post-issuance compliance training tax rules and emma presentations/post...revenue procedure 2016-44)...

POST-ISSUANCE

COMPLIANCE TRAINING:

TAX RULES AND EMMA

WPTA Annual Conference, April 13, 2017

TaxSarah Kuipers, Foster Pepper

Post-Issuance Compliance – April 13, 2017

Tax Discussion Topics

� Purpose of post-issuance compliance policies

� Form of post-issuance compliance policies

� Review of private use rules

� New management contract safe harbors

� Identifying private use issues

� Review of arbitrage rebate rules

� New issue price regulations

� Identifying arbitrage rebate issues

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Purpose of Post-Issuance Compliance Policies

� Revised Form 8038-G

� Line 43: Written procedures relating to “remedial action”

� Line 44: Written procedures relating to compliance with

arbitrage rules

� Responsibility for tax law compliance also falls on conduit

borrower in conduit bond issues

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Purpose of Post-Issuance Compliance Policies (cont’d)

� Provide continuity of attention

� Allow the policies and procedures to survive employee turnover

during the life of the bonds

� Prevent or avoid violations

� Educate users of bond-financed property

� Promote early discovery of violations

� Regular review of federal tax law compliance

� Coordinate review with required EMMA filing deadlines for

practical purposes

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� Ability to exercise remedial action because of a change in

use of bond financed property

� Any permitted redemption or defeasance of non-qualified bonds

must occur within 90 days

� Waiver of 50% penalty on late arbitrage payment

� Requires finding of no “willful neglect,” which may be shown by

following established compliance policies and procedures

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� Potential benefit under IRS Voluntary Closing Agreement

Program (VCAP)

� Information that an issuer must submit includes:

� An affirmative or negative statement as to whether it has adopted

comprehensive written compliance procedures

� Detailed description of the portion of such comprehensive

procedures which relate to the violation

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Form of Post-Issuance Compliance Policies

� No required format

� May be part of general debt management policies or in the

form of separate procedures

� May be adopted formally in writing by governing board or

developed independently by management

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Review of Private Use Rules

� No more than 10% of the proceeds of the bonds, measured

on an annual basis and averaged over the life of the bonds

� No more than 5% of bond proceeds if the use is unrelated to

the governmental purpose of the bonds

� More private business use may be allowed if no payments

are made with respect to the use or if only de minimis

payments are made (10% private payment test)

� Cap of $15,000,000 for all private business use of proceeds

of a single issue

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Review of Private Use Rules (cont’d)

� For buildings, private business use generally is measured by

percentage of space used in private business use averaged

over life of bonds

� May allocate equity to portions of building used in private

business use

� Management contracts that are not qualified can result in

private business use of the entire building

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New Management Contract Safe Harbors

� New management contract safe harbors in Revenue Procedure

2017-13 (modifying and superseding the previously issued

Revenue Procedure 2016-44) apply to any management contract

entered into on or after January 17, 2017

� Issuers may choose to apply new safe harbors to management

contracts entered into before January 17, 2017

� Issuers may apply old safe harbors to management contracts

entered into before August 18, 2017

� New safe harbors more flexible and less formulaic, but may require

more substantive review of the contract terms

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New Management Contract Safe Harbors (cont’d)

� Key changes:

� Service provider cannot bear any net losses from the operation of the property (in

addition to not sharing in net profits)

� Only limitation on term of contract is that it is not longer than the lesser of 30 years or

80% of the economic life of the managed property

� Requirement that issuer must control managed property includes control over rates

charged for the use of the managed property

� Note that Revenue Procedure 2017-13 approves of the following as “reasonable

compensation” (consistent with past guidance):

� compensation based solely on a capitation fee, periodic fixed fee, or per-unit fee;

� incentive compensation based on the service provider’s performance in meeting one

or more standards that measure quality of services, performance, or productivity; or

� a combination of the above.

