Hospice care provider sought judicial review of denial of its application for property tax exemption as to inpatient hospice care pavilion, based on purportedly exclusive charitable use.

The Circuit Court confirmed the denial. Provider appealed.

The Appellate Court held that:

• Department’s decision was subject to clearly erroneous standard of review;
• Evidence supported Department’s finding of lack of charitable purpose; and
• Prior settlement stipulation by the Department did not require it to find hospice pavilion exempt.

Illinois Department of Revenue’s denial of hospice care provider’s application for property tax exemption, as to inpatient hospice care pavilion, was subject to clearly erroneous rather than de novo standard of review on appeal; the issue before the Department in its administrative proceeding was whether provider had met its burden of demonstrating that the pavilion was used exclusively for charitable purposes, such that the Department’s decision was a fact-intensive question which was not purely legal.

Evidence was sufficient to establish that revenue received by hospice care provider was not devoted to an identifiable charitable need or the general purposes of charity, supporting the Illinois Department of Revenue’s denial of application for property tax exemption as to provider’s inpatient care pavilion; evidence showed that provider generated ninety-four percent of its revenue from billing patients rather than patients in need of charitable care, that provider was receiving full payment from relevant government programs, that provider’s charitable expenses represented less than one percent of its net services revenue, and that provider rendered charitable services for only eight percent of its patients.

Prior settlement stipulation by the Illinois Department of Revenue providing that hospice provider’s palliative care center was tax exempt as a charitable institution did not require the Department to also find tax exempt provider’s inpatient hospice care pavilion at the same location, despite fact that the two divisions operated under the same financial policies; provider acknowledged that the care center and pavilion were separate, the stipulation provided that it could not be used as evidence of charitable status in other proceedings, and evidence did not show that the hospice pavilion was reasonably necessary for carrying out the palliative care center’s mission.

After taxpayers purchased real property from owner of charter school that filed for bankruptcy protection and ceased operations mid-year, taxpayers brought a tax claim asserting that property remained entitled to charter school exemption for tax year, and filed a petition for refund with county board of supervisors.

County board denied the petition, and taxpayers amended tax court complaint to add special action claim seeking a writ of mandamus directing board to refund tax payment. The Arizona Tax Court granted board’s motion to dismiss the complaint. Taxpayers appealed.

The Court of Appeals held that:

• Provision of statute governing tax exemption for property used for education that exempted charter school property from taxation if it was used for education did not apply to taxpayers’ property;
• Statute conditioned exemption on continued educational use of property, and thus taxpayers were not eligible for exemption
• Statute did not authorize proration for property that was exempt for a portion of tax year; and
• Taxpayers were not entitled to an award of attorney’s fees.

Summary

Going forward, investors will be seeking ways to minimize that future tax burden, especially for those in states with high state and local taxes.

Municipal bonds, which are issued by state and local governments, occupy a special place in the investing landscape.

For most investors, the choice of a muni bond fund is primarily driven by the need for tax-efficient income. The income from these bonds is exempt from federal income tax and sometimes state income taxes as well.

Tax preparers everywhere are explaining to clients what they can expect with this year’s tax filing. Going forward, investors will be seeking ways to minimize that future tax burden, especially for those in states with high state and local taxes (SALT).

Municipal bonds, which are issued by state and local governments, occupy a special place in the investing landscape. The income from these bonds is exempt from federal income tax and sometimes state income taxes as well. This treatment can make them especially attractive for investors looking for ways to minimize their tax burden.

It’s all in the math

To account for their tax benefit, municipal bonds tend to have lower yields than comparable taxable securities, such as corporate bonds or U.S. Treasuries. Calculating a tax-equivalent yield lets you fairly compare these two types of bonds.

The formula is straightforward:

Tax-equivalent yield = Muni bond yield / (1 – tax rate)

In 2019, the highest marginal tax bracket is 37% and the 3.8% Health Care Act tax also applies to investment income, giving us a maximum marginal tax rate of 40.8%.1 Thus, if you had a muni bond that was yielding 2%, then it had a tax equivalent yield of 3.4% (2% / (1 – 40.8%). In other words, a taxable bond would need to yield at least 3.4% to provide a comparable return.

Ramping up tax efficiency with ETFs

For most investors, the choice of a muni bond fund is primarily driven by the need for tax-efficient income. But the income is only part of the story. Here is a checklist you can use to help determine the tax efficiency of a muni bond investment:

Consider state-specific options if you live in a high-SALT state

For many investors in high-tax states, such as California or New York, only $10,000 of state income taxes can be deducted.1 State-specific funds let investors deduct bond income from their federal and state tax returns.

Minimize capital gains payouts

Both mutual funds and exchange-traded funds (ETFs) must pay out any realized capital gains. According to data from Morningstar, 33% of intermediate-term municipal bond mutual funds paid out capital gains in 2018. These distributions may be taxable events, increasing an investor’s tax burden.

Look out for AMT-eligible securities

Income from bonds issued by non-governmental entities, such as a development project for a municipal airport, might be subject to the alternative minimum tax. These bonds might yield more to make up for this tax treatment, but the bond holder will have to report this income and potentially pay tax on the interest. When evaluating an individual bond, mutual fund or ETF, make sure to check for the AMT exposure. (This can typically be found in the annual report or a fund company’s website.)

iShares muni bond ETFs check all three tax efficiency boxes. They have:

• Monthly income that is exempt from federal income taxes.
• A history of no capital gains payouts. Since 2007, no iShares municipal bond ETFs have distributed capital gains.
• No AMT exposure. The iShares Municipal Bond ETFs seek to track S&P Municipal Bond indexes that screen out any bonds with income subject to AMT.

Over time, tax savings can have a big impact on your bottom line. April 15 is a good reminder that tax awareness isn’t a seasonal activity, but one that’s good practice all year around.
___________

1 Source: Forbes, March 7, 2018; irs.gov.

BlackRock

Mar. 27, 2019

Five months ago, the Treasury department issued its first tranche of proposed regulations concerning the opportunity zones (OZ) tax incentive, releasing 74 pages of regulations, a revenue ruling, an updated Q&A document and a draft of Internal Revenue Service Form 8996.

In the next few weeks, the second tranche will be released. It will include a request for comments and be followed by a public hearing. What will the second set of guidance include? The issues addressed will likely include many of those presented at the most recent public hearing and included in comment letters, as well as Treasury’s assessment of areas most in need of guidance.

The following is a summary of 20 OZ guidance areas that Novogradac is closely tracking as we await the second tranche of guidance. How these issues are addressed will go a long way in determining the success of the OZ incentive in facilitating the investment of equity capital in real estate and operating businesses in distressed communities.

This list is segregated into six broad categories (and assumes a working knowledge of the OZ incentive):

• Compliance testing/calculations
• Operating businesses
• Real estate
• Renewable energy
• Corporations
• Fund management
• Compliance testing/calculations

1. 90 percent and 70 percent asset test. Last year’s proposed regulations require that qualified opportunity funds (QOFs) and qualified OZ businesses use generally accepted accounting principles (GAAP) to calculate compliance with the 90 percent and 70 percent asset tests, if they have applicable financial statements. Mandating the use of GAAP to value tangible property is not a suitable valuation method for several reasons. (For additional discussion, see page 8 of the Novogradac Opportunity Zones Working Group (OZWG) Dec. 28, 2018 letter to the Internal Revenue Service (IRS).) The final regulations should allow QOFs and qualified OZ businesses to elect to use unadjusted cost basis to value tangible property regardless of whether or not they have an applicable financial statement.

2. When must a qualified OZ business begin. In order for investments in corporations and partnerships to qualify as opportunity zone property (OZ property), the statute requires that as of the time such interest was acquired, such corporation/partnership was a qualified OZ business (or, in the case of a new corporation/partnership, such corporation was being organized for purposes of being a qualified OZ business). Treasury guidance is needed that provides new businesses that are being organized for the purpose of being a qualified OZ business and existing businesses that are expanding within or into OZs time to acquire and/or improve tangible property and put such property to active use in OZs. (For additional discussion, see page 6 of the OZWG July 16, 2018 letter to the IRS.)

Operating businesses

3. Measuring 50 percent of gross income in OZs. The proposed regulations require that at least 50 percent of the gross income of a qualified OZ business be derived from the active conduct of a trade or business in the OZ. Practitioners need further guidance on how to measure that. Treasury should provide a safe harbor for the 50 percent test that could include such things as location of employee services, location of tangible property and the location where economic value is created. The determination should not be solely based on the location of the customers of the business. (For additional discussion, see page 5 of the OZWG Nov. 26, 2018 letter to the IRS.)

4. Leased property. Under the statute, OZ property must be “purchased.” However, the substantially all test for qualified OZ businesses refers to tangible property owned or leased. Guidance is needed as to how to value leased property for purposes of the substantially all test, as well as how to apply the original-use requirement for leased property. (For additional discussion, see page 6 of the OZWG Nov. 26, 2018 letter to the IRS.)

5. Intangible property. The proposed regulations require that a substantial portion of the intangible property of a qualified OZ business be used in the active conduct of a trade or business in the OZ. Guidance is needed regarding (i) the meaning of the term “substantial,” (ii) the meaning of the phrase “used in the active conduct of a trade or business,” (iii) a method for measuring the portion of intangible property used in a business, and (iv) a method for determining whether a business’s intangible property is used in the OZ. (For additional discussion, see page 16 of the OZWG Dec. 28, 2018 letter to the IRS.)

6. Reasonable working capital definition. Proposed regulations created a reasonable working capital safe harbor for qualified OZ businesses to acquire, construct and/or substantially improve tangible property. However, new and expanding operating businesses also need working capital to cover expenditures such as payroll, inventory and occupancy costs during the startup phase. A similar working capital safe harbor is needed for operating expenditures. (For additional discussion, see page 12 of the OZWG Dec. 28, 2018 letter to the IRS.)

7. Substantial improvement and aggregation of assets. Qualified OZ business property must have its original use in an OZ with a QOF or a qualified OZ business, or the QOF or qualified OZ business must substantially improve the property. Property is treated as substantially improved by the QOF or a qualified OZ business only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the QOF or qualified OZ business exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the QOF or qualified OZ business. To facilitate the qualification of an existing operating business as a qualified OZ business, it would be quite helpful if, at the election of the taxpayer, the substantial improvement requirement could be met by an operating business on an aggregate basis–where the acquisition of tangible property over any 30-month period exceeds the aggregate adjusted basis of existing tangible property held by the business at the beginning of a 30-month period. (For additional discussion, see page 2 of the OZWG Dec. 28, 2018 letter to the IRS.)

Real estate

8. Refinancing in excess of basis. Guidance is sought on tax consequences for debt-financed distributions from a partnership QOF, especially due to an increase in the fair-market value of a business. At issue is whether such distributions trigger recognition of deferred gain or affect qualification for the 10-year hold fair-market-value step-up election. (For additional discussion, see page 8 of the OZWG July 16, 2018 letter to the IRS.)

9. Substantial improvement requirement for unimproved land. It remains unclear whether unimproved land needs to be substantially improved to meet the substantial improvement test and Treasury could settle that issue. (For additional discussion, see page 9 of the OZWG Nov. 26, 2018 letter to the IRS.)

10. Original use requirement and vacant buildings. The proposed regulations ask whether some period of abandonment or underuse of tangible property erases a property’s history of prior use in the OZ and if so, should such a fallow period enable subsequent productive use of the tangible property to qualify as “original use.” To facilitate the improvement of vacant or underused property, prior use should be disregarded for property vacant or idle for at least a one year. (For additional discussion, see page 1 of the OZWG Dec. 28, 2018 letter to the IRS.)

11. Treatment of IRC Section 1231 Gains. Section 1231 gains are required to be netted with Section 1231 losses to determine the amount, if any, of capital gains a taxpayer has. This brings into question when the 180-day window to invest Section 1231 gains begins, and whether partnerships can invest gross Section 1231 gains into a QOF. (For additional discussion, see page 4 of the OZWG Dec. 28, 2018 letter to the IRS.)

12. 31-month working capital safer harbor–issues beyond taxpayer’s control. The proposed regulations provide qualified OZ businesses with a 31-month safe harbor to hold funds, but make no provision to extend that period for issues beyond their control. It is not uncommon for real estate and other developments to experience delays that are beyond the businesses control–such as delayed permitting and other municipal approvals, contract disputes, supply embargoes, labor stoppages, extreme weather events and national disasters. Additional flexibility is needed to give investors comfort that businesses experiencing these unforeseen delays will not be disqualified. (For additional discussion, see page 12 of the OZWG Dec. 28, 2018 letter to the IRS.)

13. Residential rental property and triple net leases. Guidance is needed as to whether renting property pursuant to a triple-net lease can be an active trade or business and final confirmation is desired that operating residential rental property can be an active trade or business. (For additional discussion, see page 10 of the OZWG Nov. 26, 2018 letter to the IRS.)

Renewable energy:

14. Depreciation recapture under Section 1245. The sale of a partnership QOF interest, after holding the investment for 10 years, will generally result in no net gain, because of the 10-year hold fair-market-value election. However, if the QOF has a direct or indirect partnership interest in depreciated personal property, it is unclear if the investor must recognize ordinary income recapture and a corresponding capital loss. This issue is particularly significant for the renewable energy community.

Corporations:

15. Consolidated group rules. Neither the statute nor the regulations address whether capital gains of one member of a consolidated return group of corporations can be treated as capital gain of other members of the consolidated return group so that gains may be aggregated under a single deferral election by the consolidated return group for purposes of the OZ statute. Guidance is needed as to the proper treatment of QOF investments within a consolidated group. (For additional discussion, see page 10 of the OZWG Dec. 28, 2018 letter to the IRS.)

Fund management:

16. Reasonable time to invest and working capital allowance. QOFs need time to make investments. The OZ statute explicitly states that Treasury guidance is needed to provide a reasonable time for a QOF to reinvest the return of capital from the sale of investments in OZ property. Likewise, QOFs need adequate time to assemble and underwrite initial OZ property investments. Treasury regulations provided qualified OZ businesses a safe harbor, allowing funds to be held for up to 31 months if there is a written plan in place that follows specific requirements. A similar safe harbor is needed for QOFs. (For additional discussion, see page 1 of the OZWG Nov. 26, 2018 letter to the IRS.)

17. Interim gains at fund level. In the first tranche of guidance, Treasury asked whether interim gains should be subject to tax. If yes, an additional question is whether a partnership operating as a QOF can make the election on behalf of its investors to reinvest, rather than being required to make a distribution and for the investors to then reinvest in the same or another QOF. (For additional discussion, see page 1 of the OZWG Mar. 9, 2018 letter and page 2 of the OZWG Nov. 26, 2018 letter to the IRS.)

18. Time to reinvest interim gains for purposes of 90 percent test. If QOZP is sold for cash, it is no longer a qualified investment for the 90 percent test–but the OZ statute allows a reasonable time to reinvest. Treasury could provide a definition of “reasonable time,” which should be at least one year. (For additional discussion, see page 1 of the OZWG Nov. 26, 2018 letter to the IRS.)

19. Exit approach in wind-down period. The OZ statute provides a fair-market-value step-up benefit only if a taxpayer sells its investment in a QOF. That requirement is counter to the way funds generally unwind. Treasury could issue rules that provide that if a QOF disposes of assets after 10 years, pursuant to a plan of liquidation, then the QOF investors can treat such sales in a manner equivalent to selling an interest in a QOF.

20. Appreciated property contribution and carried interest. The statute and proposed regulations do not specify whether investments in QOFs must be cash, or can include property or services. Guidance is needed. If eligible investments include contributions of property, anti-abuse rules are needed to regulate contributions of appreciated property. (For additional discussion, see page 20 of the OZWG Dec. 28, 2018 letter to the IRS.)

This list of 20 OZ guidance areas that Novogradac is closely tracking is not an exhaustive list, but how they are addressed will go a long way in determining the success of the OZ incentive in facilitating the investment of equity capital in real estate and operating businesses in distressed communities. What issues would you add to this list? Email your ideas to [email protected].

Join us in Denver
Join OZ investors, fund managers, businesses, community leaders and advisers to discuss this guidance and other timely OZ topics at the Novogradac 2019 Opportunity Zones Spring Conference, April 25-26 in Denver.

Published by Michael Novogradac on Thursday, March 21, 2019 – 12:00am

David Nikoloff spends his days thinking about real estate and economic development in small Pennsylvania cities that have proud industrial pasts with names you might recognize, like Bethlehem Steel. In a changing global economy, while there’s still a lot of pride in Bethlehem or Lancaster or Reading, there seems to be less and less capital, especially for small businesses. It’s made it hard to bounce back after de-industrialization.

“With the consolidation of banks, some acquired market share and inherited a bank in Lancaster, and they honestly didn’t know what to do with it,” Nikoloff says. “God love ’em, but they knew nothing about south central PA or Berks County.”

Nikoloff is vice president for real estate lending at Community First Fund, a nonprofit loan fund based in Lancaster, Pennsylvania. Founded in 1992, the loan fund has built up a $42.5 million small business loan portfolio, with clients borrowing money to purchase and renovate buildings for everything from barbershops and a barber school, to locally owned grocery stores, restaurants, and cafe-bakeries. As a federally certified community development financial institution, no less than 60 percent of Community First Fund’s loans go to businesses located in low- and moderate-income census tracts.

Continue reading.

NEXT CITY

by OSCAR PERRY ABELLO

MARCH 26, 2019

Should the Treasury Department impose a community impact reporting requirement on Opportunity Zone investing? And what would a reporting framework even look like? Earlier this year, the U.S. Impact Investing Alliance, in partnership with Georgetown University’s Beeck Center for Social Impact + Innovation, created the Opportunity Zones Reporting Framework — a guideline that defines best

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March 27, 2019

• Muni mutual funds have drawn most cash since records began
• But analysts wonder if it’s based on reality or perception

The rally in the $3.8 trillion municipal-bond market is about to face a major tax-season test.

All year, analysts have credited the $10,000 cap on state and local tax deductions for driving a record-setting amount of cash into tax-exempt debt as investors look for ways to cut what they owe to the federal government. The wave of money helped propel a five-month rally that’s pushed yields on some municipal bonds to the lowest against Treasuries since at least 2001.

But it’s still not clear whether that influx was driven by investors who were sure to face higher tax bills — or those who just feared they would. Analysts are now watching to see if there’s a pullback after the last tax returns are due on April 15 should the hit be smaller than expected. And there’s also the chance some who are paying more this year will sell bonds to raise cash for their tax bills.

Continue reading.

Bloomberg Markets

By Amanda Albright

April 1, 2019

Taxpayers sought certiorari review of decision of the town’s board of review to sustain property tax assessment that was based upon assessor’s change in the classification of taxpayers’ property from agricultural and agricultural forest to residential.

The Circuit Court upheld board’s decision. Taxpayers appealed, and the Court of Appeals reversed. The Supreme Court granted certiorari review.

The Supreme Court of Wisconsin held that lots were chiefly put towards the growing of Christmas trees, apples, and hay, and thus were devoted primarily to agricultural use and were entitled to be classified as “agricultural lands” for tax purposes.

Two lots were chiefly put towards the growing of Christmas trees, apples, and hay, and thus were devoted primarily to agricultural use and were entitled to be classified as “agricultural lands” for tax purposes, where landowners maintained a barn and a one-acre apple orchard on the smaller of the two lots, the remainder of the lot consisting of untillable forest, apple trees were individually staked out and planted in clean rows, larger of the two lots contained a four- to five-acre Christmas tree farm and a three-acre hayfield, Christmas trees were individually staked out and planted in clean rows, and landowners consistently planted and harvested hay in the hayfield and planned to harvest the field again.

Tax matters partner for limited liability company (LLC) treated as a partnership for federal taxation purposes petitioned for review of final partnership administrative adjustment (FPAA) which denied worthless debt deduction for bridge loan to developer that developer had failed to repay.

The Tax Court held that:

• LLC was entitled to claim worthless debt deduction;
• State law supported finding that lender’s transfer of debt to LLC did not negate legitimacy of the debt; and
• Debt became worthless in tax year in which private activity bonds were terminated and district court dismissed developer’s counterclaims and affirmative defenses in foreclosure case.

Individual lender’s transfer of debt, a bridge loan he had extended to property developer, to limited liability company (LLC) in exchange for equity interest therein did not negate the legitimacy of the debt, and thus, debt was bona fide and LLC could claim a worthless debt deduction when developer defaulted on repayment of the loan; transaction postponed need for development company to repay the debt, it did not discharge the debt, and while the development company and LLC had common, related owners, they did not have identity of ownership, and further, bona fide debt existed between development company and LLC, since LLC held a promissory note with a fixed maturity date and accrued interest at above-market rate, interest increased upon default, and at time of note’s transfer, LLC fully intended to collect the debt from development company.

State law supported finding that individual lender’s transfer of debt, a construction bridge loan to developer, to limited liability company (LLC) in exchange for equity interest therein did not negate the legitimacy of the debt, for purposes of LLC’s claimed worthless debt deduction when developer defaulted on repayment of the loan; the underlying debt continued to exist, as there was no novation, as required by state law to release debtor of its liability to a creditor, but rather, a creditor’s valid assignment of a promissory note.

Bridge loan to developer for construction project became worthless, for purposes of worthless debt deduction from income taxes, not in tax year that foreclosure proceedings were started or in tax year when final judgment of foreclosure was issued, but rather, in tax year in year in which private activity bonds were terminated, since note had value at beginning of that year, and with termination of the bonds, developer did not see viable means to obtain refinancing of the project, and also, the developer’s negotiations to avoid foreclosure broke down in that year and the district court dismissed developer’s counterclaims and affirmative defenses in the foreclosure case.

Plaintiff municipalities brought action against defendant municipalities, brokers, and internet retailers, seeking to recover use tax revenue that was purportedly unjustly retained by defendants under an alleged scheme by which they misreported situs of online retail sales.

The Circuit Court entered an order dismissing claims, and plaintiffs appealed. The Appellate Court reversed and remanded. Leave to appeal was granted.

The Supreme Court of Illinois held that Illinois Department of Revenue had exclusive jurisdiction over plaintiff municipalities’ claims against defendant municipalities, brokers, and internet retailers to recover use tax revenue that was purportedly unjustly retained by defendants under an alleged scheme by which they misreported situs of online retail sales, since Department was vested with sole authority to audit disputed transactions and to distribute and redistribute tax revenue due to any error.

The Internal Revenue Service (IRS) released 2019 population figures in Notice 2019-19, indicating the 2019 low-income housing tax credit (LIHTC) ceiling and tax-exempt private activity bond (PAB) cap for all states will increase. From 2018-2019, the U.S. population increased by 1,448,256 people to 327,167,434 in total, representing a 0.4 percent gain. U.S. territories lost more than 140,000 people, a 3.8 percent decrease.

The fiscal year (FY) 2018 omnibus appropriations bill provided a 12.5 percent increase in LIHTC allocations from 2018-2021. For 2019-2021, annual inflation adjustments would be applied to the new 2018 allocation amounts. Novogradac estimates the temporary 12.5 percent increase will increase affordable housing production by about 28,400 homes over 10 years compared to previous law.

Under Rev. Proc. 2018-57, each state’s 2019 LIHTC ceiling is the greater of $2.75625 multiplied by the state population or $3,166,875. The 2019 PAB volume cap is the greater of $105 multiplied by the state population or $316,745,000. With the increase in per-capita allowances, states that lost population but do not qualify for the small-state minimum, will not be seeing a decrease in their LIHTC and PAB cap. In 2018, the state LIHTC cap was the greater of $2.70 per resident or $3,105,000 and state bond caps were the greater of $105 per resident or $310,710,000.

Highlights from Notice 2019-19 include:

Fastest growth: Arizona and Idaho grew by more than 2 percent each, with total population changes of 155,376 and 37,265, respectively. Other states with at least a 1 percent increase in population include (in increasing order): New Hampshire, North Carolina, Montana, Oregon, South Carolina, Nevada, District of Columbia, Texas, South Dakota, Florida, Colorado, Washington and Utah.

Losing population: States that lost population include: Alaska, Connecticut, Hawaii, Illinois, Kansas, Louisiana, Maryland, New Jersey, New York, Rhode Island, West Virginia and Wyoming. Territories that lost population are American Samoa, Puerto Rico and the U.S. Virgin Islands.

New York saw the largest numeric decrease with a 307,190 population decline, representing a nearly 1.6 percent drop. The largest percent decrease is Puerto Rico, with a loss of nearly 4.3 percent of its population or 142,024 residents. The population 2019 population figures for American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands are the 2018 midyear population figures in the U.S. Census Bureau’s International Database and therefore, do not reflect the impact of the 2018 hurricane season.

Biggest states: The 10 most populous states continue to be California with 39,557,045, followed by Texas, Florida, New York, Pennsylvania, Illinois, Ohio, Georgia, North Carolina and Michigan. Eight of the top 10 states saw population increases for 2019. In addition to New York losing nearly 1.6 percent of its population, Illinois also lost 60,943 residents or nearly 0.5 percent of its population. Of all U.S. states with increases, Pennsylvania and California saw the smallest population percentage gain with 0.01 percent and 0.05 percent, respectively.

Small-State LIHTC Minimum: Because their populations are below the small state minimum, these states will receive LIHTC allocations of $3.167 million and not the population-based LIHTC allocation: Alaska, Delaware, the District of Columbia, Montana, North Dakota, Rhode Island, South Dakota, Vermont and Wyoming. U.S. territories are American Samoa, Guam, Northern Marian Islands and the U.S. Virgin Islands. This list of small-state recipients remains unchanged from 2016, 2017 and 2018.

Small-State PAB Cap Recipients:

The small-state PAB recipients for 2019 are the same as those in 2018, with the additions of Arkansas, Mississippi and Montana. Eighteen states, plus the District of Columbia will receive the 2019 small-state PAB minimum: Alaska, Arkansas, Delaware, the District of Columbia, Hawaii, Idaho, Kansas, Maine, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, West Virginia and Wyoming.

Published by Michael Novogradac on Tuesday, March 19, 2019

Democrats’ talk of higher taxes for the rich might intensify interest in state and local government bonds, where income is often exempt from taxes.

Tax-loss harvesting in municipal bond portfolios can allow investors to offset tax liabilities stemming from capital gains in other asset classes—as long as investors and advisors do their homework.

“Basically, when rates go up investors will potentially experience capital losses on munis—and that’s when tax-loss harvesting gets powerful and interesting,” said Alex Etzkowitz, vice president of investment research and strategy at Gurtin Municipal Bond Management in Solana Beach, Calif. “Investors can swap into other bonds, lock into the same amount of income and actually take advantage of losses to offset gains elsewhere. This is unlike tax-loss harvesting with equities, ETFs and mutual funds, which simply defers payments of taxes into the future and effectively postpones the capital gains tax burden.”

In a simple example, your client purchases a municipal bond at $120 that is now priced in the marketplace at $110. He or she realizes a $10 loss on the sale and reinvests into a similar security with an identical maturity date, priced at $110. When the bonds mature, there are no capital gains because the purchases were executed above par. But the client has locked in a $10 capital loss that can be used to offset other gains realized through other investments.

Historically, muni bonds have outperformed Treasurys after the hiking of top marginal tax rates. “For top taxpayers, municipal bonds should be a core piece of an overall asset allocation,” Etzkowitz said.

High-earning individuals are often better positioned to realize the most benefit from tax-free municipal bonds, said Jim Barnes, director of fixed income at Bryn Mawr Trust in Bryn Mawr, Pa., especially after tax reform introduced limitations on such long-standing deductions as state and local tax and property (SALT) tax.

Muni bonds have become desirable to wealthy investors in high-tax states such as California and New York, where the limitation on the SALT deduction hit hardest.

“We have a few clients in which we do manage a tax-free bond mutual fund portfolio for them in their taxable accounts and we’re able to generate fairly comparable yields after taxes to stocks and other taxable bond portfolios,” said Bruce Primeau, president of Summit Wealth Advocates in Prior Lake, Minn. He cited the example of managing a portfolio that is 55 percent stocks and 45 percent bonds for a couple that lives in Texas, which has no state income tax. “They do have about $1 million in tax-deferred accounts, but several million dollars in a taxable joint account,” he said. “We have to manage a bond component in their taxable account to keep their overall asset allocation in line. In their case, we own a few different municipal bond mutual funds to construct a short-to-intermediate municipal bond portfolio for them, and it’s been generating a little over 2 percent after-tax return for them each year.”

The market comes with potholes. “The municipal bond market is thin and not efficient for trading,” said William Velekei, a CPA and financial advisor with Corbenic Partners in Bethlehem, Pa. “Investors have more attractive pricing trading larger bond lots than those who trade smaller lot sizes. One strategy we recommend is building out and owning individual bonds in a laddered portfolio. It hedges against the risk of rising interest rates by reinvesting maturing bond proceeds, and it diversifies the holdings of the individual bonds across multiple issuing agencies.”

Velekei’s firm has clients who live in states that have above-average state income tax rates. “This strategy gives us the flexibility to customize a municipal bond portfolio that not only maximizes the benefit at a federal tax level but also at the state income tax level,” he said.

But he had one note of caution: “Municipal bonds are often thought of as safe and conservative. The majority are. But individuals should be aware that not all states, municipalities or agencies have the same credit quality,” Velekei said.

FINANCIAL ADVISOR

by JEFF STIMPSON

MARCH 18, 2019

Taxpayer, a limited liability company (LLC) that owned a condominium in New York City, brought article 78 proceeding to annul rules of the Department of Finance of City of New York which retroactively eliminated eligibility for a tax abatement for corporate and other non-individual owners of condominiums and cooperative apartments.

The Supreme Court, New York County, denied the petition, and taxpayer appealed.

The Supreme Court, Appellate Division, held that:

• Department’s determination that the term “primary residence” in statute granting a partial tax abatement for cooperatives of condominiums referred to the dwelling place of individuals and did not apply to corporations, LLC partnerships or other entities was not arbitrary or capricious, and
• Department did not violate taxpayer’s due process rights when it restored erroneously abated taxes for four years.

Determination by the New York City Department of Finance that the term “primary residence” in statute granting a partial tax abatement for cooperatives or condominiums referred to the dwelling place of individuals and did not apply to corporations, limited liability company (LLC) partnerships or other entities was not arbitrary or capricious; determination was consistent with dictionary definitions and common usage of the term, and was also consistent with legislative history.

New York City Department of Finance did not violate due process rights of taxpayer, a limited liability company (LLC) that owned a condominium in city, when it restored erroneously abated taxes for four years after determining that the statute granting a partial tax abatement for cooperatives or condominiums did not apply to units owned by LLCs; statute’s primary residency requirement was made retroactive, and the retroactivity provided for in the statute was not excessive.

After county board of equalization and review affirmed Tax Administrator’s decision to allow assessment of tax deficiency issued by county office of tax assessor against taxpayer for unpaid taxes on goods taxpayer offered to customers through “lease purchase” agreements, taxpayer appealed, arguing that such property was inventory exempt from taxation.

The Property Tax Commission, sitting as the State Board of Equalization and Review, determined that property in physical possession of taxpayer’s customers pursuant to “lease purchase” agreements was subject to ad valorem taxation. Taxpayer appealed.

The Court of Appeals held that:

• Taxpayer’s transfers of property did not constitute sales, and thus transferred property was not exempt from taxation; and
• Statutory definition of “inventory” did not include goods taxpayer transferred to customers.

Taxpayer’s transfers of property to customers through “lease purchase” agreements did not constitute sales, and thus transferred property was not exempt from taxation as “inventor[y] owned by retail and wholesale merchants”; customers were under no obligation to purchase leased property or to pay total purchase price of property, and were permitted to return leased property at any time without penalty, and price to purchase leased property through purchase option was higher than price for purchasing property directly.

Statutory definition of “inventories” as goods “held” for sale in regular course of business did not include goods taxpayer transferred to customers through “lease purchase” agreements, where property was in customers’ possession.

Washington state, which gave Boeing $1 billion over the past four years, has a well-established system to evaluate tax deals. Many governments don’t.

SPEED READ:

• Boeing has received roughly $1 billion in tax incentives and credits from Washington state over the past four years.
• Washington is one of 30 states that regularly evaluates corporate tax incentives.
• Only a few cities regularly track and assess these business deals to see if the promised results were achieved.

The aircraft manufacturer Boeing has received roughly $1 billion in tax incentives and credits from Washington state over the past four years. That includes tens of millions of dollars for activities in 2017 related to production equipment for the 737 MAX jets, all of which have been grounded in the past week after two fatal crashes.

That information is known because Washington state has one of the more well-established tax incentive evaluation programs in the country. As corporate tax breaks — like the ones used to lure Amazon’s HQ2 — have come under increasing scrutiny, more states are tracking them and attempting to ensure that the businesses that receive them are holding up their end of the deals.

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GOVERNING.CCOM

BY LIZ FARMER | MARCH 20, 2019 AT 4:00 AM

The Opportunity Zone tax incentives created by the federal Tax Cuts and Jobs Act of 2017 seemed to be a perfect opportunity to spur development of environmentally impaired properties, known as brownfields, in economically distressed communities. But the IRS draft regulations currently under consideration do not appear to allow for inclusion of brownfields in the program. That could mean, for lack of a better description, a real lost opportunity for many communities since brownfields often are in the very areas that the Opportunity Zone program is intended to benefit.

The tax law created Opportunity Zones, which now have been designated in all 50 states, the District of Columbia and five U.S. territories, to provide tax benefits to investors in the form of deferred tax on gains invested in a Qualified Opportunity Fund (QOF) until they sell or exchange the investment in the fund or December 31, 2026, whichever is earlier. Depending on how long the investment is held, up to 15 percent of deferred gain can be excluded. If held for more than 10 years, the investor will not be taxed on any gain from a sale or other disposition of the interest in the QOF. Many investors and economically distressed areas have been eager to take advantage of the program.

Not coincidentally, many Opportunity Zones have properties that could qualify for inclusion in the federal Environmental Protection Agency’s (EPA) Brownfield Program, which has existed for a number of years to cleanup and reuse properties that sit idle due to environmental contamination. Although the Opportunity Zone provisions and the Brownfields program seem like a match made in investor-heaven, the EPA pointed out in comments on the IRS proposed regulations and guidance that brownfields may not fall within the definitions of property that qualifies for the incentives.

The statute requires that at least 90 percent of a QOF’s assets be Qualified Opportunity Zone (QOZ) property, which ultimately requires direct or indirect ownership of “qualified opportunity zone business property.” To be QOZ business property, the “original use” of the property must commence with the QOF or the QOF must make “substantial improvements” in the property within 30 months of acquisition. “Substantial improvements” generally means additions to the property’s basis greater than the adjusted basis of the property at the beginning of the 30-month period.

For brownfields properties, the “original use” and the “substantial improvement” requirements are potentially problematic. A property is a brownfield in the first place because its former use(s) caused environmental contamination that render it uneconomical to redevelop without substantial remediation. Under the current “original use” test, this prior use of a former factory site requiring extensive remediation means that the “original use” cannot begin with the QOF. Further, in Rev. Rul. 2018-29, which provides guidance on the meaning of “substantial improvement,” the IRS indicated that the substantial improvement rules do not apply to land. Even if the remediation qualified as “substantial improvements,” they do not have much chance of completion in the 30-month window for “substantial improvement.”

The EPA’s comments to the IRS recommend defining “original use” to incorporate brownfields properties located in QOZ. Thus, if a brownfields remediation firm buys a contaminated property in a QOZ with the intent to remediate the property and redevelop it for a new use, the EPA suggests that the brownfield status should qualify as the “original use.” Similarly, the EPA recommended that the IRS treat the “original use” of property that has been vacant or underutilized for a year or more as commencing with the QOF, and allow foreclosed and tax-reverted properties held by local governments to be treated as “underutilized or abandoned” property. If adopted, this recommendation would allow the QOF to satisfy the 90 percent test during the remediation period.

The EPA also recommended that the IRS treat the environmental assessment, cleanup and other site preparation costs as expenses meeting the “substantial improvement” test. Rev. Rul 2018-29 appears to apply only to improvements to a building, which would leave out the critical improvements to the land necessary to make a brownfield ready for redevelopment. If adopted, this recommendation would resolve the potential ambiguity as to whether improvements to the land itself count towards the necessary investment to constitute a substantial improvement. Finally, the EPA recommended that IRS allow carryover of gains from QOF investments in brownfields properties to other QOF investments and stacking of QOF investments of brownfield properties.

The IRS held a public hearing last month after having to delay the hearing from January 2019 due to the government shutdown. The final version of the regulations are expected any time. It is, however, unclear whether the IRS will adopt any of these recommendations in its next iteration of the regulations. The IRS’s clarification on this and other issues is time sensitive — the elimination of the 15 percent of capital gains invested in a QOF requires a seven-year holding period in the QOF. This means December 31, 2019, is the last day to make the investment to meet this holding period by the end of 2026, the year in which the deferred gain is recognized.

Lane Powell PC

March 15, 2019

AVONDALE, Ariz. — A hotel groundbreaking ceremony here in an old cotton field not far from Interstate 10 last month featured two United States senators, a hot catered lunch and a stream of speeches about driving economic investment to this corner of the Southwest that is still recovering from the Great Recession.

Whether they were celebrating the beginnings of a wave of investment in distressed parts of America, or just another Marriott property, could hinge on a coming decision by the Trump administration.

A new batch of tax regulations from the Treasury Department will establish the most comprehensive guidelines yet for what sorts of investments qualify for tax benefits associated with opportunity zones, which were created by the 2017 tax law, and how investors must proceed in order to take advantage of them.

Potentially billions of dollars are waiting on the Treasury’s decision. Civic leaders in areas like Avondale, which is still hurting from the 2008 housing crisis, are hoping the rules will be broad enough to improve the odds of attracting new businesses that offer well-paying jobs to residents. Investors, eager to put money into the tax-advantaged opportunity zones, are also clamoring for guidelines that could determine the types of projects they can back.

Among the money dependent on the Trump administration’s rules is $22 million in investment guarantees, to be announced Monday by the Kresge Foundation, to support two socially conscious investment funds that hope to pour $800 million into manufacturing, clean energy and other business development in Opportunity Zones.

The zones are a creation of President Trump’s signature tax law that use tax advantages to lure capital to economically lagging cities, suburbs and rural areas. So far, they have stirred growing investor interest, including from Wall Street, and criticism from some tax experts who worry they will serve mostly as a handout to the rich.

Most of the projects spurred so far by the zone designations are real estate, like condominium developments, or hospitality, like the SpringHill Suites by Marriott project started here in Phoenix’s west suburbs by a private equity group called Virtua Partners.

Whether the zones can ultimately spur other types of investment, like small businesses and start-up technology companies, will depend on how the rules are structured. Treasury officials have sent the White House a draft version of what will be the second batch of regulations governing so-called opportunity funds, which invest in Opportunity Zones, and what types of investments can qualify for the special tax treatment.

The tax break works by allowing investors to roll capital gains from other investments into the funds. Taxes on those original gains are deferred and, if the investment is held for several years, can be sharply reduced. Adding to the attraction is the potential for investors who hold their money in the opportunity fund for a full decade to be exempt from any capital gains taxes on that investment.

Conflict over the regulations reflects, in part, a tension among officials concerned most with limiting the potential for investors to exploit loopholes in the program in order to reduce their tax bills, and those most concerned with maximizing investment in struggling parts of America.

In the first batch of regulations, Treasury officials took a more restrictive approach, according to documents obtained through a Freedom of Information request. But those were ultimately overruled by the White House, which prevailed on several points that investors had championed, those records show.

A recent Internal Revenue Service hearing on what will be the second batch of regulations was dominated by investors and civic leaders requesting changes and additions to the rules in several areas that could deter investment in start-up companies.

Those include a provision that currently requires qualifying businesses to earn 50 percent of their income inside the zones, which would seem to limit businesses that make money by exporting goods or selling them online. Investors are also seeking flexibility to sell their stake in a business before the end of a decade and use the proceeds to invest elsewhere in an opportunity zone.

Investors also want to clarify a rule that forces them to “substantially improve” an asset in order to qualify for the tax benefit, to ensure that biotech, software and other start-ups that deal largely with intellectual property can meet the test.

“The second tranche of regulations is a moment of truth for investors and communities,” said John Lettieri, the president of the Economic Innovation Group think tank, who was an architect of the Opportunity Zone concept. The difference in potential investment in the zones between favorable and unfavorable regulations, he said, “is orders of magnitude.”

While investors wait for clarity, the existing regulations have “frozen some of the market for business investment,” said Steve Glickman, another architect of the concept who now runs an Opportunity Zone-related consulting business called Develop L.L.C., and who has produced an Opportunity Zone Index to help investors find and select promising zones for projects.

The Kresge guarantees, for example, are meant to help two funds — run by Arctaris in Boston and Community Capital Management in Fort Lauderdale, Fla. — deploy $800 million into Opportunity Zone projects like solar farm development in Flint, Mich. In exchange, the funds are committing to a set of rules that would require them to invest in creating living-wage jobs, form community advisory boards and seek to avoid displacing residents from those zones. They will also compile and share data on the quality and impact of their investments, which is not currently required by the federal government.

But they are dependent on the outcome of the regulations, and whether they will encourage business projects. “These are practical concerns for us,” said Aaron Seybert, a social investment officer at Kresge. “We need to quantify the risk that we’re taking.”

The existing regulations have made that calculation relatively easy for real estate investors, who are accelerating previously planned projects in the zones and starting new ones that might not have worked without the special tax treatment. That activity has already paid off for incumbent landowners in Opportunity Zones, according to research by the real estate firm Zillow: Average sales prices in the zones jumped 25 percent last fall, compared with the year before.

City officials welcomed the new hotel to Avondale, a majority-Hispanic city of 84,000 people that is still recovering from the burst housing bubble a decade ago. At one point, 40 percent of the city’s homeowners were underwater on their mortgage or had fallen into foreclosure.

Conditions have improved, slowly, and developers have added 200,000 square feet of new retail space in the last five years, city officials said. But Kenn Weise, the mayor, said the city still needed help — and real-estate development won’t do it alone.

The city, Mr. Weise said, needs to revitalize its historic downtown, which has fallen on hard times, and it needs businesses to employ the more than 80 percent of workers who live here but endure long commutes to other parts of the metro area, where the jobs are.

“This part of it is easy,” Mr. Weise said under the shade of a white tent here recently, gesturing toward the row of shovels that were about to break ground on what will be the latest in a recent string of new hotels near the freeway in and around Avondale. “This is the low-hanging fruit.”

The more far-flung dignitaries gathered for the ceremony made similar points, even as they praised Virtua and Hotel Equities, the company that will manage the new hotel. “At the end of the day, real estate development is a very important step forward,” Senator Tim Scott, Republican of South Carolina and the principal champion of the Opportunity Zone provision in the tax law, said in a brief speech. “Bringing jobs into the community is a leap forward.”

Virtua Partners has 15 projects in the works in the Phoenix area alone, including a townhouse development on the site of a crumbling RV park in nearby Surprise, and more than 100 total projects planned in zones around the country. Construction in the Avondale cotton field will create 120 temporary jobs and 30 permanent ones in the hotel, which officials at the groundbreaking promised would provide pathways for employee advancement.

“Our goal is to give everyone the opportunity to move into the middle class,” Quinn Palomino, Virtua’s chief executive, said at the groundbreaking, which along with Mr. Scott also featured Senator Martha McSally, Republican of Arizona, and Jan Brewer, the state’s former governor.

But even real estate investors would like more from the Treasury in the next round of regulations. In an interview, Ms. Palomino said she hoped the government would mandate reporting on metrics such as the number of jobs and affordable housing units created in the zones.

“Everyone’s running to this industry,” including a lot of people without the background in real estate development, she said. “It’s pretty scary out there, some of the projects that are coming in. Kind of, two guys in the back of a van, trying to get an Opportunity Zone project done.”

The New York Times

By Jim Tankersley

March 17, 2019

Washington’s political rancor is rippling across the nation’s real estate industry, as the recent federal shutdown has delayed a plan to unleash trillions in property investment in the country’s biggest cities and most impoverished communities.

Specifically, the delay has affected new rules for investing in so-called Opportunity Zones, and in the process has prevented many investors from exploiting one of program’s key benefits: the ability to sell long-held properties, more or less tax free.

The potential payoff, which limits capital gains taxes on investment gains that are then reinvested in Opportunity Zones, stems from a little-known provision in the federal tax code changes passed by Congress in 2017.

Continue reading.

By Jeff Jeffrey – National Digital Producer, The Business Journals

Mar 15, 2019, 1:12pm EDT

“If you simply try to impose something on a community, you do so at your own peril,” says one mayor. This and other themes emerged this week at a summit focused on the program.

STANFORD, Calif. — Mayor Sly James, of Kansas City, Missouri, says the Opportunity Zones in his city are getting ample attention from investors and developers, but emphasizes that it’s going to take more than that to make the program a success.

“There’s a high level of interest,” he told Route Fifty here Monday during a summit of about 400 state and local leaders, investors and others gathered to discuss the economic development program. “There’s people that want to make the investments.”

But some, James says, are eying ventures that may not mesh with the city’s overall vision for developing the zones—census tracts that are eligible for investment under the program.

“We’re saying, ‘No, no, no, no, no.’ We’re not going to have these little scattershot one-off projects,” he said. “We want transformative things. So everybody cool your jets. Let’s focus this.”

Monday’s summit shed more light on how governments, the investor community, and nonprofit organizations are approaching Opportunity Zones, a program designed to stimulate investment in low-income areas by offering taxpayers a federal tax break on their capital gains.

Attendees stressed that community engagement will be crucial in any places where investment does take place. There was also discussion about the need for working across agencies and levels of government as the public sector interacts with potential investors in the zones.

And there was talk about the key role philanthropic organizations and foundations may have to play as the program continues to unfold.

“This is one of those moments when we have to go on offense,” said Mary Ellen Wiederwohl, CEO of Louisville Forward, an economic development agency in Louisville, Kentucky.

Wiederwohl says there’s a need for cooperation among agencies involved in economic development, land use and permitting, with the aim of providing “concierge service” when inquiries comes in from prospective Opportunity Zone investors and developers.

“You don’t have to go: ‘Well, call the planning department and get back to me on what they say,’” she said. “You’re going to lose that deal.”

Ben Seigel is Baltimore’s point person for Opportunity Zones. In his remarks he bemoaned that he was appearing at the event days after The New York Times Magazine published an article headlined: “The Tragedy of Baltimore,” billed as a look at “the crackup” of the city.

But he said in his work he’s trying to serve as sort of a “Match.com” for investors and projects in the city that might be a good fit for them.

He noted that Baltimore has launched a “neighborhood impact investment fund” backed by lease revenues from city-owned parking facilities and that the fund will operate alongside the so-called “opportunity funds” that will make investments in zones.

Route Fifty

By Bill Lucia,
Senior Reporter

MARCH 19, 2019

Can blockchain technology revolutionize Opportunity Zones real estate investing? Security token offerings utilizing distributed ledger technology enables tokenization of assets, increased liquidity, reduction of costs, and improved transaction speed. And it has the potential to change how properties are sold and how deals are recorded. Josh Burrell and Lane Campbell at Activated Capital have an

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Opportunity Db

March 20, 2019

Read the Client Alert.

Hunton Andrews Kurth | Mar. 13

Following last month’s hearing on Qualified Opportunity Funds, the IRS has completed its second tranche of regulatory guidance.

Yesterday, the proposed rules were submitted to the Office of Information and Regulatory Affairs for review. OIRA is a branch of the White House’s Office of Management and Budget.

OIRA will now review the proposed guidance for at least 10 days before releasing them for publication in the Federal Register.

Issues that the publication may clarify include: Opportunity Zone business qualification requirements, 70% and 90% asset test requirements, interim gains reinvestment, treatment of land, treatment of refinance proceeds, the substantial improvement test, treatment of multi-asset funds, treatment of carried interest, and depreciation recapture treatment, to name a few.

OpportunityDb

By Jimmy Atkinson

March 13, 2019

Fitch Ratings-New York-11 March 2019: Recent US state tax revenue data affirms Fitch Ratings’ view that the passage of the federal Tax Cuts and Jobs Act (TCJA) in December 2017 would contribute to abnormal state revenue volatility and uncertainty. We expect volatility to continue in 2019, but lessen over the next several years as taxpayers and states adjust to the changes, particularly the cap on State and Local Tax (SALT) deductions. Long-term state credit implications from the TCJA should be broadly limited but there are risks of variable effects depending on the state and reduced revenue-raising flexibility.

State personal income tax (PIT) revenue data for January showed a notable deterioration. The median change in PIT revenue for 33 reporting states was basically flat, growing only by 0.1% yoy. A significant majority (29) of those states showed either a deceleration in the rate of PIT revenue growth or an outright yoy contraction. The weak PIT data for January was a marked contrast to the same period in 2018, where 100% of reporting states showed acceleration in revenue growth and the median growth rate was 8.8% yoy.

PIT revenue data also contrasted with sales and use taxes (SUT), which broadly increased. For reporting states, median SUT revenue grew by 4.6% yoy in January versus 3.3% in January 2018. Furthermore, 34 of 36 reporting states that have a SUT showed an increase in the SUT revenue growth rate in January.

The contrasting trends in PIT and SUT revenue growth and the significant volatility on the PIT side point to direct state revenue effects from the TCJA. It is notable that PIT revenue, on average, declined even as economic growth and labor market indicators showed positive trends during the period – factors which likely contributed to the improving SUT revenue trends.

The scale of PIT revenue growth change between January 2018 and 2019 is highly abnormal and points to specific taxpayer incentives caused by the TCJA, namely the $10,000 cap on SALT deductions. Taxpayers were incentivized to push non-withholding income into calendar and tax year 2017 to maximize deductions in the last year of uncapped SALT deductions, which bolstered December 2017 and January 2018 PIT revenue dramatically. Without this incentive, taxpayers may now push non-withholding income to the end of the tax filing season in April and May 2019. Under the pre-TCJA unlimited SALT deduction, taxpayers always had the incentive to pay their taxes by December 31 versus later in the tax filing season to bring the benefits of the deduction forward. Stronger capital markets performance in 2017 and sharp declines in December 2018 also contributed to these trends.

PIT revenue volatility is leading to uncertainty for state revenue outlooks this year. States generally anticipated some level of decline in PIT collections from last year’s record highs but the depth of the decline in December and January was a surprise. Some states experiencing yoy declines in PIT revenue through January, such as California, are anticipating strong rebounds in PIT collections by the end of the fiscal year. Other states, such as Maryland, are revising revenue forecasts downward to account for relative weakness seen to date. April and May revenue results will be particularly informative for states as they could confirm a significant shift in timing of tax filings and payments. In most cases, the data will come in before final budgets for fiscal 2020 are enacted, allowing states to make any final budgetary adjustments before the start of the new fiscal year.

We believe the recent revenue volatility is not likely to be sustained and should not have a direct, long-term fundamental credit effect for states, as TCJA results on PIT non-withholding collections peter out. However, unintended and indirect effects from the TCJA could have consequences for states. In particular, the SALT cap could affect revenue growth prospects and revenue-raising flexibility. Uncertainty over how individuals and companies adjust to the changes imposed by the TCJA could also lead to lingering complications for states’ revenue forecasting, making the budgeting process more unpredictable.

Contact:

Eric Kim
Director, U.S. Public Finance
+ 1 212 908 0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Arthur Tildesley
Analyst, U.S. Public Finance
+1 646 582-4749

Justin Patrie, CFA
Head of Fitch Wire
+1 646 582-4964

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

• Minnesota has 4th-highest state income tax rate in the U.S.
• Municipal bonds seen as way to reduce federal tax liability

It’s not only residents of high-cost coastal states that are plowing into municipal bonds as a haven from the new deduction limits. It’s happening in Minnesota, too.

Pinched by the new cap on state and local tax deductions, Minnesota residents are buying up municipal debt to reduce their tax burden because the securities pay interest that’s exempt from federal and state taxes. New York and California investors have gotten plenty of attention for helping drive a $20 billion influx of cash into municipal mutual funds in 2019. But there’s also more interest in the asset class by investors living in smaller high-tax states, asset managers say.

Minnesota had the fourth-highest top state income-tax rate in the country last year at 9.85 percent, according to TurboTax. That’s driven more interest in Eaton Vance’s $135 million Minnesota Municipal Income Fund, said Craig Brandon, co-director of state and local government bond investments at Eaton Vance Management. Of the company’s 17 state-specific municipal mutual funds, 16 have seen positive net inflows in 2019.

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Bloomberg Markets

By Amanda Albright

March 13, 2019, 10:32 AM PDT

In possibly less than two weeks, financial advisors and their clients may hear the answers they’ve been anticipating from the IRS about additional regulatory guidance on the Opportunity Zones-based capital gains tax waivers.

On March 12, the IRS dispatched to the White House’s Office of Information and Regulatory Affairs and the Office of Management and Budget its second tranche of proposed OZ program regulations.

This new set of rules will likely: “address what types of property qualify as qualified OZ business property; steps an OZ business must take to be qualified; the penalty for a qualified opportunity fund’s failure to meet the 90 percent investment standard; and more,” according to Novogradac, an organization of accountants that closely follows the new tax-sheltering option.

Plenty of FAs and their employers will welcome more details from the IRS about the program.

“While the proposed regulations addressed a number of key questions, many investors, practitioners, and community stakeholders are awaiting clarification on a number of open items,” Andrew Lee, who is head of Americas sustainable and impact investing at UBS Global Wealth Management, wrote in a report issued in January.

“Opportunity Zone” investments became an option for clients following the passage of the Tax Cuts and Jobs Act of 2017. Congress identified capital gains tax relief as a way to induce investment into long-neglected U.S. neighborhoods. Ultimately, the U.S. Treasury approved some 8,700 census tracts, located in all 50 states, as economically disadvantaged enough to be eligible for OZ investments.

But investors have been waiting for the IRS to finalize the regulations for the new program.

The IRS sent a first set of proposed regulations last year, and the White House and the OMB reviewed those for 36 days before releasing them for public comment. The OMB has a required 10 days of review before releasing any new proposed rules.

At a public hearing in mid-February on the IRS’s first set of rules, an overflow crowd lobbed a wide array of questions and recommendations at agency officials. Many commenters focused on ways to make it easier for investors to purchase stakes in operating businesses rather than just real estate properties in the OZ census tracts and still preserve the preferential capital gains tax treatment.

“This is obviously an exciting area of the tax law with a great deal of potential to have significant impact throughout various parts of the country. It’s also, as you well know, rules that are not particularly specific,” and leave a great deal of questions, Scott Dinwiddie, associate chief counsel for the IRS, told the audience at the start of that hearing.

Financial Advisor IQ

By Miriam Rozen

March 13, 2019

Through the Tax Cuts and Jobs Act passed in 2017, the federal government has created nearly 9,000 “Opportunity Zones” in the U.S. to stimulate investment in low-income communities. Thanks to the tax incentive attached to this program, around $20 billion in capital has already been raised in investment funds for development in the designated areas. However, money alone won’t be enough, according to Rachel Reilly, director of impact strategy at the Economic Innovation Group. Reilly sees the potential to unlock significant benefits through the Opportunity Zone program, but she says achieving that means overcoming obstacles.

“Across the nation, what I’m seeing are investors trying to find places to put capital and communities struggling with capacity issues and figuring out how to connect to investors and elevate the types of deals and the types of businesses that are going to be long-term beneficial for those communities,” Reilly says.

Neighborhoods that are Opportunity Zones have been short on investment for years so capital markets lack experience working in these communities. That means, Reilly says, working with local partners is critical to making sound investment decisions.

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NEXT CITY

by ZOE SULLIVAN

MARCH 12, 2019

Tax protester sought declaration that separate advisory votes were required for each tax increase in tax legislation.

