto, pp. 28-31; art. XIII, § 4(a).) Yet the Legislature did nothing in these amendments to overturn the SBE’s conclusion that the term “property taxation” does not include special taxes such as the one at issue here.

Indeed, Proposition 218 — adopted by the electorate 16 years after the SBE issued its special tax opinion — also did nothing to displace this longstanding administrative interpretation. This inaction lends strong support to our conclusion that the Legislature’s intent in adopting and maintaining the article XIII tax exemptions was to limit them to ad valorem property taxation. And nothing in Propositions 13 and 218 has altered this view. Absent any clarification by the Legislature or the voters in “unmistakably clear” terms of their intent to expand the religious exemption to encompass duly enacted special taxes, we conclude that the religious exemptions from property taxation set forth in article XIII, sections 3 and 4, apply only to ad valorem property taxation and therefore do not exempt Valley Baptist from payment of the Paramedic Tax. (Estate of Simpson, supra, 43 Cal.2d at pp. 602-603.)11

E. Free Exercise Challenge
Valley Baptist argues on appeal that even if the Paramedic Tax is an excise tax and not a tax incident to property ownership, the tax is unconstitutionally applied against the church because it infringes on Valley Baptist’s free exercise of religion. We need not resolve this relatively undeveloped claim because Valley Baptist chose to forego any free exercise challenge to the Paramedic Tax in the trial court proceedings.

In argument below, Valley Baptist made several concessions worth highlighting. Valley Baptist agreed that if the trial court characterized the Paramedic Tax as an excise tax rather than a property tax, Valley Baptist would not be exempt from it. Valley Baptist acknowledged that the article XIII exemptions from “property taxation” do not apply to assessments or fees. It also agreed that the determinative issue was the interpretation of the term “property taxation” and if the City’s interpretation were adopted, “the church would be responsible” for the Paramedic Tax.

Most notably, Valley Baptist agreed in argument before the trial court that it was not raising a free exercise challenge. When counsel for Valley Baptist mentioned the federal constitutional issue in a discussion about its right to use its buildings for religious worship, the trial court cut counsel off, stating: “But that’s a different analysis altogether, right? I mean, that’s a different challenge, if you say an otherwise lawful tax has the effect of — is a governmental attempt to limit or constrict the free exercise of religion. That’s a completely different argument, which doesn’t seem, to me, placed here. [¶] The dispute between the parties that’s been proffered to me that I have to resolve in order to provide declaratory relief, again, is very straightforward: Whether the California Constitution, whether the exemption — and I didn’t — I haven’t heard any dispute that the Valley Baptist Church is entitled to a constitutional exemption as a religious organization. [¶] The only dispute is whether the exemption applies to this specific special tax promulgated by the voters of San Rafael.” Counsel for Valley Baptist replied: “That is correct, Your Honor. That is correct.”

In argument on the City’s new trial motion, counsel for Valley Baptist reiterated this position. The trial court stated: “But at the end of the day, I don’t need to be informed by the larger federal constitutional principles that animate the treatment of religious organizations because I’m dealing with a very specific state constitutional provision. And no one has challenged that by saying that somehow it’s inconsistent with or contravenes the federal Constitution.” Counsel for Valley Baptist responded: “Right, you are correct on that.” Given these concessions by counsel, Valley Baptist has forfeited any free exercise challenge on appeal. (See People v. Rudd (1998) 63 Cal.App.4th 620, 628 [“constitutional objections must be interposed before the trial judge in order to preserve such contentions for appeal,” citing cases].)

While we may overlook the forfeiture of a claim and reach the merits on appeal (see People v. Marchand (2002) 98 Cal.App.4th 1056, 1061), we decline to do so here. Valley Baptist raises an as applied challenge to the constitutionality of the Paramedic Tax. Yet there has been no development in the record of its assertion on appeal that the Paramedic Tax has handicapped the church’s free exercise of religion. Valley Baptist’s belated free exercise claim raises many questions that defy resolution on this limited factual record. In what way has the Paramedic Tax impeded its ability to conduct worship services? Does Valley Baptist claim that it is exempt only from funding paramedic services, or from other city services as well such as water, sewage, electricity, or garbage collection? How has the City exhibited “hostility” toward Valley Baptist? Because this claim was not properly presented or developed below, we have no occasion to weigh these matters for the first time on appeal.

III. DISPOSITION

The judgment is reversed, and the matter is remanded for further proceedings consistent with this opinion. The City is entitled to its costs on appeal.

Sanchez, J.

WE CONCUR:

Humes, P. J.

Banke, J.

FOOTNOTES

1 All article references are to the California Constitution. We use the terms “non-ad valorem special property tax” and “special property tax” interchangeably to refer to a special tax assessed by an agency upon a parcel of property or as an incident of property ownership under the requirements set forth in article XIII A, section 4. (See art. XIII D, § 3(a)(2).)

2 The ad valorem property tax imposed under section 1 of article XIII and permitted by article XIII D, is, as its name suggests, a general tax based upon the value of the property assessed. (See Rev. & Tax. Code, § 2202 [“’Ad valorem property taxation’ means any source of revenue derived from applying a property tax rate to the assessed value of property.”].) Special taxes authorized by section 4 of article XIII A, in contrast, cannot be ad valorem taxes. (Art. XIII A, § 4(b) [“Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district,” italics added].)

3 As this court earlier explained: “At the most general level, a property tax is a tax whose imposition is triggered merely by the ownership of property. [Citation.] An excise tax, by contrast, is a tax whose imposition is triggered not by ownership but by some particular use of the property or privilege associated with ownership, such as the transfer of the parcel to a new owner. . . . Excise taxes are not subject to the California constitutional provisions restricting imposition of property taxes.” (Thomas v. City of East Palo Alto (1997) 53 Cal.App.4th 1084, 1088-1089 (Thomas); see also City of Oakland v. Digre (1988) 205 Cal.App.3d 99, 104-109 (Digre).)

4 Section 2 addresses the taxation of personal property, granting the Legislature broad authority to “classify such personal property for differential taxation or for exemption.” Most forms of personal property have been exempted from taxation by the Legislature pursuant to this power. (Pope & Goodrich, California Property Tax Exemptions, Exclusions, Immunities, and Restrictions on Fair Market Valuation — Or, Whatever Became of Full Value Assessment? (1987) 18 Pacific L.J. 943, 945-946 (Property Tax Exemptions).)

5  The distinction between a property tax and an assessment remains unaltered today. Article XIII C, section 1 excludes from the definition of a “tax” any “assessments and property-related fees imposed in accordance with the provisions of article XIII D.” (Art. XIII C, § 1(e)(7).) Article XIII D defines an “[a]ssessment” as “any levy or charge upon real property by an agency for a special benefit conferred upon the real property.” (Id., § 2, subd. (b); see also San Marcos Water Dist. v. San Marcos Unified School Dist. (1986) 42 Cal.3d 154, 162 (San Marcos) [a special assessment is “a charge imposed on particular real property for a local public improvement of direct benefit to that property, as for example a street improvement, lighting improvement, irrigation improvement, sewer connection, drainage improvement, or flood control improvement”], superseded by statute on other grounds as recognized in City of Marina v. Board of Trustees of California State University (2006) 39 Cal.4th 341, 353.) While a special benefit assessment is not a tax, article XIII D, section 4 sets forth a series of procedures and requirements for the levy of an assessment.

6 The respondent in Estate of Simpson argued that because no state property tax existed at the time the statutory exemption was enacted, the exemption clause would be rendered meaningless if it did not apply to inheritance, gift, and income taxes as well. (Estate of Simpson, supra, 43 Cal.2d at p. 601-602.) The court disagreed, noting that prior to 1910, “taxes for state purposes were raised in the same manner as county taxes, that is, by ad valorem levy upon all taxable property in the state.” (Id. at p. 602.) “Thus in the event that the Legislature should determine in any year to adopt some plan of ad valorem taxation for state purposes (art. XIII, § 1), [the exemption statute] would serve to exempt the rights, benefits and money in the retirement fund from such taxation.” (Id. at p. 602.) It is apparent from this exchange that “property taxation” is synonymous with the ad valorem property tax.

7 By order dated May 6, 2019, we granted City’s request that we take judicial notice of the ballot materials for Propositions 8, 13, and 218. On our own motion, we additionally take judicial notice of the ballot materials for Propositions 93 and 160. (See Evid. Code, §§ 452, subd. (c), 459, subd. (a); St. John’s Well Child & Family Center v. Schwarzenegger (2010) 50 Cal.4th 960, 967, fn. 5; Kidd v. State of California (1988) 62 Cal.App.4th 386, 407, fn. 7.) We deny the remainder of the City’s judicial notice request — which was deferred until consideration of the merits of this appeal — as unnecessary to our decision.

8 Proposition 218 did not define the term “tax.” That definition was provided with the passage of Proposition 26 in 2010, which added subdivision (e) to section 1 of article XIII. (Citizens for Fair REU Rates, supra, 6 Cal.5th at p. 11.) Proposition 26 broadly defined “tax” to include “any levy, charge, or exaction of any kind imposed by a local government,” subject to various listed exceptions for charges, fines, and fees. (Art. XIII C, § 1, subd. (e).) A charge that satisfies an exception is, by definition, not a tax, and includes charges imposed for government services or benefits conferred on the payor, charges to recoup the costs of regulatory enforcement, and special assessments and other property-related fees governed by article XIII D. (Ibid.)

9 Post-Proposition 218 case law tends to use the phrase “local property taxes” loosely when discussing article XIII D. (See Apartment Assn., supra, 24 Cal.4th at p. 830, 837 [“Proposition 218 allows only four types of local property taxes: (1) an ad valorem property tax; (2) a special tax; (3) an assessment; and (4) a fee or charge.”]; see also Plantier v. Ramona Municipal Water Dist. (2019) 7 Cal.5th 372, 381 [citing Apartment Assn.]; Crawley, supra, 243 Cal.App.4th at p. 404 [same language]; Neilson, supra, 133 Cal.App.4th at p. 1307 [same].) These cases, which appear to equate “local property taxes” with a wide variety of property-related exactions, are not altogether helpful in construing the exemption from “property taxation” set forth in article XIII, as it is clear that many property-related fees and assessments are not “property taxes” under the Constitution. (See art. XIII C, § 1(e), (7) [excluding from the definition of “tax” any “assessments and property-related fees imposed in accordance with the provisions of article XIII D”]; Art. XIII D, § 2(e) [defining a “fee” or “charge” as “any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service.”].)

10 A legal ruling of counsel in this context is “a legal opinion written and signed by the Chief Counsel or an attorney who is the Chief Counsel’s designee, addressing a specific tax application inquiry from a taxpayer or taxpayer representative, a local government agency, or board staff.” (Cal. Code Regs., tit. 18, § 5700, subd. (a)(2).) Annotations, in contrast, “are summaries of the conclusions reached in selected legal rulings of counsel. Annotations do not embellish or interpret the legal rulings of counsel which they summarize and do not have the force and effect of law.” (Id., subd. (a)(1); see also Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 4-7 (Yamaha).)

11 Given the rule of strict construction we must apply, Valley Baptist’s reliance on first amendment precedent to argue for an expansive reading of “property taxation” in line with “changed conditions” is misplaced. Because we conclude that the religious exemption from property taxation applies solely to ad valorem property taxation, we need not consider or resolve the parties’ disagreement over the proper characterization of the Paramedic Tax as a property tax or an excise tax.

END FOOTNOTES




Novogradac Opportunity Zones Mapping Tool.

Now Identifying 2020 Census Tract Boundary Changes

About the Novogradac Opportunity Zone Mapping Tool

This tool displays designated qualified opportunity zones as published by the CDFI Fund as of June 15, 2018, as well as areas that may be eligible for OZ designation.

Designated opportunity zones displayed in the Novogradac Opportunity Zones Mapping tool are those that were nominated by those chief executive officers, and have been certified and designated by the Treasury Department. In addition, every low-income census tract in Puerto Rico was designated as an OZ in 2018 budget legislation. Once an OZ is designated, it remains a qualified OZ for a period of 10 years from the date of designation.

Launch the Novogradac Mapping Tool.




The Three Best Capital Sources for OZ Deals, with Hall Labs.

What are the three different classes of investors that are the most likely capital sources for Opportunity Zone funds or deals? And what are some tips for approaching and pitching to them?

Dave Kunz is managing partner and general manager of Hall Venture Partners. Will Walker is a private equity veteran and advisor to Hall Labs and HVP.

Continue reading.

OpportunityDb

By Jimmy Atkinson

March 3, 2021




Advance Refunding Bill Introduced in the Senate.

On February 25, Senator Roger Wicker (R-MS) introduced legislation reinstating advance refunding to the tax code. Senator Wicker has been a steadfast ally in support of bringing the provision back, citing the value the statute brings to local leaders as a financial management tool.

Learn more.




H.R. 451 Would Increase Highway Bond Limitation

SUMMARY BY TAX ANALYSTS

H.R. 451, the Building United States Infrastructure and Leveraging Development (BUILD) Act, introduced by House Ways and Means Committee member Earl Blumenauer, D-Ore., would double the national limitation amount for highway or surface freight transfer facility bonds.

Citations: H.R. 451; Building United States Infrastructure and Leveraging Development (BUILD) Act

FULL TEXT PUBLISHED BY TAX ANALYSTS

117TH CONGRESS
1ST SESSION

H.R. 451

To amend the Internal Revenue Code of 1986
to increase the national limitation amount for qualified highway
or surface freight transfer facility bonds.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 25, 2021

Mr. BLUMENAUER (for himself and Mr. RODNEY DAVIS of Illinois)
introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to increase the national limitation amount for qualified highway or surface freight transfer facility bonds.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the “Building United States Infrastructure and Leveraging Development Act” or the “BUILD Act”.

SEC. 2. INCREASE NATIONAL LIMITATION AMOUNT FOR QUALIFIED HIGHWAY OR SURFACE FREIGHT TRANSFER FACILITY BONDS.

(a) IN GENERAL. — Section 142(m)(2)(A) of the Internal Revenue Code of 1986 is amended by striking “$15,000,000,000” and inserting “$30,000,000,000”.

(b) APPLICATION OF DAVIS-BACON ACT REQUIREMENTS. — Section 142(m) is amended by adding at the end the following new paragraph:

“(5) APPLICATION OF DAVIS-BACON ACT REQUIREMENTS. — If any proceeds of any issue are used for construction, alteration, or repair of any facility otherwise described in paragraph (15) of subsection (a), such facility shall be treated for purposes of subsection (a) as described in such paragraph only if each entity that receives such proceeds to conduct such construction, alteration, or repair agrees to comply with the provisions of subchapter IV of chapter 31 of title 40, United States Code with respect to such construction, alteration, or repair.”.

(c) EFFECTIVE DATE. — The amendments made by this section shall apply to bonds issued after the date of the enactment of this Act.

DATED JAN. 25, 2021




TAX - SOUTH CAROLINA

South Carolina Public Interest Foundation v. Calhoun County Council

Supreme Court of South Carolina - February 10, 2021 - S.E.2d - 2021 WL 479824

Advocacy group and taxpayers brought action against county council seeking declaratory judgment that projects funded by referendum imposing one percent sales and use tax exceeded Capital Project Sales Tax Act’s scope, and thus were invalid.

The Circuit Court entered summary judgment in county council’s favor, and plaintiffs appealed.

The Supreme Court held that Act’s 30-day limitations period applied to claim that projects funded by referendum exceeded Act’s scope.

Capital Project Sales Tax Act’s 30-day limitations period applied to claim that projects funded by county referendum imposing one percent sales and use tax exceeded Act’s scope, even though claim was substantive, rather than procedural, challenge; Act did not contain any express language limiting challenges to “the results of the referendum” to only procedural aspects.




TAX - SOUTH DAKOTA

Wings as Eagles Ministries, Inc. v. Oglala Lakota County

Supreme Court of South Dakota - February 10, 2021 - N.W.2d - 2021 WL 501428 - 2021 S.D. 8

Taxpayer appealed county commission’s denial of property tax abatement request for two tax years, contending that property should have remained under charitable property tax exemption.

The Circuit Court affirmed, and taxpayer appealed.

The Supreme Court held that taxpayer was required to show that property was tax exempt during tax years to obtain property tax abatement, rather than show that it should have been exempt.

Taxpayer was required to show that property was tax exempt during tax years to obtain property tax abatement, rather than show that it should have been exempt, and could not litigate anew whether property was entitled to charitable tax exemption; county board of equalization had denied applications for property tax exemption, and taxpayer did not timely appeal those denials.




New Jersey Enacts Legislation Imposing Annual Community Service Contributions on Nonprofit Hospitals.

On February 22, 2021, New Jersey Governor Phil Murphy signed into law new legislation (A1135/S357) that clarifies and preserves the statutory property tax-exemption historically afforded to nonprofit hospitals under N.J.S.A. 54:4–3.6 while also securing from nonprofit hospitals a yearly contribution to their host municipality to help defray the costs of the municipal services they utilize. The new law takes immediate effect.

Background

The new law is New Jersey lawmakers’ legislative remedy to the New Jersey Tax Court’s 2015 landmark decision in AHS Hospital Corp. v. Town of Morristown. In that case, the Tax Court held that a nonprofit hospital in Morristown was not entitled to property tax exemption because it operated too similarly to a for-profit business. The Tax Court determined that there were insufficient proofs to draw a distinction between the for-profit and nonprofit activities conducted on the hospital property. The Tax Court also found that if other nonprofit hospitals operated in the same manner, their nonprofit status was a legal fiction because of the level of for-profit activity shown to exist at the Morristown hospital. With this decision, the Tax Court kicked the ball squarely to the New Jersey Legislature to address the modern nonprofit hospital and its entitlement, if any, to a real property tax exemption going forward.

The 2015 Tax Court decision led to a flurry of lawsuits by host municipalities against local hospitals to revoke their municipal property tax exemptions and assess real estate taxes based on the value of the hospital’s real estate. In response, Bill S3299 was introduced in late 2015, seeking to require certain nonprofit hospitals that were otherwise exempt from payment of real estate taxes to pay a community service contribution to cover the costs of providing public safety and other municipal services. The bill was left unsigned by then-Governor Chris Christie and failed to become law.

Annual Community Service Contribution

Likewise, under the recently enacted legislation certain nonprofit hospitals (as defined by the law) that are exempt from real property taxation are now required to make an annual community service contribution to the host municipality. The community service contribution for tax year 2021 equals $3 a day for each licensed bed at the nonprofit hospital as of January 1, 2020. For example, a hospital with 500 licensed beds will be assessed a community service contribution in the amount of $547,500 for tax year 2021.

The law also provides for a community service contribution for satellite emergency care facilities, which equals $300 for each day in the prior tax year. For each tax year thereafter, the per day contributions for both nonprofit hospitals and satellite emergency care facilities will increase by 2%. The community service contributions will be due and payable in equal quarterly installments, and 5% of the contribution will be shared with the county government. If any quarterly installment is not paid when due, the unpaid amount constitutes a lien after 30 days and may be enforced in the same manner as unpaid real estate taxes.

Exemption

The new law provides for an exemption from remitting the community service contribution if the owner certifies to the New Jersey Department of Health that, in the prior year, the hospital did not bill any patient for inpatient or outpatient professional or technical services rendered at the hospital, and that the hospital has provided community benefit over the preceding three years for which the hospital has filed such forms averaging at least 12% of the hospital’s total expenses as documented on IRS Form 990, Schedule H, part 1, column F. The hospital must file a copy of the documentation with the municipal tax assessor on or before December 1 of the pre-tax year. Upon receipt of the documentation, the tax assessor is required to notify the hospital, on or before December 31, that it is exempt from payment of the community service contribution for the new tax year.

Nonprofit Hospital Community Service Contribution Study Commission

Lastly, the new law establishes a permanent commission known as the Nonprofit Hospital Community Service Contribution Study Commission to study the system created under the legislation. The Commission will issue reports every three years to the Governor and Legislature.

Greenbaum, Rowe, Smith & Davis LLP – Thomas J. Denitzio, Jr., James A. Robertson and Hunain Sarwar

March 1 2021




New Jersey Reinstates Property Tax Exemption for Nonprofit Hospitals: Ballard Spahr

Summary

New Jersey Gov. Phil Murphy signed into law legislation that restores property tax exemptions for nonprofit hospitals. However, the law requires New Jersey nonprofit hospitals to make a community service contribution.

The Upshot

The Bottom Line

The change begins with tax year 2021, so hospitals and health systems should put plans in place to comply.

FULL ALERT

On February 22, 2021, New Jersey Gov. Phil Murphy signed into law legislation that restores property tax exemptions for nonprofit hospitals. However, the law requires New Jersey nonprofit hospitals to make a community service contribution, beginning in tax year 2021, to municipalities in which the facilities operate.

Previously, the New Jersey Tax Court found Morristown Medical Center, a tax-exempt New Jersey nonprofit corporation, liable for property taxes for years 2006 through 2008. The court concluded that the hospital failed to meet the legal standard for a nonprofit, charitable organization under New Jersey law due to its “entangled infrastructure” of for-profit and nonprofit activities.

The new law addresses the 2015 Tax Court decision by exempting nonprofit hospitals and satellite emergency care facilities from property tax. However, any portion of the hospital or emergency care facility leased to a profit-making organization or used for purposes that are not exempt from taxation shall be subject to property tax.

Additionally, hospitals and satellite emergency care facilities that are exempt from property tax will be assessed a “community service contribution” to the municipality in which they are located.

The annual community service contribution for hospitals will be “$3 a day for each licensed bed at the hospital in the prior tax year.” And, for satellite emergency care facilities, “$300 for each day in the prior tax year.” The amount of the contributions will increase by 2% each year.

A hospital may be exempt from making annual contributions if, in the previous year, the hospital did not bill any patient for inpatient or outpatient professional or technical services rendered at the hospital and the hospital has provided community benefit over the preceding three years averaging at least 12% of the hospital’s total expenses. Additionally, facilities may offset required contributions by any amounts paid to municipalities pursuant to voluntary agreements.

Ballard Spahr attorneys represent hospitals and health systems, as well as other clients across the health care industry in New Jersey and throughout the nation. Our attorneys are available to assist clients with navigating this developing New Jersey law.

__________________________________________________________________

February 26, 2021

Copyright © 2021 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.




OZ Investing in Puerto Rican Tourism, with Lifeafar Capital

What are some of the factors that may make Puerto Rico a compelling destination for Opportunity Zone investment, particularly in…

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opportunitydb.com

February 24, 2021




Tax Advantage on Muni Bonds Disappears as Prices Hit Record High.

Municipal-bond prices have risen so much that the tax breaks that typically lure investors are washing away.

The yields on top-rated five year state and local government securities are hovering around 0.2%, about one-quarter of what they were a year ago. Even after factoring in the federal tax exemption, that’s the equivalent of about 0.3% for the highest-income investors — less than what one would earn on comparable Treasuries. The same goes for benchmark 10-year bonds.

The phenomenon shows how much the $3.9 trillion market has broken from its historic patterns as investors plow billions of dollars into mutual funds focused on state and local government bonds, keeping yields little changed even as those on Treasuries rise. Last week, such funds picked up $3.5 billion of new cash, the most since at least 2007, according to figures from the Investment Company Institute.

The influx is fueling demand for tax-exempt bonds — which are scarcer with interest rates so low that governments are frequently selling taxable bonds to avoid the regulations tied to federally subsidized debt.

Those factors have helped hold municipal-bond yields at record lows against Treasuries, indicating that valuations are at an all time high. With the tax advantages effectively erased when it comes to the safest securities, some money managers have been shifting into taxable bonds instead.

Terry Goode, a senior portfolio manager at Wells Capital Management, said that he’s seeing “intense demand” for taxable securities.

“Tax exempt munis are at record rich levels all along the curve and in most rating categories, so if you’re able to buy taxable munis, you should be buying taxable munis,” Goode said. “Even on an after-tax basis it still makes sense.”

Bloomberg Markets

By Danielle Moran

February 17, 2021, 10:30 AM PST

— With assistance by Romy Varghese




IRS PLR: IRS Grants Extension of Expenditure Period for Bond Proceeds

The IRS granted an authority an extension of the expenditure period for available project proceeds of qualified school construction bonds after determining that the authority had reasonable cause for its failure to spend all the proceeds and that the remainder will be spent for qualified purposes with due diligence.

LTR 202106002

February 12, 2021




TAX - NEW JERSEY

City of Newark v. Township of Jefferson

Superior Court of New Jersey, Appellate Division - January 29, 2021 - A.3d - 2021 WL 297824

Taxpayer, a city, sought review of local property tax assessment on taxpayer’s watershed land located in township.

After a bench trial, the Tax Court affirmed. Taxpayer appealed.

The Superior Court, Appellate Division, held that:

Value of city’s watershed land in township was not nominal for purposes of local property tax assessment by virtue of sale of development rights to State as part of land conservation and the moratorium on development by virtue of land’s status as watershed property; even city’s expert asserted that property’s assessed value should be based on $1500 per acre.

Local property tax assessment on city’s watershed land in township did not result in discrimination against city, even if assessments increased on city’s land but were otherwise reduced township-wide, where assessment was primarily based on assessor’s settlement negotiations with city’s counsel, which assessor believed resulted in an assessment of $5000 per acre.

Local property tax assessment on city’s watershed land in township had no basis in fact and thus was defective, where assessment was primarily based on assessor’s settlement discussion with city’s counsel rather than value of land, which was subject to unique restrictions due to sale of development rights to State as part of land conservation and the moratorium on development by virtue of land’s status as watershed property, assessor relied on another sale that he failed to verify, and trial judge made no findings regarding validity of assessment methodology.




The Evolution of the OZ Marketplace, with Peter Truog.

How has the Opportunity Zone marketplace evolved over the past 2+ years and how will it continue to evolve going…

CONTINUE READING »

OpportunityDb

February 17, 2021




TAX - CALIFORNIA

Howard Jarvis Taxpayers Association v. City and County of San Francisco

Court of Appeal, First District, Division 5, California - January 27, 2021 - Cal.Rptr.3d - 2021 WL 265412 - 21 Cal. Daily Op. Serv. 995 - 2021 Daily Journal D.A.R. 948

Organizations representing taxpayers and business owners brought action seeking to invalidate municipal ballot initiative imposing additional tax on commercial rents to fund early childcare and education on ground that it was passed by simple majority of voters, rather than two-thirds supermajority.

The Superior Court granted summary judgment in favor of city. Organizations appealed.

The Court of Appeal held that initiative imposing additional tax on commercial rents to fund city’s early childcare and education program was valid and enforceable after being passed by simple majority of voters.

Municipal ballot initiative imposing additional tax on commercial rents to fund city’s early childcare and education program was valid and enforceable after being passed by simple majority of voters, and did not require two-thirds supermajority of voters for passage.




Maryland Approves Country’s First Tax on Big Tech’s Ad Revenue.

Analysts estimate that the tax will generate up to $250 million for schools in the state in the first year. It will also probably face fierce legal challenges.

State politicians, struggling with yawning budget gaps from the pandemic, have made no secret about their interest in getting a bigger piece of the tech industry’s riches.

Now, Maryland’s lawmakers are taking a new slice, with the nation’s first tax on the revenue from digital advertisements sold by companies like Facebook, Google and Amazon.

The State Senate voted on Friday to override the governor’s veto of the measure, following in the footsteps of the state’s House of Delegates, which gave its approval on Thursday. The tax will generate as much as an estimated $250 million in the first year after enactment, with the money going to schools.

The approval signals the arrival in the United States of a policy pioneered by European countries, and it is likely to set off a fierce legal fight over how far communities can go to tax the tech companies.

Other states are pursuing similar efforts. Lawmakers in Connecticut and Indiana, for example, have already introduced bills to tax the social media giants. Several other states, like West Virginia and New York, fell short of passing new taxes on the tech giants last year, but their proponents may renew their push after Maryland’s success.

The moves are part of an escalating debate about the economic power of the tech giants as the companies have grown, become gatekeepers for communication and culture and started to collect reams of data from their users. In the United States, law enforcement agencies brought multiple antitrust cases against Google and Facebook last year. Members of Congress have proposed laws to check their market power, encourage them to moderate speech more carefully and protect their users’ privacy.

Maryland’s tax also reflects the collision of two economic trends during the pandemic: The largest tech companies have had milestone financial performances as social distancing moved work, play and commerce further online. But cities and states saw their tax revenues plummet as the need for their social services grew.

“They’re really getting squeezed,” said Ruth Mason, a professor at the University of Virginia’s law school. “And this is a huge way to target a tax to the winners of the pandemic.”

Lobbying groups for Silicon Valley companies like Google and Facebook joined other opponents of the law — including Maryland Republicans, telecom companies and local media outlets — in arguing that the cost of the tax would be passed along to small businesses that buy ads and their customers. Doug Mayer, a former aide to Gov. Larry Hogan who now leads a coalition backed by industry opponents of the tax, said at a news conference last week that the law’s supporters were “using this bill to take a swing at out-of-state, faceless big corporations.”

“But they’re swinging and missing and hitting their own constituents in the mouth,” he said.

The Maryland tax, which applies to revenue from digital ads that are displayed inside the state, is based on the ad sales a company generates. A company that makes at least $100 million a year in global revenue but no more than $1 billion a year will face a 2.5 percent tax on its ads. Companies that make more than $15 billion a year will pay a 10 percent tax. Facebook’s and Google’s global revenues far exceed $15 billion.

Bill Ferguson, a Baltimore Democrat who is president of the State Senate, was a main driver behind the bill. He said he was inspired by an Op-Ed essay from the economist Paul Romer proposing taxing targeted ads to encourage the companies to change their business models.

“This idea that one outsider can exploit and use the personal data of another area and pay nothing for its use, that doesn’t work in the long run,” Mr. Ferguson said.

Maryland’s Democratic-controlled legislature passed the tax with veto-proof majorities last March. But Mr. Hogan, a moderate Republican, vetoed the measure in May.

“With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now,” Mr. Hogan said in a letter explaining his reasoning.

Late last year, industry groups helped to form a lobbying organization to try to stop the legislature from overriding Mr. Hogan’s veto.

For months, the organization, Marylanders for Tax Fairness, backed by some of Silicon Valley’s top lobbying groups, has warned Maryland lawmakers in spots on cable news and local radio that a proposed tax on digital advertisements is a “bad idea” at a “bad time.”

The New York Times

By David McCabe

Feb. 12, 2021




IRS Provides Guidance on Electronic Signatures to Form 8038: Squire Patton Boggs

Remember back in the day when we would all gather for a transaction closing to get documents signed and enjoy a nice meal out at a restaurant together? Me neither. In fact, in-person closings were starting to fade long before the pandemic.

Now that we have been closing transactions from the comfort [sic] of our homes for almost a year, in-person closings may become extinct altogether. With that comes the complicated logistics of getting documents signed, shipped, and overnighted to the respective parties where electronic signatures cannot, for one reason or another, be used. Electronic signatures have saved transaction closings during the pandemic, but specific IRS forms, such as the family of Form 8038s, still required a wet signature.

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By Alexis Chandler on February 9, 2021

The Public Finance Tax Blog

Squire Patton Boggs




Snowy Owls and Constituted Authorities: Squire Patton Boggs

On January 27, 2021, a snowy owl was seen in New York City’s Central Park for the first time in 130 years. Nine days later, on February 5, 2021, something almost as rare occurred – the Internal Revenue Service released a private letter ruling dealing with Section 103 of the Internal Revenue Code.[1] In PLR 202105007, the IRS determined that a nonprofit corporation that amended its articles of incorporation to change its purposes and come under the control of a city became a “constituted authority,” within the meaning of Treas. Reg. 1.103-1(b), of the city that could issue tax-exempt bonds on behalf of the city.

The coincidence of these infrequent events involving ornithology and quasi-governmental entities calls to mind the field guide Johnny Hutchinson prepared on the tax classifications of various species of the latter, which was an homage to Roger Tory Peterson’s Field Guide to Birds, a seminal work in the canon of the former. February is a good time to brush up on both.

[1] of 1986, as amended.

By Michael Cullers on February 7, 2021

The Public Finance Tax Blog

Squire Patton Boggs




In Support of the Fiscal Pleasure Restoration Act of 2021: Squire Patton Boggs

Our own Mike Cullers was quoted in Law360 on Wednesday in an article about renewed hope for a full restoration of tax-exempt advance refundings of tax-advantaged bonds after their repeal by the TCJA. The article describes the renewed optimism in the muni bond community that tax-exempt advance refundings can be restored, precipitated by the confirmation of Mayor Pete as Transportation Secretary.

As you have probably seen by now, Mr. Buttigieg made clear in his Senate confirmation hearing that he, like Brother Cullers, is a man of refined taste who appreciates the great pleasures of life (fine scotch, advance refundings for debt service savings, etc.). (Other similarities: neither man is a cat.)

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By Johnny Hutchinson on February 11, 2021

The Public Finance Tax Blog

Squire Patton Boggs




TAX INCREMENT FINANCING - ILLINOIS

Grassroots Collaborative v. City of Chicago

Appellate Court of Illinois, First District, Second Division - December 15, 2020 - N.E.3d - 2020 IL App (1st) 192099 - 2020 WL 7352740

Nonprofit organizations brought complaint against city, alleging that city, for over 30 years, had illegally administered tax increment financing program in a racially and ethnically discriminatory manner.

The Circuit Court dismissed complaint based on lack of standing. Organizations appealed.

The Appellate Court held that:

Nonprofit organizations did not establish injury sufficient to confer standing to bring action against city based on city’s allegedly illegal administration of tax increment financing program under Tax Increment Allocation Redevelopment Act in racially and ethnically discriminatory manner, even if organizations had diverted resources from their other, usual advocacy efforts to engage in advocacy efforts to counter city’s action; organizations had for years engaged in advocacy in an effort to achieve their respective ideological goals, and their expenditure of resources to advocate against city’s actions, at most, simply represented a shift in the target of their advocacy efforts.

Nonprofit organizations forfeited, for purposes of appeal, any argument that they should have been afforded an opportunity to allege a viable injury in an amended complaint, following trial court’s dismissal for lack of standing of their complaint against city based on city’s allegedly illegal administration of tax increment financing program under Tax Increment Allocation Redevelopment Act in racially and ethnically discriminatory manner; organizations never asked to amend complaint during trial court proceedings, and elected to forego that request by stating at dismissal hearing that they believed complaint as filed included sufficient facts establishing standing.




Creating Impact with Essential Housing in Opportunity Zones, with Clark Spencer.

After raising over $200 million for Qualified Opportunity Zone investment, how is one OZ fund creating impact with essential housing?

CONTINUE READING »

opportunitydb.com

February 10, 2021




Illinois Department of Revenue Issues Guidance on Marketplace Tax Collection Duties.

In February 2021, the Illinois Department of Revenue issued a Compliance Alert on the tax remittance obligations of remote retailers, marketplace sellers, and marketplace facilitators. It concluded that remote retailers and marketplace facilitators must collect and remit state and local retailers’ occupation taxes (ROT) administered by the Illinois Department of Revenue – including the Chicago Home Rule Municipal Soft Drink ROT. However, marketplace facilitators are not required to collect and remit other (non-ROT) taxes administered by the Department on sales made by marketplace sellers over the marketplace and remote retailers, including the Prepaid Wireless E911 Surcharge, Illinois Telecommunications Access Corporation Assessment, and Tire User Fee.

In another Compliance Alert, the Department clarified that the Metropolitan Pier and Exposition Authority Food and Beverage Retailers’ Occupation Tax– imposed on certain persons engaged in the business of selling food, alcoholic beverages, or soft drinks – must continue to be remitted by the restaurants. Marketplaces, including food delivery services, should not remit the MPEA Food and Beverage Tax.

Eversheds Sutherland (US) LLP – Jonathan A. Feldman, Chris Lee and Charles C. Capouet

February 11 2021




TAX - LOUISIANA

Balbesi v. Lafayette-City Parish Consolidated Government

Court of Appeal of Louisiana, Third Circuit - December 30, 2020 - So.3d - 2020 WL 7768414 - 2020-61 (La.App. 3 Cir. 12/30/20)

Utilities customers brought a class action petition for declaratory judgment and damages against city-parish consolidated government and Lafayette Utilities System (LUS), challenging the constitutionality of annual transfers of utility’s revenues to the government known as in-lieu-of-tax (ILOT) payments.