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New Management Contract Safe Harbors(cont’d)

� New management contract safe harbor requirements:

� Reasonable compensation to service provider not based on a share of net profits

from the managed property (same as prior rules)

� The service provider does not bear any net losses from the operation of the managed

property

� The term of the contract, including legally enforceable renewal options, is not longer

than the lesser of 30 years or 80% of the economic life of the managed property

� The issuer/borrower exercises a significant degree of control over the use of, and

bears the risk of loss with respect to, to the managed property

� The service provider does not receive the benefit of any tax attributes of the

managed property (depreciation, tax credits, etc.)

� The service provider does not have any role or relationship with the issuer/borrower

that substantially limits the issuer/borrower’s ability to exercise its rights under the

contract

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Identifying Private Use Issues

� Examples of arrangements that can result in private use

include:

� Private ownership

� Nonqualified management and service contracts

� Leases, including cell tower leases

� Naming rights

� Preferential rates for certain customers

� Use by federal government and nonprofits on preferential basis

� Certain “take” and “take or pay” contracts for “output facilities”

� Keep records of any contracts providing special legal

entitlements to use property

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Identifying Private Use Issues (cont’d)

� Examples of arrangements that are not private use include:

� General public use

� Use by a natural person not engaged in a trade or business

� Use by another state or local governmental entity

� Use according to a uniformly applied rate schedule

� Qualified management and service contracts

� Certain short-term uses

� Incidental use, such as advertising displays and vending

machines

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Identifying Private Use Issues (cont’d)

� Educate users of property

� Includes persons with authority to propose:

� Any lease of the property

� Operation or the property under a management or service contract

� Any sale or other disposition of all or any part of the property

� Involve legal counsel when new use arrangements proposed

� “Was this property financed with tax-exempt bonds?”

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Review of Arbitrage Rebate Rules

� Arbitrage and Rebate rules apply to:

� Earnings on investments of bond proceeds prior to being spent

� Earnings on investments of certain revenues set aside to pay

bonds

� Rebate excess of amount earned over what would have been

earned if invested at bond yield

� Rebate amounts not likely earned on investments of bond

proceeds since 2008, but future investment rates could be

higher – e.g., on reserve fund investments held during the life

of the bonds

17


Review of Arbitrage Rebate Rules (cont’d)

� Timing for Rebate Computation - at least every five years from

issue date

� May calculate earlier upon final expenditure of all bond proceeds

� Upon final maturity or early redemption of all bonds

� Form 8038-T and payment due within 60 days after the

computation date

� Yield reduction or rebate is only necessary if you cannot show

that interest earned was below the bond’s arbitrage yield

18


New Issue Price Regulations

� Affect the determination of “issue price” of bonds, which is used to

determine bond yield for arbitrage purposes

� General rule for bonds issued for money is the same

� Treas. Reg. §1.148-1(f)(2)(i) provides that the issue price of bonds issued

for money generally is the first price at which a substantial amount (10%) of

the bonds is sold to the public

� If a bond is issued for money in a private placement to a single buyer that is

not an underwriter or a related party to an underwriter, the issue price of the

bond is the price paid by that buyer

� Issue price is not reduced by any issuance costs

19


New Issue Price Regulations (cont’d)

� Reasonable Expectations/Hold-the Offering Price Rule: may treat

initial offering price to public as issue price if:

� lead or sole underwriter provides a certification, together with

supporting documentation, that underwriter(s) offered bonds to the

public at a specified initial offering price on or before the sale date;

and

� underwriter agrees in writing that it will neither offer nor sell the

bonds to any person at a price higher than the initial offering price

during the period from sale date to the earlier of (1) the close of the

fifth (5th) business day after the sale date, or (2) the date on which

underwriters have sold at least 10% of the bonds of that maturity at

a price no higher than the initial offering price of that maturity

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� Competitive Sale Rule: issuer may treat reasonably expected initial offering

price to the public as of the sale date as the issue price if issuer obtains a

certification from the winning bidder regarding the reasonably expected

initial offering price to the public upon which the price in the winning bid is

based

� “competitive sale” must meet these requirements:

� issuer disseminates notice of sale to potential underwriters in a manner

reasonably designed to reach potential underwriters;

� all bidders have an equal opportunity to bid;