The Superior Court dismissed the action. Protester appealed.

The Court of Appeals held that:

• Protester’s appeal was moot;
• Public interest exception to mootness doctrine applied;
• Phrase “not subject to appeal” applied only to short description to be placed on ballot for advisory vote; and
• Protester’s petition for declaratory judgment was untimely.

Exception to mootness doctrine for matters of continuing and substantial public interest applied to tax protester’s appeal from trial court’s denial of his petition for declaratory judgment as untimely, in protester’s action claiming that a separate advisory vote was required for each tax increase enacted by tax legislation; the content of a ballot and issues of statutory interpretation were generally matters of substantial public interest, the timeliness and appealability issues did not depend on the nature of the tax increases at issue, and whether separate advisory votes were required was an issue that would likely recur with each package of legislative tax increases.

Township brought mandamus action against city, city manager, and city finance director, seeking order compelling defendants to calculate and pay lost tax revenue associated with territory annexed to the city and subsequently excluded from the township 14 years later under conformity of boundaries statute.

The Supreme Court of Ohio held that:

• Current version of statute imposing duty to pay for lost tax revenue applied, but
• Township failed to show clear right to payments, as required for mandamus relief.

Current version of statute imposing legal duty to pay lost tax revenue to township upon annexation of territory and exclusion under conformity of boundaries statute, rather than prior version requiring payment only upon annexation, applied in township’s mandamus proceeding against city seeking payment of lost tax revenue with respect to territory annexed while prior version was in effect, but excluded after current version became effective; uncodified language of intervening version requiring application of prior version for annexations occurring while prior version was in effect did not apply, city’s claim of overpayment required evaluation of wisdom of current statute’s payment scheme, and application of current statute did not violate prohibition against retroactive legislation.

Township failed to demonstrate a clear legal right to payment of lost tax revenue for territory annexed by city, thus precluding mandamus relief; township did not identify the extent of annexed territory excluded from the township under conformity of boundaries statute, as required to calculate the amount of lost revenue, there was no evidence of the tax rate applicable to the territory, and failure of county auditor to create a millage rate for portion of township’s territory that overlapped with city did not excuse township’s failure to establish a clear legal right to the requested relief.

County board of revision and school board sought judicial review of a decision of the Board of Tax Appeals adopting an appraisal valuation that reduced the value of owner’s property.

The Supreme Court of Ohio held that Board properly applied collateral estoppel to preclude relitigation as to covenant that prohibited valuation complaints.

Non-enforceability of a covenant in a tax-increment-financing (TIF) agreement that purportedly prohibited property owner from contesting county auditor’s valuations of the property was actually determined in a prior decision of the Board of Tax Appeals, and thus the Board properly applied collateral estoppel to preclude school board’s attempt to relitigate the issue in owner’s subsequent appeal to the Board contesting the property’s valuation; the prior decision included a finding that the proponents of applying the covenant failed to prove that they were entitled to its enforcement, the prior decision made no statement about retaining jurisdiction in remanding to county board of revision, and Board’s remand order did not call for county board to reconsider whether to enforce the covenant.

Bipartisan Call to Make Permanent the Federal Tax Credit that Leverages Private Investment in Economically Distressed Communities, Expands Businesses and Creates Jobs

Washington, D.C. March 12, 2019 – Legislation was introduced in the House and Senate to secure the future of the New Markets Tax Credit (NMTC). Congresswoman Terri Sewell (D-AL) and Congressman Tom Reed (R-NY), introduced the House bill. In the Senate, the bill was introduced by Senators Roy Blunt (R-MO) and Ben Cardin (D-MD). The bills, both titled The New Markets Tax Credit Extension Act of 2019, would ensure that rural communities and urban neighborhoods left outside the economic mainstream have access to financing that stimulates economic growth and job creation.

Established in 2000, in the Community Renewal Tax Relief Act (P.L.106-554), also called the New Markets Tax Credit, is a bipartisan effort to drive economic growth in low-income urban neighborhoods and rural communities. Congress extended the NMTC for five years as part of The PATH Act. (P.L. 114- 113) in December 2015. As Congress and the Administration continue to push tax reform, organizations, businesses and communities that have seen the positive impact of the NMTC have increasingly urged Congress to make the credit a permanent part of the tax code.

“Last Congress, over 125 members of Congress from both parties cosponsored NMTC extension legislation. The strong support of the New Markets Tax Credit was a direct result of the tangible impact it makes in distressed rural and urban communities that have been left outside the economic mainstream,” said Bob Rapoza, spokesperson for the NMTC Coalition. “The NMTC has generated over 1,000,000 jobs and delivered $90 billion in total capital investment through public-private partnerships.”

A majority of the members of the House Ways and Means Committee cosponsored NMTC extension legislation last session, and the new bill starts off with support from 17 members of the powerful tax-writing committee.

U.S. Department of the Treasury data indicates that more than 72 percent of NMTC activity is in severely distressed communities with unemployment rates at least 1.5 times the national average or with poverty rates of at least 30 percent. In FY 2018 alone, the CDFI Fund, which operates the program at the Treasury, reported that the NMTC delivered nearly $4 billion in financing to 680 businesses, community facilities and economic revitalization projects. Communities put the capital to work, creating nearly 9,500 permanent jobs and almost 30,000 construction jobs in areas with high unemployment and poverty rates.

House and Senate lawmakers have added their own perspective to the introduction of this legislation:

“The New Markets Tax Credit is an essential tool for revitalizing rural and urban communities across the country, and is a proven, cost-effective incentive that spurs investment in areas by providing businesses with flexible, affordable access to financing. I am confident that extending the tax credit will continue to help attract new investment in Alabama’s 7th District. New Markets Tax Credits have helped spur a number of important projects in the 7th District, including financing the Entrepreneurial Center in Birmingham and transforming the Huyck Felt brick plant into a new wood pellet manufacturing facility in Aliceville, creating 275 jobs,” said Congresswoman Terri Sewell.

“We care about boosting jobs here in New York and across the country, but unfortunately some small businesses – the backbone of our economy – still struggle to secure a fair amount of capital to spur revitalization. By creating a better environment for businesses we will see transformative projects to thrive – boosting wages, services and economic development where it’s needed most,” said Congressman Tom Reed.

“The New Markets Tax Credit is a critical tool for encouraging new investment in areas that need it most. This program has a successful record of expanding economic opportunities and improving quality of life in areas across our state, whether it’s financing a training center for sheet metal workers in St. Louis or the first new grocery store in more than a generation in Pagedale. This program benefits families and local economies and urban and rural areas alike, and I urge all of our colleagues to support it,” said Senator Roy Blunt.

“In Maryland, the New Markets Tax Credit has been deployed across our state on a diverse range of infrastructure and community development efforts, from an affordable housing project to provide apartments for educators and teachers in my home city of Baltimore, to a multicultural center for low-income minority families in Langley Park. I am pleased once again to be a supporter of this bipartisan legislation, which will create jobs and stimulate our economy in communities across Maryland and across America,” said Senator Ben Cardin.

Senators Roy Blunt and Ben Cardin were joined by four original cosponsors, including Senators Chuck Schumer (D-NY), Rob Portman (R-OH), Tim Scott (R-SC) and Maria Cantwell (D-WA). In the House, Representatives Terri Sewell and Tom Reed were joined by Representatives Gwen Moore (D-WI), Earl Blumenauer (D-OR), Brian Higgins (D-NY), Suzan DelBene (D-WA), Bill Pascrell (D-NJ), John Larson (D-CT), Daniel Kildee (D-MI), Danny Davis (D-IL), Ron Kind (D-WI), Linda Sanchez (D-CA), Brad Wenstrup (R-OH), Jackie Walorski (R-IN), Mike Kelly (R-PA), Jason Smith (R-MO) and Darin LaHood (R-IL).

For examples of how the NMTC is making an impact in each state, see the NMTC Coalition’s NMTC at Work in Communities report or check out its Project Profile Map.

Posted on March 12, 2019 By Paul Anderson

Contact: Ayrianne Parks
[email protected]
(202) 393-5225

South Dakota v. Wayfair opened the door for new collections from online retailers, with several states currently considering plans.

State sales tax collections in the third quarter of 2018 outpaced average levels in recent years, a trend due at least in part to a Supreme Court ruling last summer that cleared the way for states to bring in additional tax revenues from online sales, new research suggests.

Last June, the U.S. Supreme Court in South Dakota v. Wayfair overturned prior rulings that had made it difficult for states to collect taxes on sales by out-of-state, or “remote,” online retailers. States made legislative and regulatory changes in the wake of the case, seeking to ensure they didn’t continue to lose out on these tax dollars.

Research the Urban-Brookings Tax Policy Center published this month shows general state sales tax collections grew 6.5 percent in the third quarter of last year, or 4.1 percent when adjusted for inflation, compared to the third quarter of 2017.

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Route Fifty

By Bill Lucia,
Senior Reporter

MARCH 15, 2019

“I want to make sure it works the way it was intended,” one Ways and Means Committee member said of the new program.

Congressional lawmakers stressed to Treasury Secretary Steven Mnuchin on Thursday that they want to see data and metrics for the Opportunity Zones program so that the initiative is transparent and its effectiveness can be assessed.

Their comments came during a House Ways and Means Committee hearing where Mnuchin testified. He fielded other questions related to Opportunity Zones as well, like whether the program could be expanded to more places and when people could expect a second round of promised regulations for it to be released.

Opportunity Zones were created under the massive tax package President Trump signed into law in December of 2017.

Under the program people and companies can get tax breaks on capital gains by funneling money into special funds that invest in economically distressed census tracts designated as zones.

U.S. Rep. Ron Kind, a Wisconsin Democrat, was one of the lawmakers who brought up the initiative in Thursday’s hearing.

“Right now there’s no accountability or data reporting requirements as far as where these investments are going,” he said. “Nor is there government data at this time tracking the number or the characteristics of the qualified opportunity funds.”

Kind expressed optimism about the program, but added: “I want to make sure it works the way it was intended.”

Mnuchin agreed that data collection and accountability are concerns. He told the lawmaker that if there is specific information he’d like to see collected, he should send the Treasury Department a letter describing it. “We will take that into consideration,” Mnuchin said.

Terri Sewell, an Alabama Democrat, also raised data collection and reporting issues, saying she wants to make sure metrics are tracked to show whether communities are benefiting from the program.

Mnuchin told her that the only reason Treasury has not issued guidelines around reporting and data collection is that the department did not want to rush the process of coming up with them.

“We want to have the proper reporting,” Mnuchin said. “We’ll work with you very closely.”

Sewell and Kind were among 16 House and Senate members who signed onto a letter in January that outlined concerns about the first round of proposed Opportunity Zones rules, issued last October.

One issue they addressed was to urge Treasury to include reporting requirements to prevent waste, fraud and abuse in the program and to help verify that is achieving desired results.

Sewell and a Pennsylvania Republican, Rep. Mike Kelly, both asked Mnuchin about the status of additional Opportunity Zones regulations Treasury and the IRS are working on. The secretary did not offer a specific date for when further guidelines might be issued, saying that they are going through a review process.

“I ask my team every day: ‘Where are they?'” Mnuchin said. “I hope this is a matter of weeks that we can get these out,” he added. “I can assure you this is on the top of my list when we have tax meetings every day.”

There are currently about 8,700 census tracts designated as zones around the U.S. These areas were selected by governors and approved by the federal government.

Mnuchin told the lawmakers that he does not believe the Treasury Department has legal authority to allow for any more zones to be designated, but that the department would be willing to work with lawmakers to pass the appropriate legislation to expand the program to more tracts if that is something that Congress is interested in.

Route Fifty

By Bill Lucia,
Senior Reporter

MARCH 14, 2019

How can real estate investing in opportunity zones create triple bottom line returns? And what are some ways we can measure the social impact of these investments? Loren Schirber is project pipeline manager for Minnesota Opportunity Zone Advisors, which recently started raising capital for their DREAM Fund. DREAM stands for “Developing Real Estate in Emerging

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March 13, 2019

BONITA SPRINGS, Fla. — A senior Treasury official said Thursday that consideration will be given requests by municipal bond market trade groups for allowing issuers of tax-exempt bonds to elect to declare when a reissuance has occurred.

Treasury also will consider requests for allowing qualified tender bonds to be remarketed at a premium after being converted to fixed interest rates to maturity, John Cross, associate tax legislative counsel at the Treasury’s Office of Tax Policy told attorneys attending a National Association of Bond Lawyer conference here.

“We are certainly receptive to relooking at that issue,” Cross said in reference to the request for permission to continue the remarketing at a premium.

Cross noted it wasn’t included in the proposed Internal Revenue Service rule on reissuance because of technical reasons.

All four industry groups that submitted comments on the proposed rule requested a continuation of the practice that allows remarketing reissuances at a premium.

The request was made in separate letters by NABL, the Bond Dealers of America, the Government Finance Officers Association and the Securities Industry and Financial Markets Association.

“If qualified tender bonds are forced to be sold only at par to avoid a reissuance, demand will decrease and issuer costs will increase, GFOA said. “Similarly, if a transaction does trigger a reissuance because they are sold at a premium, issuers would incur extra issuance costs.”

SIFMA said, “A rough estimate of the cost to a municipal securities issuer, of issuing par bonds instead of premium bonds, is approximately a 30-60 basis point differential on a 30-year level debt service structure.”

“Particularly in a rising interest rate environment, as a result of the de minimis rule, investors have an incentive to purchase premium bonds,” wrote Leslie Norwood, SIFMA managing director and associate general counsel.

The request for issuers to be able to declare a reissuance came from NABL but GFOA’s letter signed by Emily Brock, director of the federal liaison center, also asked for clarity as to when a reissuance takes place.

“Case in point – as state and local governments and entities continue to suffer the economic costs related to the loss of advanced refundings, many are looking for different ways to achieve the benefits that advance refundings provide, including interest savings for taxpayers,” GFOA wrote. “This includes executing ‘Cinderella’ bond transactions where taxable advance refunding bonds convert to tax-exempt bonds at the time of the call date for the refunded bonds.”

The BDA letter pointed out that remarketing at a premium has been allowed under IRS rules issued in 2008 as part of Notice 2008-41.

Cross, in his opening remarks for a panel discussion on reissuance, said tender bonds have become less important since the 2008 financial crisis and amounted to about $10 billion annually over the last two years.

“Since that time, the topic of tender option bonds has become less significant in the market because of the Fed’s zero interest policy and the last 10 years worth of really low interest rates,” Cross said. “Just to illustrate, in 2007 there were probably $100 billion in primary market tender option bonds.”

However, Cross emphasized that Treasury does not intend to use the proposed rules to change its policy. He said Treasury will “continue the special protection for the structure of tender option bonds and otherwise send people to the general significant modifications standard in Section 1001.”

As an illustration of how the proposed regulations will not change current practices, Cross said, “For tax exempt bond purposes, the intent was that both that the existence and exercise of qualified tender rights, basically the put option with certain features, do not give rise to a reissuance nor does the change in interest rate mode in the connection with the exercise of one of these puts.”

The comment letters submitted by NABL and GFOA also requested that Treasury address the phase-out of Libor and the transition to SOFR.

Cross said that issue will be addressed separately.

“We expect IRS and Treasury to put out guidance,” Cross said. “It’s really in more general tax guidance that would provide pretty broad relief for movement from Libor to some benchmark of this new benchmark rate by the Fed called SOFR.”

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 03/07/19 03:19 PM EST

SUMMARY

SIFMA provides comments to the Internal Revenue Service (IRS) in response to request for comment on proposed regulations that address when tax-exempt bonds are treated as retired for the purposes of section 103 and sections 141 through 150 of the Internal Revenue Code. (Re: REG–141739–08: Reissuance of State or Local Bonds)

Read Comment Letter.

 

• State’s bonds could get more valuable as tax shelters sought
• But some risk seen that wealthiest could move out of state

A millionaire tax is a Catch-22 for New Jersey’s bondholders.

Taxing the rich at higher rates — which Governor Phil Murphy proposed Tuesday as part of his $38.6 billion budget — would likely boost demand for municipal bonds because the interest is exempt from federal and state taxes. But at the same time, some investors say the Garden State’s precarious finances could be worsened if wealthy people start moving out of a state where high property taxes are already a major complaint.

“It’s going to be a tremendous balancing act because they’re going to see how far they can push these taxes without losing the entire population of wealthy individuals,” said Brad Harris, director of fixed income for Lantern Investments, which manages money for clients living in New Jersey.

Murphy came away from last year’s budget negotiations with a higher levy on incomes above $5 million, affecting about 6,700 people in and out of the state. In his budget speech in Trenton today, he said he could raise another $447 million on those earning at least $1 million. The hunt for extra money comes after New Jersey’s income-tax collections, the state’s biggest revenue source, fell 6 percent this fiscal year through January, in part because of a rush by wealthy residents to shift bonuses and other income into 2017 before President Donald Trump’s tax overhaul took effect.

That law has since driven a stampede into New Jersey bonds as residents seek to drive down their taxable income after being hit by the $10,000 cap on state and local deductions, which was broadly felt in the state. As a result, the extra yield that investors demand on New Jersey general-obligation bonds maturing in 10 years has fallen to 59 basis points, lower than the one-year average of 67 basis points, according to data compiled by Bloomberg, while bonds sold by borrowers in the state have outperformed the market.

A millionaire’s tax would add to the already-strong demand, said Gary Pollack, head of the private clients fixed-income desk at Deutsche Bank Wealth Management.

That demand has drive yields closer to the benchmark for certain New Jersey bond issuers, particularly the ones that don’t need state support, he said. Issuers that rely on funding from New Jersey’s general budget trade “much cheaper” because of concerns surrounding the state’s finances, he said. While both types of bonds will likely benefit from a millionaires’ tax — driving down borrowing costs for the state and local governments — he said it could act as a drag on the economy in the longer term.

It is “a mixed blessing for the state’s overall economy,” Pollack said. “While there’s an immediate boon to the state’s tax receipts, on a long-term basis it might be negative as affluent taxpayers flee the state for lower-tax states.”

But such concerns have been raised for years in states with high taxes, and whether such levies actually compel residents to move is still a subject of debate. Analysts from Morgan Stanley, for example, expressed skepticism that residents are fleeing high-tax states, saying the population loss in New York reflects the hollowing out of its manufacturing strongholds.

Taylor Financial Group, a wealth management company that specializes in high-net worth clients, has increased allocations to New Jersey municipals because of the new limit on state and local tax deductions, said Debra Taylor, principal of the firm in Franklin Lakes, New Jersey.

While buying more municipal bonds would blunt the impact of a millionaires’ tax on investors, residents are becoming increasingly squeezed by the high cost of living, she said. Taylor said she’s seeing more and more investors concerned about their taxes. In a Feb. 12 Monmouth University poll, 45 percent of residents said property taxes were the most important issue facing the state.

“The folks that are subject to this millionaires’ tax have options,” she said. “They’ll figure out a way to avoid the tax or declare residency in another state.”

Bloomberg Markets

By Amanda Albright and Claire Ballentine

March 5, 2019, 10:31 AM PST Updated on March 5, 2019, 11:35 AM PST

— With assistance by Martin Z Braun, and Elise Young

• ‘Demand has been huge’ as residents see their new tax bills
• New York City and California deals total around $3.3 billion

Wealthy investors from big coastal states will find an opportunity for refuge from the federal tax overhaul as California and New York City sell about $3.3 billion of tax-free bonds over the next two days.

Key Insights:

• The federal cap on state and local tax deductions has hit high-net-worth residents of states like New York and California hard. Analysts say they are now looking for investments that will help shelter some of their income, which has spurred demand for municipal bonds in their home states.
• Investors have poured $10 billion over eight straight weeks into municipal-bond mutual funds, according to Lipper US Fund Flows data.
• Supply of new municipal securities is also depressed because of a more direct effect of the federal tax overhaul: it banned a kind of refinancing known as advance refundings, contributing to a steep slowdown in new sales last year.
• While local governments have issued nearly $50 billion of new debt during the first two months of the year, that’s less than what was sold during the same period in 2015, 2016 and 2017, according to data compiled by Bloomberg.
• Demand outstripping supply had led to high prices of munis, with 10-year benchmark state and local government yields on Friday hitting the lowest against Treasuries since Bloomberg’s records began in 2001.

California’s $2.3 Billion Deal

• Individual investors on Tuesday can place orders for the state’s biggest general-obligation deal since August 2017, followed by institutional firms Wednesday. The offering is also the biggest for the municipal market in six months.
• Yields on California’s bonds have fallen close to those on top-rated securities, spurred by brisk demand and fiscal gains that have left the government with swelling surpluses. The state’s 10-year bonds yield about 2.23 percent, or 0.08 percentage point over the benchmark. That gap, a key measure of perceived risk, is down from 0.32 percentage point two years ago.

New York City’s $986 Million Deal

• The city’s sale comes after Friday’s rating upgrade to Aa1, the second-highest level, by Moody’s Investors Service. Individual investors are getting the first crack, with the bonds initially offered for yields of 0.05 percentage point to 0.20 percentage point over the benchmark, according to a person familiar with the matter.
• Pricing for institutional buyers will end Wednesday
• As with California, yields on the city’s bonds have fallen close to those on top-rated securities. On Thursday, the gap over the benchmark was just 0.07 percentage point in trading of already issued securities, the lowest since at least 2013, according to Bloomberg BVAL indexes.

Expectations

• California and New York will easily sell their deals, said Dora Lee, vice president at Belle Haven Investments.
• “Demand has been huge,” she said. “Everyone is getting their tax bills and realizing that munis are a very attractive place to be.”

Bloomberg Markets

By Romy Varghese

March 5, 2019, 5:19 AM PST

— With assistance by Danielle Moran, and Martin Z Braun

They’re supposed to help distressed communities. We need strong reporting requirements to make sure they’re really doing that.

When President Trump signed the Investing in Opportunity Act into law in 2017, it caught the attention of mayors and entrepreneurs as well as developers and investors. They all saw the promise to increase economic opportunities for the many communities that have increasingly watched those opportunities slip away.

By waiving capital-gains taxes for long-term investments in more than 8,000 designated low-income census tracts across the country — referred to as “opportunity zones” — the incentive is intended to stimulate commerce and create jobs in economically distressed communities.

But how will we know if it’s really working? The legislation currently has no built-in reporting requirements to make clear which projects received investment. Nor does it require managers to track or measure the impact on their communities.

An opportunity zones framework released in February by the U.S. Impact Investing Alliance and the Beeck Center at Georgetown University aims to elevate these essential considerations, ensuring that opportunity zone returns accrue equally to communities and to investors. The framework, funded in part by the Kresge Foundation, is an important first set of principles to guide this rapidly emerging market. But those principles are only as useful as their adoption. Unless the federal legislation is amended to include requirements for transparency, measurement and impact reporting, we’ll simply never know the full impact of opportunity zones in our communities. We won’t know if incentivizing investors with tax relief results in them making investments they otherwise wouldn’t have made.

Early media reports on projects receiving investment under the program have added to my worries. In Texas, for example, a commercial real estate company made a $16 million purchase of 10 acres of land outside San Antonio to build a storage warehouse. A waterfront hotel is being developed as part of a mixed-use project in Seattle. And luxury apartments are going up in Baton Rouge, La.

Perhaps there are unseen community benefits built in to these projects. But in principle, disinvested communities need more than storage, fancy hotels or unaffordable condos. They need deep investment in affordable housing, living-wage jobs and infrastructure. It’s hard to see how a facility for affluent homeowners to deposit their excess belongings will provide significant benefits to struggling neighborhood families.

Opportunity zone investments should breathe life into forgotten communities by funding public spaces and revitalizing shopping centers, schools or small-business corridors. They should give small entrepreneurs the boost they need to create jobs and economic opportunity for residents. Otherwise, capital will always flow to the lowest-risk, highest-return investments. It’s simple economics. The natural winners will not be residents of the economically distressed areas this legislation is supposed to help.

What if, as intended, opportunity zone investors were truly incentivized to focus on small storefronts and new ventures in rural Michigan or central-city Phoenix and not only on shovel-ready projects? In an age of growing income inequality, this program could facilitate an investment pipeline that lifts working families and that does not just reward the rich.

At the U.S. Conference of Mayors’ winter meeting in January, I joined a room full of policymakers from across the country to lay out the true promise of the opportunity zones program and how its risks can be mitigated. Simply adopting current reporting standards in place for another federal program, the New Markets Tax Credit Program, would largely remediate many concerns. It’s an easy fix.

At the Kresge Foundation, we’ve launched incubators for opportunity zone funds with measurable community impact objectives, and we’re implementing loan guarantees for organizations that will commit to reporting their true community impact. We’re also calling on philanthropic and financial institutions and policymakers across the country to speak out against investment strategies that do not create jobs and expand opportunities for the people who need them most.

This is a crucial moment. As we await the next round of regulatory guidance on opportunity zones, it’s an important inflection point for a piece of legislation that could do a lot of good in a lot of places. To fully realize that potential, policymakers need to incorporate guidelines that ensure that transparency, meaningful community benefit and broad geographic impact are achieved. If that happens, opportunity zones could chip away at inequality and increase opportunities for working families across the country.

governing.com

By Kimberlee Cornett | Contributor
Managing director of the Kresge Foundation’s Social Investment Practice

MARCH 7, 2019 AT 6:15 AM

Tax breaks to corporations in exchange for jobs are often modified — in secret — after the fact, a new study finds.

Governing magazine reports that the University of Texas at Austin studied 165 awards given out by the Texas Enterprise Fund, which manages such corporate incentives for the state. In 46 of those cases — about a quarter — the fund changed contracts after they had been finalized. In most cases, the changes were favorable to the company, lowering the number of jobs required to get the tax breaks, or changing the schedule for meeting those requirements. And many times, Governing says, the changes happened right before a company would be subject to provisions requiring it to pay back the incentives it received for not creating those jobs.

There might be more amended deals than included in the study, as many companies challenged UT Austin’s public-records requests during its research. “This finding, from a single state, is troubling,” Nathan Jensen, the study’s co-author, told Governing. “If companies can not only secretly renegotiate the rules, they can also make sure that public records laws shield them from revealing these renegotiations.”

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NEXT CITY

by RACHEL KAUFMAN

MARCH 7, 2019

What will business investing in opportunity zones look like? Coworking hub and startup incubator Launch Pad may offer the best example I’ve seen so far. The husband-wife team of CEO Chris Schultz and president Anne Driscoll are on a mission to create the world’s strongest community of entrepreneurial workers. They believe in a world where

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opportunitydb.com

March 6, 2019

Village filed criminal complaints against business operator and business, claiming that they had violated ordinance imposing a license fee upon owners of vehicles used for transportation or property, for hire and for use in the village.

After transfer from village’s mayor court, the Court of Common Pleas granted defendants’ motions to dismiss. Village appealed. Appeals were consolidated.

The Court of Appeals held that:

• Ordinance imposing a license fee upon owners of vehicles used for the transportation of persons or property, for hire and for use in the village, was a valid exercise of village’s taxing power;
• Home Rule Amendment’s did not bar village’s imposition of license fee; and
• Village’s argument that the trial court erred when it failed to apply the doctrines of res judicata and stare decisis when it considered motions to dismiss was moot.

Objector brought declaratory judgment action against county, challenging county’s assessment of increased property taxes.

The Superior Court, King County, dismissed action as untimely. The Court of Appeals reversed.

After grant of review, the Supreme Court of Washington held that:

• Proposed measure for increase in property taxes sufficiently described taxation structure which county later implemented, and therefore ten-day time limit for challenging measure’s ballot title applied;
• Challenges to a ballot title based on failure to comply with statute requiring a ballot title for a levy lid lift to contain an express statement in certain circumstances must be raised during the statutory ten-day time limit for challenges to a ballot title; and
• Challenges to a ballot title based on failure to comply with statutory accuracy and clarity requirements must be raised during the statutory ten-day time limit for challenges to a ballot title.

Local and State governments are working together to advance and streamline online sales tax collection in order to ensure success for all stakeholders.

Click here for the FAQ’s about the Streamline Sales Tax Project.

You have been waiting all weekend to hear the news, so we will get straight to the point. It took three years, but the IRS finally corrected the brain-melter that we posted a few days ago, making fairly comprehensive changes to Part 4, Chapter 81, Section 6 of the Internal Revenue Manual (IRM 4.81.6), titled “Closing Agreements,” on February 20, 2019. Exciting, is it not?

As we’ve discussed before, the Internal Revenue Manual provides detailed rules for calculating the taxpayer exposure that must be paid on an issue that is taken into VCAP or that is ensnared in an audit that reveals a problem with the bonds. Once the issuer calculates the taxpayer exposure amount for each affected year, the issuer must be future-valued forward in time or present-valued back in time to the date on which the issuer enters into a closing agreement with the IRS to fix the problem with the bonds.

The IRS rewrote the example from the weekend into the imperative mood, making it somewhat less incomprehensible.[1]

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By Alexis Baker on March 4, 2019

The Public Finance Tax Blog

Squire Patton Boggs

On February 15, the U.S. Court of Appeals for the Fourth Circuit decided Norfolk Southern Railway Co. v. City of Roanoke, et al.; the Chesapeake Bay Foundation was an Intervenor-Defendant. The Fourth Circuit held that a large stormwater management fee (stated to be $417,000.00 for the year 2017) levied by the City of Roanoke against the railroad to assist in the financing of the City’s permitted municipal stormwater management system was a permissible fee and not a discriminatory tax placed on the railroad.

The Railroad Revitalization and Regulatory Reform Act of 1976 specifically provides that states and localities may not impose any tax that discriminates against a rail carrier, 49 U.S.C. § 11501. Accordingly, the issue confronting the Fourth Circuit was whether the assessment was fee and not a tax.

A 1992 decision of the U.S. Court of Appeals for the First Circuit, San Juan Cellular Telephone Co. v. Public Service Commission of Puerto Rico, provides a framework by which the courts can decide these very close cases. Applying this framework, the Fourth Circuit concluded that the City’s charge—levied against only local property owners and not the general public, “is part of a regulatory scheme, rooted in the Clean Water Act, whose purpose is to remedy the environmental harms associated with stormwater runoff and to hold stormwater dischargers responsible for footing the bill.”

Judge Wilkinson filed a concurring opinion, noting how degraded the Chesapeake Bay has become over the years, but that effective municipal stormwater management systems established to handle large quantities of stormwater will not only ensure the City’s compliance with its permit and the Clean Water Act, it will eventually enhance the overall health of the Bay, even though the City of Roanoke does not lie within the Bay’s watershed. To rule otherwise would put existing Chesapeake Bay-area cleanup projects, financed by such fee systems, at risk. He writes that

“Our rivers and estuaries are complex, interconnected ecosystems. It follows, therefore, that efforts to restore the are correspondingly complex and interconnected… Everyone… is better off when our streams run clear and estuarine flora and fauna are flourishing.”

Pillsbury – Gravel2Gavel Construction & Real Estate Law

by Anthony Cavender

February 26, 2019

The pilot program will now include “new construction” and “substantial rehabilitation” projects

The federal Opportunity Zones program has been wildly popular with investors and developers, but critics say the tax incentive program has so far not gone to areas most in need.

Now, the Department of Housing and Urban Development has announced an initiative to encourage affordable housing investment within the thousands of designated Opportunity Zones nationwide.

The Federal Housing Administration’s low-income housing tax credit financing pilot program will now include “new construction” and “substantial rehabilitation” of multifamily projects only, HUD Secretary Ben Carson said. Opportunity Zones development, meanwhile, can cover a wide range of property types.

The provision could speed up the application process for developers looking to use the low-income tax credit to build new ground-up apartment projects, or for those seeking to drastically redevelop old buildings in Opportunity Zones. HUD said the average processing time for low-income credit deals is currently 90 days, but under the FHA pilot it can potentially reduce this time to 30 days.

The low-income tax credit is a federal subsidy that finances low-income housing. It allows investors to claim tax credits on their federal income tax returns for building affordable housing.

In recent years, allegations have surfaced of fraud and misuse of the low-income tax credits. In August, Bloomberg reported Wells Fargo was being investigated by the Department of Justice for allegedly colluding with affordable housing developers nationwide to drive down the prices of low-income tax credits — potentially defrauding hundreds of millions of dollars from the federal program.

The Opportunity Zones program, pushed forward by President Trump’s tax plan in 2017, allows developers and investors to defer and possibly forgo paying capital gains taxes if they invest in historically distressed areas. The biggest tax advantage goes toward developers or investors who hold the properties for at least 10 years.

The Opportunity Zones program does not have a requirement to build affordable housing, and there are only a few restrictions as to what a developer cannot build in the zones.

Critics are worried the program will only benefit wealthy developers in gentrifying and up-and-coming areas that happen to be located in Opportunity Zones, and that the truly distressed areas will be ignored.

Real estate developers are anxiously awaiting the IRS and the U.S. Treasury, which will release more guidance and rules around Opportunity Zones.

In recent months, firms have launched numerous Opportunity Zones funds targeting hundreds of millions of dollars. Some of those companies include Youngwoo & Associates, Fundrise, RXR Realty and EJF Capital. SkyBridge Capital is targeting a $1 billion fund. That fund was rolled out in December with EJF as a subadviser, though SkyBridge later dissolved the partnership and found a new subadviser.

The Real Deal

By Keith Larsen | February 25, 2019 04:30PM

What types of opportunity zone investments are community leaders looking for? And what can local communities do to incentivize investment in their opportunity zones? Joining me on the podcast to discuss these topics and more is Erin Gillespie, principal at economic development consulting firm Madison Street Strategies and former deputy chief of staff for Florida’s…

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February 27, 2019

Taxpayer, who was a retired federal marshal, sought judicial review of Office of Tax Appeals’ decision affirming refusal of Tax Commissioner of State of West Virginia to allow taxpayer to exempt from his taxable state income benefits received from Federal Employee Retirement System (FERS).

The Circuit Court reversed the Office of Tax Appeals. Commissioner appealed. The Supreme Court of Appeals of West Virginia reversed and remanded. Certiorari was granted.

The Supreme Court of the United States held that the West Virginia statute exempting from state taxation the pension benefits of certain state and local law enforcement officers, but not the federal pension benefits of retired federal marshal, violates the intergovernmental tax immunity doctrine, as codified in federal statute.

Although the favored class is small, the state statute expressly affords state law enforcement retirees a tax benefit that federal retirees cannot receive, there were no significant differences between federal retiree’s former job responsibilities as a United States Marshal and those of tax-exempt state and local law enforcement retirees, and so state statute unlawfully discriminates against retired federal marshal “because of the source of [his] pay or compensation,” as forbidden by federal.

The so-called Clean Stormwater and Flood Reduction Act (Assembly Bill A2694; Senate Bill 1073), which was passed by the New Jersey Legislature on January 31, currently awaits Gov. Murphy’s signature. The act notes that 10 percent of New Jersey’s land area is covered with impervious surfaces. The bill received wide support, because, as it states, “New Jersey, in particular, is prone to pollution and flooding problems,” which are “particularly acute in the 21 urban New Jersey municipalities that have combined sewer systems, which routinely overflow and discharge untreated wastewater and stormwater into the State’s waters, contributing to water pollution and impairing the use and enjoyment of those waters.”

The act would permit a county or municipality to establish a public stormwater utility for the purposes of “acquiring, constructing, improving, maintaining, and operating stormwater management systems in the county or municipality.” Once a utility is established, a county or municipality could establish and collect “reasonable fees and other charges” to recover the stormwater utility’s cost for stormwater management. Such “fees and other charges” may be billed to and collected from the “owner or occupant, or both, of any real property from which originates stormwater runoff which directly or indirectly enters the stormwater management system or the waters of the State” and are to “be based on a fair and equitable approximation of the proportionate contribution of stormwater runoff from the property.” Farmland or land in agricultural use and assessed as such pursuant to the Farmland Assessment Act would be exempt from such fees or other charges. Presumably, such a fee would be based on the amount of impervious coverage a property has; however, the act provides for a partial fee reduction for properties that incorporate stormwater management strategies that exceed New Jersey Department of Environmental Protection or local stormwater control requirements.

A portion of the funds collected would be diverted to state and local coffers other than those of the stormwater utility. The lesser of 5 percent of such fees and charges or $50,000 is to be remitted to the state treasurer by each public stormwater utility for deposit into the Clean Stormwater and Flood Reduction Fund. Up to 5 percent of a surplus in annual revenue from a stormwater utility may be transferred to and included in the local municipal budget.

While there is no doubt that the enhancement of stormwater infrastructure encouraged by the act would be a public benefit, particularly in reducing pollution from runoff, it is questionable whether the proposed act will actually make a difference in a state with some of the most aggressive stormwater regulations in the country. One of the arguments against the so-called “rain tax” is the existence of New Jersey’s Stormwater Management rules, which regulate runoff through the Residential Site Improvement Standards in connection with residential applications as well as in connection with major developments and site plan applications. The Stormwater Management rules have been in effect since 2004.

It is likely that such fees will add another layer of cost for developers who already have to comply with stormwater management regulations to reduce runoff and sometimes make off-tract improvements to stormwater systems. The stormwater utilities that would be formed pursuant to the act can be compared to existing sewer authorities, which collect connection and usage fees; yet despite these funds, many sewer systems are antiquated. In such cases, despite the payment of sewer connection and usage fees, sewer authorities and municipalities still look to developers to repair or upgrade the off-tract sewer systems in connection with development approvals.

Gov. Murphy has not yet signed the act. If he does, it remains to be seen how many municipalities and counties will establish local stormwater utilities and fund them through local taxation.

Day Pitney Alert

February 28, 2019

Day Pitney Author(s) Christopher John Stracco Katharine A. Coffey Craig M. Gianetti

The March 1 deadline for submitting comments on the proposed reissuance regulations to the IRS is coming up fast. We make a general comment here – the existing guidance contains helpful ancillary rules that aren’t directly implicated by the core reissuance rules. The IRS should not exclude these helpful ancillary rules from the final regulations. They’ve proved helpful to issuers, and there’s no policy reason to scrap them.

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By Johnny Hutchinson on February 19, 2019

The Public Finance Tax Blog

Squire Patton Boggs

Many fixed-income investors gravitate towards municipal debt as an investment option because of the tax-free income; for some, this single benefit is enough to relinquish the potential for higher coupons on other alternatives like corporate debt or equity investments.

These alternatives may produce higher yields; however, the overall tax benefit with municipal debt is often enough to outweigh the higher yields offered on taxable debt. Most importantly, this tax benefit increases as an investor’s tax bracket increases.

On the contrary, an investor purchasing municipal debt solely for its tax-free income benefit must be aware of situations where income from municipal debt holdings can be treated like normal interest income, creating a tax liability and cutting into the overall return of the security.

In this article, we will take a closer look at some of these situations and how investors can thoroughly assess their investment options before making any investment decisions.

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municipalbonds.com

by Jayden Sangha

Feb 20, 2019

“This is politics masquerading as tax policy,” New Jersey Gov. Phil Murphy said.

A coalition of governors from high-tax states hit hardest by a provision of the Republican tax overhaul said Friday they will join together to push Congress to restore the full federal tax deduction for certain state and local taxes.

The eight states are all led by Democratic governors, but New York Gov. Andrew Cuomo said they are also bound by their belief that the $10,000 cap on the so-called SALT deduction is fundamentally unfair. Cuomo said the 2017 GOP tax law hurts states that already pay more in taxes than they get back from the federal government. These states tax citizens to pay for much-desired services like education and health care, he said.

“This is politics masquerading as tax policy,” said New Jersey Gov. Phil Murphy during a news conference at a National Governors Association meeting in Washington, D.C. “It is gutting our middle class. It is just plain wrong.”

Along with New York and New Jersey, governors from Connecticut, Hawaii, Illinois, Oregon, Rhode Island and Washington state have joined the coalition. Many of these states are part of a federal lawsuit that challenges the change. Some, too, have attempted to pass tax workarounds through their legislatures to restore the deduction for residents, but the IRS has ruled those out-of-bounds.

Cuomo met with President Trump earlier in February about the issue, although the White House after the meeting tamped down expectations of a change of heart by the administration.

Now, the focus needs to be on lobbying Congress to make clear that restoring the full deduction should be a priority with a new Democratic majority in the House, Cuomo said. He acknowledged that Republican Sen. Chuck Grassley, a key player on tax issues, a couple weeks ago indicated he would not support reworking the SALT cap.

“We need a change to the law. That has to happen in Washington,” Cuomo said. “It is on Speaker [Nancy] Pelosi’s radar screen.”

Murphy emphasized that there are proposals on the table, such as a bill introduced earlier this month by New Jersey Sen. Bob Menendez and others. In January, two New York House members introduced their own legislation to restore the full deduction.

Tax experts across the ideological spectrum have noted that the SALT problem hits higher-income taxpayers most deeply. The Urban-Brookings Tax Policy Center has estimated that 57 percent of the additional tax from limiting the deduction would be paid by the top 1 percent.

During the news conference, Cuomo emphasized that the state saw a $2.3 billion decline in income tax payments in December and January, a fact that he has tied to the SALT deduction limit. But tax experts interviewed by the New York Times suggested the revenue shortfall more likely was related to volatility in the stock market, for example, with high earners choosing to write off capital losses to reduce their tax burdens.

Route Fifty

By Laura Maggi,
Managing Editor

FEBRUARY 22, 2019

The individual income tax is one of the most significant sources of revenue for state and local governments. In fiscal year (FY) 2016, the most recent year of data available, individual income taxes generated 23.5 percent of state and local tax collections, just less than general sales taxes (23.6 percent).

The map below shows combined state and local individual income tax collections per capita for each state in FY 2016. Forty-one states and the District of Columbia levy broad-based taxes on wage income and investment income, while two states—New Hampshire and Tennessee—tax investment income but not wage income. Tennessee’s tax on investment income—known as the “Hall tax”—is being phased out and will be fully repealed by tax year 2021. Seven states do not levy an individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

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The Tax Foundation

Katherine Loughead

February 21, 2019

After third party that owned parcel of real property on which respondent’s automobile-parts business was located defaulted in “in rem” tax foreclosure proceeding commenced by city, default judgment was entered which, inter alia, awarded possession of parcel, as well as “all items of personal property thereon deemed abandoned,” to city.

Respondent made application by order to show cause for order vacating, for lack of jurisdiction, that part of the judgment of foreclosure that deemed his personal property abandoned. The Supreme Court, Oneida County, denied application, and respondent appealed.

The Supreme Court, Appellate Division, held that:

• Respondent’s application was not subject to the one-month limitations period set forth in the default judgment section of the statute governing foreclosure of tax liens, and
• The court in the tax foreclosure proceeding lacked jurisdiction to enter a judgment disposing of personal property.

One-month limitations period set forth in default judgment section of statute governing foreclosure of tax liens applies only to an application to reopen a default judgment with respect to a parcel of real property described in an underlying petition of foreclosure; it does not apply where the application seeks to vacate for lack of jurisdiction a provision in a judgment disposing of personal property not described in the petition.

Although Supreme Court may exercise in rem jurisdiction over real property in a proceeding to foreclose a tax lien, the court lacks jurisdiction to enter a judgment disposing of personal property; article 11 of Real Property Tax Law (RPTL), governing procedures for enforcement of collection of delinquent taxes, does not grant jurisdiction over personal property located on a parcel of real property that is the subject of an in rem tax foreclosure proceeding, nor does it permit the tax district to obtain a judgment awarding the tax district such personal property.

Railroad brought action against South Carolina Department of Revenue alleging that South Carolina’s property tax scheme discriminated against railroads in violation of Railroad Revitalization and Regulatory Reform Act (4–R Act) by excluding railroad property from benefit of 15% cap to increases in appraised values under South Carolina Valuation Act, and seeking injunctive and declaratory relief.

Following bench trial, the United States District Court entered judgment in favor of Department. Railroad appealed. The Court of Appeals vacated and remanded.

On remand, the District Court held that:

• Appropriate comparison class to railroad consisted of the other commercial and industrial real property taxpayers within South Carolina, and
• State provided sufficient justification for Valuation Act’s failure to extend cap to railroad.

Provision of South Carolina Valuation Act imposing 15 percent cap on increase in fair market value of real property attributable to a periodic countywide appraisal and equalization program constituted a limitation on increases on ad valorem property taxes in South Carolina and not an exemption from tax, and thus provision was subject to Railroad Revitalization and Regulatory Reform Act (4–R Act) prohibition on any tax that resulted in discriminatory treatment of a railroad; whether or not railroad would be allowed to benefit from 15 percent cap would affect railroad’s property tax.

Appropriate comparison class to railroad consisted of the other commercial and industrial real property taxpayers within South Carolina, in railroad’s action against South Carolina alleging violation of Railroad Revitalization and Regulatory Reform Act (4–R Act) through South Carolina Valuation Act’s exclusion of properties valued by the unit valuation method from a general cap on permissible increases in appraised values of commercial and industrial real properties.

State provided sufficient justification for South Carolina Valuation Act’s failure to extend general 15 percent cap on permissible increases in appraised values of commercial and industrial real properties to railroad, and thus failure to extend cap to railroad did not violate Railroad Revitalization and Regulatory Reform Act (4–R Act) prohibition on discriminatory tax treatment of railroad; a 20 percent equalization factor applied to railroads but not to commercial and industrial taxpayers, state law provided various tax exemptions for benefit of railroads, and because sale of commercial and industrial property triggered assessment that set fair market value on property without regard to 15 percent cap, lost value was recouped in whole or in part for tax base at time of sale.

In the first quarter of 2018, we and our colleagues worked with our governors to designate our states’ Opportunity Zones. No economic development program is perfect. But this new federal tax tool, which was introduced by over 100 bipartisan congressional co-sponsors, has great potential. We take our responsibility to utilize this new tool to strengthen the economic vitality of our communities and enhance the well-being of our citizens seriously. We selected zones based on the intent of Congress that this new federal capital gains tax incentive attract scarce equity capital to underinvested communities for two purposes: the development of brick and mortar projects and the growth of operating businesses. This program was not designed simply for investments in real estate. It was also created to foster entrepreneurial ventures, to strengthen manufacturers, to draw capital to businesses small and large, and to result in the production of jobs in these designated communities. As key stakeholders in the success of our states’ Opportunity Zones, we want to ensure that the regulations the IRS delivers in the coming weeks reflect this same two-part intent.

The scale of need is vast. As recently as 2016, more than three-quarters of all U.S. counties still contained fewer places of business than before the recession, according to the Economic Innovation Group. If current trends continue, some of the country’s most distressed census tracts may never recover the jobs they lost to the Great Recession. The status quo would have investors continue to pour capital into the places already doing well. Opportunity Zones have the potential to change investor behavior by providing an incentive to take off blinders and consider investing in spaces and businesses that can bring new vitality and opportunity to places that have been left behind.

We and our peers – a dozen top state economic development officials – have written two letters to Treasury, the IRS, and the regulatory authorities summarizing our suggestions to ensure this new tax incentive delivers what both Congress and our governors have promised their constituents. We make four main recommendations.

First, Opportunity Zone investors should be able to invest in high-impact operating businesses that can generate jobs and wealth at scale by drawing revenue from outside of the community into it. Investors should be able to inject equity into manufacturers and e-commerce companies in addition to the restaurants and storefronts that also make up a community. For example, this means that the 50 percent gross income requirement should be interpreted to require that qualifying entities be active businesses as opposed to holding companies or patent boxes. But it should not require that income be majority derived from a single point of sale in an Opportunity Zone, which would disqualify most e-commerce companies, manufacturers, and other businesses with the potential to create significant numbers of new jobs and wealth for their communities. (The current set of proposed regulations seemingly require such predominantly localized sales.) We agree with proposals that allow businesses the necessary operational flexibility to qualify for these investments, such as the straightforward requirements that 70 percent of a qualifying business’s tangible property be in an Opportunity Zone.

Second, the IRS and Treasury must demonstrate a basic understanding of what motivates investors to provide equity to operating businesses by writing rules and regulations that allow Opportunity Funds–the required vehicles for investment under this program–to create diverse investment portfolios. Successful Opportunity Fund managers will naturally seek to spread out their risk by investing in several businesses in case any of them fail. Diversification is particularly important in struggling communities where investors already view projects as riskier and returns are seen as less certain. Because sound funds will make multiple business investments, they will need flexibility in the time allowed to meet the law’s twice annual “90 percent asset test” to ensure that the Fund managers can put together a strong portfolio of qualifying business investments that will attract and keep investors interested in zone communities.

Third, Opportunity Funds should be able to buy and sell assets without triggering tax liabilities for their partners that would undermine the 10-year tax benefit. Specifically, the rules should allow funds to reinvest interim gains in a timely manner without incurring a penalty or triggering a taxable event. Successful investing requires a degree of nimbleness to react to new developments. Investors will be reluctant to commit to holding a stake in a single company for 10 years given all the forces that could intervene during that period. Investors should be able to divest from less-than-successful companies if they keep their capital at work in Opportunity Zones. The IRS could consider establishing a minimum hold period for any individual investment in a zone, but requiring an investor to hold each individual business investment for 10 years (rather than simply committing to remain invested in the Fund for 10 years) will significantly undermine the ability to invest in operating businesses.

Finally, we encourage Treasury to adopt simple, unobtrusive reporting requirements to collect data on Funds and their investments. Such reporting will illuminate where the incentive has been successful and will help identify areas for improvement and modification in the future. These data will help us understand whether this program is incentivizing the investments intended by Congress.

We recognize that finalizing new regulations is never as simple as it seems, but by working together, we are confident we can unleash the true potential of Opportunity Zones in these key communities.

THE HILL

BY STEFAN PRYOR, VALE HALE AND DON PIERSON, OPINION CONTRIBUTOR — 02/20/19 02:45 PM EST

THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF THE HILL

Stefan Pryor is the Rhode Island Secretary of Commerce. Vale Hale is Executive Director of the Utah Governor’s Office of Economic Development. Don Pierson is Secretary of Louisiana Economic Development.

A new program may be a boon to struggling cities — if it targets the right ones.

York, Pa., grew up making things. The brick smokestacks that break up the skyline are inescapable reminders of its industrial past. Buildings that once housed factories employing hundreds of workers have now been converted into warehouses that employ only a handful of people, at wages that don’t come close to rivaling those of their industrial predecessors.

Mayor Michael Helfrich grew up in York. He remembers when middle-class jobs were only a short walk away from the homes of the men and women who produced everything from Pullman cars to Pfaltzgraff dinner plates to York Peppermint Patties. Those companies are gone. Pullman succumbed to competition from Detroit automakers. Hershey’s bought the York candy factory and moved production to its own plants, which eventually landed in Mexico in 2009. Pfaltzgraff was purchased in 2005 and its operations moved to China.

But most of the jobs haven’t left because of competition or consolidation as much as they’ve left to escape York’s taxes, which are almost three times the rate in surrounding York County. The taxes have led to a vicious cycle — innovation, development and flight — that has persisted for decades. “We used to build wealth in the city of York,” Helfrich says. “In almost 50 years, we have not seen that. Our growth has been, ‘Can you come here and give us some jobs?’ Meanwhile, the wealth was going somewhere else. It wasn’t building in York.”

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GOVERNING.COM

BY J. BRIAN CHARLES | FEBRUARY 2019

The online retail giant’s plans in New York attracted bad PR for a new federal program aimed at helping economically distressed areas like Long Island City.

Amazon’s announcement last week that it would no longer build a corporate headquarters out of New York City was met with harsh criticism from many state and local leaders. Mayor Bill de Blasio condemned the online retail company, while Gov. Andrew Cuomo, also a Democrat, lambasted the progressive politicians whose attacks against Amazon ultimately killed the deal.

“Amazon chose to come to New York because we are the capital of the world and the best place to do business. However, a small group [of] politicians put their own narrow political interests above their community,” Cuomo said in a statement shortly after Amazon’s announcement.

But for backers of so-called opportunity zones, Amazon’s withdrawal removes an unwelcome distraction from a burgeoning effort to attract new investment to low-income neighborhoods.

Opportunity zones were created as part of the 2017 federal tax overhaul. If private investors plop money into these economically distressed neighborhoods, they can shield portions of their capital gains tax liability. There are 8,700 of these zones scattered across the country. One of them is in Long Island City, Queens, in New York, where Amazon was going to locate one of its two new headquarters.

When Amazon made its HQ2 announcement in November, many people questioned the area’s opportunity zone participation. If the neighborhood was attractive enough for the tech giant, then why did it need help from a federal investment program for distressed areas?

“When you first heard about the opportunity zone program, you said, ‘Well this is helpful to poor people,'” says Timothy Weaver, an urban policy professor at the State University of New York at Albany. “But then you hear Amazon’s name and that doesn’t seem like something to help the poor.”

On the same day Amazon announced its plans to move to Long Island City, Goldman Sachs announced that its opportunity zone fund was investing $83 million into the same neighborhood. The pairing of the two announcements, which Goldman Sachs said was a coincidence, led to sharp criticism of the opportunity zone program from the press.

Unlike Goldman Sachs, Amazon is too large to have qualified for an opportunity zone tax break. But the company nonetheless would have benefited from it being an opportunity zone, say Weaver and others. For instance, Goldmans Sachs had already planned to finance construction of apartments in Long Island City.

Now, with the Amazon move off the table, Weaver suggests the opportunity zone plan, at least in Long Island City, can move forward on its merits.

“I certainly think the HQ2 saga has been an unfortunate distraction at the expense of the thousands of needy communities nationwide that stand to benefit from thoughtful opportunity zone implementation,” says John Lettieri, the president and chief executive officer of the Economic Innovation Group, the think tank that helped draft the opportunity zone language in the 2017 tax plan. That group, started by Napster founder and former Facebook executive Sean Parker, has spent more than five years trying to draw investment to economically depressed areas.

“There are outliers, but the national numbers aren’t ambiguous: The vast majority of opportunity zones are facing an array of deep socioeconomic challenges,” Lettieri says. “They deserve far more serious attention than they are getting.”

Neither Lettieri or Weaver will speculate on whether Amazon’s exit will have an impact on investment in the Long Island City opportunity zone. The program is still new. The rules governing opportunity zones are still subject to change, and the market conditions are always in flux, Lettieri says.

And questions remain as to whether the program will deliver jobs or services as intended. Weaver has long been a critic of opportunity zones. His belief is that a tax incentive program like this one naturally will encourage those investments designed to deliver maximum returns. That means high-yield projects like real estate developments, but not other projects that could perhaps better serve distressed communities.

“The type of things we might want in these neighborhoods — schools, libraries or playgrounds — have nothing to do with investment and profit,” Weaver says.

GOVERNING.COM

BY J. BRIAN CHARLES | FEBRUARY 20, 2019 AT 12:23 PM

This past Thursday, February 14, the IRS Auditorium in Washington DC was packed to capacity with over 200 attendees as stakeholders spoke during the public hearing on proposed regulations: “Investing in Qualified Opportunity Funds” [REG-115420-18].

Hearing participants requested additional guidance on a wide variety of proposed regulations, with many suggesting improvements to the regulations that would allow for more flexibility — particularly in regards to business investment.

Podcast episode on the hearing

This IRS hearing was the focus of on a recent episode of the Opportunity Zones Podcast.  Click here to listen to the recap.

Topics covered at the hearing

• Opportunity zone business qualification requirements
• 70% and 90% asset test requirements
• Community impact reporting and program effectiveness measurement
• Reinvestment of interim gains
• Substantial improvement test for operating businesses
• Multi-asset funds
• Combining Opportunity Zones with other credits (HTC, NMTC, and LIHTC)
• How land value exclusion could potentially lead to predatory activity
• Applying SBIC framework to Opportunity Zones
• Using Opportunity Zones for veteran housing
• Gentrification risks and potential for negative impact on minority communities
• How Section 469 would apply to investments made in qualified opportunity funds
• QOF asset sales
• Debt refinance proceeds
• Employee Stock Ownership Plans (ESOPs)
• Feeder partnerships
• Carried interest
• Interaction of Section 752 with qualified opportunity fund liabilities
• Grantor trust tax liability treatment
• Treatment of ground leases, specifically in regards to tribal land

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OpportunityDb

By Jimmy Atkinson

February 16, 2019

Distressed America is Wall Street’s hottest new investment vehicle.