The District Court granted summary judgment in favor of defendants dismissing customer’s claims. Customers appealed.

The Court of Appeal held that:

The Lafayette Utilities System (LUS) was a revenue-producing public utility that was exempt from ad valorem taxes as contemplated by the state constitution, because it operated to provide a public service.

In-lieu-of-tax (ILOT) payments made by Lafayette Utilities System (LUS) to city-parish consolidated government were not de facto ad valorem taxes, even though the ILOT transfers were referred to in bond ordinances as payments-in-lieu-of tax, and/or because they were placed into the City General Fund along with other tax revenue; payments were a made from revenue generated by the utility, and payments were in no way related to the value of any property.




TAX - PENNSYLVANIA

In re Coatesville Area School District

Supreme Court of Pennsylvania - January 20, 2021 - A.3d - 2021 WL 190862

City and school district sought judicial review of county board of assessment’s grant of a partial real estate tax exemption in separate actions, which was based on charitable purposes of tax-exempt taxpayer’s property.

After the trial court issued identical orders under separate docket numbers affirming the board’s decision, city, school district, and taxpayer cross-appealed, school district filed a notice of intervention in city’s case, and appeals were consolidated.

Following remand by the Commonwealth Court, the Court of Common Pleas issued two essentially identical, but differently captioned decisions and orders. School district and taxpayer cross-appealed as to the ruling in district’s case, but not as to the identical simultaneous ruling with contained the city’s docket number. The Commonwealth Court consolidated appeals and dismissed, holding that appeal of the trial court decision and order was precluded by unappealed essentially identical decision and order. School district and taxpayer appealed.

The Supreme Court held that:

Res judicata did not bar school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes, even though subject matter and sole issue of appeals were identical and deemed consolidated for disposition only, where appeal was not a recasting of an original cause of action to get a second bite at the apple, it was not clear that final judgment in city’s case was a prior judgment as required for application of res judicata, and claim preclusion would have served no salutary purpose.

Collateral estoppel did not bar school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes; there was no discrete subset issue within taxing districts’ overall claim that should have been foreclosed from resolution, but rather claim and legal issue were the same, whether property was correctly accorded 72 percent tax-exempt status.

Review of school district’s appeal following intervention in city’s parallel contemporaneous appeal with a different docket number of trial court’s determination that tax-exempt taxpayer’s property was entitled to a partial exemption from taxation based on property’s charitable purposes would not have impermissibly created an irreconcilable conflict from any ruling other than an affirmance of trial court’s order, notwithstanding conflict, if any, with earlier final order in city’s case, which affirmed board’s assessment, since assessment figure ultimately reached in school district’s appeal would have been mandatory in relation to county assessment office.




S&P: Massachusetts And New York State Could Lose Billions Of Income Tax Dollars If Lawsuit Challenging Remote Work Succeeds

NEW YORK (S&P Global Ratings) Jan. 22, 2021–S&P Global Ratings believes a pending U.S. Supreme Court case, New Hampshire v. Massachusetts, could result in the reallocation of billions of income tax dollars between certain states. New York and Massachusetts in particular could potentially lose significant amounts of income tax, while New Jersey and Connecticut could gain revenue.

The case considers whether Massachusetts may impose income tax on New Hampshire residents who are teleworking from home for employers with primary offices in Massachusetts. New Hampshire argues the Massachusetts tax violates its state sovereignty (that is, only New Hampshire has the authority to tax its residents’ income). Massachusetts argues that the COVID-19 pandemic is temporary, and ultimately those New Hampshire residents will go back to work at their offices in Massachusetts where the tax is valid. More broadly, the lawsuit could clarify the allocation among the states of taxable personal income generated from teleworking. A decision as to whether the U.S. Supreme Court (SCOTUS) will accept the case should be forthcoming. If SCOTUS declines to take up the case, we expect similar challenges to reappear.

The Pandemic Prompted The New Hampshire v. Massachusetts Dispute, But The Issue Is Not New Or Unique To These Two States

Massachusetts’ tax was in response to the COVID-19 pandemic, which prompted many companies to require employees to work from home. Nevertheless, a small number of states have imposed income taxes on out-of-state telecommuters for some time, such as New York. Connecticut or New Jersey residents telecommuting for a New York City-based company have historically paid income tax to New York State regardless of whether or not they worked in New York City or worked remotely from their homes. While New York City levies a local income tax, its city income tax applies only to residents and not commuters. New Jersey and Connecticut have had to enact income tax credits to residents for income taxes paid to New York to avoid double taxing their residents. New York State has defended its tax on the theory that as long as a company does not require workers to telecommute from a specific out-of-state location, telecommuting out of state was at the convenience of the employee and that income should be attributed to the home office of the company, unless telecommuting was “deemed necessary” by the employer. But in light of COVID-19, many companies are requiring their workers to telecommute. Furthermore, as New Jersey argues, in an amicus curiae brief supporting New Hampshire’s position in the case, the threshold of “deemed necessary” may not be the appropriate standard any longer given that technology has all but eliminated the need for many employees to be physically present at the employer’s location.

A win for New Hampshire would benefit states with a large number of residents commuting out of state to work, such as New Jersey, Connecticut, Hawaii, and Iowa

The credit impact of the case for New Hampshire is not immediately significant because New Hampshire doesn’t levy a personal income tax. Nevertheless, the state estimates approximately 300,000 of its residents stand to benefit because they would avoid paying Massachusetts tax on approximately $6.04 billion of their collective income. Other states, New Jersey and Connecticut among them, with a significant number of residents commuting out of state to work, where income tax collections have gone to the state of employment, could also benefit if New Hampshire prevails against Massachusetts. Since the filing of the original New Hampshire lawsuit on Oct. 19, 2020, New Jersey, Connecticut, Hawaii, and Iowa have filed amicus briefs supporting New Hampshire’s position.

New Jersey estimates in its amicus brief that 400,000 state residents commuted to jobs in New York City before the pandemic, while Connecticut estimates 78,000 of its residents did. New Jersey calculates that in 2018 it credited more than $2 billion to resident taxpayers who worked for out-of-state employers, virtually all of which is attributable to New York City employers, and of which $100 million-$400 million of the credit was for work performed by New Jersey residents working remotely. Once the pandemic began, New Jersey estimates the work-from-home rates ranged from 44% to 58%, indicating a loss of tax revenue of $928.7 million-$1.2 billion to New York for the 12-month period beginning March 2020. The potential new revenue from a favorable ruling could be significant compared with the $36 billion of 12-month operating revenue New Jersey has budgeted for fiscal 2021. Using a similar analysis, Connecticut estimates it will lose $339.0 million-$444.5 million of 2020 income tax revenue to New York State.

On the other hand, a win for New Hampshire could reduce revenue for some states with large employment centers–New York, Arkansas, Delaware, Massachusetts, Nebraska, and Pennsylvania

Potential tax losers could include states with large employment centers on the other side of the state line, with New York State of particular importance because of the large number of high-income Connecticut and New Jersey residents who work in New York City. The amicus brief identifies six states–Arkansas, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania–that tax out-of-state residents for income earned working from home.

New York State stands to lose $1.27 billion-$1.64 billion of tax revenue in New Hampshire were to prevail, compared to its budgeted general fund tax receipts of $62 billion in fiscal 2021. New Hampshire’s amicus brief does not estimate Massachusetts’ potential tax loss, although a separate analysis by New Hampshire’s economic advisor estimates up to $1.2 billion of earnings are attributable to New Hampshire residents who work remotely but are employed by an organization located in Massachusetts. The New Jersey amicus brief estimates Massachusetts could also lose about $3.2 million-$4.2 million to New Jersey alone. Taxes on out-of-state residents tend to be popular with the state imposing them and will likely not disappear without an adverse ruling from SCOTUS.

22 Jan, 2021

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.




Mike Cullers on New Hampshire v. Massachusetts: Squire Patton Boggs

In a complaint filed directly with the U.S. Supreme Court under its original jurisdiction,[1] New Hampshire has sued Massachusetts for attempting to tax residents of the Granite State who normally work in Massachusetts but are working at home during the pandemic.

Continue reading.

The Public Finance Tax Blog

By Johnny Hutchinson on January 29, 2021

Squire Patton Boggs




Biden Tax Changes a Possible Boost for Munis, Western Asset's Amodeo Says.

Robert Amodeo, Western Asset Management head of municipals, says the Biden administration’s stimulus aid and potential tax code changes could be positive for the municipal bond market. He speaks with Bloomberg’s Taylor Riggs on “Bloomberg Markets: The Close.”

Watch video.

Bloomberg Markets

January 26th, 2021, 1:21 PM MST




Tax Windfalls Drive States to Unlikely Role in U.S. Recovery.

America’s governors aren’t waiting for Washington to stimulate their economies.

Faced with unexpected budget surpluses after tax revenue held up better than anticipated during the pandemic, governors in more than half a dozen states are taking steps to help small businesses or provide cash to residents thrown out of work.

In Maryland, Republican Governor Larry Hogan is pushing for a $1 billion stimulus package that would provide one-time checks of as much as $750 to lower-income families. Michigan’s Gretchen Whitmer, a Democrat, is seeking to provide $225 million to small businesses. And in California, Governor Gavin Newsom has proposed using part of a $15 billion windfall to pay for $600 checks for some residents and $4.5 billion of grants and tax credits to businesses hurt by virus shutdowns.

The plans reflect a surprising way the pandemic has rippled through the nation’s economy. Initially confronted with the deepest contraction since World War II, states braced for a steep drop in revenue. But with higher-income Americans still able to work from home, strong consumer spending, and the stock market surging last year as Congress enacted measures to revive the economy, tax collections are rising — or at least not falling nearly as much as expected. That’s given states unexpected influxes of cash that can be used to soften the blows of the pandemic.

“The fact that some states have additional revenue gives them the opportunity to stimulate their own economy or help their residents,” said Karen Krop, a senior director at Fitch Ratings. “They can take that additional money and say, ‘What is our highest priority right now?’ And in most cases it is to stimulate their economy and help their citizens.”

The measures are small compared with the $1.9 trillion economic stimulus proposed by President Joe Biden, and big budget gaps are likely to reappear as states put together spending plans for the coming fiscal year since the surpluses are largely the result of pessimistic forecasts.

Overall state tax revenue still fell 3.2% between March and November from a year earlier, according to preliminary data from 46 tracked by the Urban Institute, causing states to eliminate 373,000 jobs, more than were lost during the last downturn. Former Federal Reserve Chair Janet Yellen, Biden’s pick to head the Treasury Department, said last week that she’s concerned state and local budget cutting could stall the economic recovery as it did after the last recession, underscoring the administration’s plan to provide some $350 billion in aid.

For now, though, confronted with an unprecedented crisis, some governors are plowing short-term surpluses back into their economies.

Colorado has already provided $375 stimulus checks for some residents and lawmakers are considering other one-time measures like financing infrastructure projects. In Maryland, a wealthy state where income-tax revenue is rising despite the pandemic, Hogan is proposing to send checks to an estimated 400,000 residents. California, reaping a surge in capital gains taxes from the state’s highest earners, may send similar payouts to some 4 million people.

“It’s in each state’s interest to be as supportive, as they’re financially able, to help their tax base and tax generators to survive and come out stronger on the other side of Covid,” said Ty Schoback, senior municipal research analyst at Columbia Threadneedle Investments. States have “been able to take a little more of a scalpel approach and be a lot more intentional.”

Michigan’s Whitmer last week released a plan that would help businesses, unemployed residents and renters. In January, state leaders revised revenue forecasts for fiscal 2021 up by about $1.2 billion from an estimate in August, though the revenue is still less than what the state was expecting before the pandemic.

Minnesota lawmakers were among the first to act. In December, they passed a $216 million relief package that includes direct payments to restaurants, bars and gyms. The state’s revenue department said that it helped nearly 3,900 businesses though the middle of this month.

Robert Doty, commissioner of the Minnesota Department of Revenue, said the aid is the “right thing to do” and will trickle down to business owners and employees, which is ultimately supportive for the state’s coffers as well. “Anything we can do to help is pretty cool,” he said.

South Carolina Governor Henry McMaster, a Republican, is incorporating small business relief as part of a budget proposal released this month that would provide $123 million in grants to supplement federal aid. South Carolina’s total general-fund revenue is about $248.4 million higher than expected for the July to November period, according to figures released in December.

The governor has also proposed putting $500 million in reserve. The pandemic has been a reminder of the importance of preparing for the unexpected, said Brian Symmes, a spokesman for McMaster. “It can change at the drop of the hat,” he said.

Bloomberg Economics

By Amanda Albright and Danielle Moran

January 25, 2021, 5:00 AM MST

— With assistance by Romy Varghese




NABL Connect Launches a New Tax Law Community.

NABL is excited to launch a new Tax Law community on NABL Connect, a private members-only (excluding Federal regulators) online discussion forum. The Tax Law community will enable NABL members to stay informed about new developments in Federal tax law related to municipal bonds, share tax resources, and discuss new regulations and interpretations of existing regulations and Code sections.

This new community is intended to facilitate dialogue among members, but is not intended to supplant the need to consult with competent tax attorneys regarding particular situations.

To sign up for NABL Connect, click here.




Democrats Aim for SALT Write-Off Expansion in Stimulus Bill.

Two New Jersey Democrats are leading an effort to expand a valuable tax break for state and local levies in the next virus-relief package, a long-shot effort as lawmakers continue to squabble over the size and scope of the next round of stimulus.

Representatives Josh Gottheimer and Bill Pascrell, both Democrats representing northern New Jersey districts, are calling on House Speaker Nancy Pelosi, Senate Majority Leader Chuck Schumer and Treasury Secretary Janet Yellen to include a full repeal of the $10,000 limit on deductions for state and local taxes, or SALT, that was part of the tax law former President Donald Trump signed in 2017.

“This is key to the health of our economy, key to keeping our state strong,” Gottheimer said at a press conference in Paterson, New Jersey, on Wednesday. “It’s essential to hardworking middle class families who have been crushed by this pandemic and crushed by the SALT cap.”

The effort is likely to be a hard sell, at least in the short run, as Democrats and Republicans struggle to agree on an economic stimulus package that goes beyond more vaccine funding. Democrats are already making moves that would allow them to use the budget reconciliation process, a fast-track procedure to pass some economic relief with only Democratic votes.

Even then, SALT could be controversial because the benefits largely flow to higher-income households in high-tax states, while the pandemic’s toll has been concentrated on lower earners. Yellen said at her confirmation hearing this month that the SALT cap’s impact on municipal governments and residents warrants more study before taking action.

Yellen has appeared to downplay the possibility that a repeal of limit on the SALT deduction could be included in the upcoming stimulus bill. In follow-up answers to Senate questions after her confirmation hearing, she said Biden’s rescue plan does not include a proposal to expand the SALT deduction.

Repealing the SALT cap is a costly proposition. To allow unlimited deductions just in 2021 would cost $88.7 billion, according to Congress’s non-partisan scorekeeper the Joint Committee on Taxation. Permanently repealing the limitation, as Gottheimer and Pascrell are proposing, would cost many multiples of that.

All 12 of New Jersey’s House members, including the state’s two Republican Representatives — Chris Smith and Jeff Van Drew — support a fully restored SALT deduction, Gottheimer said. However, it’s unclear whether the Republicans would sign onto a broader stimulus bill that included the SALT cap repeal.

Still, with Democrats now in control in Washington, this is the first plausible opportunity lawmakers from high tax states like New Jersey have had to reclaim one of their favorite tax breaks. House efforts to expand the SALT tax break failed to gain any traction when the Senate was under Republican leader Mitch McConnell’s control.

Why Are They Moving?

Representatives from states where residents were more likely to claim the SALT deduction, like New York and California, say the loss of the tax break has caused some of their residents to leave. Gottheimer pointed to data that show New Jersey residents leaving the state since the SALT cap has been in place.

Nearly half – 49.2% — of the United Van Lines LLC customers who booked moves out of New Jersey in 2020 reported earning more than $150,000 a year. But many of those people might have left even if the SALT deduction had been instated — 32.3% said they were leaving to retire, whereas only 19% reported moving for “lifestyle” reasons.

AMERCO’s U-Haul says that New Jersey, Illinois and California, all relatively high tax states, are their bottom ranking states for migration growth, based on their truck rental data.

Bloomberg Markets

By Laura Davison

January 27, 2021, 12:15 PM MST Updated on January 27, 2021, 7:07 PM MST




TAX - NEW JERSEY

Eagle Rock Convalescent Center v. Township of West Caldwell

Tax Court of New Jersey - January 6, 2021 - 32 N.J.Tax 122

Taxpayer filed action seeking to lower the local property tax assessments on property, a skilled nursing facility which depended on Medicaid for income.

The Tax Court held that:

Income approach relied upon by taxpayer’s expert was not a reliable indication of value of real property subject to property tax assessment, a skilled nursing facility; there was no attempt to separately allocate value among the realty versus the value of the business operation, properties offered as comparables were not located within competitive market, there were more differences than similarities when attempting to align comparable properties with the subject property, and record provided inadequate support to find property’s actual income was stable and consistent with the market.

Cost approach which utilized automated valuation software to generate cost estimates was not a valid or reliable approach to determine value of real property subject to property tax assessment, a skilled nursing facility, where inputs and additional data used by software were not provided to court for review, and experts did not authenticate and explain calculations used by automated valuation software, were not knowledgeable about the workings of software or how program performed cost calculations, and did not produce evidence to confirm validity of results through manual calculation or through production of actual construction costs to compare experts’ conclusions reached using software.

There was no evidence from which the court could determine value of real property subject to property tax assessment, a skilled nursing facility, as to certain tax years, and thus township’s assessments as to those years were affirmed due to a failure of proofs.

There was no evidence to support claim of economic obsolescence in determining value of real property subject to tax assessment, a skilled nursing facility that received substantial income from Medicaid; there was no evidence that rules establishing the Medicaid reimbursement rate for nursing home patient care, in any manner governed, restricted, or limited the transfer and ownership of the land or that receipt of Medicaid revenue equated to a public policy that should have been shared by the taxpayers in form of reduced property taxes for nursing homes.

Conclusion of taxpayer’s expert as to five percent depreciation for curable functional obsolescence in determining value of real property subject to tax assessment, a skilled nursing facility, was based on credible testimony that expert relied on national cost index with local building costs defined by zip-codes or local cost multipliers for the cost of the items, including installation, and converted the figure to a percentage.

There was no evidence that real property subject to property tax assessment, a skilled nursing facility, suffered from incurable functional obsolescence; there was no proof connecting property’s vacancy to the real estate versus operation of the business or evidence of statewide vacancy rates, and Certificate of Need for 180 beds continued at property unchanged year to year for more than 20 years.

Opinion of township’s expert regarding effective age of real property subject to tax assessment, a skilled nursing facility, in determining physical depreciation, that the general maintenance of property over the years was very good, was well founded and supported by permits taken out on property; permits dated during ten years prior to and after valuation dates elicited a pattern of maintenance, upgrades, and repairs at property demonstrating a propensity for taxpayer to maintain and upgrade the property in a manner which would likely have reduced its effective age.




TAX - CALIFORNIA

Letterman Digital Arts Ltd. v. City and County of San Francisco

Court of Appeal, First District, Division 4, California - December 30, 2020 - Cal.Rptr.3d - 2020 WL 7767276 - 21 Cal. Daily Op. Serv. 140 - 2021 Daily Journal D.A.R. 62

Lessee of property within national park that was established at site of a former military base in the city of San Francisco brought action against city for refunds of gross receipts taxes it paid on rents it had collected pursuant to sublease that was authorized by terms of its commercial lease with federally owned trust that managed the park.

The Superior Court sustained city’s demurrer without leave to amend. Lessee appealed.

The Court of Appeal, held that federal tax exemption on local property taxation of “interests” created under leases of park property did not exempt lessee from payment of gross receipts tax on rents collected under its sublease.

Rental income collected by lessee of property within national park that was established at site of a former military base in the city of San Francisco, under sublease authorized by terms of lessee’s commercial lease with federally-owned trust that managed the historic and financial aspects of the park, did not constitute an “interest” within meaning of federal tax exemption embodied in the Presidio Trust Act, which prohibited local property taxation of “all interests created under leases associated with properties” in the park, and therefore, lessor was not exempt from payment of city’s gross receipts tax on rents collected; lessee’s property interest in the park was not same as its rights conveyed by that interest.




Finding Opportunity Zone Investors in 2021, with Will Walker & Jeffrey Maganis.

What are some of the best ways to find Opportunity Zone investors in 2021?

Jeffrey Maganis is co-founder of Crowdcreate, a digital marketing company that focuses on investor outreach for private equity funds. Will Walker is Crowdcreate’s director of business development.

Continue reading.

Opportunity Db

By Jimmy Atkinson

January 20, 2021




Key Opportunity Zone Deadlines for 2021, with Ashley Tison.

Why is 2021 expected to be a big year for Opportunity Zones and what are some of the key deadlines that investors and fund issuers should be aware of?

Ashley Tison is an Opportunity Zone consultant and attorney based in Charlotte, North Carolina. Along with Jimmy Atkinson, he is co-founder of OZ Pros, an Opportunity Zone advisory firm.

Continue reading.

Opportunity Db

By Jimmy Atkinson

January 27, 2021




TAX - NEW JERSEY

Township of Freehold v. CentraState Healthcare Services, Inc.

Tax Court of New Jersey - January 5, 2021 - 32 N.J.Tax 103

Township appealed county board of taxation’s dismissal of its petitions to impose omitted assessments and to revoke property tax exemptions given to taxpayer.

The Tax Court granted township’s motions for partial summary judgment on reconsideration. Taxpayer moved for reconsideration and sought dismissal of township’s omitted assessment complaints.

The Tax Court held that:




S&P: Massachusetts And New York State Could Lose Billions Of Income Tax Dollars If Lawsuit Challenging Remote Work Succeeds

NEW YORK (S&P Global Ratings) Jan. 22, 2021–S&P Global Ratings believes a pending U.S. Supreme Court case, New Hampshire v. Massachusetts, could result in the reallocation of billions of income tax dollars between certain states. New York and Massachusetts in particular could potentially lose significant amounts of income tax, while New Jersey and Connecticut could gain revenue.

The case considers whether Massachusetts may impose income tax on New Hampshire residents who are teleworking from home for employers with primary offices in Massachusetts. New Hampshire argues the Massachusetts tax violates its state sovereignty (that is, only New Hampshire has the authority to tax its residents’ income). Massachusetts argues that the COVID-19 pandemic is temporary, and ultimately those New Hampshire residents will go back to work at their offices in Massachusetts where the tax is valid. More broadly, the lawsuit could clarify the allocation among the states of taxable personal income generated from teleworking. A decision as to whether the U.S. Supreme Court (SCOTUS) will accept the case should be forthcoming. If SCOTUS declines to take up the case, we expect similar challenges to reappear.

The Pandemic Prompted The New Hampshire v. Massachusetts Dispute, But The Issue Is Not New Or Unique To These Two States

Massachusetts’ tax was in response to the COVID-19 pandemic, which prompted many companies to require employees to work from home. Nevertheless, a small number of states have imposed income taxes on out-of-state telecommuters for some time, such as New York. Connecticut or New Jersey residents telecommuting for a New York City-based company have historically paid income tax to New York State regardless of whether or not they worked in New York City or worked remotely from their homes. While New York City levies a local income tax, its city income tax applies only to residents and not commuters. New Jersey and Connecticut have had to enact income tax credits to residents for income taxes paid to New York to avoid double taxing their residents. New York State has defended its tax on the theory that as long as a company does not require workers to telecommute from a specific out-of-state location, telecommuting out of state was at the convenience of the employee and that income should be attributed to the home office of the company, unless telecommuting was “deemed necessary” by the employer. But in light of COVID-19, many companies are requiring their workers to telecommute. Furthermore, as New Jersey argues, in an amicus curiae brief supporting New Hampshire’s position in the case, the threshold of “deemed necessary” may not be the appropriate standard any longer given that technology has all but eliminated the need for many employees to be physically present at the employer’s location.

A win for New Hampshire would benefit states with a large number of residents commuting out of state to work, such as New Jersey, Connecticut, Hawaii, and Iowa

The credit impact of the case for New Hampshire is not immediately significant because New Hampshire doesn’t levy a personal income tax. Nevertheless, the state estimates approximately 300,000 of its residents stand to benefit because they would avoid paying Massachusetts tax on approximately $6.04 billion of their collective income. Other states, New Jersey and Connecticut among them, with a significant number of residents commuting out of state to work, where income tax collections have gone to the state of employment, could also benefit if New Hampshire prevails against Massachusetts. Since the filing of the original New Hampshire lawsuit on Oct. 19, 2020, New Jersey, Connecticut, Hawaii, and Iowa have filed amicus briefs supporting New Hampshire’s position.

New Jersey estimates in its amicus brief that 400,000 state residents commuted to jobs in New York City before the pandemic, while Connecticut estimates 78,000 of its residents did. New Jersey calculates that in 2018 it credited more than $2 billion to resident taxpayers who worked for out-of-state employers, virtually all of which is attributable to New York City employers, and of which $100 million-$400 million of the credit was for work performed by New Jersey residents working remotely. Once the pandemic began, New Jersey estimates the work-from-home rates ranged from 44% to 58%, indicating a loss of tax revenue of $928.7 million-$1.2 billion to New York for the 12-month period beginning March 2020. The potential new revenue from a favorable ruling could be significant compared with the $36 billion of 12-month operating revenue New Jersey has budgeted for fiscal 2021. Using a similar analysis, Connecticut estimates it will lose $339.0 million-$444.5 million of 2020 income tax revenue to New York State.

On the other hand, a win for New Hampshire could reduce revenue for some states with large employment centers–New York, Arkansas, Delaware, Massachusetts, Nebraska, and Pennsylvania
Potential tax losers could include states with large employment centers on the other side of the state line, with New York State of particular importance because of the large number of high-income Connecticut and New Jersey residents who work in New York City. The amicus brief identifies six states–Arkansas, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania–that tax out-of-state residents for income earned working from home.

New York State stands to lose $1.27 billion-$1.64 billion of tax revenue in New Hampshire were to prevail, compared to its budgeted general fund tax receipts of $62 billion in fiscal 2021. New Hampshire’s amicus brief does not estimate Massachusetts’ potential tax loss, although a separate analysis by New Hampshire’s economic advisor estimates up to $1.2 billion of earnings are attributable to New Hampshire residents who work remotely but are employed by an organization located in Massachusetts. The New Jersey amicus brief estimates Massachusetts could also lose about $3.2 million-$4.2 million to New Jersey alone. Taxes on out-of-state residents tend to be popular with the state imposing them and will likely not disappear without an adverse ruling from SCOTUS.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

22 Jan, 2021




IRS Notice Provides COVID-19 Relief to QOFs, OZ Investors, OZ Businesses: Novogradac

The Internal Revenue Service (IRS) today issued a notice providing relief to qualified opportunity funds (QOFs) and their investors due to the COVID-19 pandemic, extending opportunity zones (OZ) relief provided by an earlier notice. Notice 2021-10 provides relief for the 180-day investment requirement, the 30-month substantial improvement period, 90% investment standard for QOFs, working capital safe harbor for OZ businesses and 12-month reinvestment period for QOFs. The relief largely extends relief provided earlier in Notice 2020-39.

For all taxpayers’ whose last day of their 180-day window to invest capital gains was from April 1, 2020, to March 31, 2021, the 180-day deadline is now March 31. The 30-month substantial improvement period is now tolled from April 1, 2020, through March 31, 2021. A failure by a QOF to satisfy the 90% investment standard is considered reasonable if the last day of its first six-month period of a taxable year or last day of a taxable year falls from April 1, 2020, through June 30, 2021, and the QOF meets other requirements. All OZ businesses holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, receive up to an additional 24 months. If a QOF’s 12-month reinvestment period includes June 30, 2020, the QOF receives up to an additional 12 months to reinvest.

The notice addresses many of the issues included in an Opportunity Zones Working Group letter sent to the IRS Dec. 23, 2020. “Treasury’s guidance provides relief that opportunity zones stakeholders have sought and will enable the incentive to continue to provide capital in areas of need during our nation’s recovery from the COVID-19 pandemic,” said Michael J. Novogradac, CPA, managing partner at Novogradac.

January 19, 2021




Stock Market Rally Spurs Investment in New Tax-Saving Funds.

Bridge Investment Group said its strategy of developing real estate in designated “opportunity zones” hauled in almost $2 billion from investors by the end of last year. That’s roughly double the amount the Salt Lake City-based firm had raised through 2019.

“We actually turned away capital,” said Bridge Executive Chairman Robert Morse, adding that he expects to bring in about $1 billion to invest in the zones this year.

Bridge has emerged as one of the money managers deploying the most capital in the nation’s roughly 8,800 opportunity zones. Created as a part of the 2017 Republican tax overhaul signed into law by President Donald Trump, the program is aimed at encouraging investment in poor communities. Investors are eligible for a suite of generous tax breaks for starting businesses and developing real estate in the zones.

Under the policy, capital gains earned elsewhere — say, by selling stocks — get parlayed into an opportunity zone fund. Taxes owed on the initial gain are deferred through 2026, but a sweeter benefit comes later: Returns on projects in the zones are exempt from capital-gains taxes if they’re held for at least a decade.

While the incentives enjoy broad bipartisan support, some early efforts claiming the breaks have stoked controversy. Plans have been announced for luxury projects from Florida to Oregon. And a proposal in Norfolk, Virginia, involves razing public housing to make way for new mixed-income development.

‘Spirit of the Law’

Bridge has been using the program largely to develop multifamily housing in cities such as Sacramento, California; Austin, Texas; and Phoenix, where population growth is driving demand. Overall, the company said it manages more than $25 billion in real estate assets, including multifamily, senior housing and suburban office properties.

“As a company, we’re embarrassed by the abuses that others have committed” in opportunity zones, Morse said. “We spend a lot of time making sure we are observing both the letter and the spirit of the law.”

As financial markets swooned earlier this year amid a worsening pandemic, some backers of opportunity zones worried that interest in the program would wane. But money continued to pour into funds targeting the zones, reaching more than $12 billion by the end of August, the most recent data from tax adviser Novogradac shows.

President-elect Joe Biden has signaled that he supports the opportunity zone incentives, but favors changes so investments create social benefits. The new administration and Democrat-controlled Congress may also look to increase the country’s capital-gains tax rate.

Were that to happen, “the appeal of an opportunity zone investment, somewhat counterintuitively,” goes up because of the tax breaks available for investments in the zones after 10 years, said Morse. “We’ve done a lot of relatively sophisticated math about that.”

Bloomberg Markets

By Noah Buhayar

January 15, 2021, 9:00 AM MST Updated on January 15, 2021, 9:47 AM MST




Finding Opportunity Zone Investors in 2021, with Will Walker & Jeffrey Maganis.

What are some of the best ways to find Opportunity Zone investors in 2021? Jeffrey Maganis is co-founder of Crowdcreate, ….

CONTINUE READING »

opportunitydb.com

January 20, 2021




New IRS Notice Extends Several Opportunity Zone Deadlines.

Taxpayers who recognized a gain in 2019 may now have until March 31, 2021 to invest in a Qualified Opportunity…

CONTINUE READING »

opportunitydby.com

January 19, 2021




Reviewing Opportunity Zones With Steve Glickman and Ira Weinstein.

The two experts share insights and perspectives on the program’s performance.

The Opportunity Zones program has been around for more than three years now. Throughout this period a lot has happened, including last year’s health crisis and culminating with the 2020 presidential elections, which appeared to mark the passage to a new economic cycle. Multi-Housing News asked two Opportunity Zone experts to share their thoughts on the program’s performance so far and how it will function in the future, considering the current state of affairs on a global scale.

Ira Weinstein is a managing principal at CohnReznick and an Opportunity Zone practice leader, while Steve Glickman is the CEO of Develop LLC, an advisory firm dedicated to building and supporting Opportunity Zone funds. Glickman, an adviser to former President Barack Obama, was one of the co-founders of the Economic Innovation Group that built the Qualified Opportunity Zones program. Recently, the two co-authored a book—“The Guide to Making Opportunity Zones Work”—aiming to help investors benefit from this federal program’s incentives.

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Multi-Housing News

By Anca Gagiuc

JAN 05, 2021




After Rocky Start, Opportunity Zones Could Boom In 2021.

President-elect Joe Biden and his administration are keen to undo much of what their predecessors did. Yet when it comes to one flagging Trump initiative— the opportunity zone program— Biden and the Democrat-controlled Congress could actually provide a big boost.

The unique program, which offers a complicated and multipart capital gains tax breaks on funds invested into certain lower income zip codes (as identified by local officials and blessed by the Treasury) was created by the Tax Cuts and Jobs Act of 2017 (a.k.a the Trump tax cuts), which passed without any Democratic support. Yet the opportunity zone idea has bipartisan roots.

That crucial cross-aisle appeal, combined with the potential for increased regulatory clarity, possible tax rate increases, the massive gains of the unprecedented bull market of the last decade-plus and the economic devastation in cities from Covid-19 have all set the stage for what could be a long-anticipated rush to opportunity zones.

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Forbes

by Jason Bisnoff

Jan 15, 2021




Louisiana Board Vacates Local Tax Assessment on School Meals.

SUMMARY BY TAX ANALYSTS

In Healthy Course LLC v. City of New Orleans, the Louisiana Board of Tax Appeals vacated a local sales tax assessment against a catering company in connection with meals furnished to the students of a private school, finding that the city’s home rule charter, which would have required taxation of the meals, did not override the applicable exemption under state statute.

Citations: Healthy Course LLC v. City of New Orleans; No. L00807

DATED JAN. 13, 2021




Dems Likely Claw Back SALT In Stages: Bloomberg Radio

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence: Biden stimulus, SALT, and taxable munis. Hosted by Paul Sweeney and Vonnie Quinn.

Listen to audio.

Bloomberg Radio

January 15, 2021




Congress Can Help State and Local Governments Prepare for a Rainy Day Without Repealing the SALT Cap.

With Joe Biden in the White House and narrow control of the Congress, Democrats are likely to try to restore the full state and local tax (SALT) deduction, capped through 2025 at $10,000 per year. But if lawmakers really want to assist state and local governments, rather than cutting federal income taxes for mostly high-income households, we suggest a SALT substitute.

Although we have disagreed on the value of the SALT deduction, we agree on an alternative. We’d use the roughly $80 billion annual cost of restoring the full deduction to instead create a special insurance fund that would help states and localities weather recessions without mass layoffs and cuts in essential services. Repealing the SALT deduction completely could obviously fund an even larger program.

Creating a fund along these lines, which we call the State Macroeconomic Insurance Fund (SMIF), would help individual states during economic downturns and lessen the severity and duration of recessions for the whole country.

How the SALT deduction works

The Tax Cuts and Jobs Act of 2017 (TCJA) limited to $10,000 the amount of state and local taxes that households can deduct each year from their federal income tax. By also doubling the standard deduction, the TCJA dramatically reduced the number of itemizers. These provisions, like almost all of those affecting the individual income tax, are scheduled to expire after 2025.

Today, only about 11 percent of households take the SALT deduction, and most of the benefit goes to high-income households. For top-bracket taxpayers, the deduction amounts to a 37 percent federal tax subsidy for up to $10,000 of state and local taxes paid. President-elect Biden has proposed to limit the value of itemized deductions to 28 percent, but 28 percent of an uncapped SALT deduction would be worth far more than the $10,000 capped deduction for most taxpayers.

Pros and cons of the SALT deduction

There’s a huge partisan divide on the SALT deduction. Most Republicans claim that it’s a “blue state subsidy,” that largely benefits big spending, rich states with lots of high-income taxpayers. Democrats argue that the subsidy makes it easier for states and localities to raise taxes to pay for essential public services.

They’re both a bit right. The evidence suggests deductibility does make high-income people more tolerant of high state taxes. But, it’s unclear how much of those higher state and local taxes are used to pay for services that benefit vulnerable populations.