� issuer receives bids from at least three underwriters of municipal bonds

who have established reputations for underwriting new issuances; and

� issuer awards sale to the bidder who offers highest price or lowest interest

cost

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� Forthcoming guidance from NABL and SIFMA regarding how to

modify form documents (including BPA, notice of sale, certifications)

to comply with the various rules

� Effective date: bonds sold to public on or after June 7, 2017

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Identifying Arbitrage Rebate Issues

� Maintain records for life of the bonds (including refunding

bonds) plus three years

� Records to be maintained include

� Bond transcript

� Purchases and sales of investments made with bond proceeds and

receipt of earnings on those investments

� Records showing how bond proceeds were spent: purchase

contracts, construction contracts, invoices and records of

“allocations”

� Records showing how bond-financed property used

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EMMAStacie Amasaki, Foster Pepper


Securities Law Discussion Topics

� Disclosure policies

� Rule 15c2-12

� EMMA review

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Disclosure Policies

� Policies designed to reduce chance of failing to comply with

requirements and establish a defense of reasonable care

� Policy can avoid “silo” effect where facts known by one

department are not known by finance department

� Internal working group review and diligence

� Subject matter review

� Senior official review

� Outside consultants

� SEC has indicated if it investigates an issuer it will look more

favorably if the issuer has a disclosure policy

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Disclosure Policies (cont’d)

� National Association of Bond Lawyers has provided guidance

on policies

� Policies should be tailored to the size, complexity and other

features of particular issuers

� Policies should cover

1. Types of disclosures covered

2. Process involved in disclosure and documenting compliance

3. Adequate supervision and disbursement of responsibilities

4. Training

� Tailor the policy to your situation and adopt something you

expect to be able to comply with

27


Rule 15c2-12

� Applies to public offerings >$1 million

� Does not apply to private bank loans

� Prior to purchase, underwriter must obtain and review official

statement

� Underwriter must obtain undertaking to provide disclosure

� Annual disclosure of financial information and operating data

� Timely disclosure of listed events

� Official statement must disclose past noncompliance with

prior undertakings

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Listed Events

� Principal and interest payment delinquencies

� Non-payment related defaults

� Unscheduled draws on debt service reserves reflecting financial difficulties

� Unscheduled draws on credit enhancements reflecting financial difficulties

� Substitution of credit or liquidity providers, or their failure to perform

� Adverse tax opinions or events affecting the tax status of the security

� Modifications to the rights of holders of the security

� Bond calls (other than scheduled mandatory redemptions of Term Bonds) and tender offers

� Defeasances

� Release, substitution or sale of property security repayment of the security

� Rating changes

� Bankruptcy, insolvency, receivership or similar event of the issuer

� Merger, consolidation or acquisition involving the issuer or sale of all/substantially all of the

assets of the issuer

� Appointment of a successor or additional trustee

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Proposed Amendments to Listed Events

� On March 1, 2017, SEC issued proposed amendments to Rule 15c2-12

� Amendments would add to the list of events requiring an issuer or

obligated person to file on EMMA:

� Incurrence of a financial obligation of the issuer or obligated person, if

material, or agreement to covenants, events of default, remedies, priority

rights, or other similar terms of a financial obligation of the issuer or

obligated person, any of which affect security holders, if material; and

� Default, event of acceleration, termination event, modification of terms,

or other similar events under the terms of the financial obligation of the

issuer or obligated person, any of which reflect financial difficulties.

� SEC is currently taking comments on proposed amendments

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EMMA Review

� emma.msrb.org

� Things to have handy when preparing to file on EMMA

� MSRB/EMMA User ID and password

� 6-digit “base” CUSIP number(s)

� Document(s) and information to be filed (in word searchable .pdf)

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Walk-Through of an EMMA Filing

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Where Your Filings Go…

33


MSRB/EMMA Resources

� MSRB website – www.msrb.org/EducationCenter.aspx

� “Disclosing Information to Investors”

� Periodic webinars

� Tutorials

� Fact sheets

� “How-to” .pdfs

� Bond counsel

� Financial advisors

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