Hedge funds, investment banks and money managers are trying to raise tens of billions of dollars this year for so-called opportunity funds, a creation of President Trump’s 2017 tax package meant to steer money to poor areas by offering potentially large tax breaks.

Little noticed at first, the provision has unleashed a flurry of investment activity by wealthy families, some of Wall Street’s biggest investors and other investors who want to put money into projects ostensibly meant to help struggling Americans. The ranks of those starting such funds include Anthony Scaramucci, the New York hedge fund executive who served briefly as Mr. Trump’s communications director.

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The New York Times

By Matthew Goldstein and Jim Tankersley

Feb. 20, 2019

Tax increment financing (“TIF”) has had a long and effective history in Colorado. In many cities and towns throughout Colorado, TIF has successfully been used to help remediate environmental issues and spur development in blighted areas where market realities would have prohibited such progress. A great example of a successful TIF development project is Belmar, an open-air shopping center in Lakewood, Colorado, that previously contained a dilapidated shopping center with high vacancy rates. More to the point, the site contained a large chemical plume that was costly to remediate. But for the public-private partnership and the use of TIF, the successful Belmar redevelopment project would have never been feasible. Accordingly, TIF is an important governmental tool to encourage the type of development that supports a thriving community.

In Colorado, many large development projects that are supported by TIF are constructed with the help of a governmental district such as a metropolitan district, or other special improvement district, which has certain tax considerations and treatment that is different than a private developer. The law is clear and undisturbed that most governmental districts can receive TIF revenues for eligible public improvements without, in most cases, a negative tax treatment.

However, not all development projects are of sufficient size and scope to justify the cost and complexity of forming a district, or don’t lend themselves to the use of a district or tax-exempt municipal financing for other reasons. Instead, many developments are financed, constructed, owned and managed by private entities.

Prior to the Tax Cuts and Jobs Act of 2017 (“TCJA”), if a private entity was a corporation and received incremental tax funds as part of the project’s financing, such revenues were not considered federal taxable income pursuant to the contribution to capital exclusion found in Section 118 of the Internal Revenue Code (“IRC”). Additionally, a private developer could (and still can) receive TIF as reimbursement for the construction of public infrastructure without immediate taxation of the TIF proceeds irrespective of whether or not the entity is a corporation. The issue that many private developers will have to resolve is that not all TIF revenues received by a private developer can be directly linked to or measured as reimbursement for the limited scope of public infrastructure recognized by the IRC and applicable case law. Many improvements and amenities that are generally considered “public” in the development world are not treated as such by the federal tax code. For those development expenditures by a private developer that are not recognized as public infrastructure costs but have appropriately received TIF revenues for reimbursable costs, will the developer now be taxed on such TIF revenues as ordinary income for the tax year in which the developer receives the TIF revenues? The answer remains unclear.

Historical Safe Harbor for Private Developers

The prior version of IRC Sec. 118 allowed the contribution of capital, such as the receipt of tax increment revenues, to be excluded in most circumstances from the definition of gross income for a corporation (this treatment did not apply to partnerships). Accordingly, before the TCJA, a private developer corporation could receive free land or monetary support from a governmental entity in order to incentivize the developer’s real estate project. In the case of a contribution of land, the developer would, in most circumstances, receive a basis of zero in the property and, therefore, would pay taxes on the contributed property at the time of sale. In the case of the receipt of tax increment revenues, the revenues would, in most circumstances, reduce the basis in the property and improvements thereto. Accordingly, taxes were ultimately recovered, to some extent, by the sale; the impact of the incentive contribution, however, wasn’t diminished at the outset of the development project by the immediate taxation of the tax increment revenues.

TCJA Changes to IRC Sec. 118

The TCJA gutted the ability of a corporation to exclude tax increment revenues from ordinary income in the tax year received by the private corporate developer entity by adding the following exclusion to the definition of “contribution to capital to the taxpayer” in Section 118 of the IRC: any contribution by any governmental entity or civic group (other than a contribution made by a shareholder). For example, a privately owned parking structure could, in certain circumstances, be funded with TIF revenues but would have to be received by a corporate developer entity as a contribution to capital pursuant to Sec. 118 of the IRC in order to avoid immediate taxation as ordinary income. With the TCJA changes to Sec. 118, it is likely that the foregoing scenario would result in a contribution that is immediately taxable as ordinary income.

The good news is that the revisions to Sec. 118 may not be applicable to many TIF revenues! While the Internal Revenue Service (“IRS”) has not yet issued Treasury Regulations on this issue, the revised Sec. 118 provides the following exception:

“The amendments made by this section shall not apply to any contribution, made after the date of enactment of this Act by a governmental entity, which is made pursuant to a master development plan that has been approved prior to such date by a governmental entity.” (emphasis added).

Accordingly, it is possible that urban renewal plans approved and in effect in Colorado as of Dec. 22, 2017, could be considered approved master development plans that are not subject to the revisions to Sec. 118. As such, private developers should work with their legal counsel to determine, in the absence of clear guidance from the IRS, whether the anticipated receipt of TIF revenues pursuant to an adopted urban renewal plan may be eligible for beneficial tax treatment under the former version of Sec. 118.

by Catherine Hildreth, Erik Jensen, and Carolynne White

February 7, 2019

Brownstein Hyatt Farber Schreck

It’s an annual reminder about the debt’s obvious benefits.

If the last few days are any indication, the denizens of Wall Street either aren’t as sharp as they seem or they’re dreading the prospect of paying more in taxes. I say this because two of the most popular articles on the Bloomberg terminal this week boiled down to the simple fact that U.S. municipal bonds offer income that’s exempt from federal taxes, and often state and local ones as well.

Consider the first article, “Invesco Money Manager Faces SALT Bite, Turns to This Tax Break.” It chronicles Mark Paris’s dismay that as a New Jersey resident, he’s going to end up paying more in taxes because of the new $10,000 federal cap on state and local tax deductions. So what’s the head of municipal strategies at Invesco going to do about it? Buy more tax-free munis, of course.

Just two days later, Bloomberg readers couldn’t click fast enough on another article, “Your New York Taxes Are Too High? Muni Bonds May Offer an Answer.” In it, Anthony Roth, chief investment officer of Wilmington Trust Investment Advisors, said some people in high-tax states like California, Connecticut, New Jersey, New York and Massachusetts would find that they owe more, which should boost demand for — you guessed it — tax-exempt municipal bonds.

Continue reading.

Bloomberg Opinion

By Brian Chappatta

February 14, 2019, 4:00 AM PST

Tax protester sought declaration that separate advisory votes were required for each tax increase in tax legislation.

The Superior Court dismissed the action. Protester appealed.

The Court of Appeals held that:

• Protester’s appeal was moot;
• Public interest exception to mootness doctrine applied;
• Phrase “not subject to appeal” applied only to short description to be placed on ballot for advisory vote; and
• Protester’s petition for declaratory judgment was untimely.

Tax protester’s appeal from trial court’s denial of his petition seeking declaration that a separate advisory vote was required for each tax increase enacted by tax legislation was moot, where the legislation had been voted on in a single advisory vote in which a majority of voters advised its repeal, so that the Court of Appeals could no longer provide effective relief.

Exception to mootness doctrine for matters of continuing and substantial public interest applied to tax protester’s appeal from trial court’s denial of his petition for declaratory judgment as untimely, in protester’s action claiming that a separate advisory vote was required for each tax increase enacted by tax legislation; the content of a ballot and issues of statutory interpretation were generally matters of substantial public interest, the timeliness and appealability issues did not depend on the nature of the tax increases at issue, and whether separate advisory votes were required was an issue that would likely recur with each package of legislative tax increases.

Phrase “not subject to appeal,” as used in statute governing the short description to be placed on a ballot for an advisory vote on tax legislation, applied only to the Attorney General’s formulation of the short description and not to other matters such as a decision to consolidate multiple tax increases in a single advisory vote; the phrase was placed in the middle of a clause requiring the Attorney General to prepare a short description for an advisory vote, and the phrase only appeared in the short description statute and was not found in sections addressing other steps in the preparation of advisory votes.

Tax protester’s petition seeking declaration that a separate advisory vote was required for each tax increase enacted by tax legislation was untimely after the Attorney General transmitted the short description for the advisory vote to the Secretary of State; statutes governing short descriptions and their filing and transmittal established that the transmitted description would be used in upcoming ballots, and any challenge necessarily affected the description and how it appeared in a ballot, so that allowing challenges after transmittal would have injected self-contradiction into the statutory scheme and potentially jeopardized timely preparation of ballots.

MUNIS IN FOCUS: Joe Mysak, Editor for Bloomberg Brief: Municipal Market, on infrastructure, Amazon, and high speed rail. Hosted by Abramowicz and Paul Sweeney.

Running time 06:00

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Bloomberg Radio

February 15, 2019 — 11:30 AM PST

• Wilmington Trust’s Roth sees munis as ‘tail risk’ hedge
• Filers in high-tax states may shelter more income in munis

One of the most banal-sounding investments for U.S. investors may be one of the best opportunities, at least according to Anthony Roth, chief investment officer of Wilmington Trust Investment Advisors.

Roth is referring to the $3.8 trillion municipal bond market, which he calls one of the few places where investors can find a haven from the risks buffeting the market, and an area he expects to “hold up really well if we go through a down cycle.”

Another draw for wealthy investors: the opportunity for residents of high-tax states to shelter more income, now that state and local property and income tax deductions are capped at $10,000. Roth expects overall tax refunds in 2019 to exceed those of 2018 by some $60 billion, but notes that some people in high-tax states like California, Connecticut, New Jersey, New York and Massachusetts will find that they owe more than ever. That could increase demand for municipal bonds on the margin, Roth said.

Muni finances are generally strong, with supply limited over the past year and tax receipts pretty healthy, said Roth.

“If you’re careful with credit research, it’s not hard to find high-quality muni issuers that have a very low chance of defaulting through the next credit cycle,” he said. “If we’re at the end of the cycle, just keeping your money intact and having a real positive return is not a bad result.” He recommends that clients buy bonds with maturities between three and five years.

Munis are also attractive as a way to hedge tail risk, said Roth, which he defined as the chance of a significant drop in equities, perhaps accompanied by a recession. He isn’t forecasting either in 2019, but if something like that does come to pass, “munis will hold up quite well because municipal balance sheets are generally very strong at this time, much more so than corporates,” Roth said.

The after-tax returns for high-net-worth investors would be about 3 percent. “In an environment where inflation is 1.9 percent over the long term, getting a real return of more than 1 percent with very little risk, in order to wait out the cycle until things improve — that is not uncompelling,” said Roth. “There aren’t many places to hide today.”

Bloomberg Wealth

By Suzanne Woolley

February 13, 2019, 6:43 AM PST

New York bills call for compacts with other states promising to not provide any company-specific subsidies

The collapse of Amazon.com Inc.’s plan to build a second headquarters in New York City has the potential to damp some states’ willingness to offer tax breaks.

Spurred by Amazon’s second-headquarters selection process, politicians and groups long opposed to incentive packages have launched legislative efforts to prohibit them in some states. In New York, bills proposed in the State Assembly and Senate call for compacts with other states promising to not provide any company-specific subsidies.

Recent pivots by large companies, including Foxconn Technology Group and General Electric Co. , will likely lead to increased attention to incentives tied to performance and timelines, with an emphasis on long-term commitments, said Jeff Finkle, president of the International Economic Development Council, a group that represents economic-development officials across the U.S.

Continue reading.

The Wall Street Journal

By Valerie Bauerlein, Kate King and Cameron McWhirter

Updated Feb. 15, 2019 3:57 p.m. ET

Lawmakers in at least a half-dozen states are considering forming a compact in which they would agree to end efforts to lure companies with tax incentives.

• SPEED READ:
• Legislatures in Florida, Illinois, New York and several other states are considering or may take up a version of the End Corporate Welfare Act, which would stop the practice of offering tax incentives designed to woo certain corporations to relocate.
• Supporters say such a multistate compact would end the “race to the bottom” of states trying to outbid one another in corporate giveaways.
• The effort is part of a backlash to the $2 billion in tax breaks promised to Amazon by New York and Virginia for its second headquarters.

Amazon’s yearlong, nationwide contest for its second corporate headquarters netted the internet retail giant more than $2 billion in promised tax breaks from New York state and Virginia. But after mounting public resistance to such “corporate welfare,” Amazon announced Thursday that it will abandon its plans for New York City.

This, as the End Corporate Welfare Act is circulating in several states, including New York. The bill would essentially call a cease-fire on awarding tax incentives to certain companies by creating an interstate compact of states that agree to end the practice.

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GOVERNING.COM

BY LIZ FARMER | FEBRUARY 14, 2019 AT 5:05 PM

Property owner filed actions against town, seeking refunds of special ad valorem levies for garbage and refuse collection services against certain “mass” properties, and town filed third-party actions against county and its board of assessors, seeking indemnification under county guaranty.

Following consolidation of actions, the Supreme Court, Nassau County, denied county’s motion for leave to renew its opposition to property owner’s motion for leave to renew its motion for summary judgment, denied county’s successive motion for summary judgment, granted property owner’s motion for summary judgment, and entered judgment in favor of town against county. County appealed.

The Supreme Court, Appellate Division, held that:

• County failed to offer new evidence in support of its motion to renew;
• County’s reimbursement of town pursuant to county guaranty was not prohibited by state constitution’s gift and loan clause; and
• County failed to make sufficient showing to warrant consideration of its successive motion for summary judgment.

In January 2019, the Internal Revenue Service (IRS) issued Notice 2019-09, which provides interim guidance for Section 4960 of the Internal Revenue Code of 1986. As a reminder, Section 4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee. A “covered employee” is one of the organization’s top-five highest-paid individuals for years beginning after December 31, 2016. An organization must determine its covered employees each year, and once an individual becomes a covered employee, that individual will remain a covered employee for all future years.

Of particular interest to state colleges and universities is the answer to Q–5 of the notice. It provides that the Section 4960 excise tax does not apply to a governmental entity (including a state college or university) that is not tax-exempt under Section 501(a) and does not exclude income under Section 115(l). What does this mean? Basically, if an institution does not rely on either of those statutory exemptions from taxation, the institution will not be subject to the excise tax provisions of Section 4960. This exclusion from Section 4960 means the institution could compensate its athletic coaches (or other covered employees) in excess of the $1 million threshold and not be subject to the 21 percent excise tax.

As we discussed previously, some institutions rely on political subdivision status for tax purposes. Importantly, the notice also provides that any institution relying on its political subdivision status to avoid taxation, as opposed to relying on either of the above-mentioned exemptions, will be subject to the Section 4960 excise tax if the institution is “related” to any entity that does rely on either of the exemptions.

Although the IRS’s guidance is helpful in determining Section 4960’s application to state colleges and universities, it appears not to reflect “Congressional intent.” On January 2, 2019, the Committee on Ways and Means of the U.S. House of Representatives released a draft technical corrections bill that seeks to correct “technical and clerical” issues in the Tax Cuts and Jobs Act of 2017. The corrections bill seeks to clarify Section 4960’s application by stating that any college or university that is an agency or instrumentality of any government or any political subdivision, or that is owned or operated by a government or political subdivision, is subject to Section 4960. Given the current state of affairs in Washington, D.C., we are not confident that the corrections bill’s expanded application to state colleges and universities will ever come to fruition, but we will continue to monitor the situation.

by Taylor Bracewell & Robert Ellerbrock, III

February 6, 2019

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

NABL suggests a dozen tax tweaks for the muni market

WASHINGTON — The National Association of Bond Lawyers has a dozen suggestions for tax code tweaks that the Internal Revenue Service tax could make to benefit the municipal bond market, including clarification about the ability of local and state governments to engage in public-private partnerships.

None of the 12 requires congressional action and all are within the scope of the service’s administrative powers, according to NABL.

Seven of the proposed changes relate toIRS Revenue Procedure2018-26, 2018-18 IRB 546 published last April regarding remedial actions to preserve the tax-advantaged status of bonds when non-qualified uses occur.

Five other NABL suggestions for are unrelated measures, including the ability of state and local governments to engage in public private partnerships.

All 12 were developed by an ad hoc committee of bond attorneys chaired by David Cholst, a partner at Chapman and Cutler in Chicago.

NABL President Dee Wisor sent the 35-pages of detailed suggestions and an accompanying two page executive summary to IRS Commissioner Charles Rettig and nine other top officials of the IRS earlier this month.

“The revenue procedure did a number of good things,” Cholst said in an interview. “That’s the way we started our comments. One big part was the ability to remediate for direct pay bonds without actually calling in bonds or defeasing bonds. People realize there ought to be a way to say the bond doesn’t qualify anymore so I’m not going to ask for the subsidy payment.”

Many Build America Bond issuances had what Cholst described as “onerous call provisions such as a make-whole calls at a premium.”

“There is no reason from the U.S. government’s policy point of view why the bond should be called so long as they can stop making the tax subsidy,” he said.

The IRS revenue procedure also offered a cure for nonqualified uses that occur under long-term leases that’s similar to the cure for a sale of property that was financed by tax-exempt bonds.

The NABL letter suggests that the cure should include shorter term leases as well.

“If it works for a 20-year lease it ought to work for a 10-year lease as well,” Cholst said. “We don’t see a policy reason for it to be longer term.” NABL suggested there be no specific time limit.

The executive summary of the recommendations related to the 2018 IRS Revenue Procedure suggests that Treasury:

• Eliminate the double remediation that seems to be currently required by Rev. Proc. 2018-26 in the context of the remediation via removal of the tax advantage;
• Expand anticipatory remediation to apply to all permitted remedial actions;
• Make rules more consistent to avoid needless complexity;
• Limit required remediation to the amount of available funds created by the violation;
• Make the yield reduction mechanism of the Revenue Procedure more consistent with the arbitrage rules (and clearer at the same time);
• Modify the trigger for determining when nonqualified use occurs to be more consistent with Treas. Reg. §1.141-12; and
• Clarify the determination of the amount of nonqualified bonds resulting from a nonqualified use.

The other five recommendations propose that Treasury:

• Eliminate current expensive requirements, such as defeasance escrows, that do not further the purpose of the remediation provisions;,
• Expand the remedial action provisions to allow remediation of private payments;
• Add direct payment to the United States Treasury of taxpayer exposure as an alternative to redemption of nonqualified tax-exempt bonds;
• Expand anticipatory remedial action to cover all types of remediation otherwise available; and
• Provide more flexible remediation when a change in use preserves public access and some control over the financed facilities following the change in use.

The last recommendation is intended to make it easier for governments to engage in public private partnerships.

“If you do are doing something to improve public infrastructure that is going to be continued to be used by the public even though it is going to be privately used in some way….it shouldn’t require any additional actions,” Cholst said. “That’s really what’s going to allow the country to rebuild its roads and bridges and other public structures.”

Congress has the authority to enact legislation to also accomplish the same goal, but this administrative action by the IRS “would be more direct and easier to implement,” he said.

BY SOURCEMEDIA | MUNICIPAL | 03:11 PM EST

By Brian Tumulty

Confusion is mounting over real estate’s most buzzed-about federal program, but there still may be an excess of players trying to get in on the action.

It was a telling moment for those fixated on Opportunity Zones.

“Who the hell is EJF and their expertise as it relates to real estate?” Anthony Scaramucci asked on a December conference call to promote his $3 billion Opportunity Zone fund.

The rhetorical question seemed to be an attempt to reassure potential investors that EJF Capital would be a qualified partner for Scaramucci’s firm, SkyBridge Capital. But the former White House communications director’s swagger wasn’t enough to move the needle — and the two hedge funds parted ways a month later.

SkyBridge attributed the split to concerns from its distribution partners that EJF didn’t have enough experience managing real estate funds. “It’s a difficult investment environment,” the firm’s president, Brett Messing, told The Real Deal. “People get more risk-averse. And being risk-averse means bringing your clients a track record and someone who might be a little more known for being associated with real estate.”

Continue reading.

therealdeal.com

By Rich Bockmann and Eddie Small | Research by Yoryi De La Rosa and Kyna Doles

February 01, 2019 09:00AM

We are committed to evaluating and amplifying the long-term outcomes benefiting those living and working in Opportunity Zones today.

About the Framework

The Opportunity Zones Reporting Framework is a voluntary guideline designed to define best practices for investors and fund managers looking to invest in Opportunity Zones. It includes a set of first principles and a detailed impact measurement framework.

Learn More and Download the Framework

• Presidential hopefuls’ plans include higher rates on wealthy
• Higher rates would likely boost demand for tax-exempt debt

Politics aside, one corner of Wall Street is likely welcoming Democrats’ talk of raising taxes on the rich.

Higher rates tend to be a good thing for the $3.8 trillion state and local government bond market, a haven for investors looking for income that’s exempt from federal taxes. And progressive Democrats looking to define their party’s platform ahead of next year’s presidential election have made boosting rates on the wealthiest Americans a key part of their agenda, seeking to seize on discontent with rising income inequality.

If history is any guide, that might provide a boost to returns, at least temporarily. Municipal bonds outperformed Treasuries soon after the election of Bill Clinton, who raised the top marginal rate in 1993, according to Bloomberg Barclays indexes. The same thing happened under Barack Obama, when the expiration of previous cuts for the highest earners in 2013 was followed by a run of outperformance.

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Bloomberg Markets

By Danielle Moran and Claire Ballentine

February 4, 2019, 10:28 AM PST

Walmart, Target, and other big-box retailers around the U.S. are deploying “dark store theory” to slash property taxes. Now the state at the center of this fiscal threat may take action.

In November, CityLab investigated the practice of “dark store theory,” the novel legal argument big-box retail chains like Walmart, Target, and Menards use to slash their property taxes by assessing active stores as if they were vacant. The practice has resulted in the loss of millions of dollars in taxable value to communities in Wisconsin, Michigan, Minnesota, Indiana, and beyond.

Now Wisconsin Governor Tony Evers is pledging to shut it down: His proposed state budget will close the “dark store” legal loophole.

CityLab’s story was followed by additional reports about the issue by the New York Times, Slate, and others. These articles, and the practice itself, have generated vigorous debate about what big-box properties that proliferate across the urbanized U.S. should be worth.

Lawyers representing retailers say that big-box stores are effectively worthless at the point of sale, which should be reflected in the taxes they pay—even while the stores are still active. And many companies file repeat tax assessment appeals until municipalities capitulate. Tax assessors say that this argument defies common sense, and that the lost revenue will eventually force a heavier tax burden onto other homeowners.

State tax boards weighing the two sides have largely been split about who’s right. And municipal finance experts have warned that fiscal havoc lies ahead for local governments across the U.S. if the issue isn’t resolved by state tax laws.

The commitment to close the loophole by Evers, Wisconsin’s newly elected Democratic leader, also follows statehouse lobbying by the Wisconsin League of Municipalities and the Wisconsin Counties Association, two groups representing the interests of local units that levy property taxes. In 2018, state lawmakers considered a bill that would have blocked the practice, but the measure failed to reach a vote.

“Having large big box stores have the property tax levied at a level as if the building is empty is absolutely a non-starter with me,” he told reporters this week. “It should be fair for all and in order to do that we have to close that loophole.”

Still, this element of Evers’ budget proposal is likely to find a challenger in Wisconsin Manufacturers & Commerce, the trade group representing retailers that have benefited from this tax appeal tactic. And Indiana, the only state that has enacted legislation to combat dark store theory, has continued to see challenges by commercial property tax payers using the same type of argument.

To Robert Hill, a Minnesota-based attorney who is perhaps the nation’s top lawyer propagating dark store theory on behalf of big-box stores, the issue is a matter of rebalancing the property tax burden that currently weighs too heavily on successful businesses. Corporations must defend themselves from being “discriminated against” by assessors, Hill told CityLab last year.

“We eat what we kill,” he said. “We kill only because they need to be killed.”

Evers’ budget proposal is expected later this month.

CITYLAB

LAURA BLISS FEB 8, 2019

City officials aligned opportunity zones with potential sites. Retailer now says it won’t take advantage of tax breaks.

The Amazon.com Inc. executives looked battered after more than an hour of questioning last week about their plans to build an office in New York. City Council members thrashed the retailer for its resistance to unions, working conditions at warehouses and its founder’s wealth. The responses drew laughter from the balcony.

So when Jimmy Van Bramer, who represents the Queens neighborhood where Amazon decided to locate its new office, raised the issue of a suite of generous tax breaks the project was eligible for, it was an opportunity to offer a satisfying answer.

“We will not be using the opportunity zone on this project,” Holly Sullivan, Amazon’s head of economic development, said at the Jan. 30 hearing.

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Bloomberg

By Caleb Melby and Lauren Leatherby

February 8, 2019, 2:00 AM PST Updated on February 8, 2019, 9:32 AM PST

Seven U.S. senators and nine members of the House of Representatives – all original co-sponsors of the Investing in Opportunity Act, the forerunner of the opportunity zones (OZ) incentive – sent a letter Thursday to Treasury Secretary Steven Mnuchin, calling for further clarity on several issues related to the OZ regulations. Among other things, the letter asks Treasury to remove the requirement that an OZ business derive 50 percent of its gross income from active conduct of a trade or business in the qualified OZ, but simply require that it derive at least 50 percent of total gross income from the active conduct of its trade or business. The letter also seeks more timing flexibility for opportunity funds to make investments; says fund-level activity should not disallow the tax benefit to opportunity fund investors who don’t take distributions from the fund or sell their interest before the 10-year holding period, regardless of whether there is “churn” in the opportunity fund’s investments; and asks that future regulations include reasonable reporting requirements.

Learn more about OZs at the Novogradac 2019 Opportunity Zones Spring Conference, April 25-26 in Denver.

Friday, January 25, 2019

While the company has stepped up collection efforts in recent years, a new report argues that local lawmakers should ensure Airbnb collects all lodging taxes.

More and more, when booking to stay in a house or apartment through Airbnb, a visitor will be charged a local or state tax, just like when staying at a hotel.

But this collection effort by the popular online hosting company isn’t universal. A new report that weighs the economic benefits and costs associated with short-term rentals through Airbnb argues it should be, saying local governments should insist that the tax regimes—and other regulations—are the same as for the hotels they compete with.

“If the lodging tax in a city is X percent, Airbnb should have to pay that full amount in a transparent way,” said Josh Bivens, research director at the Economic Policy Institute, in an email. “And if a building is zoned for residential units and not short-term travel accommodations, then Airbnb shouldn’t be allowed to offer full-apartment rentals in it.”

Continue reading.

Route Fifty

By Laura Maggi,
Managing Editor

JANUARY 31, 2019

No reason for local policymakers to let Airbnb bypass tax or regulatory obligations

Summary
“The sharing economy” refers to a constellation of (mostly) Silicon Valley–based companies that use the internet as their primary interface with consumers as they sell or rent services. Because this term is “vague and may be a marketing strategy” (AP 2019), we refer to these firms less poetically but more precisely as “internet-based service firms” (IBSFs).

Economic policy discussions about IBSFs have become quite heated and are too often engaged at high levels of abstraction. To their proponents, IBSFs are using technological advances to bring needed innovation to stagnant sectors of the economy, increasing the quality of goods and services, and providing typical American families with more options for earning income; these features are often cited as reasons why IBSFs should be excused from the rules and regulations applying to their more traditional competitors. To skeptics, IBSFs mostly represent attempts by rich capital owners and venture capitalists to profit by flouting regulations and disguising their actions as innovation.

The debates about whether and how to regulate IBSFs often involve theories about their economic costs and benefits. This report aims to inform the debate by testing those theories. Specifically, it assesses the potential economic costs and benefits of the expansion of one of the most well-known of the IBSFs: the rental business Airbnb.

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Economic Policy Institute

By Josh Bivens • January 30, 2019

Read more on EMMA.

Sunday’s Super Bowl, a rematch 17 years in the making, harkens back to a thrilling 2002 title game between Tom Brady’s underdog New England Patriots and the high-flying St. Louis (now-Los Angeles) Rams. But the host of this year’s game, Atlanta’s sparkling new Mercedes-Benz Stadium, reminds us of something less thrilling: the $1 billion or so that politicians give away in unnecessary public handouts to professional sports every year.

The $1.6 billion stadium was underwritten by $248 million in local bonds. Once taxpayers pay those off, they’ll then write the NFL’s Atlanta Falcons an annual check for stadium operations and upkeep. Our calculations suggest taxpayers will pay around $1.02 billion over the course of the deal. Combined with $77 million in sales tax rebates, infrastructure investments, and city-provided land, locals could be on the hook for over five times the initial $200 million estimate.

The story is the same in most other sports cities. And like other sports teams, the Falcons rake in buckets of money: corporate sponsorships ($900 million) and personal seat licenses ($267 million) could have paid for 75 percent of the stadium cost alone, not to mention annual revenue from season ticket sales ($550 to $3,850 per ticket), TV revenue and merchandise licensing ($256 million), stadium concessions, and other events held in the stadium.

There are only so many tax dollars to go around. Misspending them to enhance sports industry profits means that public services must be cut, taxes have to be higher, or both. Atlanta will spend about as much on the stadium as it would cost to employ an additional 300 Atlanta police officers or educate 2,900 public school students for 30 years.

Perhaps even worse, Americans from coast to coast share the burden. The income that lenders earn on the municipal bonds typically used to finance stadium construction is exempt from federal income taxes. That means the rest of us have to pay higher taxes (or see the federal deficit climb even higher) to make up for the shortfall.

A tax exemption for stadium subsidies may sound like small potatoes, but Brookings Institution researchers estimated the loophole was responsible for $3.7 billion in lost federal revenue between 2000 and 2014. President Obama tried to end it, as did House Republicans in last year’s tax reform, but the sports industry won each time.

Lately there have been encouraging examples of taxpayers and principled political leaders standing up to the sports industry. Last fall local citizen groups in Austin and Seattle gathered signatures to force public referenda that would require popular votes on future stadium subsidies — which is meaningful, since 70 percent of Americans say they’re against giving money to sports teams.

Meanwhile, a group of Atlanta taxpayers are challenging another tax exemption. Their lawsuit argues that even though the Falcons’ stadium is built on publicly owned land, the fact that the team controls all events and revenue it generates means it should pay local property taxes. That could amount to $700 million over 30 years.

And in the Washington, D.C. area, Virginia Delegate Michael Webert has for the past two years partnered with Maryland Delegate David Moon and D.C. Council member David Grosso to advance perhaps the best idea of all: an “interstate compact” that would prohibit subsidies for a new Washington Redskins stadium. This would prevent their three governments from engaging in a taxpayer-funded bidding war to attract the team.

If all 50 states were to sign on to a similar agreement, we could permanently end the subsidy war for sports teams. As a bonus, it would eliminate a major reason that leagues restrict the number of teams, so new franchises could expand into more cities.

Fans may be excited to experience the Super Bowl at Atlanta’s new state-of-the-art facility, but they should remember that the money that subsidizes stadiums could go to much better purposes. Sunday’s spectacle will show yet again that the NFL doesn’t need — or deserve — public money.

By Michael Farren and Anne Philpot Tribune News Service (TNS)

Jan 28, 2019 Updated Jan 28, 2019

WASHINGTON — Members of the Government Finance Officers Association are asking House lawmakers to sign onto a bipartisan letter seeking an assurance that any infrastructure legislation enacted this year won’t jeopardize the tax exemption for municipal bonds.

More than 100 GFOA members who are attending their organization’s winter meeting here are expected to visit members of Congress Tuesday. GFOA’s goal is to get more than 218 House members, a majority of the chamber, to sign on to the letter, written by House Municipal Finance Caucus co-chairs Reps. C.A. “Dutch” Ruppersberger, D-Md., and Steve Stivers, R-Ohio.

The letter is addressed to House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Rep. Kevin, Brady, R-Texas.

Neal has been a longtime member of the Municipal Finance Caucus, but Brady has not and in late 2017 shepherded through his chamber legislation that proposed terminating tax-exempt private activity bonds and advance refundings as part of the Tax Cuts and Jobs Act.

The exemption for PABs was saved during conference negotiations with the Senate over the final tax bill, but the elimination of advance refundings remained in the final bill.

Emily Brock, director of GFOA’s federal liaison center, told members of the debt committee Monday that preservation of the muni tax exemption should be their starting point in discussions with lawmakers.

GFOA also is asking its members — who represent local governments in places ranging from San Bernardino, Calif., and Rock Hill, S.C. — to ask House members to join the bipartisan Municipal Finance Caucus.

Legislatively in the muni bond area, GFOA’s priorities include reinstatement of advance refundings and enhancement of what is being described as “bank eligible” bonds to lawmakers and their staffers.

Bank eligible bonds refers to what has been known in the muni industry as bank qualified or BQ debt.

The lobbying seeks to raise the limit for bank eligible bonds to $30 million per individual borrower and link the limit to inflation so that smaller borrowers such as small airports and rural public cooperatives can finance their bonds through local banks.

The current limit for bank qualified debt is $10 million and it applies to conduit issuers rather than the individual borrowers.

The 2009 American Recovery and Reinvestment Act economic stimulus bill temporarily increased the bank eligible bonds limit to $30 million for borrowers so GFOA has examples of how it was used.

However, in the last Congress there was no House sponsor of a bill on bank qualified loans or bank eligible bonds. Two Democrats on the Senate Finance Committee — Sens. Robert Menendez of New Jersey and Ben Cardin of Maryland — sponsored a Senate version of the bill. Their bill also would allow individual small borrowers who are part of a larger pooled debt issue to place $30 million in bank eligible debt.

As part of the new legislative push, a three-member GFOA delegation was scheduled to meet Tuesday with the staff of Senate Finance Committee Chairman Charles Grassely, R-Iowa, to explain how an increase in the limit on bank eligible bonds might benefit small borrowers in Iowa.

GFOA also wants its members to ask lawmakers to support permanent repeal of the excise tax on so-called Cadillac health plans enjoyed by member of some public employee unions. A bipartisan bill introduced last week, H.R. 748, by Rep. Joe Courtney, D-Conn., to do that already has 41 cosponsors, including 18 Republicans.

The Cadillac tax was one of the revenue raisers included in the Affordable Care Act.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 01/28/19 01:27 PM EST

Owners of properties, that had been expropriated by a university and Veterans Administration for construction of new medical facilities following Hurricane Katrina, moved to release monies remaining in registry of the court pursuant to a settlement agreement and city opposed contending that the monies were owed as property taxes.

The District Court granted the release. City appealed.

The Court of Appeal held that the property owners were entitled to withdraw the funds from court registry under settlement agreement.

Property owners were entitled to withdraw funds from court registry under settlement agreement; property owners had settled after expropriation of their properties to build medical facilities, and only remaining monies were those earmarked for alleged property taxes, but settlement provided that property owners were entitled to withdraw any remaining funds to the extent permitted by law, and there was no express exclusion pertaining to taxes.

Property owners filed petition for review of Indiana Board of Tax Review’s determination that declined to address their annexation and storm-water claims and that they failed to show that assessment of their property should be changed.

The Tax Court held that:

• Town’s storm-water charges were taxes, rather than user fees;
• Board’s decision was a final determination;
• Claims arose under Indiana’s tax law; and
• Property owners failed to establish a prima facie case for a reduction of assessment of their property.

Town’s storm water charges were taxes, rather than user fees, as required for property owners’ appeal from Indiana Board of Tax Review’s determinations on their annexation and storm-water claims to be an original tax appeal within the jurisdiction of the Tax Court; town imposed storm-water charges on nearly all the real property within its corporate boundaries, owners of that property received bills for the charges either on a monthly basis with the billing statements for their other town services or biannually with their property-tax bills, and property owners could not decline the service or control the extent to which the service was used.

Indiana Board of Tax Review’s decision with respect to property owners annexation and storm-water claim was a final determination, as required for property owners’ appeal from the decision to be an original tax appeal within the jurisdiction of the Tax Court, even though Board determined that it lacked the statutory authority to address the claims; decision ended the administrative process with respect to those claims and ultimately compelled the property owners to challenge that determination by filing an appeal with the Tax Court.

Property owners annexation and storm-water claims arose under Indiana’s tax law, as required for property owners’ appeal from Indiana Board of Tax Review’s determinations on the claims to be an original tax appeal within the jurisdiction of the Tax Court, even though claims did not challenge the collection of taxes directly; claims could arise under Indiana tax laws if they challenged earlier steps in the taxation or assessment process.

Property owners failed to establish a prima facie case for a reduction of assessment of their agricultural property, even though they applied an alternative valuation methodology as allowed under the guidelines of the Department of Local Government Finance; property owners failed to show that they actually converted property’s decreased crop production capacity into a value or that their valuation method comported with generally accepted appraisal principles

A new federal program may be a boon to distressed cities – if it targets the right ones.

York, Pa., grew up making things. The brick smokestacks that break up the skyline are inescapable reminders of its industrial past. Buildings that once housed factories employing hundreds of workers have now been converted into warehouses that employ only a handful of people, at wages that don’t come close to rivaling those of their industrial predecessors.

Mayor Michael Helfrich grew up in York. He remembers when middle-class jobs were only a short walk away from the homes of the men and women who produced everything from Pullman cars to Pfaltzgraff dinner plates to York Peppermint Patties. Those companies are gone. Pullman succumbed to competition from Detroit automakers. Hershey’s bought the York candy factory and moved production to its own plants, which eventually landed in Mexico in 2009. Pfaltzgraff was purchased in 2005 and its operations moved to China.

But most of the jobs haven’t left because of competition or consolidation as much as they’ve left to escape York’s taxes, which are almost three times the rate in surrounding York County. The taxes have led to a vicious cycle — innovation, development and flight — that has persisted for decades. “We used to build wealth in the city of York,” Helfrich says. “In almost 50 years, we have not seen that. Our growth has been, ‘Can you come here and give us some jobs?’ Meanwhile, the wealth was going somewhere else. It wasn’t building in York.”

Along with the commercial exodus came an exodus of residents. York’s population declined by almost a third from 1950 to 2000. It has since inched back up as families pushed out by rising rents in New York and Philadelphia, or those fleeing crime in Baltimore, have landed in the city. But with unemployment approaching 9 percent, York is now a place with epidemic levels of poverty. More than one-third of the city’s residents live in poverty, a higher rate than in Baltimore or Philadelphia and twice the poverty rate in New York City.

Nonetheless, Helfrich has high hopes that a new federal incentive package might bring business back to York. So-called opportunity zones, an incentive with bipartisan support, were included in the 2017 federal tax law to lure capital from Wall Street to struggling cities and towns across the country. The Economic Innovation Group (EIG), a D.C. think tank launched by Sean Parker, the founder of Napster and former president of Facebook, worked for four years on the incentive, which is meant to fix a problem that has been evident to economists and mayors for years but has eluded a solution.

That problem worsened when the recession officially ended in mid-2009. The ensuing recovery was uneven. The economic expansion was led by a handful of urban hubs, the rock stars of the recovery. Austin, Los Angeles, New York City, San Francisco, Washington, D.C., and their surrounding metro areas were far outpacing most of the country in job growth. From 2010 to 2017, nearly half of the job growth occurred in the nation’s largest 20 metro areas. About half of the net increase in business establishments across the country from 2007 to 2016 took place in either D.C. or New York City. A generation ago, the opposite was the case. Job growth in the 1990s was led by rural and suburban counties, not urban centers. What the post-recession economy has favored — an educated workforce, density and an established startup culture — has left places like York far behind. “The rising tide,” says John Lettieri, president and CEO of EIG, “isn’t lifting all the boats.”

Lettieri, Parker and their colleagues created a blueprint they hoped would help even out jobs and wealth creation across the country. Investors had gotten fat on Wall Street bets. Much of their newfound money was sitting idle. If those funds could be shielded from capital gains, EIG theorized, they could be moved off Wall Street and invested in new ventures in other places.

Their idea was to allow investors to reduce their capital gains exposure in exchange for investment in certain low-income Census tracts to be designated as opportunity zones. For a place to qualify as an opportunity zone, at least 20 percent of its residents have to live in poverty, or the earnings of the residents have to be below 80 percent of the area’s median income. In return for their money, investors would be able to reduce the capital gains tax liability on their investment by 10 percent if they left their money in the zone for five years. If they didn’t move the money for seven years, they would receive a 15 percent reduction in capital gains taxes. If they kept it there 10 years, they would receive a 15 percent reduction in capital gains taxes and escape any liability on gains that came from investment in the zone. Congress bought into the idea. U.S. Treasury Secretary Steven Mnuchin estimated that $100 billion in capital would move off Wall Street as a result of the program.

Governors were allowed to mark 25 percent of the qualifying Census tracts in their states as opportunity zones. In June, the Treasury Department certified more than 8,700 zones across the United States and Puerto Rico. The exact rules are still being set, but investors needed to have their money in the opportunity zone funds by Dec. 31 to take full advantage of the benefit.

Helfrich pounced on the chance to leverage the tax incentives in opportunity zones, hoping they would be enough to overcome the high taxes in the city. He worked closely with Gov. Tom Wolf, himself a York native, to designate five city Census tracts as opportunity zones. As the deadline approached in December, only a handful of investors showed interest in York’s opportunity zones, and most of those weren’t large private equity firms from outside the city, but local investors.

York’s problem attracting outside investment to its opportunity zones has been even more frustrating considering where capital was moving. An opportunity zone fund targeting Chicago raised $105 million in 17 hours in November. When Amazon announced it had picked Long Island City, in the New York borough of Queens, as one of two sites to host the company’s second headquarters, investment sprinted to the opportunity zone that would be adjacent to the tech giant. Goldman Sachs, for example, announced it was putting $83 million into a real estate deal nearby.

Like York, Long Island City was once an industrial hub. The red neon Pepsi-Cola sign on the banks of the East River lit up the front of a bottling plant that churned out thousands of sodas each day. In the 1920s, the boom from industry lured the Bank of Manhattan to build a tower in Long Island City at the foot of the newly constructed Queensboro Bridge. When the bank opened in 1927, it was the tallest building in the borough, a title it would hold for 63 years. The surrounding square near the foot of the cantilever bridge was dubbed the Times Square of Queens.

Long Island City’s fortunes turned, just as they did in York. The bottling plant closed in 1999. The Bank of Manhattan branch was abandoned. The hands on the tower clock stopped ticking. And the slow and steady economic decline took its toll on the residents. As the factories emptied out, the demographics of the surrounding neighborhood shifted. The neighboring housing project went from a mix of white and black working-class people to largely poor residents, according to New York City’s own estimates, and almost exclusively black and Latino.

But unlike York, Long Island City has recovered in the last decade. With Manhattan and Brooklyn rents choking the wallets of the city’s young professionals, it has become one of the hottest places in the city for renters, especially affluent white renters. From 2010 to 2015, Long Island City was tied for first place among neighborhoods in New York in its influx of white residents. Median home prices went up 51 percent in the last six years. And rents in the neighborhood are the highest in Queens, according to the real estate firm Zillow.

The old Bank of Manhattan tower is slated to be transformed into office and retail space with a luxury apartment complex right next door. Amazon will make an area already attractive to affluent professionals even more attractive. The company is kicking in $2.5 billion in real estate investment in the neighborhood. But since poverty persists in Long Island City, especially in the housing projects, the area was certified as an opportunity zone in June. The designation allowed Goldman Sachs to cash in on its real estate deal. The company called the timing of its announcement, on the same day as Amazon declared that it would move to Long Island City, a coincidence. And perhaps it was, but analysts see a trend in the actions of major investors. “If you look at the behavior of the real estate industry,” says Timothy Weaver, an urban policy assistant professor at the University at Albany, “it is amassing vast amounts of money and directing money to take advantage of the policy.” To critics, opportunity zones are threatening to bestow huge grants on communities that don’t really need them.

Opportunity zones are the latest in a long series of efforts by the federal government to direct investment to impoverished areas. Since the New Deal, the government has been trying to jumpstart economic growth in portions of the country where the economy was faltering. In the 1970s, the Department of Housing and Urban Development launched Community Development Block Grants and Urban Development Action Grants to revive struggling cities. Those programs were popular with the progressive administrations and congresses that dominated federal politics during that period.

Also in the 1970s, Republicans, led by U.S. Rep. Jack Kemp, began proposing market-driven solutions to the same problems, referring to them most often as enterprise zones. Nearly all of these solutions were based on tax incentives or the loosening of economic regulations. Slightly different versions, under different names, were created and enacted by Democrats in the Clinton and Obama years. But the percentage of Americans living in poverty remained nearly unmoved through all the decades. Equally troubling was the increase in those living in extreme poverty. The number of Americans whose earnings equal less than 50 percent of the federal poverty line has more than doubled in the last 40 years, according to the Census.

Opportunity zones borrows a bit from the playbooks of the previous plans. But there are some significant changes. The market-driven solutions of the last 40 years have been in line with conservative supply-side economic policies. Investment, goes the theory, drives the economy. Cut taxes and investors will use their capital to make more money and, in turn, create jobs. Democrats in the 1980s and 1990s were largely skeptical of supply-side economics. The party insisted that market-driven programs include local hiring and local contracting provisions to make sure jobs were created in the community and the gains made by investors were shared with local businesses. For example, the empowerment zones that were established under the Clinton administration gave businesses a tax credit for hiring employees who lived in the zones. No such provisions exist in the opportunity zone program, despite backing from some prominent Democrats. Urban policy analysts see the program as an unbridled supply-side program. “It’s almost a purer version of the original vision,” Weaver says. “What happened with the empowerment zones and the enterprise zones is that Congress made compromises that watered them down.”

While companies aren’t required to hire a certain number of local employees, firms must have 70 percent of their tangible assets (property, materials and goods for sale) within the zone, a regulation designed to keep large retailers such as Amazon and Walmart from cashing in on the tax break. Even so, critics still characterize the program as too wide and unrestricted, noting that hot markets such as Chicago, Los Angeles and New York have already shown the most visible successes. Even their poorer neighborhoods are seen as better bets. That’s why Long Island City, not York, Pa., is attracting so much investment. And what critics fear is that the feverish investment in hot markets will lead to displacement of low-income residents. “If these investments are going to be luxury hotels and real estate investments it’s not going to help low-income people,” says Chris Edwards, director of tax policy studies at the Cato Institute. “It’s more likely to displace them.”

When EIG designed opportunity zones, the drafters expected that real estate would be — and in their estimate, should be — the first place for investors in the zones to put their money. Businesses would need offices, and workers would need housing. Gentrification was a concern, so the program included a condition that a developer buying a piece of real estate must make an equal investment in improving the property. If developers paid $1 million for a property in a city, they were required to make $1 million in improvements.

However, in the rules released by the IRS in October, the value of the land was taken out of the calculation for necessary improvements on a property. So only the structure, if there is one, will be factored into the amount of improvement necessary to qualify under the program. In York, Helfrich is worried that investors might see his city as a place to buy up real estate and not invest in businesses. Developers have long been buying factories in the city and converting them to condominiums and loft apartments. “We are very aware of the potential pitfalls of this program,” Helfrich says. “Our city wants to attract job-providing businesses and discourage those who want to gentrify the neighborhoods in our city.”

Despite the market-driven underpinnings behind opportunity zones, libertarian-leaning conservatives are critical of the plan. For one thing, they insist, allowing governors to pick the areas of investment politicizes the program. The original zone map proposed for York included residential neighborhoods. But a lobbying effort by elected officials convinced the governor to move the zones to commercial areas where city leaders wanted the investment to go.

Another concern is that by lumping cities like Chicago, New York and Washington, D.C., with places such as Akron, Ohio; Clarksdale, Miss.; and York, the program is only encouraging more investment in superstar cities. “If you look in Los Angeles and New York City, many of the places that are labeled opportunity zones are places where investment is already happening,” says Weaver, the urban policy professor. “And investors are going to get tax breaks on investments that were going to happen anyway.”

Not only are the zones in the less attractive markets forced to compete with places such as Long Island City for investment, but the smaller markets are also competing with each other. “There are more than 8,000 Census tracts with the same tax advantage,” says Brett Theodos of the Urban Institute. It’ll be hard for these eager supplicants to distinguish themselves from one another. It would be simpler, he says, to play it safe and invest in Chicago, New York or Seattle.

Then there’s the issue of the Treasury Department rules. One of them states that 50 percent of the gross income generated by a business in a qualified opportunity zone must result from sales made within the zone. That would essentially disqualify all but retail and real estate investment. Lettieri of EIG has been critical of the 50 percent gross revenue rule, saying that if it remains in effect, opportunity zones will fail to spur the kind of economic activity that can revive the areas the program was designed to serve. “The No. 1 outcome we should be driving for here is to support new businesses,” Lettieri says. “The gross income rule is damaging to businesses unless you are a laundromat or hardware store who doesn’t sell anything online.”

The public comment period for the Treasury rules closed Dec. 14. EIG submitted comments in opposition to the 50 percent rule, but as of publication, it was still in the tax code.

The combined result of all this is that Helfrich is fielding only a handful of calls from outside investors. Still, there is some interest. John McElligott is the founder and CEO of York Exponential, a robotics firm that programs, designs and constructs its robots in York. On the day Governing visited the robotics plants, McElligott was set to meet with angel investors about the company’s expansion. McElligott wants to construct a $136 million robotics campus on a parcel of land called the Northwest Triangle. Gov. Wolf gave the company $6 million toward the project, but York Exponential is looking to investors for the rest of the capital to create what the CEO believes will transform York into a tech hub for hardware and manufacturing. “We are not going to be a research and development community,” McElligott says. “York is going to be less Facebook and more Ford.”

The campus, McElligott hopes, will be the tipping point in York’s renaissance. Once the new facility is operating, he believes other firms will come to York to compete either in building robots or building the materials to support his businesses’ growth. As the opportunity zone program was being developed, McElligott traveled to Washington, D.C., at least once a month to lobby on behalf of York’s interest.

The proposed York Exponential campus won’t die if the 50 percent gross revenue rule remains in place. McElligott is confident his investors will stick with his vision whether or not they reap the benefits of a tax break. But that might not be the case for the tech firms Helfrich and McElligott would like to see orbiting the campus when it is complete. “The program under the 50 percent rule encourages you to create a pizza shop,” McElligott says. “We are trying to create jobs.” McElligott and Helfrich want what they describe as middle-income jobs, not retail or restaurant employment. In 2017, retail paid an average of $14 an hour, or roughly $30,000 a year, if the employee worked 40 hours a week and received paid leave, according to the Bureau of Labor Statistics.

Even if the Treasury Department removes the 50 percent rule, investors will need some handholding if they are to see places such as York as genuinely appealing targets. None will want to lose the gains made on Wall Street in a risky business proposition. “Naturally the capital in this program is going to flow to real estate,” says Steve Waters, founder and CEO of SMB Intelligence, a firm that provides local government with data and information on how to grow their small business sectors. “It’s only going to flow to businesses if it’s directed.”

Many potential investors are looking to the Treasury right now to finalize the rules governing the program. “Investors are champing at the bit to invest in opportunity zones,” says Rebecca Mitich, a partner with Husch Blackwell, a law firm that specializes in using tax credits to develop real estate. “There are huge New York private equity funds and giant fund managers who are ready to go but still want additional guidance to proceed.

Lettieri believes the rules for the program are not set in stone. He and others expect more rules, perhaps a revision of the 50 percent gross revenue rule, to come in the spring. And even as the real estate activity around opportunity zones has been red hot, at what appears to be the expense of commercial business applicants, Lettieri and other backers of the opportunity zone idea believe business capital will begin to come off the sideline in 2019 as the program is better defined. If that doesn’t happen and the zones remain largely a benefit for real estate development, their creators believe they won’t reinvigorate communities like York. “Real estate is the floor, not the ceiling,” Lettieri says. “If the road ends with real estate, that is a big shortcoming.”

GOVERNING.COM

BY J. BRIAN CHARLES | FEBRUARY 2019

The Tax Cuts and Jobs Act of 2017 introduced the concept of Opportunity Zones (OZs) to promote long-term investment in qualifying areas. Since the law was passed, the IRS has designated some 8,700 Qualified Opportunity Zones (QOZs) across the United States, including many in key parts of the city of Cleveland.

The OZ program has garnered significant attention in the real estate community, both locally and nationwide, as it essentially allows for a) deferral of capital gains, upon reinvestment of gains in QOZ areas, until the earlier of the sale of the asset or Dec. 31, 2026; b) a partial exclusion (up to 15%) of original capital gains deferred, based on the term of ownership of the asset through 2026; and c) a 100% exclusion of capital gains through 2047 on further appreciation of qualified assets held for at least 10 years — sometimes referred to in the industry as the “juice.” The juice provides enormous potential for tax savings of appreciated property.

The Treasury Department issued initial OZ program regulations on Oct. 19, 2018. The regulations provide a variety of parameters to qualify for favored tax treatment under the law, including deadlines for reinvestment of capital gains and deployment of funds. Among other things, the regulations and accompanying revenue ruling state, in effect, that as to real estate investments, either a) the investor must “substantially improve” the real estate, which may be done by doubling the tax basis of the building only, without regard to the value of the land; or b) the “original use” of the subject property must “commence” with the applicable investment.

In the context of “substantial improvements” to property, the land value is not counted. Based on the foregoing, the cost of environmental remediation of land would likely not be taken into account and the funds applied to remediation would not qualify for special treatment under the OZ program.

The “substantial improvement test and the “original use” test have garnered much comment and attention from industry and lobbying groups, as well as from inside the administration, in order to allow investors more direction and leeway in qualifying under the program.

Of perhaps greater interest, on Dec. 18, 2018, the U.S. EPA, through its Office of Brownfields and Land Revitalization (OBLR), issued a letter to the IRS asking for clarification of the above tests, primarily in the context of brownfields remediation. The purpose of the OBLR request is to spur redevelopment of brownfield and other underutilized sites by expanding the breadth and impact of the OZ program.

Specifically, the EPA submitted the following requests:

1. Allow remediation costs to be counted toward substantial improvements. The OBLR recommended that final IRS guidance should clarify that funds applied to environmental remediation (including assessment, cleanup and other site preparation costs) should qualify under the program and should be considered when evaluating the “substantial improvement” test under the regulations.

2. Allow deployment of funds over time. The OBLR asked the IRS to take into account the extended time period necessary for remediation projects and to allow for deployment of funds during the entire period of cleanup. Specifically, the EPA suggested the “stacking” of a 30-month window for cleanup, in addition to the 30-month window for vertical construction in the existing regulations.

3. Allow carryover of gains. The OBLR asked the IRS to enable gains realized from the sale of remediated property to be carried over into other QOZ property. This would allow an investor to complete remediation, sell the remediated property to a vertical developer and reap the ongoing benefits of the OZ program.

4. Allow brownfields cleanup to constitute “original use.” The OBLR also asked that the term “original use” be defined so it automatically applies to properties that are characterized as brownfield sites under the CERCLA. This would go a long way toward simplifying the analysis for investors as to whether the OZ program applies to a project.

5. Allow reuse of vacant, underutilized or land bank property to constitute “original use.” Beyond brownfields, the OBLR also recommended that the definition of “original use” should include property that is underutilized or vacant for a period of one year or more and property foreclosed upon and held by a local government or land bank. OBLR further suggested that the underutilized test may apply to the entire property or to “a portion thereof … which is used only at irregular periods or intermittently.” This would provide flexibility as to qualified redevelopment of partially shutdown facilities.