Bigger problems

State and local governments are subject to a well-known one-two punch in recessions: just as revenues are falling, demand goes up for the safety net programs they provide.

Yet, because most states and localities are required to balance their books over each budget cycle, they are forced to slash spending or raise taxes during economic downturns. For instance, state and local governments have cut 1.4 million positions since the onset of the COVID-19 pandemic. Spending cuts can harm not only vulnerable populations but also the larger economy.

Rainy day funds can help, but both amassing those funds and withdrawing them can be politically risky. Managing these types of funds is complicated and the economics of how much to save during a year and when to withdraw money are far from straightforward.

Congress sometimes fills part of this fiscal gap, but not always. For example, it provided about $240 billion in state and local fiscal relief in March, but declined to include further unrestricted aid in the 11th hour compromise bill that was passed last month.

A proposal

Our alternative would use the federal revenue that would otherwise go to reinstating the full SALT deduction to create a State Macroeconomic Insurance Fund (SMIF). Accrued over nine years (the average length of the last four economic expansions) and with interest earnings, such a fund could provide nearly $1 trillion to states and local governments during a downturn.

In addition, states could be encouraged to supplement the fund by making additional premium payments to the SMIF. This might let them save beyond current political limits and help standardize rainy day fund rules. States that declined to pay these additional premiums could still participate in the SMIF but would get the smaller baseline insurance payout.

To prevent states from gaming the program, both expected contributions and recession-generated payouts would be determined by a formula with factors outside of a governor’s control, such as state unemployment rates.

To prevent federal policymakers from raiding the SMIF – as they have routinely done to the Social Security trust fund – it would be treated as a “non-budgetary account” or “deposit fund.” Contributions would be considered to generate outlays at the time they are made rather than when state and local government payments are dispersed. Premiums would be considered receipts and would generate an offsetting outlay for the contribution to the fund, with no net budgetary effect. This is generally the way the federal government accounts for loan guarantee programs.

Winners and losers

The SMIF would help states maintain current services in a recession and boost the economy by funding new investments in infrastructure and other projects. Some states may perceive that a program along these lines would provide less benefit than an unrestricted SALT deduction. But if the last 10 months have taught us anything, it’s the value of insurance.

taxpolicycenter.org

January 14, 2021




Bond Market Tax Haven Shrinks as Corporate-Style Munis Surge.

America’s municipal-bond market is becoming less of a tax haven.

Interest rates have sunk so low that states and local governments have been flooding the market with bonds that aren’t tax-exempt, allowing them to revive a refinancing tactic that was stripped of its subsidies by President Donald Trump’s 2017 tax-cut law or sidestep federal rules on how the proceeds can be spent.

The volume of taxable municipal-debt sales more than doubled last year to about $140 billion, the most since the Obama administration’s Build America Bond program picked up part of the interest bills on state and local securities to stoke the economy after the recession. At the same time, tax-exempt bond sales declined about 8% to $315 billion, according to data compiled by Bloomberg.

Wall Street analysts anticipate that the surge will continue, with CreditSights analyst Patrick Luby forecasting that the pace of tax-free bond sales will drop this year to a more than two-decade low.

The shift has been a boon to the tax-exempt market, where cash has continued to flood in, by reducing the supply. The increase in taxable debt sales has also provided an opportunity for investors hunting for safe, higher-yielding securities at a time when interest rates are negative or near zero in much of the world.

“It’s going to be stronger than it was than 2019,” said Adam Stern, co-head of research at Breckinridge, who added that it would also be bigger than 2020. “With the amount of sheer negative yielding debt around, if you’re a big institution, whether you’re a foreign buyer or a pension fund, it’s a nice fit.”

One of the major drivers of the increase in taxable sales was the 2017 law that prevents governments from selling tax-exempt bonds for so-called advance refundings, a tactic that allows governments to refinance debt that can’t yet be bought back from investors.

The Democratic control of Congress and the White House once Joe Biden is sworn in could have an impact on the trend if the subsidy is revived, allowing governments to sell lower-cost tax-exempt bonds instead. “You would see tax exempt issuance go up, and you would see taxable issuance decrease significantly,” said Timothy Heaney, senior managing director and senior portfolio manager at Newfleet Asset Management.

Yet other elements could be supportive of more taxable municipal-bond sales. It’s possible a Biden administration could revive a version of the Build America Bond program to pump more money into infrastructure projects, something that Democrats have sought periodically since the program lapsed a decade ago, only to be stymied by Republican opposition.

“That is actually bullish for taxables, despite the high supply, because there is a lot of pent up demand,” said Citigroup Inc. municipal-bond analyst Vikram Rai, speaking in a call with clients last week.

Bloomberg Markets

By Nic Querolo

January 11, 2021, 10:40 AM PST Updated on January 12, 2021, 8:21 AM PST

— With assistance by Danielle Moran




The Most Popular OZ Podcast Episodes of 2020.

The Opportunity Zones Podcast will return next week with new episodes for 2021. But in the meantime, here are the most popular episodes of the show in 2020 (presented in reverse chronological order).

Highlights include interviews with Opportunity Zone experts across several industries, including Ashley Tison, Tony Nitti, Dan Kowalski, Jim Sorenson, Erik Hayden, Travis Steffens, Emily Lavery, Garth Everhart, Clem Turner, Mike Novogradac, Riaz Taplin, and more.

CONTINUE READING »

opportunitydb.com

By Jimmy Atkinson

January 13, 2021




TAX - NEW JERSEY

Township of Freehold v. CentraState Healthcare Services, Inc.

Tax Court of New Jersey - January 5, 2021 - N.J.Tax - 2021 WL 47389

Township appealed county board of taxation’s dismissal of its petitions to impose omitted assessments and to revoke property tax exemptions given to taxpayer.

The Tax Court granted township’s motions for partial summary judgment on reconsideration. Taxpayer moved for reconsideration and sought dismissal of township’s omitted assessment complaints.

The Tax Court held that:




IRS Extends Temporary Relief for Qualified Low-Income Housing Projects: NABL

Today, the Internal Revenue Service (IRS) issued Notice 2021-12 extending the temporary relief from certain requirements under § 42 for qualified low-income housing projects and under §§ 142(d) and 147(d) for qualified residential rental projects that was provided in Notice 2020-53, 2020-30 I.R.B. 151 in response to the continuing COVID-19 pandemic. The notice also provides relief for additional § 42 requirements not previously addressed in Notice 2020-53.

Of note:

On December 2, 2020, NABL submitted a letter to the U.S. Department of the Treasury and IRS requesting an extension of IRS Notice 2020-53 through December 31, 2022. Notice 2020-53 provided relief to bond issuers, operators, owners and tenants of qualified residential rental projects and qualified low-income housing projects financed with exempt facility bonds, and state agencies that have jurisdiction over these projects, from otherwise-applicable federal tax law compliance requirements. Read NABL’s letter here.

Notice 2021-12 will be in IRB: 2021-6, dated February 8, 2021.




Ohio Tax Board Affirms Denial of Property Tax Exemption for Church’s Parcel.

SUMMARY BY TAX ANALYSTS

In Greater Fellowship Assembly Outreach v. McClain, the Ohio Board of Tax Appeals found that a church failed to prove that a vacant lot qualified for a real property tax exemption, affirming the Ohio tax commissioner’s denial of an exemption for the parcel.

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First, Do No Harm: States Can Preserve Revenue by Decoupling From CARES Act Tax Breaks for Business Losses.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, included several costly federal tax breaks for businesses that will also reduce many states’ personal and corporate income tax revenues because their tax codes are tied to the federal code. Several of these tax breaks allow businesses to get refunds of taxes they owed for the 2018 and 2019 tax years, before the pandemic hit. Five states — Colorado, Georgia, Hawaii, New York, and North Carolina — have already “decoupled” their tax laws from these provisions to avoid having to give back revenue they have already collected; other states should do the same.[1]

Some of these tax breaks have questionable merit at the federal level and make even less sense for states, which must balance their budgets each year — an extremely challenging task given their sharp revenue declines since the pandemic hit. States will need to increase tax revenues during the next several years to minimize cuts in education, health care, child care, infrastructure, and other critical services, which would disproportionately harm low-income people and people of color. Their immediate priority must be to preserve existing revenue sources by avoiding unnecessary and unwarranted tax cuts.

About half the states have probably lost some revenue already because their tax codes are linked to current provisions of the Internal Revenue Code (IRC). These “rolling conformity” states need to decouple from the CARES Act provisions as early as possible in their 2021 legislative sessions to prevent additional revenue losses and minimize the number of taxpayers that will have to file amended tax returns and pay taxes that were previously refunded.

Continue reading.

CENTER ON BUDGET AND POLICY PRIORITIES

BY MICHAEL MAZEROV

JANUARY 4, 2021




TAX - NEW YORK

Town of Irondequoit v. County of Monroe

Court of Appeals of New York - December 22, 2020 - N.E.3d - 2020 WL 7497940 - 2020 N.Y. Slip Op. 07689

Towns brought hybrid Article 78 proceeding and declaratory judgment action against county and several of its officials, alleging that county was required to credit towns for amount of unpaid maintenance charges, or to guarantee those amounts, that towns assessed against individual properties, for performing services such as cutting grass or removing weeds following property owners’ failure to maintain their property themselves.

The Supreme Court, Monroe County, granted towns’ petition and denied county and officials’ motion to dismiss. County and officials appealed. The Supreme Court, Appellate Division, reversed. Towns appealed.

The Court of Appeals held that counties were required to guarantee and credit towns in connection with certain “unpaid delinquent taxes” assessed by towns.




Democrats Get Clout Needed for Risky Bid to End Trump’s SALT Cap.

Democrats will soon have the balance of power required to repeal President Donald Trump’s limitation on a prized tax deduction, but doing so will likely require a tricky procedural process and a politically fraught vote.

There are few issues that have riled certain segments of the Democratic Party more than Trump’s cap on write-offs of state and local tax, or SALT. Repealing it, however, would require Democrats to vote for something widely seen as a tax cut for the rich at the same time the party is proposing tax increases to make the Internal Revenue Service code more progressive.

Democrats have been trying to restore unlimited SALT deductions since the 2017 tax law capped the benefit at $10,000. Lawmakers from high-tax states, including New York, California and New Jersey, where the tax break is particularly valuable, decried the move saying it was punishing their voters to pay for Trump’s $1.5 trillion tax cut for corporations and the wealthy.

Senator Chuck Schumer of New York, who will become the chamber’s majority leader thanks to the victories of Raphael Warnock and Jon Ossoff in this week’s Senate runoff elections in Georgia, said last year that abolishing the SALT deduction cap would be among his top priorities.

“When we get in the majority we’ll do it permanently,” Schumer said at a press conference on Long Island in July. His office didn’t immediately respond to a request to comment.

Senator Ron Wyden, an Oregon Democrat poised to control the Finance Committee, said in a statement that he would be looking to lift the SALT cap as part of a broader tax agenda.

The politics are easy for lawmakers from high-tax states where many residents saw their deductions decline following the 2017 tax overhaul, but it’s a harder sell for Democrats in low-tax states where few constituents owe more than $10,000 in state income and property taxes.

It’s even trickier because allowing taxpayers to write off their full SALT bills largely benefits the wealthiest Americans. About 52% of the benefit from repealing the cap flows to households earning at least $1 million a year, according to the the non-partisan Joint Committee on Taxation.

Because of that, it’s earned a reputation among Washington economists and policy wonks across the political spectrum for being a dumb idea. Jason Furman, a former economic adviser to President Barack Obama has called restoring the full tax break a “waste of money.”

“At best, the SALT deduction is a warped way to do social policy; at worst it is a politically motivated handout to the richest people in the richest places,” two Brookings Institution researchers wrote in a report last year. “Either way, it is bad policy — especially at a time of rising inequality.”

Still, Democrats are jazzed over the chance to restore a tax break that they say was included in the 2017 law by Republicans to hurt taxpayers in Democratic-leaning districts, including middle-income earners in areas where housing is expensive and taxes are high. Liberals see the cap as part of a broader strategy by conservatives to undermine support for progressive agendas.

“With Democrats in complete control of the federal government, and New York’s senior senator in charge of the Senate agenda, our chances for giving tax relief to middle class New Jerseyans have never been better,” Representative Bill Pascrell said in a statement. “I’m already working with my colleagues in the delegation who are chomping at the bit to restore the SALT deductions Republicans stole from our neighbors in their 2017 tax scam.”

Representative Tom Suozzi, a New York Democrat, is among the legislators leading the charge to repeal the cap. He said he wants it repealed in its entirety.

“The SALT deduction is based upon basic fairness,” Suozzi said. “You shouldn’t be taxed on taxes you have already paid.”

“The second part of the fairness issue is that state and local governments have been operating under this paradigm for a hundred years,” he added.

Shepherding the vote through the House and Senate will require the slim Democratic majorities in both chambers to stay united on what is likely to be a complex and sweeping economic policy bill.

The SALT repeal would likely be bundled with dozens of other tax and spending provisions in what’s known as a budget reconciliation bill, a fast-tracked process to pass legislation with a simple Senate majority — rather than the normal 60-vote threshold.

That way, the chamber’s 50 Democrats, combined with a tie-breaking vote from soon-to-be Vice President Kamala Harris, could pass the legislation without needing any Republicans to sign on.

Democrats have a long trail of defeats trying to get rid of the SALT cap. New York Governor Andrew Cuomo went to court to invalidate the law. Governors of Democratic-led states, including Cuomo, then tried to use the judicial system to throw out regulations regarding the cap. So far, both efforts have failed.

House Democrats successfully passed a short-term repeal of the SALT cap in 2019, but the Senate didn’t consider it.

It’s an expensive proposition to fully repeal the SALT cap. Restoring the tax break would cost about $620 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center. That’s about twice the cost the $1,200 stimulus payments Congress approved in March for most Americans. However, the Tax Policy Center projects that most benefits would fall to top earners, leaving middle-income households with an average tax cut of $10.

Democrats could opt to do something short of a full restoration of the SALT tax break that would blunt the disproportionate share going to the richest earners, said Seth Hanlon, a senior fellow at the Center for American Progress.

“For example, the cap could be raised but not eliminated, or Congress could extend cap relief only to households under a certain income level,” he said. “These options would cost a fraction of the revenue of total SALT cap elimination, and would be targeted at middle-class families.”

A more generous SALT break could also be coupled with tax increases on top earners that would cut into some of the savings they would receive.

A reversal of the SALT cap could also have an unintended consequence for state and local government coffers, another concern for Democrats. When the cap went into effect, it spurred a record municipal bond buying spree with investors turning to the tax-free securities as a tool to shrink their tax bills. Unwinding the cap risks doing the opposite — imposing a slight dampening effect on markets with high taxes like New York and California.

Reversal would be a slight positive at the local level, and negative for states, both of which are struggling with economic fallout from the coronavirus pandemic, said Barclays Plc strategist Mikhail Foux.

Bloomberg Politics

By Laura Davison and Kaustuv Basu

January 7, 2021, 11:00 PM PST Updated on January 8, 2021, 8:49 AM PST

— With assistance by Nic Querolo




Tax Credits in the Housing Authority World: Opportunities and Challenges

The low-income housing tax credit (LIHTC) has been critical to public housing authorities (PHAs) to address preservation, development and redevelopment goals.

To achieve these goals, LIHTCs complement other programs created by Congress and administered by the U.S. Department of Housing and Urban Development (HUD), including Moving to Work (MTW), the Choice Neighborhoods Initiative (CNI) and the Rental Assistance Demonstration (RAD). PHAs use these programs and LIHTCs to address a variety of objectives:

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Novogradac

Published by Arlene Conn on Thursday, January 7, 2021




State and Local Sales Tax Rates, 2021.

Key Findings

Continue reading.

Tax Foundation

by Janelle Cammenga

January 6, 2021




IRS Issues Procedures for Appealing Adverse Bond Determinations.

SUMMARY BY TAX ANALYSTS

The IRS has issued procedures (Rev. Proc. 2021-10) for an issuer of tax-advantaged bonds to request an administrative appeal to the Independent Office of Appeals of a proposed adverse determination made by the Office of Tax Exempt Bonds (TEB Examination Office) regarding issues within the scope of the guidance.

The IRS is required to allow bond issuers to contest a proposed adverse determination to a senior officer in Appeals before the agency proceeds to tax bondholders. Rev. Proc. 2006-40 sets forth procedures for an issuer of bonds to appeal a proposed adverse determination regarding the qualification of an issue of bonds as tax-exempt bonds or a claim for recovery of asserted overpayments of arbitrage rebate under section 148. However, the procedures in Rev. Proc. 2006-40 do not apply to an appeal of a proposed adverse determination regarding the qualification of other types of tax-advantaged bonds, such as tax credit bonds. Rev. Proc. 2021-10 describes the circumstances and procedures under which an issuer may request that specified adverse determinations by the TEB Examination Office be reviewed by Appeals.

An issuer of bonds is eligible to request an appeal under Rev. Proc. 2021-10 after receiving from the TEB Examination Office (1) a proposed adverse determination that the issuer fails to qualify for the exclusion of the interest on the bonds from the gross income of the bondholders under section 103; (2) a proposed adverse determination that the issuer fails to qualify for the tax credits for the bondholders or direct payments to the issuer regarding the bonds under provisions of the tax code applicable to tax-advantaged bonds; or (3) a proposed adverse determination that denies a claim for recovery of an asserted overpayment of arbitrage rebate under section 148 regarding tax-exempt bonds or under section 148 as modified by relevant provisions of the tax code regarding other tax-advantaged bonds.

A bond issuer’s appeal request must be submitted in writing to the TEB Examination Office within 30 days of the date of the proposed adverse bond determination or arbitrage rebate claim denial and must include the information specified in Rev. Proc. 2021-10. The TEB Examination Office may extend the 30-day period if the issuer submits a written request justifying the extension before the 30-day period expires. Upon receipt of an appeal request, the TEB Examination Office will review the request to determine whether it meets the requirements of the revenue procedure. If it does not, the issuer will have 30 days from the date of the notification to correct the deficiencies. If the request meets the requirements and contains no new information or analysis of the taxpayer’s position, the TEB Examination Office will transfer the case file to Appeals.

If an issuer does not submit a written appeal request in the manner and within the time periods described in the revenue procedure, the proposed adverse bond determination or arbitrage rebate claim denial will become final. If a proposed adverse bond determination becomes final, then, depending on the type of bond that was issued (1) the interest on those bonds will no longer be treated as excludable from gross income under section 103; (2) holders will not be allowed any credit against income tax for interest on those bonds; or (3) issuers will not be allowed a direct payment. The IRS may also initiate procedures to impose tax on interest on the bonds, disallow the tax credits, or if it has not already done so, disallow direct payments regarding the interest on the bonds. Moreover, a notice of deficiency may be issued to recover overpayments of direct payments.

_______________________________________________

FULL TEXT PUBLISHED BY TAX ANALYSTS

Modifies Rev. Proc. 2006-4

SECTION 1. PURPOSE

This revenue procedure provides procedures for an issuer of tax-advantaged bonds (as defined in § 1.150-1(b) of the Income Tax Regulations (Regulations)) to request an administrative appeal to the Independent Office of Appeals (Appeals) within the Internal Revenue Service (IRS) of a proposed adverse determination made by the office that is responsible for examinations of tax-advantaged bonds, presently the Office of Tax Exempt Bonds (and including any successor IRS office performing such examinations, the TEB Examination Office), with respect to issues within the scope of this revenue procedure.

SECTION 2. BACKGROUND

.01 Appeals jurisdiction. Section 3105 of the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, 112 Stat. 685 (1998 IRS Restructuring Act), directed the IRS to modify its administrative procedures to allow issuers an expeditious appeal of a proposed adverse determination by the IRS with respect to a bond issue to a senior officer in Appeals before the IRS proceeds to tax bondholders.

.02 Bond appeals guidance. Rev. Proc. 2006-40, 2006-2 C.B. 691, sets forth procedures for an issuer of bonds to appeal a proposed adverse determination regarding the qualification of an issue of bonds as tax-exempt bonds (as defined in § 150(a)(6) of the Internal Revenue Code (Code)) or a claim for recovery of asserted overpayments of arbitrage rebate under § 148. However, the procedures in Rev. Proc. 2006-40 do not apply to an appeal of a proposed adverse determination regarding the qualification of other types of tax-advantaged bonds, such as tax-credit bonds.

.03 Other applicable appeals procedures. Procedures under § 601.106 et seq. of the Statement of Procedural Rules, including those governing submissions and taxpayer conferences, apply to appeals regarding bond issues, bondholders, and arbitrage rebate. A bondholder’s appeal rights under § 601.106 of the Statement of Procedural Rules are independent and separate from an issuer’s appeal rights under this revenue procedure. Section 1.148-3(i)(3)(iii) of the Regulations also applies to appeals concerning an Arbitrage Rebate Claim Denial (as defined in section 4.02 of this revenue procedure).

.04 Issuers as taxpayers. To conduct an examination (including any related administrative appeal) of a tax-advantaged bond expeditiously, the IRS generally treats an issuer as the taxpayer for the bond issue under examination.

.05 Conduit borrowers as taxpayers. In appropriate circumstances, Appeals may consider, concurrently with an issuer’s appeal, issues relating to those raised in a Proposed Adverse Bond Determination (as defined in section 4.02 of this revenue procedure) that affect the tax liability (other than any potential penalties) of the borrower of bond proceeds of a conduit financing issue. Appeals will consider an issue relating to the borrower’s tax liability only if the borrower is under examination with respect to the issue, the resolution of that issue is affected by the Proposed Adverse Bond Determination (for example, issues under § 150(b) or 168(g)), and the borrower agrees to resolve the issue concurrently with the issuer’s appeal under this revenue procedure. See § 601.106 of the Statement of Procedural Rules for procedures applicable to the borrower.

.06 Technical advice. An issuer may submit a request to the TEB Examination Office or Appeals for referral of a tax matter to the IRS Office of Chief Counsel for technical advice while a tax-advantaged bond issue is under the jurisdiction of the TEB Examination Office or Appeals, respectively. See Rev. Proc. 2021-2, 2021-01 I.R.B. 116, or annual successor revenue procedure.

.07 Alternative dispute resolution programs. Alternative dispute resolution methods permit Appeals officers to mediate, facilitate, or propose settlements in the resolution of matters identified during the course of an examination prior to the issuance of a Proposed Adverse Bond Determination or an Arbitrage Rebate Claim Denial. Alternative dispute resolution methods within Appeals applicable to bonds currently include TE/GE Fast Track Settlement (FTS) (Announcement 2012-34, 2012-36 I.R.B 334), Post Appeals Mediation (Rev. Proc. 2014-63, 2014-53 I.R.B. 1014), and Early Referral (Rev. Proc. 99-28, 1999-2 C.B. 109).

SECTION 3. SCOPE

This revenue procedure applies to Proposed Adverse Bond Determinations and Arbitrage Rebate Claim Denials as defined in section 4.02 of this revenue procedure.

SECTION 4. INITIATING THE APPEAL PROCESS

.01 In general. Section 4.02 through 4.06 of this revenue procedure set forth the circumstances and procedures under which an issuer may request that certain adverse determinations by the TEB Examination Office be reviewed by Appeals.

.02 Availability of appeal request to issuer. An issuer is eligible to request an appeal under this revenue procedure upon the receipt from the TEB Examination Office of a: (1) proposed adverse determination that an issue of bonds fails to qualify for the exclusion of the interest on the bonds from the gross income of the bondholders under § 103 (a Proposed Adverse Bond Determination); (2) proposed adverse determination that an issue of bonds fails to qualify for the tax credits for the bondholders or direct payments to the issuer with respect to the bonds under provisions of the Code applicable to tax-advantaged bonds, such as former §§ 54, 54A, 54AA, 1397E, and 6431 (also a Proposed Adverse Bond Determination); or (3) proposed adverse determination that denies a claim for recovery of an asserted overpayment of arbitrage rebate under § 148 with respect to tax-exempt bonds or under § 148 as modified by relevant provisions of the Code with respect to other tax-advantaged bonds (an Arbitrage Rebate Claim Denial). Except as provided in alternate dispute resolution programs, including any applicable programs referenced in section 2.07 of this revenue procedure or in any subsequently issued published guidance, appeal rights are not available to an issuer prior to the receipt of a Proposed Adverse Bond Determination or an Arbitrage Rebate Claim Denial.

.03 Requesting an appeal. An issuer’s appeal request must be submitted in writing to the TEB Examination Office within 30 days of the date of the Proposed Adverse Bond Determination or Arbitrage Rebate Claim Denial. The appeal request must include the information listed in section 4.04 of this revenue procedure. The TEB Examination Office may extend this 30-day submission period based on an issuer’s written request to the TEB Examination Office within the 30-day submission period that justifies such extension.

.04 Required information and signature. An appeal request made under this revenue procedure must include the information listed in this section 4.04.

(1) A detailed written response to the Proposed Adverse Bond Determination or Arbitrage Rebate Claim Denial, including a detailed explanation of the issuer’s position regarding each issue in dispute.

(2) A declaration in the following form: “Under penalties of perjury, I declare that I have examined this request for an appeal, including accompanying documents, and that, to the best of my knowledge and belief, the facts presented are true, correct, and complete.”

(3) The issuer or the issuer’s authorized representative must sign an appeal request. An issuer may designate an authorized representative by submitting a duly executed Form 2848, Power of Attorney and Declaration of Representative, when making an appeal request under this revenue procedure.

.05 Response to an appeal request. Upon receipt of an appeal request, the TEB Examination Office will review the request to determine whether it meets the requirements of this revenue procedure. If the request does not meet such requirements, the TEB Examination Office will notify the issuer in writing of the request’s deficiencies and the issuer will have 30 days from the date of the notification to correct the deficiencies. If the request meets the requirements of this revenue procedure and contains no new information or analysis of the taxpayer’s position, the TEB Examination Office will transfer the case file to Appeals. If the request meets the requirements of this revenue procedure and contains new information or analysis of the taxpayer’s position, the TEB Examination Office will notify the issuer that such new information or analysis may change the case’s outcome and requires the TEB Examination Office’s further consideration prior to transfer of the case file to Appeals.

.06 Failure to make appeal request. If an issuer does not submit a written appeal request in the manner and within the time periods described in section 4.03 through 4.05 of this revenue procedure, the Proposed Adverse Bond Determination or Arbitrage Rebate Claim Denial will become final.

.07 Jurisdiction over tax matters. Once the TEB Examination Office sends the case file to Appeals, jurisdiction over the issues raised in the Proposed Adverse Bond Determination or Arbitrage Rebate Claim Denial will transfer from the TEB Examination Office to Appeals. Except for matters considered by Appeals under section 2.05 of this revenue procedure (relating to the tax liability of the conduit borrower of the bond proceeds), the TEB Examination Office will retain jurisdiction over all tax matters related to the bond issue under examination that are not specifically raised as an issue in the Proposed Adverse Bond Determination or Arbitrage Rebate Claim Denial.

.08 Notification to issuer. Simultaneously with the transfer of the case file to Appeals, the TEB Examination Office will furnish to the issuer a copy of the TEB Examination Office’s transmittal letter and response, if any, to the issuer’s positions stated in its appeal request.

SECTION 5. ARBITRAGE REBATE CLAIM DENIAL FOR TIMELINES

When an appeal of a claim described in either § 1.148-3(i)(3)(iii)(A) or (B) of the Regulations (regarding timeliness) is determined in favor of the issuer, Appeals will release jurisdiction and return the case to the TEB Examination Office for further consideration of the substance of the claim.

SECTION 6. EFFECT OF CERTAIN FINAL ADVERSE BOND DETERMINATIONS OR FINAL ARBITRAGE REBATE CLAIM DENIALS

.01 Final Adverse Bond Determination. If a Proposed Adverse Bond Determination becomes final under section 4.06 of this revenue procedure or because Appeals sustains the Proposed Adverse Bond Determination without entering into a closing agreement with the issuer, then, depending on the type of bond that was issued: (i) the interest on those bonds will no longer be treated as excludable from gross income under § 103 of the Code, (ii) holders will not be allowed any credit against income tax with respect to interest on those bonds, or (iii) issuers will not be allowed a direct payment. In addition, IRS functions other than Appeals may initiate procedures with respect to open years to, respectively, (i) impose tax on interest on the bonds, (ii) disallow the tax credits, or (iii) if it has not already done so, disallow direct payments with respect to the interest on the bonds. Further, a notice of deficiency may be issued to recover overpayments of direct payments.

.02 Final Arbitrage Rebate Claim Denial. If an Arbitrage Rebate Claim Denial becomes final under section 4.06 of this revenue procedure or Appeals sustains the Arbitrage Rebate Claim Denial in full, the IRS will notify the issuer of the final determination and the issuer’s right to bring suit for recovery.

SECTION 7. NO USER FEE

No user fee applies to either a request for an appeal pursuant to this revenue procedure or a closing agreement resulting from the appeal.

SECTION 8. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2006-40 is modified and superseded.

SECTION 9. EFFECTIVE DATE

This revenue procedure applies to Proposed Adverse Bond Determinations or Arbitrage Rebate Claim Denials issued by the TEB Examination Office on or after February 4, 2021.

SECTION 10. DRAFTING INFORMATION

The principal authors of this revenue procedure are B. Darrell Smelcer, Office of Tax-Exempt Bonds (Technical), and Lewis Bell, Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Mr. Smelcer at 470-639-2425 (not a toll-free call).

DATED JAN. 5, 2021




How to Appeal Adverse Determinations from the IRS for Tax-Advantaged Bonds: New Guidance - Squire Patton Boggs

The IRS has had a busy start to 2021! Guidance continues to pour forth as the change in Administration approaches. On January 4, the IRS released Revenue Procedure 2021-10, which provides issuers with updated procedures for obtaining review from the IRS Office of Appeals of proposed adverse determinations and rebate refund rejections by the IRS Office of Tax-Exempt Bonds. Rev. Proc. 2021-10 supplements and supersedes Rev. Proc. 2006-40, which previously set forth the procedures for getting to Appeals. Rev. Proc. 2006-40 predated the advent of tax credit and direct pay bonds, and therefore applied only to tax-exempt bonds. As many of you may have experienced, the IRS has applied the logic of Rev. Proc. 2006-40 to tax-advantaged bonds that were not tax-exempt bonds (e.g., BABs) in audits of those bonds. Rev. Proc. 2021-10 adopts this practice.

Specifically, Rev. Proc. 2021-10 provides that an issuer is eligible to request an appeal once the issuer receives (1) a proposed adverse determination that interest on the bonds is not tax-exempt; (2) a proposed adverse determination that an issue of bonds fails to qualify for the tax credits to the bondholders or direct payments to the issuer with respect to the bonds under provisions of the Code applicable to tax-advantaged bonds, such as former §§ 54, 54A, 54AA, 1397E, and 6431; or (3) a proposed adverse determination that denies a claim for a rebate refund. These items are, in effect, your “ticket to Appeals.” On items (1) and (2), recall that the “proposed adverse determination” is the final step in the audit process, coming after the “Notice of Proposed Issue” (often referred to as the “30-day letter”). In most bond issues subject to a continuing disclosure undertaking, the receipt of that Notice of Proposed Issue triggers the requirement for the issuer to disclose the audit to the market, although many issuers may choose to disclose before they reach that point.

In addition, Rev. Proc. 2021-10 modifies Rev. Proc. 2006-40 by explicitly giving the issuer 30 days to correct any deficiencies in the appeal that deviate from the requirements in Rev. Proc. 2021-10. (Given the ambiguity in Rev. Proc. 2006-40 on this point, it probably depends on the situation whether this is a positive or negative change.) The new guidance also notes that the TEB Examination Office will furnish to the issuer a copy of the TEB Examination Office’s transmittal letter and response, if any, to the issuer’s positions stated in its appeal request.

The mechanics of the appeal will continue to be handled under Section 8.7.8 of the Internal Revenue Manual.

There remains no user fee for an appeals request, which is comforting after the IRS recently[1] hiked the user fee for a tax-advantaged bond private letter ruling from $30,000 to $38,000,[2] notwithstanding NABL’s recent request to provide for reduced user fees for tax-exempt bonds.

The new procedures apply to proposed adverse determinations for tax-advantaged bonds or denials of rebate refund claims issued by the TEB Examination Office on or after February 4, 2021.

[1] We would say “inexplicably,” but there’s a pretty clear, if unpalatable, explanation.

[2] And that’s just the cover charge.

Squire Patton Boggs

The Public Finance Tax Blog

By Alexis Chandler on January 7, 2021




IRS Procedures Revised for Issuing Letter Rulings.

The IRS has published (Rev. Proc. 2021-1, 2021-1 IRB 1) revised procedures for issuing letter rulings, determination letters, and information letters on specified issues. Rev. Proc. 2020-1 is superseded.

1/4/21




TAX - ARKANSAS

City of Little Rock v. Ward

Supreme Court of Arkansas - December 3, 2020 - S.W.3d - 2020 Ark. 399 - 2020 WL 7134991

City and municipal airport commission sought review of county assessor’s denial of tax exemption for unleased airport-owned properties that airport purchased as a buffer or used to store historical plane and equipment used for clearing runways during snow and ice events.

The Pulaski County Court ruled in favor of city and commission. Assessor appealed. The Circuit Court granted assessor’s motion for summary judgment. City and commission appealed.

The Supreme Court held that:

County assessor’s failure to timely file answer within 30 days in compliance with rule governing appeals from county court to circuit court was a procedural error, not a jurisdictional one, and thus it did not deprive circuit court of jurisdiction over assessor’s appeal of county court’s determination that unleased real property of municipal airport was exempt from taxation.

Municipal airport’s unleased real property located within secure airfield, comprised of an office building and five hangars, was used exclusively for public purposes when it was unleased, and thus property was exempt from taxation under State Constitution during that time, where airport used property to store historical plane owned by airport, to house offices for city police department, and to store and stage equipment such as snow brooms, bulldozers, and trucks used for clearing runways during snow and ice events.

Municipal airport’s unleased real property that airport purchased to maintain buffer around airport was used exclusively for public purposes, and thus property was exempt from taxation under State Constitution; buffer adhered to Federal Aviation Administration (FAA) regulations and furthered aeronautical activities and safety by preventing height enhancements, radio interference, and glares that would have disrupted aeronautical activities of airport.




Opportunity Zone Group Requests Deadline Relief.

SUMMARY BY TAX ANALYSTS

The Novogradac Opportunity Zones Working Group has asked Treasury and the IRS for several forms of relief that focus principally on the postponement of deadlines related to the Opportunity Zone incentive during the COVID-19 pandemic.

FULL TEXT PUBLISHED BY TAX ANALYSTS

December 23, 2020

Office of Associate Chief Counsel (Income Tax and Accounting)
Attention: Erika C. Reigle and Kyle C. Griffin
Internal Revenue Service (IRS)
1111 Constitution Avenue, NW
Washington, D.C. 20224

CC:PA:LPD:PR
(IRS Review of Regulatory Relief)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Opportunity Zones Compliance Relief Requested due to Continuing COVID-19 Impact

Dear Ms. Reigle and Mr. Griffin:

The Novogradac Opportunity Zones Working Group (OZ Working Group) is writing to request further relief from certain provisions under Internal Revenue Code (IRC) Section 1400Z-2 and the regulations thereunder due to ongoing and future business impacts of the current COVID-19 pandemic.

The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) have broad authority under IRC Section 7508A to postpone certain deadlines by reason of Presidentially Declared Disaster. The previously issued IRS Notice 2020-39 extended certain opportunity zones- (OZ-) related deadlines to Dec. 31, 2020. As of the date of this letter, the Presidential Disaster Declarations issues due to the COVID-19 pandemic remain ongoing and are expected to continue into 2021. We believe additional extensions of the relief provided in Notice 2020-39 are within the scope of the agencies’ regulatory authority.

The OZ Working Group includes various participants in community development finance: investors, lenders, for-profit and nonprofit developers, community development financial institutions, trade organizations and other related professionals. Our request represents collective input from these stakeholders as to how to make OZ incentive more impactful to low-income communities.