These recommendations, if adopted, would have important implications for real estate investors. For example, an investor could qualify under the program, under the original-use test, based on “underutilization” of the asset for at least one year. Also, an investor who purchases impacted properties and performs remediation and site preparation could take advantage of the program without conducting their own vertical or other redevelopment. Rather, the investor could complete sufficient remediation activities, sell the remediated property and reinvest the proceeds in other QOZ property, with a carryover of tax advantages. In addition, a redeveloper who performs both remediation and vertical development could count the remediation costs toward satisfying the “substantial improvement” test.

At this time, the real estate community awaits further IRS guidance, which has been delayed by the partial government shutdown. Many other important issues concerning the regulations persist. The final regulations will significantly alter the financial analysis of investment in sites located within OZ areas.

Crain’s Cleveland Business

Thomas J. Coyne

January 19, 2019 04:00 AM

Coyne is practice group leader of the National Real Estate Practice Group of Thompson Hine LLP.

The Internal Revenue Service has issued final regulations amending and modernizing the so-called TEFRA public notice, hearing and approval requirements applicable to tax-exempt private activity bonds.

The attached Hawkins Advisory discusses these final regulations.

The 2017 tax law created a new tax break to encourage investment in low-income areas (“opportunity zones”) but, as high-profile Wall Street, Silicon Valley, and real estate investors rush to profit from it, critics are raising sensible concerns about the policy:

• The law enabled state policymakers to designate relatively affluent areas as opportunity zones, which could divert investment from truly disadvantaged communities.
• While the new tax break enables investors to accumulate more wealth, it includes no requirements to ensure that local residents benefit from investments receiving the tax break. Thus, this tax break could amount to a “subsidy for gentrification” in many areas instead of, as intended, for providing housing and jobs for low-income communities.[1]
• Potential loopholes in the law and an initial set of proposed Treasury regulations — which investors are now lobbying to re-shape — could enable investors to secure the tax benefits while generating little real economic activity in the opportunity zones. The scope of potential tax avoidance — an issue that hasn’t received enough attention to date — will become clearer as Treasury finalizes its first set of regulations and releases additional guidance on how to comply with the law.
• The new tax break will cost an estimated $1.6 billion in lost federal revenue over ten years, according to Congress’ Joint Committee on Taxation,[2] but the costs could be significantly higher after the first decade because, as explained below, some of the most generous tax benefits extend far into the future.[3] Moreover, the extent to which the $1.6 billion figure accounts for large-scale tax avoidance isn’t clear.

Continue reading.

CENTER ON BUDGET AND POLICY PRIORITIES

BY SAMANTHA JACOBY

JANUARY 11, 2019

The federal tax overhaul and stock market volatility help to explain some recent income tax revenue trends.

Income tax collections in December were short of expectations and prior year levels in New York, California and other states, Moody’s Investors Service noted in a brief last week.

The trend is not entirely surprising and underscores the uncertainty state revenue forecasters face as taxpayer behavior changes in response to the 2017 federal tax overhaul, and recent stock market volatility potentially shakes up collections tied to capital gains.

“We expected to get a lower number in December,” John Hicks, executive director of the National Association of State Budget Officers, said by phone on Friday as he discussed income tax collections. “As to whether it’s so low that it’s a problem: Don’t know yet.”

“Revenue estimators will say, particularly with personal income tax, there’s a lot of uncertainty around taxpayer behavior,” he added.

States in December 2017 saw personal income tax revenues swell. The uptick has been widely attributed to high-income taxpayers making early payments so they could claim tax breaks that would be curtailed under the changes to federal tax law enacted that year.

So, in other words, because income tax revenues in December 2017 were unusually high, it makes sense that December 2018 collections would be lower by comparison.

At the same time, how the 2017 federal tax overhaul will affect state income tax revenues in the long run is still coming into focus.

In New York gross personal income tax collections were not only $2.8 billion less than a year earlier, according to the Moody’s brief, but also $500 million shy of the state’s revenue forecast. Total gross personal income tax revenues in New York through December were down about 1.6 percent for the same period during the prior year.

State income tax collections around December are generally seen as a barometer of how income tax receipts will stack up when they’re totaled up in April, Moody’s points out.

NASBO has said previously that in fiscal 2018 states funded on average nearly 46 percent of their budgets with income taxes.

California, Massachusetts and New Jersey were among the other states that reported lower than anticipated income tax collections in December, according to Moody’s. In California, for instance, receipts for the month were down $4.7 billion from the prior year.

Hicks said that running up to December, personal income tax growth was generally strong across the country. “It’s not to say that people aren’t watching closely,” he added.

A key factor affecting state income tax revenues in the December-January timeframe are what’s known as “estimated payments,” which are typically made by taxpayers with sizable income from sources other than wages—like stock market gains.

Moody’s says January collections could make up for the slide in December income tax revenue in some states, but also highlighted that New York reduced its personal income tax forecast for its current budget cycle and future years.

“We expect continued uncertainty to cloud state revenue forecasts in fiscal 2020,” the brief from the ratings agency says. Analysts there added: “It will take the passage of time and more missed revenue forecasts for state revenue analysts to capture new trends.”

Route Fifty

By Bill Lucia,
Senior Reporter

JANUARY 27, 2019

The court on Monday asked for the U.S. government to submit views on an Alabama case.

Alabama for about a decade now has been battling in court over whether a tax the state levies on the diesel fuel that railroads purchase to power their locomotives discriminates against the industry and is therefore in violation of federal law.

In the latest chapter of this long-running dispute, two linked petitions concerning the same case are pending before the U.S. Supreme Court. So far, the high court hasn’t decided to hear the matter. But on Monday justices asked for the Trump administration to submit views on it.

Alabama’s lawyers describe the case as the “de facto bellwether” for other related disputes.

They add that state and federal courts across the federal 11th Circuit, which covers Alabama and Georgia, have stayed over 30 actions in the two states for tax refunds and injunctions while awaiting resolution in the case, which pits Alabama against CSX Transportation, Inc.

The Alabama legal fight hinges on claims by CSX, one of the nation’s largest rail carriers, that the state discriminates against it by requiring railroads to pay a 4 percent sales and use tax on diesel purchases. In contrast, trucks and interstate water carriers are exempt from the tax.

Alabama says eight railroads have sued seeking refunds for tax payments on fuel totaling about $24 million, not including interest, and that CSX stopped paying the state tax in 2011. Most of the state’s sales and use tax revenue goes to fund public schools, the state adds.

It also notes that CSX is seeking to clawback similar taxes in Georgia totaling upwards of $34 million.

CSX agrees there are public dollars at stake.

But the company says the state “ignores the victim of its illegal taxing scheme” and that “the railroads have been in the past, and continue to be, beleaguered by what Congress determined was ‘widespread, long-standing and deliberate’ discriminatory state and local taxation.”

Claims Under the ‘4-R Act’

The federal law at the center of the controversy is the Railroad Revitalization and Regulatory Reform Act, or “4-R Act.”

Enacted in 1976, it prohibits three types of state tax practices related to property taxes. The law also contains a clause that blocks states from imposing other types of taxes that discriminate against rail carriers under the jurisdiction of the federal government.

On two other occasions, Alabama’s fuel tax feud with CSX has reached to the Supreme Court—most recently in late 2014.

That time around, the court sent the case back to the 11th U.S. Circuit Court of Appeals to determine whether Alabama could justify the tax exemptions for trucks and water carriers, like barges.

In the wake of the ruling, Alabama now says the Supreme Court should hear the case to “definitively” clarify whether and when sales and use tax exemptions violate the 4-R Act.

The state’s petition asking the court to take up the case describes how railroads, citing the federal law, began bringing litigation in the 1990s against state taxes on diesel fuel. These claims began in Alabama in 2008, with seven rail carriers filing four lawsuits.

“States have been waiting for an answer for more than 20 years; years we have spent litigating cases that have cost taxpayers millions of dollars,” the state’s filing with the Supreme Court says.

“Granting review to answer the decades-old question thus provides the opportunity to resolve multiple pending cases and prevent new ones.”

The railroad says it’s inaccurate to characterize the case as the culmination of two decades of litigation because there has not been a string of prior cases with unsettled questions about when tax exemptions for water carriers are justified.

CSX, in a linked “cross-petition,” is asking the Supreme Court to review the portion of the 11th Circuit decision related to trucks if it green-lights the state’s petition focused on water carriers.

While truckers don’t pay the sales and use tax on fuel in Alabama, they do pay a 19 cent per gallon state excise tax on diesel, along with a roughly 24 cent per gallon federal tax. Cargo vessels traveling in and out of the state on waterways don’t pay a state fuel tax in Alabama, but do pay a per gallon federal tax of about 29-cents.

Fuel for CSX trains is not subject to any of those taxes, the state court filing notes. Alabama says that between 2007 and 2016 its state and local taxes for train fuel totaled about 23-cents per-gallon.

The company counters that while water carriers pay no Alabama state fuel taxes, CSX in Birmingham and Montgomery, where it buys most of its fuel in the state, faces a combined state and local tax rate of 10 percent, and statewide owes about $5 million in the tax costs annually.

The state’s tax exemption for fuel used by water carriers dates back to 1939 and the state says that, while it’s not entirely clear, it was likely enacted to comply with federal laws and court decisions.

“Alabama did not exempt water carriers to disadvantage trains,” its court petition says.

The state also makes a case that the federal government has jurisdiction over waters used for interstate shipping, and because vessel operators pay federal fuel tax to support projects and policing on those waters, states should be able to forego taxing fuel for ships.

CSX argues that the federal taxes are “irrelevant” and points out that the 11th Circuit rejected arguments tied to the fact that shipping on interstate waters is within the federal domain.

The company says in the 1970s, when lawmakers passed the 4-R Act, many railroads were on the brink of financial collapse, partly due to state and local tax burdens, and that the federal law was meant to help boost competition between freight trains and other types of haulers.

“The Eleventh Circuit’s water carrier ruling does just that,” the company says. “A state should not be heard to complain of ‘lost tax revenue’ from its own discriminatory tax.”

The 11th Circuit ruling, which preceded the current petition and cross-petition before the Supreme Court, gave Alabama two options to fix the discrimination it found: stop collecting sales and use taxes on fuel from the railroad, or revoke the water carrier exemption.

Under the first option, CSX would pay zero taxes on fuel in the state, Alabama says. With the second, it would face a total tax burden in the state for diesel of about 23 cents per gallon, while for trucks the figure would be around 47 cents, and for barges about 52 cents.

Use of Tax Proceeds

Another company, Illinois Central Railroad Co., on Jan. 2, filed a petition asking the Supreme Court to hear a similar but separate case dealing with a Tennessee tax law.

In the Illinois Central case, the company is asking the court to consider whether a state fuel tax on diesel for trains, that truckers are exempt from, discriminates against railroads under the 4-R Act. The 6th U.S. Circuit Court of Appeals upheld the tax, deeming it “roughly equivalent” to the fuel taxes that motor carriers do pay in the state.

Illinois Central zeros in on the idea that the way tax revenues are spent can factor into whether a tax is discriminatory. Sure, truckers pay fuel taxes in the state, the railroad says, but that money helps pay for highway construction and maintenance, which they benefit from.

Railroads on the other hand, according to Illinois Central, receive “minimal direct benefit” from the fuel taxes they pay and must pony up for their own infrastructure, like tracks and bridges.

This gives an advantage to trucking firms, the company claims. Illinois Central says the case presents the court with a chance to resolve whether the way a state uses tax revenue is relevant when it comes to determining if a tax is allowable under the 4-R Act.

CSX’s cross-petition, urging the Supreme Court to weigh in on the 11th Circuit’s blessing of Alabama’s diesel sales and use tax exclusion for trucks, features similar arguments.

Alabama’s lawyers say the court should grant the railroad’s cross-petition to resolve questions about the “truck issue” as well.

They also say the Illinois Central case does not present the same issues surrounding the justification for the water carrier exemption and that the court should take its case instead. “The one it knows best,” the state adds, “and thanks to Alabama’s acquiescence to CSX’s cross-petition, the only one that tees up all necessary issues.”

Route Fifty

By Bill Lucia,
Senior Reporter

JANUARY 14, 2019

Bill Bradley did not like sports betting. The former New York Knicks star forward felt it sent the wrong message to young athletes and undermined the integrity of the game. So when Bradley transitioned from the basketball court to the U.S. Senate, he championed a nationwide ban on sports betting.

It was not, perhaps, the most likely of causes for a Senator from New Jersey, home of Atlantic City, and then-Rep. Bob Torricelli was chagrined. To Sen. Bradley’s dismay, Torricelli engineered a carveout for New Jersey, with a grandfather clause that allowed continuing sports book operations in a handful of states that already allowed them, including Nevada.

However, a stalemate in the state legislature prevented New Jersey from legalizing sports betting in the narrow window granted them by the new federal law, the Professional and Amateur Sports Protection Act (PAPSA) of 1992. And so it came to pass that, two and a half decades later, a new generation of New Jersey politicians would unmake Bradley’s legacy, winning a victory in the Supreme Court to strike down PAPSA and open the door to state legalization—and of course taxation—of sports betting.

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The Tax Foundation

by Jared Walczak

January 25, 2019

The Texas state legislature must decide whether or not to extend the ad valorem property tax abatement program currently authorized under state law. The program is currently set to expire on September 1, 2019. Local tax abatements are not without their detractors, and the decision to extend the existing program could impact the viability of future renewable energy and other energy developments across the state.

Background: Chapter 312 Property Tax Abatement Program

Chapter 312 of the Texas Tax Code currently permits local taxing units to enter into agreements with property owners providing for the abatement of ad valorem property taxes, provided that the property owner makes specified improvements or repairs to the property. These agreements are entered into between a property owner and a local county, city, special taxing district or other authority such as a water district or a hospital district. The state law authorizes and establishes certain guidelines for the abatement agreements, with the precise terms of the abatements negotiated and agreed to by the local taxing authority and the taxpayer. Any agreement must be approved by a vote of the members of the governing body of the local taxing unit.

Currently, the Chapter 312 abatement program is set to expire on September 1, 2019. The expiration of the program would not impact abatement agreements that have already been executed, but would prohibit local taxing units from entering into any new agreements after the expiration date. The term of an abatement agreement is limited to a maximum of 10 years by the statute, so property owners who have executed agreements prior to the potential expiration of the program could potentially still benefit from the abatement program for a number of years past this expiration date.

School districts, whose ad valorem property tax rates are typically greater than those of the other local taxing units, are prohibited from entering into abatement agreements under Chapter 312. However, Chapter 313 of the Texas Tax Code provides for a similar incentive with respect to ad valorem taxes levied by local school districts. Unlike Chapter 312, which provides for the abatement of property taxes, Chapter 313 allows school districts and property owners to enter agreements to limit the appraised value of property for ad valorem property tax purposes. Chapter 313 is currently set to expire on December 31, 2022, barring any legislative action to extend the expiration date.

Texas Legislative Session and Proposals

The Texas legislature began its session on January 8, 2019, and the session is scheduled to end on May 27. Pre-filing of bills for the 2019 session opened on November 12, 2018. Three pre-filed bills addressing the pending expiration of the Chapter 312 abatement program would extend the program for an additional term of 10 years. The bills introduced to date include Texas H.B. 360 and Texas H.B. 499, filed by Republican State Representatives Jim Murphy and Angie Button, respectively, as well as Texas S.B. 118, filed by Democratic State Senator Royce West. As currently drafted, the bills do not contain any provisions creating any additional limitations or carve-outs from the abatement program.

Eversheds Sutherland Observation: Tax abatement agreements have been offered by local taxing jurisdictions across Texas to taxpayers in a wide range of industries and for diverse types of projects. Lobbyists and trade groups are currently presenting arguments on both sides of the debate regarding extension of the Chapter 312 abatement program. In particular, a number of groups have expressed opposition to granting tax abatements to renewable energy projects, including wind and solar farms. Taxpayers who are contemplating a project in Texas or who have already begun acquiring or developing such a project should be mindful of the pending expiration of this abatement program and seek to execute any abatement agreements in advance of September 1, 2019. Eversheds Sutherland will continue to monitor any developments regarding the extension or modification of the Chapter 312 abatement program and provide updates of any significant developments.

January 24, 2019

Eversheds Sutherland (US) LLP

Land deals in eligible tracts from Bronx to Oakland jump 62%.

In a former warehouse on a dimly lit street in the South Bronx, developers sipping Puerto Rican moonshine listened as a local official urged them to capture a new U.S. tax break by rebuilding the decaying neighborhood.

In Alabama, a young lawyer quit his job after seeing the same tax break’s potential to help one of the nation’s poorest states. He now spends his days driving his Hyundai from town to town, slideshow at the ready, hoping to connect investors with communities.

And on a conference call with potential clients, a prominent hedge fund executive pitched investments in a boutique hotel in Oakland, which he described as San Francisco’s Brooklyn. The project is eligible for the same tax break, designed to help the poor.

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Bloomberg

By Noah Buhayar and Caleb Melby

January 15, 2019

Citizens, who own real property and pay ad valorem taxes in the county, filed petition for writ of mandamus and other relief against county board of tax assessors, individual tax board members, and board’s chief appraiser, alleging the board failed to exercise its duty to diligently investigate and determine whether stadium lessee was subject to ad valorem property taxation, and seeking temporary and permanent injunctive relief, to enjoin defendants from recognizing stadium property as tax exempt, and a declaration that taxable leasehold interest had been transferred to lessee, rather than a non-taxable usufruct.

The trial court granted defendants’ motion to dismiss for failure to state a claim, and then dismissed other pending motions as moot. Citizens appealed.

The Court of Appeals held that:

• Citizens failed to rebut the presumption that the trial court followed the law and limited its consideration to the amended petition and attached exhibits in ruling on defendants’ motion to dismiss for failing to state a claim on which relief could be granted;
• Citizens failed to allege that county board of tax appraisers and other defendants failed entirely to conduct an investigation and reach a decision regarding the ad valorem tax status of stadium lessee’s interest in new football stadium, as required to state a mandamus claim;
• Sovereign immunity clearly barred the plaintiffs’ declaratory and injunctive relief claims against the board and other defendants in their official capacities; but
• The doctrine of official immunity did not operate to bar suits for declaratory or injunctive relief against county officers in their individual capacities.

Article 78 was initiated to review Tax Appeals Tribunal determination sustaining a notice of deficiency.

The Supreme Court, Appellate Division, held that evidence was sufficient to support determination that investment in gas and oil partnership was an abusive tax avoidance transaction.

Evidence was sufficient to support Tax Appeals Tribunal’s determination that overall financing structure of gas and oil partnership artificially inflated partners’ actual capital contributions, allowing large tax deductions based upon intangible drilling costs derived through inflated turnkey contract, and thus that taxpayer’s investment in partnership was an abusive tax avoidance transaction; collateral agreement had effect of satisfying the principal of taxpayer’s subscription note by payment of only 15% of the face value, which was to be used to purchase bonds that were used to pay off the principal of the subscription note, taxpayer only paid interest paid sporadically, and turnkey contract’s price bore no relationship to reasonably projected or actual drilling costs but instead was correlated with promised 250% tax deduction.

Commercial real estate professionals will know there’s no avoiding Opportunity Zones these days, especially in hot markets like Phoenix. The popular government program sets out to stimulate low-income and underdeveloped communities across the nation by offering generous incentives on capital gains to investors and developers. Of the 144 designated census tracts across the state of Arizona, 61 are located in the greater Phoenix area. Considering the rewards at stake, the local commercial real estate community is keen, with more sophisticated funds already capitalizing on market trends. But, resources are limited, and as more players enter Phoenix’s Opportunity Zone market, competition is beginning to intensify. How can investors and developers successfully surpass others for valuable assets?

The advent of commercial real estate technology and democratization of off-market data has allowed the commercial real estate community to streamline and simplify their Opportunity Zone search experience. Access to the entire pool of property across the nation, including Phoenix’s qualified census tracts, provides commercial real estate professionals an easier way to find potential investments. Then, when looking at Phoenix’s hottest submarkets like industrial and multifamily, users can analyze individual asset data to empower stronger, smarter deal-making.

How Off-Market Data Helps

As investors and developers race to find valuable properties for investment in Phoenix Opportunity Zones, off-market data is now more beneficial than ever. In the age of digital disruption, it’s no longer enough to rely solely on “on-market” listed properties. Instead, off-market data, which includes an area’s total asset stock, can empower simpler, more strategic due diligence. Off-market data aggregation tools, like Reonomy, give users the advantage of finding high-demand properties faster, long before the less-sophisticated competition does.

More importantly, robust off-market platforms arm investors and developers with the information they need to make stronger decisions to usher in more flexible deals. For Opportunity Zone deal-making, specifically, granular building and transactional information can give users an edge on the competition. Ownership and portfolio information enable them to reach decision-makers directly, rather than getting stonewalled by gatekeepers and LLCs. In all, it’s the comprehensive depth and breadth of off-market data that opens doors for investors interested in Opportunity Zone investments.

Uncovering Phoenix’s Potential

Using off-market data, what particular Phoenix markets should commercial real estate professionals explore? Industrial and manufacturing had a strong 2018; the sector hit an all-time high since 2007 with approximately 6.9 million square feet under construction throughout the metro. Phoenix’s positive economic growth lends itself to extremely low vacancy rates (7.3%) and an increase in rent prices, which have steadily increased to an average $7.2 per square foot.

According to Reonomy data, more than 6,800 commercial properties are located in Phoenix’s designated Opportunity Zones. Nearly 3,000 of these properties are categorized as industrial and include a myriad of assets, spanning from aircraft hangars to sprawling warehouses. For those interested in capitalizing on Phoenix’s industrial advancement, there’s plenty of potential in the area’s nominated census tracts. Users who utilize off-market data platforms, like Reonomy, can explore this information further, by customizing their search experience source the properties that best match their preferences and ensure the highest return on investment (ROI).

Additionally, Phoenix’s strong job and population growth are attracting multifamily investments across the city. Globe Street reports the need for more multifamily units will likely attract land investment and development deals throughout the first few months of 2019. Big-name buyers have already begun investing in Phoenix’s promising multifamily sector, with companies like LaSalle Investment Management and TruAmerica expanding their portfolios throughout the city. These high-yielding multifamily investments might prove lucrative in the years to come, especially in Phoenix’s Opportunity Zones where ROI can be maximized.

Current Reonomy off-market data indicates that there are 1,280 multifamily assets located throughout Phoenix’s Opportunity Zones, including duplexes, triplexes, and general multifamily communities. Reonomy data also indicates another 2,600 land parcels in qualified census tracts. While 953 of these are zoned for industrial properties, over 1,211 are zoned for residential purposes, giving developers a wide-ranging scope of property options for consideration.

These numbers provide a broad overview of the options in Phoenix’s Opportunity Zones, but it’s the depth of the off-market data that truly empowers smart investment decisions for stronger deal enablement. Commercial real estate technology like Reonomy allows users to dive deeper into individual asset details to explore physical, transactional and owner information. This granular intel ultimately enables investors and developers to strike more flexible, personal deals with decision-makers before the competition does.

There’s no doubt Arizona’s capital city will continue to garner attention from investors and developers. With Opportunity Zones in the picture now, off-market data is essential for simplified prospecting and stronger deal facilitation.

AZBIGMEDIA.COM

REAL ESTATE | 14 Jan | RICHARD SARKIS

Richard Sarkis is Co-Founder & CEO of Reonomy, a commercial real estate data and analytics platform. For a simpler approach to searching for Opportunity Zones in Phoenix, try the Reonomy platform for free, here.

In Farmland Dairies, Inc. v. Borough of Wallington, N.J. Super. App. Div. (per curiam) (unpublished decision) (35-2-7909), the Appellate Division upheld the decision of the Tax Court in denying an unrelated neighboring property owner’s efforts at intervening in a pending local property tax appeal between the property owner and the Borough. The court concluded that the intervention application of the putative intervenor was out of time and barred by the statute of limitations. Although all residents of municipalities have standing and maintain the right to pursue tax appeals as “aggrieved” parties under the statute, including those related to their neighbor’s properties, any such contests must nonetheless comply with the statutory filing deadline.

The New Jersey Supreme Court has consistently recognized the necessity of complying with filing deadlines in the area of taxation. The statutory scheme establishing the court’s jurisdiction in this area is “one with which continuing strict and unerring compliance must be observed.” See McMahon v. City of Newark, 195 N.J. 526, 546 (2008). Indeed, our Supreme Court has declared that the “failure to file a timely appeal is a fatal jurisdictional defect.” F.M.C. Stores v. Borough of Morris Plains, 100 N.J. 418, 425 (1985). The Supreme Court has also explained that strict adherence to statutory filing deadlines is of particular concern in tax matters, given “the exigencies of taxation and the administration of local government.” F.M.C. Stores, 100 N.J. at 424. The Legislature “has attempted to set out a well-organized time-table for the purpose of enabling a municipality to ascertain the amount of taxable ratables within the jurisdiction in order that it might adopt a responsible and fairly accurate budget.” Id. at 425. “By incorporating a strict deadline in [the statute], the Legislature intended to ensure that municipalities receive timely notice that a particular property’s valuation is subject to challenge.” Prime Accounting Dept. v. Township of Carney’s Point, 2013 N.J. Lexis at *31.

After previously remanding the matter to the Tax Court for further proceedings concerning the timeliness and propriety of the putative intervenor’s application for permissive intervention, the Appellate Division made it plain, mindful of the above-referenced well-settled jurisprudence, that any effort to intervene must, in the first instance, be timely pursued and that the annual tax appeal filing deadline will effectively wait for no one.

Although as demonstrated above, the inviolate nature of this statutory deadline is plain, the court’s decision here may have been made easier by the attendant distasteful nature of a case involving an unrelated party’s efforts at meddling with pending litigation between the real parties in interest (the actual owner of the property in question and the municipality).

by Carl Rizzo

January 17, 2019

Cole Schotz

On December 28, 2018, the U.S. Department of the Treasury released final regulations (the “Final TEFRA Regulations”) regarding the requirements for public notice, hearing, and approval of qualified private activity bonds under Section 147(f) of the Internal Revenue Code.  The Final TEFRA Regulations replace temporary regulations under Section 103(k) of the Internal Revenue Code of 1954 (the “Existing TEFRA Regulations”) by finalizing rules set forth in proposed regulations issued in September 2017  (the “2017 Proposed Regulations”) with a few notable improvements and clarifications.  [The main changes to the Existing TEFRA Regulations implemented and/or confirmed by the Final TEFRA Regulations include:

• Shortening Notice Period to Seven Days. Under the Final TEFRA Regulations a notice of public hearing is presumed reasonable if published no fewer than seven days in advance of the hearing.  This is shorter than the 14 days presumed reasonable under both the Existing TEFRA Regulations and the 2017 Proposed Regulations.
• Deadlines Related to Public Approval.  The Existing TEFRA Regulations do not impose any specific restriction on the period of time between a TEFRA hearing and the required public approval.

• Period Between TEFRA Notice and Public Approval.  The Final TEFRA Regulations do not impose any specific restriction on the permitted time between the TEFRA Notice and the required public approval.  The preamble to the Final TEFRA Regulations confirms that a period of one year between the TEFRA notice and the public approval is reasonable and acknowledges that a period of more than one year also may be reasonable in some circumstances.
• Period Between Public Approval and Issuance of Bonds.  For bonds not issued pursuant to a plan of financing, the Final TEFRA Regulations follow the 2017 Proposed Regulations in providing that public approval is timely only if it occurs within one year before the issue date of the bonds.  The Final TEFRA Regulations are clear that the one-year clock begins running on the date of the approval, not the date of the hearing.

• Allowing Website Publication by Governmental and On-Behalf-Of Issuers.  The Final TEFRA Regulations allow the notice requirement to be satisfied with a posting on the approving governmental entity’s website or, in the case of on-behalf-of issuers, with a posting on the on-behalf-of issuer’s website.  Publication of notice in a newspaper is no longer required (but is still permissible).  Notably, the Final TEFRA Regulations eliminated the requirement in the 2017 Proposed Regulations that website publication was only permitted with “reasonable alternative notice” by other means to accommodate potential residents with no internet access.

• Location of Website Posting.  For issuers with complex, multipage websites, the Final TEFRA Regulations require a public notice to be posted on the issuer’s “primary public website” in an area used to inform residents about events such as public meetings.
• Maintenance of Records.  Issuers are required to maintain records demonstrating that notices posted to a website satisfied the above requirements and, therefore, must develop procedures for capturing and retaining the time and content data of the applicable website.

• Expanding Definition of “Project” to Include Non-Proximate Sites Used in Integrated Operations.  One of the few burdensome requirements added by the 2017 Proposed Regulations was that the notice of public hearing must identify the maximum principal amount of bonds to be allocated to each “project” specified in the notice — rather than just stating the amount of bonds for all projects in the aggregate.  The Final TEFRA Regulations retain the dollar-breakout requirement.Following the 2017 Proposed Regulations, the Final TEFRA Regulations define “project” as land, building, equipment and other property “located on the same site, or adjacent or proximate sites used for similar purposes.”  The Final TEFRA Regulations also provide, however, that capital projects or facilities that are used in an “integrated operation” may be treated as the same “project” even if not located on the same site or adjacent or proximate sites.

• Practical Compliance Considerations.  The requirement of the 2017 Proposed Regulations to assign a maximum principal amount to each project caused concern among issuers and bond counsel.  Although the Final TEFRA Regulations permit an “insubstantial deviation” of 10% above the stated maximum principal amount specified for each project, the lack of specificity around the terms “proximate” and “integrated operation” will likely lead to conservative practices in specifying projects and stating expected amount of bonds.

• Permitting Supplemental Public Approval.  The Final TEFRA Regulations retain the welcome provision in the 2017 Proposed Regulations that, in certain unforeseen and unexpected circumstances, a supplemental public approval may be obtained after bonds are issued but before proceeds are spent on a use not set forth in the original TEFRA notice.
• Clarifying that General Partner Is a Beneficial Party of Interest.  The Existing TEFRA Regulations require that the TEFRA notice to include the name of the initial owner, operator, or manager of the facility.  The 2017 Proposed Regulations provided that the notice may comply by naming a significant true beneficial party of interest for the initial owner or user.  The Final TEFRA Regulations provide that the general partner of the partnership that owns the facility is a beneficial party of interest that may be named in the TEFRA notice.
• Special Rules.  The Final TEFRA Regulations confirmed and clarified various rules in the 2017 Proposed TEFRA Regulations that relate to the approval requirements for working capital financings, pooled financings with qualified 501(c)(3) bonds, single-family housing bonds, student loan bonds, airport bonds, and high-speed rail bonds.

Effective Date.  The Final TEFRA Regulations apply to bonds issued pursuant to a public approval occurring on or after April 1, 2019.  Because the effective date is keyed to the date of the approval rather than the date of the public notice or the date of the bond issue, the Existing TEFRA Regulations apply to notice content, hearings, and approvals for bonds issued after April 1, 2019, provided that the approvals were obtained before that date.

by Andrea Ball, Charles Cardall, Richard Moore & Aviva Roth

January 8, 2019

Orrick, Herrington & Sutcliffe LLP

On December 31, 2018, the Department of Treasury and Internal Revenue Service released long-awaited proposed regulations (the “Proposed Regulations”) that address when modifications to the terms of tax-exempt bonds are treated as an exchange of existing bonds for newly issued (or “reissued”) bonds for purposes of section 103 and sections 141 through 150 of the Internal Revenue Code and when an issuer’s acquisition of its bonds results in such bonds ceasing to be outstanding for federal tax purposes. The Proposed Regulations (found at https://www.govinfo.gov/content/pkg/FR-2018-12-31/pdf/2018-28370.pdf) are intended to unify and clarify existing guidance.

Background

If, after tax-exempt bonds are issued, an issuer and bondholder agree to significantly modify the terms of the bonds, the original bonds may be treated for federal tax purposes as having been exchanged for newly issued modified bonds. Additionally, if an issuer or its agent acquires and resells a bond, the bond may be treated as having been retired upon acquisition and replaced with a newly issued bond upon resale. The replacement of the old bond with the newly issued bond is commonly referred to as a “reissuance”. Reissuance of a bond is significant because it is treated as a current refunding for tax purposes and the continued tax-exemption of the bond after the reissuance date must be reassessed by reference to tax law requirements and factual circumstances in effect as of the reissuance date. In addition, a reissuance may result in the realization of tax loss or gain as of the reissuance date by the holder of the reissued bond.

Tender option bonds and variable rate demand bonds have certain characteristics that raise reissuance questions. The Proposed Regulations are expected to replace existing guidance in Notice 88-130 and Notice 2008-41 related to tender option bonds and variable rate demand bonds and to conform Treasury Regulations Section 1.1001-3, which generally governs modifications to debt instruments, to the special rules in the Proposed Regulations.

Proposed General Rules for Retirement of Tax-Exempt Bonds

Under the Proposed Regulations, a tax-exempt bond is treated as retired (i.e., no longer outstanding for federal tax purposes) if a significant modification occurs under Regulations Section 1.1001-3, if the issuer or an agent acquires the bond in a manner that liquidates or extinguishes the holder’s investment in the bond, or if the bond is otherwise redeemed (for example, paid at maturity or upon an optional or mandatory redemption). Notably, under the Proposed Regulations, “issuer” is defined to mean the actual issuer of the bonds or any related party rather than the conduit borrower. This means that acquisition of a bond by a conduit borrower would not result in the retirement of that bond.

Exceptions to the General Rules

The Proposed Regulations provide three exceptions to the general rules. The first two exceptions relate to “qualified tender bonds” and the third applies to all tax-exempt bonds. A “qualified tender bond” is defined as a tax-exempt bond that (i) bears interest during each authorized interest rate mode at a fixed interest rate, a qualified floating rate or an objective rate, (ii) bears interest unconditionally payable at periodic intervals of no more than one year, (iii) has a stated maturity date that is not later than 40 years after the issue date of the bond, and (iv) includes a qualified tender right. A “qualified tender right” is defined as the right or obligation of a holder of the bond to tender the bond for purchase that (i) is available on at least one date before the stated maturity date, (ii) has a purchase price equal to par plus any accrued interest, and (iii) is followed by the issuer or remarketing agent either redeeming the bond or using reasonable efforts to resell the bond within 90-days from the date of tender for a purchase price of par plus any accrued interest.

Under the first exception in the Proposed Regulations, both the existence and exercise of a qualified tender right are disregarded when applying Regulations Section 1.1001-3 to a qualified tender bond. Accordingly, an interest rate mode change that occurs pursuant to the terms of a qualified tender bond does not cause the bond to be reissued because the qualified tender right is ignored and the issuer’s election to change the interest rate mode is considered the exercise of a unilateral option, which under Regulations Section 1.1001-3 is not treated as a modification.

Under the second exception in the Proposed Regulations, the acquisition of a qualified tender bond by the issuer or its agent does not result in retirement of the bond if the acquisition is pursuant to the operation of a qualified tender right and the bond is not held by the issuer or its agent for more than 90 days after the date of tender. In other words, if a qualified tender bond is tendered to an issuer, the issuer or its agent can hold the bond for up to 90 days before remarketing it without causing a reissuance of the bond. As noted above, a conduit borrower or its agent can hold such a bond indefinitely before remarketing without causing a reissuance.

The third exception under the Proposed Regulations applies to all tax-exempt bonds, not just qualified tender bonds. Under this exception, the acquisition of a tax-exempt bond by a guarantor or liquidity facility provider acting on the issuer’s behalf but unrelated to the issuer does not result in retirement of the bond if the acquisition is pursuant to the terms of the guarantee or liquidity facility.

Consequences of Retirement

If a bond is treated as retired pursuant to the Proposed Regulations due to a deemed exchange, the modified bond is treated as a new bond issued in exchange for the original bond. If a bond is treated as retired pursuant to the Proposed Regulations following the acquisition of the bond by the issuer or its agent, (i) if the issuer resells the bond, the bond is treated as a new bond issued on the date of resale, or (ii) if the issuer does not resell the bond, it simply ceases to be outstanding for federal tax purposes. If the bond is treated as a newly issued bond, it will generally be treated as a current refunding bond which must be retested for qualification as a tax-exempt bond under sections 103 and 141 through 150 of the Internal Revenue Code. Potential negative consequences for the issuer include a change in yield for purposes of arbitrage and rebate, acceleration of any required rebate calculation and payment and change-in-law risk.

Optional Application

The Proposed Regulations will be effective 90 days after they are published (following comments and any revisions) as final regulations in the Federal Register but they may be applied to events and actions taken with respect to tax-exempt bonds that occur before that date.

Comments and requests for a public hearing must be received by March 1, 2018.

by Christie L. Martin

January 11, 2019

© 2019 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Abstract

The Department of Treasury solicited comments as part of the process for the proposed rule “Investing in Qualified Opportunity Funds, IRS REG-115420-18.” As the IRS considers revisions to Form 8996, we recommend they consider including additional Fund- and transaction-level reporting requirements. Following precedent from prior economic development incentives and programs, nonburdensome reporting requirements would answer questions of “who”, “what”, “when”, “where”, and “how much” for each Opportunity Zones investment. Without collecting this basic information, it will be difficult for IRS to fulfill its statutory evaluation obligations for Opportunity Zones.

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The Urban Institute

by Brett Theodos & Brady Meixell

December 28, 2018

The small oil companies and banks holding more than $800 million in refundable tax credits scored a victory Wednesday when an Alaska Superior Court judge threw out a lawsuit challenging the state’s plan to sell bonds to pay off those credits.

Judge Jude Pate granted the State of Alaska’s motion to dismiss the suit filed by former University of Alaska regent Eric Forrer arguing against the constitutionality of the bond scheme contained in House Bill 331 that the Legislature approved last spring.

In making the ruling, Pate concluded that Forrer and his attorney, Juneau lawyer Joe Geldhof, failed to state a claim upon which the court could grant relief on the grounds that HB 331 “passes constitutional muster.”

Forrer filed the suit in May, contending the plan to sell the “tax credit bonds” falls outside the tight sideboards the Alaska Constitution puts on the state’s ability to incur debt. He also said in interviews and through court filings that the plan amounts to a de-facto dedication of general fund money to pay the bond debt because not making the payments would have grave consequences on the state’s credit rating and future finances.

Attorneys with the Legislative Legal Services office also questioned the legality of the tax credit bonds while HB 331 was being debated. A competing legal opinion by former Attorney General Jahna Lindemuth declared the bill was constitutional.

Geldhof said Friday morning that Forrer will appeal Pate’s ruling to the Alaska Supreme Court.

The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold.

State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole.

HB 331 allows the Revenue Department to set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds.

State attorneys contended the plan is legal because the bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments.

New Attorney General Kevin Clarkson and Revenue Commissioner Bruce Tangeman praised Pate’s order in a formal statement from the Department of Law.

“With this tax credit bond program, we are following through in paying down the tax credits, so industry and the financial markets know we are open for business. This will bring more stability to state finances and help the business community to get the economy back on track,” Tangeman said.

Tangeman also said in a brief interview earlier Thursday that the state would be working to release $100 million originally approved in the current fiscal year budget for companies that chose not to participate in the bond plan.

“It’s a high priority to cut that $100 million loose,” he said, noting even if HB 331 is upheld at the Supreme Court it will take several months to execute a large bond sale.

State officials initially planned to hold the sale last August, but it was put off given the looming lawsuit would almost certainly require high interest rates on the bonds, if they could be sold at all. That situation could remain if Forrer appeals Pate’s ruling as expected.

Pate, in a narrow but lengthy ruling, wrote that while the policy implications of selling the bonds can be debated, those issues are not the courts’ to decide, noting that HB 331 has provisions that allow credit holders to sue the Tax Credit Certificate Corp., but not the State of Alaska, if the bonds aren’t paid through appropriations by the Legislature.

“An examination of the bond transaction in HB 331 demonstrates the presence of both an effective non-appropriations clause and the shield of an independent state corporation,” he wrote. “These two features sufficiently ensure that HB 331 does not create any debt that is legally enforceable against the State.”

Hatched by former Gov. Bill Walker’s administration as a way to pay off the large tax credit obligation — expected to be upwards of $1 billion when the final tax credit certificates are applied for — HB 331 would allow the companies and banks holding credits to get their money relatively quickly instead of possibly waiting for the state to pay them off over years of appropriations according to current statute.

Until Walker vetoed $200 million worth of the credits in the 2016 budget while facing a deficit of more than $3 billion, the Legislature had always paid off the full credit balance each year.

To get paid sooner the credit holders would have to accept a discount of up to 10 percent less than the face value of the certificates. The state Department of Revenue would then use the difference between the credit values and the discounted amount actually paid to cover the borrowing costs.

Forrer, Geldhof and others skeptical of the plan have also questioned the economics of it.

Supporters of the tax credit bonds insist it is a way to restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of credit payment amounts at levels below what was applied for as the Legislature and the administration debated how to resolve the state’s large budget deficits.

The credits were largely issued to small exploration companies that did qualifying work, but they were then often used as collateral for loans issued by investment banks to support additional exploration work. A commonly used credit for explorers with no production and no tax liability had the state paying 35 percent of the cost of qualifying work in cash.

When the earned credits weren’t paid off in full in the fiscal years 2016-18 state budgets, as had previously been done, the banks holding them mostly stopped lending into the Alaska oil sector.

In one unique instance, the Department of Revenue in October 2015 issued a $22.5 million tax credit-backed loan to a holding company set up by the state-owned Alaska Industrial Development and Export Authority. The loan was made because the authority had not received payment on its investment in a small North Slope oil development spearheaded by Brooks Range Petroleum Corp. — payment that was supposed to come from tax credits paid by Revenue for work Brooks Range had performed.

Forrer and Geldhof rebut that the new corporation would not have any revenue of its own — which Pate acknowledged in his order — but would rely on legislative appropriations from the general fund. According to Geldhof, Pate incorrectly applied a prior Alaska Supreme Court decision involving a lease-purchase agreement that does not apply to this case.

“Everybody’s admitting that, well, if a future Legislature doesn’t use general funds to give this phony shell corporation the money to pay back the bond holders there’ll be enormous consequences through Moody’s and the other ratings agencies and Alaska’s credit rating will take a hit and there is recourse,” he said.

Permitting the state to invoke the subject to appropriation language and set up pass-through corporations for the use of selling bonds sets a dangerous precedent, Geldhof argued further.

“It’s going to be all bets are off and the State of Alaska will start incurring fantastic debt,” he said, later adding, “It’s a recipe for running this place like Illinois or Venezuela.”

Pate acknowledged this argument, but wrote that, “the court should not engage in second guessing the wisdom of the legislature’s fiscal policy decisions, even when those decisions may have a negative impact on the State’s credit rating.”

The judge also pointed to prior court rulings that “concerns regarding the state’s credit rating do not create legally binding debt.”

While he disagrees with Pate’s ruling on multiple fronts, Geldhof said he appreciates the effort that went into it. During oral arguments in October Pate said he would issue a decision in early November, but the 44-page order wasn’t published until Jan. 2.

“As an attorney I at least want to know the judge heard my argument. He clearly did because he labored on it,” Geldof commented

Alaska Journal of Commerce

By: Elwood Brehmer

01/03/2019

Those interested in the economic development program have been closely tracking the guidelines.

Citing the partial federal government shutdown, the Treasury Department on Monday cancelled a hearing scheduled for later this week on rules for the Opportunity Zones program.

The department said a new date for the postponed Jan. 10 meeting would be set once its appropriations are restored. Treasury released proposed rules for the economic development initiative in October.

Investors and others were eager for Treasury to issue guidelines for the program so that more investments could start to flow through it.

While the current proposed regulations provided substantial insights into how the program would work, they also left some key questions about it unanswered. And dozens of written comments offering feedback on the rules, from parties ranging from nonprofits to investment firms, have been submitted in recent weeks.

On Tuesday, the partial government shutdown was in its 18th day, with Democratic lawmakers and President Trump unable to break an impasse over the president’s demands for billions of dollars to build a wall on the nation’s southern border with Mexico.

Created by the sprawling 2017 federal tax overhaul, the Opportunity Zones program offers tax breaks to investors who funnel capital gains into special funds that are supposed to invest the money into eligible census tracts that are economically distressed—the “zones.”

When the Treasury Department released the draft rules last October, the department said it anticipated issuing a second round of guidance before the end of the year.

But, as of Tuesday, the White House Office of Information and Regulatory Affairs had not publicly reported that any additional Opportunity Zones rules were under review.

Dec. 28 was the deadline for written comments on the draft rules released in October.

The online federal docket for the regulations shows that at least 145 comments had been received.

One group that submitted feedback is the Florida Housing Coalition. The nonprofit suggested Treasury set performance measures and reporting requirements for the program, and that it should take steps to prevent “predatory or speculative” purchases of vacant land.

Another example of the comments is from Ovation Partners, an investment adviser that manages more than $500 million of assets. The firm is seeking greater clarity on timing requirements for investing gains from partnerships into the funds that can invest in the zones.

Treasury says the new date for a hearing on the proposed rules will be set no earlier than two weeks from the date a notice announcing it is published in the Federal Register. This week’s meeting was going to be held at an IRS building in Washington, D.C.

Route Fifty

By Bill Lucia,
Senior Reporter

JANUARY 8, 2019

Objector brought declaratory judgment action against county, challenging county’s assessment of increased property taxes.

The Superior Court, King County dismissed action as untimely. The Court of Appeals reversed.

After grant of review, the Supreme Court of Washington held that:

• Proposed measure for increase in property taxes sufficiently described taxation structure which county later implemented, and therefore ten-day time limit for challenging measure’s ballot title applied;
• Challenges to a ballot title based on failure to comply with statute requiring a ballot title for a levy lid lift to contain an express statement in certain circumstances must be raised during the statutory ten-day time limit for challenges to a ballot title; and
• Challenges to a ballot title based on failure to comply with statutory accuracy and clarity requirements must be raised during the statutory ten-day time limit for challenges to a ballot title.

Property owner brought action against county treasurer and city, seeking declaration that special tax assessments on the property had been extinguished under the General Property Tax Act (GPTA) by foreclosure.

The Circuit Court granted defendants’ motion for summary disposition. Property owner appealed.

The Court of Appeals held that:

• Circuit court, rather than Michigan Tax Tribunal (MTT), had jurisdiction over property owner’s challenge to special assessments, and
• Defendants were engaged in exercise or discharge of a government function under the governmental tort liability act (GTLA), and thus were entitled to immunity on property owner’s slander of title action.

Circuit court, rather than tax tribunal, has jurisdiction to consider a challenge to a tax assessment based not on the validity of the assessment per se, but on peripheral issues relevant to enforcing a tax assessment, and which does not require any findings of fact but only construction of law.

Circuit court, rather than Michigan Tax Tribunal (MTT), had jurisdiction over property owner’s challenge to special assessments, where the owner did not challenge factual basis or amount of the assessments on his land, which arose from special assessment agreements entered into by prior owner, but argued that the assessments were extinguished under the General Property Tax Act (GPTA) by judgment of foreclosure on the property.

Property owner’s challenge to an amendment to voluntary special assessment/development agreement between prior property owner, city, and others was contractual in nature, and thus circuit court, rather than Michigan Tax Tribunal (MTT), had jurisdiction over the issue; the amendment was recorded after a judgment of foreclosure on the property and property owner’s challenge to the amendment asserted that it was not supported by consideration and against public policy.

County treasurer and city were engaged in exercise or discharge of a government function under the governmental tort liability act (GTLA) in attempting to collect extinguished special assessments, and thus were entitled to immunity on property owner’s slander of title action after city and treasurer attempted to collect on special assessments, entered into by prior property owner, after foreclosure had extinguished the debts; city was authorized to assess and collect such assessments.

The Urban Institute looks at how local leaders can get the most out of a new federal program designed to boost investment in struggling neighborhoods.

Opportunity Zones! Are they good or bad?

The answer to that question may depend in part on whether or not you buy the premise that tax incentives are the most effective way to successfully uplift economically depressed areas. And even if you do, at this moment, a lot hinges on the final rules governing the program, which was unveiled as part of the 2017 tax reform as a way to lure investment to neglected neighborhoods and left-behind cities. It also depends on exactly how local governments choose to implement it.

In a new brief, the Urban Institute’s Brett Theodos and Brady Meixell use the case of Cook County, Illinois, to illustrate how local leaders could get the most out of their brand-new zones. Their big takeaway: Understanding the nuances between the selected areas will go a long way in maximizing the benefits of this program.

Continue reading.

CITY LAB

TANVI MISRA JAN 10, 2019

Abstract

Local officials, impact investors, and philanthropy have important roles to play in helping communities access Opportunity Zone financing that benefits current residents, especially those with low or moderate incomes. Using Chicago and Cook County as a case study, we identify steps these actors can take to attract helpful, and limit harmful, investments. We find that the Opportunity Zones selected in Chicago and Cook County broadly fulfilled the incentive’s spirit, targeting areas that were more economically distressed. Going forward, it will be necessary to leverage available policy and philanthropic levers to compel private action in line with community interests.

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The Urban Institute

by Brett Theodos & Brady Meixell

January 10, 2019

Wauwatosa, Wis., is chockablock with malls. Some of the stores are challenging their property taxes, arguing that their assessment should be based on the sale price of vacant stores in other places.

WAUWATOSA, Wis. — With astonishing range and rapidity, big-box retailers and corporate giants are using an aggressive legal tactic to shrink their property tax bills, a strategy that is costing local governments and school districts around the country hundreds of millions of dollars in lost revenue.

These businesses — many of them brick-and-mortar stores like Walmart, Home Depot, Target, Kohl’s, Menards and Walgreens that have faced fierce online competition — maintain that no matter how valuable a thriving store is to its current owner, these warehouse-type structures are not worth much to anyone else.

So the best way to appraise their property, they contend in their tax appeals, is to look at the sale prices on the open market of vacant or formerly vacant shells in other places. As shuttered stores spread across the landscape, their argument has resonated.

To municipalities, these appeals amount to a far-fetched tax dodge that allows corporations to wriggle out of paying their fair share.

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The New York Times

By Patricia Cohen

Jan. 6, 2019

The most recent partial shutdown of the federal government has halted many operations of the U.S. Department of the Treasury, including those of the Internal Revenue Service. The shutdown has, however, evidently left untrammeled the Treasury Department’s ability to promulgate regulations. On Friday, December 28, the Treasury released final regulations under Internal Revenue Code Section 147(f) regarding the public notice, hearing, and approval requirements that apply to qualified private activity bonds (the “Final TEFRA Regulations“). The Final TEFRA Regulations put into final, effective form the proposed TEFRA regulations that were issued on September 28, 2017 (the proposed TEFRA regulations are available, and are analyzed, here). The promulgation of the Final TEFRA Regulations allows the IRS and Treasury to check-off a perennial item on their annual priority guidance plan, and during a shutdown of the federal government, no less. That’s dedication. For a brief summary of the Final TEFRA Regulations, hit the jump.

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The Public Finance Tax Blog

By Michael Cullers on December 30, 2018

Squire Patton Boggs

Johnny Hutchinson could tell you, from memory, that the Defenestration of Prague occurred on May 23, 1618, and it precipitated the Thirty Years’ War, which ended on May 15, 1648 upon the ratification of the first of a series of peace treaties that comprised the Peace of Westphalia.

In 1988, 370 years after the Defenestration of Prague, the IRS began its campaign of guidance regarding the reissuance for federal tax purposes of tax-exempt bonds (specifically, qualified tender bonds) with the issuance of Notice 88-130. 20 years later, in 2008, the financial crisis and collapse of the auction rate securities market compelled the Service to update this guidance, which it did by releasing Notice 2008-41. On the very last day of 2018, more than 30 years after commencing this line of guidance (a period longer than the Thirty Years’ War), the IRS and Treasury released proposed regulations that, if finalized, would unify and complete the rules for determining whether tax-exempt bonds have been reissued for federal tax purposes (the “Proposed Reissuance Regulations“).

The Proposed Reissuance Regulations will take effect 90 days after they are published as final regulations in the Federal Register, but issuers of tax-exempt obligations can elect to apply the Proposed Reissuance Regulations now. Alternatively, issuers can apply either Notice 88-130 or Notice 2008-41. Dealer’s choice. Comments and requests for a public hearing on the Proposed Reissuance Regulations must be received by the Treasury on or before March 1, 2019. A brief summary of the Proposed Reissuance Regulations follows the jump.

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The Public Finance Tax Blog

By Michael Cullers on December 31, 2018

Squire Patton Boggs

WASHINGTON – Treasury and the Internal Revenue Service took two-long awaited regulatory steps important to the municipal market on New Year’s Eve with publication of a finalized public notice requirement for issuing private activity bonds and a proposed regulation clarifying when tax-exempt bonds require re-issuance.

The Federal Register publication of the finalized PAB regulation takes effect April 1 but part of it can be implemented by issuers immediately.

The final regulations simplify the public notice and approval requirements for PAB issuance to require publication on an issuer’s website seven days prior to a public hearing.

Proposed regulations issued in September 2017 would have required a longer notice period of 14 days and publication at a second location such as a community bulletin board.

The regulations do not – as some in the muni industry requested – drop the requirement for a public hearing if there are no advance requests to speak at the hearing nor does it allow hearings to be held by teleconference or webcast.

Mike Bailey, public finance attorney at Foley & Lardner in Chicago and a board member of the National Association of Bond Lawyers, described the final regulations as “a welcome development.”

“They were, in many ways, responsive to the comments,” Bailey said. NABL requested that the public notice requirement be reduced to seven days.

Although the effective date is April 1, Bailey said issuers will need to update their procedures by mid March.

Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities, described the final regulations as “a mixed bag of improvements beyond the status quo and some disappointments.”

“The trick is to take advantage of the new technology that exists since the original rules were published as well as to minimize the burden and the resources spent by state and local governments and issuers while, of course, complying with the requirements of the law,” Samuels said in an email.

The rule overall has received praise from practitioners because it marks a long-overdue update to the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) that first imposed the public notice and approval requirement for PABs, which at the time were limited to industrial development bonds.

The Tax Reform Act of 1986 greatly expanded the types of projects and financings for which PABs can be used.

The final regulations take into account tax law changes that have expanded the kinds of PABs that can be issued and technological changes that have occurred such as ubiquitous use of the Internet.
A proposed update of the public notice requirements in September 2008 was never finalized and the new regulations finalized Monday were proposed in September 2017.

The proposed re-issuance regulation, however, may be more significant because it would be the first reissuance regulation covering the tax-exempt bond market.

It would consolidate a number of Treasury notices – such as 88130 and 2008-41 – which were issued during the 2007-2011 financial crisis.

Vicky Tsilas, a partner at Ballard Spahr who worked on both regulations as head of branch 5 in the chief counsel’s office of the Internal Revenue Service, said she considers the proposed re-issuance regulation to be very important.

“That is a major regulation, Tsilas said. “Before this regulation got published, there were no re-issuance regulations for bonds. So the only regulation you had for bonds, but it didn’t quite cover all types of bonds, was under Section 1001 whether something was a significant modification.’’

Tsilas said the IRS has had drafts of a re-issuance regulation dating back to 1994. “I can’t tell you proud I am that I worked on that regulation that actually made it out the door because it took so many years to actually get a regulation for bonds out,” said Tsilas, who left the IRS in the spring of 2018.

The final public notice regulation for PABs was noncontroversial, according to Tsilas, who said she was “surprised at how long it took for them to get out.”

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 01/02/19 07:05 PM EST

On December 31, 2018, the Department of the Treasury and the Internal Revenue Service released final regulations (the “Final Regulations”) relating to public approval requirements for tax exempt private activity bonds. The Final Regulations update and streamline implementation of the public approval requirement for tax exempt private activity bonds provided in section 147(f) of the Internal Revenue Code and are largely an improvement over the existing regulations that date back to 1983.

Timing and Dissemination of Reasonable Notice

The most significant improvements in the Final Regulations over the existing regulations and proposed regulations released in September 2017 (“Proposed Regulations”) are in the required timing and methods of notice of public hearing. In response to numerous comments received, the Final Regulations reduce the required notice period from 14 days to 7 days. Notice is now presumed reasonable if given no fewer than 7 calendar days before the hearing.

In addition to the newspaper and radio notices in the existing regulations, the Final Regulations also allow for postings on a governmental unit’s public website and, in response to comments received, eliminate the requirement set forth in the Proposed Regulations for an alternative method of obtaining the information in a website notice. In addition, the Final Regulations provide that public notice may be posted on the public website of either the issuer or the approving governmental unit.

Content of Reasonable Notice

The content requirements for reasonable public notice in the Final Regulations are a mixed bag. The public notice must include a general functional description of the project or projects, the maximum stated principal amount of bonds to finance each project, the name of the initial owner or principal user of the projects and a general description of the project locations. The Final Regulations follow the Proposed Regulations in allowing the Issuer to describe the category of bonds being issued and the type and use of the project or projects rather than providing more specific project information. For example, “exempt facility bonds financing an airport pursuant to section 142(a)(1) of the Internal Revenue Code”, “qualified small issue bonds, as defined in section 144(a) of the Internal Revenue Code, financing a manufacturing facility ” and “qualified 501(c)(3) bonds, as defined in section 145 of the Internal Revenue Code, financing a hospital facility and working capital expenditures” would all be sufficient project descriptions. This eliminates the need for the detailed project descriptions that are currently used.

However, if an issue finances and/or refinances multiple projects, the notice and approval must include the maximum stated principal amount of bonds to be issued for each project and this has raised some issues, particularly for large system financings with many projects and many locations. The Final Regulations generally retain the definition of “project” set forth in the Proposed Regulations and “project” generally means one or more capital projects or facilities, including land, buildings, equipment and other property, to be financed with an issue that are located on the same site or adjacent or proximate sites used for similar purposes. In rejecting a commenter suggestion to allow an aggregate maximum amount to finance all projects of the issue, the Final Regulations note that Treasury and IRS “have determined that the relative principal amounts within an issue to be spent on each separate project are relevant information for this public approval process”. Interestingly, the Final Regulations add back a concept from the existing regulations that says projects on different sites may be treated as part of the same project if used in an integrated operation. This had been eliminated from the Proposed Regulations as being too difficult to determine and will potentially be helpful for projects located at various sites. It is unclear, however, how useful this provision will be given the clear description in the summary description that lumping multiple projects together is not giving adequate notice of scope of project and potential impact on a particular community.

The requirement to provide a maximum bond amount by project location may be particularly troublesome with refundings. With bonds issued to refund bonds of many series that had themselves been issued to refinance many prior series, it gets very complicated to try to figure out amounts by project and location for each prior series. A comment to allow a refunded bond issue to only provide an overall project refinancing amount was rejected.

Hearing

An in-person hearing is required. Webinar or teleconference methods were rejected as being “not sufficiently reliable, publicly available, susceptible to public response or uniform in their features and operation”. A commenter’s suggestion to allow issuers to cancel a hearing was also rejected.

Insubstantial Deviations and Curing Substantial Deviations

Like timing and dissemination of notice, the expanded description of what is an insubstantial deviation and the new ability to cure a potential substantial deviation with a subsequent approval are substantial improvements over the existing regulations. A deviation in actual principal amount allocated for a project is insubstantial under the Final Regulations if it is no more than 10% greater than the maximum amount in the notice or is any amount less. Overestimating the maximum principal amount of bonds allocated for each project should, therefore, be the norm. In addition, any amount used to finance working capital directly associated with any project specified in the notice is an insubstantial deviation and any deviation in the name of an owner or user of the project named in the notice is an insubstantial deviation if the parties named in the notice and the actual parties are related parties on the issue date of the bonds.

All deviations that are not specifically treated as insubstantial deviations in the Final Regulations will need to be analyzed based on all the facts and circumstances. In the event a deviation is determined to be substantial, a new public approval can cure the deviation. In order to take advantage of the supplemental public approval, the issue must have had a valid public approval and the issuer must have reasonably expected there would be no substantial deviation on the issue date, the substantial deviation must be as a result of unexpected events or unforeseen changes in circumstances that occur after the issue date, and the supplemental public approval must be obtained prior to using proceeds of the bonds in a manner or amount not provided for in the original public approval.

Application Date

The Final Regulations apply to bonds issued pursuant to a public approval occurring on or after April 1, 2019.

An issuer may apply the provisions related to deviations in public approval method in whole but not in part to bonds that are issued pursuant to a public approval that occurs prior to April 1, 2019. However, in order to take advantage of the supplemental public approval, it appears that the original public approval would have to have met the requirements of the Final Regulations. This will not always be the case, particularly for large system financings with projects at multiple locations that did not specify amounts by project in the original notice.

by Christie L. Martin

January 4, 2019

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

The Internal Revenue Service celebrated New Year’s Eve this year by issuing two rule-making notices of interest to the tax-exempt bond community, on the topics of public approval of private activity bonds and reissuance.

The first notice contains final regulations on the public approval requirement of section 147(f) of the Internal Revenue Code, 26 U.S.C. §147(f). You can access a copy of the final regulations here.

The final regulations on section 147(f) make several significant modifications to the proposed regulations, which were published by the Service on September 28, 2017 (read our prior analysis of the 2017 proposed regulations here). Some of the key highlights of the final regulations are as follows:

• 7-Day Notice Period: The current regulations, at 26 C.F.R. §5f.103-2, require that the public notice be given at least 14 days before the date of the public hearing. The IRS had previously issued proposed regulations in 2008, shortening this requirement to 7 days, but went back to 14 days in the 2017 proposed regulations. The stated reason for this decision was a reference in the legislative history to a 14-day notice period. However, in response to comments to the 2017 proposed regulations, the IRS has determined to restore the 7-day notice period, as the statutory text makes no mention of a 14-day notice period.
• Website Notices: The current regulations require that the notice must be published in a newspaper or announced by radio or television broadcast. The 2017 proposed regulations introduced website notices, but required that the issuer offer to residents without access to the Internet an alternative method for obtaining the information contained in the website notice. The final regulations drop this “alternative notice” requirement. Therefore, a notice that is published solely through the governmental unit’s website will satisfy the public notice requirement of section 147(f). The notice must appear in an area of the government’s website that is used to inform residents about events affecting the residents.
• Deviations and Ability to Cure: The 2017 proposed regulations introduced the concept of insubstantial deviations, that is, deviations from the notice and public approval that are so minor as to not cause the notice and public approval to fail to meet the requirements of section 147(f). Additionally, for deviations that were substantial, the 2017 proposed regulations afforded issuers the opportunity to cure the resulting violation through a supplemental notice and hearing that met the requirements of the regulations. The final regulations largely implement these concepts as originally proposed.
• Effective Date and Retroactive Use: The final regulations are generally effective April 1, 2019. However, the IRS in response to comments it received agreed to afford issuers the option of retroactively applying the “deviation” provisions (including the ability to cure) to any bond issued pursuant to a public approval that occurred prior to April 1, 2019. This presents an excellent opportunity for issuers of bonds with faulty public approvals to reduce their audit risk.

The second New Year’s Eve notice from the IRS contains proposed regulations on the reissuance of tax-exempt bonds, particularly qualified tender bonds. You can access a copy of the proposed regulations here. The proposed regulations follow the guidance previously provided by the IRS in Notices 88-130 and 2008-41, related to qualified tender bonds. Each of those Notices will be rendered obsolete once the regulations are finalized.

The proposed regulations are not intended as a departure from previous guidance. Thus, the proposed regulations, like the Notices before them, provide that the existence or exercise of a qualified tender right of a qualified tender bond will not, in and of itself, result in a reissuance for tax purposes. And, the terms “qualified tender bond” and “qualified tender right” carry meanings substantially similar to the definitions that were ascribed to these terms in the Notices.

The IRS is requesting that any comments to the proposed regulations or requests for a public hearing in connection with them be delivered by March 1, 2019.

by Timothy Horstmann

January 4, 2019

McNees Wallace & Nurick LLC

The “SALT” deduction was curbed by the GOP-backed tax law passed in late 2017.

Two New York lawmakers in the U.S. House have re-introduced a bill to fully restore a federal tax deduction for state and local taxes that was significantly scaled back under the massive federal tax overhaul that was enacted a little over a year ago.

Rep. Nita Lowey, a Democrat who now chairs the House Appropriations Committee, introduced the legislation on Thursday, with Rep. Peter King, a Republican, signing on as a co-sponsor. The bill has been referred to the tax-writing Ways and Means Committee.

It would eliminate a $10,000 cap the 2017 GOP-led tax code revamp imposed on the federal income tax deduction for state and local property, income and sales taxes that households pay. Lowey and King sponsored a nearly identical two-page bill in the last Congress.

“Repealing the SALT deduction was a callous move designed to target New York taxpayers,” Lowey said in a statement.

The bill she is backing is apt to face long odds in the Senate, which is still controlled by Republicans.

The limits imposed on the so-called “SALT” deduction drew strong opposition from groups representing cities, counties and mayors, as well as congressional lawmakers in higher-tax states, such as New Jersey and New York.

But capping the deduction promises to raise around $650 billion for the federal government over 10 years, providing a key revenue boost to partially offset other policy changes, including the corporate and individual rate cuts, that were core elements of the tax law.

One of the main arguments state and local groups made against eliminating or curtailing the SALT deduction, is that it would make it harder for states and localities to impose and raise their own taxes to help pay for projects and services.

The thinking goes that residents would become more resistant to state and local taxes because they would no longer be able to write-off the expense on their federal tax returns.

Experts at the Urban-Brookings Tax Policy Center have noted that, in 2018, 96 percent of the additional tax from the limitation of the SALT deduction was expected to fall on the top 20 percent of taxpayers and 57 percent on the top one percent.

Lowey represents New York’s 17th congressional district, which is located north of New York City in the lower Hudson River valley and includes part of Westchester County. The median household income in the district was about $96,100 in 2017 Census Bureau estimates show.

That’s higher than the median household income for all of New York, which Census estimates for 2013 to 2017 peg at around $62,000.

King’s district is located on Long Island and includes portions of Nassau and Suffolk counties. The estimated median household income there in 2017 was about $97,300.

Route Fifty

By Bill Lucia,
Senior Reporter

JANUARY 4, 2019

Rep. Nita Lowey (D-NY) and Rep. Peter King (R-NY) introduced a bill in the House of Representatives to repeal the $10,000 cap on the state and local deduction (SALT). The SALT deduction cap was introduced as part of the Tax Cuts and Jobs Act as a means to broaden the individual income tax base and partially fund reductions in statutory tax rates. Repealing this provision of the TCJA would reduce federal revenue by more than $600 billion over the next 10 years. It would also almost exclusively provide tax relief to the top 20 percent of income earners, the largest tax cut going to the top 1 percent of earners.

Under previous law, individuals who itemized their deductions could deduct the amount of state and local taxes against their federal taxable income. The taxes individuals could deduct included state and local individual income taxes (or sales taxes), real estate taxes, and personal property taxes. The amount individuals could deduct was unlimited.

The TCJA broadened the tax base by limiting the amount individuals could deduct in state and local taxes to $10,000. For high-income taxpayers, this cap increased federal taxable income. By itself, this provision would increase federal tax liability. However, high-income taxpayers also received offsetting tax cuts, such as lower statutory tax rates, a much larger Alternative Minimum Tax Exemption, and a reduction in the corporate income tax. On net, these taxpayers tended to have a lower liability under current law, even with the capped SALT deduction.

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The Tax Foundation

by Kyle Pomerleau

January 4, 2019

Key Findings:

• The Tax Cuts and Jobs Act created the Opportunity Zones program to spur investment in economically distressed census tracts. Opportunity zones reduce capital gains taxes for individuals and businesses who invest in qualified opportunity zones.
• Opportunity zones were estimated to cost $1.6 billion in revenue from 2018-2027. New regulations stipulate that the program’s benefits would continue through 2047, meaning the program’s revenue impact could increase over time depending on how many investors utilize the program.
• Research suggests place-based incentive programs redistribute rather than generate new economic activity, subsidize investments that would have occurred anyway, and displace low-income residents by increasing property values and encouraging higher skilled workers to relocate to the area.
• While opportunity zones present certain budgetary and economic costs, it is unclear whether opportunity zone tax preferences used to attract investment will actually benefit distressed communities.

Introduction

The Tax Cuts and Jobs Act (TCJA) created the Opportunity Zones program to increase investment in economically distressed communities. The program provides preferential capital gains treatment for investments within designated low-income census tracts. Policymakers hope opportunity zones will unleash investment in low-income communities throughout the country.[1]

This analysis describes opportunity zone program incentives, reviews both academic and government evidence on the effects of place-based incentive programs, and discusses possible outcomes for opportunity zone residents. Overall, we find opportunity zones will present certain budgetary and economic costs to taxpayers and investors, but based on evidence from other place-based incentive programs, we cannot be certain opportunity zones will generate sustained economic development for distressed communities.

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The Tax Foundation

January 8, 2019

Taxpayer filed petition to recover ad valorem taxes, alleging that it provided public housing and, therefore, was exempt from ad valorem taxation.

The District Court granted summary judgment for parish assessor. Taxpayer appealed. The Court of Appeal reversed and remanded. On remand, the District Court denied in part and granted in part assessor’s motion for summary judgment and denied in part and granted in part taxpayer’s cross-motion for summary judgment. Assessor appealed, and taxpayer filed answer.

The Court of Appeal held that:

• Fact issues remained as to whether certain units were entitled to public use exemption, but
• Remaining units were not entitled to public use exemption.

Genuine issues of material fact as to whether housing units for very low-income and extremely low-income tenants that were subject to Section 8 rent subsidies were utilized in a way that was dedicated and open to the public, or used in a way that benefited the general public, and as to the use of revenue generated from the units, precluded summary judgment for tax assessor as to issue of whether the units were entitled to public use exemption from ad valorem taxation, in proceeding on taxpayer’s petition to recover taxes paid under protest.

Low-income housing units were not entitled to public use exemption from ad valorem taxation; the units were not subject to Section 8 housing assistance program contract restrictions, the units were fully occupied during the tax year, and the units generated income to subsidize units for very low-income and extremely low-income tenants that were subject to Section 8 rent subsidies.

County board of revision and school board sought judicial review of a decision of the Board of Tax Appeals adopting an appraisal valuation that reduced the value of owner’s property.

The Supreme Court of Ohio held that Board properly applied collateral estoppel to preclude relitigation as to covenant that prohibited valuation complaints.

Non-enforceability of a covenant in a tax-increment-financing (TIF) agreement that purportedly prohibited property owner from contesting county auditor’s valuations of the property was actually determined in a prior decision of the Board of Tax Appeals, and thus the Board properly applied collateral estoppel to preclude school board’s attempt to relitigate the issue in owner’s subsequent appeal to the Board contesting the property’s valuation; the prior decision included a finding that the proponents of applying the covenant failed to prove that they were entitled to its enforcement, the prior decision made no statement about retaining jurisdiction in remanding to county board of revision, and Board’s remand order did not call for county board to reconsider whether to enforce the covenant.

Fitch Ratings-New York-17 December 2018: Any reduction in the Affordable Care Act (ACA), either through repeal, piecemeal legislative efforts or legal challenges to its constitutionality, is detrimental for the U.S. not-for-profit healthcare sector, particularly in those states that have or are expanding Medicaid, according to Fitch Ratings. Should Friday’s legal decision in Texas ruling that the ACA is unconstitutional be upheld, tens of millions of people would be directly affected. Those that currently receive healthcare insurance under expanded Medicaid would likely become bad debt or charity for provider organizations.

U.S. District Judge Reed O’Connor ruled the ACA is unconstitutional due to a recent change in federal tax law. The ACA has been under regular political legal pressure since its passing in 2010 but has managed to survive two Supreme Court challenges in 2012 and 2015.

The 2012 ruling, combined with the recent change to the U.S. federal tax code, underpins Friday’s court decision. During the 2012 Supreme Court challenge, the ACA was upheld, with one of the deciding opinions that the penalty for not having health insurance was considered a tax, which Congress has the power to impose. With the recent tax overhaul bill (The Tax Cuts and Jobs Act), this penalty has been eliminated. The recent ruling sided with the argument that, with the penalty requirement no longer in place, there is effectively no longer a tax, and therefore, the entire ACA is not constitutional.

This latest ruling is highly likely to be appealed, potentially up to the Supreme Court. Ultimately, we believe the ACA will survive through the appeals process as it has survived other challenges in the Supreme Court. However, renewed debate on the ACA will generate further uncertainty for healthcare providers and the general public alike.

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Kevin Holloran
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Observers thought the federal law would stifle the sale of municipal bonds — and in effect infrastructure projects. But it hasn’t been that bad.

SPEED READ:

• The impact of the federal tax overhaul on the municipal bond market hasn’t been as bad as many feared.
• But the elimination of so-called advanced refunding bonds has reduced the overall supply of municipal bond offerings.
• While banks are retreating from the muni market, taxpayers in high-tax states are sheltering more of their income in municipal bonds.
• States are on pace to issue 20 percent more new debt this year.

When Congress passed the tax overhaul last December, some worried that it would ultimately hurt the way governments finance major infrastructure projects by making the municipal bond process more expensive.

In some ways, it has. But there have also been some pleasant surprises. Overall, 2018 has been a good year for governments issuing bonds.

Look at Detroit, which was recently able to sell bonds backed by the city’s own credit for the first time in decades. It not only did so with a junk bond rating, but it also got a lower interest rate on the debt than it expected simply because of low supply — thanks to the federal tax law. Investor demand for the higher yield that comes with riskier securities like Detroit was also a factor.

Here are three ways tax reform has impacted the municipal bond market in 2018.

Muni Bond Supply Is Down

Far and away, the most notable effect that the tax overhaul had on the municipal market this year was through the elimination of a valuable cost-saving tool for municipalities. Called advanced refunding bonds, the tool allowed governments to refinance debt earlier, thus letting them take advantage of lower interest rates years sooner.

Losing this benefit has pushed down supply. By some estimates, it’s cut refinancing activity by as much as 20 percent.

Overall, Municipal Market Analytics’ Matt Fabian is predicting that total bond issuance this year will be around $320 billion — down about $100 billion from 2017. While he and other analysts thought that governments would find a way to replace the savings opportunity with other types of bonds, that hasn’t happened. “The dominant response,” he says, “has simply been to not [refinance] the bond.”

Taxpayers Turn to Muni Bonds as Banks Retreat

Historically, banks and insurance companies buy a lot of municipal bonds, making up 28 percent of the market. But since the tax bill passed, banks’ muni holdings have fallen every quarter this year.

That’s because the law slashed the corporate income tax rate from 35 percent to 21 percent. That, combined with rising interest rates, has made low interest rate muni bonds less attractive relative to other investments.

Observers initially feared that, at a minimum, muni rates would have to go up in order to be competitive. That, or corporations would start selling off their municipal debt.

Neither has happened. According to data from Municipal Market Analytics, banks’ total municipal bond holdings have only fallen 7 percent over the last year.

Meanwhile, tax reform’s caps on state and local tax deductions offer taxpayers in high-tax states an opportunity to shelter more of their income in municipal bonds. That’s helped pick up the slack. “Individual investors are chomping at the bit,” says G. Joseph McLiney, a municipal bond consultant. A lack of volume this year and an appetite for tax-exempt income, he says, has worked in the market’s favor and kept costs steady.

States Issue More New Debt

While the overall supply is down, governments have already surpassed last year’s total of $203 billion in new municipal bonds and are on pace for a 20 percent increase for the year.

The tax overhaul played an indirect role in this development in that it helped state revenues grow by more than was expected this year. The improved economic conditions led some governments to pull the trigger on long-awaited projects. “It’s important to keep in mind that in November of 2016 alone, [voters] approved roughly $60 billion in new bond offerings,” she says. “Often, it takes a few years for those projects to culminate, and this year we saw some of that materialize.”

The jump in new money is a bit of a surprise to Payden & Rygel’s Ksenia Koban, though. She expected the elimination of advance refundings and some other bond programs to take a bigger slice out of the new money market.

GOVERNING.COM

BY LIZ FARMER | DECEMBER 19, 2018

Key Findings

• State tax changes are not made in a vacuum. States often adopt policies after watching peers address similar issues. Several notable trends in tax policy have emerged across states in recent years, and policymakers can benefit from taking note of these developments
• The enactment of the federal Tax Cuts and Jobs Act (TCJA) expanded many states’ tax bases and drove deliberations on tax conformity. At year’s end, only five states conform to an older version of the federal tax code, though many have yet to resolve issues raised by their tax conformity regimes.
  Several states experimented with mechanisms to allow their high-income taxpayers to avoid the new cap on the state and local tax (SALT) deduction, efforts cast into doubt–though not entirely ended–by draft U.S. Treasury regulations.
• Three states and the District of Columbia cut corporate taxes in 2018, with rate reductions pending in two other states. Reductions in other taxes on capital are ongoing as well, with Mississippi beginning the phaseout of its capital stock tax.
• The U.S. Supreme Court’s Wayfair v. South Dakota decision ushered in a new era of sales taxes on e-commerce and other remote sales, but many states have yet to implement the provisions the Court strongly suggested would protect such tax regimes from future legal challenges.
• A second state (Arizona) adopted a constitutional amendment banning the expansion of the sales tax to additional services, with similar efforts–which have the effect of locking an outdated sales tax base in place–expected to emerge in other states in 2019 and beyond.
• A court ruling has states scrambling to legalize and tax sports betting, while shifting public attitudes continue to render the legalization and taxation of marijuana an attractive revenue option in a growing number of states. In 2018, seven states adopted sports betting taxes, while two legalized and taxed marijuana.
• States continue to grapple with the appropriate taxation, if any, of e-cigarettes, with two states adopting taxes at rates reflective of vapor products’ potential for harm reduction, while the District of Columbia increased its tax to a punitive 96 percent rate.
• Business head taxes came out of nowhere to become a key consideration for several cities, particularly those with thriving tech sectors.
• Consideration of gross receipts taxes continue as corporate income tax revenues decline, though concerns about their economic effects have generally helped stave off their adoption.
• Two states repealed their estate taxes in 2018, continuing a decade-long trend away from taxes on estates and inheritances.
• Revenue triggers, a relatively modern innovation, again featured prominently in tax reform packages and will continue to do so.

Continue reading.

Tax Foundation

by Jared Walczak

December 19, 2018

Champagne will flow, Auld Lang Syne will be sung, resolutions will be made (and soon forgot, and never brought to mind), and, in a handful of states, taxes will change.

There is less January 1st activity than we usually see, but this does not mean 2018 was a quiet year. Rather, state consideration of tax conformity after the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017 moved many changes forward, with rate reductions and other adjustments adopted midyear made retroactive to the start of the year. For instance, Idaho, Utah, and Vermont all trimmed income tax rates this year—but made them effective January 1 of 2018, not 2019.[1]

This was also a significant year for ballot measures, but some of the changes approved by the voters will take time to go into effect. Voters approved the legalization and taxation of marijuana in both Michigan and Missouri, but marijuana won’t go on sale in these states on January 1st.[2] Lawmakers and regulators still have work ahead of them before the new regimes go into effect.

Continue reading.

Tax Foundation

by Jared Walczak

December 27, 2018

Nonprofit corporation appealed tax commissioner’s denial of its application for real-property-tax exemption relating to property it leased to a nonprofit tenant, which was also the sole member of a foundation that was the sole member of the nonprofit corporation.

The Board of Tax Appeals rejected corporation’s contention, and, nearly three years later, reissued its decision upon corporation’s request. Corporation appealed.

The Supreme Court of Ohio held that:

• Property did not qualify as property used for charitable purposes;
• Corporation could not establish its tax-exempt charitable status by relying on the activities of its nonprofit tenant
• Corporation’s core activity was to own and lease subject property; and
• Fact that nonprofit corporation was exempt from federal income tax did not establish its charitable-use tax exempt status under Ohio law.

Property owned by nonprofit corporation and rented to nonprofit tenant, which was also the sole member of a foundation that was the sole member of the nonprofit corporation, did not qualify as property used for charitable purposes, as basis for tax exemption; owner’s sole use of the property was leasing it, and leasing was not a use that was exclusively for charitable purposes.

Nonprofit corporation that owned property could not establish its tax-exempt charitable status by relying on the activities of its nonprofit tenant, which was also the sole member of a foundation that was the sole member of the nonprofit corporation; despite allegation that corporation was organized for the sole purpose of holding title to property and collecting rental income, corporation was itself a separate legal entity and could not rely on vicarious exemption to establish its charitable status.

Nonprofit corporation’s core activity was to own and lease subject property, and therefore, corporation did not qualify for tax-exempt charitable status, despite fact that its nonprofit tenant was the sole member of a foundation that was the sole member of the nonprofit corporation; fact that proceeds of income-producing lease inured to the benefit of foundation did not support claimed charitable status, and corporation engaged in ongoing business activity of leasing real property, an activity that generates substantial revenue.

Fact that nonprofit corporation was exempt from federal income tax as an entity organized for the exclusive purpose of holding title and collecting rent from an exempt organization did not establish its charitable-use tax exempt status under Ohio law; federal tax laws provided for a charitable-use exemption on a less restrictive basis than Ohio law.

Cellular telephone service provider brought hybrid article 78 proceeding and declaratory judgment action against city and school district, seeking to compel city to determine and approve provider’s petitions for property tax refunds for tax paid related to its equipment and antennas housed on rooftops of office buildings within its service area.

The Supreme Court, Westchester County, denied the petition and dismissed the proceeding. Provider appealed. The Supreme Court, Appellate Division, affirmed, and provider was granted leave to appeal.

The Court of Appeals held that provider’s equipment was subject to taxation as real property.

Cellular telephone service provider’s base transceiver stations and large rectangular antennas mounted to the exterior of buildings were “inclosures for electrical conductors” under the tax statute’s definition of real property; the transceiver stations were essentially cabinets that housed cables and other electrical components and provided battery power, and the antennas were part of the transceiver stations.

Various cables in cellular telephone service provider’s data transmission installations were “lines” and/or “wires” under the tax statute’s definition of real property.

Components of cellular telephone service provider’s data transmission installations were “used in connection with the transmission or switching of electromagnetic voice, video and data signals between different entities separated by air, street or other public domain,” as required to be subject to taxation as real property; primary function of the equipment installations was to transmit cellular data.

Phrase “for electrical conductors” in statute defining telecommunications equipment taxable as real property modifies only “inclosures,” and the provision encompasses, when not owned by a local utility, lines, wires, poles, and supports, regardless of whether they are related to the conduction of electricity, as well as “inclosures for electrical conductors,” when those items are used in the transmission of data signals across public domain.

Central office equipment phaseout from taxation related to property located in the “central office” of a telephone company did not encompass cellular telephone service provider’s large data transmission installations, which were mounted to the outside of buildings dispersed throughout the provider’s service area.

“Station connections” exception to statutory definition of telecommunications subject to real property taxation relates to wiring physically connecting customer telephones to telephone poles and does not encompass cellular telephone service provider’s large outdoor installations including fiber optic cables and antennas.

The Grateful Dead were noted in their live performances for, among other things, beginning a song and then segueing to one or more other songs before concluding the first song in the thread. Sometimes, the Dead would wait several concerts to complete the original song.

Today we emulate the Grateful Dead by completing a string of posts that began in May about the potential relocation of Major League Soccer’s Columbus Crew to Austin, Texas. In our first post, we described the lawsuit brought by then-Ohio Attorney General, and now Governor-Elect, Mike Dewine to apply Ohio’s “Art Modell Law” to halt the Crew’s departure. We observed in this post that if successful, Ohio’s Art Modell Law could serve as a model to other states to prevent the relocation of professional sports franchises that have benefited from publicly financed arenas, stadiums, and other facilities. Our second post reported Major League Soccer’s award of an expansion franchise to Cincinnati, which demonstrates that a state’s enactment of an Art Modell Law evidently will not dissuade a professional sports league from expanding to that state.

Continue reading.

The Public Finance Tax Blog

By Michael Cullers on December 20, 2018

Squire Patton Boggs

In jockeying for Major League Soccer retention and inclusion, numerous cities in recent weeks have echoed a similar mantra.

No new taxes levied upon the broad general public.

For decades, sports teams have extracted favorable financial deals with host cities because of the basic supply-demand dynamic which exists for professional sports teams who hold the threat of being mobile if unsatisfied.

Namely, if you don’t build it, we will leave (or never come in the first place).

And while we shouldn’t expect public financing of sports facilities to ever completely dissipate (both for political and legitimate reasons), there is no question it is becoming more difficult for teams to extract the volume of public subsidies they once enjoyed from local, county, and state coffers.

Continue reading.

Forbes

by Patrick Rishe, Contributor

Dec 21, 2018

Public-private partnerships may just be the secret to maximizing the enhanced benefits of this program for investors and local governments.

By now, everyone in commercial real estate have been deluged with notices from lawyers, accountants and consultants explaining the significant benefits of raising funds to invest in opportunity zones under the new tax law. And these notices are quite accurate. The tax benefits are significant, especially for investors with large capital gains or investors with long-time horizons (which basically describes everyone who invests in real estate).

However, many may wonder, after reading all these, how to put together a commercial real estate deal that will appeal to investors and leverage the opportunity zone tax benefits to enhance returns. The answer to this question is complicated and represents the biggest reason why—at least initially—the supply of dollars to invest in opportunity zones will exceed the number of available deals.

Why is this? Simply put, state governments chose opportunity zones for location in areas with chronically low employment rates and incomes. These areas are not traditionally appealing for investment. The basic idea of the major deferrals, reductions and eliminations of capital gains taxes in the new provisions is to get investors to build and create jobs in those zones. However, the practical side of finding real estate deals that can locate well in economically depressed areas remains significant.

SOUND FINANCIALS

This is where public-private partnerships or “P3” arrangements can help facilitate deals. In the U.S., a large number of state and local governments have updated their laws to facilitate P3 deals. At their core, P3 real estate deals combine public and private assets into real estate facilities that serve public and private uses. The kinds of buildings in the P3 space right now include workforce housing, K-12 schools, higher education teaching and research facilities, government office buildings, sports facilities, public safety buildings and even speculative commercial office buildings that aim to attract private tenants in areas where governments want to see economic growth. Additionally, there is robust deal flow into heavy civil facilities, such as roads, bridges, ports and tolled highway lanes.

In trying to cobble together an economically viable real estate deal in tough geography, partnering with the public sector can be of significant benefit. First, it can ease—and in some cases subsidize—the cost of basic infrastructure that catalyzes growth, such as roads, transit, water/sewer, education and public safety.

Second, public sector users often can locate facilities in areas outside of class-A commercial zones. For example, having a new charter school, 50,000 feet of government office space or a new police precinct on a long-term lease provides a credit tenant that eases the burden of raising capital and attracting private sector users to an area. For more “commercial” government uses—such as research buildings, hotels, convention centers and sports arenas—the advantages are even more significant.

Finally, the opportunity zone law itself provides tax advantages that make private capital more willing to accept lower returns on a long-term lease or build to suit for a government use. Put differently, one of the big obstacles to P3 deal formation using private capital is the higher return it seeks, relative to public revenue or general obligation debt. In this scenario, the opportunity zone tax advantages enhance the return on capital, making rates compare more favorably to the cost of funds from other public sources.

The state and local governments that figure this out first, and put P3 deals on the table in opportunity zones, will be the ones that capture the early advantages from the new law. On the private-sector side, consider public-private partnerships an essential tool to help create an availability of real estate deals that will satisfy the coming demand from investors seeking to benefit from the new law.

Commercial Property Executive

by Brad Alexander

DEC 17, 2018

Brad Alexander, a senior advisor with McGuireWoods Consulting, has extensive knowledge in structuring public-private partnerships and negotiating economic incentives. He is a former congressional and state legislative staffer.

Jamie Stolpestad is building two apartment buildings in St. Paul’s St. Anthony Park neighborhood, right in the heart of an “O-Zone.”

Loren Schirber is gearing up for the “O-Zone” on St. Paul’s East Side, where he foresees at least two dozen tiny apartments, a dog park, a solar installation and an all-season food truck hall.

They’re hoping $100 million in projects will follow, including the massive redevelopment of Ramsey County’s former Government Center West building on Kellogg Boulevard.

So what are “O-Zones,” or Opportunity Zones? Distressed areas. Tax shelters. Opportunities for urban — and rural — renewal. The outcroppings of a federal effort to marry philanthropy, private-sector tax avoidance and housing advocacy.

Others might sum them up in a single word: Hope.

Continue reading.

By FREDERICK MELO | [email protected] | Pioneer Press

PUBLISHED: December 15, 2018

WASHINGTON — A real estate investment firm co-founded by President Donald Trump’s son-in-law and adviser, Jared Kushner, is betting big on the administration’s Opportunity Zone tax breaks.

But New York-based Cadre, in which Kushner still holds at least a $25 million passive stake, made it clear to potential investors in recent marketing materials that it doesn’t plan to look for development deals in most of those zones because of their “unfavorable growth prospects.”

Instead, Cadre said it will target a “small subset” of zones in such cities as Los Angeles, Seattle and Miami where both populations and incomes are already set to rise faster than the national average.

Cadre is a high-profile example of how early investor interest in the program appears focused on the places that need it the least: zones that qualified for the tax breaks despite already drawing substantial investment or are undergoing gentrification.

Among the examples of such zones is a swath of the Upper East Side of Manhattan that includes the top of Fifth Avenue’s Museum Mile, where three-bedroom apartments overlooking Central Park sell for $4 million. Another is Ledroit Park in the nation’s capital, which falls mostly in what real estate blog Curbed has anointed Washington’s “most gentrified” ZIP code. Yet another Opportunity Zone includes part of The Willows neighborhood of Menlo Park, Calif., less than 2 miles from Stanford’s campus, where the tech boom has driven home prices to $1,500 per square foot, 10 times the national average. The Opportunity Zone where Amazon put its New York City headquarters in Queens has a median household income of more than $130,000.

“It’s hard to imagine why we should be subsidizing that,” said Brett Theodos, a researcher whose Urban Institute analysis found nearly one-third of the nation’s more than 8,700 Opportunity Zones are showing signs of pre-existing heavy investment. “These investors are not bad people. They are responding to the incentives.”

Such is the major criticism of the Investing in Opportunity Act, which became law last December as part of the Republican-sponsored tax overhaul. Promoted by Trump in a White House event last week, it offers developers potentially millions of dollars in capital-gains tax breaks to invest in zones selected by states on the basis of such factors as high poverty and low income.

While the program highlights an average 32 percent poverty rate in the zones, it includes a wide range of areas — and allows “contiguous” tracts that might not be low-income but are close enough to distressed areas to qualify.

Cadre said in a statement to The Associated Press that the neighborhoods it is targeting for investment may be poised for growth but still exhibit low median incomes and are “capital deprived.”

“The Opportunity Zone tax benefits only kick in if we succeed for the communities in which we invest,” the statement said.

There’s no evidence the administration sought to include better-off Opportunity Zones in the program. A White House spokesman told the AP last week that the choice of the zones was up to the states. The Treasury Department, which certified the final roster of zones, declined to comment on the presence of gentrified areas in the program.

For some funds, the gentrification of some zones was an explicit selling point, a much safer bet than putting money in distressed areas.

Anthony Scaramucci, the hedge-fund executive who was briefly the White House communications director for Trump, is trying to raise as much as $3 billion for Opportunity Zone projects. On a marketing call last week, he pitched both a warehouse project in Savannah, Ga., and a “swanky” hotel project in Oakland, Calif.

“For those of you who have yet to go to that part of the Bay Area, I can tell you that it is fully gentrifying,” Scaramucci said.

Fundrise, another Opportunity Zone fund that is trying to raise $500 million for investments, is targeting many of the same areas as Cadre, ranking its “Top Ten” targets for Opportunity Zone investing based on which have the fastest-rising housing costs.

One measure of how much the zones overlap with developers’ pre-existing interests is how much they overlap with their current holdings. An AP review of Kushner’s holdings found that he holds stakes in 13 Opportunity Zone properties, all in locations deemed by the Urban Institute to be showing indications of rapid change or full-out gentrification.

An AP investigation found that Kushner and his wife, Ivanka Trump, both helped push for the program and as a couple stand to benefit financially from it. Even though Kushner gave up any management role in Cadre, ethics watchdogs say it is a conflict that arose from their decision to become presidential advisers without divesting from their extensive investments.

Marcy Hart, a Philadelphia real estate tax lawyer who has advised clients on the Opportunity Zone program, says she hasn’t seen much indication that the program is redirecting investment to places that lacked it before.

“There are some projects that have probably come online because they’re in Opportunity Zones,” she said. “But my clients were already investing in these areas.”

Even some of the program’s strongest proponents have acknowledged that not all the Opportunity Zones are equally needy. At a Kemp Foundation gala last month honoring Sean Parker, a San Francisco venture capitalist who helped push for the Opportunity Zones’ creation, Parker himself said that the zones included some “low hanging fruit,” neighborhoods that were already clearly drawing investment.

But the program’s incentives are great enough, he said, that after the obvious opportunities are exhausted, investors will eventually turn their attention to needier areas.

“There will be a lot of capital sitting in opportunity funds, and it’s going to have to find a place to go,” he said.

by JEFF HORWITZ and STEPHEN BRAUN The Associated Press | December 18, 2018.

Information for this article was contributed by Bernard Condon of The Associated Press.

It goes without saying that not all opportunity zones are created equal or present the same investment opportunities.

As the Qualified Opportunity Zone tax program gains national attention from investors looking to deploy billions in capital gains into those areas, sources tell Bisnow the designated areas stand to benefit greatly from opportunity zone-friendly policies enacted at the federal, state and municipal level to further lure investment where it is most needed.

With more than $6 trillion in unrealized capital gains eligible to be deployed in opportunity zones, interested investors who invest those capital gains into an Opportunity Zone fund within 180 days can defer taxes on those gains through 2026. Investors also are eligible to receive tax forgiveness on their opportunity zone investment capital gains if held for at least a decade.

“All OZs are not equal. There are some that are already well underway to being revitalized, and others where it is hard to believe 10 years is enough time for a turnaround,” RegentAtlantic Managing Partner and Chief Investment Officer Chris Cordaro said.

Continue reading.

BisNow.com

by Champaign Williams, National Editor

December 19, 2018

A year ago, Republicans and Democrats finally agreed on something: the Opportunity Zones program. Speaker of the House Paul Ryan, a Wisconsin Republican, called it “the critical component of our poverty-fighting agenda,” while Cory Booker, a New Jersey Democrat, proclaimed that “this could end up being the greatest economic development initiative in a generation in our country.”

OZ investors receive significant tax advantages. If you sell an investment and put what you’ve made in a qualified Opportunity Fund that finances businesses or real estate projects located in an OZ, then you can defer your capital gains tax until the end of 2026. You also pay no capital gains tax on new earnings you make through the Opportunity Fund if you stay invested for ten years.

The Economic Innovation Group calculates that $6.1 trillion in unrealized capital gains will be eligible to benefit from this program. But OZs require more than money; they need local leadership and smart strategies. As EIG recently noted, “State and local leaders are responsible for devising the strategies that will take these few new lines of the tax code and turn them into something that unlocks opportunity for local residents and entrepreneurs. Capital alone is not a strategy.”

Other regions are already ahead of southeast Louisiana. Erie, Pennsylvania’ mayor worked with 35 local groups to prioritize projects and created a concierge service to ensure they happen; Birmingham’s mayor secured twice as many OZs as any other city in Alabama and launched an online mapping tool to showcase them; and the mayors of Louisville, Oklahoma City, and South Bend have all unveiled OZ investment prospectuses in the last month.

But we can catch up quickly because our OZ map is, in a word, opportune. Gov. John Bel Edwards designated 150 Louisiana OZs, with 47 in 2 parishes: East Baton Rouge and Orleans. The entirety of downtown Baton Rouge, all of the New Orleans BioDistrict and Central Business District, and properties surrounding both Baton Rouge Metropolitan Airport and Louis Armstrong New Orleans International Airport all qualify. So do areas near Southern University, the Louisiana Tech Park at the Bon Carré Business Center, the Algiers Naval Support Activity and the NASA Michoud Facility.

There are also resources to help Louisiana investors become first movers and market makers, such as LED’s map of Louisiana zones, GNO.zone, which GNO, Inc. created to highlight OZ projects, and OZ Guide, a platform for best practices and breaking news.

Now is the time to take what we have learned about economic growth and resilience across southeast Louisiana — 13 years after Katrina, a decade after Gustav and the Great Recession, eight years after the BP oil spill, and two years after the Baton Rouge floods — and design a comprehensive OZ strategy to spur innovation. Based on that plan, public officials and civic leaders should court OZ funds that catalyze high-growth industries, while developing strategic public-private and philanthropic-private partnerships that create additional incentives for priority projects.

OZs unlock new sources of capital, so we should look for transformation, not simply one-off transactions, when studying the map.

Investments in and around Michoud provide a precedent. Recently, GE located its world-class Technology Center for the Americas there, announcing a major expansion that created 100 new jobs. As center director James Martin explained, “We can handle some of the largest structures on the planet, we’ve got access to a deep water port, and we have relationships with local universities. New Orleans is going through a technology renaissance moment, and it’s attracting a lot of talent.” OZs can bring additional investment to industries and areas where companies like GE have already seen so much promise.

Not only will Baton Rouge and New Orleans benefit, but we should also expect greater investment in the 80 miles between them. The 23 parishes that comprise the southeast Louisiana Super Region (population 2.6 million) contain 87 OZs. By comparison, the 12 counties in the Charlotte region (population 2.5 million) have 46 OZs spanning North Carolina and South Carolina, the 13 counties in the Dallas/Fort Worth region (population 7.4 million) have 50 OZs, and the 30 counties of the Atlanta metropolitan area (population 5.9 million) have 65 OZs.

To reiterate, our region is in a very fortunate position right now.

Funds flowing to OZs could easily exceed previous programs, such as New Markets Tax Credits, Low-Income Housing Tax Credits, or Enterprise Zones. Because of how it is structured — with no caps, no need for annual Congressional approval, and almost no reporting requirements — this program could lead to more investment than all of those programs combined.

Every OZ fund can invest in zones anywhere across America. If we don’t distinguish ourselves, other regions will, and investment will go elsewhere. But if we plan for innovation at the outset, while taking a holistic, region-wide approach, we are well positioned to lead the nation in the next decade of economic development through OZs.

Louisiana, opportunity knocks.

The Advocate

by Rob Lalka

DEC 25, 2018 – 6:00 PM

Rob Lalka directs Tulane’s Albert Lepage Center for Entrepreneurship and Innovation.

ROB LALKA IS COFOUNDER AND PARTNER AT MEDORA VENTURES, A STRATEGY CONSULTING FIRM, AND PROFESSOR OF PRACTICE AT TULANE’S A.B. FREEMAN SCHOOL OF BUSINESS, WHERE HE IS THE EXECUTIVE DIRECTOR OF THE ALBERT LEPAGE CENTER FOR ENTREPRENEURSHIP AND INNOVATION.

Contractors and investors in P3s can continue taking a full tax deduction for interest on debt under recent IRS guidance (Revenue Procedure 2018-59, issued November 26). Many P3s are highly leveraged, and the interest deduction is a valuable tax benefit for developers. Were this deduction restricted, P3 developers’ (and by extension governments’) costs would rise; potential investors would demand higher rates of return; and infrastructure projects would be more costly. Without this guidance, the 2017 tax law would otherwise severely restrict the interest deduction for businesses.[1] The IRS’ position is welcome (and a relief) and caps an intense letter-writing campaign by industry groups – including the Design-Build Institute of America, Associated General Contractors of America, Performance Based Building Coalition, and Association for the Improvement of American Infrastructure – to the IRS and Treasury.[1]

The deduction restriction (new section 163(j)) emerged from last year’s Tax Cuts and Jobs Act (“TCJA”) and generally caps a business’ interest deductions at 30% of “adjusted taxable income” (which is similar to, but not the same as, EBITDA or EBIT).[2] “Real property trades or businesses” can elect out of these new deduction limits, but at the price of less-generous depreciation for their buildings and other improvements. The actual section 163(j) language is a good deal more complicated, and the Treasury proposed regulations accompanying the IRS guidance consist of 400-plus pages trying to explain everything.[3]

Revenue Procedure 2018-59 provides a safe harbor – which most P3s should meet – under which a P3 will be a “real property trade or business.”[4] As a result, companies and investors in a P3 can elect out of the restricted interest deduction rules – and, because the tax-exempt government agency in a P3 usually owns the improvements which otherwise give rise to depreciation deductions, giving up the more generous depreciation treatment usually is not an issue. Because Revenue Procedure 2018-59 is an administrative promulgation and not a regulation, it is effective immediately and not subject to the comment period and other delays with the accompanying Treasury proposed section 163(j) regulations.

Revenue Procedure 2018-59 follows a trend of mostly favorable treatment for infrastructure by the IRS and Congress, including continuing to allow an exemption for interest on private activity bonds used to funds P3s[5] and proposed regulations issued in June clarifying that investment of bond proceeds in infrastructure projects will not trigger rebates to the government under the Code’s exempt bond arbitrage provisions.[6]

[1] The letter can be viewed here.

[2] The text of Code section 163(j) is available here. The text of the TCJA and accompanying Congressional reports, can be viewed here.

[3] The proposed regulations (REG-106089-18) are available here.

[4] Revenue Procedure 2018-59 is available here.

[5] Earlier drafts of the TCJA would have ended this tax exemption (see our prior post (November 10, 2017)  but the final bill kept it.

[6] The proposed regulations (REG-106977-18) are available here.

Nossaman Infra Insight Blog

By Douglas Schwartz on December 11, 2018

As investors across the nation seek to deploy billions of dollars in capital gains into Qualified Opportunity Zones, they are actively seeking guidance about the program and on the hunt for resources to help identify neighborhoods, assets and available land within opportunity zones most ripe for investment.

The program, created through the passing of the Tax Cuts and Jobs Act last year, aims to incentivize private investment in underserved and otherwise blighted communities across the U.S. in exchange for a hefty tax break.

More than 8,700 census tracts have been classified as opportunity zones and numerous opportunity zones funds have already launched to take advantage of the program — with an estimated $6 trillion in unrealized capital gains eligible to be deployed into opportunity zones, according to a study conducted by Real Capital Analytics.

In response to high demand from firms and high net worth individuals interested in the opportunity zones program, a number of tools have come to market to help potential investors understand how the program works, identify neighborhoods that qualify for it and locate assets within the designated areas in need of investment.

“Opportunity zones have brought national attention to areas of the country that have been too often looked over for investment. Unlike traditional community development institutions, knowledge and understanding about these communities is quite limited,” Smart Growth Americas Vice President of Land Use and Development Christopher Coes told Bisnow. Coes is also director of national real estate developer and investor network LOCUS.

“The structure of the opportunity zones tax incentive places the onus on the investor to identify and conduct due diligence … which requires an understanding of not only the project but also the place. Because of this demand, we’re seeing a lot of tools [come to market] to help assist investors and policymakers.”

Bisnow has assembled a list of some of these resources below.

CRE Models Opportunity Zones One-Stop Shop

St. Petersburg, Florida-based real estate data and analysis company CREModels’ Opportunity Zones Resource Center is fit with an interactive map that allows users to search by address to identify neighborhoods and assets within opportunity zones, downloadable documents and links to other opportunity zones portals. When using the map, users can find granular information for specific tracts, including population size and density, number of households, household sizes, total housing units and other occupancy figures such as vacant units, owner-occupied units and occupied rental units.

“High-net worth investors are sitting on an extraordinary amount of capital gains. Our Qualified Opportunity Zones Resource Center gives developers and real estate investment fund managers the tools and resources they need as they work with such investors on acquisitions and development projects in these low-income areas,” CREModels Managing Director Mike Harris said in a statement.

Economic Innovation Center Opportunity Zones Resources

Economic Innovation Center, an economic public policy organization founded in 2013, has created a resource page on its site that links to state-by-state opportunity zone updates. Each state on an interactive map of the U.S. links to a profile PDF that provides a complete overview of the state’s opportunity zones program, including how many tracts were designated as opportunity zones, the number of residents in each zone and the number of jobs and businesses in each zone. It is not clear how often this page is updated.

Enterprise Community Partners Opportunity Zones Eligibility Tool

Opportunity360, a subsidiary of Enterprise Community Partners — a nonprofit that works to make housing more affordable and sustainable nationwide — has created an Opportunity Zones Explorer tool to help potential investors identify which tracts in their states qualify for the Opportunity Zones program. This tool also identifies if those tracts qualify for any other federal place-based programs.

“In addition, users can filter tracts using the Opportunity360 Outcome Indices to see how people living in these tracts are faring across our five outcome dimensions and explore tracts that were eligible but not designated by the states as Opportunity Zones,” the organization wrote on its site.

Novogradac OZ Mapping Tool

National professional services provider Novogradac & Co. has created a resource center dedicated to opportunity zones. The dominant resource on this page is an Opportunity Zones Mapping Tool that users can search for Qualified Opportunity Zones by address or zooming into an interactive map. The map also reveals how many public housing developments are underway in those tracts.

Reonomy Opportunity Zones Search Tool

New York-based real estate data provider Reonomy unveiled a new search tool in October that allows its clients to gather multiple layers of information about properties and building owners in opportunity zones in rural, urban and metropolitan areas. Using various filters, users can search by location, asset type, sales and debt. Since creating this search feature, Reonomy has identified about 6.75 million commercial properties that fall within opportunity zones, Reonomy Director of Product Patrick Rafferty said.

“I think there’s going to be a substantial uptick in demand for those properties [located in opportunity zones]. I think owners of those properties can expect there is going to be a renewed or elevated interest in those properties and … people acting on that now will have a first mover advantage. Our product helps offer that,” Rafferty said.

Smart Growth America-LOCUS Opportunity Zones Navigator

LOCUS, a national network of real estate developers and investors spearheaded by Smart Growth America, has created an Opportunity Zone Navigator that allows users to search within opportunity zones for transit, environmental, economic, housing and affordability information. The map is interactive and users can use filters to advance their search to identify opportunity zones with brownfields, or how many commercial and industrial jobs are within each tract, for example.

“LOCUS created the Opportunity Zones Navigator to provide real estate professionals and locals [with] a centralized, user-friendly tool to identify opportunity zones that are ideal for creating new vibrant and walkable neighborhoods,” Smart Growth Americas’ Coes said. “Our goal [is that] the tool can facilitate investments that will achieve the greatest economic and social impact.”

Yardi Matrix Opportunity Zones Search Tool

Commercial real estate software company Yardi Matrix has created a “Quick Search” and “Property Type Advanced” search tool that allows its subscribers to locate multifamily, self-storage and office assets within opportunity zones.

bisnow.com

Champaign Williams, National Editor

December 9, 2018

WASHINGTON — President Trump directed federal agencies on Wednesday to steer spending toward certain distressed communities across the country — part of his administration’s push to turn a tax break included in last year’s $1.5 trillion tax package into a broader effort to combat poverty and geographic inequality.

Mr. Trump signed an executive order at the White House to push federal resources to so-called opportunity zones — a small but lucrative provision tucked into his signature tax cut that in recent months has vaulted to prominence among real estate developers and other investors.

Mr. Trump told attendees at the meeting that the zones would receive “massive incentives” for private-sector investment. He said the goal of the order was to help “draw investment into neglected and underserved communities of America so that all Americans regardless of ZIP code have access to the American dream.”

Continue reading.

The New York Times

By Jim Tankersley

Dec. 12, 2018

It has been nearly a year since Qualified Opportunity Zones became law, and the early numbers suggest they may not be working as intended.

The program is meant to encourage private investment in destitute or underserved communities by allowing investors to defer capital gains tax on income invested in those zones. A new report from Real Capital Analytics shows that on average, land prices in census tracts designated as opportunity zones are not significantly lower than outside of them.

Since the Tax Cuts and Jobs Act was passed, transaction volume for land purchases have grown in every quarter, with Q3 seeing a year-over-year increase of over 50%. Deal volume outside of opportunity zones have remained stagnant over the same period, according to RCA. Though investors have responded to the new tax break, they haven’t changed their behavior meaningfully, RCA Senior Vice President Jim Costello said.

Continue reading.

Bisnow

by Matthew Rothstein

December 5, 2018

Taxpayer appealed from county board of supervisor’s calculation of the true value of taxpayer’s power plant for purposes of computing ad valorem tax.

The Circuit Court entered judgment in favor of county, awarding county $533,827.80 together with eight percent interest per year. Taxpayer appealed.

The Supreme Court of Mississippi held that:

• The trial court did not err in excluding taxpayer’s proffered expert testimony on the true value of its industrial power plant, and
• The trial court did not abuse its discretion by denying taxpayer’s motion for a change of venue.

On appeal from the county board of supervisor’s calculation of the true value of taxpayer’s power plant for purposes of computing ad valorem tax, trial court, in a trial de novo, did not err in excluding taxpayer’s proffered expert testimony on the true value of its industrial power plant, when expert failed to use the underlying statutorily mandated historical cost-less-depreciation approach for calculating the true value

On appeal to the circuit court from county board of supervisor’s calculation of the true value of taxpayer’s industrial power plant for purposes of computing ad valorem tax, the circuit court did not abuse its discretion by denying taxpayer’s motion for a change of venue, even though a majority of the 91-person venire knew the county tax assessor and the board; during voir dire, the court struck every juror that said he or she could not be fair and impartial, and every juror taxpayer challenged for cause was dismissed by the court.

Taxpayers, Louisiana residents and owners of several limited liability companies (LLC) and Subchapter S corporations that transacted business in Texas, Arkansas, and Louisiana, brought action seeking recovery of income taxes paid under protest.

The District Court found that Act amending State income tax statute violated the dormant Commerce Clause. The Department of Revenue appealed.

The Supreme Court of Louisiana held that:

• Taxpayers’ payment of a Texas franchise tax constituted a net income tax imposed by and paid to another State for purposes of entitlement to resident income tax credit;
• Statute governing entitlements to resident income tax credits for income taxes paid to another State failed the fair apportionment test for determining the validity of a state tax under the dormant Commerce Clause; and
• Statute governing entitlements to resident income tax credits for income taxes paid to another State impermissibly discriminated against interstate commerce, in violation of the dormant Commerce Clause.

Payment of a Texas franchise tax by taxpayers, Louisiana residents who were owners and members of several limited liability companies (LLC) and S corporations, pass-through entities that transacted business in Texas, Arkansas, and Louisiana, constituted a “net income tax” imposed by and paid to another State for purposes of entitlement to resident income tax credit in Louisiana; the Texas franchise tax was essentially imposed on an income basis, the payment of the tax was made by pass-through entities doing business in Texas, but the credit was being claimed by individual shareholders and members.

Statute governing entitlements to resident income tax credits for income taxes paid to another State failed the fair apportionment test for determining the validity of a state tax under the dormant Commerce Clause; the statute, as amended, failed to fairly apportion the tax according to each state’s relation to the income since no credit was given with respect to taxes paid on income earned from sources in Texas, which created the potential for multiple taxation of the same income.

Statute governing entitlements to resident income tax credits for income taxes paid to another State, which failed to give credit to resident taxpayers with respect to taxes paid by pass-through entities on income from sources in Texas, impermissibly discriminated against interstate commerce, in violation of the dormant Commerce Clause; the statute, as amended, resulted in the double taxation of interstate income as compared with the taxation of intrastate income, which created an incentive for taxpayers to opt for intrastate, rather than, interstate economic activity.