The OZ Working Group appreciates your consideration of issues related to OZ compliance as investors, qualified opportunity fund sponsors, OZ businesses and other organizations struggle with the national impact of COVID-19. We note that the IRS has broad regulatory authority under IRC Section 7508A and robust disaster relief provisions in Rev. Proc. 2018-58. We believe this authority has been triggered by the President’s declaration of a national emergency on March 13, 2020, which included his instruction to the Secretary of Treasury to provide relief from tax deadlines under Section 7508A and encouraged requests for a declaration of a major disaster. In response to this declaration, the IRS issued Notice 2020-23 and Notice 2020-39, which extended certain deadlines and provided other relief to taxpayers affected by COVID-19. As we remain under a state of national emergency, we request that the IRS and Treasury further postpone these deadlines and provide other relief related to the OZ incentive.

Notwithstanding the authority the IRS and the Treasury have with respect to disaster relief, the OZ Working Group is requesting the following additional relief:

As we remain under a state of national emergency, we request that the IRS and Treasury further postpone the above deadlines related to OZs as investors, QOF sponsors, OZ businesses and other organizations struggle to recover from the national impact of COVID-19.

Thank you for your consideration of these requests. Please contact us if you have any comments or questions regarding the matters discussed above.

Very truly yours,

By Michael J. Novogradac, Managing Partner

John S. Sciarretti, Partner

Novogradac & Company LLP
Dover, OH

CC:
Michael Novey, Office of Tax Policy, Treasury
Julie Hanlon-Bolton, ITA, IRS
Scott Dinwiddie, Associate Chief Counsel




State Tax and Economic Review, 2020 Quarter 2.

States Saw Freefall Drop in Revenues in the Second Quarter; Partly Offset in the Third Quarter but Still Depressed from Pandemic

Abstract

States saw steep declines in revenues in the second quarter of 2020, though some of this was caused by shifting revenues into the next quarter and next fiscal year. Consequently, most states ended fiscal year 2020 uncertain about their fiscal bottom line. Many states cut spending, laid off or furloughed workers, or used federal aid or rainy-day funds, while they waited to see what their revenues would be after the July 15 income tax filing deadline.

States are still facing unprecedented fiscal uncertainties because of the pandemic which has substantially weakened the economy since March. The recent surge in infection rates mean depressed business activity for a wide range of businesses and services across virtually all states, possibly less consumer spending, and less sales tax revenues for states. Although COVID vaccines are on the horizon, it will take a long time for business activity to return to pre-pandemic levels, with some activities and industries facing a very slow recovery.

View the full report.

The Urban Institute

by Lucy Dadayan

December 24, 2020




TAX - INDIANA

Millikan v. City of Noblesville

Court of Appeals of Indiana - December 7, 2020 - N.E.3d - 2020 WL 7134869

Property owners filed complaint against the city to quiet title to property they claimed to have acquired title to through adverse possession.

Parties both filed motions for summary judgment and, after a hearing granted the city’s motion. Thereafter, the trial court denied property owners’ motion to correct error. Property owners appealed.

The Court of Appeals held that property owners substantially complied with the statutory tax payment requirement for establishing title by adverse possession.

Property owners, who filed complaint against the city to quiet title to tract of land that they claimed to own under the doctrine of adverse possession, did preserve for appellate review the argument that because they had openly maintained exclusive possession and control of the disputed property for 27 years prior to any special assessments being due they had satisfied the statutory tax payment requirement for establishing title by adverse possession; although they could have raised the issue more clearly in their motion to correct error, property owners did raise the issue in their summary judgment motion when they asserted that they satisfied the statutory requirements prior the city’s assertion of drainage assessments on disputed property.




How to Be a Shrewd Opportunity Zone Investor.

What does it take to be a shrewd Opportunity Zone investor? Several Opportunity Zone experts provided their insights on a live panel recorded on November 17, 2020 during OZ Pitch Day, titled “Being a Shrewd Opportunity Zone Investor.”

Today’s podcast episode is the audio version of that panel. Moderated by OpportunityDb founder Jimmy Atkinson, the panel featured Dave Kunz of Hall Venture Partners, Rocco Forino of DealConnectHub, Jeffrey Maganis of Crowdcreate, Chris Cooley of OZworks Group, and Gerry Reihsen of Coasis Coalition.

Click the play button below to listen to the audio recording of the panel.

Listen to audio.

Opportunity Db

By Jimmy Atkinson

December 23, 2020




CRE Pros Laud Biden’s Proposed Changes to Opportunity Zone Program.

Biden and his team contend that the program has fallen short of its promise of bolstering communities of color, small businesses and homeowners.

The federal Tax Cuts and Jobs Act of 2017 created the Opportunity Zone program, an initiative touted by the Trump administration as a vehicle for spurring investment in economically distressed pockets of the country. Today, more than 8,700 of these zones have been designated. As of the end of 2019, Opportunity Zone funds had collected more than $75 billion in private capital for an array of real estate projects.

The Trump administration hails the Opportunity Zone program as a success. A report released in August by the White House Council of Economic Advisers promoted the potential of these zones “to further prosperity and self-sufficiency in those areas that most lack it.”

Continue reading.

National Real Estate Investor

John Egan | Dec 07, 2020




New Jersey Appellate Division Holds No Reimbursement of Municipal Taxes for Undisclosed Conservation Easement.

In a decision approved for publication, the New Jersey Appellate Division recently held that the holder of a tax lien who, upon attempting to foreclose on the property, learns that it is encumbered by a previously undisclosed conservation easement, is unable to recoup municipal taxes paid on the property in the absence of bad faith on the part of the Township. Garden State Investment & Isadore H. May v. Township of Brick, 2020 WL 7250904 (N.J. Super. Ct. App. Div. Dec. 10, 2020).

Plaintiffs were the purchasers of tax sale certificates on vacant lots in Brick Township. Before purchasing the certificates, the parties “physically inspected the properties and examined the assessment records and tax map,” but did not obtain a title search. When the Plaintiffs commenced a tax foreclosure, they discovered that the properties were encumbered by a conservation easement arising out of a 2001 settlement with the Department of Environmental Protection. This easement prevented the “disturbance,” and thus, the development, of the property. A deed recording this easement was recorded in the Ocean County Clerk’s Office, but the Township’s Tax Collector never received notice of the easement, nor was the easement ever indicated on the tax assessment card, nor reflected by a reduction in the encumbered lots’ assessed values. Plaintiffs then filed suit “seeking recession of their tax sale certificate purchases and reimbursement of taxes they paid on the properties.” On cross-motions for summary judgment, the trial court held that Plaintiffs were not entitled to equitable relief concerning the taxes paid and denied recession of the purchases.

The Appellate Division affirmed. In holding that plaintiffs had no right to rescission of the tax sale purchases, nor the refunding of any municipal taxes paid between the tax sale purchase and the foreclosure action, the Court stated that “[t]he township tax assessor was unaware of the conservation easement. While its existence was ascertainable to all – since deeds containing the easement had been recorded in the County Clerk’s Office – plaintiffs, by engaging in this form of investment, had a greater interest in learning of any limitations on the property than the township did.” In doing so, the Appellate Division distinguished this case from Township of Middletown v. Simon, 193 N.J. 228 (2008), affirming in part, 387 N.J. Super. 65 (App. Div. 2006). In Middletown, the Appellate Division allowed the rescission of a tax sale purchase upon a municipality’s belated declaration that the property was intended for public use. The New Jersey Supreme Court affirmed and allowed equitable relief as again, the Township filed an action to have the lot dedicated for public use and adopted an ordinance accepting the lot for public use. In Garden State, however, the Township did not “[play] an active role in seeking to deprive [buyer] of his investment.” Additionally, “plaintiffs had every reason to uncover all material circumstances about their investments,” and their “failure to act more diligently in ascertaining any defects in or limitations on their investments bars their claim for equitable relief, particularly against the township, which acted passively and innocently throughout.”

This case is important because it illustrates that the purchase of a tax sale certificate requires some minimum due diligence, and that a title search may be advisable before purchasing any tax sale certificate for a substantial sum. Here, although the encumbrance rendered the property non-developable, and was not disclosed in the municipal tax records, the lack of wrongdoing on the part of the township, as well as the court’s judgment of the lienholders as failing to do proper due diligence on their investment, left the certificate holder with a worthless property for its investment.

Riker Danzig Scherer Hyland & Perretti LLP – Michael Crowley, Michael R. O’Donnell and Andrew Raimondi

December 18 2020




TAX - MICHIGAN

City of Grand Rapids v. Brookstone Capital, LLC

Court of Appeals of Michigan - October 29, 2020 - N.W.2d - 2020 WL 6370351

City brought action against housing project developer and housing association limited partnerships, who were otherwise exempt from ad valorem property taxes, for breaches of agreements for payments of a service charge in lieu of taxes and unjust enrichment for defendants’ failure to pay the amount of charges billed as required under city’s payments in lieu of taxes ordinance.

The Circuit Court granted city’s motion for summary disposition on grounds of no genuine issue as to any material fact and denied defendants’ motion for summary disposition on ground the opposing party was entitled to judgment. Defendants appealed.

The Court of Appeals held that:

Section of Michigan State Housing Development Authority (MSHDA) Act governing tax exemptions and payment of service charges for housing projects requires that plaintiff impose an annual payment of a service charge in lieu of taxes charge to be paid by defendant owners of a subject low-income housing projects calculated for the units occupied by low-income persons or families either pursuant to the default amounts set by subpart of statute, or the amount plaintiff established by ordinance as permitted under the subpart.

Section of Michigan State Housing Development Authority (MSHDA) Act governing tax exemptions and payment of service charges for housing projects requires that plaintiff impose an annual payment of a service charge in lieu of taxes charge respecting all portions of the subject projects occupied by “other than low income persons or families” equal to the full amount of the ad valorem taxes that would have been required if the projects were not tax exempt, to be paid by defendant owners of the subject projects.

A direct conflict existed between section of Michigan State Housing Development Authority Act (MSHDA) governing tax exemptions and payment of service charges for housing projects and portion of city’s payment of a service charge in lieu of taxes ordinance, and thus MSHDA Act preempted subject portion of ordinance, where ordinance required payment in lieu of taxes by a housing project owner in the amount of 4% of annual shelter rent which was defined as the total collections from all occupants of a housing project exclusive of charges for utilities provided to them, but MSHDA Act commanded city to charge fees in lieu of taxes equal to the ad valorem tax for portions of projects occupied by “other than low income persons and families.”

Doctrine of in pari materia did not apply, and could not reconcile, city’s payments in lieu of taxes ordinance and section of Michigan State Housing Development Authority (MSHDA) Act governing tax exemptions and payment of service charges for housing projects, which otherwise preempted the ordinance, since the ordinance, which required payments in lieu of taxes by a housing project owner in the amount of 4% of annual total collections from all occupants of housing project exclusive of charges for utilities, and the MSHDA section, which commanded city to charge fees in lieu of taxes equal to the ad valorem tax for portions of projects occupied by “other than low income persons and families,” both lacked ambiguity.

Housing project developer and housing association limited partnerships breached contracts between themselves and city, which provided developer and housing associations the benefits of tax exemption for the low-income housing projects pursuant to section of Michigan State Housing Development Authority (MSHDA) Act governing tax exemptions and payment of service charges for housing projects in exchange for payment of a service charge in lieu of taxes pursuant to subject section of MSHDA Act, where when billed pursuant to the parties’ contracts, developer and housing associations refused to pay the contractually defined amounts required by city.




Bond Lawyers Seek Further Relief for Low-Income Housing Projects.

SUMMARY BY TAX ANALYSTS

The National Association of Bond Lawyers has requested that the timing relief provided in guidance (Notice 2020-53) for qualified low-income housing projects and qualified residential rental projects be extended through December 31, 2022.

FULL TEXT PUBLISHED BY TAX ANALYSTS

December 2, 2020

David J. Kautter
Assistant Secretary
Office of Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Michael J. Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Krishna Vallabhaneni
Tax Legislative Counsel
United States Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3044
Washington, DC 20220

Re: IRS Review of Regulatory and Other Relief to Support Economic Recovery

Messrs. Kautter, Desmond and Vallabhaneni:

On July 1, 2020, in response to the ongoing outbreak of the novel coronavirus disease (the “COVID-19 Outbreak”), the Internal Revenue Service released Notice 2020-53 to provide relief to bond issuers, operators, owners and tenants of qualified residential rental projects and qualified low-income housing projects financed with exempt facility bonds, and state agencies that have jurisdiction over these projects, from otherwise-applicable federal tax law compliance requirements. On behalf of the National Association of Bond Lawyers (“NABL”), I am writing to request that the time-limited relief set forth in IRS Notice 2020-53 be extended through December 31, 2022, as more specifically set forth below.1

This letter was prepared by an ad hoc task force comprising the individuals listed in Appendix A and was approved by the NABL Board of Directors. NABL exists to promote the integrity of the municipal market by advancing the understanding of and compliance with the law affecting public finance. A professional association incorporated in 1979, NABL has approximately 2,500 members and is headquartered in Washington, DC.

If NABL can provide further assistance, please do not hesitate to contact Jessica Giroux, Director of Governmental Affairs in our Washington DC office, at (518) 469-1565 or at [email protected]

Sincerely,

Teri M. Guarnaccia
President, National Association of Bond Lawyers
Washington, DC

Enclosure:
NABL’s April 9, 2020 Letter to Congress and the Treasury

cc:
Helen M. Hubbard, Associate Chief Counsel, Financial Institutions & Products, Internal Revenue Service
Melissa Moye, Director, Office of State and Local Finance, U.S. Department of the Treasury
Johanna Som de Cerff, Acting Branch Chief, Internal Revenue Service
Zoran Stojanovic, Assistant to the Branch Chief, Internal Revenue Service
Timothy Jones, Office of the Associate Chief Counsel, Financial Institutions & Products, Internal Revenue Service
David White, Office of the Associate Chief Counsel, Financial Institutions & Products, Internal Revenue Service
Brett York, Acting Deputy Tax Legislative Counsel, U.S. Department of the Treasury

Background Relating to Tax-Exempt Bond Provisions of IRS Notice 2020-53

Section 142(d) of the Internal Revenue Code of 1986 (the “Code”) generally requires as a condition for tax-exempt bond financing that a qualified residential rental project provide for the set-aside of either (i) 20% of its units for tenants with income that does not exceed 50% of area median income or (ii) 40% of its units for tenants with income that does not exceed 60% of area median income (the “Set-Aside Requirement”).

Section 147(d) of the Code generally requires that the proceeds of certain types of tax-exempt qualified private activity bonds, including bonds that finance qualified residential rental projects, may only be spent to acquire an existing building if a minimum amount of money is spent on rehabilitation of the building within two years of the later of (i) the date of bond issuance or (ii) the date the building was acquired (the “Rehabilitation Requirement”).

As NABL noted in its April 9, 2020 submission to federal policymakers recommending guidance with respect to the tax-exempt bond provisions of the Code in response to the COVID-19 Outbreak,2 if proceeds of bonds issued pursuant to Section 142(d) of the Code are used to acquire an existing, rented-up residential rental project, the tenant mix at the time of bond issuance and/or acquisition may not satisfy the Set-Aside Requirement. Unless all or a significant portion of existing tenants are evicted immediately, it may take some time until the Set-Aside Requirement is satisfied. Since 2004, with the release of Revenue Procedure 2004-39, the Department of Treasury and the Internal Revenue Service have recognized and addressed this problem by providing a “transition period” of up to one year to comply with the Set-Aside Requirement for bond-financed acquisitions of residential rental projects. NABL’s April 2020 submission went on to report that, at that time, residential leasing activities had stopped around much of the country as a result of the COVID-19 Outbreak, and that, in addition, supply chains had been disrupted, which in turn suggested that satisfaction of the Rehabilitation Requirement on a timely basis would be more difficult.

Accordingly, in its April 2020 submission, NABL requested an extension of the “transition period” set forth in Revenue Procedure 2004-39, as well as an extension of time to satisfy the Rehabilitation Requirement.

IRS Notice 2020-53 responded to these concerns, providing relief with respect to acquired qualified residential rental projects that, pursuant to Section 5.02 of Revenue Procedure 2004-39, would have a “transition period” ending on or after April 1, 2020 and before December 31, 2020, postponing the last date of the “transition period” for all such projects to December 31, 2020. The same relief is provided in IRS Notice 2020-53 for purposes of satisfying the Rehabilitation Requirement.3

Recommendation

NABL applauds the Internal Revenue Service and the Department of Treasury for promulgating IRS Notice 2020-53, which has provided much-needed timing relief to bond issuers, to residential rental project owners and operators and to other affected parties. As of the date of submission of this request, however, it is apparent that the timing relief in IRS Notice 2020-53 should be extended beyond the end of 2020.

As you know, there is consistent, broad-based reporting today that the public health challenges presented by the COVID-19 Outbreak are continuing at the end of 2020, at levels that are even higher than they were in April, and that in many jurisdictions around the country, shut-down orders of varying degrees are being imposed or reimposed. In recent weeks, NABL members have reported that owners and operators of residential rental projects described in IRS Notice 2020-53 continue to face severe challenges with respect to achieving compliance with the Set-Aside Requirement and the Rehabilitation Requirement. For example, owners and operators have reported that State or local shut-down conditions have made it extremely difficult or even impossible in some cases to show vacant apartment units and to conduct in-person diligence with respect to the income eligibility of prospective tenants. Moreover, there have been many reports in the press about the scarcity of construction materials and building trades labor to complete construction projects of all kinds.

In light of COVID-19 Outbreak conditions that continue to prevail around the country, we request that the Internal Revenue Service publish guidance supplementing, amplifying or superseding IRS Notice 2020-53, providing that:

1. For purposes of Section 5.02 of Revenue Procedure 2004-39, the last day of a 12-month transition period for a qualified residential rental project that ends on or after April 1, 2020 and before December 31, 2021 is postponed to December 31, 2022; and

2. If a bond is used to provide a qualified residential rental project and if the two-year rehabilitation expenditure period for the bond under Section 147(d) of the Code ends on or after April 1, 2020, and before December 31, 2021, the last day of that period is postponed to December 31, 2022.

We respectfully submit that time is of the essence with regard to the compliance matters set forth in this submission, and we therefore additionally request that that the Internal Revenue Service publish the guidance requested herein on or before December 31, 2020.

APPENDIX A
NABL AD HOC TASKFORCE MEMBERS
Antonio D. Martini, Chair
Hinckley, Allen & Snyder LLP
28 State Street
Boston, MA 02109-1775
Telephone: 617-378-4136
Email: [email protected]

Christie L. Martin
Mintz Levin Cohn Ferris Glovsky and Popeo P.C.
1 Financial Center
Boston, MA 02111-2621
Telephone: 617-348-1769
Email: [email protected]

Brian P. Teaff
Bracewell LLP
711 Louisiana Street
Suite 2300
Houston, TX 77002-2770
Telephone: 713-221-1367
Email: [email protected]

Matthias M. Edrich
Kutak Rock LLP
1801 California Street
Suite 3000
Denver, CO 80202-2626
Telephone: 303-292-7887
Email: [email protected]

FOOTNOTES

1This request is being submitted in part in response to the November 5, 2020 solicitation of Sunita Lough, Deputy Commission of Internal Revenue, Services and Enforcement, inviting comments from the public regarding regulations and other requirements that can be rescinded, modified or waived to assist business and individual taxpayers with the ongoing economic recovery from the COVID-19 Outbreak. See 85 Fed. Reg. 73252 (November 17, 2020).

2A copy of NABL’s April 9, 2020 submission is enclosed for reference; see page 16 of that submission for a discussion of these issues.

3Although the focus of this submission is concentrated on the tax-exempt bond aspects of IRS Notice 2020-53, affecting compliance under Sections 142(d) and 147(d) of the Code, we observe that IRS Notice 2020-53 also provides relief with respect to a number of compliance matters under Section 42(d) of the Code. For example, IRS Notice 2020-53 states that, between April 1, 2020 and December 31, 2020, owners of “qualified low-income housing projects” (as such term is defined in Section 42(d) of the Code) are not required to perform certain income re-certifications or reduce the eligible basis in a building because of the temporary closure of an amenity or common area due to the COVID-19 Outbreak and that state agencies that have jurisdiction over such projects are not required to conduct compliance-monitoring. Additionally, pursuant to IRS Notice 2020-53, between April 1, 2020 and December 31, 2020, owners and operators of qualified low-income housing projects, bond issuers and state agencies are permitted to treat medical personnel and other essential workers providing services during the COVID-19 Outbreak as if they were “displaced individuals” within the meaning of Revenue Procedures 2014-49 and 2014-50, which in turn facilitates the use of qualified low-income housing projects to provide emergency housing for such essential personnel.

END FOOTNOTES




Bond Lawyers Seek COVID-19 Relief Extension.

Public finance attorneys are seeking an extension of pandemic-related economic relief provided by the IRS earlier this year regarding qualified low-income housing projects.

The National Association of Bond Lawyers (NABL), which originally sought COVID-19 relief in April, is asking for an extension of IRS Notice 2020-53, 2020-30 IRB 151, issued July 1.

The notice provides relief to bond issuers, operators, owners, tenants of qualified residential rental projects and qualified low-income housing projects financed with exempt facility bonds, and state agencies with jurisdiction over those projects from otherwise applicable federal tax law compliance requirements, NABL noted in a December 2 letter to the IRS and Treasury.

Although the guidance has provided much-needed relief, the ongoing pandemic makes clear the relief should continue beyond 2020, according to the letter.

“As you know, there is consistent, broad-based reporting today that the public health challenges presented by the COVID-19 Outbreak are continuing at the end of 2020, at levels that are even higher than they were in April, and that in many jurisdictions around the country, shut-down orders of varying degrees are being imposed or reimposed,” NABL said.

The group said that owners and operators of residential rental projects described in the notice are still finding it difficult to comply with the set-aside and rehabilitation requirements.

That’s why “time is of the essence” in extending the notice, NABL said.

The last day of a 12-month transition period for a qualified residential rental project ending on or after April 1, 2020, and before December 31, 2021, should be postponed to December 31, 2022, NABL said.

If a bond is used to provide a qualified residential rental project, and if the two-year rehabilitation expenditure period for the bond ends on or after April 1, 2020, and before December 31, 2021, the last day of that period should be postponed to December 31, 2022, NABL added.

TAX ANALYSTS

by FRED STOKELD

POSTED ON DEC. 9, 2020




Rich States Uncover Tax Windfall, Undercutting Push for Aid.

It was a shocking, and seemingly improbable, figure.

Eight months into the pandemic — and the brutal economic collapse it triggered — California’s budget watchdog said the state was poised to pocket a windfall of some $26 billion. Just as New York and Connecticut had revealed weeks earlier, tax revenue was coming in at a clip no one expected, thanks in part to the booming stock market.

And so it has largely played out across the country this year, albeit to a smaller extent in many of the less well-to-do states. The fiscal apocalypse expected to blow massive holes in state budgets hasn’t come — at least not yet.

This in turn is providing fuel to the argument made by some Republicans that additional federal aid for states and municipalities can wait until next year instead of being settled in the relief package that’s being heatedly debated in Washington now. Top leaders from both sides in Congress are near a deal for Covid relief of less than $900 billion, including direct stimulus payments but leaving out state and local aid, according to two people familiar with negotiations. That relief has been one of the key sticking points.

“In some ways, U.S. taxpayers have saved some money by the stimulus package being delayed so that they could really get their arms around what revenues look like,” said Jennifer Johnston, director of research for Franklin Templeton Fixed Income’s municipal bond team.

There are several important caveats to this somewhat rosy picture, to be clear.

For one, many states and cities are still facing large deficits, just not as big as initially forecast. Also, the spike in Covid-19 cases could trigger more economic shutdowns, potentially reversing the nascent recovery that local governments have seen so far. Most of California is back under a stay-at-home order, and New York could be headed toward one. And because of the lag in collecting taxes, states historically struggle with big deficits well after recessions end.

Financial forecasts have improved considerably in recent months, though. In the spring, congressional Democrats had sought $1 trillion in aid for states and municipalities. Back then, states were expected to report total budget shortfalls of $650 billion through fiscal 2022; now that number is forecast at about $400 billion, according to the Center on Budget and Policy Priorities. And Democrats more recently were pushing for just $160 billion as a first step.

The muni bond market, buoyed by rock-bottom benchmark interest rates, also shows investors are unconcerned about a looming fiscal crisis. States including Pennsylvania, Michigan and California can all borrow for 10 years at rates well below 1%, a historically low threshold. Even a benchmark of near-junk Illinois debt yields just 2.76%, around the level reserved for only the highest-rated borrowers as little as two years ago.

State bond yields retreat to pre-pandemic lows

California is a prime example of the turnaround in fiscal accounts. In May, it girded for a two-year $54 billion gap. It now projects only a $5 billion deficit next year after it reaped a $26 billion windfall from raking in more tax revenue and spending less than expected. New York City, once the epicenter of the coronavirus crisis, collected $985 million more revenue than forecast for the first four months of its fiscal year thanks to a banner year on Wall Street.

The surprise underscores the disproportionate impacts of the outbreak and business shutdown. Lower-income workers for such face-to-face industries as restaurants are losing their jobs, while wealthier individuals work from home, buy goods online and sell stock — all generating the income that states rely on to balance their books.

Stock markets have thrived — both because of the Federal Reserve’s rate cuts and prospects for an economic rebound in 2021 — and initial public offerings have minted a new class of wealthy Americans, a boost to states such as New York and California that have progressive tax systems.

In California, which gets almost half of its personal income tax collections from the top 1% of earners, three former Stanford University students became billionaires from the IPO of their San Francisco-based food-delivery company DoorDash Inc.

“For those fortunate to maintain employment and income during this pandemic, their financial situation is better than before,” economists at UCLA Anderson said in a December report. “These households have been able to accumulate at least an additional $1.6 trillion in savings.”

Internet Sales

And many have continued to spend. Because states are permitted to tax internet sales from businesses outside their borders, municipal governments have benefited from people shopping at home. Texas, which garners its largest source of revenue from sales taxes, saw the biggest gains over the past 12 months from the $1.25 billion of collections from online retailers, Comptroller Glenn Hegar said last month. In California, home to some of the most sweeping Covid restrictions nationwide on businesses, sales tax revenue stands at about the same so far as it was in the previous year.

Regions have gone through different experiences given the variance in public health restrictions, with some only now beginning to feel the pain, said Irma Esparza Diggs, director of federal advocacy for the National League of Cities. “This pandemic hasn’t hit our state and local governments the same way at every point in time, which has been the difficulty in conveying to Congress this is how much we’re losing,” she said.

The group in December released a survey that found on average, cities have seen revenues decline by 21% since the beginning of the pandemic, while additional expenditures such as protective equipment have jumped 17% over the same time period. Chicago closed an $800 million gap in its 2020 budget that was caused by Covid-19 and an even bigger $1.2 billion hole in 2021, 65% of which was related to the pandemic.

The virus has decimated the finances of transit agencies. New York’s Metropolitan Transportation Authority, the nation’s largest mass transit system, said it will have to slash subways and buses by 40% and chop commuter rail service by half if aid doesn’t come from Washington.

And some states have needed to take unusual action to balance their books. New Jersey last month sold $3.7 billion of general-obligation bonds to cover its revenue shortfall. Illinois has tapped the Federal Reserve’s emergency lending program.

“Even though the prospects of a vaccine are promising, it’s going to take at least a year or two before things go back to some kind of normalcy,” said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center.

Bloomberg Politics

By Romy Varghese and Amanda Albright

December 15, 2020, 3:53 PM PST Updated on December 16, 2020, 7:34 AM PST

— With assistance by Martin Z Braun, Danielle Moran, Michelle Kaske, Shruti Singh, Laura Litvan, Erik Wasson, and William Selway




Understanding A Path To Boosting Lower-Income Communities: Qualified Opportunity Zones

Anyone involved in any type of commercial real estate endeavor has by now heard of the qualified opportunity zone program. For those who haven’t, the qualified opportunity zone (QOZ) came out of the bipartisan Investing in Opportunities Act of 2017 as a means for investors to defer paying taxes on capital gains after the sale of assets. Eventually, it found its way into the Tax Cuts and Jobs Act of 2017 and was rolled out soon after. In all the pro-and-con media hype around the program, many forget that its underlying purpose was to funnel financial resources toward in-need lower-income communities.

Though the program is still in its early days – it is, after all, a long-term initiative – the following issues should be considered when discussing QOZs: the program’s impact on lower-income areas, how qualified opportunity funds (QOFs) can boost economic development and how investors can ensure gains are directed to areas in need. With that said, there are still questions as to whether this community revitalization program is actually being utilized to revitalize communities.

QOZs: A Background

The QOZ program’s foundation is found in “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas,” a 2015 report released by the Economic Innovation Group (EIG).

Continue reading.

Forbes

by David Wieland

Dec 1, 2020




Leveraging Development Finance Tools to Attract Opportunity Zone Investment.

Read the CDFA document.




How to Make Communities Part of the Opportunity Zone Equation.

Three years ago, the federal government created Opportunity Zones as a way to encourage private investors to bring an influx of money to struggling urban and rural neighborhoods through tax incentives. The promise of Opportunity Zones to communities? Add affordable housing, boost small businesses owned by Black entrepreneurs and other people of color, and bring solid jobs to local residents, many of whom are living below the poverty level.

But last year, when Angeline Johnson arrived in Wichita, Kansas, as a FUSE executive fellow tasked by the City Manager’s Office with encouraging equitable investment in Opportunity Zones (OZs), she discovered that some residents in northeast Wichita had mobilized to share concerns about their OZ designation.

“There was a legitimate fear of gentrification and displacement,” Johnson said.

Continue reading.

NEXT CITY

EMILY NONKO DECEMBER 17, 2020




Workforce Housing in Opportunity Zones, with Riaz Taplin.

Why should investors consider workforce housing as a stable Opportunity Zone investment strategy? Riaz Taplin is principal and founder of …

CONTINUE READING »

Opportunity Db

December 16, 2020




TAX - ALABAMA

Jefferson County Board of Education v. City of Irondale

Supreme Court of Alabama - October 23, 2020 - So.3d - 2020 WL 6235733

County board of education and several public-school employees, who worked either as public-school teachers or support staff, sought to avoid application of an occupational tax imposed by city.

The Circuit Court entered summary judgment for city. County board of education and public-school employees appealed.

The Supreme Court held that:

Nature of services performed by public-school employees, who worked either as teachers or support workers, was not an adequate basis for excluding them from having to pay city’s occupational tax; ordinance applied to all employees working in the city limits, regardless of the person’s employer or place of residence, and occupational tax did not create a new or additional requirement for gaining or maintaining employment by the county board of education.

State-agent immunity was not a basis to find that employees of county board of education were exempt from occupational tax imposed by city; ordinance did not affect any government function of the county board of education, payment of the occupational tax was not related to a board employee’s government responsibilities, and if the county board of education was unwilling to withhold the occupational tax for its employees, the ordinance provided a procedure for employees to independently comply with the requirements of the ordinance.

Occupational tax imposed by city ordinance neither violated statutorily mandated salary schedule for employees of local boards of education nor failed to ensure equitable pay for such employees so as to preclude occupational tax from being applied to employees of county board of education; despite argument that a difference in net wages occurred based on where employees of county board of education provided services within county, nothing in ordinance prohibited county board of education from paying employees gross wages exactly as required under the mandated salary schedule, and statute in question did not state that employees of local boards of education were otherwise exempt from local, state, or federal taxes.




Understanding A Path To Boosting Lower-Income Communities: Qualified Opportunity Zones.

Anyone involved in any type of commercial real estate endeavor has by now heard of the qualified opportunity zone program. For those who haven’t, the qualified opportunity zone (QOZ) came out of the bipartisan Investing in Opportunities Act of 2017 as a means for investors to defer paying taxes on capital gains after the sale of assets. Eventually, it found its way into the Tax Cuts and Jobs Act of 2017 and was rolled out soon after. In all the pro-and-con media hype around the program, many forget that its underlying purpose was to funnel financial resources toward in-need lower-income communities.

Though the program is still in its early days – it is, after all, a long-term initiative – the following issues should be considered when discussing QOZs: the program’s impact on lower-income areas, how qualified opportunity funds (QOFs) can boost economic development and how investors can ensure gains are directed to areas in need. With that said, there are still questions as to whether this community revitalization program is actually being utilized to revitalize communities.

Continue reading.

Forbes

by David Wieland

Dec 1, 2020




Despite Challenges, Opportunity Zones Provide Much-Needed Capital.

The program has been criticized for a lack of transparency and for being used as a tax dodge, but developers say it is “a great tool to have in the toolbox.”

Following a slow rollout of rules governing opportunity zones, a program Congress approved three years ago to encourage investment in low-income neighborhoods, developers have pumped billions of dollars into the zones nationwide, even in the midst of the pandemic.

The program has drawn myriad detractors, including critics who charge investors are using it simply to avoid paying taxes. Others point to a lack of transparency that makes it tough to gauge whether the investments are making a real impact on communities.

The Trump administration has resisted providing much federal reporting or oversight, but some states and cities are using the initiative to help steer investment into their underserved neighborhoods and track how much residents are benefiting from it.

Continue reading.

The New York Times

By Joe Gose

Nov. 24, 2020




Opportunity Zones Working Group Prepares to Provide Feedback on OZ Legislation, Oversight.

The OZ Working Group provides a platform for OZ stakeholders to work together to create consensus solutions to technical OZ incentive issues and to provide recommendations to the government to make the OZ incentive more efficient in delivering benefits to low-income communities.

During the run-up to the election, President-elect Joe Biden released his Build Back Better plan, which included several proposed modifications to the OZ incentive. These proposed changes have since been included in the Biden-Harris transition plan for racial equity and include:

Additionally, there has been a bipartisan call for data collection and transparency intended to enhance efforts to evaluate OZ policy and guard against abuse. Legislation introduced during the 116th Congress includes:

During 2021, the OZ Working Group will continue to foster opportunities for its members and continue to provide a platform where industry stakeholders can discover how best to implement the OZ incentive into their business strategy. The group will also continue to maintain a leadership role within the OZ industry by keeping abreast of emerging issues and providing input for shaping proposed legislation and rulemaking. With the likely change in administration, the group will turn its immediate focus to the following regulatory and legislative initiatives:

Administration Oversight

Legislative Activity

Conclusion

The leadership of the OZ Working Group has contributed greatly to the success of the OZ incentive during the first three years of implementation and there is still more work to do to successfully transition the incentive under a new administration and to maximize its potential to transform distressed communities. The OZ Working Group is excited to flip the calendar to a new year where we will continue our work of helping to shape the implementation of the OZ incentive toward the maximum efficiency and effectiveness in transforming communities. Parties interested in joining the OZ Working Group can contact John Sciarretti at [email protected]

Novogradac

Published by Jason Watkins, John Sciarretti on Wednesday, December 2, 2020




Last-Minute Opportunity Zone Strategies for 2020, with Ashley Tison.

With just a few weeks left in the year, what are some last-minute strategies and options to keep in mind for Opportunity Zone investors?

Ashley Tison is an Opportunity Zone consultant and attorney based in Charlotte, North Carolina. Along with Jimmy Atkinson, he is co-founder of OZ Pros, an Opportunity Zone advisory firm.

Click the play button below to listen to my conversation with Ashley.

Opportunity Db

By Jimmy Atkinson

December 9, 2020




TAX - NEW JERSEY

Metz Family Ltd. Partnership v. Township of Freehold

Tax Court of New Jersey - October 20, 2020 - 32 N.J.Tax 69

Taxpayer appealed township’s assessment of its local retail shopping center with warehouse component to the rear.

Township filed motions seeking orders for joinder of county board of taxation and Director of the Division of Taxation.

As matter of first impression, the Tax Court held that joinder of board and Director, as parties, was warranted.

Joinder of county board of taxation and Director of the Division of Taxation, as parties, was warranted in taxpayer’s appeal from township’s property tax assessments, where board and Director approved assessor’s initial application to perform annual reassessment, allegedly monitored assessor’s progress, and apparently verified assessment as qualifying on Director’s list for implementation of Revaluation/Reassessment; board and Directors should explain and defend their process and explain why there was no average ratio for assessments, for only they could provide such information.