The enactment in October of a shared housing surcharge in Chicago and a new tax on online bookings in Pennsylvania both will have an impact on the hotel industry.

Chicago’s Shared Housing Surcharge
The City of Chicago has enacted a new surcharge targeting one of the hotel industry’s biggest competitors: the vacation rental and shared housing industry. Section 3-24-030(C) of the Chicago Municipal Code imposes a new surcharge (the “shared housing surcharge”) on the rental or lease of any vacation rental or shared housing unit in the City. Effective December 1, 2018, the shared housing surcharge is 2%, plus the 4% surcharge already in place under Section 3-24-030(B), for a total surcharge of 6% of the gross rental or leasing charge.

The shared housing surcharge is also in addition to the City’s 4.5% hotel accommodations tax. Thus, effective December 1, 2018, the total City tax rate on vacation rentals and shared housing units will be 10.5% (compared to 4.5% for most hotels). As with the hotel accommodations tax, operators are responsible for collection and remittance of the shared housing surcharge.
A vacation rental is defined in §4-6-300 as a dwelling unit that contains six or fewer sleeping rooms that are available for rent or for hire for transient occupancy by guests. Likewise, a shared housing unit is a dwelling unit with six or fewer sleeping rooms that is rented in whole or in part for transient occupancy by guests. City Code §4-14-010.

The surcharge does not apply to temporary accommodations provided by a hospital or the rental of an accommodation which is considered a permanent residence of the person who occupies it.

Pennsylvania’s New Tax on Online Travel Agencies
Also in October, Pennsylvania enacted Act 109, a new law increasing the tax payable by online travel agencies for hotel room bookings in the state. This new tax will apply to online travel agencies.

The new law eliminates a loophole that allowed online booking websites to charge the hotel occupancy tax only on room rates as negotiated with the hotel, rather than on the final amount paid by the guest. Under the new law, which is expected to take effect February 1, 2019, online booking agents will also be required to pay tax on accommodation fees and other charges included in the booking price. Guests will pay tax on the same base whether they book through online booking agents or directly through the hotel.

The goal of the new law was to level the playing field for hotel bookings and to raise funds for tourism for the state of Pennsylvania.

Akerman – SALT Insights

(Reuters) – Corporate tax subsidies, in the spotlight again after Amazon.com Inc’s secretive quest to find a site for its second headquarters, are costing American public schools big money, according to a report issued on Tuesday.

In fiscal 2017, U.S. public schools lost $1.8 billion across 28 states through corporate tax incentives over which most schools themselves had little or no control.

The 10 most affected states could hire more than 28,000 new teachers if they were able to use the lost revenues, according to the report released by Good Jobs First, a left-leaning Washington think tank.

The report comes amid increased taxpayer scrutiny of such deals following Amazon’s nationwide, yearlong search for its “HQ2” site.

Amazon decided last month to build two new headquarters at $5 billion each in New York City and Arlington, Virginia, saying it will hire up to 50,000 people altogether.

Though conducted mostly in secret, the search was still a public spectacle, pitting state against state in a bidding war and raising questions about transparency and the need for such subsidies for a company run by Jeff Bezos, the richest man in the world.

States and cities have long used abatements, subsidies and other tax incentives to lure companies, keep them from leaving or encourage them to expand.

Such deals are meant to boost development and investment, and proponents say the lost tax revenue is worth it because they grow local economies.

But it can be hard to know whether the benefits outweigh the burdens. And until recently it has been difficult to discern how much one entity may have lost because of another entity’s tax breaks.

However, a governmental accounting rule issued in August 2015 now requires local U.S. governments to report how much money they lose on corporate tax breaks for development projects – their own, or another nearby governmental entity.

Good Jobs examined the first full year of reporting for most of the school districts, which are particularly affected because most of their revenue comes from property taxes – yet they typically have little influence over subsidies granted by the cities or counties where they are located.

“Cities say they care about economic development, but then they end up granting subsidies in a way that cuts out control by school boards, parents and others,” said Good Jobs’ Scott Klinger, who authored the report.

Good Jobs reviewed financial reports from fiscal 2017 for more than 5,600 of the nation’s 13,500 independent school districts.

Of the five districts that lost the most, three are in Louisiana. Together, they lost more than $158 million, or at least $2,500 for each student enrolled.

More than half of the districts did not report any such losses, in many cases because the new accounting rule appeared to have been “simply ignored,” the report said.

In Oregon’s Washington County, Intel Corp and Genentech, the U.S. biotech arm of Swiss drugmaker Roche, have both been getting a property tax exemption on capital projects for years. Its Hillsboro School District lost nearly $97 million in fiscal 2017, more than any district in the country, the report found.

Nathan Buehler, spokesman for Oregon’s economic development agency, declined to comment because he had not had “an opportunity to review the study, its findings, and the context to the data going in to it.”

Intel spokesman William Moss declined to comment on the report but noted that “with nearly 20,000 employees in the Hillsboro area, Intel is an anchor of the local economy.”

Genentech did not comment on the report but noted its $17 million it has donated to science education across U.S. cities in the last four years. It also said it had promised in 2006 to create 250 new jobs in Hillsboro but now has more than 450 full-time employees.

“We strongly believe in stable funding for local municipalities and tie our company’s success to a well-educated and well-compensated workforce,” Genentech said.

In Pennsylvania, the School District of Philadelphia, which only last year regained control from state officials after climbing out of a deep fiscal crisis, lost the second most revenue at $62 million.

While the Philadelphia district clearly “bears one of the largest burdens in the country of the upfront costs … this study only looks at one side of the ledger, so it is impossible to comment on the net impact of these incentives,” spokesman H. Lee Whack Jr. said in an email.

City spokesman Mike Dunn said the study does not appear to factor in “the value of enhanced development resulting from the incentives.” It had already commissioned a new study of tax credits.

“We remain committed to further discussions with our colleagues on City Council about the future of the abatement, including proposals that would see it modified,” Dunn said.

The Hillsboro district did not reply to a request for comment.

Reuters

Dec. 4, 2018

(Reporting by Hilary Russ in New York; Editing by Lisa Shumaker and Bill Berkrot)

• Southwestern Energy is contesting how it’s taxed in the state
• Amid dispute, local school hasn’t enough money for books

A $2.7 billion company is contesting its local tax bills in Arkansas. Seven hundred students in the tiny town of Pangburn are paying the price.

Houston-based Southwestern Energy Co. has filed lawsuits in six Arkansas counties disputing the way its taxes are calculated and isn’t paying some as the cases are decided. That’s left the Pangburn School District, which counts on Southwestern as its largest taxpayer, without enough money for library books, computer lab upgrades, or new teachers.

The district’s troubles show what happens when a locality relies too much on a single company or industry. That’s what sent Detroit spiraling into bankruptcy as auto-industry jobs disappeared, and it forced New Jersey to rescue junk-rated Atlantic City as casinos shuttered. Now it’s Arkansas’s turn as declining natural gas prices and production threaten a key source of revenue for some municipalities.

“It’s just filtered through our whole system,” said Stacy Hopkins, business manager for the school district, which is located 64 miles (103 kilometers) from Little Rock. “At the end of the day, our main objective is to educate these kids. We’re doing our best to cut in other areas that don’t affect our students.”

In Dispute

Southwestern was the first company to pull natural gas from the Fayetteville Shale in 2004, and went on to become a top producer in the state. Now, production out of Arkansas, after growing rapidly between 2007 and 2010, has plummeted. Southwestern said earlier this year that it would sell its Fayetteville exploration and production business to focus on “higher margin” assets in other regions of the country.

In court, Southwestern is arguing the counties calculate taxes using an industry metric of natural gas prices that is averaged over three years, which has resulted in the company paying levies based on higher prices than what it earns in the market. The company is also arguing that the amount it is allowed to deduct in lease operating expenses, or what it costs to get gas out of the ground, is too low, which drives up the tax bill.

In Cleburne County, Southwestern has been overcharged by about $2 million a year, company spokeswoman Christina Fowler said.

“Southwestern Energy recognizes the uncertainty that this tax issue is creating for local school districts and county governments,” Fowler in an emailed statement. “That is why we have been working with the state regulatory authority and county governments to find an equitable resolution.”

Natural gas futures have since popped to multi-year highs in November.

If the fiscal problems at some of the districts worsen, the state may need to step in since it guarantees debt issued by school districts.

“It’s like a perfect storm,” said Mark Whitmore, a lawyer representing Conway County, one of the counties that Southwestern has sued. “The fact that they’re not paying has left these schools in duress.”

The lawsuits add to the pressure communities in the Fayetteville Shale face. The lower prices and falling production has caused dramatic drops in assessed property value, which is what determines property taxes they can collect, the Arkansas Assessment Coordination Department said in a report.

In Van Buren County, the assessed value has plummeted 25 percent since 2014 to $145 million in 2016, according to the report. That’s a hard hit to rural areas in a state that has already seen half its mining and logging jobs disappear in the last decade, according to the U.S. Bureau of Labor Statistics.

In Pangburn, Hopkins said she’s concerned that if Southwestern wins, it will spur other companies and individuals to contest their tax bills too.

“It’s not just an oil and gas issue — any company can do this,” she said. “Any taxpayer can do this if they’ve got the money.”

Bloomberg Business

By Amanda Albright

December 8, 2018, 4:00 AM MST

Citizens, who own real property and pay ad valorem taxes in the county, filed petition for writ of mandamus and other relief against county board of tax assessors, individual tax board members, and board’s chief appraiser, alleging the board failed to exercise its duty to diligently investigate and determine whether stadium lessee was subject to ad valorem property taxation, and seeking temporary and permanent injunctive relief, to enjoin defendants from recognizing stadium property as tax exempt, and a declaration that taxable leasehold interest had been transferred to lessee, rather than a non-taxable usufruct.

The trial court granted defendants’ motion to dismiss for failure to state a claim, and then dismissed other pending motions as moot. Citizens appealed.

The Court of Appeals held that:

• Citizens failed to rebut the presumption that the trial court followed the law and limited its consideration to the amended petition and attached exhibits in ruling on defendants’ motion to dismiss for failing to state a claim on which relief could be granted;
• Citizens failed to allege that county board of tax appraisers and other defendants failed entirely to conduct an investigation and reach a decision regarding the ad valorem tax status of stadium lessee’s interest in new football stadium, as required to state a mandamus claim;
• Sovereign immunity clearly barred the plaintiffs’ declaratory and injunctive relief claims against the board and other defendants in their official capacities; but
• The doctrine of official immunity did not operate to bar suits for declaratory or injunctive relief against county officers in their individual capacities.

Fitch Ratings-Austin-05 December 2018: Not-for-profit hospitals will continue struggling to adapt to the paradigm shift in the broader health care sector into next year, according to Fitch Ratings 2019 not-for-profit hospital and health systems outlook report.

Fitch maintains a negative sector outlook for not-for-profit hospitals for 2019 due largely to ongoing operational weaknesses, which have evolved from an ongoing trend into a real fundamental shift in the sector. “Hospitals now have to continuously focus on operational, clinical and transformational initiatives to offset compressed commercial rate increases and little, if any, net rate increases from governmental sources,” said Senior Director Kevin Holloran. Countering operational pressures for hospitals is the fact that balance sheets are stronger than they have been in over a decade.

It’s this balance sheet flexibility that will benefit larger hospital systems most as they plan to cut billions from their expense bases in order to become profitable on Medicare rates. Lower rated hospitals, in contrast, are less able to trim expenses, and as such are more likely to be price takers than price makers when negotiating commercial rates.

Consolidation of hospital systems through M&A and alignment activity is also likely to continue in 2019. “Size and scale alone do not necessarily result in success, though further consolidation is a logical outcome given current industry pressures,” said Holloran.

Operating pressures notwithstanding, Fitch maintains its stable outlook for not-for-profit hospitals next year. “Most hospitals will be able to offset short-term operational pressures with their absolute levels of cash and investments,” said Holloran.

“Fitch 2019 Outlook: U.S. Not-for-Profit Hospital and Health Systems” is available at www.fitchratings.com.

Contact:

Kevin Holloran
Senior Director
+1-512-813-5700
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on www.fitchratings.com

Moody’s Investors Service expects not-for profit hospitals will continue on their course in 2019 with expenses continuing to outpace revenue, according to its new report.

Moody’s maintained its negative outlook on the sector as weak volume trends, reimbursement compression, more Medicare patients and growing bad debt loads will limit revenue growth, analysts projected in its 2019 outlook released Monday.

Operating cash flow will be flat or slightly decline, hinging on providers’ ability to further cut expenses, according to the report.

“The margins are at some of the lowest levels that we have seen in a while, but that’s more a function of expenses outpacing revenue,” Lisa Goldstein, associate managing director for Moody’s public finance group, told Modern Healthcare in September.

This week, my colleagues and I are attending AdvaMed’s annual MedTech Conference. Participants will hear about the latest innovations, such as new digital products that incorporate the latest advances in wireless technology and increasingly powerful computing capabilities for generating clinical and economic insights.
Read more >

Hospitals are doing a better job of limiting expenses by cutting staff, boosting productivity and squeezing supply costs, according to the report. Salaries and supplies expense growth fell to 6% and 5.9% in 2017 from 7.7% and 8.2% in 2016, respectively. Overall drug price growth will likely continue to slow, which will also help.

Total expense growth is expected to drop slightly to 4% to 5% in 2019 from 5.7% in 2017. But that will still eclipse projected revenue growth of 3% to 4%.

Inpatient admission will remain very weak, following 2017’s median admission growth of 1%, according to the report.

Outpatient visit growth will also remain soft, highlighted by median growth declining for the first time in five years to 2.2% in 2017 as the number of outpatient surgeries significantly dropped. More competition coupled with the ongoing shift to outpatient services will suppress margins. Value-based pay models and higher out-of-pocket expenses will are poised to drag utilization.

Meanwhile, demand for temporary nurses, continued recruitment of employed physicians, wage increases associated with lower unemployment, innovative specialty drugs and expanded use of medical devices will drive up expenses.

“The not-for-profit healthcare outlook remains negative amid some glimmers of stability,” Diana Lee, a Moody’s vice president, said in a statement.

Medicare as a percentage of gross revenue rose to 45.6% in 2017 from 43.7% in 2013, according to Moody’s data. Overall reimbursement rate increases will continue to be in the low-single-digit range. This combined with growing bad debt levels will strain not-for-profits’ balance sheets, according to the report.

Bad debt levels are projected to grow in the 8% to 9% range as commercial insurers will continue to limit coverage and raise copays and deductibles.

Medicare inpatient base rates will grow about 3% in fiscal 2019, a bit higher than in prior years. However, the CMS estimates that about 80% of hospitals will incur readmission penalties of up to 3% of their diagnosis-related group. Site-neutral payments and capping 340B drug discount rates would also hurt not-for-profit hospitals.

The uncertain state of work requirements for Medicaid eligibility and a looming reduction in Medicaid disproportionate share funding would acutely impact not-for-profit providers, according to the report.

Meanwhile, commercial insurers’ negotiating leverage will rise as more Medicare and Medicaid beneficiaries are covered by managed-care programs, which feature lower rate increases and higher denial rates. Certain hospitals will face additional margin constraints as budget-strapped states seek to reduce spending on their employee health benefit plans, analysts said.

Not-for-profit hospitals will still seek scale to alleviate financial pressures, according to the report. But the jury is still out on long-term savings for larger systems that acquire struggling, Goldstein said.

“Day 1 integration is key to making these deals work,” she said. “We’ve seen mergers go very smoothly; we’ve seen mergers over the years that have been wobbly coming out, and some have been very difficult.”

Modern Healthcare

By Alex Kacik | December 3, 2018

Benjamin Franklin famously said that nothing in this world is certain except death and taxes. And the certainty of taxes leads to the inevitability of audits. Whether you are preparing for your first State tax audit or your thousandth, keeping in mind the following ten best practices will help ensure that the audit goes as smoothly as possible.

NO. 1: IDENTIFY POTENTIAL ISSUES –

The best offense is a good defense – true in both sports and tax. When you are preparing the tax returns, consider any issues that an auditor may focus on. Some items that might attract an auditor’s attention include instant unity for combined reporting states, characterization of income as business or nonbusiness income, sourcing of services for apportionment purposes and, unsurprisingly, any item that has a large tax effect. By preserving the necessary records to support your company’s filing positions in the beginning, you will decrease your work later.

Please see full Issue below for more information.

Morrison & Foerster LLP

November 27, 2018

The process will be more of a struggle in some states than others.

State and local governments, responding to a June U.S. Supreme Court decision, have begun to collect sales taxes from out-of-state retailers. But depending on tax systems already in place, the process will go much more smoothly in some states than in others.

Analysts expect new rules being drafted around the country in response to the South Dakota v. Wayfair Inc. decision to deliver billions of dollars annually to state coffers. They will also force retailers to navigate an untested patchwork system stretched across the nation’s 12,000 state and local taxing districts.

The high court decision was meant to level a playing field, where for decades sales tax laws that applied to brick-and-mortar stores often didn’t apply to online retailers. State and local governments saw an end to years of lost revenue from the booming online retail sector. Offline retailers celebrated the ruling as an overdue corrective.

Continue reading.

Route Fifty

By John Tomasic,
Special to Route Fifty

NOVEMBER 28, 2018

WASHINGTON – Airport authorities will have an easier time signing leases at their bond-financed terminals for prohibited uses such as retailers specializing in the sale of regional wines under a new Internal Revenue Service private letter ruling.

The ruling publicly released Friday allows floating private equity to be used for a prohibited use for a tax-exempt bond-financed airport terminal renovation.

Floating private equity refers to money that is not the proceeds of a bond sale that can be moved around as needed, rather than dedicated to a specific location. Prohibited uses include stores specializing in the sale of alcohol for offsite consumption, health clubs and gambling facilities such those featuring slot machines.

The ruling applies to exempt facility bonds, the same concept the IRS used in a 2015 rule that allows floating private equity to be applied to private use in a government bond financed project.

Ed Oswald, a former Treasury official who is a partner at Orrick Herrington & Sutcliffe in Washington, joined with John Stanley, an associate at Orrick’s San Francisco office, in making the request to the IRS on behalf of an unnamed client.’

The IRS letter ruling did not identify the airport owner, but did say the terminal complex “includes boarding areas, which have a wide variety of retail shops, bars, restaurants, coffee shops, and similar passenger amenities” operated by third parties under leases.

The airport, according to the IRS, is in the process of making “substantial renovations to portions of the terminal complex” that include “the complete demolition and reconstruction of the boarding area” and will finance part of the costs of the renovations with the proceeds of a bond issuance.

The request to the IRS indicated that private money other than the funds from the tax-exempt bond sale will be set aside for non-qualified uses. Oswald said in an interview the ruling allows airports to more easily move prohibited use facilities to other parts of their terminals with the application of the floating private equity.

“We can borrow from the thinking from the 2015 private use regulations regarding private activity bonds and adopt a similar theme and allow equity to flow to these prohibited facilities,” Oswald said.

“Although duty-free shops have long sold bottled alcohol, those shops generally offer a wide range of other products for sale,” Oswald and Stanley wrote in their summary of the ruling. “This newer trend in airport concessions is towards smaller spaces that primarily or exclusively sell bottled alcohol, particularly in wine-growing regions.”

Charles Almond at Bracewell in Houston described the IRS letter ruling as “not surprising, but helpful.”

“Big airports are in some respects almost like big cities,” Almond said. “There’s lots of stuff going on there. There are tens of thousands of people going through an airport and you see the types of retail have developed into a pretty wide variety.”

Almond said the ruling is an extension of the 2015 rule for government bonds issued under section 141, applying the same principle to qualified use bonds issued under section 142.

“I think large airports would be wise to use this to avoid pitfalls where a kind of prohibited use sneaks up on you,” Almond said. “I think it’s a positive development.”

Almond said there have been workarounds to allow prohibited uses in bond-financed airport terminals “if you were constantly vigilant about the types of retail that were going into your facility and had great communication between the finance people are the airport and the people who were doing the retail leasing and planning.’’

Going forward, Almond said, “You can allocate those prohibited uses to that equity wherever they are located and avoid those sort of uh-oh moments.”

The Bond Buyer

By Brian Tumulty

November 26, 2018, 2:58pm EST

The IRS ruled for Dallas-Fort Worth Airport, holding that a major airport could treat its inter-terminal-building transportation facilities (a bus system on the “non-secure” side of the terminal buildings and a train system on the “secure side” of the buildings) as discrete facilities, separate from the terminal buildings, that qualify for governmental (“non-AMT”) financing.

Read IRS Private Letter Ruling 201847001.

Charles L. Almond of Bracewell LLP represented Dallas-Fort Worth Airport in this matter.

Taxpayer brought action against mayor for violation of the Kentucky Constitution, seeking to recover surplus sanitation assessment revenue that was not devoted to trash collection and recycling.

Mayor filed a motion to dismiss, which the Circuit Court granted. Taxpayer appealed and the Court of Appeals reversed the Circuit Court and remanded. Mayor sought discretionary review, which the Supreme Court granted.

The Supreme Court of Kentucky held that:

• Sanitation assessment was not a user fee;
• Excess revenue generated by sanitation assessment was a tax;
• Repeal of state statute on cities’ use of excess revenues did not indicate Legislature’s intent to hold city officials strictly liable for using revenues collected for one purpose on another lawful purpose; and
• Recognition of an offset defense for mayor was not unwarranted, overruling City of Newport v. Rawlings, 289 Ky. 203, and City of Newport v. McLane, 256 Ky. 803.

Sanitation assessment imposed by city ordinance was not a user fee and could be considered a tax, and thus taxpayer could establish action against mayor based on allegedly unconstitutional use of excess revenues collected under the ordinance for general city purposes, where excess fees had historically been treated as taxes by the Supreme Court.

Excess revenue generated by city’s sanitation assessment, which was diverted to a general fund for other city expenditures, was a tax, and thus taxpayer could bring action against city’s mayor based on constitutional prohibition against collecting taxes for one purpose and spending them for another; when the annual sanitation assessment ordinance was passed and monies were collected, it was abundantly clear that excess funds would be generated, such that the predictable excess regularly devoted to general city expenditures took the form of a tax.

Repeal of state statute on cities’ use of excess tax revenues did not indicate intent by Legislature to hold city officials strictly liable for collecting tax revenues for one purpose and then using them for different lawful purposes, and thus mayor could invoke an offset defense in action brought by taxpayer based on city’s use of excess revenues from a sanitation assessment for general city purposes; the statute in question did not create the offset defense and its repeal therefore did not eliminate the defense, in that the statute was simply a repackaging of an older statute which already provided for offset, and subsequent statutes on city tax assessments made no effort to prohibit offset in plain and unmistakable language.

Recognition of an offset defense for mayor in an action brought by taxpayer based on city’s use of excess revenues from a sanitation assessment for general city purposes was not unwarranted and did not render city taxation statutes limiting the use of revenues meaningless; the offset defense shielded city officials acting in good faith from shouldering significant personal liability for using excess funds on municipal obligations that benefited all taxpayers, but it also placed a burden on these officials to account for excess funds and imposed personal liability for any expenditures not made for valid municipal obligations, such that the offset defense did not relieve city officials from having to defend their actions in a court of law.

School board sought judicial review of a decision of the Board of Tax Appeals adopting a value for a horse-racing facility provided by owner’s appraisal.

The Supreme Court of Ohio held that:

• Adjustment of comparable sales to account for value of potential video-lottery-terminal (VLT) licenses was proper;
• Reduction of facility’s market value to account for value of owner’s VLT license was proper;
• Board was required to consider appraisal of facility as if generating income under hypothetical lease;
• Board properly denied motion for judicial notice that some casinos operated on leased real estate; and
• Facility’s sale price in bankruptcy proceeding was not relevant evidence of facility’s minimum value.

Appraiser’s reduction, as part of his sales-comparison analysis, of real-property values of his comparable sales by allocating 50 to 60% of the comparable-sales prices to the value of racing and potential video-lottery-terminal (VLT) licenses was not contrary to law, in proceeding before the Board of Tax Appeals regarding the real-property valuation of a horse-racing facility; appraiser simply placed value on an intangible asset, namely, the opportunity to acquire valuable licenses.

Appraiser’s reduction, as part of his income-capitalization analysis, of $50 million from the market value of a horse-racing facility, representing the value of a video-lottery-terminal (VLT) license, was not contrary to law, in proceeding before the Board of Tax Appeals regarding the real-property valuation of the facility; that there were territorial restrictions on the conduct of VLT licensees did not make their licenses part of the real property on which the licensees operated, and non-transferability of a VLT license did not render such license part of the real property.

Board of Tax Appeals was required to consider an appraisal of an owner-occupied horse-racing facility as if it were leased, in proceeding regarding the real-property valuation of the facility; a property owner could realize the value of its property by encumbering it with a lease, so that an appraiser could take that possibility into account when valuing it, and appraising the facility as if generating income under a hypothetical lease was consistent with real-estate valuation statute’s directive to determine “the true value of the fee simple estate, as if unencumbered,” so long as the appraisal assumed a lease that reflected the relevant real-estate market.

Board of Tax Appeals properly denied school board’s motion for judicial notice that some casinos operated on leased real estate or, alternatively, to allow introduction of evidence supporting the assertion three months after hearing before the Board closed, in proceeding regarding the real-property valuation of a horse-racing facility; rule permitting judicial notice did not override general rule requiring parties to present their evidence before the hearing record closed, school board’s new evidence existed at the time of the hearing, and board did not show that it was prevented from timely presenting the evidence.

Sale price of a horse-racing facility and related assets in a bankruptcy proceeding was not relevant evidence of the facility’s minimum value, in proceeding before the Board of Tax Appeals regarding the real-property valuation of the facility.

Homeowners sought extraordinary relief from decision upholding town’s foreclosure on their home. A single justice of the Supreme Judicial Court denied relief. Homeowners appealed.

The Supreme Judicial Court of Massachusetts held that homeowners were not entitled to relief under Supreme Judicial Court’s power of general superintendence over inferior courts or in nature of mandamus.

As America grapples with widening inequality and deepening political polarization, a group of wonks in Washington is quietly embarking on a new national experiment to rehabilitate the country’s most distressed regions. Tucked into the 2017 Republican tax law, Opportunity Zones, as the program is called, offer huge tax incentives for financiers who invest in downtrodden communities.

The promising idea has one potentially huge flaw, however: As the Treasury Department finalizes the program’s rules in preparation for its launch in 2019, researchers and economists are increasingly worried that the agency is leaving out critical requirements to track the law’s effects—and as a result, we may never know if Opportunity Zones actually work.

The new law has attracted attention in policy circles because it’s the most specific thing the Trump administration has done to help “left behind” areas, and could cost more than $1 billion a year, at least initially.

But it’s far from a sure thing. Earlier versions of the idea have been tried, with an unproven track record. The Opportunity Zones provision was originally drafted with a requirement for the Treasury Department to provide detailed information on the distressed regions and the impact of investments, but that dropped out when the tax bill was finalized. And when the Treasury Department released its proposed rules for the program last month, it didn’t require investors to disclose much detailed information.

Without better reporting requirements in this version, critics say, it’s hard to know if the law will have any effect besides saving investors money and draining federal tax revenues.

“There’s never going to be a really rigorous evaluation of this program,” said Tim Bartik, an economist at the Upjohn Institute. “There will always be questions.”

Federal programs often pass Congress without any evidence they work, in part because it’s so difficult to collect data on the impact of broad policies. But Opportunity Zones are a trackable scheme, operating in the data-rich field of finance, where investments and returns are all carefully measured by the financial players involved. It appears, however, they won’t need to report those results to Washington.

“The regulations, as they are right now, don’t include any of the data fields we were hoping for,” said Nick Fritz, an official at the Sorenson Impact Center at the University of Utah, which focuses on improving the social impact of investing. Fritz is optimistic about Opportunity Zones but worries that the lack of data will make it hard to know whether the program actually succeeds.

Tax incentives for investing in distressed areas first gained traction in the 1980s, when they were pushed by NFL-player-turned-congressman Jack Kemp as a free-market solution to regional poverty. They were expanded during the Clinton administration, which liked to back ideas that were politically centrist and didn’t sound like “welfare.”

But despite billions of dollars targeted toward communities—through both direct spending and the tax code—policymakers know little about the results. In numerous studies over the years, some have found small positive gains, others small negative ones. Two major studies, conducted by the Government Accountability Office in 2006 and 2010, concluded that there simply wasn’t enough data to evaluate.

As a result, many economists are skeptical that Opportunity Zones will do what they promise, helping lift up impoverished areas. Instead, they argue, money will be funneled to areas that are on the cusp of a development boom and don’t need the extra help. Since the zones were designated by state governments—which could designate up to 25 percent of their low-income communities as Opportunity Zones—they also worry that political considerations and lobbying efforts influenced the states’ selection process.

“The places that got picked got picked for a reason, and the ones that got passed over got passed over for a reason,” said Adam Looney, a senior fellow at the Brookings Institution who has been closely tracking Opportunity Zones. That initial design choice, he said, will make it difficult to fairly compare the results of the program without deeper information on the areas that actually received the investments.

The program is built on the fact that investors nationwide are sitting on $6 trillion in unrealized capital gains—money that they’ve made in the stock market and other investments but haven’t put to new use because doing so would trigger a tax payment. The new law will allow investors to defer those taxes by rolling that money into “Opportunity Funds,” new vehicles that invest primarily in distressed areas. If they hold that investment for 10 years, any new returns are tax-free. (They do eventually have to pay taxes on the deferred capital gains.)

Supporters believe the law will result in a flood of new investor money into those areas. But it comes at a cost to the government: The Joint Committee on Taxation projects that the tax break will cost $7.7 billion during the first five years, falling to $1.6 billion over a decade as investors pay their deferred capital gains.

Given the disagreements over the potential for the program, experts on both sides agree that good data is essential. The original bill, introduced by Sens. Tim Scott (R-S.C.) and Cory Booker (D-N.J.) in February 2017, required Treasury to submit an annual report to Congress, starting five years after enactment, with detailed information about how the tax incentive was affecting Opportunity Zones, including which communities and projects actually received investment.

That section was dropped from the bill when it was inserted into the GOP tax package, however, because the Republican Congress passed the tax law through budget reconciliation—a process that, by Congress’ rules, can include reforms that only affect taxes or spending. The reporting requirement fell outside that boundary.

That’s left Treasury with broad authority to collect information about the program—or not. The agency’s initial proposal and an accompanying proposed IRS form require Opportunity Funds to provide basic information, such as the name of the fund, and aggregate investment numbers. Those numbers are used to prove to the IRS that investors are actually investing their money in Opportunity Zones, but they don’t provide the granular, transaction-level data that would show which specific tracts and types of projects received money. The omission has left even supporters concerned that limited data will make it harder to grow political support for the program.

“It’s the crux of really realizing the power and potential of this incredibly exciting bill,” said Tracy Palandjian, CEO of Social Finance. “Without an intentional framework about how to think about how to measure the payment over time … we’re going to be back to the old tales that these things are ineffective.”

Not everyone is so concerned. John Lettieri, president of the Economic Innovation Group, a leading proponent of the program, dismissed the skeptics’ concerns that states designated less-needy tracts for investment. He pointed to recent research from the Urban Institute, which found just 3 percent of the selected areas were experiencing substantial socioeconomic improvement. As a result, he said, researchers will be able to analyze the program’s impact, even without the additional data.

Lettieri agreed that additional reporting requirements would be helpful and was optimistic that they would be added in the future. But he added that the agency had to craft such requirements so they don’t impose a heavy burden on investors or, worse, require them to turn over proprietary information.

“You want to avoid implicitly restricting or inhibiting the very things the incentive was designed to do,” Lettieri said, adding, “[The] right balance needs to be struck.”

A spokesperson for the Treasury Department said the agency hasn’t written off the idea and is “considering whether the initiative could benefit from a more robust data collection effort in future tax years.”

“We believe we can spend some time to get this right and still have enough data to analyze its effectiveness,” said the spokesperson. “Our current focus is on ensuring that the tax incentives of [Opportunity] Zones best serve communities and benefit investors.”

If the Treasury Department does add new requirements going forward, it won’t be a huge surprise. The agency had a tight timeline for drafting rules and launching the program, forcing it to prioritize some elements of the rollout over others. If reporting requirements are added, researchers will breathe a sigh of relief. Given the long-term nature of the investments—the tax benefits rise substantially as investors hold their investments for longer—a retrospective requirement could be enough to answer their questions about whether it works.

But, said Fritz, the researcher at Sorenson Impact, the real challenge with later reporting is the effectiveness of the funds themselves. The longer Treasury takes to collect and analyze data, the less investors will know about what types of projects have the greatest impact on low-income communities. “This limits the ability of municipalities and funds to learn from others’ best practices and make sound, impactful investments,” Fritz added.

Even with the best economic data, debates over the effectiveness of public policies are never settled. Despite decades of evidence on minimum wage increases, for instance, researchers are still sharply divided on its impact. In other words, experts suggested, even if Treasury imposes significant reporting requirements on Opportunity Funds, disagreements over such place-based policies will continue—but that’s not a reason to not collect the data at all.

“Will we be able to evaluate the efficacy of this tax expenditure and, in particular, who it’s benefiting?” said Laurel Blatchford, president of Enterprise Community Partners and a former senior official at the Department of Housing and Urban Development. “There’s a lot of excitement and a lot of questions.”

THE AGENDA

By DANNY VINIK

11/20/2018

Danny Vinik is a student at the Georgetown University Law Center and former assistant editor of The Agenda. He can be reached @DannyVinik and [email protected].

A HOW-TO FOR OPPORTUNITY ZONES

OVERVIEW
The Tax Cuts and Jobs Act of 2017 provides a new incentive—centered around the deferral, reduction, and elimination of capital gains taxes—to spur private investments in low-income areas designated by states as Opportunity Zones. This provision is based heavily on the Investing in Opportunity Act (S. 1639) introduced by Senator Cory Booker (D-NJ) and Senator Tim Scott (R-SC). Given the significant interest among investors, it is possible that this new tax incentive could attract hundreds of billions of dollars in private capital, making this one of the largest economic development initiatives in U.S. history.

The broad objective of this new tax incentive—expanding economic opportunities for places and people left behind—cannot be achieved by the market and outside investors alone. Cities in the broadest sense—local governments for sure but also universities, philanthropies, employers, local financial institutions and community development organizations—will need to act with deliberate agency and purpose if Opportunity Zones are to spur growth that is inclusive, sustainable and truly transformative for each city’s economy.

To enable such intentional action, Accelerator for America engaged New Localism Advisors to create a replicable product—an Investment Prospectus—to enable cities, counties and states to communicate their competitive advantages, trigger local partnerships and identify sound projects that are ready for public, private and civic capital. Our aim was to help communities and investors get smarter and more precise about the broad range of investment possibilities that exist in Opportunity Zones and, literally, help make and shape markets where there were none.

To date, mayors in five cities—Joe Schember in Erie, Greg Fischer in Louisville, David Holt in Oklahoma City, Pete Buttigieg in South Bend and Michael Tubbs in Stockton—have led multi-sector efforts to design and release the first versions of an Investment Prospectus. The five cities have deliberately followed a common template and routinized format in order to enhance the potential for replicability across multiple cities.

We have created this Opportunity Zone Investment Prospectus Guide to speed the process by which a broad group of cities adopt this market tool and build Investment Prospectuses that are customized to local assets and advantages and scalable across cities by asset classes and product types. Our ambitions are large: to grow the number of cities with Investment Prospectuses from our original five cities to fifty communities by March 2019 and unveil them at an Investors Summit at Stanford University.

Using the Louisville effort as a base, this document walks through each core element of the Investment Prospectus unveiling, where appropriate, information about the source of data, why the data was chosen, and what cities should do with it. Accelerator for America and New Localism Advisors have partnered with the Nowak Metro Finance Lab at Drexel University and identified institutions like PolicyMap to ease the replication process and codify best practices.

Continue reading.

Drexel University Lindy Institute for Urban Innovation

Kresge grant to Calvert Impact Capital will send cohort of five potential fund managers through exploratory program

The Kresge Foundation announced today a $390,000 grant to Calvert Impact Capital that will support the Opportunity Zones Incubator, a technical assistance program for social impact entities that are interested in or exploring taking a Qualified Opportunity Fund to market.

Kresge selected five mission-aligned organizations that are exploring ways to direct capital to Opportunity Zones to enter the incubation program, where they will receive technical assistance around potential fund structures as well as assistance related to legal, tax and accounting considerations. Holland and Knight and Plante Moran will both assist Calvert Impact Capital with providing support to the organizations.

The Opportunity Zone legislation in the Jobs and Tax Act of 2018 provides tax forgiveness to investors who invest in more than 8,000 designated, low-income Census tracts across the U.S.

Kresge, in partnership with The Rockefeller Foundation, released a call in the summer of 2018 for letters of inquiry from potential Opportunity Zone fund managers, drawing more than 141 responses. From those applications, Kresge has selected a dozen to move forward through either this technical assistance incubator program or into a due diligence process for impact investments. Over the coming months, The Rockefeller Foundation intends to select additional fund managers to participate in the technical assistance program alongside Kresge.

The five organizations that are exploring starting an Opportunity Zone Fund through this incubation program are:

• Craft3, a regional nonprofit that makes loans in Oregon and Washington to strengthen the resilience of businesses, families and nonprofits.
• New Orleans Startup Fund, a nonprofit venture fund, established by Greater New Orleans business and community leaders, that provides seed capital and technical assistance to early-stage firms that demonstrate significant growth potential.
• Gulf Coast Housing Partnership. which works in the Gulf Coast region to promote community and economic development through various programs implemented to deliver effective and meaningful results.
• Renaissance HBCU Opportunity Fund, a partnership between Renaissance Equity Partners and an affiliate of the HBCU Community Development Corporation to invest in value-added and opportunistic real estate on or near the campuses of Historically Black Colleges and Universities.
• Fifth Ward Community Redevelopment Corporation, which seeks to enhance quality of life for individuals and families living in Houston’s fifth ward, eliminate blight, attract investment and resources, encourage commercial and business development, coordinate government and public service, and offer a sense of destination and creative placemaking.

The Opportunity Zones initiative takes a free-market approach unmatched by any federal spending guarantees, which means that designation as an Opportunity Zone doesn’t mean that a community will receive money for schools, health care or other public services, or even that they’ll receive any money at all.

“These five organizations understand deeply what it takes to invest in low-income communities,” said Rip Rapson, Kresge’s President and CEO. “We hope through this incubation program they can prepare impact funds that will test whether the Opportunity Zones legislation will support impact investing methods, in which social impact outcomes are weighted heavily. We hope this sets this new market on a trajectory more likely to serve low-income communities well.”

Kresge’s Social Investment Practice sees Opportunity Zones as a potential benefit to low-income communities, but only if early market movers prioritize community impact and measure and report on their outcomes.

“The goal of this effort is to strengthen these fund managers’ investment concepts through high-quality advisory services,” said Kimberlee Cornett, Kresge’s managing director of the Social Investment Practice. “Through partnership with Calvert Impact Capital, these managers will be better prepared to approach investors and further develop their programmatic thesis for future investment considerations.”

Calvert Impact Capital has been working in low-income communities across the U.S. for nearly 25 years and is committed to ensuring that the Opportunity Zone tax incentive is leveraged in a way that provides inclusive economic opportunity and growth for people living and working in designated zones.

“We want to fill gaps to more efficiently move money into these communities,” said Beth Bafford, vice president of Syndications and Strategy at Calvert Impact Capital. “This is an incentive that defers heavily to the market in its implementation, and early movers will define it. We want to show investors what good can look like.”

November 29, 2018

This is the first holiday season since the U.S. Supreme Court allowed states to tax online shopping.

Retail experts are anticipating that the Thanksgiving shopping weekend will once again be record-breaking, particularly for online sales. Last year, the Monday after Thanksgiving — nicknamed Cyber Monday — saw a record $6.6 billion in sales, up 16.8 percent from the previous year.

But if states are hoping for a revenue windfall in the aftermath of the U.S. Supreme Court ruling this year that allowed them to collect online sales taxes — not so fast. “Ultimately, I think there will be a nice little bump to states,” says Brian Kirkell, a principal at the tax consulting firm RSM, “but it’s not going to change much.”

That’s because there are still a lot of unknowns when it comes to how much the ruling will affect revenues.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | NOVEMBER 21, 2018

Federal and state tax credits for renewable energy facilities are winding down, but a new federal tax incentive enacted in tax reform may provide a boost to many new installations, repowering projects, and storage facilities. The Qualified Opportunity Zones (“QOZ”) incentive provides attractive tax benefits for investors with capital gains that, unlike other federal incentive programs such as the New Markets Tax Credit and Historic Rehabilitation Tax Credit, can be combined with the Investment Tax Credit (“ITC”) and Production Tax Credit (“PTC”) for facilities located in geographic areas that are designated as QOZ. Further, QOZ benefits will remain in place for a significant period after the ITC and PTC have become less valuable or expired. Recently released regulations provide significant clarity and highlight how valuable the QOZ incentive can be for qualified investments. See our October 23 alert for a discussion of how the regulations make the QOZ incentive even more interesting.

How does the QOZ Incentive work?

The QOZ incentive is designed to encourage long-term investment in over 8700 low-income areas in rural and urban parts of all 50 states, the possessions, and the District of Columbia that have been designated by the Secretary of the Treasury as QOZs. The benefits of the QOZ incentive are available when a taxpayer disposes of a capital asset and, within 180 days, invests the proceeds in a qualified opportunity fund (“QOF”) that invests in QOZ property, either through a direct investment in QOZ tangible business property (“QOZBP”) or a newly-issued equity interest in a partnership (including an LLC) or corporation operating a business in a QOZ (“QOZB”). A QOF can be a corporation or a partnership (including an LLC) for U.S. federal income tax purposes and can function as an investment fund, a private investment entity, or many options in between. The major requirement is that at least 90 percent of the QOF’s assets (measured by cost or value, depending on the applicable facts) must be invested in QOZ property as described above. For more details about the terms and conditions of the QOZ incentives, see our March 14 alert, which contains a helpful overview.

What are the benefits of the QOZ Incentive?

The QOZ incentive consists of three tax benefits for investors.

• First, federal taxes on capital gains invested in QOFs may be deferred until 2026.
• Second, if the taxpayer holds the QOF investment for at least five years, the basis of the asset sold to generate proceeds for investment in the QOF may be increased by 10 percent, thus reducing the capital gain that is eventually recognized. The basis will be increased by another 5 percent if the taxpayer holds the QOF investment for at least seven years.
• Third, if the taxpayer holds the QOF investment for at least 10 years, capital gains realized upon disposition of the investment are free from federal income tax due to a step up in basis of the investment to its fair market value at the time of disposition.

Who can use the QOZ Incentive?

Any U.S. person and certain non-U.S. persons can invest in a QOF and use the QOZ incentive. This includes individuals, corporations, partnerships, and trusts. Partners investing capital gains from a partnership have a longer window to invest in a QOF than the partnership would.

How does the QOZ Incentive help renewables projects?

Many QOZs are located in desirable locations for renewable energy projects and standalone storage. An equity interest in a renewable energy facility (e.g., solar, wind, biomass, geothermal) generally should be a qualified asset, provided that the facility is located in a QOZ and all the requirements of the QOZ incentive for tangible property or a QOZB are met. In addition, there is extensive overlap in the type of property that qualifies for the QOZ incentive, PTC, and ITC, which may boost the value of the ITC and PTC even while the credit rates are sun-setting. Specifically, all three incentives require an ultimate investment in tangible property that is used in a trade or business (ITC and PTC qualified assets also must be personal property). Moreover, the QOZ incentive is:

• technology agnostic;
• available for standalone storage as well as transmission assets;
• available for new installations, as well as repowering or rehabilitation (including installation of storage) of existing installations acquired after December 31, 2017 when expenditure thresholds are met and the work required to meet those thresholds is completed within a 30-month period;
• compatible with the structuring techniques familiar to tax equity investors and developers AND offers new options for tailoring the structure to suit certain investors; and
• may be combined with other available tax credits, including the ITC and PTC.

The benefits of leveraging the QOZ incentive with other tax incentives can be considerable. However, the terms and conditions to meet QOZ requirements are quite complex, so it is important that investors and developers obtain good counsel in order to avoid costly mistakes that could result in loss of QOZ benefits. Our Opportunity Zones and Renewables teams would be happy to help you determine how the QOZ incentive can help your projects pencil out and to make sure you are complying with all QOZ requirements.

Opportunity for Treasury comments/more guidance coming

The U.S. Treasury has requested taxpayer comments on a variety of points in the Proposed Regulations and on several issues to be addressed in forthcoming proposed regulations expected by the end of the year. Taxpayers may provide responses to these requests and other comments through December 28, 2018. Comment opportunities include how long a QOF may take to reinvest proceeds in qualified assets, the treatment of vacant land, how to determine if at least 90 percent of a QOF’s assets are qualified assets, how exits must be structured, and when the 30-month period for repowering or other rehabilitation activities of existing projects begins.

K&L Gates

by Elizabeth C. Crouse and Mary Burke Baker

Nov 16, 2018

Big-box retailers nationwide are slashing their property taxes through a legal loophole known as “dark store theory.” For the towns that rely on that revenue, this could be a disaster.

WEST BEND, WI—Kraig Sadownikow doesn’t look like an anti-corporate crusader. The mayor of West Bend, Wisconsin, stickers his pickup with a “Don’t Tread on Me” snake on the back window, a GOP elephant on the hitch, and the stars-and-stripes logo of his construction company across the bumper.

His fiscal conservatism is equally well billboarded: In the two hours we spent at City Hall and cruising West Bend in his plush truck, Sadownikow twice mentioned the 6 percent he has shaved off the Wisconsin city’s operating budget since becoming mayor in 2011, and stressed its efforts to bring more business to town.

So you might be surprised to learn that Sadownikow (he instructed me to pronounce his name like sat-on-a-cow) is personally boycotting two of the biggest big-box retailers in his town, Walmart and Menards, the Midwestern home improvement chain. He’s avoiding shopping at these companies’ stores until they cease what he sees as a flagrant exploitation of West Bend’s property tax system: repeat tax appeals that, added up, could undermine the town’s hard-won fiscal health.

Continue reading.

NEXT CITY

LAURA BLISS

NOV 14, 2018

Taxpayer brought action challenging Department of Revenue’s determination as to its industrial property’s real market value, the assessor’s notation of the assessed value on the assessment roll, and enterprise zone’s sponsor’s imposition of a public benefit contribution.

Following bench trial, the Tax Court issued opinion setting the real market value of taxpayer’s electric cogeneration facility at $38.2 million and $19.1 million for two tax years. The Department appealed.

The Supreme Court of Oregon held that:

• Taxpayer’s claims all fell within the sole, exclusive, and final judicial authority of the Tax Court;
• Taxpayer had standing to challenge the Department’s erroneous real market value determination; and
• Evidence was insufficient to support Department of Revenue’s real market value determination with regard to taxpayer’s electric cogeneration facility.

Taxpayer’s claims, which challenged the Department of Revenue’s determination as to its electric cogeneration facility’s real market value, the assessor’s notation of the assessed value on the assessment roll, and enterprise zone’s sponsor’s imposition of a public benefit contribution, all fell within the sole, exclusive, and final judicial authority of the Tax Court, regardless of whether or not the facility was exempt from taxation during the years at issue; taxpayer was subject to taxation, irrespective of whether it owed any taxes in a given year, all the statutes that related to taxpayer’s claims bore on tax liability, the first arising out of the Department’s obligation to determine real market value for industrial properties, and the second arising out of the assessor’s obligation to ensure that the tax rolls accurately reflected assessed values, and at all material times, taxpayer was paying property taxes on the real property underlying its electric cogeneration facility.

Taxpayer was aggrieved by Department of Revenue’s erroneous real market value determination with regard to taxpayer’s electric cogeneration facility, and because the erroneous act affected taxpayer and its property, taxpayer had standing to challenge that determination in the Tax Court; taxpayer alleged a wrong, the erroneous real market value determination, as well as a private interest that was different from that of the general public, the imposition of an excessive public benefit contribution directly resulting from that erroneous determination, along with an attendant increase in property taxes.

Evidence was insufficient to support Department of Revenue’s real market value determination with regard to taxpayer’s electric cogeneration facility for the tax year in question; the Department’s appraiser relied on a power purchase agreement that provided taxpayer with revenues significantly in excess of what a purchaser of the property on the assessment dates would have been able to negotiate for, for electricity, capacity, and renewable energy credits (REC), and erroneously considered intangible assets by valuing taxpayer’s entire property and business under the income approach, subtracting only an amount for working capital.

Property owners brought action against county for fraud, inverse condemnation, and slander of title, based on alleged lack of county authority to tax their property.

The District Court granted summary judgment in favor of county. Property owners thereafter filed motion for transfer and assignment of property tax obligations to county’s attorney. The District Court denied the motion and awarded attorney fees to county. Property owners appealed.

The Supreme Court of North Dakota held that:

• Property owners failed to establish a claim for abatement or refund, and
• Property owners’ appeal was frivolous.

Property owners, who challenged county’s assessment of taxes on their property, failed to establish a claim for abatement, where they did not submit such claim to county board of commissioners for administrative review prior to seeking judicial relief.

Property owners’ appeal to trial court’s grant of summary judgment against them, in their action challenging county’s tax authority over their property, was frivolous, and thus county was entitled to attorney fees and double costs; owners’ arguments on appeal, such as that “it is the federal government’s obligation to pay the real estate tax[,]” were so devoid of merit that owners should have been aware of the impossibility of success.

But cities can fight back.

When I want to go to an Oakland A’s baseball game, I walk 10 minutes to the MacArthur bart station. The station was part of an infrastructure plan that cost Bay Area taxpayers in the 1960s and ’70s $1.6 billion, and currently costs billions in maintenance and expansion. I pay a few bucks to ride—about 75 percent of bart’s operating costs are maintained by fares. If the train car I step into is new, it cost taxpayers $2 million.

The train travels south, dips underground through downtown Oakland, hangs a left around Lake Merritt, and resurfaces in Fruitvale. It stops outside of the looming monstrosity called the Oakland–Alameda County Coliseum, home to the A’s and, for now, the Raiders. Just behind it is the Oracle Arena, home to the Golden State Warriors basketball team, also for now. Both stadiums opened in 1966 and together cost $25.5 million for construction, in addition to $1 million for the land they sit on, all funded by municipal bonds, which is to say taxpayers.

I and my fellow passengers walk over the sloping concrete bridge, where vendors hawk tickets, T-shirts, and beers amid the din of train whistles and street drummers, and we merge with other fans. They’ve come in cars and buses, maybe bicycles or Bird e-scooters, streaming in on public roads that will cost Oakland at least $66 million to improve and maintain in 2019. We all go inside, having given our money to John J. Fisher, the billionaire majority owner of the A’s, who in exchange lets us watch his team play.

Continue reading.

THE ATLANTIC

RICK PAULAS

NOV 21, 2018

Limited liability corporation (LLC) brought qui tam action against telecommunications carriers under the Minnesota False Claims Act (MFCA).

Attorney General declined to intervene. Carriers filed a motion to dismiss, which the District Court granted. LLC appealed. The Court of Appeals affirmed. The Supreme Court granted review.

The Supreme Court of Minnesota held that:

• Plain meaning of “[s]tatutes relating to taxation” referred to any portions of state statutes that pertained to taxation;
• Surcharges collected by telecommunications carriers were taxes; and
• Use of the definition of tax from statute defining words and phrases in legislation did not convert all fees to taxes.

Plain meaning of the phrase “[s]tatutes relating to taxation[,]” in section of the Minnesota False Claims Act (MFCA) that excluded qui tam actions regarding such statutes, referred to any portions of state statutes that related to, bore upon, or pertained to levying, assessing, or imposing a tax; the phrase “relating to taxation” and the MFCA itself were unambiguous, the exclusion was not restricted to statutes enacted under the State’s taxing power in that the plain language did not invoke this power, and the MFCA’s reference to “portions” of statutes relating to taxation did not suggest legislative intent to focus only on statutes comprising Minnesota’s counterpart to the Internal Revenue Code.

Surcharges for the funding of state 911 emergency system and telephone assistance programs were taxes, and thus provision of the Minnesota False Claims Act (MFCA) which excluded qui tam actions regarding statutes pertaining to taxation applied to action against telecommunications carriers based on failure to pay these surcharges; the surcharge amounts were established by the Commissioner of Public Safety and the Public Utilities Commission, surcharge payments collected by carriers were deposited in the State’s special revenue fund and paid to the Commissioner, and the amounts owed for these surcharges were not tied to a consumer’s level of use of the 911 system or telephone assistance programs.

Use of the definition of “tax” from state statute defining words and phrases in legislation did not convert all fees to taxes regardless of Legislature’s intent, and thus the definition could be used to characterize surcharges for the funding of state 911 emergency system and telephone assistance programs as taxes, which the Minnesota Fair Claims Act (MFCA) exempted from qui tam actions; the definitions statute applied absent clear intent to the contrary, the plain and unambiguous language of the MFCA tax bar provision could not be construed to encompass only a restricted subset of statutes or suggest intent to have such a restriction, and the definitions statute did not generally define all fees and charges to be taxes.

Taxpayer sought review of county’s ad valorem tax assessment.

The Circuit Court entered judgment for taxpayer. County board of supervisors appealed.

The Supreme Court of Mississippi held that taxpayer’s failure to post a bond deprived the circuit court of subject-matter jurisdiction.

City board of education appealed decision of the Board of Tax Appeals adopting county board of revision’s decrease in value of property for property tax purposes, as sought by taxpayer.

The Supreme Court of Ohio held that:

• Board of education bore burden of proving new value of property under test of Bedford Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 875 N.E.2d 91;
• Board of education’s appraisal review testimony was insufficient to carry burden of proving new value of property; and
• Board of education was not entitled to reinstatement of auditor’s original valuation as default.

City board of education’s notice of appeal put taxpayer and Supreme Court on notice that it was asserting that Board of Tax Appeals (BTA) erred in property tax appeal by mischaracterizing rule of Bedford Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 875 N.E.2d 913, which laid out test for determining whether the board of education bore the burden before the BTA of proving a new value for property tax purposes, and thus Supreme Court had jurisdiction to review that claim; board of education’s notice of appeal mentioned Bedford no fewer than three times, assignment of error in notice of appeal was not required to rise to level of reasoned argumentation, and board of education’s exposition on Bedford issue took on more concrete shape in its appellate brief.

Elements of test for determining when the board of education bears the burden before the Board of Tax Appeals (BTA) of proving a new value for property tax purposes, be that the auditor’s value or some other value, under Bedford Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 875 N.E.2d 91, are as follows: first, the property owner must have filed either an original or a countercomplaint; second, the board of revision must have ordered a reduced valuation based on competent evidence offered by the property owner; third, the board of education must have appealed the board of revision’s decision to the BTA; and fourth, the board of revision’s reduction in value must have been based on appraisal evidence, not a sale price.

Board of education bore burden before the Board of Tax Appeals (BTA) of proving a new value of property for property tax purposes under test of Bedford Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 875 N.E.2d 91, in board of education’s appeal of county board of revision’s reduction of valuation of taxpayer’s property on taxpayer’s complaint, even though board of revision’s valuation did not precisely align with appraisal report presented by taxpayer, especially given that board of revision explicitly mentioned taxpayer’s evidence, and no other evidence, as prelude to announcing its determination of value, and that determination differed by less than 2% from opined value by taxpayer’s appraiser.

Testimony by appraisal reviewer criticizing taxpayer’s appraisal evidence and stating that appraisal-reviewer did not have any opinion as to value of property, was insufficient for board of education to carry its burden to prove new value of property for property tax purposes, in board of education’s appeal before Board of Tax Appeals challenging board of revision’s reduction of valuation based on taxpayer’s appraisal evidence; board of education was required to provide competent and probative evidence of new value, and appraisal-reviewer’s testimony did little, if anything, to assist BTA in fulfilling its duty to determine taxable value of property.

Taxpayer presented competent and at least minimally plausible evidence in form of appraiser’s testimony and appraisal report to board of revision in seeking reduction of property’s value for property tax purposes, and thus board of education was not entitled to reinstatement of auditor’s original valuation as default on appeal to Board of Tax Appeals from board of revision’s reduction of valuation of property, though board of revision asserted that appraisal report was flawed.

County board of revision and school board sought judicial review of a decision of the Board of Tax Appeals adopting an appraisal valuation that reduced the value of owner’s property.

The Supreme Court of Ohio held that Board properly applied collateral estoppel to preclude relitigation as to covenant that prohibited valuation complaints.

Non-enforceability of a covenant in a tax-increment-financing (TIF) agreement that purportedly prohibited property owner from contesting county auditor’s valuations of the property was actually determined in a prior decision of the Board of Tax Appeals, and thus the Board properly applied collateral estoppel to preclude school board’s attempt to relitigate the issue in owner’s subsequent appeal to the Board contesting the property’s valuation; the prior decision included a finding that the proponents of applying the covenant failed to prove that they were entitled to its enforcement, the prior decision made no statement about retaining jurisdiction in remanding to county board of revision, and Board’s remand order did not call for county board to reconsider whether to enforce the covenant.

It was a Saturday morning in early December 2017.

Historic Tax Credit Coalition leaders and their advisors were on the phone with Hill staff arguing for a better deal than the 10 percent historic tax credit (HTC) offered by Senate Finance Committee Chairman Orrin Hatch, R-Utah. The cost of retaining the 20 percent credit had been calculated at $3.7 billion over 10 years. We were challenged to find this amount of savings by the end of the day, from IRC Section 47 alone. After estimating the savings from an annual HTC cap, per-project cap and a slightly reduced credit percentage, the only fix that got us close was a five-year credit. The Coalition ran out of time trying to sell the idea of coupling the 5-year credit with elimination of the 100 percent basis adjustment. Through interviews with HTC industry participants, this article tries to paint a picture of what this change has meant for the HTC nearly 12 months later.

Grandfathered Deals Drive the Market
Interviews with preservation consultants, investors and syndicators indicate that HTC volume in the first two quarters of 2018 was robust. The rush to close on projects that qualified for grandfathering as a one-year credit created a sharp increase in activity. This industry feedback is corroborated by Brian Goeken of the National Park Service (NPS) who reported that, during the last calendar quarter of 2017 there was a 40 percent increase in Part 1 and a 10 percent upswing in Part 2 approvals over the previous year. In mid-August 2018, Part 2 approvals were up 4 percent. Given the turmoil and uncertainty of the past 12 months, any outcome that approaches last year’s record high of $1.2 billion in credits approved would be extraordinary–an indication that demand for the HTC is resilient.

Investor Appetite Remains Strong
Tim Karp at JPMorgan Chase said that the firm’s appetite for the HTC is unchanged. “The HTC is a powerful tool for community development and commercial real estate,” he said. “We thought so before tax reform and we continue to believe that.” Merrill Hoopengardner of the National Trust Community Investment Corporation (NTCIC) said that NTCIC expects to do a record volume of HTC transactions in in its fiscal year 2018.

While the four largest banks by asset size–Bank of America, Citibank, Wells Fargo and Chase–have plenty of tax liability despite the lower tax rate, U.S. Bank (fifth-largest) has shifted its HTC business model post-tax reform. Due to its reduced tax rate combined with its past high volume of LIHTC, HTC, new markets tax credit (NMTC) and solar credit investing, USB will emphasize HTC syndication over direct investments going forward. Steve Kramer and Kristen Switzer said their HTC platform will underwrite and close transactions on their books, monitor construction, then sell their interests in the partnership to a pre-identified investor before the property is placed in service. Precluded by the HTC revenue procedure, U.S. Bank has not provided investor guarantees.

Will There Be a Slowdown on Five-Year Credit Deals?
There is speculation among some industry professionals that developers’ intensive focus on closing grandfathered deals has weakened their pipeline of five-year credit projects. NTCIC reports that it saw a flurry of activity for grandfathered projects in the first six months of calendar 2018. Their first five-year transactions are just coming in now. Chase also indicated that the industry is seeing a pipeline increase in five-year deals during the fourth quarter.

While these comments might suggest a slowdown is coming in 2019, the recent history of the HTC has shown a consistent increase in qualified rehabilitation expenditures since the Great Recession. Time will tell whether the statistics bear out these industry concerns.

Pricing Impacts of the Five-Year HTC
While investor interest has stayed strong despite the lower corporate tax rate, the time value of money and the reduced value of associated capital losses have combined to lower pricing for the federal HTC. An analysis done by Novogradac in late December 2017 projected a new range of pricing depending on what discount rate investors apply to the five-year credit stream. At an 8 percent discount rate, pricing was expected to drop by 10 to 15 percent to a range of 77 cents to 81 cents. At a 6 percent rate, pricing was projected to drop 7 to 13 percent to a range of 78 cents to 84 cents. However, on a deal-by-deal basis, high investor competition appears to be driving prices to the upper end of the Novogradac projections. Ted Russell of Wexford Science and Technology said that one of their large five-year credit transactions with a single credit tenant attracted six bids with a range of prices from the high 80s to low 90s. NTCIC reported seeing pricing from 80 cents to 90 cents depending on deal size, quality of sponsorship, Community Reinvestment Act value and the product. The company also expects to see adjustments to investor cash requirements and partnership flip percentages as investors try to maintain higher pricing. At least two investors are offering pay in schedules that extend beyond Part 3 approval. That said, there have been only a handful of five-year projects closed. Trends are hard to document with so few data points.

HTC Financing Gap Tests Developer Creativity
Developers are the closest to the ground when it comes to pricing trends and strategies for closing financing gaps. Two projects that could not qualify for grandfathering illustrate the continued creativity of HTC developers in the face of adversity.

Dominium has been working on its Ft. Snelling HTC/LIHTC affordable housing project in Minnesota for some time. Faced with a five-year federal and Minnesota state HTC, Dominium was able to secure $29 million in affordable housing bonds to help shore up the financing gap. The developer was also successful in advocating in the state legislature for a grandfathering of the previously one-year Minnesota credit for the Ft. Snelling transaction. Jeff Huggett plans to look for new projects that pencil at 82 cents and target deals that also provide other incentives such as the NMTC and state HTCs.

Alexander Company’s Soldiers Home veterans’ housing project in Milwaukee was dealt a blow when they were unable to obtain the Congressional approval needed to have a signed Enhanced Use Lease (EUL) with the Department of Veterans Affairs (VA) prior to the end of December 2017. EULs require multiple, time-consuming layers of approval including a Section 106 review, OMB sign-off and a vote of Congress. With both the federal and Wisconsin state credits changed to five-year vesting, Jon Beck stated that the project suddenly had a multimillion dollar financing gap. To close the gap, Alexander was able to obtain a $5 million VA Military Construction Grant. The company also successfully lobbied the Wisconsin Housing and Economic Development Agency to allow a “hybrid” LIHTC structure where they used a two-condominium structure to deploy 9 percent and 4 percent LIHTC credits on the same deal. Once Alexander maxed out on the state’s 9 percent per project credit cap, the company earned 4 percent credits on the property’s excess eligible basis.

Darin Smith, CEO of Arch Icon Development in Woodbine, Iowa, faces similar challenges with the five-year credit. Smith does market-rate and affordable housing projects in midsize cities and towns in the Midwest. He said he is filling the HTC gap by seeking out properties that can also utilize the LIHTC. In small towns, there are few local financing tools to use, so he looks to other federal credit programs to close the gap created by the five-year HTC. The most impacted part of his business is market-rate housing where twinning with other credits is not possible, and the numbers no longer work, no matter what he pays for the building.

State HTC Impacts
According to state HTC syndicators, the demand for these credits has remained robust since tax reform.

Three states had statutory language requiring their credit programs to conform to the new federal credit vesting schedule. New York state advocates acted swiftly to change their state law last spring to retain a one-year credit. There is confusion in Minnesota where some attorneys are issuing opinions that state law requires Minnesota credits to follow federal vesting. The state historic preservation office reports they have rulings from the revenue department that maintain the one-year credit. Advocates are working to resolve these contradictions. In Wisconsin, proponents plan to ask the legislature in January to return to a one-year credit.

Federal Legislative Outlook
The HTTC has convinced its House and Senate champions to take a second look at eliminating the HTC’s downward basis adjustment. The bill, The Historic Tax Credit Enhancement Act, was introduced this spring in both Houses. Darin LaHood, R-Ill., is the original sponsor in the House with two original co-sponsors, Mike Kelly, R-Pa., and Earl Blumenauer, D-Ore. Sen. Bill Cassidy, R-La., is the original sponsor in the Senate joined as of this date by four co-sponsors, Johnny Isakson, R-Ga., Ben Cardin, D-Md., Susan Collins, R-Maine, and Sherrod Brown, D-Ohio.

Industry analyses show that elimination of the basis adjustment, which would conform the HTC to the LIHTC, should increase HTC pricing substantially by lowering investors’ capital gains taxes upon exit. Washington Report panelists at the recent Novogradac HTC conference in Nashville were cautiously optimistic that any year-end, lame-duck tax bill could include this fix.

Conclusion
One year after tax reform, the HTC program is enjoying continued high demand from both developers and investors. NPS stats verify the incentive’s continued popularity. Concerns that lowering corporate tax rates would dampen investor appetite have not materialized. Developers are adjusting their acquisition strategies amid lower pricing projections for the federal HTC by targeting projects that fill the HTC gap with NMTCs and state HTCs and hoping for relief from upcoming opportunity zones incentive benefits. Interviews indicate that market-rate housing and small-town projects may suffer because they don’t offer as many ways to close the gap.

Novogradac Journal of Tax Credits

Published by John Leith-Tetrault on Tuesday, November 6, 2018

David Dragoo’s two companies own 164 acres of former farmland along the Uncompahgre River near downtown Montrose, Colorado. He’s planning to redevelop the area by adding a hotel, apartments, space for outdoor recreation businesses and a path along the river.

It’s an unusually ambitious project for a sleepy town of about 20,000, known mostly for an airport where the glitterati disembark on their way to Telluride. And the project is attracting an unusual amount of attention, because it’s in a federally approved “opportunity zone” where investors can get a tax break for spending money on certain businesses and property.

“There are now investors reaching out to us from all around the East Coast,” Dragoo said. He’s heard from businesses looking to relocate and developers aiming to build apartments. “There are groups that are looking at it and saying, ‘We just want to buy the whole thing.’”

The tax break, created under the tax law President Donald Trump signed last year, could be a game changer for towns in rural areas such as Montrose. The zones are expected to attract billions of dollars from people eager to reduce their tax bill on money they’ve made selling stocks, bonds or property.

Nationally, there are over 8,700 such census tracts, nominated by states for their combination of economic distress and growth potential and approved by the U.S. Treasury Department and IRS earlier this year.

But as investors start to open their wallets, some local leaders and national economic development experts worry most of the cash will be spent in booming cities. When it does flow to rural places, they warn, it’s more likely to flow to real estate projects such as Dragoo’s rather than to local startups desperate for capital.

“I’m worried that none of this money is going to flow where it’s really needed,” said Paul Major, president and CEO of the Telluride Foundation, a philanthropic organization that focuses on Western Colorado. “You can see 99 percent of the money going to urban redevelopment projects and accelerating gentrification.”

For instance, one of Amazon’s chosen sites for its new headquarters is in an opportunity zone in Queens that’s close to a low-income census tract but is already dense with pricey condos.

Past tax incentives intended to spur growth in distressed areas, such as the New Markets Tax Credit program, have had mixed success. About 83 percent of New Markets money from 2001 to 2015 went to cities, according to research by Rebecca Lester, an assistant professor at the Stanford Graduate School of Business who studies tax policy.

That may be because more people live in cities, because city projects are better-known, or because urban economies are stronger, Lester said. But she expects opportunity zone money to end up even more concentrated in cities than New Markets money, because there are fewer restrictions on how the money can be spent.

Economic developers in rural Colorado remain hopeful that with enough preparation and marketing savvy, they can attract investment dollars — and not just to large, downtown real estate deals.

“The money has always flowed to the cities, so that’s something that we’re used to,” said Deana Sheriff, economic recovery coordinator for the West End Economic Development Corporation, which works in the outer reaches of Montrose County. “We just have to work a little harder to make sure our voices are heard as well.”

The Latest, Greatest Economic Incentive

Unlike other economic development incentives, opportunity zones aren’t a program with a federal, state or local approval process for projects. Congress created some parameters — for instance, investors can’t just buy a building in a zone, they must improve it.

But the program is designed to give investors a tax break simply by investing in a given area. “You could rehab affordable housing and turn it into luxury condos and still get an incentive,” said Brady Meixell, senior research assistant at the Urban Institute. “There’s no rule against that.”

To get the tax benefit, people must invest their capital gains in an opportunity zone fund, which in turn invests in businesses or property in a zone. Investors can defer paying taxes on their gains right away. They earn a 15 percent tax cut on those gains if they hold on to their shares for seven years.

And if they hold on to their shares for 10 years, they don’t have to pay income taxes on money they make when the shares increase in value.

“Those tax benefits are huge,” said Chris Montgomery, founder and managing director of Four Points Funding, a real estate investing group based in Steamboat Springs, at a recent conference for economic developers in Estes Park, Colorado.

“They’re not big enough to make a bad investment good,” he said, “but they’re really significant.”

The IRS released some guidance last month but has yet to clarify all the details of the tax break. Until it does — probably early next year, lobbyists say — many investors are holding off on taking an equity stake in a business or building a structure in an opportunity zone.

In hot real estate markets such as the Denver area (Montrose is located on the other side of the state), however, opportunity zones already have set off a fundraising frenzy.

Andrew Klein owns 750 acres in an opportunity zone in Aurora, not far from Denver International Airport. The land around the airport, once home mostly to prairie dogs, is now filling up with subdivisions, hotels and business parks.

Klein’s company, Westside Investment Partners Inc., is planning to construct industrial buildings that could house businesses such as data centers and logistics companies.

He said he’s talked to many investors, from wealthy Coloradans to national groups that handle family fortunes. The people he’s talked to are, collectively, willing to spend some $100 million on his project, he said.

“I’m currently out in New York City meeting with people who want to develop in opportunity zones,” he said when he spoke to Stateline last week.

Yuriy Gorlov, a vice president of the Aurora Economic Development Council, said that some local landowners and developers are putting together seven- and eight-figure investment funds.

The money flowing in will help accelerate development around the airport, he said. “Instead of taking the next 20 years to build out a large swath of land out there, maybe it’ll take 10 years.”

Rural Investment

Rural Colorado presents investors with fewer obvious moneymaking opportunities. While Denver and other cities along Colorado’s Front Range have rapidly added people and jobs in recent years, many rural places are shrinking as farming and some mining jobs disappear.

Recognizing that rural places such as Montrose County need a boost, the Colorado Office of Economic Development and International Trade gave the federal government a list of opportunity zones skewed toward rural areas.

Only 40 percent of the state’s 126 zones are in the Front Range, according to Jana Persky, strategic initiatives manager for the development office.

Persky has been crisscrossing the state for months, speaking at conferences and meeting with local leaders to explain the opportunity zone incentive and encourage communities to start promoting themselves and lining up projects to pitch to investors.

“Investors are finding it,” she said of the incentive. “We want to make sure that communities are equally informed and equally prepared.”

Montrose hasn’t had to do much to market itself, thanks to a July Forbes article that name-dropped the county and called opportunity zones “the most unbelievable tax break ever.”

After the article was published, “the phone started ringing off the hook,” Montrose’s mayor, Roy Anderson, said, adding that he expects multiple businesses to relocate to the town in the next six to nine months, partly because of the opportunity zones.

Smaller towns west of Montrose haven’t gotten as much attention. Sheriff of the West End Economic Development Corporation is working with three tiny communities in a remote and rugged region near the Utah border: Naturita (population 500), Norwood (600), and Nucla (700).

Both Nucla and Naturita’s main streets look like stretches of highway, Sheriff said. “The town of Naturita literally does not have sidewalks.” The towns are hoping their zone designations will lead to improving sidewalks and renovating buildings.

Her office also is compiling data to convince investors that there’s demand for housing in the area. “We’ve got folks that want to move into the region, but there’s simply no place” to house them, she said.

In many rural places, investors likely will have to take advantage of not just the opportunity zone but layers of other incentives to make money, economic development experts say.

“Deals aren’t just going to surface,” said Major of the Telluride Foundation. They’ll need to be put together using everything from foundation grants to state job training assistance, state tax credits, and a state and local program that pays companies up to $10,000 for every new job created, he said.

Communities may need to go the extra mile to draw investment to needed projects that aren’t particularly lucrative, such as a day care center or affordable housing, Major said. “Are there parcels of land that nobody thought about, that the town owns? The town could donate that to do a housing project that opportunity zone capital can invest in.”

Businesses Need Not Apply (Yet)

The architects of the opportunity zone incentive intended capital gains to flow to businesses as well as real estate. But investors have shown less enthusiasm in taking an equity stake or partnership interest in businesses.

This is partly because it’s harder to make money that way and partly because the IRS has yet to finalize how such investments must be structured.

According to the IRS rules so far, investors must put their money into businesses that generate half their gross income within the zone. That’s a problem, because investors are most interested in growth businesses that sell regionally or nationally, said Montgomery of Four Points Funding.

Even though he’s hoping his fund will invest in real estate and businesses, he said it’ll likely invest more in real estate.

“Most people that are raising money are doing it just for real estate,” he said. “It’s an easier path forward.”

Major noted that it’s hard to make a profit investing and growing a business, particularly in a rural area. “You’re not going to have a Google, or Amazon, or a Facebook in a distressed, rural community.

“What you’re going to have is small, medium-sized businesses that grow slowly.”

Major has been helping Natalie Binder, a vacation rental manager based in Telluride, look for funding for her passion project: a camp near Nucla and Naturita that could become a destination for people who want to escape Colorado’s increasingly crowded mountain towns.

She’s envisioning cabins, platforms for tents, a vintage bus used as a check-in desk, and funky art made of junk — “kind of like a Burning Man meets Marfa meets Colorado,” she said, adding that she reached out to some investors working on opportunity funds, but they didn’t bite.

“They were too busy to even talk,” she said. She’s hoping to find investors who are interested in the project with or without the zone designation.

If the final IRS rules skew the incentive almost entirely toward real estate, “then that’s a big failure,” said John Lettieri, president and CEO of the Economic Innovation Group.

The Washington, D.C.-based organization, created by Napster founder Sean Parker, came up with the opportunity zone idea and lobbied Congress to include the incentive in the tax law.

But real estate development can be beneficial, Lettieri said, if it sets the stage for businesses to move to and expand in distressed communities. “For many of these communities, the built environment is the first step to broader economic growth.”

That’s why Montgomery sees potential in Dragoo’s project, which would cluster apartments, businesses and amenities such as restaurants — creating an attractive place for people to live and work.

And that’s why Sheriff is confident that more attractive main streets will encourage mountain bikers and ATVers to linger in the area. “We’ve seen it happen in other communities,” she said. “You have to go out and spend the money first.”

By Sophie Quinton

BY STATELINE | NOVEMBER 19, 2018

Treasury takes an important first step in bringing clarity to the QOZ program.

The Proposed Regulations provide a 31-month grace period for development of a QOZ Business –

The treatment of land is clarified for purposes of the Qualified Opportunity Zone Business Property rules –

The Proposed Regulations confirm that an investor’s share of partnership debt under Code Section 752 is not treated as a separate investment in a Qualified Opportunity Fund –

Please see full Publication for more information.

by Thomas Morton

November 15, 2018

Pillsbury Winthrop Shaw Pittman LLP

There are wine bars and a cycling studio along the riverfront in Long Island City, among gleaming high-rise apartment buildings with views of Midtown Manhattan. The soon-to-open library branch is a modern art cube of concrete, the median income is $138,000 a year, and America’s hottest online retailer is about to move in.

In the eyes of the federal government, the census tract that will house Amazon’s new headquarters in New York is an “opportunity zone,” eligible for tax credits meant to spur investment in low-income communities.

The retail giant said Tuesday that it had selected this upscale slice of Long Island City to house one of two new secondary headquarters. The decision was based on a host of factors, including state tax incentives and, in Amazon’s words, the ability to attract top talent. But the choice could give eager developers — who almost certainly would have flocked to the area anyway — a tax benefit conveyed by a provision in the $1.5 trillion tax overhaul that President Trump signed last year.

Continue reading.

The New York Times

By Jim Tankersley

Nov. 14, 2018

The midterm elections are (mostly!) over. What’s coming next? No one is in a better position to tell you the answer than our Public Policy colleagues. Here for your reading and savoring are two pieces – a breakdown that spans all areas of law, and an analysis of what the election means specifically for tax policy.

Click here for the big breakdown, and be sure to click “Download” to download the full .pdf.

Click here for the tax-focused piece.

The Public Finance Tax Blog

By Johnny Hutchinson on November 12, 2018

Squire Patton Boggs

The 2017 Tax Cuts and Jobs Act (TCJA) is the first major set of reforms to this country’s tax codes in decades. While it’s getting lots of headlines for cutting corporate rates and lowering the highest marginal federal tax bracket, the new law also features a less appealing feature for many high net-worth investors.

Starting with individual 2018 tax returns, the state and local taxes (SALT) you pay will be capped at $10,000 a year as a tax deduction against your income in calculating federal taxes. Among the common types of taxes that many states impose are personal income tax, corporate income tax, sales tax, and real property tax. This $10,000 cap is low for high net-worth individuals in states with high tax rates like California and New York.

Muni bonds are issued to help finance public projects like road repairs and water treatment plants. To help enhance their allure to investors and to provide lower cost of capital for the municipalities, interest income paid to investors is exempt from federal taxes and may also be exempt from state taxes, if issued within the state. As we have stated many times before, the investor’s expected return equals the cost of capital of the firm or in this case, the municipality. That cost of capital is a measure of the risk and, in the case of munis, the tax benefits offered to the buyers of those securities.

Continue reading.

Index Fund Advisors

Murray Coleman
Investment Writer – Index Fund Advisors

Wednesday, November 14, 2018

City school district board of education filed a valuation complaint challenging the tax valuation of a shopping center on five separate real-estate parcels.

The county board of revision, and subsequently the Board of Tax Appeals valued the individual parcels by reference to the aggregate price allocated to those parcels from the total amount paid under a portfolio-sale agreement. Property owner and one of its tenants appealed.

The Supreme Court of Ohio held that:

• Commercial tenant had no standing independent from its landlord to challenge the valuation;
• Fact that commercial tenant lacked standing to appeal the decision did not support exclusion of evidence presented of the value of tenant’s parcel;
• Ample evidence supported Board of Tax Appeals’ inference of a typographical error; and
• The Board was required to give full consideration of the appraisal evidence of the value of the parcels at issue.

Record supported conclusion that shopping-center owner authorized attorney to appeal tax-valuation decision, and therefore, fact that commercial tenant, on whose behalf attorney was also appealing the same decision, lacked standing to appeal the decision did not support exclusion of evidence presented of the value of tenant’s parcel; notice of appeal from board of revision decision relating to tenant’s parcel was explicitly prosecuted as a joint appeal of owner and tenant, and was signed by attorney, who gave her attorney-registration number along with her contact information and signed as appellant or representative.

Although shopping-center owner’s filing of two separate notices of appeal from the same Board of Tax Appeals decision was not good practice and parties should avoid it, such circumstances did not present a jurisdictional defect, given that both notices of appeal separately invoked the court’s jurisdiction at the time they were filed.

Ample evidence supported Board of Tax Appeals’ inference of a typographical error in portfolio-sale agreement’s exclusion of parcel number from contractual allocation, in proceedings challenging whether sale price of shopping center represented its value for tax purposes; deeds and property-record cards confirmed that the parcel was sold as part of the total sale and that the parcel number on the contractual allocation was a typographical error.

In challenge to tax valuation of shopping center sold as part of portfolio sale, Board of Tax Appeals (BTA) was required to give full consideration of the appraisal evidence of the value of the parcels at issue; BTA adopted an allocated aggregate sale price of leased properties as the property value of each parcel without giving proper consideration to the appraisal evidence, and appraiser testified that the contract rent on two parcels exceeded the market rent derived from rent comparables, as could support finding that sale price did not indicate value of unencumbered fee-simple estate.

• Tax increases struck down in states where Democrats made gains
• Bucking the ‘Republican caricature of tax and spend liberals’

Democrats may have gotten their blue wave in 2018. But with it came a decidedly red anti-tax wave, too.

Voters in Maine, Missouri, Colorado, Montana, and South Dakota shot down various measures that would have increased taxes. In Florida, they made it harder for lawmakers to pass tax hikes, something supported by outgoing Republican Governor Rick Scott. North Carolina voters also lowered the maximum possible income-tax rate to 7 percent.

The rebuke came even as wage growth remains strong, unemployment stands near a half-century low and federal taxes were reduced this year. In some places, voters rejected tax increases even while voting for Democrats, showing Americans of both political persuasions aren’t feeling particularly charitable toward government.

Continue reading.

Bloomberg Markets

By Amanda Albright and William Green

November 9, 2018, 5:47 AM PST

Since the mid-1900’s, state and local governments have struggled with the issue of taxing remote sales. For decades, the primary method of remote sales was in the form of mail-order businesses. In 1967, the U.S. Supreme Court ruled in Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), that a state could not require sellers to collect use taxes if the only connection with customers in the state is through materials sent by common carrier or mail.

Then in 1992, the Supreme Court upheld the standard in Bellas Hess in Quill v. North Dakota, 504 U.S. 298 (1992), holding that a state can only require a business to collect and remit sales tax if the business has substantial presence (i.e. nexus) in that state. Both decisions, however, occurred well before the Internet forever changed the way consumers shopped and transformed the retail marketplace into the billion-dollar global platform we know today.

As a result of these decisions, state and local governments faced growing numbers of uncollected sales taxes over the past several decades. In an attempt to remedy this, there have been efforts at the federal level to enact legislation that would establish a framework of sales tax simplification and administration. The intent of the framework is to bring sales tax laws into the 21st century and grant state and local governments the ability to enforce existing sales tax laws on remote sales, while also minimizing the burden of collection on retailers. The billions of dollars state and local governments forego each year is much needed revenue that could support vital services in communities across the country like infrastructure, public safety, and education.

But 2018 proved to be a landmark year for the issue of remote sales tax. In June, the U.S. Supreme Court reversed those two pivotal cases by finally removing the antiquated physical presence requirement that has burdened state and local sales and use tax laws. This report will take a brief look at the importance of these taxes and how sales tax administration could be one step closer to 21st century modernization.

Download: Bringing Sales Tax into the 21st Century

Efforts to raise state taxes largely failed. That wasn’t the case at the local level.

With a few exceptions, voters across the country on Election Day approved statewide proposals to reduce or limit taxes while also widely rejecting any efforts to raise them. But that wasn’t the story at the local level, where several tax increases passed.

Three out of four states voted to restrict tax policy. In Florida, voters enacted a two-thirds legislative supermajority requirement to pass a tax increase. Arizona voters favored a new ban on taxing services. And North Carolinians opted to lower that state’s income tax rate cap.

Measures that limit lawmakers’ taxing authority have a mixed track record. “These measures happen in waves,” says Wake Forest University political professor John Dinan. “You might say there’s a bit of a resurgence in their success judging by Tuesday’s results.”

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GOVERNING.COM

BY LIZ FARMER | NOVEMBER 9, 2018

The project will be big: 40,000 square feet of mixed-use space with a restaurant from former “Top Chef” contestant Sylva Senat, a co-working space and business incubator, and a new home for a landscape architecture firm that specializes in green roofs. Plus, its 39 residential apartments are meant to be market-rate affordable — leased at a monthly rate that people who live in the surrounding Northwest Philadelphia neighborhood can afford without a rental subsidy.

To raise the $7.2 million necessary to build the project out, Mosaic Development Partners could have gone the simple route, says Gregory Reaves, principal and managing partner of the Philadelphia-based firm. The project, called Golaski Labs, wouldn’t have been difficult to finance, and Mosaic probably could have done it with a single investor, Reaves says. Instead, the firm has developed a complex financing structure that will take advantage of New Markets Tax Credits, a small portion of equity offered through the crowdfunding service Small Change, and capital raised through the new Opportunity Zones tax incentive created as part of the Tax Cuts and Jobs Act passed at the end of 2017.

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NEXT CITY

BY JARED BREY | NOVEMBER 5, 2018

The 2017 Tax Cuts and Jobs Act provides tax incentives for investments in “Opportunity Zones,” in an effort to promote economic development in selected communities. Investors can reduce by up to 15 percent taxes on existing capital gains invested via designated “Qualified Opportunity Funds,” deferring those taxes for up to 10 years and eliminating 100 percent of the future capital gains tax on profits generated by the Qualified Opportunity Funds.

Investors, investment managers, municipalities, real estate developers and business owners can benefit from this program – but should first work to understand the types of projects and investments that are best suited for Opportunity Zone funding.

Key Concepts to Understanding the Opportunity Zones Program

For Investors

Opportunity Zone investments exists within an asset class spectrum. The vast majority of investments are likely to be made within the real estate sector, with a smaller but important portion of investments to be made in operating businesses. Understanding how to maximize your return while diversifying your risk profile will be important.

For Investment Managers

Most Opportunity Zone communities have a limited number of “investment ready” projects. Funds will need to be strategic in identifying a pipeline of investment ready projects and selective about developing “but for funding” and concept projects.

When assessing whether or not a project is eligible for Opportunity Zone funding, it’s helpful to consider which of the following three categories it would fall under:

• Conceptual projects: Projects that have not completed their pre-development phase and do not have funding. Opportunity Zone funding alone is not enough to move these projects forward. The community will need to make some investment to move these conceptual projects to the investment ready stage.
• “But for Funding” projects: Projects that have already completed their pre-development phase but have funding gaps. The Opportunity Zone funding typically completes the funding source needed to execute a project. This typically represents a smaller, identifiable fraction of projects in most communities.
• Investment Ready projects: Projects that have already completed their pre-development phase and are essentially funded. The Opportunity Zone funding typically supplants or complements an existing funding source. This represents the smallest but most readily identifiable fraction of projects in most communities.

For Municipalities

Cities will need to market investment ready projects at a minimum but will also need to select and invest in concepts that will develop into investment ready projects. Identifying partners to help in this process as well as partners to ultimately invest will be critical.

Download our guide to the Opportunity Zones program and funding eligibility.

Faegre Baker Daniels

November 7, 2018

The Opportunity Zone program was created by the 2017 Tax Cuts and Jobs Act and is intended to increase investment in areas designated as Opportunity Zones (i.e., economically distressed communities). The general idea behind the program (which we have previously written about here) is that investors are able to defer paying tax on gains from selling property by investing the proceeds from the sale into an Opportunity Zone Fund.

The IRS recently issued much needed guidance on how the Opportunity Zone program will work. Specifically, the IRS released anxiously-awaited proposed regulations, along with Rev. Rul. 2018-29, and a draft Form 8996 (that entities will need to file with the IRS to certify that they qualify as a Qualified Opportunity Fund).

Our colleague, Steve Mount, has been at the forefront of the Opportunity Zone program from its inception. He has written yet another insightful article in Bloomberg’s Tax Management Real Estate Journal describing the new guidance in more detail. Click here to read the article. You can read Steve’s earlier articles on Opportunity Zones here and here.

The Public Finance Tax Blog

By Cynthia Mog on November 6, 2018

Squire Patton Boggs

Read the results.

Land owner and owner of branch bank sought judicial review of Board of Tax Appeals’ decision adopting a higher value for the property than the value adopted by county board of revision.

The Supreme Court of Ohio held that:

• Appraisal submitted by school board did not constitute a use valuation, and
• Board properly relied on the appraisal as determining value of fee-simple estate as if unencumbered.

Appraisal of branch bank submitted by school board did not constitute a use valuation, as opposed to a market valuation, based on its reference to definition of “special-purpose property,” and thus the Board of Tax Appeals properly relied on the appraisal in determining the property’s value; appraisal did not attribute to the property a special adaptation of improvements that made the property less marketable, as circumstance typical of special-purpose properties, but instead the appraisal referenced the present use of the property as a branch bank in the context of deciding which comparables were more analogous to the property, and, focusing on bank buildings, appraisal concluded that property’s best use was as a freestanding commercial building.

Board of Tax Appeals properly relied on an appraisal of a branch bank submitted by school board as determining the value of the fee-simple estate as if unencumbered; Board made findings regarding the appraisal’s adjustments to leased comparables, there was no conflict between a sale price and appraiser’s opinion, but instead the case involved conflicting appraisals and credibility of an appraiser’s testimony, concerning which matters the Board’s discretion was at its greatest, and property owners’ reasons in opposition to the appraisal merely established that the Board might have exercised its discretion differently.

For those who still had doubts, the IRS has now made it crystal clear: You can still issue tax-exempt bonds to advance refund most taxable bonds. In other words, the much-lamented “repeal of tax-exempt advance refunding bonds” in the Tax Cuts and Jobs Act from December 2017 isn’t ironclad. The repeal prevents the issuance of tax-exempt bonds to advance refund only (1) other tax-exempt bonds and (2) a very limited subset of taxable bonds. The IRS expressed this conclusion in Chief Counsel Advice Memorandum 201843009, dated August 31 and released on October 26.

Following the logic of this guidance, the only taxable bonds that can’t be advance refunded with tax-exempt bonds are taxable bonds that:

• Have a federal subsidy, such as Build America Bonds (i.e., “tax-advantaged bonds,” as defined in Reg. 1.150-1(b), that are not tax-exempt bonds) and
• Do not lose their subsidy at the time that the tax-exempt bonds that advance refund them are issued.

One way to force a tax-advantaged taxable bond to lose its tax advantage is to “legally defease” it, which happens in almost all advance refundings once the issuer deposits Treasury securities acquired with proceeds of the advance refunding bonds into the refunding escrow on the issue date. Perhaps the only exception – certain governmental bonds cannot be legally defeased under state law.[1]

That’s the bottom line. Read on for a little more about this guidance and the history behind it.

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The Public Finance Tax Blog

By Johnny Hutchinson on October 28, 2018

Squire Patton Boggs

WASHINGTON — The Internal Revenue Service is publicly affirming that last year’s tax law changes do not preclude the issuance of tax-exempt bonds to advance refund non-tax-advantaged, taxable bonds.

The assurances were made in an IRS Chief Counsel Memorandum released Oct. 26 after Treasury and IRS officials told bond attorneys that at a conference earlier this year during discussions about the limitations on the termination of advance refundings under the Tax Cuts and Jobs Act enacted in December.

The memo appears to respond to a March 29 written request by the National Association of Bond Lawyers to Christie Jacobs, director of the IRS Indian Tribal Governments/Tax Exempt Bonds Office to clarify the new law.

Three tax attorneys who are members of NABL told The Bond Buyer that this newly released memo should address any uncertainty in the municipal bond market over the scope and limitations of the termination of advance refundings for tax-exempt bonds.

“I think this is going to be good enough for probably everyone,” said Matthias Edrich, a partner at Kutak Rock in Denver.

Perry E. Israel, a sole practitioner in Sacramento, Calif., described the IRS memorandum as “big news.”

The memo “specifically addresses” whether tax-exempt bonds can be used to advance refund Build America Bonds, Israel said.

“It says if you defease the BABs, they are reissued and you no longer can get the subsidy for the BABs,” Israel said. “There is only one tax-advantaged thing outstanding and, so yes, you can advance refund that as long as you defease them.”

The timing of the news is important because Build America Bonds were issued in 2009 and 2010 and most of them had 10-year call dates.

“There probably are a lot of issuers who may have been undecided about the economics and they will be callable in the next two years,” said Johnny Hutchinson, chair of the NABL Tax Law Committee and a partner at Squire Patton Boggs in Houston.

A significant percentage of attorneys who attended the NABL Tax and Securities Law Institute in February were uncertain whether advance refundings still were legal in any instance.

“The folks at Treasury and the IRS thought that it was obvious that this pre-existing Treasury regulation that allows you to ignore tax-exempt advance refundings on taxable bonds continued to apply,” Hutchinson said.

Hutchinson was particularly encouraged that the IRS memo went to the IRS enforcement staff, which means “you wouldn’t have to spend a lot of time on an audit trying to convince the enforcement folks that the position the policy folks were taking was the right position.”

“It also makes clear that the same logic will extend even to a tax-advantaged taxable bond as long as it is legally defeased in the course of the refunding,” Hutchinson said. ”There’s only maybe a very small subset of bonds, some general obligation bonds in some states, that can’t be legally defeased. But for any for any tax-advantaged, taxable bonds that can be legally defeased, they will lose their subsidy on the date that they were defeased, which is usually the issuance date of the advance refunding bonds.”

Although the memo from the IRS Office of Chief Counsel was released publicly on Oct. 26, it is dated Aug. 31.

Johanna Som de Cerff, a senior technician reviewer in IRS Branch 5 of the Chief Counsel’s Office, sent the memo to Patricia P. Wang, area counsel for the Pacific Coast area of the Tax Exempt & Government Entities Division.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 10/30/18 07:01 PM EDT

WASHINGTON – The Treasury Department Inspector General for Tax Administration plans to audit the Internal Revenue Service’s use of a much-feared enforcement tool under which it can impose penalties for the misconduct of municipal bond transaction participants such as underwriters, lawyers, municipal advisors or their firms.

The audit, listed in TIGTA’s annual audit plan for fiscal 2019, could spell trouble for the IRS’ tax-exempt bond folks, who seem to have virtually stopped using these penalties under Section 6700 of the Internal Revenue Tax Code.

“Taking 6700 action against law firms or banks does not make you popular when you’re trying to leave the IRS,” said Mark Scott, former director of the IRS Tax-Exempt Bond Office who now has a private practice representing whistleblowers. “It decreases your opportunities for post-government employment.”

Section 6700 was originally intended to allow the IRS to impose penalties against promoters of abusive tax shelters.

But in 1989 Congress approved legislation allowing the agency to apply Section 6700 in municipal bond enforcement cases so it could go after the bad actors in muni bond transactions and not be restricted to declaring bonds taxable or entering into settlement agreements with issuers. This tax enforcement tool, unlike others, has no statute of limitations.

The revised Section 6700 allowed the IRS to impose penalties on municipal bond transaction participants who make or provide statements related to the tax exemption or other tax benefits in transactions that they know or have reason to know are false or fraudulent.

The penalties can apply to individuals or firms, including underwriters, bond counsel or other lawyers, issuers, conduit borrowers, financial advisors, or feasibility consultants.

The penalties used to equal the lesser of $1,000 per activity or 100% of the gross income from the activity, with the IRS taking the stance that “activity” could mean a single bond, typically $5000, so the penalties would soar in large transactions.

But since Oct. 23, 2004, penalty amounts have been required to be 50% of the gross income derived, or to be derived, from the activity of the person or firm targeted with enforcement action.

IRS tax-exempt bond officials ramped up the use of this section in 2000, with Scott, who was then the IRS’ national bond director, telling The Bond Buyer at that time that the agency was using this anti-abuse tool in more than 40 bond audits, representing about 10% of its pending bond audits.

A TIGTA audit of the IRS Tax-Exempt Bond Office’s enforcement activities from fiscal year 2002 through fiscal year 2004 that was released in September 2005 found the office closed 16 Section 6700 cases with more than $34 million in penalties in 2002, 44 with more than $4 million in penalties in 2003 and 19 with $6.61 million in penalties in 2004.

Scott left the IRS at the end of 2005 to join the law firm of Vinson & Elkins, which no longer exists. He was replaced by Cliff Gannett, who retired from the IRS in June 2013. Gannett was in turn replaced by Rebecca Harrigal in October 2013. Harrigal left in December 2016 to join Greenberg Traurig as a shareholder in its public finance practice.

A TIGTA audit on TEB enforcement activities from fiscal year 2005 through fiscal year 2010, released in August 2012, found the number of Section 6700 misconduct investigations had dropped to two in fiscal 2010 from 21 in fiscal 2005.

“TEB office management stated they believe the reason for the decrease in cases can be attributed to the suspension of eight investigations in fiscal 2006 and 2007 that they plan to reactivate in the future, and that highly public criminal prosecutions have created a deterrent effect,” TIGTA said in the audit, the second and last one done on TEB’s enforcement program.

Robert Henn, former acting director of the TEB Office, had high hopes for the use of this tool when he told The Bond Buyer in a November 2012 interview as he was set to retire at the end of the year that he was disappointed he would not see completion of the IRS’ efforts to pursue Section 6700 probes of firms and individuals that violated the tax laws by participating in schemes to rig the bids for guaranteed investment contracts and other products for the investment of muni bond proceeds.

The IRS had initially investigated bid-rigging but referred the cases to the Department of Justice’s division for criminal prosecution in 2005. The DOJ launched a massive antitrust probe in the municipal market in 2006 that led to the indictments and convictions of numerous firms and individuals, as well as some settlements.

Later Scott obtained information from the TEB Office under a Freedom of Information Act request showing its examination plans for fiscal 2015 included only one Section 6700 case pending at that time.

By Lynn Hume

BY SOURCEMEDIA | MUNICIPAL | 10/31/18 07:04 PM EDT

The IRS recently announced the cost-of-living adjustments applicable to certain dollar limitations for employee pension benefit plans for 2019. The resulting dollar limits are as follows:

• The annual benefit limit for defined benefit plans is increased from $220,000 to $225,000.
• The annual addition limit for defined contribution plans is increased from $55,000 to $56,000.
• The annual limit with respect to the exclusion for elective deferrals to a 401(k), 403(b) or 457 plan is increased from $18,500 to $19,000.
• The limit on annual contributions to an individual retirement arrangement (IRA) is increased from $5,500 to $6,000. The dollar limit for an additional catch-up contribution to an IRA for individuals age 50 or older remains unchanged at $1,000.
• The annual limit on compensation that can be taken into account under a qualified retirement plan is increased from $275,000 to $280,000.
• The dollar limit for determining key employees in a top-heavy plan is increased from $175,000 to $180,000.
• The dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period is increased from $1.105 million to $1.130 million. The dollar amount used to determine the lengthening of the five-year distribution period is increased from $220,000 to $225,000.
• The dollar limit for catch-up contributions for 401(k) plans for individuals age 50 or older remains unchanged at $6,000. In addition, the dollar limit under SIMPLE plans and SIMPLE IRAs for catch-up contributions for participants who are age 50 or older remains unchanged at $3,000.
• The limitation used in the definition of “highly compensated employee” is increased from $120,000 to $125,000.

A complete list of applicable pension plan limitations can be found here.

If you have any questions about the cost-of-living adjustments or any other employee benefits or executive compensation matter, please contact a member of Day Pitney’s Employee Benefits and Executive Compensation practice group.

Day Pitney Alert

November 2, 2018

Day Pitney Author(s) Kathy A. Lawler David P. Doyle Liza J. Hecht Thomas F.J. O’Mullane

Town appealed decision by hearing officer of Property Valuation and Review Division to impose a $2,000 discovery sanction against it in property-tax-reappraisal appeal.

The Supreme Court of Vermont held that hearing officer abused his discretion in imposing a monetary sanction against town, where town had fully complied with order compelling discovery.

Taxpayer appealed determination of the Board of Tax Appeals (BTA) independently valuing property on school board’s appeal of determination of county board of revision adopting taxpayer’s appraisal value of property.

The Supreme Court of Ohio held that:

• BTA discharged its duty to perform independent valuation of property, and
• BTA’s valuation of property was presumed to be proper in accordance with constitutionally required uniformity.

Board of Tax Appeals (BTA) discharged its duty to perform independent valuation of property for property tax purposes, though taxpayer asserted that BTA erred in utilizing unreliable “consulting report” prepared by school board’s appraiser as if it were an appraisal, and that BTA engaged in profusion of errors; BTA did not rely on consulting report in undifferentiating matter, but instead looked at information within report and evaluated it in conjunction with its consideration of report prepared by taxpayer’s appraiser, including consideration of different approaches with respect to expense items, and taxpayer did not demonstrate profusion of errors.

Independent valuation of property by Board of Tax Appeals (BTA) for property tax purposes, which adjusted value upward from board of revision’s valuation to amount very similar to county’s original valuation, was presumed to be proper, though taxpayer alleged that BTA’s decision created appearance of being outcome oriented in violation of constitutionally required uniformity, where taxpayer offered no evidence that would impugn motives of the BTA.

Restaurant owner challenged county board of revision’s valuation of its property for tax purposes.

The Board of Tax Appeals valued the property in according to a recent sale price. Owner appealed.

The Supreme Court of Ohio held that the Board of Tax Appeals was required to consider restaurant owner’s appraisal evidence.

Board of Tax Appeals was required to consider restaurant owner’s appraisal evidence in valuing its property for tax purposes, despite fact that there had been a recent arm’s-length sale and the property was not encumbered by an above-market lease; appraiser’s valuation could have some evidentiary value as an independent matter apart from the concern of the lease.

• IRS proposal on income may bar startups from opportunity zones
• Investors say many high-growth businesses won’t meet threshold

Dan Borok got excited when last year’s Republican tax overhaul included a provision that stood to help his venture capital firm pursue its mission of funding businesses and creating jobs in Newark, New Jersey.

Then came the fine print.

Borok said he was stunned earlier this month by a long-awaited Treasury Department proposal detailing how taxpayers qualify for special breaks by investing in low-income areas throughout the U.S. While the guidelines are generous to investors, buried in the rules is a clause that could deter venture capitalists — and investment in businesses that could stimulate those downtrodden neighborhoods.

One of the rules requires that businesses generate at least half their gross income within the distressed community or “opportunity zone” in which they operate. That’s fine for, say, an apartment building or a grocery store, but a disaster for a business hoping to manufacture a product to be sold widely, or provide services online.

Borok’s firm Newark Venture Partners has backing from Amazon.com Inc.’s Audible unit, Prudential Financial Inc. and several other prominent firms with offices in the New Jersey city. He worked for Google in the early 2000s, a company he says would never have met the 50 percent income test.

“None of the revenue came from Mountain View,” he said, referring to the Silicon Valley city where the search-engine giant is headquartered. For a lot of high-growth businesses, “their customer base is not where the company is.”

The clause seems to be at odds with the intent of the legislation, which is to attract private capital to roughly 8,700 disadvantaged economic areas and create jobs. Treasury Secretary Steven Mnuchin has suggested that $100 billion could flow to opportunity zones. The Economic Innovation Group, a Washington think tank that helped push the idea, has called the incentive the most ambitious effort to spur investment in low-income areas in a generation.

The tax breaks are especially attractive for people looking for ways to minimize levies on capital gains. Investors can plow proceeds from the sale of a business, stock or other asset into opportunity funds, deferring those taxes until 2026 — and potentially reducing their liabilities by as much as 15 percent. If the funds buy and hold qualifying businesses or property in opportunity zones for at least a decade, investors can avoid paying capital gains on any of the fund’s appreciation altogether.

‘Unintentional Consequence’

Such incentives should be a natural fit for investors looking to take their winnings from a tech startup and deploy it in another one located in an opportunity zone. But the Treasury regulations will hurt high-growth startups, which tend to generate most of the net new jobs, according to Steve Case, the AOL co-founder whose firm Revolution LLC has focused on seeding companies outside well-established tech hubs.

In July, Case hired two real estate executives to help make direct investments in opportunity zones. Before the legislation passed, Case was also a prominent backer of the tax breaks.

“I hope the Treasury Department will see the unintentional consequence of this new restriction and amend it in the final rules,” Case said in a statement.

So far, the most interest and activity in opportunity zones has come from the real estate industry. Some of the highest-profile firms that are wading into the market — from Goldman Sachs Group Inc. to hedge fund EJF Capital — have plans to use the tax breaks to develop buildings.

“One of the fears that many have is that this incentive will end up being predominantly used” to invest in rental properties, said Michael Novogradac, a specialist in tax breaks for low-income housing, community development and renewable energy. If the gross-income requirement isn’t changed, “it’ll definitely restrict the number of operating businesses in opportunity zones that benefit from the incentive.”

Old Tax Code

The backlash against such a small detail in a document that ran dozens of pages shows the difficulties regulators face as they rely on guidelines and definitions in the old tax code to implement the new law’s provisions. The legislation left open a lot for interpretation, forcing regulators to fill in gaps and sparking criticism about who will ultimately benefit.

Even before the proposed regulations were released, researchers and nonprofits argued the opportunity zone provisions were written so broadly that savvy investors and real estate developers could exploit them for projects they might have done anyway or that displace lower-income residents. There’s also no requirements for businesses to hire employees from within the zones or benefit the communities more broadly.

Treasury is currently studying the gross-income issue, collecting information and hearing from stakeholders, according to an official. The department is committed to swiftly issuing sound regulations that best serve communities and investors, the Treasury official said.

Potential investors welcomed most of Treasury’s other proposed regulations related to opportunity zone businesses. One of them stipulates that only 70 percent of a company’s tangible property has to be in a designated area, a threshold that an official previewing the regulations earlier this month for reporters said was favorable. Many investors, accountants and lawyers following the regulatory process were concerned the bar would’ve been set higher.

‘Terrible Economics’

Still, rules like that could be moot if the income requirement stays in the final regulations, said Steve Glickman, chief executive officer of Develop LLC, a consulting firm for investors in opportunity zones, and a co-founder of the Economic Innovation Group.

“I’m not sure they totally realized the impact this is going to have on high-growth business investment,” he said. Only allowing local businesses, like hardware stores and restaurants, “sounds like great politics, but it turns out to be terrible economics.”

Treasury is accepting comments on the opportunity zone proposals until Dec. 28. The department is also planning to release a second batch of regulations by the end of the year addressing the ongoing operations of opportunity zone funds.

For now, some investors who hope to use the opportunity zone tax breaks to finance businesses are waiting, hopeful that the income requirement will be revised or eliminated.

“Given what we know about the intent behind this legislation, we feel this is an oversight that will be rectified,” said Peter Brack, managing partner of Hypothesis Ventures, a firm that invests in startups outside California’s Bay Area. “A responsible venture investor would be sitting on the sidelines right now until this is clarified.”

Bloomberg Economics

By Noah Buhayar

October 31, 2018, 1:00 AM PDT Updated on October 31, 2018, 8:07 AM PDT

— With assistance by Laura Davison

‘Tis the season for Opportunity Zone investing. The new tax incentive to invest in economically distressed areas was already drawing significant interest before Oct. 19, the day when the Internal Revenue Service (IRS) proposed key guidelines that many were waiting upon to begin making their cash available for investment in designated Opportunity Zones. The guidelines provided important clarity on a number of questions that were still preventing a large number of investors from making their cash available for Opportunity Zones.

A number of Opportunity Funds — vehicles for aggregating the funds to make multiple Opportunity Zone investments — are already forming. Novogradac & Co., an accounting firm that specializes in community development finance, published a directory of 21 Opportunity Funds, with stated goals to raise as much as $4.8 billion in capital under the new tax incentive. The National Council of State Housing Agencies also published a directory of Opportunity Funds, with some overlap between the two. Under the new law, it’s also possible to create single-investment Opportunity Funds for investing in just one eligible business or property.

Treasury Secretary Steven Mnuchin has said that he anticipates as much as $100 billion in investment through the Opportunity Zones tax incentive. As Next City has reported recently, many in fast-growing cities such as Austin, Texas, are concerned that the flood of capital could exacerbate existing gentrification challenges, while others in places such as Alabama are eager to connect investors to projects in places that haven’t had much access to community development capital before.

Federal records show four meetings hosted at the Office of Information and Regulatory Affairs to discuss the proposed guidelines before their release. Attendees included representatives from the Department of the Treasury, major accounting firms, lobbyists for the logistics industry, departments of economic development or commerce from six states, Economic Innovation Group (the think thank that hatched the Opportunity Zones tax incentive) and venture capitalist Ross Baird.

If you are still getting informed on Opportunity Zones, you’re far from alone. The program has only been around since the passage of the Tax Cuts and Jobs Act at the end of 2017. The program offers tax breaks on capital gains income for investing in designated Opportunity Zones across the country.

The new law gave states, specifically governor’s offices, the responsibility to select Opportunity Zones from among eligible census tracts. To be considered eligible, census tracts had to have a poverty rate of at least 20 percent or a median family income not exceeding 80 percent of median family income for the metropolitan area or statewide median, whichever is higher. States could select up to 25 percent of eligible census tracts, and up to five percent of their selections could also be census tracts that did not meet qualifications themselves but were adjacent to an eligible census tract. Based on those parameters, out of 42,176 possible census tracts, all 50 states, five territories and the District of Columbia chose 8,762 census tracts to receive designation as Opportunity Zones.

The designation process intentionally differed from the EB-5 Immigrant Investor program, which allows foreign investors to “buy” permanent U.S. residency by making an investment in a project located in a distressed area. Under the EB-5 program, developers can gerrymander census tracts together to create an “area” that meets the unemployment threshold of the program, with the project receiving the investment located far from areas of actual high unemployment. That won’t be possible under this program.

Some 35 million people live in designated Opportunity Zones, with a majority being people of color, according to an analysis by the nonpartisan Urban Institute. The same researchers also created a ranking of census tracts based on existing investment trends, which revealed that many selected Opportunity Zones are already receiving a significant amount of outside investment. In selected metropolitan areas, they also found, a large proportion of selected Opportunity Zones are already experiencing demographic shifts toward more highly educated, higher-income households.

Here’s how the tax incentive works: If I have a million dollars in capital gains income, from the sale of stock or real estate or other assets (including works of art), I can temporarily defer federal tax payments on that capital gains income by investing the million dollars directly into an eligible business located in an Opportunity Zone or into an Opportunity Fund, which must invest at least 90 percent of its assets into eligible businesses located in Opportunity Zones. Eligible businesses include real estate projects (excluding golf courses, country clubs, massage parlors, hot tub or suntan facilities, race tracks, gambling establishments or liquor stores). If I leave the million dollars in this investment for five years, I get a ten percent reduction in my original capital gains taxable income; if I leave it for seven years, I get a 15 percent reduction; in other words, I’d be taxed on $850,000 of capital gains income instead of the original one million. Bonus: if I leave the funds invested for at least ten years, any new capital gains income from that investment are tax-free at the federal level.

One of the key questions addressed in the new IRS guidelines pertains to the timeline of raising capital versus actual investment in eligible projects or businesses. While investors want the tax benefits right away, real estate projects can take years to aggregate necessary capital, especially if they are projects with an intentional plan to benefit communities. Under the new guidelines, Opportunity Funds have 31 months from receiving capital from investors before they must invest the capital into an actual project — provided that they have a plan to do so within six months of receiving the capital. That means investors can have the confidence to invest in Opportunity Funds with a pipeline of projects that might take longer to come to fruition for the sake of community benefit.

Another key question concerned the law’s requirement that businesses receiving Opportunity Zone investment must conduct “substantially all” of its business inside an Opportunity Zone — as a safeguard against businesses registering an address inside an Opportunity Zone for the purposes of raising capital without actually hiring anyone or serving anyone inside that Zone. Under the final guidelines, at least 50 percent of the gross income of an eligible business must come from “the active conduct of a trade or business in the qualified Opportunity Zone.” Some advocates were hoping for a higher percentage, but others feared that might discourage investors from taking advantage of the program.