TAX - VIRGINIA

International Paper Company v. County of Isle of Wight

Supreme Court of Virginia - September 17, 2020 - 847 S.E.2d 507

Corporate taxpayer, which had successfully obtained tax refund judgment for prior tax years, filed application for correction of new county machine and tools tax assessment, claiming the assessment was non-uniform, invalid, and illegal.

The Isle of Wight Circuit Court granted county’s motion to strike, and taxpayer appealed.

The Supreme Court held that:

County’s machinery and tools tax plan did not improperly interfere with corporate taxpayer’s vested right to tax refund judgment, although tax plan may have “clawed back” the money paid to taxpayer under refund judgment, where taxpayer received the money it had a vested right to receive, county had authority to increase the tax rate, and tax increase did not retroactively alter the prior tax rates or interfere with the paid judgment.

County had the statutory and constitutional authority to impose taxes on corporate taxpayer’s machinery and tools property as well as authority to execute tax relief program, even if the practical effect was to “claw back” tax refunds paid to taxpayer for prior years; county did not revise previous assessments, but instead increased tax rate for subsequent years, and tax relief program was to help businesses negatively impacted by the adjustment to the tax rate.

Corporate taxpayer’s assertion that county’s machinery and tools tax “assessment is otherwise invalid or illegal” because it is not uniform was sufficient to state a constitutional uniformity claim.

Corporate taxpayer provided prima facie evidence sufficient to show that county machinery and tools tax relief program payments were integrated into the taxation process and had the same effect as partial tax exemptions, and thus that taxpayer’s machinery and tools tax assessment was non-uniform, invalid, and illegal, as required to survive motion to strike; stated purpose of tax relief program was to relieve liability for tax rate increase for certain class of taxpayers whom county deemed to be “harmed” by the rate increase, county structured the program to directly exempt certain tax liability and payments from the program directly offset tax liability, program factually correlated with tax rate increase and was funded predominantly by the tax rate increase, and relief payments were calculated by using tax figures.

Corporate taxpayer provided prima facie evidence that county machinery and tools tax assessment was non-uniform, invalid, and illegal; tax relief formula treated taxpayers differently based upon whether the county had lawfully owed that taxpayer a refund on taxes overpaid in prior years, which created a sub-class of taxpayers, refund and relief payment were negatively correlated, only taxpayers who had received a refund were required to pay the tax assessment increase, and net tax rates paid by taxpayers, given the payments made to some taxpayers by the tax relief program, were not uniform




NABL Submits Letter to Treasury and IRS.

On Wednesday, December 3, 2020, the National Association of Bond Lawyers (NABL) submitted a letter to the U.S. Department of the Treasury (“Treasury”) and Internal Revenue Service (IRS) requesting an extension of IRS Notice 2020-53 through December 31, 2022. The notice, released on July 1, 2020, in response to the coronavirus pandemic provides relief relief to bond issuers, operators, owners and tenants of qualified residential rental projects and qualified low-income housing projects financed with exempt facility bonds, and state agencies that have jurisdiction over these projects, from otherwise-applicable federal tax law compliance requirements.

Read the full letter here.




Hawkins Advisory re: Rev. Proc. 2020-49 - Extension of Ability to Hold Telephonic TEFRA Hearings.

In consideration of the ongoing Covid-19 pandemic, Treasury and the Internal Revenue Service have extended the temporary guidance originally provided in Rev. Proc. 2020-21, published in May of 2020. The temporary guidance allows issuers of private activity bonds to hold the public hearings required by the TEFRA rules by teleconference until December 31, 2020. The release on November 4, 2020 of Rev. Proc. 2020-49 extends the period during which issuers may hold telephonic hearings to September 30, 2021.

Read the Hawkins Advisory describing Rev. Proc. 2020-49.




Opportunity Zones: Past, Present, and Future, with Rachel Reilly.

With a new President taking office next month, what does the future hold for Opportunity Zones? And what policy reforms under a Biden-Harris administration would improve the policy such that it more closely adheres to legislative intent?

Rachel Reilly is former director of impact strategy at Economic Innovation Group, a bipartisan public policy organization that helped to create the Opportunity Zone legislation.

Continue reading.

Opportunity Db

By Jimmy Atkinson

December 2, 2020




TAX - NEW YORK

Wells Fargo Bank, N.A. as Trustee for Carrington Mortgage Loan Trust, Series 2006–NC2 Asset- Backed Pass-Through Certificates v. Budram

Supreme Court, Appellate Division, Third Department, New York - November 5, 2020 - N.Y.S.3d - 2020 WL 6493824 - 2020 N.Y. Slip Op. 06323

In action by mortgagee to enforce its mortgage after taxpayer-mortgagors reacquired property from city following tax foreclosure sale, the Supreme Court entered order dismissing complaint and, upon reargument, adhered to its prior decision dismissing complaint.

The Supreme Court, Appellate Division, held that any transfer of real property from city back to taxpayers, after the city had acquired a fee simple interest therein by a deed issued following tax foreclosure sale, could not be considered a redemption of the property or a rescission of the tax foreclosure, and did not restore mortgage lien.

Any transfer of real property from city back to taxpayers, after the city had acquired a fee simple interest therein by a deed issued following tax foreclosure sale, could not be considered a redemption of the property or a rescission of the tax foreclosure, and did not have effect of restoring mortgage lien which had been extinguished upon city’s acquisition of fee simple interest in property by the issuance of deed following expiration of taxpayer-mortgagors’ right of redemption; mortgagee, having made no attempt to protect its mortgage interest in tax foreclosure proceeding, could not attempt to enforce its mortgage once taxpayer-mortgagors reacquired the property from city.




IRS Releases UBTI Calculation Regs for Exempt Orgs.

Treasury and the IRS have released final regulations on calculating the unrelated business taxable income of tax-exempt organizations.

The final regs (T.D. 9933) issued November 19 address section 512(a)(6), a Tax Cuts and Jobs Act provision that requires exempt organizations with more than one unrelated trade or business to calculate UBTI separately for each one. The regs provide guidelines for identifying separate UBTI and explain when EOs can treat investment activities as one unrelated trade or business when computing UBTI.

The final guidance adopted some clarifications provided in the proposed regs (REG-106864-18) without change. Those clarifications involve the section 513(b) definition of unrelated trade or business applying to individual retirement accounts and the inclusions of subpart F and global intangible low-taxed income being treated in the same manner as dividends when determining UBTI.




UBTI Calculation Regs Reflect Public Input.

Guidance from the IRS and Treasury to help tax-exempt organizations calculate unrelated business taxable income if they have more than one unrelated trade or business adopts many suggestions offered in public comments.

The final regulations (T.D. 9933), released November 19 ahead of official publication in the Federal Register, address section 512(a)(6), a Tax Cuts and Jobs Act provision that requires exempt organizations with multiple unrelated trades or businesses — silos — to calculate UBTI separately for each one.

The final regs explain how an EO can determine if it has more than one unrelated trade or business and, if it does, how to calculate its UBTI.

“The IRS should be commended for its speedy efforts in issuing final guidance on 512(a)(6), along with their level of consideration given to the 17 comments submitted in response to the proposed regulations,” Meghan R. Biss of Caplin & Drysdale Chtd. told Tax Notes.

The preamble to the final regs discusses reducing the administrative burden on organizations and the IRS by adopting bright-line rules, Biss noted.

“In doing so, I believe that the IRS is taking into account how it will enforce these rules,” Biss said. “To me, the rejection of facts and circumstances is an indication that they want agents to avoid the enforcement difficulties posed in other EO areas that rely solely on a facts and circumstances test.”

NAICS Codes
The final regs retain the proposed regs’ (REG-106864-18) provision requiring an EO to identify each of its separate unrelated trades or businesses by using the first two digits of the North American Industry Classification System (NAICS) code that most accurately describes the unrelated trade or business.

The determination is based on the more specific NAICS code that describes the organization’s activity, and the descriptions in the current NAICS manual of trades or businesses using more than two digits of the NAICS codes are relevant in making that determination, according to the preamble.

In response to comments, the final rulemaking incorporates a NAICS rule for identifying particular industries and provides that when there are sales of goods both online and in shops, the separate unrelated trade or business is identified by the goods sold in shops if the same goods generally are sold online and in stores.

If an EO concludes that its trade or business activities would be most accurately described by different NAICS two-digit codes, the activities should be identified that way and treated as separate unrelated trades or businesses, according to the final regs.

Like the proposed rulemaking, the final regs say the NAICS two-digit code has to identify the separate unrelated trade or business in which the EO directly or indirectly engages. It may not describe activities substantially related to accomplishing the organization’s exempt purpose.

The final regs, in response to comments, eliminate the restriction on changing NAICS two-digit codes. An organization that changes the identification of a separate unrelated trade or business must report the modification in the tax year of the change in accordance with forms and instructions.

IRAs, Subpart F Income
The final regs adopt the proposed rulemaking’s clarification that the definition of unrelated trade or business applies to IRAs.

Likewise, the proposed regs’ clarification that inclusions of subpart F income and global intangible low-taxed income are treated the same way as dividends for purposes of determining UBTI is retained in the final rulemaking.

Net Operating Losses
An EO with more than one unrelated trade or business will determine the net operating loss deduction separately for each of its unrelated trades or businesses, according to the final regs. They also provide that reg. section 1.512(b)-1(e), which addresses the application of section 172 in the context of UBIT, applies separately for each such unrelated trade or business.

The final regs say an organization with losses in a tax year beginning before January 1, 2018, and in a tax year starting after December 31, 2017, will deduct its pre-2018 NOLs from total UBTI before deducting any post-2017 NOLs regarding a separate unrelated trade or business against the UBTI from such trade or business. The IRS and Treasury rejected a commentator’s request to permit an EO to choose the order in which it uses pre-2018 and post-2017 NOLs based on its own facts and circumstances.

The final regs clarify that pre-2018 NOLs are taken against the total UBTI in a way that allows for maximum use of post-2017 NOLs, rather than pre-2018 NOLs, in a tax year.

“For example, the final regulations further clarify that an exempt organization may allocate all of its pre-2018 NOLs to one of its separate unrelated trades or businesses or it may allocate its pre-2018 NOLs ratably among its separate unrelated trades or businesses, whichever results in the greater utilization of the post-2017 NOLs in that taxable year,” the preamble explains.

The final rulemaking also provides that after offsetting any gain from terminating, selling, exchanging, or otherwise disposing of a separate unrelated trade or business, any remaining NOL is suspended.

But the suspended NOLs may be used if the previous separate unrelated trade or business later resumes or if a new unrelated trade or business that is accurately identified using the same NAICS two-digit code as the previous separate unrelated trade or business begins or is acquired in a future tax year, according to the preamble.

In response to six commentators, the final regs provide that for purposes of section 512(a)(6), a separate unrelated trade or business that changes identification is treated as if the originally identified separate unrelated trade or business is terminated and a new separate unrelated trade or business begins.

Therefore, none of the NOLs from the previously identified separate unrelated trade or business will be carried over to the newly identified separate unrelated trade or business, the preamble explains.

The change in identification may apply to all or a part of the originally identified separate unrelated trade or business. If the change applies to the originally identified separate trade or business entirely, any NOLs attributable to that separate unrelated trade or business are suspended, the final regs say.

If the change in identification applies to the originally identified separate unrelated trade or business in part, the originally identified separate unrelated trade or business that remains unchanged keeps the entire NOLs attributable to it, including the part for which the identification is changing.

Investment Activities
Despite pleas from some commentators, the final regs, like the proposed version, treat an EO’s investment activities that are subject to UBIT as a separate unrelated trade or business for purposes of section 512(a)(6).

Regarding specified payments from controlled entities, the IRS and Treasury adopted the language in the proposed regs without change, rejecting the suggestion that all specified payments be treated as one unrelated trade or business for purposes of section 512(a)(6).

Qualified Partnership Interest
The final regs rejected commentators’ recommendations of alternative or additional methods for identifying a qualified partnership interest (QPI).

The rulemaking adopts the proposed regs’ position that once an organization designates a partnership interest as a QPI, it can’t subsequently identify the trades or businesses conducted by the partnership that are unrelated trades or businesses regarding the EO using NAICS two-digit codes unless and until the partnership interest stops being a QPI.

In response to a commentator, the final regulations clarify that if an organization whose interest must be considered when determining the EO’s percentage interest for purposes of the first prong of the control test is a general partner in a partnership in which an EO holds an interest, that interest is not a QPI.

Regarding the first prong of the control test, the final regs keep the 20 percent capital interest threshold of the proposed regs. However, they make clear that the EO must satisfy the percentage interest requirement for its tax year with which or in which the partnership’s tax year concludes.

TAX ANALYSTS

by FRED STOKELD

POSTED ON NOV. 20, 2020




IRS PLR: City’s Geographic Boundaries Constitute Qualified Service Area

The IRS ruled that the entire geographic area of a city is a qualified service area of its public utilities commission within the meaning of section 141(d)(3)(B)(i) but expressed no opinion on whether the interest on bonds used to finance the city’s plan to provide retail electric service will be tax-exempt.

Read the IRS Private Letter Ruling.

Citations: LTR 202046004




IRS PLR: Renewable Energy Facility Is Not Public Utility Property

The IRS ruled that the portion of a public utility’s photovoltaic array built on a customer’s land that is the dedicated renewable energy facility serving that customer will not be public utility property within the meaning of section 168(i)(10) and former section 46(f)(5).

Read the IRS Private Letter Ruling.

Citations: LTR 202047004




IRS Attacks Impact Investing With Flawed Logic: A Critical Review of the IRS Argument

On October 9th, the Internal Revenue Service released Private Letter Ruling 202041009 (the “Ruling”), which, in what many in the nonprofit community would have expected to be a relatively straight-forward exemption approval for a new 501(c)(3) nonprofit organization (the “Nonprofit”), resulted in not just a denial of the Nonprofit’s tax-exempt status, but, in some respects, a repudiation of impact investing as a whole, including program related investments (PRIs). While private letter rulings are only legally binding on the taxpayer that requested the ruling (in this case, the Nonprofit), these rulings are used by practitioners as a guide to IRS’s position on the application of the tax law. Thus, a negative IRS ruling is generally viewed as a warning to all others in similar circumstances. All is not necessarily lost for the Nonprofit in the Ruling. The Nonprofit still has a variety of options to consider taking to continue its fight, which the authors of this article hope it will vigorously do. As the goal of this article is not to review all of the legal strategies one could take in the exemption process, we note that there are various options so readers know that this story may not be over.

Ruling Overview

The Ruling was prompted by the Nonprofit seeking a Determination Letter from IRS confirming that it qualifies for exemption as an organization described in Section 501(c)(3) of the Internal Revenue Code. According to the Ruling (which is heavily redacted to preserve the confidentiality of the actual applicant), the Nonprofit was formed: Exclusively for charitable purposes, including, for such purposes, increasing the capital available to organizations that develop and/or operate (i) long term affordable housing for the economically and physically disadvantaged, (ii) community facilities such as schools and community health centers, (iii) businesses providing access to healthy foods, (iv) sustainable energy projects, (v) commercial real estate, and (vi) other projects that may increase social welfare.

The exempt purpose of the Nonprofit, more generally, is to “deploy capital into projects that promote a social good and that otherwise struggle to find financing in normal capital markets” in low income and underserved communities. Capital for the Nonprofit’s work comes from impact investors, specifically in the form of equity investments in pooled investment funds organized by the Nonprofit. The Ruling describes impact investors as “individuals and institutions who want to see that their funds accomplish positive social and environmental objectives and as a concomitant objective to earn financial returns and utilize capital to finance projects and organizations in line with the investors’ dual objectives”. While we recognize there are many different views on how to define an impact investor, this is the version used in the Ruling. Unlike many determination requests from applicants in the exemption process, the Nonprofit had already begun conducting activities prior to making its request for an IRS determination. Thus, the Ruling provides actual examples of activities undertaken by the Nonprofit, namely two funds that were already organized. The first was a loan fund focusing on preventative healthcare and social service investments in an effort to reduce costly acute care interventions. The initial projects included the provision of housing and social services for the chronically homeless and for individuals exiting incarceration to reduce recidivism and the prison population. The second loan fund targeted small-scale energy efficiency and clean energy project finance. In this case, initial projects included efficiency upgrades in non-profit affordable housing units and at a non-profit senior living facility. Both projects focused on lowering operating and utility costs. The Ruling describes the funds’ projects as “not commercially financeable”. In fact, in characterizing all of the investments made to date by the Nonprofit, the Ruling states:

These kinds of activities are not well supported by traditional capital markets. The activities are too niche, too small scale, or too low-return to draw the attention and resources of banks, venture capital and private equity funds, and public stock and bond markets.

The Ruling also describes, in brief detail, the manner in which the Nonprofit selects projects for investment, which includes both somewhat traditional investment due diligence considering both risk and return, as well as social and environmental impact screens. In order for the Nonprofit to become sustainable it charges a “substantially below market” management fee for its services to the investment funds it manages. To the extent the Nonprofit earns any funds in excess of its costs, which it endeavors to keep low by sharing space and services with its parent organization 501(c)(3) nonprofit organization, such excess is either invested into one or more of the funds or contributed to its parent. Some other facts describing the Nonprofit’s activities include that: (a) it will likely be required to register with the Securities and Exchange Commission (SEC) as an investment advisor at some point, (b) no guarantees are made to investors that they will receive a “fair market return”, (c) “as of a couple of years ago” the Nonprofit was already managing assets, (d) no charitable deductions are offered to investors in the Nonprofit’s funds, despite the Nonprofit’s management activities being conducted in furtherance of its charitable mission, and (e) the Nonprofit’s model is projected to be successful, with substantial excess revenue over expenses by its third year of operations. Questionable Application of Legal Precedent In reviewing the law governing qualification for exemption in the Ruling, IRS relies on a variety of Treasury Regulations articulating both the “organizational test” and the “operational test”.

The former requires that an organization be organized in a manner that qualifies for exemption; in other words, the governing documents must meet the literal requirements for exemption. The latter test, being the more complex of the two, requires that the organization engage primarily in activities that accomplish one or more of the organization’s exempt purposes. The Ruling then proceeds to recite a series of Revenue Rulings from the late 1960s through the mid-1970s, as well as a number of court cases dating back to 1945. After analyzing the precedent, IRS ultimately determined that the Nonprofit fails to qualify for tax-exempt status because it fails to satisfy the operational test for exemption, more specifically, that a substantial portion of the Nonprofit’s activities consists of managing funds for a fee that provide a market or near-market return for investors. In other words, more than an insubstantial amount of the Nonprofit’s activities further non-exempt purposes. As IRS characterizes the Nonprofit’s activities, the funds are open to any interested investors who expect market or near-market returns while also capitalizing on activities with a public purpose. Ultimately, IRS believes the Nonprofit’s “charitable objectives or results are incidental to [its] business purposes of maximizing returns for [its] investors.” While some of the authority underlying the IRS conclusion is on point, a number of the citations referenced may best be described as misguided or, at worst, far from applicable to the Nonprofit’s activities. For example, IRS compares the Nonprofit to an organization denied exemption in Revenue Ruling 69-528, where the organization provided investment services for a fee to other nonprofits in a manner similar to what is considered an unrelated trade or business when operated by a nonprofit organization. In contrast, the Nonprofit charged below-market fees for investments not made in common stocks, but in specifically curated projects that not only advance the Nonprofit’s exempt purposes but that would not otherwise be funded without the Nonprofit’s actions. IRS seemingly ignores the fact that the Nonprofit’s purposes were advanced by its investment in those projects, which were charitable. IRS similarly cites Revenue Ruling 72-369 for the proposition that offering services at cost is not enough to qualify an activity as charitable.

However, the Nonprofit is not providing general managerial and consulting services at cost like the organization in Revenue Ruling 72-369, but is rather providing below-market rates for its investment services as part of a package meant to increase the desirability of investment in exempt purpose projects that would not be funded otherwise. Again, these are projects that were otherwise not commercially financeable. In Revenue Ruling 74-587, a nonprofit invests in economically depressed areas with loans tailored to business needs based on a primary goal of advancing charitable goals, as opposed to amassing profit. While some individuals and businesses receiving financial assistance from the organization may not qualify for charitable assistance, they are “merely instruments” in effectuating the organization’s exempt purposes. IRS contrasts this organization with the Nonprofit, stating that because the Nonprofit screens potential investments for both financial feasibility/risk and social/environmental impact, as well as charging fees and benefitting investors, the Nonprofit is primarily concerned with the rate of return. On the other hand, the Nonprofit will only invest if the exempt purposes screen is met, so the assertion that the Nonprofit’s investments are “first and foremost concerned with the risk and return potential” seems an unfair characterization based simply on the order of operations of the Nonprofit’s vetting methodology; IRS said form counts more than substance. Additionally, the activities of the organization in Revenue Ruling 74-587 are not without private benefit (to the individuals/businesses). There is no indication the loans are interest-free and there clearly is no requirement that the recipients qualify for charitable assistance.

The cases cited by IRS in the Ruling highlight the impact of the commerciality doctrine on the exemption analysis, which is somewhat murky in practice but basically equates to the fact that substantial commercial activity, as defined based on all relevant facts and circumstances, must be in furtherance of a nonprofit’s exempt purposes in order to be acceptable. Various court cases over time have enumerated different facts and circumstances to be weighed, but a few commonly cited examples include whether the activity competes with for-profit enterprises, as well as how the activity is priced, advertised and funded. IRS believes the Nonprofit’s activities are like those typically operated by commercial ventures, with funding solely from management fees and resulting in a high financial reserve advising against a finding of exemption. However, a comparison to B.S.W. Group, Inc. v Commissioner, 70 T.C. 352 (1978), for example, is not directly on point as the Nonprofit is not offering consulting services for high fees, but instead charges below-market rates and eschews a carried interest typical of fund managers, all designed to not generate a profit for the Nonprofit. It is operating to provide investments that otherwise are not offered in the market because they could not attract capital, even if there is the potential for market or near market returns. The lack of competition is, in a way, the reason the Nonprofit created the funds in the first place and is the basis of its exempt purpose. Other cases are cited by IRS, including Airlie Foundation v. Commissioner (283 F. Supp 2d 58 (D.D.C., 2003) and Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991), in order to continue the competition argument, as well as to point to revenue from investment fees (as opposed to donations) and a projected high financial reserve as counseling against exemption. However, the Nonprofit invests any reserve back into its exempt projects or donates the funds to its parent 501(c)(3) organization. Additionally, based on the facts provided in the Ruling, it is a bit of a stretch to compare the Nonprofit’s “promotional efforts,” described as a publicly available brochure and offering documents accompanying the private funds that would be required by securities laws, with the wide-spread advertising and “commercial catch phrases” used to promote the restaurants and health food stores run by Living Faith, Inc.

Ultimately, the facts and circumstances of the Nonprofit’s activities do not fit neatly with the precedents cited by IRS, which means there seems to be a significant basis for challenging the legal foundation for the position taken by IRS to deny the Nonprofit’s exemption.

Tensions with Established Impact Investing Practices

In addition to applying flawed logic to the facts as presented, the Ruling seems to indicate a discomfort with the very types of activities that drive impact investing, including programrelated investments (PRIs) made by private foundations. The Ruling provides a definition of impact investing that highlights dual objectives of positive social and/or environmental good and financial returns, such that the investment is not exclusively about generating profit. Nonprofits have long engaged in impact investing, sometimes termed “mission related investments (MRIs)” and IRS has declined to penalize nonprofit organizations for investments made with a charitable mission in mind that may offer lower returns than standard investment alternatives. The tax law explicitly blesses PRIs, on the other hand, with private foundations authorized to treat amounts expended in connection with PRIs as part of their required 5% minimum distribution requirements and without being considered imprudent from an investment perspective. The Treasury Regulations define PRIs as investments characterized by a primary purpose to advance exempt purposes, without a significant purpose of production of income or appreciation of property. The actual production of significant income or appreciation, however, is not, in and of itself, considered evidence of a significant purpose involving the production of income. In fact, an investment is considered to be made primarily to accomplish exempt purposes if it significantly furthers the accomplishment of the nonprofit organization’s exempt activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the exempt activities. A relevant consideration is whether investors solely focused on profit would make the investment on the same terms.

The Ruling stands in stark tension with PRIs and the larger impact investing environment, as the PRI criteria seem to directly echo the facts in the Ruling. The Nonprofit created “not commercially financeable” funds in furtherance of its exempt purposes, as typical capital markets were not an option due to the “niche,” “small-scale,” and “low-return” nature of the investments. In short, the investments further the Nonprofit’s purposes and would not have been made but for the Nonprofit’s efforts. While the Nonprofit was able to provide market or near-market returns to its investors, in the PRI context, the mere creation of profit is not enough to villainize the investment itself. IRS makes much of the Nonprofit’s costsaving efforts, which again, are not enough to make profit the primary motive. Similarly, evaluating potential investments for both risk and social impact does not automatically mean a PRI is not in furtherance of exempt purposes, nor should the assumption be made about the Nonprofit’s activities simply because the possibility of a return is considered. While the investors in the Nonprofit’s funds may have entertained any number of reasons for investing in the Nonprofit’s projects, the Nonprofit offers no promises or expectations to investors about market returns and focuses instead on furthering its exempt purposes in innovative ways. Additionally, there is no requirement that a PRI, or for that matter, charitable activities, only benefit a recipient that would otherwise qualify for charitable assistance, though IRS cites this as a reason against exemption. Lastly, as noted, PRIs are not considered to have a primary profit motive simply because they happen to be a good investment with market or near-market returns. Characterizing the Nonprofit’s activities as “trying to secure the highest returns possible for your clients” misses the greater context in which the Nonprofit is operating, namely in a space where projects in furtherance of exempt social and environmental purposes would not otherwise get done. IRS is also uneasy about the fact that investors, including the general public as opposed to simply exempt organizations, can (and are) benefitting from the Nonprofit’s investments. However, in the PRI context, the private enterprises that receive support are most certainly benefitted, but so are exempt purposes furthered. On the other hand, PRI returns are required to be recycled by the investing private foundation for charitable purposes. Perhaps the decision in the Ruling would have come out differently had the Nonprofit’s management activities been funded through donations as opposed to below-market fees, but the arguments made by IRS strain against the backdrop of established PRI regulations.

The Ruling may result in the curbing of creative fundraising of third-party dollars by nonprofit organizations striving to provide much-needed capital for exempt-purpose facilities and services when facing a dearth of traditional funding options. One of many dangers with this approach is a reduced ability for nonprofits to court or work with outside funding that is not a charitable donation, grant or loan, which, in turn, will reduce the probability that many difficult-to-fund projects with immense social good will ever be started. While IRS may have legitimate arguments in favor of such restrictions, the reasoning provided in the Ruling is not altogether convincing.

Thursday, October 22, 2020

© Polsinelli PC, Polsinelli LLP in California




Treasury Releases Priority Guidance Plan.

On November 17, 2020, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) announced the release of the 2020-2021 Priority Guidance Plan. The 2020-2021 Priority Guidance Plan sets forth guidance priorities for the Treasury and the IRS. Each year, the Treasury Department’s Office of Tax Policy and the IRS use the Guidance Priority List to identify and prioritize that tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The Guidance Priority List focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

You can find the 2020-2021 priority guidance plan here.




TAX - OHIO

Athens v. McClain

Supreme Court of Ohio - November 5, 2020 - N.E.3d - 2020 WL 6494232 - 2020 -Ohio- 5146

Municipalities brought action against Tax Commissioner challenging constitutionality of statutes governing state collection and administration of municipal net profit taxes.

The Court of Common Pleas entered judgment for Tax Commissioner. Municipalities appealed. The Court of Appeals affirmed. Municipalities appealed.

The Supreme Court held that:

General Assembly acted within its authority when it enacted centralized administration system for municipal net profit taxes; laws did not take over a municipality’s own internal operations but instead made administration of municipal net profit tax, for those taxpayers that elected centralized administration, an operation of the state tax department, with the state thereby becoming a fiduciary for the municipalities whose taxes it collected.

Statute directing State Treasurer to retain one-half percent of municipal net profit taxes for collection and administration services, as part of centralized administration, rather crediting amount to fund that distributed funds to municipalities, exceeded General Assembly’s general power to legislate, since municipalities exercising home-rule authority were not persons “subject to” the state’s regulation.




TAX - SOUTH DAKOTA

Flandreau Santee Sioux Tribe v. Terwilliger

United States District Court, D. South Dakota, Southern Division - October 21, 2020 - Slip Copy - 2020 WL 6158920

Flandreau Santee Sioux Tribe, filed action seeking a judicial declaration that, under federal law, the State of South Dakota did not have the authority to impose the South Dakota excise tax in connection with services performed by non-Indian contractors on the Tribe’s on-reservation construction project.

The District Court held that:

“In conclusion, the court finds that under a Bracker analysis, the State of South Dakota’s interest in imposing the contractor’s excise tax does not outweigh the tribal and federal interests in promoting tribal self-sufficiency and self-governance, ensuring the Tribe is the primary beneficiary of gaming, protecting gaming as a means of general tribal revenue, and securing tribal economic development. Considering all the Bracker factors, the evidence presented at trial demonstrated: (1) a strong historical backdrop of tribal sovereignty and sovereignty in the field of Indian gaming; (2) the federal regulatory scheme of IGRA is extensive; (3) there is a strong federal interest in the construction and maintenance of Indian gaming to protect the environment and public health and safety of Indian gaming facilities and patrons while simultaneously promoting tribal self-sufficiency and strong tribal government as evidenced by the statutory structure of IGRA; (4) the Tribe’s own regulation of gaming, gaming revenue and on-reservation construction is extensive; (5) the economic burden of the State excise tax falls directly on the Tribe; (6) the State excise tax places a substantial burden on the Tribe’s ability to generate gaming revenue and provide essential tribal governmental programs through the Tribe’s budget; (7) there is no nexus between the services or regulations funded by the State general fund and provided by the State to the Tribe, tribal members, or Henry Carlson Company and the Casino renovation project; (8) any State services provided to the Tribe, tribal members, the Casino, or Henry Carlson Company off-reservation are not connected to the Casino renovation project and minimal; (9) the State does not uniformly apply the contractor’s excise tax or its Department procedures for Indian country tax exemptions; and (10) the State provides little government services funded from the general fund to the Tribe, tribal members, the Casino, or Henry Carlson Company; the State does not uniformly apply the tax; and as a result, the State can only demonstrate a general interest in raising revenue.”

“The South Dakota contractor’s excise tax on Henry Carlson Company’s gross receipts derived from the on-reservation construction and renovation of the Royal River Casino is not per se invalid nor expressly preempted under IGRA. After considering the federal, tribal, and state interests under the Bracker balancing test, the court finds that the tax interferes with federal and tribal interests reflected in IGRA. This outweighs the State’s minimal interests. Thus, the State tax is preempted under IGRA.”

“Additionally, because Congress has not said otherwise, Indian Trader Statutes expressly preempt the contractor’s excise tax. In the alternative, even if the Indian Trader Statutes do not expressly preempt the State tax, after considering the federal, tribal, and state interests under the Bracker balancing test, the court finds that the tax interferes with federal and tribal interests reflected in the Indian Trader Statutes. This outweighs the State’s minimal interests. Thus, the State tax is preempted under the Indian Trader Statutes. Because the State’s interests do not outweigh the strong federal and tribal interests under IGRA or the Indian Trader Statutes, the State contractor’s excise tax is preempted under federal law.”




Biggest Source of Tax Revenue in Every State.

Stacker used survey data from Pew Charitable Trusts, which analyzed tax revenue for U.S. states for the 2019 financial year. For each state, it found the biggest source of tax revenue from the following categories—personal income, corporate, general sales, selective sales, severance, licenses, and property. The data was released in June 2020.

The 50 states have carved out their own ways to collect taxes from their residents and businesses. Those states rich in natural resources collect severance taxes on oil and natural gas extraction, while Delaware trains its tax eye on corporations. Most stick to more typical personal income and sales taxes.

Nearly every state employs progressive ways of taxing the rich more than the poor, although several use flat-rate income taxes that take a much bigger relative bite out of low incomes than of big salaries. And in many states, sales taxes, the most regressive levy of all, comprise the biggest source of public revenue.

The size of tax revenues range from the enormous $188 billion collected last year by the state of California to the far more modest $1.78 billion pocketed by the state of Alaska.

People everywhere love to complain about the taxes they pay, but a survey taken this year found 48% of people thought the amount of taxes they paid were about right, and more than the 46% who thought their taxes were too high. Another 3% thought the taxes they paid were too low.

Check out the list to see what kinds of tax dollars your state collects, and how it compares with the rest of the country.

View the list.

dbrnews.com

Ellen Dewitt | Nov 13, 2020




States Go After Small Businesses on Amazon - and Sometimes Amazon - for Millions in Back Sales Taxes

The Supreme Court in 2018 gave states the power to make new rules for collecting sales taxes online. But back taxes on products sold by small businesses on Amazon’s marketplace are still a major point of dispute.

Amazon is one of the nation’s largest retailers in part because of its rapidly growing online marketplace, which allows small business owners to sell their products to a vastly larger group of consumers. In fact, Amazon’s marketplace sales more than doubled in just three years, climbing to about $230 billion in 2019, accounting for more than half of the online giant’s business.

But up until last year, many of those sales weren’t taxed because the legal requirement to do so was murky. Now, some state governments are trying to recoup those taxes. But whether they’re going after Amazon or small business owners themselves for that money depends upon the state.

In California, a state agency is trying to collect back taxes from Fulfilled-By-Amazon (FBA) sellers from as far back as 2012, when Amazon first opened warehouses and fulfillment centers there.

Earlier this year, Philadelphia-based FBA seller Brian Freifelder received a notice from the California Department of Tax & Fee Administration (CDTFA) warning that he could owe California up to $1.6 million in back sales tax, plus penalties and interest. (After the story made national news, the CDTFA admitted the $1.6 million estimate was “higher than it should have been,” but did not let Freifelder off the hook.)

The CDTFA argues that a business owner’s inventory stored for sale in California amounts to having a physical presence there, and therefore triggered the eligibility for those sales to be taxed. The action by the agency has sparked at least two lawsuits, the most recent one filed in September by the trade organization Online Merchants Guild. The guild, which represents FBA sellers, says those sales taxes should have been collected by Amazon in the first place because Amazon was the retailer. In the marketplace format, it argues, merchants are the equivalent of suppliers because they don’t have control over where their products are shipped or sold.

“They [the CDTFA] have no more discretion to go after Amazon sellers than they do Black & Decker for their sales within Home Depot,” said Paul Rafelson, executive director of the guild.

But California isn’t alone in trying to directly collect from sellers, with Massachusetts, Minnesota, Washington and Wisconsin also sending demands for back taxes in recent years.

In South Carolina, however, the state is targeting Amazon itself. It sued the company for $12.5 million in unpaid sales tax, interest, and penalties for the first quarter of 2016 alone. An administrative law judge sided with South Carolina, but that ruling is under appeal. The state says Amazon is liable for remitting sales tax for third-party marketplace sales because customers are using Amazon’s website and fulfillment services for the purchase.

Amazon said last year the ruling was without merit and hinted at the scale of the potential financial hit if other states followed this tack. “If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities.”

Most states sought to clarify the responsibility for collecting taxes after the landmark 2018 Supreme Court ruling that allowed states to collect sales taxes from online sellers, no matter where those merchants are located. In enacting their own sales tax laws, many governments made a distinction between businesses doing direct sales to in-state consumers and those done via online marketplaces such as Amazon or Ebay.

These marketplace facilitator laws, which have been passed in 33 of the 45 sales tax states, make clear that the marketplace platform is responsible for collecting sales taxes—not the merchant who is providing the product. The intent was to keep in place protections for small business owners for whom it may be cost prohibitive to comply with dozens of different sales tax laws. For example, California’s law that took effect in 2019 says that remote retailers must register to collect and remit sales tax once their annual sales into the state exceed $500,000.