The IRS also created a “70-30 rule,” permitting up to 30 percent of an eligible business’ property to be located outside a designated Opportunity Zone. So if a local restaurant chain has five locations, for example, at least four of them must be inside an Opportunity Zone.

On other suggested safeguards, the IRS has so far been mute or is leaning more toward being friendly to investors instead of the 35 million Opportunity Zone residents. Despite calls from advocates to do so, there are no guidelines for eligible businesses to hire residents who live in the Opportunity Zones where they are operating, nor are there requirements that any housing units created with Opportunity Zone capital be affordable for existing residents of Opportunity Zones. The IRS also released a draft version of the required form to “self-certify” as an Opportunity Fund. The form is one page long, two if the fund is “out of compliance,” and the only measure of compliance is the percentage of the fund’s assets located inside a designated Opportunity Zone. Opportunity Funds must pay a nominal fee — based on how much the fund is below the 90 percent threshold — for each month in the previous tax year they are not in compliance.

With so few “guard rails” at the federal level, some are looking to states or municipalities to create measures for protecting Opportunity Zone residents from displacement, or at least incentives to encourage more responsible behavior on the part of Opportunity Funds.

“We believe the state, in designating these zones, has a responsibility to protect the communities that are already there and make sure they benefit from these zones,” Paulina Gonzalez, executive director of the California Reinvestment Coalition, told Next City earlier this year.

NEXT CITY

BY OSCAR PERRY ABELLO | OCTOBER 30, 2018

Treasury issued long-awaited Proposed Regulations and a Revenue Ruling today (October 19, 2018) regarding key issues involved with investing in and forming Qualified Opportunity Zone Funds (“OZ Fund”) and the OZ Fund’s investments in Opportunity Zone Businesses (“OZ Business”). Although the Proposed Regulations do not answer all of our key questions, Treasury did provide generally taxpayer friendly guidance to the issues discussed below. These Regulations are only proposed, and are therefore subject to further revisions based on comments received by Treasury. However, Treasury has provided that taxpayers can rely on many of these proposed rules, provided that the taxpayer applies the rule in its entirety and in a consistent manner.

• Treatment of Land.  Land is excluded from the requirement that the original use of opportunity zone property commence with the OZ Fund or that the OZ Fund substantially improve the property, alleviating fears that land could only be a “bad” asset. Very favorably, if the OZ Fund purchases an existing building and the underlying land, the OZ Fund is only required to substantially improve (“double the basis”) the building. The cost of the land is disregarded for this purpose.
• Treatment of Capital Gains of Partnerships and other Pass-Thru Entities.  Partners have 180 days from the end of the partnership’s taxable year to invest in an OZ Fund. Accordingly, capital gains recognized by a partnership early in 2018 (or even very late 2017) may still be eligible for investment in OZ Funds, even if 180 days have passed. A partnership has the option of either investing capital gains in an OZ Fund itself or allocating the gain to its partners, thereby permitting the partners the opportunity to invest their distribute share of the gain in an OZ Fund. If desired, the partner has the option to select the 180-day period starting from the date of the partnership’s sale of the property.
• Treatment of Working Capital.  The Proposed Regulations provide a working capital safe harbor for investments in OZ businesses that acquire, construct, or rehabilitate tangible business property. An OZ business can hold the working capital for a period of up to 31 months if there is a written plan that identifies the working capital as held for the acquisition, construction, or substantial improvement of tangible property in an opportunity zone and such written plan identifies a schedule of expenditures. This alleviates the concern that cash invested by an OZ Fund in an OZ business would be a “bad asset” for the OZ business. Working capital can be held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
• Only 70% of an OZ Business’ Tangible Assets Need to be OZ Property.  An OZ Fund that invests directly in assets must have 90 percent of its assets be qualifying OZ Property. Qualifying property includes an investment into an OZ Business. An OZ Business only needs to have “Substantially all” of its tangible assets consist of qualifying OZ Property. The Proposed Regulations define, for this purpose only, “substantially all” as 70 percent of the OZ Business’ tangible assets. This is critical in allowing investors in non-real estate businesses to take advantage of the opportunity zone benefits. The Proposed Regulations provide alternative methods for determining compliance with the “substantially all” test, based either on the values in an applicable financial statement of the OZ business, or, if the business does not have an applicable financial statement, applying the methodology used by its Fund investors (who hold at least 5 percent of the OZ business) for determining their compliance with the 90 percent asset test.
• The OZ Fund Can Borrow Money.  The Proposed Regulations provide that deemed contributions of money derived from a partner’s share of partnership debt do not create a separate, non-qualifying investment in the OZ Fund. There had been concern that the proportion of the investment relating to money borrowed by the Fund would result in a non-qualifying investment. The Proposed Regulations do indicate that Treasury is considering an anti-abuse rule for investments that may be considered abusive. In addition, the Proposed Regulations imply that partners in OZ Funds do get outside basis for amounts borrowed by the OZ Fund, thereby potentially permitting the investors to take advantage of OZ Fund losses.
• “Gains” are Limited to Gains Treated as Capital Gain.  Treasury has specifically limited the OZ Fund benefits to gain that “is treated as a capital gain” for Federal income tax purposes. Although this provision could have been clarified better, we think that “treated as a capital gain” is intended to include Section 1231 gains (special rules apply gains from hedging/straddles).
• Special Allocations are Permitted.  Investors must receive an equity interest in an OZ Fund. For OZ Funds organized as partnerships, the Proposed Regulations specifically permit special allocations. Depending on whether additional limits are placed on special allocations, this may permit a certain amount of “carried interest” to be paired with an equity investment for OZ Fund service providers.
• Early Disposition of OZ Fund interest.  If an OZ Fund investor sells all of its interest in an OZ Fund before the end of deferral in 2026, the OZ Fund investor can maintain the original gain deferral by reinvesting the proceeds into a new OZ Fund within 180 days. This allows an investor to get out of a bad deal without losing the deferral benefits. Note that the Proposed Regulations specifically deferred until future Regulations issues involved when the OZ fund itself sells OZ Fund property. These issues include what a “reasonable period of time” is for the OZ Fund to reinvest in qualifying assets and what the potential income tax consequences to the Fund and its investors of such a sale of OZ Fund property by the OZ Fund.
• Valuation of Assets for Purposes of the 90% Test.  For purposes of determining whether a Fund holds 90 percent of its assets in qualified opportunity zone property, the Proposed Regulations require the Fund to use asset values reported on an applicable financial statement of the Fund. Applicable financial statements are prepared in accordance with U.S. GAAP and either: (1) filed with a federal agency besides the IRS (which includes the SEC); or (2) are audited and used to make decisions by the taxpayer. If a Fund does not have an applicable financial statement, the Fund must use its cost in acquiring the assets for the calculation. Treasury is seeking comments as to whether adjusted basis or another valuation method is a better measurement than cost.
• 90% Asset Test Testing Dates.  The Proposed Regulations provide for the possibility that an OZ Fund formed late in the taxable year could have to fully comply with the asset tests by the end of that year. The law requires that an Oz Fund invest 90 percent of its assets in qualified opportunity zone business property, measured as the average of two Testing Dates. The first testing date is the last day of the 6th month following formation, and the second Testing Date is the last day of the taxable year. For example, if a calendar-year fund selects April as its first month as an OZ Fund, then its first testing dates are the end of September and the end of December. However, if a Fund is formed in the last half of the taxable year, then it will have only one testing date, which may be soon after formation. This creates the possibility that an OZ Fund formed in December only has until the end of December to fully comply. We are hoping that the final Regulations will provide more time for the OZ Fund to initially comply.
• Limited Liability Companies (LLCs) Can Be OZ Funds.  So long as the LLC is taxed as a partnership or a corporation, an LLC can be an OZ Fund.

The Proposed Regulations are generally favorable to investors, and so we expect that Opportunity Zone investments will really take off. Based on the 70 percent “substantially all” rule for OZ Businesses, we expect that Opportunity Zone investments will not be limited to real estate investors. In addition, we think Opportunity Zone investments are more likely to be structured with OZ Funds owning OZ businesses rather than the OZ Fund owning assets directly, because of the working capital safe harbor, the substantially all test, and the testing dates for OZ Funds.

Polsinelli PC

by Korb Maxwell, Jeffrey A. Goldman & S. Patrick O’Bryan

Saturday, October 20, 2018

Ballard Spahr to hold webinar on November 1, 2018

The Tax Cuts and Jobs Act introduced a new tax-incentive program known as Qualified Opportunity Zones (QOZs). In 2018, governors of all 50 states, the District of Columbia, and the five U.S. possessions designated more than 8,700 QOZs. The program’s benefits include gain deferral and gain elimination for taxpayers who roll over capital gain into a Qualified Opportunity Fund (QOF).

Specifically, if an investor (1) recognizes capital gain, (2) invests cash in an amount equal to the capital gain in a QOF within 180 days of the date the gain is recognized, and (3) makes an election (on IRS Form 8949) to treat the investment as a QOZ investment, the investor is eligible for the QOZ tax benefits. These benefits include (1) deferral of tax on the rolled-over gain until the earlier of the date the investor sells its interest in the QOF or December 31, 2026, (2) 10% of the investor’s roll-over gain is eliminated if on or before December 31, 2026, the investor holds its interest in the QOF for at least five years and another 5% of the roll-over gain is eliminated if the investor holds its interest in the QOF on or before December 31, 2026, for a total of seven years (for a total gain elimination of 15%), and (3) if the investor holds its QOF interest for at least 10 years, the investor will pay no tax on any gain recognized when such QOF interest is sold. There is no tracing of funds to the proceeds of a sale that produces capital gain; the investor may obtain the cash from any source to invest an amount equal to the roll-over gain in a QOF. There are a variety of technical requirements a fund must satisfy to be a QOF. (See below and see our March 1, 2018, e-alert on qualified opportunity zones.)

Investors and promoters of QOFs have been anxiously awaiting guidance from the U.S. Department of the Treasury and the IRS on the issues raised by the statutory language creating this incentive program. On October 19, 2018, the first set of proposed regulations (Proposed Regulations) and a Revenue Ruling were released providing initial guidance on QOFs. At least two more proposed regulations packages are expected, one this year and one in the spring of 2019. The Proposed Regulations and Revenue Ruling address some of the important uncertainties necessary to implement this program, which is expected to stimulate a great deal of investment. Taxpayers may rely on the Revenue Ruling and taxpayers may rely on the Proposed Regulations—with certain limitations—before they are finalized.

INITIAL GUIDANCE

What type of gain may be rolled-over?

The Proposed Regulations clarify that only gain treated as capital gain may be rolled over into a QOF to obtain QOZ benefits. This includes long-term and short-term capital gain from the sale or exchange of a capital asset, gain that is treated as capital gain from the sale of a Section 1231 asset (depreciable property used in a trade or business held for more than one year and real property used in a trade or business held for more than one year other than dealer property, inventory and certain other exceptions), and “unrecaptured section 1250 gain” (the gain on real estate currently subject to tax at a 25% rate). To be eligible for QOZ benefits, cash (not property) in an amount equal to the gain must be contributed to a QOF within 180 days of when the capital gain is recognized. The Proposed Regulations also provide that, subject to certain rules, eligible capital gain will include capital gain a QOF investor recognizes on the sale of a QOF interest on or before December 31, 2026.

What types of taxpayers may roll over cash equal to capital gains they recognize into a QOF?

Individuals, partnerships, corporations (including S corporations, REITs, and RICs), trusts, and estates may roll over gain into a QOF and obtain the tax benefits of investing in a QOF with respect to gains realized on or before December 31, 2026. The Proposed Regulations clarify that either a partnership or its partners may roll over gain realized by the partnership. If the partnership rolls over the gain, the partnership has 180 days from the sale that produces the gain to roll over the gain. If the partnership opts not to roll over the gain, one or more of the partners may roll over their share of the gain. If a partner rolls over gain, the partner’s 180-day period starts from the last day of the partnership’s tax year or, if the partnership notifies the partners of the date of the sale, at the election of a partner rolling over the gain, the partner’s 180-day period may start on the date of the partnership’s sale. Similar rules apply to S corporations, trusts and estates, and their shareholders and beneficiaries.

When does the ability of an investor to take advantage of the 10-year benefit expire?

Once a QOF investor has held its QOF interest for at least 10 years, the QOF investor can sell that interest and pay no tax on any gain. But, to be a QOF, a fund—among other things—must be invested directly or indirectly in a QOZ, and all QOZs expire on December 31, 2028. Therefore, there was concern that a fund no longer could qualify as a QOF when the QOZs expire. The Proposed Regulations solve this problem by providing that a QOF investor pays no tax on the sale of a QOF interest if (1) the QOF investor rolls over capital gain into a QOF in a timely manner, (2) the investor holds its QOF interest for at least 10 years, and (3) the QOF investor disposes of its QOF interest no later than December 31, 2047.

How does a fund qualify as a QOF?

To be a QOF, an entity must be certified and must satisfy three tests: (1) it is organized as a corporation or partnership (the Organization Test), (2) it is an investment vehicle formed for the purpose of investing in QOZ Property (the Purpose Test), and (3) at least 90% of the entity’s assets are invested in QOZ Property (the 90% Asset Test). QOZ Property is (a) an entity interest in a subsidiary partnership or corporation [1] that is a QOZ Business, or (b) QOZ Business Property. For each month that a QOF does not satisfy the 90% Asset Test, it would owe a penalty. The Proposed Regulations provide clarification about the certification process and each of the three elements required to qualify an entity as a QOF.

FAQs published by the IRS in July 2018 indicated that an entity could self-certify as to QOF status. The Proposed Regulations state that self-certification will be accomplished by filing Form 8996 with the tax return filed for the first taxable year the entity “wants” to be a QOF. A draft of Form 8996 and accompanying instructions were released simultaneously with the Proposed Regulations.

With respect to the requirement that a QOF be organized as a corporation or partnership, the Proposed Regulations state that a QOF must be a corporation or partnership for federal income tax purposes, thus clarifying that an entity formed as a limited liability company under state law but taxed as a partnership for federal income tax purposes is eligible for QOF status. Neither a QOF nor its subsidiary partnership can be a disregarded entity.

The Proposed Regulations place a special limitation on the Organization Test for a QOF formed under the laws of any one of the U.S. possessions (Puerto Rico, U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Marianas). Those entities may be a QOF only if organized for the purpose of investing in QOZ Property relating to a trade or business operated in that particular possession in which the entity is organized. This requirement is carried over to the definition of what investments in stock or partnership interests will be QOZ Property. A QOF formed under the laws of one of the 50 states or District of Columbia cannot treat as QOZ Property the acquisition of corporate stock or a partnership interest in a corporation or partnership formed under the laws of a possession. This limitation apparently reflects the IRS interpretation of the definition of “domestic” corporation or partnership for purposes of the Opportunity Zone benefits. The possession limitations are highlighted in the draft instructions to Form 8996.

With respect to the Purpose Test, Form 8996 requires that the entity certify that, by the end of the first tax year of the QOF, its organizing documents include (1) a statement that the entity’s purpose is to invest in QOZ property, and (2) a description of the qualified opportunity zone business or businesses in which the QOF expects to directly or indirectly engage. It is not clear how much detail is required as to the description of businesses in the organizing documents, but the draft Form 8996 seems to expand the statutory requirement.

The Proposed Regulations state that there is no legal barrier to an existing entity filing Form 8996 to become a QOF—as long as the other requirements are met. Thus, an existing partnership or corporation could seek new cash equity infusions that would qualify for QOZ benefits, which likely would require amending the existing entity’s organizing documents to substantiate the Purpose Test. This would mean that the existing entity would need to bifurcate the new qualifying investments from any prior investments for purposes of measuring the 90% Asset Test and for purposes of passing on the capital gains relief.

In self-certifying, the QOF also will specify on Form 8996 the first month of the initial year in which it wants to be a QOF. This date will be relevant not only for purposes of determining whether a qualifying investment has been made, but also for purposes of measuring the 90% Asset Test. Failure to identify the first month on Form 8996 will result in the IRS treating the first month of the entity’s taxable year as the first month the entity intends to be a QOF.

As to the third requirement, the Initial Guidance describes how to establish the dates for measuring the 90% Asset Test and how QOZ investments are valued. The 90% Asset Test is based on the average of the QOF’s assets on two snapshot dates: the last day of the first six months of a QOF’s tax year and the last day of a QOF’s tax year. (If a QOF has less than six months in its initial tax year, the only relevant date is the last day of its tax year.) The Proposed Regulations provide that—for purposes of determining if a QOF satisfies the 90% Asset Test—if the QOF prepares financial statements filed with the Securities and Exchange Commission or with a federal agency other than the IRS—or has certified audited financial statements that are prepared in accordance with Generally Accepted Accounting Principles (U.S. GAAP)—then the value of the assets reported on such financial statements are to be used for valuation of the QOF’s assets. In other cases, the QOF’s cost basis of the assets on the date of acquisition by the QOF is to be used. The Proposed Regulations also include special rules to permit a QOF to use the most favorable valuation method for a subsidiary that is a QOZ Business that is owned by multiple QOFs.

How are the terms QOZ Business Property and QOZ Business defined?

There are different requirements regarding the types of assets a QOF can own and operate directly and the types of assets a QOF’s subsidiary can own and operate. The Proposed Regulations provide relatively little guidance on this aspect, reserving these issues for subsequent guidance. As discussed above, to be a QOF, 90% of a fund’s assets must be composed of (1) interests in one or more corporate or partnership subsidiaries that qualify as QOZ Businesses and/or (2) QOZ Business Property. For a QOF’s subsidiary to be a QOZ Business, substantially all (at least 70%, as defined in the Proposed Regulations) of its tangible property must be QOZ Business Property, it must not be a “sin business” (golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, or other facility used for gambling, or any store the principal purpose of which is the sale of alcoholic beverages for off-premises consumption), no more than 5% of its assets can be nonqualified financial assets (e.g. cash, stock, bonds, partnership interests, and options etc.), a substantial portion of its intangible assets must be used in the active conduct of its trade or business, and at least 50% of its gross income must be from the active conduct of a trade or business within the QOZ.

QOZ Business Property is property (1) purchased by a QOF or a subsidiary of a QOF (that is a QOZ Business) from an unrelated person (related means more than 20% common ownership) after December 31, 2017, [2] (2)(i) the original use of which in the QOZ commences with the QOF or its subsidiary (that is a QOZ Business) or (ii) the QOF or its subsidiary (that is a QOZ Business) substantially improves such property, and (3) substantially all of the use of such property is in a QOZ during substantially all of the time it is held by the QOF or the QOF’s subsidiary (that is a QOZ Business).

Property is substantially improved if during any 30-month period during which it is owned by a QOF or its subsidiary, the QOF or its subsidiary essentially spends at least as much to improve the property as it spent to buy the property. The Revenue Ruling provides a taxpayer friendly rule applicable to a QOF or subsidiary of a QOF that buys land and improvements—that is for purposes of determining whether such land and improvements are substantially improved, the cost of the land is not included. For example, if a QOF’s subsidiary buys land and a building for $100—$60 of which is allocable to the land and $40 of which is allocable to the building—the subsidiary is only required to spend $40 to satisfy the substantial improvement test. But, the land nevertheless remains in the numerator (assuming it was acquired from an unrelated person after 2017) to determine if substantially all (at least 70%) of the subsidiary’s assets are QOZ Business Property. As a result, to determine if at least 70% of the QOF subsidiary’s assets are QOZ Business Property in the prior example, the $60 allocable to the land is treated as QOZ Business Property. The Revenue Ruling does not address what constitutes a substantial improvement if the purchased asset is vacant land.

There are advantages and disadvantages if a QOF invests in a QOZ through a subsidiary QOZ Business, as opposed to investing directly. The advantages include that only 70% of the tangible assets of a QOZ Business must be QOZ Business Property, whereas a greater percentage (up to 90%) may be required if the QOF invests directly in QOZ Business Property. Also, a subsidiary QOZ Business can hold more working capital than can a QOF (see below). There also are certain disadvantages if a QOF invests in a QOZ through a subsidiary QOZ Business as opposed to directly. In contrast to a business conducted by a QOF itself, a subsidiary QOZ Business cannot be a sin business, 50% of such subsidiary QOZ Business’ gross income must be from the active conduct of a trade or business, a substantial portion of the subsidiary QOZ Business’ intangible assets must be used in the active conduct of its trade or business, and less than 5% of its assets can be nonqualified financial assets.

What does “substantially all” mean?

There are a variety of places where the QOZ rules use the term “substantially all.” One such place is in one of the requirements that a partnership or corporate subsidiary of a QOF must satisfy to qualify as a QOZ Business—i.e., that “substantially all” of the subsidiary’s tangible assets (owned or leased) must be QOZ Business Property. The Proposed Regulations explain that substantially all for this purpose means 70%. The meaning of substantially all for other QOZ purposes remains undefined.

Can a QOF or its subsidiary hold working capital and for how long?

Unfortunately, the Proposed Regulations do not provide that a QOF can hold working capital as part of the assets that meet the 90% Asset Test. However, the Proposed Regulations establish a safe harbor for reasonable amounts of working capital that a QOF’s Subsidiary (a QOZ Business) can hold. This safe harbor provides a QOF’s subsidiary with greater flexibility to qualify as a QOZ Business as its property or business is being developed. In fact, the Proposed Regulations specify that reasonable working capital may be held by a QOF’s subsidiary (a QOZ Business) if (1) the working capital amount is designated in writing for the acquisition, construction and/or substantial improvement of tangible property in a QOZ, (2) there is a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital, (3) the working capital is spent within 31 months of receipt of such funds, and (4) the working capital actually is used in a manner that is “substantially consistent” with the first three requirements. It is unclear how much specificity must be included on the written schedule as to the actual property or business to be conducted by the QOZ Business.

Likewise, the Proposed Regulations provide that working capital that fits within the safe harbor also counts toward satisfying the 50% gross income test and the intangible property test that the QOZ Business must meet and clarifies that tangible property satisfies the QOZ Business requirements even while working capital is still being expended.

What are other interesting aspects of the Proposed Regulations?

Carried Interest

The Proposed Regulations make clear that an interest in a QOF may include any equity interest in the QOF, including preferred stock and a partnership interest with special allocations. As a result, it appears that if a promoter timely invests an amount equal to all or a portion of capital gain it recognized in a QOF that is a partnership and acquires an interest in the QOF, including its carried interest, its entire interest in the QOF (including the carried interest) may be eligible for QOZ benefits.

Borrowing

The Proposed Regulations make clear that an investor can borrow against its QOF interest without interfering with the investor’s QOZ benefits. However, the Proposed Regulations do not address whether a QOF that is a partnership can make debt financed distributions to a partner without the partner recognizing gain. The Proposed Regulations also clarify that debt incurred by a QOF that is a partnership or its subsidiary partnership that is a QOZ Business is not treated as an investment by the QOF’s investors for purposes of determining how much capital gain has been rolled over or for purposes of determining if other than capital gains have been invested in the QOF.

Installment Sales

The QOZ law permits a taxpayer to obtain QOZ benefits if the taxpayer rolls over capital gain from a sale of property to an unrelated person and cash equal to the gain is invested in a QOF within 180 days of the sale. The Proposed Regulations explain that the 180 days begins on the day on which the gain would be recognized if the taxpayer did not make an election to defer the gain under the QOZ rules. This provision in the Proposed Regulations might open the door for a taxpayer who recognizes gain after December 31, 2017, from an installment sale that occurred before 2018 to roll over post-2017 gain from that installment sale into a QOF.

Attributes when roll-over gain is recognized

When all or a portion of the roll-over gain is recognized on the earlier of December 31, 2026, or when the investor disposes of its interest in the QOF, the gain will have the same attributes as the gain rolled over. For example, if the rolled-over gain is short-term capital gain, it will be short-term capital gain when it is recognized and, if all or a portion of the gain rolled over is “unrecaptured section 1250 gain” from the sale of real estate (gain currently subject to tax at a 25% rate), such gain will retain its character as unrecaptured section 1250 gain. The tax rates applicable at the time the roll-over gain ultimately is recognized will apply to that gain, not the rates applicable when such gain was realized and deferred. This presents additional return risk, as the applicable tax rates may be higher when the gain ultimately is recognized.

Issues not yet answered

Among the issues requiring further guidance:

• What constitutes the active conduct of a trade or business, particularly in the context of a QOF’s subsidiary QOZ Business that owns real estate?
• What does original use in the QOZ mean?
• What transactions cause the deferral to end?
• What are the administrative rules and applicable penalties if a QOF fails to satisfy the 90% Asset Test?

The Proposed Regulations state that soon to be released proposed regulations will provide guidance on how long a QOF has to reinvest proceeds from a sale of one or more of its assets to continue the qualify as a QOF.

If you have any questions about investing in or forming and operating a QOF, please contact any member of Ballard Spahr’s QOZ team.

Members of Ballard Spahr’s QOZ Team will be presenting a seminar/webinar on QOZs addressing the Initial Guidance on November 1, 2018, at 3:00 pm ET.

[1] For this purpose, we are using the term subsidiary to mean an entity treated as a partnership or corporation in which the QOF has any direct ownership interest.

[2] Property will not qualify as a QOZ Business Property if it is contributed to—as opposed to purchased by—a QOF or a subsidiary of a QOF.

October 26, 2018

by members of the Qualified Opportunity Zones Team – Wendi L. Kotzen. Linda B. Schakel, Molly R. Bryson & Mark O. Norell

Ballard Spahr LLP

Copyright © 2018 by Ballard Spahr LLP.
www.ballardspahr.com

The Opportunity Zones Program created by the U.S. Tax Cut and Jobs Act of 2017 (the “OZone Program”) and the first wave of proposed regulations issued by the Treasury Department on October 19, 2018 (the “Regulations”) have been designed to generate economic activity in low-income urban and rural communities. Sullivan & Worcester’s Opportunity Zones Practice Group has analyzed the OZone Program and Regulations and has successfully structured multiple Qualified Opportunity Funds (“QOFs”) with an anticipated aggregate capital raise of nearly $600 million.

As we and our clients continue to develop innovative QOF structures, we will provide a series of advisories that highlight specific structuring elements that are consistent with the OZone Program and the Regulations.

Additional Time to Invest Capital Gains (October 26, 2018)

Under §1400Z-2(a)(1)(A), to be able to elect to defer capital gains, a taxpayer must generally invest in a QOF during the 180-day period beginning on the date of the sale or exchange giving rise to the capital gain. The Regulations, however, allow for flexible tax planning and provide the opportunity to make strategic decisions about the commencement and expiration of the 180-day investment period.

According to the Regulations, a partnership may elect to defer all or part of a capital gain to the extent it makes an eligible investment in a QOF. If the partnership itself makes an eligible investment in a QOF within the 180-day period following the transaction giving rise to the capital gain, the capital gain that is invested by the partnership in the QOF is not included in the net capital gain allocated to the partners under Code Sections 702 and 706.

If, however, the partnership chooses to not reinvest the gain in a QOF, then the capital gain will be included in the gain distributed on the partnership K-1 to its partners.

In turn, a separate 180-day investment period for the partners begins on the last day of the partnership’s taxable year, which is the date when the partnership-level gain is treated as distributed to the partners under Code Section 706.

The Regulations then go one step further and add a feature that gives flexibility to the partners. If a partner knows that the partnership has recognized eligible gain on a sale or exchange to an unrelated party, and that the partnership has chosen to not make an eligible investment in a QOF, then the partner may treat his/her own 180-day period as being the same as the partnership’s 180-day period.

Example:

Assume a partnership sells stock held for investment and recognizes capital gain on March 1, 2019. The partnership would have 180 days (i.e., until August 27, 2019) to invest the gain in a QOF. If the partnership elects to invest this gain in a QOF, the invested gain will not be included in capital gain distributed to its partners for the tax year. If the partnership chooses not to invest this gain in a QOF, then the individual partners are permitted to invest their distributive share of the partnership gain in a QOF. Under these circumstances, the 180-day period would commence on December 31, 2019 (assuming the partnership is a calendar year taxpayer), and partners would have 180 days (i.e., until June 28, 2020) to make an eligible QOF investment.

If, however, a partner is aware that the partnership recognized the gain on March 1, 2019 and has made the decision not to invest in a QOF, such partner can decide whether to invest his/her distributive share of the partnership gain during the partnership’s 180 day period (i.e., until August 27, 2019) or during the second 180-day period beginning on December 31, 2019 (i.e. until June 28, 2020).

Although it seems anomalous, it appears that the individual partner cannot make a qualifying investment related to the partnership gain during the period after August 27, 2019 and before December 31, 2019.

However, these rules provide exceptional flexibility in managing the 180-day investment period, especially when there is good communication between the partnership and its partners. At the extreme, gain recognized by a calendar-year partnership on January 1, 2019 could potentially be invested by an individual partner as late as June 28, 2020.

The Regulations state that rules analogous to the rules provided for partnerships and partners apply to other pass-through entities (including S corporations, decedents’ estates, and trusts) and to their shareholders and beneficiaries. Comments are requested regarding whether taxpayers need additional details regarding analogous treatment for pass-through entities that are not partnerships.

Sullivan & Worcester

by Daniel Ryan

October 29, 2018

The Office of Chief Counsel of the Internal Revenue Service (IRS) has released a memorandum regarding the use of tax-exempt bonds to advance refund taxable bonds.

The memo, which is dated August 31, 2018, but which was released on October 26, 2018, applies to a particular transaction and sets forth a fact pattern in which tax-exempt bonds advance refund and cause a legal defeasance of tax-advantaged taxable bonds. Such legal defeasance caused an extinguishment of the tax-advantaged taxable bonds and a deemed new issue of non-tax-advantaged taxable bonds. The author of the memo states: “Section 149(d), as amended by § 13532 of the 2017 Act, does not preclude the issuance of tax-exempt bonds to advance refund non-tax-advantaged, taxable bonds under the facts described below. There will not be two sets of tax-advantaged bonds outstanding for the same project or activity.” This means that tax-exempt bonds may be issued to advance refund tax-advantaged taxable bonds that are legally defeased in the advance refunding, because a legal defeasance of tax-advantaged taxable bonds results in the loss of their tax-advantaged status.

The memo does not discuss tax-advantaged taxable bonds that cannot be legally defeased.

The memorandum from the Office of Chief Counsel can be found here.

Background: As you may recall, NABL sent a letter to the IRS Office of Indian Tribal Governments/Tax Exempt Bonds (ITG/TEB) requesting written guidance that section 13532 of the 2017 Act does not preclude the issuance of tax-exempt bonds to advance refund taxable bonds. The NABL letter is available here.

Taxpayer filed complaint for refund of property taxes paid based on value of lease of federal lands.

The Superior Court sustained county’s demurrer without leave to amend, and taxpayer appealed.

The Court of Appeal held that:

• Lease included option to extend;
• Lease amendment’s removal of word “option” did not remove taxpayer’s option to extend lease; and
• It was reasonable to assume taxpayer would exercise option to extend lease.

Taxpayer’s lease of federal land included option to extend beyond five-year term such that assessor could consider option when valuing taxpayer’s possessory interest, although U.S. Navy was required to approve lease extension and was able to terminate lease at will, where lease defined five-year term as initial lease term and explicitly gave taxpayer the exclusive right to lease Navy’s property for two more five-year terms, and lease contained no language permitting the Navy to withdraw or revoke its offer.

Lease amendment’s removal of word “option” did not remove taxpayer’s option to extend term of possession of federal land, where taxpayer’s five-year lease term remained the “initial” lease term, taxpayer retained exclusive right to extend lease another ten years, U.S. Navy could not revoke or withdraw its offer, exemption from contract term limits remained intact, and mechanism to determine the amount of future rent was substantively unchanged.

Evidence was sufficient to support assessor’s finding that it was reasonable to assume taxpayer would exercise option to extend initial five year lease of federal lands for additional ten years as permitted by lease and thus to justify higher tax valuation; although U.S. Navy could terminate the lease at any time, Navy had renewed all previous leases, the parties had anticipated a long-term business relationship, current lease was not subject to the federal five-year contract term limit, and renegotiation terms implied an exemption from competitive bidding requirements.

In this Fall 2018 Issue:

• U.S. Supreme Court Internet Sales Tax Decision and Property Values
• Bulk Discount Not Available
• Appraiser’s Credibility Rules
• Geese Attacks Don’t Generate Assessment Reduction
• Dark Store Issue Makes It to the Ballot Box
• Allocation Argument Wins; Appeal Fails
• Visual Artists Rights Act Damages Awarded

Continue reading.

Pullman & Comley, LLC

October 24, 2018

The affiliated group of which a taxpayer-utility was a wholly owned subsidiary filed tax returns on which it did not claim bonus depreciation since the availability of bonus depreciation had temporarily expired. Following the retroactive restoration of bonus depreciation,1 the affiliated group filed amended tax returns claiming refunds attributable to the increased depreciation deductions. In PLR 201842001 (Oct. 19, 2018), the Internal Revenue ruled that “in calculating the amount of the [accumulated deferred income taxes] under Section 1.167(l)-1(h)(1)(iii)” that are used to reduce rate base, the reserve “should only include amounts of tax that are actually deferred and amounts of zero-cost capital that are actually received.” Thus, until the refunds were actually received, the deferred taxes attributable to the incremental depreciation deductions could not be used to reduce base.

Eversheds Sutherland Observation: PLR 201842001 is entirely consistent with prior rulings that provide that to the extent accelerated depreciation deductions contribute to a net operating loss, the deferred taxes related thereto may not be used to reduce rate base, consistent with the normalization rules, until the losses are realized. See, e.g., PLR 201709008 (normalization rules require that deferred taxes attributable to accelerated depreciation that are used to reduce rate base must be reduced by the deferred tax asset reflecting yet-unused net operating losses).

1 P.L. 113-295 (Tax increase Prevention Act of 2014); P.L. 114-113 (Protecting Americans from Tax Hikes (PATH) Act of 2015).

Eversheds Sutherland (US) LLP

October 24, 2018

Local governments are hurting from lost telecom franchise fees as the industry relies more and more on broadband, but cities can tax Internet providers and restore lost funds.

Mention the word “landline” to modern consumers, and you’ll likely get the same quizzical look as if you’d said “rotary phone.” As consumers shift almost uniformly to mobile phones and larger organizations rely on cable connections instead of DSL for their office “landlines,” the local income associated with telecom franchise fees has nosedived.

Adding to the complexity of the revenue issue is the Internet Tax Freedom Act (ITFA) of 1998, which prohibits taxing Internet usage – so, even though telecommunications companies are utilizing locally-owned phone lines to provide broadband Internet access to residents, localities can no longer tax the services being provided like they used to. However, creative minds have been working to find ways that accommodate the various federal statutes while still increasing revenue for local governments.

In recent months, cities have started to pass legislation allowing localities to tax Internet providers directly for using city right–of-ways (ROWs). It’s a highly technical loophole, but with broadband being at the forefront of the next major tax revolution, its one that your municipality may want to consider – and soon.

Cities That Tax Internet Providers

In 2016, for example, the Supreme Court of Oregon recently upheld the city of Eugene’s seven percent tax on Internet providers for utilizing city ROWs to deliver its broadband services. Its decision was based on the ambiguous language used by the Federal Communications Commission (FCC) – they determined that the provisions of the Cable Act can more precisely be read as limitations only on the cable franchising process and the terms that may be included in a cable franchise agreement.

In other words, local governments have every right to regulate the business activities that are being conducted within their territory, especially when the city’s ROWs are being used for those activities.

Oregon isn’t the only state to subject telecoms companies to such regulations. Even a decade ago in 2008, the U.S. Court of Appeals ruled in favor of Jefferson City, Missouri, that that cellular services provided through public ROWs, including those that are bundled with Internet data access charges, are subjected to a tax on telecommunications providers.

State Legislative Restrictions

Telecom companies are predictably against this type of emerging legislation. With more than 80 percent of their revenue being derived from broadband now, they do not want states or cities to be able to levy taxes on these services and are taking action to prevent such legislation.

Just this year, two legislatures in Texas passed bills that would prohibit local governments from enforcing telecom license fees, and more are surely in the works. The telecommunications industry has deep pockets and a vested interest in this issue – so time is of the essence for municipalities that want to take action.

These ongoing legal battles point toward a future in which telecoms companies are once again contributing more significantly to local government revenue. And the solutions to the issue of lost telecom revenue are realistic, viable and capable of being implemented; provided they are done correctly.

Cities wishing to enforce their own regulations for use of city ROWs should know that their efforts to do so must be artfully crafted and specifically tailored to withstand scrutiny under federal regulations and provisions under the Cable Act and the ITFA. While cable and telecommunications conglomerates are notorious and financially capable of mounting strong defenses of any efforts to enforce or expand the taxes levied upon them, they are not able to counter local governments’ lawful efforts to implement such measures.

efficientgov.com

by Jonathan Gerth

October 26, 2018

About the Author
Jonathan Gerth, Esq., is vice president of compliance auditing for Avenu Insights & Analytics. Contact him at Jonathan.Gerth[at]avenuinsights.com.

ALBUQUERQUE, N.M. — The Otero County Board of Commissioners is suing a major Albuquerque-based law firm for legal malpractice, breach of fiduciary duty and breach of contract.

The county claimed in district court filings that Sutin, Thayer & Browne provided an inaccurate tax opinion when the firm served as the underwriter for a municipal bond sale in 2002. The bonds were sold by the county to raise money for what is now the Otero County Detention Center, which houses federal detainees and is privately operated.

Specifically, the county claims the law firm issued an opinion letter stating that interest on the bonds would be exempt from federal income tax for those who held the bonds. In 2016, according to the complaint, the Internal Revenue Service made the opposite determination: that the interest was indeed taxable income.

The county wrote in the filings that, “as a result of such negligence, Otero County incurred damages which include, but are not limited to, the costs of responding to the Internal Revenue Service audit, the cost of converting the interest on the bonds to a higher taxable rate as required by the IRS . . . the additional taxable interest costs incurred by the county . . . and such other damages as may be proved at trial.”

Ben Thomas, president and CEO of Sutin, Thayer & Browne, denied the allegations and said he was confident the firm’s attorneys had acted appropriately.

Daymon Ely, an attorney for the county and a state representative, said the county chose to file the lawsuit now because of issues surrounding the statute of limitations.

The IRS agency determined that the bond interest was taxable because, among other issues, the detention center is operated by the private contractor Management & Training Corp. in a “net profit agreement,” according to what appears to be a partial version of an IRS letter included in the filings. Such a relationship results in “private business use” and makes the bonds ineligible for tax exemption, according to the letter.

Management & Training Corp. did not respond to a request for comment late Monday.

The county is seeking unspecified damages, fees, costs and expenses and interest.

The Albuquerque Journal

By Marie C. Baca

Monday, October 22nd, 2018 at 3:31pm

Opportunity zones will be in the news over the next few months. Since opportunity zones have the potential to affect communities across the state, now is a good time to learn a little bit about what they are, how they might work, and what they may mean for Minnesota communities.

Opportunity zones were created in December of 2017 through a bipartisan effort to guide more investment into low-wealth communities.1 States may designate eligible census tracts as opportunity zones, and taxpayers with capital gains can defer paying taxes on those gains by investing in opportunity funds that support investments in the in opportunity zones. These funds can be used for activities including commercial real estate development, infrastructure, housing, and business development. If an investor stays in an opportunity fund, their capital gains taxes are reduced over time. Additionally, the investor does not pay any tax on the gains earned on the opportunity fund investment if they stay invested for ten years.

Driving private investment in low wealth communities is intended to ensure that places that have suffered from a lack on investment capital are able to benefit and grow. The State of Minnesota designated a range of census tracts as opportunity zones including both urban and rural communities following consultation with local governments.2 However, designating a census tract as an opportunity zone does not mean that any investment will happen in that tract. Decisions about where investment occurs will be based on the interests and needs of the investors. Areas that are attractive targets for investment are those that are likely to have the highest financial returns for investors. This has raised fears that opportunity zones could be an investment vehicle that encourages gentrification and displacement.3 Meanwhile disinvested rural areas are unlikely to attract investment without substantial mission focused effort and targeted efforts by local partners.

Continue reading.

North Star Policy Institute

By Margaret Kaplan | September 6, 2018

Alex Flachsbart credits his founding of Opportunity Alabama, a first-of-its-kind nonprofit dedicated to maximize the impact of the state’s Opportunity Zones, to “being a nerd.”

Last November, he used Ctrl-F to search the Tax Cuts and Jobs Act of 2017 for the term “low income.” In his search, he says, “I stumbled upon the Opportunity Zone program.”

“Opportunity Zones,” passed as part of the $1.5 trillion tax overhaul, were devised to attract capital to urban, suburban and rural areas where investment lagged after the Great Recession. It allows investors to avoid some taxes when they fund projects in designated zones.

This past Friday, the Treasury Department outlined new rules with the intent of giving investors confidence to pour billions of dollars into these economically distressed areas. It’s estimated within community-development circles that these tax incentives could prompt $30 billion of investment across the country. Treasury Secretary Steve Mnuchin told The Hill he thinks it will draw $100 billion of investment into economically distressed areas.

It’s the type of program that Flachsbart, an attorney, felt like Alabama had missed out on in the past.

“Alabama is utterly underserved when it comes to programs targeted toward low-income communities,” he says. Flachsbart rattles off a list: the state has perennially found itself on the “underserved states list” for the New Markets Tax Credit program; only one organization received designation to apply to the New Markets Tax Credit program in the past decade; up until recently there were no strong statewide CDFIs (community development financial institutions) operating across Alabama.

He founded Opportunity Alabama to help build the state’s “underdeveloped” community financing infrastructure, focusing on Opportunity Zones. “We saw this program as an opportunity to get something fundamentally right,” Flachsbart says. “This could finally be our answer to how we can create sustainable funding mechanisms for our low-income communities — if done right.”

Doing things right will be crucial so that Opportunity Zones truly benefit low-income areas. So far the program lacks clear “guard rails,” which would help ensure that existing communities benefit from influxes of capital and are protected against displacement.

Analysts, like those at nonpartisan Urban Institute, have expressed concern that tax incentives could draw investors to finance projects with little benefit to existing residents, like luxury condos or hotels.

Flachsbart says that Opportunity Alabama will serve as an intermediary to facilitate investor access to all potential projects in Alabama’s 158 opportunity zones. “We’re working with every project that comes through the door, whether that be a five-star hotel or a community facility providing daycare services in a super rural area,” he says.

After introducing “projects to investors and investors to projects,” as Flachsbart says, the nonprofit will step back from negotiations and take on the role of independent data tracker. Opportunity Alabama is developing a system — which Flachsbart wants paired with every project in an opportunity zone — so the nonprofit can track its impact and, more broadly, the impact of the program on all of Alabama’s low-income communities.

He also sees Opportunity Alabama’s role as engaging incoming investors in community development strategies, whether that be hiring practices or partnerships with local organizations. Each zone, he knows, will have unique needs. While there’s concern of gentrification and displacement spurred by Opportunity Zones, he points to rural areas of Alabama where the need for jobs is more urgent. “The key will be to engage all the right stakeholders of each community from the beginning,” he says.

Given the state’s lack of a framework for community development financing, much of the nonprofit’s early work has gone to education and awareness around the program. The next step, according to Flachsbart, is working with communities to develop project promotion strategies, build a pipeline of investable projects across the state, and finally cultivate local and national funding networks.

“By the end of the year, I hope Alabama is the first state in the country with a real depth of knowledge in every county, how this works and how to harness this incentive to facilitate community development,” Flachsbart says.

He’s found a willing partner in Birmingham, a city with 24 opportunity zones. The city’s government is creating the Birmingham Inclusive Growth Fund with the intent to attract investments in areas like the Innovation District, Civil Rights District and Fourth Avenue Business District.

While Opportunity Alabama will begin as an intermediary, Flachsbart envisions the nonprofit eventually raising its own capital to build a portfolio of impactful projects across the state.

For now, “we’re building this plane while we’re flying it,” he says. “We’re the only bespoke opportunity zone 501(c)(3) organization in the country. Anyone who wants to pattern this model is welcome to come steal from us.”

NEXT CITY

BY EMILY NONKO | OCTOBER 24, 2018

A real estate developer may have invented a creative twist in project financing—but that innovation is now mired in a tax dispute and litigation.

The trouble centers on the Statler Hotel on Commerce Street in downtown Dallas.

Decades after the Jackson Five and Frank Sinatra performed on its stage and long after it became perhaps the first building to pipe music into its elevators, the structure had fallen into disrepair. It sat vacant for 16 years, its insides rotting, at one point facing demolition as Dallas’ mayor lobbied to raze it and replace it with a park.

Like many U.S. cities, Dallas has worked over the past decades to revitalize its emptied core, to coax businesses to open offices and developers to build residential spaces.

Aiming to spend money to make money, Dallas ramped up economic incentives to encourage development that might spark economic activity. Its first method—issuing bonds and using the proceeds to seed redevelopment projects—sputtered during the financial crisis. So the city revamped the program, says Denise Rappmund, a senior analyst with Moody’s Investors Service, paying incentives for a queue of approved projects.

Today, Dallas’ downtown is thriving. In that sense, the program worked. But the messiness of the Statler project highlights the vulnerability of public finance, as municipalities and states struggle to right lopsided balance sheets where liabilities dwarf revenues.

Centurion American Development Group, a Texas real estate developer, decided to capitalize on the city’s incentives to renovate the Statler and attached and related properties, including the Old Dallas Central Library. In April 2014, Dallas gave the developer a credit of up to $46.5 million in “tax increment financing,” or TIF, basically a property-tax rebate paid out over a set amount of time.

The project’s scope expanded, and a $175 million undertaking grew into a $255 million one. Centurion needed to finance the increased cost. What it came up with was apparently an innovation in municipal finance.

Centurion linked up with conduit issuer the Wisconsin Public Financing Authority, a governmental organization that since 2009 has helped others capitalize on tax advantages to finance quasipublic projects.

Through the investment bank Jefferies and the law firm Orrick, Herrington & Sutcliffe, Centurion assigned its TIF revenues to the Wisconsin authority—functionally selling them—which placed the resulting bonds with an investor. Centurion then received $26.5 million, for $41.5 million in future payments.

TIFs are lent as collateral all the time, but they’ve never been sold, according to the project’s minority owner, Fiamma Statler, another Texas developer working on the project. “No one has ever taken their TIF and then sold it by way of muni bonds for cash now,” says Fiamma’s lawyer Gregory Ziegler of Macdonald Devin.

Developers would love to sell TIFs to get cash at a project’s start, instead of suffering through years of negative cash flow, says Bob Dendy, founder of Elite Financial Management in Dallas, a money manager. “Bundling ’em up and selling them to somebody else at a discounted rate is unique, and may one day be considered ingenious,” he tells Barron’s.

Moody’s rated the bonds Baa3, the lowest rung of investment-grade. The credit-rating agency didn’t have anything to compare it to in its universe of credits because “we don’t rate anything else exactly like it,” says Moody’s senior analyst Rappmund. “What’s different about this was it’s not the city’s TIF issuing this debt—it’s sort of derivative,” she says.

The city of Dallas, in fact, was largely uninvolved.

The creativity initially sparked interest among other developers, Rappmund says, but none of them were as far along in development. That’s important, because for the Statler bond to be paid, the property needed to be operating and generating revenue, with guests arriving and its restaurants humming.

At the time Moody’s reviewed the bonds, the Statler renovation was roughly two-thirds complete.

The project deadline slid, from October 2016 to October 2017, and it opened unfinished. Another extension gave Centurion until this month to complete the project. Tenants moved in; the residences are now about 89% occupied. The Dallas Morning News now operates out of the Old Dallas Central Library. This April, D magazine named the hotel the “community impact deal of the year,” saying it was not just an expensive historic renovation, but a “place to behold.”

Then the Internal Revenue Service took a look at the project’s financing. The agency warned the Wisconsin authority that the issuance “may fail one or more” tax code provisions. In July, the IRS determined that the interest wouldn’t be tax exempt as advertised.

The IRS declined to comment, but those provisions include proceeds going to private use instead of public benefit.

The tax determination, says Dendy of Elite Financial Management, may mean that the buyer of the bonds overpaid by up to $10 million.

The Wisconsin authority is appealing the IRS determination. Andrew Phillips, its lawyer at von Briesen & Roper, underscored that the PFA is simply a conduit, neither underwriting debt nor selling it, and that TIF revenues are unaffected by the IRS determination; the only thing it affects is what PFA pays in interest on the bonds.

But he told Barron’s: “I’ll be perfectly honest with you. I’ve intentionally made it my goal not to know about the Statler project…I just want to make sure PFA comes out of the other side of it.”

In August 2017, the Dallas Morning News reported that the Securities and Exchange Commission was looking into the TIF sale, examining whether investors got full and accurate information and the proceeds were used as promised. The SEC and Centurion declined to comment on the investigation. Lawyers from Orrick, Herrington didn’t return requests for comment.

In August, Fiamma sued Centurion in state court, accusing it of defrauding Dallas taxpayers by using TIF funds for its own benefit and “artificially marking up the cost of construction” to pocket the money, including “falsifying and manufacturing change orders showing phantom increases in the cost of construction.”

Centurion’s lawyer Gregory Shamoun said through a spokesperson, “The lawsuit has no merit and is without basis in law or fact. Centurion is confident that the city of Dallas will successfully defend against this frivolous lawsuit.”

Fiamma owns 20% of the project, but was fired in early 2016 after objecting to using a construction company owned by Centurion CEO Mehrdad Moayedi. Fiamma founder and CEO Frank Zaccanelli says he didn’t even know about the TIF sale. And, he says in the lawsuit, almost all of the proceeds flowed into an entity formed days earlier with no ties to the project except that it’s also owned and managed by Moayedi.

“What should have been a shining example of how the public benefits from public-private partnership redevelopment projects,” the lawsuit says, “has, sadly, proven only to be yet another dark chapter in the sordid tale of Dallas municipal public office corruption, further unjustly enriching yet another wealthy developer with the public’s money at the expense of the taxpayers.”

Representatives for Dallas declined to comment, but Ziegler, Fiamma’s lawyer, says the city has no imminent plans to make the TIF payments. A Jefferies spokesperson declined to comment.

There may be more problems: Texas stipulates that TIF proceeds go to “project costs,” like paying the architect or pouring concrete. But these were booked as a developer’s fee, according to Fiamma’s lawsuit, which may violate the agreement between Centurion and Dallas, the Texas tax code, or statements in the bond offering.

Ramifications reach beyond Texas. The TIFs ended up with an unidentified Wisconsin pension fund, the lawsuit says. Without the tax deduction, the fund could be out millions of dollars.

And for all of the effort to rejuvenate districts and stitch funding gaps, this deal may leave a hole in Dallas tax revenue, and carve a new one in a Wisconsin pension.

Innovative indeed.

Barron’s

By Mary Childs

Oct. 19, 2018 5:26 p.m. ET

Whistleblower petitioned for redetermination of IRS’s decision to deny his application for award for original information made to the Whistleblower Office. IRS moved for summary judgment.

The Tax Court held that whistleblower award was not warranted since the IRS made no adjustments and collected no proceeds.

Whistleblower was not entitled to an award for reporting certain tax-exempt bonds issued by a city’s industrial development agency that he contended violated the general arbitrage yield restriction rules and thus constituted taxable private activity rules, where IRS examined the bonds issued by the agency and the examination was closed without any adjustments and there was no sufficient evidence that any proceeds were collected, as whistleblower merely proffered hearsay about IRS’s alleged malfeasance in other similar cases, which, even if true, was not relevant to the present case.

Owners of commercial piers that crossed county boundary petitioned for writ of mandamus to determine which county was authorized to assess ad valorem taxes.

The Supreme Court of Texas held that:

• Resolving issue was not dependent upon determination of questions of fact, as would have precluded original jurisdiction;
• Mandamus relief was necessary, and thus original jurisdiction was not precluded;
• Issue gave strong and special reason for exercise of original jurisdiction;
• Statute providing original jurisdiction to resolve issue did not violate prohibition on retroactive laws;
• As a matter of first impression, taxes were owed to county from which piers extended; and
  Owners were entitled to mandamus relief.

Determining counties’ legal authority to assess ad valorem taxes on piers that crossed county boundary was not dependent upon determination of any doubtful question of fact, and thus Supreme Court was not precluded from exercising original jurisdiction over mandamus action; even if there were fact issues regarding how much tax was owed by pier owners, those issues were not required to be resolved and did not preclude Court from deciding to which county taxes were owed.

Mandamus relief was necessary as the only reasonably effective relief from double taxation imposed on owners of piers that crossed county boundary, and thus Supreme Court was not precluded from exercising original jurisdiction over owners’ action to determine which county had authority to assess ad valorem taxes; owners had no remedy to double taxation except to pay under protest and wait for one county to obtain judgment that other must refund taxes, which neither county had shown pressing interest in achieving, as boundary dispute litigation had lasted for 46 years.

Issue of which county was authorized to assess ad valorem taxes on owners of piers that crossed county boundary presented questions of general public interest and called for speedy determination, which gave strong and special reason for Supreme Court’s exercise of extraordinary original jurisdiction, and thus Supreme Court had jurisdiction over owners’ mandamus action; even though issues involved only two counties and handful of taxpayers, counties litigated boundary dispute for 46 years and had been double taxing owners for ten years, owners were unable to join counties’ action against each other regarding boundary dispute, and counties’ blatant double taxation was unprecedented.

Statute providing Supreme Court with original jurisdiction to resolve which county had authority to assess ad valorem taxes on piers that crossed county boundary did not violate state constitution’s prohibition on retroactive laws, despite contention that county had vested right to continue litigating boundary dispute in district court; vested-rights test was no longer proper test, statute was jurisdictional, which did not take away substantive rights, and substituting original proceeding in Supreme Court for later review on appeal was not unconstitutionally retroactive.

Ad valorem taxes owed by owners of commercial piers, which extended from land of one county into waters of another county, were due to land county, rather than water county; water county could not practically render services such as fire and police protection to piers, while land county could easily access piers from land, water county could do little, if anything, to improve value of piers or provide public conveniences, as land county could, and right to construct piers sprung from ownership of land bordering shore, rather than submerged lands.

Owners of piers that were subject to double taxation from two counties assessing ad valorem taxes were entitled to mandamus relief, despite contention that county that was not entitled to assess taxes acted in reliance on valid statutes requiring assessment of taxes, which allegedly made taxation a mistake, rather than an ultra vires act correctable by mandamus; tax statutes did not provide county legal authority to assess and retain taxes on piers.

Congress created Opportunity Zones to funnel investment to economically distressed neighborhoods, in its 2017 tax bill. Opportunity Zones offer favorable capital gains treatment for taxpayers who invest in designated low-income communities. While the program was intended to target distressed areas, eligibility was broad—57 percent of all neighborhoods in America qualified—and not all were truly distressed. State governments, which had broad discretion to select from qualifying areas, faced a conflict between selecting deeply distressed areas versus already improving or gentrifying areas that were more likely to provide tax benefits to investors.

We now have a complete list of all areas designated as Opportunity Zones. Some are areas clearly in distress. Others, not so much. That’s a problem for the program’s impact; poor geographic targeting reduces the impact of the program and limits the benefits that accrue to poor residents. While federal criteria helped direct state’s choices to relatively disadvantaged places, in some cases states sought loopholes or picked places that did not need the help. And regulations released in October 2018 allow as much as 30 percent of Opportunity Zone funds to be invested outside of qualified Zones.

As one illustration, some neighborhoods were eligible to be picked as Opportunity Zones because they are college towns, with large numbers of students that make the neighborhood appear poor, even when clearly not disadvantaged. Dozens of neighborhoods that weren’t poor but had many college or graduate students were picked.

Continue reading.

The Brookings Institute

by Hilary Gelfond and Adam Looney

Friday, October 19, 2018