But far from clearing things up, those facilitator laws have in some cases added to the confusion. In California, State Treasurer Fiona Ma criticized the CDFTA’s approach, calling it “a wrong-headed and retroactive administration of the state’s tax law.” She argued in a letter to Gov. Gavin Newsom that the state’s policy was unfair to small businesses without the ability to comply, while possibly forcing them out of business. Since then, the legislature passed another law that limited the state’s look-back period to 2016 for collecting marketplace sales taxes, but that still targets sellers.

Scott Peterson, Avalara’s vice president of U.S. tax policy, said that state legislatures can potentially step in to protect marketplace sellers from past tax liability. But in California, that ship has likely sailed.

“They could have let the past be the past,” he said. “But instead they doubled down.”

Route Fifty

By Liz Farmer

NOVEMBER 12, 2020




Results of 2020 State and Local Tax Ballot Measures.

Read the Tax Analysts report.

November 3, 2020




State Ballot Tax Initiative Outcome Mixed; Modest Revenue Effects - Fitch

Fitch Ratings-New York-11 November 2020: Taxes were on the ballot in a number of states in the 2020 election, and the outcome of these statewide ballot initiatives will have a modest effect on state budgets for the most part, Fitch Ratings says. Voters split in their support of taxes against a backdrop of weakening state revenues. Measures targeting narrow types of activity or those with specific funding purposes fared better.

Notably, Illinois voters rejected a graduated income tax, narrowing the state’s fiscal options. This would have replaced the flat tax provided for in the state constitution and would have generated an estimated $1.3 billion in state tax revenue in the second half of the current fiscal year. Budget cuts are likely, but the state may also raise revenues, such as choosing to increase the flat income tax rate. Borrowing is already included in the enacted budget, but additional debt without mitigating structural measures could compound pressures on Illinois’ IDR of ’BBB-’ with a Negative Rating Outlook.

California voters also rejected a constitutional amendment, Proposition 15, or the “split roll.” Had it passed, California’s Legislative Analyst’s Office estimated it would have increased local property taxes by $8 billion-$12.5 billion per year statewide beginning in 2025, reducing cost pressure on the state to fund schools.

In Colorado, voters approved the reduction of the state income tax rate to 4.55% from 4.63%, which is expected to reduce state revenues by $169.8 million in fiscal 2021-2022. Voters also chose to repeal the Gallagher Amendment, which currently limits residential property to no more than 45% of the total statewide property tax base by essentially reducing assessments when residential property values rise. The repeal will prevent an automatic residential property tax cut anticipated in fiscal 2022 and relieve the state from an estimated $247 million fiscal offset to school districts. Voters also approved a new tax on nicotine vaping products and an increase in existing tobacco taxes, raising fiscal 2021-2022 revenue by an estimated $175.6 million, the majority of which will initially go to K-12 education. Fitch maintains a ‘AA’/Stable rating on the Colorado School Credit Enhancement Program, also known as the School District Intercept Program, or SDIP, and a ‘AA-‘/Stable rating on the Colorado Charter School Moral Obligation Program.

Arizona voters also supported a K-12 tax measure, approving an additional 3.5% tax on higher earners that will raise around $827 million for schools and teacher salaries. Arkansas voters made permanent a roughly $300 million 0.5% percent sales tax increase, first authorized in 2012, to fund transportation infrastructure. Oregon increased the cigarette tax by $2.00 per pack and created a 65% tax on e-cigarettes, generating around $160 million annually revenues for health initiatives and tobacco cessation efforts. The revenue will nominally alleviate pressures on the general fund’s $22 billion biennial budget.

Gaming initiatives passed in Maryland, Nebraska, South Dakota and most Louisiana parishes will have a marginal effect on tax revenue. Taxes on related activity such as entertainment, food, and lodging may have secondary revenue benefits, although this is unlikely to materialize until the coronavirus is contained.

Recreational cannabis legalization passed in all states where it was on the ballot: Arizona, Montana, New Jersey and South Dakota. In addition, Mississippi approved medical marijuana. While this provides a new tax source for these states, in all cases Fitch anticipates modest effects on state budgets.

Other notable ballot initiatives, including Alaska’s Measure 1 regarding fuel-production taxes, have not been called yet.

Contact:

Eric Kim
Senior Director, Head of States Ratings
+1 212 908-0241
Fitch Ratings
Hearst Tower
300 W. 57th Street
New York, NY 10019

Sarah Repucci
Senior Director, Fitch Wire
+1 212 908-0726

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.




TAX - ALABAMA

Ex parte Department of Revenue

Supreme Court of Alabama - October 30, 2020 - So.3d - 2020 WL 6374805

Department of Revenue sought review of Tax Tribunal’s judgment in favor of taxpayer, an electronic-bingo operator, in taxpayer’s challenge to Department of Revenue’s determination that it owed $75,000,000 in sales taxes and consumer-use taxes for operator’s electronic-bingo activities for a particular four-year period.

The Circuit Court denied Department’s motion for recusal but did not provide any specific rationale or reasoning. Department petitioned for a writ of mandamus.

The Supreme Court held that:

Department of Revenue was entitled to the recusal of trial judge in Department’s appeal of Tax Tribunal’s determination that Department’s $75,000,000 assessment of sales taxes and consumer-use taxes for business taxpayer’s electronic-bingo activities for a particular four-year period was void; a reasonable person would question judge’s impartiality in light of his recusal in earlier challenges to the tax assessments at issue as well as his recusals in other cases involving the same parties and the Supreme Court’s removal of him in a case involving the same parties without the issue of recusal having been heard in the circuit court, and nothing in the record on Department’s mandamus petition indicated that the reasons for recusal set forth in the previous cases did not remain.

Department of Revenue failed to demonstrate a clear, legal right to mandamus relief in regard its request that its appeal of Tax Tribunal’s determination that Department’s $75,000,000 assessment of sales taxes and consumer-use taxes for business taxpayer’s electronic-bingo activities for a particular four-year period be reassigned, even though Department was entitled to recusal of the trial judge; Supreme Court had set forth well-established procedures for a trial judge to request reassignment of a case once he or she recused himself or herself or was disqualified, and the materials before the Supreme Court indicated that the trial judge, when having recused himself in other cases, had followed those procedures.




IRS Extends Period for Telephonic Public Hearings for Private Activity Bonds to September 2021: Holland & Knight

Because of the continuing COVID-19 crisis, the IRS has issued Revenue Procedure 2020-49 (the Revised Guidance), which extends the period during which remote telephonic hearings qualify as “public hearings” required for private activity bonds to Sept. 30, 2021. Originally, such telephonic hearings could not be held past Dec. 31, 2020.

The IRS previously released guidance in Revenue Procedure 2020-21 (the Prior Guidance), allowing remote telephonic hearings to qualify as “public hearings” required for private activity bonds under Section 147(f) of the Internal Revenue Code of 1986, as amended. (See Holland & Knight’s previous alert, “IRS Provides Procedures for Telephonic Public Approval Hearings for Private Activity Bonds,” May 5, 2020.)

To qualify, the hearing must be held by teleconference accessible to the residents of the approving governmental unit by calling a toll-free telephone number. That toll-free number and the procedures for calling in with comments should be published in the public notice for the hearing. In addition to this telephonic access, the approving governmental unit may also offer additional access to the hearing by other telephone numbers or by internet-based meeting technology.

The Revised Guidance applies only to hearings held telephonically – thus internet only or other non-telephonic hearings do not qualify.

The Revised Guidance applies to public hearings held from May 4, 2020, through Sept. 30, 2021.

Holland & Knight LLP

November 6, 2020




GAO Says Oversight of Opportunity Zones Could Improve.

Congress should give Treasury the authority to collect data and report on the performance of Opportunity Zones, in collaboration with other agencies, so the program can be better evaluated for outcomes such as its effect on employment or housing in the zones, the Government Accountability Office said in a report released November 9.

Read the GAO Report.




Top Questions to Ask Before Investing in an Opportunity Zone Fund.

What are the biggest questions you should ask before investing in an Opportunity Zone fund?

With many investors facing a year-end deadline for rolling over their capital gains into an Opportunity Zone investment, know which questions to ask any fund manager before writing that big check.

Continue reading.

opportunitydb.com

By Jimmy Atkinson

November 11, 2020




TAX - ALABAMA

Jefferson County Board of Education v. City of Irondale

Supreme Court of Alabama - October 23, 2020 - So.3d - 2020 WL 6235733

County board of education and several public-school employees, who worked either as public-school teachers or support staff, sought to avoid application of an occupational tax imposed by city.

The Circuit Court entered summary judgment for city. County board of education and public-school employees appealed.

The Supreme Court held that:

Nature of services performed by public-school employees, who worked either as teachers or support workers, was not an adequate basis for excluding them from having to pay city’s occupational tax; ordinance applied to all employees working in the city limits, regardless of the person’s employer or place of residence, and occupational tax did not create a new or additional requirement for gaining or maintaining employment by the county board of education.

State-agent immunity was not a basis to find that employees of county board of education were exempt from occupational tax imposed by city; ordinance did not affect any government function of the county board of education, payment of the occupational tax was not related to a board employee’s government responsibilities, and if the county board of education was unwilling to withhold the occupational tax for its employees, the ordinance provided a procedure for employees to independently comply with the requirements of the ordinance.

Occupational tax imposed by city ordinance neither violated statutorily mandated salary schedule for employees of local boards of education nor failed to ensure equitable pay for such employees so as to preclude occupational tax from being applied to employees of county board of education; despite argument that a difference in net wages occurred based on where employees of county board of education provided services within county, nothing in ordinance prohibited county board of education from paying employees gross wages exactly as required under the mandated salary schedule, and statute in question did not state that employees of local boards of education were otherwise exempt from local, state, or federal taxes.




The COVID-19 Pandemic Continues On and So Do Telephonic TEFRA Hearings: Squire Patton Boggs

Remember earlier this year when the novelty of working from home hadn’t worn off, when every day wasn’t Groundhog Day, when we hadn’t run out of Netflix to watch, and when we were all concerned about how to satisfy the in-person TEFRA hearing requirement for tax-exempt private activity bonds in the midst of a pandemic and all sorts of Stay-at-Home orders? I know, that seems like decades ago!

As a refresher, on Star Wars Day,[1] the IRS responded to NABL’s request for relief from the in-person TEFRA hearing requirement in the form of Rev. Proc. 2020-21. Rev. Proc. 2020-21 permits telephonic TEFRA hearings during the period between May 4, 2020 and December 31, 2020. Specifically, during this period, a governmental unit can meet the TEFRA requirement that the public hearing be held in a convenient location by affording the general public access to the hearing by toll-free telephone call.[2] It’s clear that the IRS was also hoping that the COVID-19 pandemic would be all but a distant memory by the end of 2020.

Unfortunately, it looks like the COVID-19 pandemic is probably going to be with us beyond December 31, 2020. So, yesterday, the IRS issued Rev. Proc. 2020-49, which extends until September 30, 2021 the period during which telephonic TEFRA hearings can be held in lieu of in-person TEFRA hearings. Hopefully, we won’t be in quarantine until then.

Now back to your regularly scheduled stalking of election coverage.

______________________________

[1] Or May 4, 2020 – you can choose how you want to recognize days in 2020.

[2] Never have the authors of this blog explained to so many people what a toll-free number is.

The Public Finance Tax Blog

By Taylor Klavan on November 5, 2020

Squire Patton Boggs




TAX - CONNECTICUT

American Tax Funding, LLC v. Design Land Developers of Newtown, Inc.

Appellate Court of Connecticut - October 20, 2020 - A.3d - 200 Conn.App. 837 - 2020 WL 6126558

Assignee of town municipal property tax liens against estate brought action against estate which sought the foreclosure of tax liens for one year of delinquent taxes and sought an in personam money judgment for two years of delinquent taxes.

The Superior Court granted assignee’s motion for default for failure to plead, and assignee filed a motion for a default judgment regarding two counts seeking money judgment. Estate filed a motion to set aside the default and an answer. Thereafter, the Superior Court granted assignee’s motion for default judgment. Estate appealed.

The Appellate Court held that:

Because estate was not a legal entity, default judgment against it and in favor of assignee of tax liens on estate property was a nullity, and thus, trial court lacked jurisdiction to render default judgment against estate and estate’s appeal was moot and required dismissal; assignee’s complaint named estate as defendant, summons listed the estate as the party served, service on the estate was executed by serving coexecutor of estate, complaint did not name any coexecutor in a representative capacity, nor did coexecutors names appear on any appellate materials in an individual capacity, all materials filed by estate were submitted under name of, or behalf of, estate, and appellate file was not replete with references to coexecutors, nor were they treated as real parties in interest.

Mootness of appeal due to trial court’s entry of default judgment against estate, which was not a legal entity and lacked the capacity to be sued, warranted vacatur of trial court’s order, where estate was not responsible for mootness of its appeal, and trial court’s unreviewable judgment could have had preclusive effects against estate in subsequent litigation.




Webpage Will Provide Updates on TE/GE Compliance Strategies.

The IRS Tax-Exempt and Government Entities Division is launching a new webpage to keep its stakeholders up to date on its compliance strategies during the fiscal year.

TE/GE officials announced the webpage November 5 during a briefing on the division’s fiscal 2021 program letter, which has been transformed from a static document to one designed to more accurately reflect evolving compliance strategies.

The new webpage is part of that approach, acting TE/GE Commissioner Edward Killen explained. It will be easily accessible through links on irs.gov, and TE/GE will announce quarterly updates to the webpage for its communities and stakeholders, he said.

“As initiatives are closed and as we close compliance strategies, we will share the accomplishments and other relevant information that resulted from those efforts,” Killen said. He added that the new approach will increase flexibility and transparency and give taxpayers greater insight into TE/GE’s activities, “which we feel will support voluntary compliance and stakeholder engagement.”

Fiscal 2021 Priorities

TE/GE will continue working with other IRS divisions on syndicated conservation easements, abusive charitable remainder annuity trusts, and other trends, Killen said.

The division will also team up with the Large Business and International Division and the Research, Applied Analytics, and Statistics office to support compliance in the global high-wealth arena in areas of concern to TE/GE, especially regarding private foundations, retirement plans, and closely held businesses like employee stock ownership plans, Killen added.

TE/GE will continue to identify and pursue fraud and will use enhanced techniques to identify and develop civil and criminal fraud cases, including promoter investigation cases, when appropriate, according to the program letter. The division will also recommend criminal prosecution and civil penalties or injunctions against taxpayers or promoters who evade taxes.

According to acting TE/GE Deputy Commissioner Philip Lindenmuth, TE/GE will continue leveraging technology and data analytics to identify areas of noncompliance, detect emerging issues, and help the division allocate its resources for maximum effect and value. And for the first time, TE/GE will use robotic process automation to make processes more efficient and effective, he said.

The division will also be introducing a small-entity compliance initiative to address voluntary compliance challenges faced by small entities, Lindenmuth said.

Implementation of electronic filing of tax-exempt organization forms will continue as well. In fiscal 2021 TE/GE will work on e-filing for forms 990-T, 990-EZ, and 4720, Killen said.

TE/GE expects to launch an online interactive tax assistance tool in December to help taxpayers avoid making excess contributions to their 401(k) plans. There will also be an expansion of taxpayer digital communications, “which offers a secure exchange of messages and documents for taxpayers and their representatives,” Killen said.

Erroneous Revocations

Killen also addressed the IRS’s recent acknowledgment that it mistakenly revoked the tax-exempt status of thousands of nonprofits because of computer issues.

The revocations occurred after the IRS, responding to the COVID-19 pandemic, extended the calendar-year deadline for filing exempt organization information returns to July 15. Because of systemic limitations, the IRS couldn’t update the deadline in the program that automatically issues revocation notices to organizations that have failed to file returns for three straight years. That caused some revocation notices to be issued prematurely.

Killen noted that the IRS immediately took steps to solve the problem, including by making sure that erroneously revoked entities are still listed as exempt and by communicating directly with affected taxpayers.

“Taxpayers should not be adversely impacted by this administrative error,” Killen said.

TAX ANALYSTS

by FRED STOKELD

POSTED ON NOV. 6, 2020




Tax Exempt & Government Entities FY 2021 Program Letter: NABL

The Tax Exempt & Government Entities (TE/GE) FY 2021 Program Letter has been released.

It captures priorities for new fiscal year. TE/GE will also use their new Compliance Program and Priorities webpage to provide information about additional priorities at the end of each quarter during the fiscal year.

FY 2021 compliance program and priorities align with the IRS Strategic Goals:

They will release a summary of FY 2020 accomplishments when all the data is available. You can also view the annual program and accomplishment letters for previous years.

——————————
Jessica Giroux
National Association of Bond Lawyers
Washington, DC
(202) 503-3300




The Surprising Durability of OZ Multifamily in a Pandemic, with Pete LaMassa.

What are the biggest questions on the minds of Opportunity Zone investors? And what have been some of the most surprising real estate market outcomes from the coronavirus pandemic?

Pete LaMassa is Opportunity Zone deal captain and managing director at Bridge Investment Group, a vertically integrated real estate private equity firm with a $1 billion Opportunity Zone strategy.

Click the play button below to listen to my conversation with Pete.

Continue reading.

opportunitydb.com

By Jimmy Atkinson

November 4, 2020




TAX - LOUISIANA

D90 Energy, LLC v. Jefferson Davis Parish Board of Review

Supreme Court of Louisiana - October 20, 2020 - So.3d - 2020 WL 6145158 - 2020-00200 (La. 10/1/20)

Local tax board sought judicial review of decision by state tax commission, which reversed tax board decision affirming ad valorem property tax assessments against taxpayer and ordered reimbursement of taxes paid under protest.

The District Court affirmed the commission’s decision. Tax board appealed. The Third Circuit Court of Appeal reversed and vacated. Taxpayer petitioned for writ of certiorari.

The Supreme Court held that:

The Tax Commission, on review of taxpayer’s unsuccessful protest of ad valorem tax assessments on two gas wells and one salt water disposal well to the board of review, had the authority to receive supplementary evidence to aid in its valuation of the wells; regulation established by the Commission that governed appeals to the Commission expressly contemplated “new” evidence being presented to the Commission, and there was no accompanying prohibition against the receipt of new evidence.

Tax Commission was not arbitrary and capricious by relying on the purchase price of two gas wells and one salt water disposal well to establish their fair market value for purposes of calculating ad valorem tax; the Commission’s regulation permitted it to consider the sale in determining fair market value.

On appeal from ad valorem tax appraisal on two gas wells and one salt water disposal well, the specific provision for valuing oil and gas wells applied rather than the general provision applicable to “all property.”

A preponderance of the evidence existed to support Tax Commission’s finding that sale of two gas wells and one salt water disposal well was a valid arms length transaction, and that the fair market value of the wells for purposes of calculating ad valorem taxes for three tax years was $235,000; a $100,000 cancelled check dated the same day as the sale supported that amount as the purchase price, which was further documented through e-mails, taxpayer’s president testified under oath that he paid $100,000 for the property, that the property had been listed on the open market, and that the sale was fairly negotiated, and the plug and abandon cost of $45,000 per well was established by uncontroverted testimony.

Sufficient evidence existed to establish shut-in status of two gas wells, as required to entitle tax payer to a 90 percent reduction in ad valorem taxation for the tax year in which the wells were shut-in; taxpayer presented testimony of a production gauger to prove the wells were shut in, and while the assessor claimed he relied on Department of Natural Resources report showing production from the wells for tax year in question, the production gauger explained that resulted from another company introducing gas into taxpayer’s pipeline, and not from taxpayer’s wells.

Taxpayer was not required to make payment under protest to obtain review of ad valorem tax assessments, and the assessor’s judicial challenge to the Tax Commission’s valuation did not create an obligation for taxpayer to protest a tax it agreed with.




TAX - NORTH DAKOTA

RFM-TREI Jefferson Apartments, LLC v. Stark County Board of Commissioners

Supreme Court of North Dakota - October 21, 2020 - N.W.2d - 2020 WL 6157021 - 2020 ND 204

Commercial property taxpayers appealed county board of commissioners decision denying their applications for tax abatements or refunds of taxes paid on apartment and hotel properties.

The District Court affirmed, and taxpayers appealed.

The Supreme Court held that:

County board of commissioners could not adopt tax assessor’s assessment of apartment and hotel properties in light of assessor’s concession that the assessed value exceeded the market value of the properties; assessor conceded the properties could not have sold for the value they were assessed, such that their market value was less than their assessed value, and, as properties were commercial properties, their market value was synonymous with their true and full value.

County board of commissioners did not violate commercial taxpayers’ due process rights when it considered taxpayers’ information presented in written form and orally summarized by counsel and gave terse responses to their requests concerning the hearing format and time limitations, where board held a special hearing and did not restrict the taxpayers’ time to present their case or their manner of doing so.




The 2020 Election and Opportunity Zones, with Mike Novogradac and John Sciarretti.

What impact will the 2020 election have on the Opportunity Zones incentive? Expect major changes if Joe Biden is elected, and potential expansion of the program if Donald Trump wins reelection. The balance of power in the Senate should have an impact as well.

Mike Novogradac is the managing partner of Novogradac, a top 50 accounting firm founded in 1989. John Sciarretti is chair of the Novogradac Opportunity Zones conferences and leader of the Novogradac Opportunity Zones Working Group.

CONTINUE READING »




Understanding Opportunity Zone Investments in Multifamily Projects.

Baker Tilly’s podcast series specifically for professionals in the multifamily housing industry.

On this episode, multifamily housing leaders and hosts, Don Bernards and Garrick Gibson, speak to Executive Vice President of Baker Tilly Capital, Mike Fitzpatrick, on Opportunity Zones (OZ). They discuss the types of projects that are attractive to investors in the current market, the general underwriting benchmarks sponsors should be aware of, and how the election is impacting OZ equity.

If you have large capital gains, Mike will share some options for getting into an investment and how you can factor the value of OZ benefits into your investment analysis.

Listen to the Podcast.




We Heard You Missed Us – We’re Back! To Talk about Business Days: Squire Patton Boggs

It’s fall, and that means two things. Pumpkin spice everything, and a calendar that’s replete with holidays – Sukkot, Halloween, Thanksgiving, and Sweetest Day[1] to name but a few. Diligent readers of The Public Finance Tax Blog will remember that we previously posted an exhaustive analysis of the “hold-the-offering-price-method” of establishing the issue price of tax-exempt bonds (the “HTOP Method”). These same readers no doubt remember Treasury regulation § 1.148-1(f)(2)(ii)(B), which requires that the underwriter agree in writing neither to offer nor sell a bond to which the HTOP Method will apply at a price that is higher than the bond’s initial offering price to the public for a period that begins on the sale date of the issue and that ends on the close of the fifth business day after the sale date.[2]

These readers are now perhaps wondering whether, given the surfeit of autumnal holidays, they have correctly counted the number of business days to achieve a successful invocation of the HTOP Method. Don’t worry; we’re here to help.

Continue Reading

The Public Finance Tax Blog

By Michael Cullers on October 19, 2020

Squire Patton Boggs




GAO Offers Recommendations on Exempt Hospital Oversight.

To ensure that nonprofit hospitals provide sufficient benefits to their communities to justify their tax-exempt status, Congress should clarify what requirements must be met and the IRS should improve its oversight, according to the Government Accountability Office.

In a report released October 19, the GAO noted that it’s difficult for the IRS to verify community benefits because the Affordable Care Act, which established requirements under section 501(r) to help ensure nonprofit hospitals help their communities, is vague about the types of activities that qualify. Further, the IRS lacks the authority to specify such activities, the report says.

The unclear standards and the IRS’s implementation of them provide exempt hospitals “with broad latitude to determine the nature and amount of community benefits they provide,” the report says.

“The lack of clarity makes it difficult for IRS to ensure that hospitals receiving a tax exemption undertake services and activities that provide benefits to the communities in which they operate,” the GAO said. “Additional clarity in the [tax code] about specific services and activities Congress believes would provide sufficient community benefits could improve IRS’s ability to oversee tax-exempt hospitals.”

However, T.J. Sullivan of Faegre Drinker Biddle & Reath LLP was skeptical that Congress would act to clarify the meaning of community benefit or give Treasury and the IRS authority to do so. “Experience tells me this idea is headed for Sleepy Hollow,” he said.

Improving Oversight

In the meantime, the GAO offered the IRS several suggestions for improving oversight.

For one, the IRS could revise the Form 990 Schedule H, “Hospitals.” According to the report, the schedule asks for community benefit information inconsistently, resulting in uncertainty about the benefits hospitals provide. The form directs hospitals to describe how they’ve addressed three of the factors in the community benefit standard but not the other three, the report notes.

This reporting approach, the GAO said, could lead to incomplete information on how hospitals are providing community benefits, among other consequences.

A revised Schedule H “that enables tax-exempt hospitals to present community benefit information clearly, consistently, and comprehensively could help IRS, Congress, and the broader public better understand the full scope of the community benefits a hospital provides and whether the benefits sufficiently justify a tax exemption,” the report says.

The IRS should also consider requiring nonprofit hospitals to report their community benefit expenses by facility rather than at the hospital organization level, the GAO said.

Otherwise, the IRS “may be missing an opportunity to collect information that would more clearly and transparently demonstrate the benefits tax-exempt hospitals provide to the communities in which they operate,” the report says. “This information, in turn, would allow Congress, IRS, and the public to weigh the costs and benefits of the hospital’s tax exemption.”

But Sullivan noted that the IRS pointed out in the report that the information in Form 990 is based on entire organizations, not necessarily facilities or systems of related organizations.

Also, it took years for hospitals and their accounting firms to get comfortable with Schedule H reporting, and changing the whole approach would be challenging, said Sullivan, who was IRS special assistant for healthcare from 1989 to 1996 and a senior GAO evaluator from 1979 to 1984.

“For those of us advising tax-exempt hospitals, this one bears watching,” Sullivan remarked.

Other Recommendations

To further improve IRS oversight of community benefit requirements, the report calls on the agency to establish a well-documented process for identifying hospitals at risk of noncompliance with the community benefit standard that would ensure hospitals’ community benefit activities are being reviewed consistently.

Specific audit codes for identifying potential noncompliance with the community benefit standard should also be established, the GAO said.

The IRS agreed with all the report’s recommendations.

TAX ANALYSTS

by FRED STOKELD

POSTED ON OCT. 20, 2020




Biden Win Could Spark Revamp Of Opportunity Zone Program.

Democratic lawmakers are rallying behind former Vice President Joe Biden’s drive to reshape requirements for opportunity zones, which could spark a revamp of the program to deliver more benefits to low-income residents should Biden win the election.

Key Democrats in both the Senate and the House said if their party wins control of the White House and both chambers of Congress, they want to work with Biden to try to reshape parameters for the nation’s 8,700 opportunity zones authorized under the 2017 Tax Cuts and Jobs Act .

But they also made clear contentious disputes over the scope of potential restrictions on the zones and their projects would need to be settled in both chambers if such legislation is to be advanced as part of a 2021 stimulus package or a broader tax measure aimed at reshaping the 2017 tax overhaul.

In the House, Rep. Karen Bass, D-Calif., chair of the Congressional Black Caucus, predicted there would be a strong drive in the next Congress to reshape opportunity zones if Democrats win the White House, driven by Biden and allies in Congress including Majority Whip Jim Clyburn, D-S.C.

“Reforming opportunity zones is a big priority. There have been gaps in the opportunity zone that have allowed gentrification to increase. There just needs to be more guardrails on it,” Bass told Law360.

Clyburn told Law360 that several Democrats were concerned the benefits of the program go primarily to investors and developers rather than the people who live in the areas that the program is supposed to help.

With an eye to addressing these concerns, Biden has called for new requirements for opportunity zone funds and investors to disclose data on investments and community benefits, stronger oversight by the U.S. Department of the Treasury and incentives for opportunity funds to team up with nonprofits on projects to create jobs and help low-income residents.

In addition to Biden’s general goals, Clyburn and Bass made clear they hoped to revive parts of H.R. 5042, legislation that Clyburn introduced in November known as the Opportunity Zone Reform Act. The bill would bar stadiums, self-storage facilities and residential rental housing projects aimed mainly at higher-income tenants from qualifying for the program and exclude census tracts with a median family income exceeding 120% of the national median family income from being designated as opportunity zones.

Sen. Ron Wyden, D-Ore., ranking member on the Senate Finance Committee, has offered S. 2787, the Opportunity Zone Reporting and Reform Act, which would impose restrictions similar to those in Clyburn’s bill. But he also made clear he was open to developing other ideas in the next Congress.

“I want to do what fixes the problem,” Wyden told Law360.

Under the program, investors can defer taxes on capital gains invested in opportunity zone funds and businesses. Gains on the opportunity zone investments can be earned tax free if the investments are held at least 10 years.

Currently, opportunity zones are limited, for the most part, to qualified census tracts with a poverty rate of more than 20% or a median family income that does not exceed 80% of the median family income for the state or surrounding metropolitan area. But there is an allowance for 5% of a state’s opportunity zones to be census tracts contiguous to low-income communities as long as such a census tract’s median family income does not exceed 125% of the adjoining low-income community’s median family income.

A study by the Economic Innovation Group, a bipartisan public policy organization, found a proposal in the Wyden and Clyburn bills to set a qualification cap at 120% of national median family income would exclude about 30 census tracts with higher median incomes that have been designated as opportunity zones under the exemption for contiguous tracts. Proponents argue the new standard would help direct more investment to low-income communities.

Republicans, for their part, have backed President Donald Trump’s efforts to promote opportunity zones and defended the program against some Democratic plans to reshape it. For example, Sen. Jim Lankford, R-Okla., a member of the Finance Committee, said he was skeptical of tighter restrictions that could affect private investment in projects in existing opportunity zones.

“Those are folks looking for ways to be able to just mess with the opportunity zones. I would look at it, and see what the proposal is,” Lankford said.

While opposing immediate changes to economic criteria for the zones, Lankford said he would be open to the idea of reshaping such standards “when there is a new set of census tracts” based on 2020 census data, “to make sure we are dealing with the highest-need areas.”

Chris McCannell, a senior government relations consultant for GrayRobinson PA and an adviser to the Opportunity Funds Association, which represents funds with stakes in opportunity zones, said proposals by Wyden and Clyburn to screen existing opportunity zones based on national median family income could divide the two parties in the next Congress.

“If Democrats control the House and Senate and there’s a Democratic administration, it could get some traction. But this could create complexity for current and future projects at a time when investment is needed to recover from the [COVID-19] pandemic,” McCannell told Law360.

McCannell predicted GOP lawmakers would push back against proposals for major changes such as a new median income standard and a ban on certain types of projects, including stadiums.

“Changes like these would likely face opposition from Republicans, who believe they would infringe on the program’s ability to live up to its full potential,” McCannell said.

Stan Veuger, a resident scholar at the American Enterprise Institute, said a tougher median family income standard for opportunity zones would “eliminate some of the most egregious contiguous opportunity zones in big coastal metropolitan areas” but could also make the program “inaccessible to pockets of poverty surrounded by gentrified neighborhoods.”

In light of such concerns, Sen. Ben Cardin, D-Md., a senior member of the Finance Committee, said he doubted there would be consensus support for a plan to reset the median family income cap.

“It’s very hard to surgically draw it without adversely affecting some communities” that already depend on the program, Cardin told Law360.

Cardin said he believed lawmakers would need to take care in drafting any restrictions on projects to ensure there are no unintended effects on efforts to create jobs in low-income communities. For example, he said he was hopeful any restrictions on projects would not affect potential development in an opportunity zone near Pimlico Race Course in Baltimore.

While lawmakers continue to discuss restrictions on opportunity zones and on projects, Sen. Cory Booker, D-N.J., said he believed there was an opening to rally bipartisan support for efforts to encourage Treasury to develop forms for the collection of data on investors and investments in opportunity zones, and on the impact of projects in the zones.

Lawmakers in both parties have examined the program’s regulations, promoted investments in the zones to address the pandemic’s fallout and encouraged the Internal Revenue Service to provide flexibility for qualified opportunity funds and investors.

Booker said he hoped to work with Sen. Tim Scott, R-S.C., a member of the Finance Committee, and other lawmakers to promote a bipartisan proposal sponsored by Scott, S. 2994, that would require qualified opportunity funds and investors in the funds to file annual reports with data on investments and investors.

Rep. Ron Kind, D-Wis., a senior tax writer as a member of the House Ways and Means Committee, has backed a similar bipartisan proposal. It would require Treasury to make annual reports on qualified opportunity funds and to expand that report in the sixth year after enactment to include data on the impacts and outcomes of opportunity zones, including data on job creation, poverty reduction and new business starts.

“The reporting is critical,” Booker told Law360. “There are so many projects. We need to stop the abuses to the program. But we need to expand the opportunity there to create more jobs and investment.”

Law 360 Tax Authority

By Alan K. Ota · October 20, 2020, 4:58 PM EDT

–Editing by Robert Rudinger and Vincent Sherry.




How Regional EDA Groups Can Leverage Opportunity Zones, with Chad LaComb.

How can a regional economic development planning commission help their communities leverage their Opportunity Zone designations? Invest Acadiana serves as…

CONTINUE READING »




TAX - PENNSYLVANIA

Lohr v. Saratoga Partners, L.P.

Supreme Court of Pennsylvania - October 1, 2020 - A.3d - 2020 WL 5823332

Property owners filed petition to redeem property that had been sold in an upset tax sale.

The Court of Common Pleas denied the petition. Owners appealed, and the Commonwealth Court affirmed. Owners sought discretionary review, which was granted.

The Supreme Court held that:

Property owners’ asserted right to redeem property after an upset tax sale was not a fundamental constitutional right, but a statutory remedy provided as part of the legislative tax collection process, and thus owners’ equal protection challenge to the inclusion of that right in the Municipal Claims and Tax Liens Act (MCTLA), which applied to two large urban counties in the state, but not in the Real Estate Tax Sale Law (RETSL), which applied in the county in which their property was located, was subject to rational basis review, rather than strict scrutiny.

Legislature had a legitimate interest in enacting provision of Real Estate Tax Sale Law (RETSL) barring redemption of property after an upset tax sale, for purposes of property owners’ equal protection challenge to legislature’s omission of the post-sale redemption remedy from the RETSL while including it in the Municipal Claims and Tax Liens Act (MCTLA); purposes of the RETSL were to expedite the collection of delinquent real estate taxes, to retain the productivity of the real estate, and to maintain economic value, which were legitimate state interests.

Legislature’s decision to include a post-sale redemption remedy in Municipal Claims and Tax Liens Act (MCTLA), which applied to two large urban counties, but not in Real Estate Tax Sale Law (RETSL), which applied to most other counties, was rationally related to legitimate government purpose of expediting collection of delinquent real estate taxes, and thus distinction did not violate equal protection; lack of a redemption provision in RETSL ensured certainty and finality for tax sales, which, in turn, likely encouraged higher bids based on the greater security provided to the purchaser, RETSL provided greater pre-sale protections than MCTLA, and state constitution specifically granted legislature power to classify counties according to population.




University Research Parks and Opportunity Zones, with Brian Darmody.

Can university research parks, incubators, and accelerators catalyze innovation in Opportunity Zones?

Brian Darmody is CEO of the Association of University Research Parks (AURP). Many of AURP’s member institutions are located in Opportunity Zones.

Click the play button below to listen to my conversation with Brian.

Continue reading.

OpportunityDb

By Jimmy Atkinson

October 14, 2020




Group Seeks Extension of Relief for Issuers of Tax-Exempt Bonds.

SUMMARY BY TAX ANALYSTS

The Rhode Island Health and Educational Building Corporation has asked Treasury and the IRS to extend to at least December 31, 2021, the temporary COVID-19 relief provided in Rev. Proc. 2020-21 regarding the public approval requirement under section 147(f) for tax-exempt qualified private activity bonds.

FULL TEXT PUBLISHED BY TAX ANALYSTS

October 7, 2020

David J. Kautter
Assistant Secretary
Office of Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Michael J. Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Krishna Vallabhaneni
Tax Legislative Counsel
United States Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3044
Washington, DC 20220

Re: Extension of COVID-19 Relief for Issuers of Tax-Exempt Bonds

Dear Mr. Kautter, Mr. Vallabhaeni, and Mr. Desmond:

The widespread outbreak of the novel coronavirus disease (the “COVID-19 Pandemic”) is the subject of an ongoing emergency declaration made by the President of the United States pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act on March 13, 2020. The COVID-19 Pandemic has also been, and continues to be, the subject of numerous emergency declarations by state and local governments. The COVID-19 Pandemic prompted state and local governments to severely limit or, in some cases, prohibit in-person gatherings by members of the general public.

In response to the COVID-19 Pandemic, Revenue Procedure 2020-21 (“Rev. Proc. 2020-21”), effective May 4, 2020, provides temporary guidance regarding the public approval requirement under §147(f) of the Internal Revenue Code for tax-exempt private activity bonds. Rev. Proc. 2020-21 provides that for the period ending on December 31, 2020, hearings held by teleconference that are accessible to the residents of the approving governmental unit by calling a toll-free telephone number will be treated as held in a location that, based on the facts and circumstances is convenient for residents of the approving governmental unit for the purpose of §1.147(f)-1(d)(2) of the Treasury Regulations.

The same factors that led to the temporary relief provided in Rev. Proc. 2020-21 continue to exist in many jurisdictions, including Rhode Island. Even in areas where explicit restrictions have been relaxed, members of the public generally have been encouraged to continue to practice social distancing, and, while personal choices vary, certain members of the public continue to limit engagement with others. Still others are required to quarantine in their homes after potential exposure to those with confirmed cases of COVID-19.

Accordingly, we respectfully request that the time period for the temporary relief provided in Rev. Proc. 2020-21 be extended to at least December 31, 2021.

If you have any questions, please contact Kim Mooers at 401-831-3770, or through email at [email protected]

Sincerely,

Kimberly Mooers
Executive Director
Rhode Island Health and Educational Building Corporation
Providence, RI

CC:
Helen M. Hubbard, Associate Chief Counsel, Financial Institutions & Products, Internal Revenue Service
Melissa Moye, Director, Office of State and Local Finance, U.S. Department of the Treasury
Johanna Som de Cerff, Acting Branch Chief, Internal Revenue Service
Zoran Stojanovic, Assistant to the Branch Chief, Internal Revenue Service
Brett York, Acting Deputy Tax Legislative Counsel, U.S. Department of the Treasury

WAS THIS ARTICLE HELPFUL?




California Supreme Court Will Hear Bay Area Tolls Case.

The California Supreme Court will consider whether a bridge toll increase in the San Francisco Bay Area was an unlawfully approved tax.

According to an October 16 release by the supreme court, justices accepted review of the appellate court’s decision in Howard Jarvis Taxpayers Assn. v. Bay Area Toll Authority on October 14, but deferred briefing until it rules on a separate case, Zolly v. City of Oakland, which addresses a similar question.

In July 2018 the tax watchdog group Howard Jarvis Taxpayers Association challenged the June 2018 passage of Regional Measure 3, a ballot measure to increase tolls on San Francisco Bay Area bridges by $1 in 2019, 2022, and 2025, for a cumulative increase of $3. The toll increase was promoted as a means to raise revenues for local transportation improvements in the region. The measure was approved with a 55 percent majority of voters in the nine-county Bay Area, but the association alleged in its suit that the toll increase is actually a tax under state law that thus required a two-thirds vote of approval.

The association notes that the tolls will be spent on a wide range of transportation improvements in the region that will be used by payers and nonpayers of the toll increase alike. It argues that under state law, the fee amount and the use of its revenue must be closely related to the benefit or service it’s charged for, or else it’s a tax. The group claims that the toll revenue is being used too broadly to qualify as a fee for bridge use.

California law “classifies an exaction as a ‘fee’ if it is charged for goods or services delivered to the payer,” or mitigates harm caused by a payer, Tim Bittle, director of legal affairs for the Howard Jarvis association, wrote in a September 2018 newsletter explaining the group’s position. “A ‘tax,’ on the other hand, raises revenue for government programs and policies without requiring any direct nexus between the payer and the use of the funds.”

Both the San Francisco County Superior Court and the California First Appellate District ruled against the association. However, the supreme court’s decision to hear the case means justices are willing to consider its arguments.

Randy Rentschler of the Bay Area’s Metropolitan Transportation Commission told Tax Notes October 16 the supreme court’s decision to review the case is disappointing, and that the legal uncertainty threatens key transportation projects in the region. He said the 2018 measure was the third of such measures approved since 1988.

“In the past, no one took it to court,” Rentschler said, arguing the group’s claim that the toll increase is a tax is erroneous. But voters in 2010 approved Proposition 26, which treats more levies as taxes under state law. According to Rentschler, however, judges have agreed that the toll is not a tax under Proposition 26. “We’ve had two courts look at this and ruled against them.”

The issue in the case is similar to the one in Zolly v. City of Oakland, which the supreme court will hear first. That case involves a dispute over whether Oakland’s waste management franchise fees are unlawfully approved taxes. A separate panel of the California First Appellate District Court in March determined that the fees were taxes because they weren’t reasonably related to the value of the franchise rights for which they’re charged.

The appellate court’s ruling in Bay Area Toll Authority and the Zolly opinion conflict with one another. At issue is language in Proposition 26 that amended the state constitution to restrict the types of charges that aren’t considered taxes and therefore don’t require a two-thirds majority vote to pass. The amendment created a list of such charges and included in the criteria for several that they be based on the actual cost to the government of the service for which the fee is charged. But the criteria for the type of charge that encompasses bridge tolls and franchise fees — charges for entrance, use, purchase, rental or lease of government property — lacks that wording.

However, the law also contains a general provision burdening government with proving that a charge is not a tax, including that its amount is linked to the cost of the service it’s charged for, “and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.”

The appellate court in Bay Area Toll Authority determined that the absence of any reference to a cost relationship in the list’s description of charges for entrance or use of government property means the general provision doesn’t apply to that particular type of fees. The Zolly court, in contrast, determined that the general provision means that all nontax levies on the list must be linked to the cost of the service to the government, regardless of whether the specific description of each one on the list says so or not.

Bittle told Tax Notes October 16, “We’re encouraged the supreme court has granted review” of Bay Area Toll Authority, and “we believe the court of appeal in Zolly got it right.”

“Everything about Prop. 26 was intended to narrow the field of fees and expand the universe of taxes so that more things would require a two-thirds majority approval,” Bittle said.

In Howard Jarvis Taxpayers Assn. v. Bay Area Toll Authority, the Howard Jarvis association and plaintiffs are represented by the group’s attorneys; the Bay Area Toll Authority is represented by attorneys with the Metropolitan Transportation Commission and Orrick, Herrington & Sutcliffe LLP; the State Legislature is represented by attorneys with the Office of Legislative Council and Olson Remcho LLP; and the Metropolitan Transportation Commission is represented by its own counsel and Orrick, Herrington & Sutcliffe LLP.

TAX ANALYSTS

By PAUL JONES

POSTED ON OCT. 20, 2020




TAX - CONNECTICUT

Town of Redding v. Georgetown Land Development Company, LLC

Supreme Court of Connecticut - September 21, 2020 - A.3d - 2020 WL 5637649

Town, water pollution control commission, and fire district brought action to foreclose municipal tax liens against, among other lienholders, assignee of real estate tax liens originally levied by special taxing district created to finance development project.

Town and fire district filed motions for partial summary judgment with respect to priority, asserting that their tax liens had priority over the tax liens that assignee had acquired from taxing district. Assignee also moved for partial summary judgment.

The Superior Court granted plaintiffs’ motions for partial summary judgment and denied that of assignee, and the Superior Court subsequently rendered a judgment of strict foreclosure in favor of town and fire district. Assignee appealed from both orders, and appeal was transferred to the Supreme Court.

The Supreme Court held that:

In priority dispute over real estate tax liens held by different municipal entities on the same property, tax liens held by assignee, which were originally levied by special taxing district created to finance development project, were subordinate to tax liens held by town; it was undisputed that district’s assignment of tax liens to assignee did not affect priority of those liens, priority clause of special act of legislature that created district for this project provided that district’s lien for unpaid taxes “shall take precedence over all other liens or encumbrances except a lien for taxes of the town,” use of word “except” indicated legislature’s intent to remove town’s tax liens from class of liens over which district’s liens had priority, and review of other statutes addressing lien priority indicated that legislature intended phrase “except a lien for taxes of the town” in priority clause to convey, not just absence of priority over town’s liens, but subordination to them.

In priority dispute over real estate tax liens held by different municipal entities on the same property, tax liens held by assignee, which were originally levied by special taxing district created to finance development project, were superior to those of fire district; it was undisputed that taxing district’s assignment of tax liens to assignee did not affect priority of those liens, priority clause of special act of legislature that created taxing district for this project provided that taxing district’s lien for unpaid taxes “shall take precedence over all other liens or encumbrances except a lien for taxes of the town,” and by listing town’s tax liens as the only type of lien that was not inferior to taxing district’s liens, legislature was presumed to have intended to exclude all other types of liens and encumbrances, including tax liens held by fire district, such that fire district’s liens were inferior to taxing district’s liens.




Opportunity Zone Rule Change Seeks to Entice Foreign Investors.

IRS considering new rules for overseas investors who want to reap benefits from the tax program

Potential changes to the rules for Opportunity Zones could soon allow some foreign investors to reap major tax benefits from the program.

The Internal Revenue Service is considering new rules pertaining to foreign investors’ ability to defer capital gains in the Opportunity Zones program. The new regulations could be released in December, according to the White House Office of Management and Budget. The extent of the changes is unclear, but experts predict they will be geared toward giving foreign investors more clarity on their tax liabilities.

Bloomberg Tax first reported the news.

Both Democrats and Republicans have been targeting Opportunity Zones. President Donald Trump claims the initiative has helped uplift Black and Latino communities, while Democratic presidential candidate Joe Biden said he wants to reform the program to ensure it’s being used to help distressed areas.

Continue reading.

The Real Deal

By Keith Larsen

September 25, 2020




State and Local Tax Ballot Measures to Watch on Election Day 2020.

Read the report.

October 5, 2020




Announcing OZ Pitch Day 2020, an Online Investor Matchmaking Event.

If you’re an investor with capital gains, how can you find your Opportunity Zone investment and get invested before the end of this year? Today I’m officially launching the OpportunityDb OZ Pitch Day 2020 Online Event.

OZ Pitch Day will take place on Tuesday, November 17, 2020 and will feature roughly one dozen Qualified Opportunity Funds.

Continue reading.

Opportunitydb.com

By Jimmy Atkinson

October 7, 2020




TAX - DISTRICT OF COLUMBIA

Jaswant Sawhney Irrevocable Trust, Inc. v. District of Columbia

District of Columbia Court of Appeals - September 3, 2020 - A.3d - 2020 WL 5250476

Property owner appealed from decision of the District of Columbia Office of Tax and Revenue (OTR) that denied application for real property tax exemption.

The Superior Court dismissed for failure to state a claim. Property owner appealed.

The Court of Appeals held that:




Fitch: Mortgage Delinquencies Will Not Notably Affect Property Tax Payments

Fitch Ratings-New York-29 September 2020: Fitch Ratings does not expect fiscal 2021 property tax collections to be meaningfully affected by mortgage forbearance programs or delinquencies, but potential for timing delays is elevated. Mortgage servicers are obligated to advance property taxes when a borrower is not making mortgage payments and, due to the elevated number of delinquent loans and loans in forbearance, servicer liquidity is critical. Unemployment levels remain high, and Fitch expects a slower economic recovery following a third-quarter 2020 bounce back. In the absence of further federal aid, mortgage delinquencies may increase, placing greater pressure on mortgage servicers.

Property taxes have traditionally been a stable and predictable source of revenues for local governments, moderating higher volatility in more economically sensitive taxes, service charges and state aid. Overall property tax collections saw minimal declines during the Great Recession despite widespread mortgage defaults and foreclosures.

Home prices are still rising, as detailed in our U.S. RMBS Sustainable Home Price Report (Second-Quarter 2020), although growth is decelerating. Mortgage delinquencies, excluding mortgages in foreclosure, declined in August to 6.9%, but the rate of decline was slower than in the previous two months, according to Black Knight. The states with the highest delinquency rates were Mississippi, Louisiana, Hawaii, New York and Florida. During the Great Recession, the total delinquency rate peaked at 10.6%.

Forbearance has been offered in greater numbers than during the Great Recession but is trending downward from its peak in June. The share of mortgages in forbearance was 6.87% as of September 20, per the Mortgage Bankers Association. Mortgages in forbearance are generally reported as delinquent, although some borrowers with loans in forbearance are still making payments on time.

A few local governments postponed property tax deadlines or waived late payment fees for payers who can demonstrate they are affected by the coronavirus. Property tax delays are predictable and allow officials to plan for alternate sources of liquidity until tax payments are received. In contrast, an inability by servicers to advance payments to governments could cause an unexpected short-term liquidity shortfall. Almost all Fitch-rated local governments have sufficient liquidity, through internal resources, cash management tools or access to the short-term market, to offset this risk, which is reflected in higher ratings. Those local governments with weaker liquidity tend to be rated low investment-grade or non-investment grade.

A majority of US mortgages are pooled in securitizations as a tool for financing the loans. US mortgage servicers for private residential mortgage-backed securities (RMBS), Government National Mortgage Association (GNMA) RMBS, or Fannie Mae and Freddie Mac (Government Sponsored Enterprises, or GSEs) RMBS, are required by transaction documents or servicing guidelines to advance property taxes for delinquent borrowers to preserve the lien position, and did so even through the 2007-2008 housing crisis. Servicers of GSE and GNMA loans are also incentivized to continue to advance principal and interest (P&I) and taxes and insurance (T&I) to maintain their relationships with GSEs and GNMA, which guarantee mortgage performance. Mortgages guaranteed by the GSEs comprise 60%-70% of the mortgage market, while the remainder is mainly held by bank and credit union portfolios.

While most banks are unlikely to face near-term difficulties with advancing requirements, nonbank servicers, which have weaker credit profiles, are more challenged as they have greater loan exposure by dollar amount than banks. In response, master servicers, the GSEs and GNMA increased oversight of nonbank primary servicers to ensure servicer continuity and continued payments of P&I and T&I.

Many nonbank servicers secured additional lines of credit to make advances, and diversified entities benefitted from the GSE’s four-month limit on the obligation to advance P&I. So far, servicers have shown adequate liquidity to advance missed payments, and T&I are generally a smaller percentage of total monthly payments and do not materially add to servicers’ advancing obligations.

Contacts:
Amy Laskey
Managing Director, US Public Finance
+1 212 908 0568
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Michael Rinaldi
Senior Director, US Public Finance
+1 212 908-0883

Roelof Slump
Managing Director, US Residential Mortgage-Backed Securities
+1 212 908-0705

Sarah Repucci
Senior Director, Fitch Wire
+1 212 908 0726

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: [email protected]

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.




TAX - NEBRASKA

State ex rel. McNally v. Evnen

Supreme Court of Nebraska - September 10, 2020 - N.W.2d - 307 Neb. 103 - 2020 WL 5505918

Sponsors of three proposed initiatives relating to gaming devices petitioned for writ of mandamus to compel Secretary of State to place initiatives on ballot in general election.

The Supreme Court issued alternative writ requiring Secretary of State to place initiatives on ballot.

The Supreme Court held that:




TAX - VIRGINIA

International Paper Company v. County of Isle of Wight

Supreme Court of Virginia - September 17, 2020 - S.E.2d - 2020 WL 5554579

Corporate taxpayer, which had successfully obtained tax refund judgment for prior tax years, filed application for correction of new county machine and tools tax assessment, claiming the assessment was non-uniform, invalid, and illegal.

The Isle of Wight Circuit Court granted county’s motion to strike, and taxpayer appealed.

The Supreme Court held that:

County’s machinery and tools tax plan did not improperly interfere with corporate taxpayer’s vested right to tax refund judgment, although tax plan may have “clawed back” the money paid to taxpayer under refund judgment, where taxpayer received the money it had a vested right to receive, county had authority to increase the tax rate, and tax increase did not retroactively alter the prior tax rates or interfere with the paid judgment.

County had the statutory and constitutional authority to impose taxes on corporate taxpayer’s machinery and tools property as well as authority to execute tax relief program, even if the practical effect was to “claw back” tax refunds paid to taxpayer for prior years; county did not revise previous assessments, but instead increased tax rate for subsequent years, and tax relief program was to help businesses negatively impacted by the adjustment to the tax rate.

Corporate taxpayer provided prima facie evidence sufficient to show that county machinery and tools tax relief program payments were integrated into the taxation process and had the same effect as partial tax exemptions, and thus that taxpayer’s machinery and tools tax assessment was non-uniform, invalid, and illegal, as required to survive motion to strike; stated purpose of tax relief program was to relieve liability for tax rate increase for certain class of taxpayers whom county deemed to be “harmed” by the rate increase, county structured the program to directly exempt certain tax liability and payments from the program directly offset tax liability, program factually correlated with tax rate increase and was funded predominantly by the tax rate increase, and relief payments were calculated by using tax figures.

Corporate taxpayer provided prima facie evidence that county machinery and tools tax assessment was non-uniform, invalid, and illegal; tax relief formula treated taxpayers differently based upon whether the county had lawfully owed that taxpayer a refund on taxes overpaid in prior years, which created a sub-class of taxpayers, refund and relief payment were negatively correlated, only taxpayers who had received a refund were required to pay the tax assessment increase, and net tax rates paid by taxpayers, given the payments made to some taxpayers by the tax relief program, were not uniform.




Securities Law Considerations for Opportunity Zone Funds.

What securities laws should Qualified Opportunity Fund issuers be aware of before they start raising capital from investors? And what are the major differences between the different types of private placement offerings?

Clem Turner is a New York-based corporate and securities attorney for CSG He leads the firm’s alternative capital practice and specializes in Opportunity Zones, among other alternative investment vehicles.

Continue reading.

Opporunitydb.com

September 30, 2020




TAX - OHIO

Village of Put-in-Bay v. Mathys

Supreme Court of Ohio - September 16, 2020 - N.E.3d - 2020 WL 5537009 - 2020 -Ohio- 4421

Village filed criminal complaints against operators of business that made motorized golf carts available for rent within village, alleging they violated ordinance requiring owners of vehicles that were made available for hire and use within the municipality to pay a license fee on those vehicles.

After transfer from village’s mayor court, the Court of Common Pleas granted operators’ motions to dismiss. Village appealed. The Court of Appeals reversed and remanded. Operators appealed, and the Supreme Court accepted the appeals.

The Supreme Court held that:

Village ordinance requiring owners of vehicles that were made available for hire within municipality to pay license fee on those vehicles was not expressly preempted by statutes imposing state license tax on motor vehicles and allowing an additional $5 tax by counties and municipalities under certain circumstances, and thus ordinance was constitutional exercise of village’s right to tax; fact that municipalities were limited in their ability to impose a tax on the operation of a motor vehicle did not mean that General Assembly had prohibited all taxes involving motor vehicles, and municipal tax imposed by village ordinance was not same as, or similar to, state license tax, as it imposed business tax on rental vehicles, not license tax on operation of motor vehicles on public highways.

Village ordinance requiring owners of vehicles that were made available for hire within municipality to pay license fee on those vehicles did not violate prohibition in Home Rule Amendment to State Constitution stating that no monies derived from fees, excises, or license taxes relating to registration, operation, or use of vehicles on public highways could be expended other than for listed purposes and “other statutory highway purposes,” though funds collected from taxes levied by local ordinance were expended on local purposes; ordinance operated as a business tax on the privilege of renting one’s vehicle as a business venture and did not concern or otherwise place any limitations on operation or use of vehicles on public highways.




TAX - ALABAMA

Campbell v. City of Gardendale

Supreme Court of Alabama - September 4, 2020 - So.3d - 2020 WL 5268049

Taxpayer brought putative class action against city, county, and county’s tax collector based on challenge to the constitutionality of two municipal taxes adopted by city in connection with city’s planned creation of a municipal school system, which was a plan that had been rejected by the Court of Appeals.

Circuit Court entered summary judgment for defendants. Taxpayer appealed.

The Supreme Court held that Alabama Constitution’s local amendment providing that the Jefferson County property tax for schools is reduced by the amount of municipality’s special or additional taxes levied and collected for public-school purposes was not a basis for invalidating ad valorem taxes collected by Jefferson County municipality in connection with city’s planned creation of a municipal school system, regardless if the municipal taxes were special or additional taxes being levied and collected for public-school purposes.




Timing Considerations for Opportunity Zone Investors, with Ashley Tison.

As we approach the fourth quarter of 2020, what are some of the most important timing considerations for Opportunity Zone…

CONTINUE READING »




TAX - SOUTH CAROLINA

Weaver v. Recreation District

Supreme Court of South Carolina - September 2, 2020 - S.E.2d - 2020 WL 5224473

Taxpayer brought declaratory judgment action against special purpose district and others to challenge constitutionality of statute addressing millage levied in certain special purpose districts.

The Circuit Court granted judgment to defendants. Taxpayer appealed.

The Supreme Court held that:

The statute addressing the millage levied in certain special purpose districts is not special legislation prohibited by the South Carolina Constitution; the statute affects all special purpose districts with unelected governing bodies throughout the state, so the legislation is applied uniformly to a valid class of entities.

The statute addressing the millage levied in certain special purpose districts is not special legislation prohibited by the South Carolina Constitution; the statute affects all special purpose districts with unelected governing bodies throughout the state, so the legislation is applied uniformly to a valid class of entities.

The statute addressing the millage levied in certain special purpose districts does not violate the Home Rule as set forth in the state constitution and the Home Rule Act; the statute applies to a broad class of districts having similar characteristics, and a county council retains its authority over taxation.




Opportunity Zones Get Big Push as Critics Question Who They Help.

Contentious economic development incentives lawmakers and the White House are pitching as an answer to the nation’s economic and social ills are structurally unable to help fix those problems—and may even exacerbate them—critics say.

Opportunity zones, originally a bipartisan proposal from Sens. Tim Scott (R-S.C.) and Cory Booker (D-N.J.), are meant to lift struggling neighborhoods out of poverty by luring investors with tax breaks. President Donald Trump has repeatedly touted the tax incentives as one of his administration’s major wins since they were enacted in the 2017 tax code overhaul.

“I got criminal justice done, I got opportunity zones,” Trump said during a recent interview with Axios, weeks after tweeting something similar. “I did more for the Black community than anybody with the possible exception of Abraham Lincoln, whether you like it or not.”

Continue reading.

Bloomberg Tax

by Lydia O’Neal

Sept. 8, 2020, 1:46 AM




Where to Find Some of the Best Opportunity Zone Opportunities.

A widespread group of mostly-impoverished, densely-packed urban neighborhoods offers some of the best potential for Opportunity Zone investment, according to ATTOM Data Solutions and CityBldr. A study from the two firms spotlights 11 neighborhoods in seven states and the District of Columbia for some of the nation’s most attractive opportunities to take advantage of federal reinvestment tax benefits.

These range from Anacostia in southeast Washington, DC, to the South Shore area of Chicago to City Heights in central San Diego. Other neighborhoods identified include Mid-City in central Los Angeles; Parramore in west-central Orlando; Central District in eastern Seattle; West Colfax in western Denver; Spartan Keyes in eastern San Jose; North End/New Center in northern Detroit; Buckman/Kerns in southeastern Portland, OR; and Hilltop in central Tacoma.

Most of those neighborhoods stand out as notably poorer and more densely populated than the U.S. as a whole, with lower income and educational levels and far higher percentages of renters than homeowners. However, contributing to their economic potential, a few have above-average educational levels, and most have home values far above the national median home price.

These neighborhoods also have seen a wide range of median home price increases and decreases over the past year. In South Shore, prices have nearly doubled in the past 12 months, while in L.A.’s Mid-City section, they’ve declined nearly 12%, according to ATTOM data.

ATTOM and CityBldr reported that between 53% and 98% of households rent homes in the 11 areas, compared to 36% nationwide. The lowest rental rate is in Detroit’s North End/New Center, while the highest is in Orlando’s Parramore community.

The areas were identified by CityBldr as among those where both communities and housing developers have the most to gain from Opportunity Zone tax benefits. The findings were based on machine learning technology from various data sources and a detailed understanding of the various markets.

“This data tells us that housing developers should consider investing in these neighborhoods because they have an immense amount of potential, plus tax benefits aimed at realizing that potential,” said Bryan Copley, co-founder and CEO of CityBldr. “What we’ve done with this study is create a standardized score to compare every Opportunity Zone in the U.S. to determine which areas would yield the highest average return on investment.”

September 4, 2020




Board of Education of Richland School District No. 88a v. City of Crest Hill

Appellate Court of Illinois, Third District - July 24, 2020 - N.E.3d - 2020 IL App (3d) 190225 - 2020 WL 4251700

School Board filed verified complaint that challenged city’s approval of tax increment financing (TIF) for redevelopment project’s noncompliance with statutory mandates and procedural requirements.

The Circuit Court granted summary judgment for the city. School Board appealed.

The Appellate Court held that parcels separated by utility right-of-way were not contiguous.

Tax Increment Allocation Redevelopment Act for redevelopment of blighted property did not allow city to jump a 234.9 foot portion of natural gas right-of-way, located in unincorporated excluded area of approved tax increment financing (TIF) district, to establish required contiguity between two parcels, and, thus, financing district was not contiguous.

The contiguity touching requirement for tracts of land that touch or adjoin one another in a reasonably substantial physical sense ensures a municipality has properly constructed a tax increment financing (TIF) district and is legitimately reaping tax increment financing benefits under the Tax Increment Allocation Redevelopment Act for redevelopment of blighted property.

Point-to-point touching or cornering is generally not sufficient to satisfy the requirement of contiguity of tracts of land under the Tax Increment Allocation Redevelopment Act for the redevelopment of blighted tracts of land that will benefit from tax increment financing (TIF); point-to-point touching and cornering are merely a subterfuge to reach outlying areas.




TAX - PENNSYLVANIA

Dechert LLP v. Pennsylvania Department of Community and Economic Development

Commonwealth Court of Pennsylvania - June 23, 2020 - A.3d - 2020 WL 3421689

Business filed petition for review, seeking declaratory relief that the Department of Community and Economic Development (DCED) misconstrued the Keystone Opportunity Zone, Keystone Opportunity Expansion Zone and Keystone Opportunity Improvement Zone Act (KOZ Act) as precluding a beneficiary who previously enjoyed tax exemptions in a now-expired zone from moving to an active zone and again enjoying tax exemptions.

The Commonwealth Court holds, as a matter of first impression, that the movement from an expired zone into an active zone is not grounds for deeming a business unqualified for the tax benefits under the KOZ Act, assuming the business qualifies under the KOZ Act and meets the express relocation requirements.




Family Office Investing in Provo OZ Tech Accelerator Campus, with Hall Labs.

What are the strategic advantages to investing in early growth, patent-protected technology companies located in Opportunity Zones? Matt Van Dyke…

CONTINUE READING »

Opportunity Db

September 9, 2020




Novogradac Conference Speakers Expect Opportunity Zones Will Continue to be a Game-Changer for Low-Income Communities.

Legislators, policymakers and stakeholders at the Novogradac 2020 Opportunity Zones Virtual Conference in July discussed opportunity zones (OZ) legislation, reporting requirements, guidance and the evolving marketplace–all in the context of how the OZ incentive can play a role in strengthening communities and the economy.

“Opportunity zones changed the conversation,” said Daniel Kowalski, Counselor to the Secretary of Treasury, during the Novogradac conference. “Most economic incentive programs are grants or debt and the opportunity zone is an equity play. … It’s important we have this new tool that focuses on equity and changes the conversation about what you need to do in order to build up a low-income community.”

Bipartisan Support in Washington

Conference speakers shared their outlook on OZ legislation, generally agreeing that the two most likely vehicles for OZ legislation this year are a COVID-19 relief bill or an end-of-year tax package. In particular, proposals for an extension of the OZ incentive and for an expansion of reporting requirements have gained traction in Congress.

“The COVID-19 pandemic has made it clear that legislation around a two-year time extension is now more important and more necessary than ever before,” said Sen. Tim Scott, R-S.C., author of the original OZ legislation and a member of the tax-writing Senate Finance Committee, during his conference keynote address. “This will allow those using the OZ incentive to weather the storm and give our communities more time to plan and harness the potential of opportunity zones.”

Sen. Scott said he would continue working to get his bipartisan Improving and Reinstating the Monitoring, Prevention, Accountability, Certification and Transparency Provisions of Opportunity Zones (IMPACT) Act passed into law so that decision makers can better track and understand the impact of OZs. The IMPACT Act would institute reporting requirements that were included but later stripped from the 2017 tax reform package that enacted OZs.

“We really need to work to get the IMPACT Act passed,” said Emily Lavery, legislative assistant to Sen. Scott. “It’s extremely robust … and includes the largest scope of minute-level data on actual community impact, which is really what we’re trying to understand.”

Chad Maisel, economic policy advisor for Sen. Cory Booker, D-N.J., said that there is support from both sides of the aisle and from both chambers of Congress for OZs to succeed.

“I think the basis of any legislative package to move forward is likely to revolve around reporting and increased transparency,” said Maisel. “It’s something that Sen. Booker has talked a lot about and Sen. Scott has talked a lot about.” Maisel added that Sen. Booker is also interested in phasing out the small percentage of higher-income [contiguous] census tracts designated by governors as OZs, but that might not need a federal tax incentive as much as other areas.

In addition to having support in Congress, the OZ incentive is also a priority for the White House Opportunity and Revitalization Council. The council is made up of 17 federal agencies and federal-state partnerships working together to focus resources into OZs and other economically distressed communities.

Alfonso Costa Jr., former deputy chief of staff for the U.S. Department of Housing and Urban Development, outlined the White House Opportunity and Revitalization Council’s report on OZ best practices and said that additional actions will be made public in the near future.

“The White House Opportunity and Revitalization Council is intently focused on making sure that OZs are places where existing residents are the ultimate beneficiaries of the funds being invested through qualified opportunity funds, and that will never change,” said Costa.

Reporting and Data Collection

On the topic of reporting and data collection, Kowalski said the Internal Revenue Service (IRS) Form 8996 for qualified opportunity funds (QOFs) will provide two key pieces of information to help evaluate the OZ incentive: the amount of investment being made and the location of those investments.

Kowalski estimates that it will take about 18 months for Treasury to compile and process OZ information reported through Form 8996, so a complete set of data for 2019 OZ investments might not be available until mid-2021.

Kowalski said that once Treasury processes the Form 8996 information, the department should be able to create a heat map to illustrate where OZ investments are being made. Different gradations of color can show the depth of investment in a particular tract on a dollar basis.

Certain economic indicators are not tracked through Form 8996, such as income, poverty levels and job creation and destruction–information that will be available through the American Community Survey (ACS). The challenge is comparing ACS data, which is averaged over five years, with single-year data for OZ investments reported through Form 8996. Kowalski said Treasury will need to work through the time difference between the two data sets.

IRS Guidance

Notice 2020-39
As a response to the COVID-19 pandemic, the IRS in June provided OZ deadline relief through Notice 2020-39. Among several provisions, the guidance provided extensions for taxpayers to invest their capital gains in a QOF.

Panelists said the deadline extensions in Notice 2020-39 provided welcome relief, especially for transactions negotiated pre-COVID-19 that may need re-examination. “In some cases, you are seeing [developments] looking for capital and not necessarily meeting investor expectations that have changed post-COVID,” said Julia Shin, vice president and managing director of impact investing for Enterprise Community Investment Inc. “The additional time that has been granted [through Notice 2020-39] has been helpful in working through some of these questions and I think will still be very helpful moving forward.”

Implementing the Final Rule

Novogradac partner and conference chairman John Sciarretti led a discussion with representatives from the IRS on the final OZ regulations released in December 2019. The panel covered several aspects of the final rule, including the investment standard test, which requires that a QOF hold at least 90 percent of its assets in OZ property at the end of a six-month period. Under the final rule, the option to disregard recently contributed property for up to six months before a testing date does not address any earnings on that property nor does it address any capitalized organizational or startup costs that funds might have during the process.

Sciarretti suggested that Treasury allow funds to exclude earnings on the temporary contribution and to ignore any capitalized costs related to organization and startup. Panelist Alfred Bae, general attorney for the IRS, responded that it is reasonable for funds to disregard the earnings on contributions that were otherwise being disregarded under the Treasury regulations. Bae said that taxpayers should also be allowed to ignore organization and startup costs. QOFs having no assets in either the numerator or the denominator due to these disregarded assets can report as 100 percent on Form 8996, according to Bae.

Another discussion topic was how the IRS would treat a change in the use of working capital plan as a result of COVID-19. Sciarretti gave examples of how some entities have found it necessary to adjust their plans because of COVID-19, including difficulty raising financing or needing to change plans for a full-service hotel to office or residential space. Julie Hanlon Bolton, deputy associate chief counsel for the IRS, said the IRS is considering stakeholder requests that entities that modify or change their business plans because of COVID-19 are not considered to fail the working capital safe harbor requirement to use working capital assets in a manner “substantially consistent” with their written plan and schedule.

Other topics covered by the IRS panel included the treatment of related-party additions to basis, the infusion of working capital assets, triple-net leases and measuring the working capital safe-harbor COVID-19 extension.

Future Regulations

Since final regulations were issued in December 2019, followed by technical corrections in April, Kowalski said he considers the status of OZ regulations complete for now. One area in which Treasury may consider issuing guidance is the redrawing of census lines after the latest census update.

OZ Marketplace

Another topic discussed was the effects of the COVID-19 pandemic and an observed slowdown or pause in some OZ activity. Factors stemming from COVID-19, such as economic uncertainty, construction delays and underwriting challenges have contributed to some OZ participants taking a pause. Panelists said that those planning OZ developments in commercial retail and hospitality, in particular, may be rethinking their strategies.

The pandemic has also prompted businesses to think about evolving patterns of commerce, such as a greater focus on online shopping, which makes warehousing and delivery services even more important. There may also be a push to produce more goods domestically to avoid supply chain disruptions, especially in the pharmaceutical industry. Panelists said business can consider OZ investments as an opportunity to meet these evolving market demands while benefiting OZ communities.

Speakers discussed a final rule published by federal regulatory agencies June 25 to modify the Volcker Rule’s prohibition on banking entities sponsoring or investing in covered funds—a ruling that allows banks to participate in the OZ incentive. Panelists said this rule change makes them optimistic that more dollars will flow into the OZ space.

The conference also included discussion of OZ investment in operating businesses. “It’s been well documented that the overwhelming majority of OZ investments to date have been in real estate,” said Michael Kressig, a Novogradac partner and panel moderator. “The original sponsors of the incentive certainly envisioned a place for real estate investments, but they also believed that in order for this incentive to have its intended economic, catalytic impact on these distressed communities that it was really important that operating businesses and the job creation that they generate have a big place in the market.”

“I think that the recent regulation changes are very helpful to the operating business environment,” said Terry Jester, CEO of Solpad and the Impact OZ Fund. “There is a challenge of getting the message out about whatever these operating businesses’ needs are and applicability for distressed communities or distressed areas.”

Outlook

Despite challenges, including the COVID-19 pandemic, speakers expressed optimism that the OZ incentive will continue to drive capital into neighborhoods in need.

“The time to reinvest in our most distressed communities is right now,” said Sen. Scott. “The IRS has worked hard to create flexibility that will allow folks investing in 2020 to have the time they need to make smart, impactful investments. I also want to encourage those creating powerful change through opportunity zones to be vocal–I mean be loud, be seen, be heard. We need to hear your stories because the more information is in the public forum about the success of the opportunity zones, the more traction the zones will have across the country.”

Published by Teresa Garcia on Tuesday, September 1, 2020




11 U.S. Neighborhoods Emerge As Best Candidates For Opportunity Zone Investments.

Areas Identified Are More Impoverished and Densely Populated, With Low Homeownership Rates; Most Already Have Home Prices Far Exceeding National Levels; While Prices Have Both Increased and Decreased Since First Half of 2019

IRVINE, Calif., Sept. 3, 2020 /PRNewswire/ — ATTOM Data Solutions, curator of the nation’s premier property database and first property data provider of Data-as-a-Service (DaaS), teamed up with CityBldr, a Seattle-based proptech company that uses AI to determine the best use of land, to discover that a widespread group of mostly-impoverished, densely-packed urban neighborhoods ranging from Anacostia in southeast Washington, DC, to the South Shore area of Chicago, IL, to City Heights in central San Diego, CA, offer some of the most attractive opportunities in the nation for housing developers to take advantage of federal reinvestment tax benefits.

CityBldr data spotlights 11 neighborhoods in seven states and the District of Columbia with some of the best potential for using Opportunity Zone tax benefits designed to spur revival in low-income communities across the United States. The zones were established by Congress under the 2017 Tax Cut and Jobs Act.

Along with Anacostia, South Shore, and City Heights, other neighborhoods identified include Mid-City in central Los Angeles; Parramore in west-central Orlando, FL; Central District in eastern Seattle, WA; West Colfax in western Denver, CO; Spartan Keyes in eastern San Jose, CA; North End/New Center in northern Detroit, MI; Buckman/Kerns in southeastern Portland, OR; and Hilltop in central Tacoma, WA.

Most of those areas stand out as notably poorer and more densely populated than the U.S. as a whole, with lower income and educational levels and far higher percentages of renters than homeowners. However, contributing to their economic potential, a few have above-average educational levels, and most have home values that far exceed the national median home price. They also have seen a wide range of median home price increases and decreases over the past year, from nearly doubling in Chicago’s South Shore neighborhood, to a drop of 12 percent in the Mid-City section of Los Angeles, according to ATTOM.

The areas were identified by CityBldr as among those where both communities and housing developers have the most to gain from Opportunity Zone tax benefits, based on machine learning technology from various data sources and a detailed understanding of the various markets.

“This data tells us that housing developers should consider investing in these neighborhoods because they have an immense amount of potential, plus tax benefits aimed at realizing that potential,” said Bryan Copley, co-founder and CEO of CityBldr. “What we’ve done with this study is create a standardized score to compare every opportunity zone in the U.S. to determine which areas would yield the highest average return on investment.”

Todd Teta, chief product officer with ATTOM Data Solutions, noted that ATTOM contributed another key element showing home price changes from the first half of 2019 to the first half of 2020 in those areas.

“Factoring in home values and how they’ve done in the past year adds a critical piece of data to the picture,” said Teta. “Developers can get a demographic snapshot of what these areas look like, plus the hard numbers on how home prices are changing.”

Key data points for areas spotlighted in the study:

Report methodology

The overview of these opportunity zones looked at high redevelopment values defined by CityBldr in an analysis designed to showcase area that offer the greatest value to be gained by investors for building multifamily apartments, rowhomes or townhomes in those areas. Those census tracts included in the analysis also must have sufficient home sales prices from ATTOM Data Solutions, to show a year-over-year and two-year median home sales price change. Various data points mentioned above to help offer context for these opportunity zones came from Censusreporter.org.

About CityBldr
CityBldr is a technology company that determines the best use of land. The company offers commercial real estate, residential real estate, government and architecture products and powers acquisitions for some of the world’s most admired companies. For a ranking of sites within these or other opportunity zones, submit inquiries to [email protected]

About ATTOM Data Solutions
ATTOM Data Solutions provides premium property data to power products that improve transparency, innovation, efficiency and disruption in a data-driven economy. ATTOM multi-sources property tax, deed, mortgage, foreclosure, environmental risk, natural hazard, and neighborhood data for more than 155 million U.S. residential and commercial properties covering 99 percent of the nation’s population. A rigorous data management process involving more than 20 steps validates, standardizes and enhances the data collected by ATTOM, assigning each property record with a persistent, unique ID — the ATTOM ID. The 9TB ATTOM Data Warehouse fuels innovation in many industries including mortgage, real estate, insurance, marketing, government and more through flexible data delivery solutions that include bulk file licenses, property data APIs, real estate market trends, marketing lists, match & append and introducing the first property data delivery solution, a cloud-based data platform that streamlines data management – Data-as-a-Service (DaaS).

ATTOM Media Contact:
Christine Stricker
949.748.8428
[email protected]

ATTOM Data and Report Licensing:
949.502.8313
[email protected]

CityBldr Inquiries:
[email protected]




Opportunity Zones Continue to Make an Impact.

Edmon Rakipi, principal at Opp Zone Capital, shares why he expects the Opportunity Zone Program to revitalize some of the hardest-hit real estate sectors going forward.

The investment activity trajectory in qualified Opportunity Zones has been fluctuating since the end of last year, when important clarifications were added to the program legislation. Mirroring the economic outlook, the program had a great start to 2020, followed by a slowdown in spring and a rebound at the beginning of summer, according to commercial real estate valuation firm BBG.

Although the nation is bracing for a new slowdown in the last quarter of the year, Notice 2020-39—issued by the Internal Revenue Service in June—is expected to boost investors’ confidence in placing capital. Edmon Rakipi, principal at Opp Zone Capital—an entity that provides specialized Opportunity Zone investment and fund management services nationwide—expects the OZ program to contribute to the revitalization of some of the hardest-hit real estate sectors.

Continue reading.

Commercial Property Executive

By Roxana Baiceanu

AUG 31, 2020




Opportunity Zone Investing in Silicon Valley, with Urban Catalyst.

Does the Silicon Valley tech migration create a unique investment case for ground-up development in fast-growing downtown San Jose’s Opportunity…

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Opportunity Db

September 2, 2020




TAX - NEW YORK

International Student Exchange, Inc. v. Assessors Office of Town of Islip

Supreme Court, Appellate Division, Second Department, New York - July 15, 2020 - N.Y.S.3d - 185 A.D.3d 815 - 2020 WL 3980650 - 2020 N.Y. Slip Op. 03911

Nonprofit public benefit corporation brought an article 78 proceeding to annul determination of town board of assessment review that denied nonprofit’s application for property tax exemption.

The Supreme Court granted petition, annulled board’s determination, and directed town’s assessor’s office, board, and town to grant nonprofit a full property tax exemption for tax year. Defendants appealed.

The Supreme Court, Appellate Division held that:

Nonprofit public benefit corporation that facilitated student exchange was organized exclusively for a tax exempt purpose for purposes of Real Property Tax Law, where nonprofit’s Articles of Incorporation stated that it was not organized for the private gain of any single person, and even if the nonprofit benefited economically from its programs or from the rental of the property, its filed financial documents set forth that the benefit inured to the organization, not to its officers or employees personally.

Issue of fact existed as to whether nonprofit benefit corporation that facilitated exchange students used its property exclusively for exempt educational purpose, thus requiring that matter be remitted to trial court for determination of whether nonprofit was entitled to full or partial property tax exemption, on appeal from trial court’s determination that nonprofit was entitled to full property tax exemption; no evidence indicated what portion of the building was actually used in furtherance of educational purpose, and nonprofit indicated on its application that it intended to lease portion of property.




White House Estimate: $75 billion Raised by Opportunity Zone Funds Thru 2019.

In a report released earlier this week, the White House Council of Economic Advisers estimated that $75 billion of private…

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Opportunity Db

August 25, 2020




Challenges for Smaller Opportunity Zone Developers, with Garth Everhart.

What are some challenges that smaller Opportunity Zone project developers face? And are there benefits to investing in a smaller…

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Opportunity Db

August 26, 2020




When Will Tax Revenues Rebound? It Depends on the Tax.

Some taxes are more impaired by the pandemic recession than others, and each jurisdiction is impacted differently, but many will still suffer revenue slumps into next year and even beyond.

Without claiming to own a crystal ball, my multi-decade experience in public finance and investment analysis gives me some insights that can hopefully help state and local government policymakers, budgeters, managers and union leaders as they plan ahead for the economy’s transition from pandemic recession to an elongated economic and fiscal recovery.

It doesn’t take a crystal ball to see that even if the economy grows by 6 percent in 2021 from this winter’s bottom-out point, as the most optimistic Wall Street economists forecast, many states and localities will remain underwater, struggling or unable to maintain full-scale public services in the face of continuing revenue shortfalls.

Let’s first clear the air about the stock market and its limited forecasting value for public budgeting. The major stock indexes are back up to pre-pandemic levels, but that is not a useful predictor for governmental tax revenues. The lost earnings of 2021 will have only a fractional impact on the long-run value of shares in big businesses; blue-chip investors are already looking out toward 2022 and beyond. Where the business-sector pain will continue to be felt most acutely is in the lower tier of smaller public companies and the even smaller privately owned businesses.

Continue reading.

GOVERNING.COM

GIRARD MILLER, FINANCE COLUMNIST | AUGUST 18, 2020




TAX - WASHINGTON

PeaceHealth St. Joseph Medical Center v. Department of Revenue

Supreme Court of Washington - August 6, 2020 - P.3d - 2020 WL 4516799

Department of Revenue appealed a decision of the Board of Tax Appeals granting taxpayers, which were non-profit medical center operators, a refund of business and occupation taxes paid on compensation received from out-of-state subsidized health care programs.

The Superior Court reversed. Taxpayers appealed. The Court of Appeals affirmed. Taxpayers petitioned for review, which was granted.

The Supreme Court held that:

Pursuant to government function exemption, state statute limiting business and occupation tax deduction available to public and nonprofit hospitals for Medicaid and Children’s Health Insurance Programs (CHIP) compensation to only in-state, rather than out-of-state, compensation did not violate dormant commerce clause; deduction supported a quintessentially public function by helping to subsidize government’s provision of essential health care services to state’s citizens by facilitating expansion of government’s overall purchasing power for such services.




TAX - VERMONT

Martinez v. Town of Hartford

Supreme Court of Vermont - August 7, 2020 - A.3d - 2020 WL 4557061 - 2020 VT 70

Taxpayer, proceeding pro se, appealed from decision of Property Valuation and Review Division (PVR) hearing officer setting the fair market value of his single-family dwelling at $509,900, equalized to a value of $492,300, for purposes of town’s property tax grand list.

The Supreme Court held that:

Although the sale price of real property in a contemporaneous arms-length transaction is strong presumptive evidence of fair market value, for purposes of Vermont’s property tax statute, it is not solely determinative and may be overcome, in rare cases, by other evidence of value; statute expressly and without qualification allows factfinder to consider other factors beyond the recent, arms-length sale price, and, while case law emphasizes that such sale establishes a strong presumption as to the fair market value of the property, Supreme Court has never held that existence of a bona fide sale price conclusively establishes fair market value or precludes hearing officer from considering competing evidence of fair market value.

Hearing officer’s appraisal of taxpayer’s single-family dwelling at $509,900, equalized to a value of $492,300, for purposes of town’s property tax grand list, was rationally derived from the findings and evidence, even though taxpayer had recently purchased the home for $350,000; while it was undisputed that sale was bona fide, other evidence showed that sale price did not represent property’s fair market value, including town’s unchallenged comprehensive market analysis report which valued taxpayer’s property at $510,000 based on nine recent sales of comparable properties in the same planned unit development whose adjusted prices ranged from $501,400 to $515,000, and under these circumstances, hearing officer did not abuse his discretion by affording greater weight to independent market data than to sale price in determining fair market value.




Potential Legislative Improvements to Opportunity Zones, with Emily Lavery.

Why are Opportunity Zones more important now than ever before, and what legislative changes are being considered to improve the…

CONTINUE READING »

August 19, 2020




PUBLIC UTILITIES - FEDERAL

SFPP, L.P. v. Federal Energy Regulatory Commission and United States of America

United States Court of Appeals, District of Columbia Circuit - July 31, 2020 - F.3d - 2020 WL 4377850

Partnership oil pipeline filed tariff increases and, after Federal Energy Regulatory Commission (FERC) issued three orders, the Court of Appeals vacated the orders in part.

On remand, FERC issued two further orders that removed the income tax allowance, among other holdings. Pipeline and shippers petitioned for review.

The Court of Appeals held that:

Federal Energy Regulatory Commission (FERC) reasonably identified double-recovery problem in granting both an income tax allowance and a discounted cash flow return on equity, and thus FERC’s decision to remove income tax allowance for partnership oil pipeline was not arbitrary and capricious; FERC explained that granting an income tax allowance for investor-level taxes did not alter investor’s discounted cash flow rate of return, but rather it only inflated pipeline’s cost of service with tax costs already covered by that return.

Partnership oil pipeline was not entitled to reopen record at Federal Energy Regulatory Commission (FERC) regarding tariff dispute and FERC’s decision to remove income tax allowance; even though other parties would not be precluded from arguing that their recovery of income tax allowance did not result in double-recovery of investors’ income tax costs, pipeline had fully litigated issue at FERC and Court of Appeals, and FERC could deny pipeline another bite at the apple while leaving door open for others to argue issue on facts of their cases.

Federal Energy Regulatory Commission’s (FERC) decision to direct partnership oil pipeline to use its originally filed index rates in its compliance filing, which calculated certain refunds, was not arbitrary; FERC explained that it would not permit refunds following a rate case that were based on index rates different from those previously filed by pipeline and accepted by FERC, cost-of-service litigation neither altered industry-wide annual inflationary changes justifying annual index changes nor addressed annual cost changes pipeline itself experienced, and allowing pipeline retroactive adjustment would have inoculated pipeline from risk of its chosen ratemaking strategy.

Federal Energy Regulatory Commission (FERC) did not act contrary to law or arbitrarily and capriciously in permitting partnership oil pipeline to remove deferred tax account from its cost of service; refunding tax account to ratepayers or continuing to remove it from rate base would have constituted impermissible retroactive ratemaking, as decision by FERC to return account to shippers would have as a necessary predicate a conclusion that account should not have been collected in the first place, regardless of reason that account became overfunded.

Federal Energy Regulatory Commission’s (FERC) decision to allow partnership oil pipeline to recover tariff litigation expenses through three-year surcharge was adequately explained and reasonable, despite contention that costs should have been spread over 11 years of litigation, where 85.9% of expenses were incurred over three-year period to which surcharge would apply.




TAX - ARIZONA

State ex rel. Brnovich v. City of Phoenix

Supreme Court of Arizona - August 3, 2020 - P.3d - 2020 WL 4431892

Attorney General brought special action seeking resolution of issue of whether ordinance imposing fees on commercial ground transportation providers who transported passengers to and from airport violated state constitution’s prohibition on the imposition or increase of taxes or other transaction-based fees on services.

The Supreme Court held that:

Trip fees which ordinance imposed on commercial ground transportation providers who transported passengers to and from airport were not transaction-based and thus did not violate constitutional prohibition on the imposition or increase of taxes or other transaction-based fees on services; neither imposition of trip fee nor its amount depended on whether a passenger took a ride, cancelled it, or even paid for it, but rather, trip fees were based on providers’ use of airport property in picking up and dropping off passengers at designated sites as recorded by technology-based trip-tracking or provider reports.

Statutory requirement for local government to post a bond, in a special action by Attorney General to determine whether a local law violates state law or constitution, was so incomplete and unintelligible as to be unenforceable, where neither statute nor legislative history clarified bond’s purpose, conditions on which it was based, what would happen if no bond were posted, or what conditions were required to exonerate bond.




Why 2020 is Primed For Opportunity Zone Investments.

OZs are an effective investment vehicle, especially in this precarious moment

Amid all the bad news, there may be one bright spot this summer (and beyond) for investors: Opportunity Zones. New deadlines, growing momentum, and various market factors will converge to make such investments — and the positive social impact they bring — more attractive than ever.

First, a new IRS deadline extension should help put 2019 capital gains to work this summer and the months that follow. Here’s why: in normal times, regulations dictate that investors have 180 days from when capital gains are realized to invest them in a qualified opportunity fund (QOF); however, in response to the economic crisis, these regulations have been adjusted such that investors who realized capital gains on or after October 4, 2019 now have until the end of 2020 to invest in a QOF. This gives investors sorely needed time to make decisions and should ultimately prime OZs for the rest of the year.

The recent selloff in the stock market only adds to the dry powder on hand this summer. Coming off a strong bull run, COVID-19 incited some investors to sell stock and take (a potentially unplanned) recognition of capital gains. Investors with newfound liquidity might find OZs an appealing diversifier in a volatile environment.

But none of this would matter if OZs weren’t such an effective investment vehicle, especially in this precarious moment. Their long-term nature (investors must hold onto assets for 10 years to realize their full benefit) provides ample time for projects to move through the downturn and appreciate before investors look to sell.

OZ investors today can also be confident knowing they’re getting in at the start of a new real estate cycle, replete with lower labor, land and construction costs, and historically low-interest rates.

These factors, in tandem with the growing momentum of Q3 and Q4 OZ investments from 2019, have already borne fruit. QOFs have continued to make deals, close construction financing agreements and break ground on new developments. At least four new OZ developments have started construction since March in the D.C. area alone.

Most importantly, as the U.S. begins to emerge from the immediate aftermath of COVID-19 – and with protests continuing across the country – there will be an added focus on social impact and equitable recovery of our hardest-hit and historically underfunded communities. These priorities are shared by the OZ program, which aims to invest and uplift these very communities.

In this respect, we expect residential housing to remain the top investment area, be it affordable housing, apartment buildings in emerging regions, or multifamily housing serving a growing population. On the other hand, retail and hospitality may remain at higher risk, given the uncertainty of these industries’ recoveries.

The coming wave of OZ investment will also underscore the need for specialty financial administration, more transparency and better reporting. Now more than ever, new and existing investors will demand a quantitative measurement of their dollars’ social impact, a clear picture of how many jobs it created, and whether it met affordability mandates. And with so much else in our lives still wracked with unknowns, they’ll want to know that the QOF they choose fully understands the complex tax, accounting, and compliance nuances inherent in a specialty fund.

With all that said, one thing is clear: For those looking to escape the turbulent market for calmer waters — while contributing to the recovery of our hardest-hit communities — now may be the perfect time to check out Opportunity Zones.

Governor Gavin Newsom’s 2019-2020 proposed budget includes language which addresses the issue of federal conformity related to the Opportunity Zones, on page 94 of the budget summary: “The state will also make EIFDs a more attractive economic tool by pairing them with the federal Opportunity Zones program. To make Opportunity Zones more effective, the state will conform to federal law allowing for deferred and reduced taxes on capital gains in Opportunity Zones for investments in green technology or in affordable housing, and for exclusion of gains on such investments in Opportunity Zones held for 10 years or more.

californiaglobe.com

By Reid Thomas, July 31, 2020 10:45 am




Can Opportunity Zones Recover from the COVID-19 Crisis? (Episode #104)

Do Opportunity Zones have the potential to create a more optimistic and hopeful outlook, and to help build national recovery…

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HUD’s Carson Provides Opportunity Zone Updates.

The Mayor of Fort Myers, Florida said he is “encouraged” by results of the Opportunity Zone initiative for economically struggling neighborhoods in his city.

U.S. Housing and Urban Development Secretary Dr. Benjamin Carson, Chairman of the White House Opportunity and Revitalization Council, this week delivered an update on government-designated Opportunity Zones located in Fort Meyers Florida.

Carson visited Opportunity Zone neighborhoods in Fort Myers to view the progress made as a result of the 2017 Tax Cuts and Jobs Act, which created Opportunity Zones in the effort to stimulate long-term investments in low-income communities. Opportunity Zone plans are in place for communities in all 50 states this year.

“Today, I am encouraged by the force of positive change happening here in Fort Myers as a result of the Opportunity Zones initiative. I thank [Fort Myers] Mayor [Randy] Henderson and the local leadership for their determined partnership in ensuring economic growth and opportunity for all,” Carson said.

Henderson added that the Opportunity Zone initiative is an important program for the City of Fort Myers.

“Secretary Carson has championed attainable housing and public private partnerships that make it possible to attract investors, particularly in our Opportunity Zones.”

Housing advocates such as the National Association of Realtors (NAR) have expressed support for Opportunity Zones as a tool for building more housing in economically distressed areas.

On December 12, 2018, the White House established the Council to support the administration’s pledge to encourage public and private investment in urban and economically distressed areas, including Opportunity Zones.

Secretary Carson last month delivered the latest report outlining Opportunity Zone best practices and examples of revitalization occurring nationwide to President Donald Trump.

At that time, Carson reported, “There are inspiring stories happening in real time, with action being taken by State governments, local governments, Qualified Opportunity Funds, public-private partnerships, and others to spur revitalizing investments in the areas of most need. This report will prove to be especially helpful and encouraging to communities as they continue to admirably fight the invisible enemy known as COVID-19.”

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TAX - FLORIDA

Discount Sleep of Ocala, LLC v. City of Ocala, Florida

District Court of Appeal of Florida, Fifth District - June 19, 2020 - So.3d - 2020 WL 3394724 - 45 Fla. L. Weekly D1490

Businesses brought class action against city, challenging city’s fire service user fee as an unconstitutional tax.

The Circuit Court granted city’s motion to dismiss. The District Court of Appeal reversed. On remand, the Circuit Court denied class certification. The District Court of Appeal reversed again and, after a bench trial, the Circuit Court entered judgment in favor of city. Businesses appealed.

The District Court of Appeal held that:

City’s fire service user fee was not a charge paid in exchange for a particular governmental service, as factor for determining validity of fee in businesses’ class action challenging the fee as an unconstitutional tax; city provided comprehensive fire services to anyone within the city limits regardless of whether they had paid the fee, and fire services did not constitute a utility.

City’s fire service user fee benefited payors in a manner not shared by non-payors, as factor for determining validity of fee in businesses’ class action challenging the fee as an unconstitutional tax; although payors and non-payors had access to the same fire services, payors received special financial benefits such as lower insurance premiums.

City’s fire service user fee was not paid by choice, as factor for determining validity of fee in businesses’ class action challenging the fee as an unconstitutional tax; the fee appeared on businesses’ utility bill along with charges for water, sewer, and electric services, failure to pay fire service fee would lead to disconnection of water, sewer, and electric services by city, and unpaid fire service charges constituted a lien on the property.

City ordinance repealed city’s fire service user fee, and thus law-of-the-case doctrine precluded trial court from concluding, contrary to prior appellate court judgment which remanded the matter, that the statute of limitations barred businesses’ class action claims challenging user fee as an unconstitutional tax; ordinance’s plain language made it clear that repeal became effective on the mayor’s signing and mayor did sign the ordinance.

Businesses challenging city’s fire service user fee as an unconstitutional tax did not pay the fee voluntarily, and thus voluntary payment defense did not preclude refund of fee payments; failure to pay the service fee resulted in loss of water, sewer, and electric services, as well as a lien on the property to which services had been provided.

City did not act in good-faith reliance on a presumptively valid statute in imposing a fire service user fee, and therefore good-faith defense did not preclude a refund to businesses challenging the fee as an unconstitutional tax, where no statute specifically allowed city to charge a fire service fee.

Refund of fire service user fee payments would not have imposed an intolerable burden on city, and therefore good-faith defense did not preclude a refund to businesses challenging the fee as an unconstitutional tax; city could have authorized a special assessment, used a portion of reserve funds, implemented bonds, sold surplus city property, or transferred funds from other city accounts to provide for the refund.




TAX - MARYLAND

Carbond, Inc. v. Comptroller of Treasury

Court of Special Appeals of Maryland - July 29, 2020 - A.3d - 2020 WL 4354908

Corporate taxpayer sought judicial review of Tax Court’s denial of its refund claim and affirmed the Comptroller’s assessments of admissions and amusement taxes. The Circuit Court affirmed the Tax Court’s decision. Taxpayer appealed.

The Court of Special Appeals held that taxpayer’s electronic gaming devices were “games of entertainment” subject to admissions and amusement taxes.

Coin-operated electronic gaming devices placed in bars, restaurants, and convenience stores throughout city and county were “games of entertainment” subject to admissions and amusement taxes; the refrigerator-sized machines, replete with spinning wheels and lights, inherently involved use of recreational facilities or equipment.




IRS Final Rules Offer Safe Harbors for Users of SALT Workarounds.

Final regulations addressing payments to charitable organizations in exchange for state or local tax credits stick closely to the proposed regs but make some clarifications for safe harbors.

Safe harbors in the August 7 final regs (T.D. 9907) allow a C corporation or specified passthrough entity that receives or expects to receive state or local tax credits in return for payments to or for the use of a section 170(c) entity to treat the credit-sized portion of the payment like an ordinary and necessary business expense under section 162.

The treatment matches the proposed rules (REG-107431-19) from December 2019 to make it clear that such payments constitute an allowable deduction as a trade or business expense under section 162 rather than a charitable deduction.

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TAX ANALYSTS

POSTED ON AUG. 10, 2020

FRED STOKELD




Finding Uncommon Value in Untapped OZ Markets, with Four Points Funding.

What are some of the economic advantages of rural multi-asset multifamily and outdoor-focused hospitality Opportunity Zone fund investing? Chris Montgomery…

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TAX - MICHIGAN

Rafaeli, LLC v. Oakland County

Supreme Court of Michigan - July 17, 2020 - N.W.2d - 2020 WL 4037642

Former property owners brought action against county and its treasurer, alleging due-process and equal-protection violations as well as unconstitutional taking by selling their real properties in satisfaction of their tax debts and retaining surplus proceeds from tax-foreclosure sale of their properties.

The Circuit Court granted summary disposition to county and treasurer, and denied reconsideration. Taxpayers appealed. the Court of Appeals 4803570, affirmed. Taxpayers appealed.

The Supreme Court held that:

Under the General Property Tax Act (GPTA), “forfeiture” simply permits defendants to seek a judgment of foreclosure; forfeiture does not affect title, and it does not give the county treasurer, or the state if the state is the foreclosing governmental unit, any rights, titles, or interests to the forfeited property.

Former property owners did not “forfeit” all rights, titles, and interests they had in their properties under the General Property Tax Act (GPTA) by failing to pay their real-property taxes; former owners did not use their properties for illicit purposes or commit criminal offense by not paying their property taxes.

General Property Tax Act (GPTA) did not create new rights beyond those prescribed in Michigan and United States Constitutions, and therefore former property owners could not contest legitimacy of government’s authority to foreclose on their properties for unpaid tax debts and they could not contest sale of their properties to third-party purchasers on due process grounds to extent government complied with due-process, since GPTA stated its intent to only comply with minimum requirements of due process.

Nature of former property owners’ claim was taking without just compensation, not deprivation of property without due process of law, where former owners alleged that compliance with General Property Tax Act (GPTA) notice provisions did not justify defendants’ retention of surplus proceeds from tax sale and asked court to reverse decision of Court of Appeals and remand to circuit court for determination of just compensation.

Aggrieved property owners had cognizable, vested, common law right, protected by Michigan’s Takings Clause in inverse-condemnation action, to collect surplus proceeds from tax-foreclosure sale of his or her property, although General Property Tax Act (GPTA) did not recognize divested property owner’s right to surplus proceeds.

Amendments to General Property Tax Act (GPTA) did not abrogate aggrieved property owners’ cognizable, vested, common law right, protected by Michigan’s Takings Clause in inverse-condemnation action, to collect surplus proceeds from tax-foreclosure sale of his or her property.

Although government was entitled to seize owners’ properties under General Property Tax Act (GPTA) to satisfy unpaid delinquent real-property taxes, as well as any interest, penalties, and fees associated with foreclosure and sale of those properties, government’s retention of surplus proceeds from tax-foreclosure sale was unconstitutional taking.

Government could not rely on its taxing power to justify retention of surplus proceeds from tax-foreclosure sale under General Property Tax Act (GPTA), since government’s ability to take taxpayers’ properties was limited by what taxpayers actually owed as result of failing to pay their taxes and therefore any physical taking of property was arbitrary and disproportionate tax.




SPECIAL ASSESSMENTS - NORTH DAKOTA

Holter v. City of Mandan

Supreme Court of North Dakota - July 22, 2020 - N.W.2d - 2020 WL 4210906 - 2020 ND 152

Landowner sought review of city’s decision to specially assess her undeveloped residential lots for street improvements.

The District Court dismissed. Landowner appealed.

The Supreme Court held that special assessments, based on linear feet, were not arbitrary, capricious, or unreasonable.

City’s special property tax assessments, based on linear feet, on undeveloped residential lots for street improvements were not arbitrary, capricious, or unreasonable, even if assessments were slightly less than total value of the properties, where properties were assessed under city special assessment policy, city used policy to determine benefits and assessments to properties in an improvement district, and special assessment commission did more than simply take total cost of project and divide it by using a formula.




TAX - MINNESOTA

Enbridge Energy, Limited Partnership v. Commissioner of Revenue

Supreme Court of Minnesota - July 8, 2020 - N.W.2d - 2020 WL 3818130

Taxpayer filed petitions to challenge valuation of pipeline system for two tax years.

The Tax Court entered judgment in favor of Commissioner of Revenue. Taxpayer appealed.

The Supreme Court held that:

Tax court was not required to exclude indirect construction expenses from the cost indicator of value for pipeline system under construction; under general appraisal practices and industry standards for pipeline company accounting, construction work in progress (CWIP) expenses included the direct and indirect costs of construction.

Tax court valuing pipeline under construction did not commit clear error in determining that taxpayer did not carry its burden to show that expenditures listed in its construction work in progress (CWIP) accounts reflected the cost of items that were not installed as of the valuation dates; although taxpayer argued that evidence of in-service dates it offered were synonymous with when projects were installed, it conceded that the in-service dates could relate to an entire project and might not capture when portions of that project were installed.

Taxpayer was not entitled to include only expansionary construction work in progress (CWIP) expenses and exclude non-expansionary expenses for valuing pipeline system under cost approach.

Tax court error in requiring taxpayer to show that nationwide or industrywide factors contributing to pipeline obsolescence affected pipeline to a greater extent than other pipelines was harmless; although court erred by expecting proof that governmental regulations affected taxpayer more than others, its underlying finding that governmental regulations did not adversely affect taxpayer since it was regulated on a cost-of-service basis was not clearly erroneous, record indicated taxpayer’s inability to meet existing demand undercutting claims that drop in oil prices negatively affected demand and competitors were interfering with business, and evidence supported court’s concerns regarding appraiser’s methodology.

Tax court had discretion to depart from default weightings to pace equal weight on the cost and income indicators of value to calculate the unit value of the pipeline system if dictated by the circumstances of the case.




COVID's Impact on Opportunity Zone Funds May Surprise You.

It seems no industry has remained unscathed or unaffected by the coronavirus pandemic up to this point. As some industries thrive others are devastated, leaving participating investors in opportunity zones wondering how their investments and funds may be impacted.

Opportunity zones (OZs) are designated census tracts that were created as a part of the Tax Cut and Jobs Act of 2017 (TCJA) and offer major tax benefits to participating investors that redirected capital into an opportunity zone fund (OZF) established for the development of new business, real estate, or expansion of established businesses in an opportunity zone.

OZs aren’t hit as hard as you may have thought

Considering that opportunity zones are 8,700 of the most rural or low-income census tracts across the United States, concern over the performance of these funds as well as their ability to execute their initial projects is understandable. The Economic Innovation Group (EIG) conducted a national study in June in which 52% of the respondents stated they have been negatively impacted by the coronavirus in some way.

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The Motley Fool

Jul 27, 2020 by Liz Brumer




9 Early Conclusions of Opportunity Zones for Equitable Development, with Brett Theodos.

In its early days, how effective has the Opportunity Zone incentive been for equitable development projects? Brett Theodos is senior…

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Opportunity Db

July 29, 2020




IRS Provides Additional Relief for Tax-Exempt Hospitals.

Deadline for completing certain needs assessment requirements moved to Dec. 31

WASHINGTON — Because of the burdens the COVID-19 pandemic has placed on hospitals, the Internal Revenue Service today provided additional relief to hospital organizations that must meet the Community Health Needs Assessments (CHNA) requirements.

Notice 2020-56 extends the deadline for conducting a CHNA and adopting an implementation strategy to meet the community health needs identified through the CHNA to Dec. 31, 2020.

Tax-exempt hospital organizations filing Forms 990 must indicate on Schedule H if they have conducted a CHNA in the current taxable year or in either of the two immediately preceding taxable years and if they have adopted an implementation strategy to meet the significant health needs identified through the most recently completed CHNA. Since these requirements may affect the hospital’s tax-exempt status and because the law imposes a $50,000 tax on a hospital organization for each hospital facility that fails to meet either or both of these requirements, the extension provided in the notice provides significant relief.

Under Notice 2020-56, the time for hospitals to comply with any CHNA requirements due to be performed on or after April 1, 2020, and before Dec. 31, 2020, is extended to Dec. 31, 2020.

Previously, the IRS issued guidance extending the due date to July 15, 2020; today’s guidance further extends that due date.

Hospitals using the relief in today’s notice that file Form 990 prior to Dec. 31, 2020, should state in the narrative of Part V.C. of Schedule H (Form 990) that they are eligible for and are relying on the relief provided in the notice, and should not be treated as failing to meet the requirements of section 501(r)(3) prior to Dec. 31, 2020.

Additional tax relief related to the COVID-19 pandemic can be found on IRS.gov.

Tax Analysts

July 14, 2020




IRS Asks Puerto Rico Power Utility to Return BAB Payments.

The U.S. Internal Revenue Service told Puerto Rico’s electric company that it has to repay the federal subsidies it received for bonds sold a decade ago as part of the government’s stimulus program in the last recession.

The IRS in a July 10 letter asked the Puerto Rico Electric Power Authority to return Build America Bond subsidy payments made since July 1, 2017, the day before the utility’s bankruptcy, according to a filing to bondholders on the Municipal Securities Rulemaking Board’s website.

Prepa, as the utility is known, sold a combined $676 million of taxable Series YY and EE Build America Bonds in 2010. The federal government covers 35% of interest costs on BABs. The IRS began examining Prepa’s subsidy payments in 2019.

The IRS also won’t make subsidy payments for credits that Prepa has requested since July 2017, according to the bondholder filing.

“Prepa intends to respond to the IRS and is currently considering its options,” according to the filing.

Bloomberg Markets

By Michelle Kaske

July 21, 2020, 8:34 AM PDT




TAX - CALIFORNIA

City and County of San Francisco v. All Persons Interested in Matter of Proposition C

Court of Appeal, First District, Division 4, California - June 30, 2020 - Cal.Rptr.3d - 2020 WL 3529750 - 20 Cal. Daily Op. Serv. 6497 - 2020 Daily Journal D.A.R. 6829

City brought action to establish that voter initiative to adopt special tax was validly enacted.

The Superior Court granted city judgment on pleadings, and initiative’s opponents appealed.

The Court of Appeal held that:




TAX - NEW JERSEY

Gourmet Dining, LLC v. Union Township

Supreme Court of New Jersey - June 30, 2020 - A.3d - 2020 WL 3525557

Operator of fine dining restaurant located on university campus sought judicial review of county tax board’s dismissal of operator’s challenges to property tax assessments.

The Tax Court denied operator’s motion for summary judgment and granted township’s motion for summary judgment. Operator appealed, and the Superior Court reversed and remanded. The Supreme Court granted petition for certification.

The Supreme Court held that:

Commercial success, rather than public purpose, was paramount factor in arrangement between university and operator of competitive high-end restaurant located on university’s campus, and thus restaurant operator was not entitled to public property tax exemption; providing food services for students, or even faculty or administrators, was not the key purpose of the restaurant, which was not even promoted as a form of convenience for students and researchers at the building, or the university generally, benefits such as employment opportunities for students were incidental, and while portion of restaurant’s revenue went to scholarships, that could not transform otherwise nonexempt purpose a public purpose.

High-end restaurant located in building on university campus was not a use of the building for the university but rather for the restaurant operator, and thus restaurant was not exempt from taxation on grounds it was used for college; profit, after all expenses were paid, went to restaurant.




Conscious Capitalism in Opportunity Zones, with Travis Steffens.

What is conscious capitalism, and how can choosing to adhere to this concept create positive social impact in Opportunity Zones?

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Opportunity Db

July 15, 2020




Key Takeaways from the Novogradac OZ Conference, with Mike Novogradac and John Sciarretti.

What were the biggest highlights from last week’s Novogradac Opportunity Zones Virtual Conference? Mike Novogradac is the managing partner of…

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Opportunity Db

July 22, 2020






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