Louisiana Law Blog

By Angela W. Adolph

The Gulf Opportunity Zone Act of 2005 (the “Act”) added several new sections to the Internal Revenue Code that provide certain tax benefits for affected hurricane disaster areas. Section 1400N(a) authorized the issuance of Qualified Private Activity Bonds (“Qualified Bonds”) to finance the construction and rehabilitation of residential and nonresidential property located in the Gulf Opportunity Zone (“GO Zone”). The Act gave private business owners and corporations the opportunity to borrow capital at favorable tax-exempt rates to acquire, construct, reconstruct or renovate qualified property in the GO Zone. The deadline for the issuance of GO Zone Bonds was extended through the end of 2011. However, the Act did not address the current refunding of Qualified Bonds after the applicable issuance deadline had passed.  

In a refunding, an issuer sells bonds and uses the proceeds to redeem outstanding debt that typically has higher interest rates. In a current refunding, the issuer uses the refunding bond proceeds to redeem the outstanding debt within 90 days. On December 23, 2011, the Internal Revenue Service released an advance copy of Notice 2012-3, which provides guidance on current refunding of outstanding prior issues of Qualified Bonds, including GO Zone Bonds and Hurricane Ike Bonds.

A current refunding of Qualified Bonds that meets the conditions of Notice 2012-3 may be issued after the applicable deadline and still be treated as Qualified Bonds. The conditions include that the original Qualified Bonds must have been issued before the deadline for the issuance of such bonds. The issue price of the current refunding issue must be no greater than the outstanding stated principal amount of the refunded bonds. And, the current refunding issue must meet all applicable requirements for the issuance of tax-exempt private activity bonds, including that the average bond maturity must be no longer than 120 percent of the average reasonably expected economic life of the facilities financed or refinanced.

Additionally, as long as the original Qualified Bonds satisfied the designation requirement, no further designation or official state or local governmental action is required for a current refunding of such bonds.

Notice 2012-3 will appear in Internal Revenue Bulletin 2012-3, dated January 17, 2012.

By Angela W. Adolph

The Internal Revenue Service (the “Service”) released a Private Letter Ruling (“PLR”) earlier this year addressing private business use of a mixed-use output facility and whether tax-exempt bonds could be used to finance improvements to the facility.  The Issuer, which is a political subdivision of a state, owns electric generation, transmission and distribution facilities that are managed by a non-governmental electric cooperative (“NGEC”) pursuant to several contractual arrangements.  Under a power sales contract, the Issuer has the right to schedule or take the portion of power generated by the facility equal to the percentage of the facility’s net rated capacity reserved by Issuer for that year.  If the Issuer does not schedule or take all the output from its reserved portion of the facility’s net rated capacity, it must offer the unused output to the NGEC before offering to third parties.   The governing body of the Issuer establishes and approves the rates for power produced from Issuer’s reserved net rated capacity of the facility and sold to the Issuer’s customers. Under an operating agreement with the NGEC, the Issuer reimburses the NGEC for its share of the actual and direct expenditures incurred by the NGEC in the operation and maintenance of the facility.  The Issuer’s share of expenses is determined by its reserved percentage of the facility’s net rated capacity.

The Issuer expects  to finance capital improvements to the facility, the costs for which will be allocated between the  Issuer and the NGEC on the basis of their respective reservations and allocations of the net rated capacity of the facility.  The Issuer intends to issue tax-exempt governmental bonds to finance its portion of the improvement costs.  The Issuer represents that, while the bonds are outstanding, it will (a) maintain its reserved net rated capacity and (b) take a sufficient amount of the total energy generated at the facility so that no more than 10% of the facility’s improvements that are to be financed with the bonds will used for private business use.

The Service first considered whether the facility constitutes public utility property under Section 168(i)(10) of the Code.  “Public utility property” means property used predominantly in the trade or business of the furnishing or sale of electrical energy (among other things) if the rates for such furnishing or sale have been established or approved by a state or political subdivision thereof.  Because the facility consists of property used predominantly in the trade or business of furnishing or sale of electricity and the Issuer establishes and approves rates for electricity provided by the Issuer from its reserved share of the net rated capacity of the facility, then, to the extent of such share, the facility constitutes public utility property. 

Under the Advance Notice of Proposed Rulemaking, 2002-2 C.B. 685 (the “Advance Notice”), tax-exempt  bonds may be issued to finance costs attributable to the government use portion of a mixed-use output facility, plus any costs attributable to permitted de minimis private business use.  The government use portion is determined based on the percentage of the available output of the facility that is not used for a private business use.  The available output is determined by multiplying the number of units produced or to be produced by the facility in one year by the number of years in the measurement period of that facility for that bond issue.    The number of units produced or to be produced in one year is determined by reference to nameplate capacity or its equivalent, which is not reduced for reserves, maintenance or other unutilized capacity.  See Treas. Reg. Sec. 1.141-6 and 7.

The Service noted that the allocation of output based upon reserved net rated capacity under the power sales contract is the equivalent of an allocation based on available output of the facility.  Thus, the government use portion of the facility consists of the Issuer’s portion of the net rated capacity of the facility less the NGEC’s purchases of non-scheduled or taken output and any other private business use.  Therefore, the Issuer may issue bonds in an amount to cover the costs of the government use portion of the facility and its improvements plus any costs attributed to permitted de minimis private business use.

Additionally, since only actual and direct expenses incurred in the operation and maintenance of the Issuer’s share of the facility are payable to the NGEC for its management of such share under the operating agreement, the operating agreement is not treated as a management contract that results in private business use by the NGEC.  See Treas. Reg. Sec. 1.141-3.

By Angela W. Adolph

In September 2011, the IRS revised Form 8038-G, which is the information return that issuers must file in connection with issuance of tax-exempt governmental obligations. The revised form includes two new questions regarding whether the issuer has effected written procedures to verify compliance with certain rules.

First, on line 43, the IRS asks whether “the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements of the Code and Regulations…” If the issuer takes a deliberate action after the issue date that causes the conditions of the private business tests or the private loan financing test to be met, then such issue is also an issue of private activity bonds. Section 1.141-2(d)(3) of the Regs defines “deliberate action” as any action taken by the issuer that is within its control regardless of whether there is intent to violate such tests. Section 1.141-12 sets forth the conditions for taking remedial actions that prevent an action that otherwise causes an issue to meet these tests from being classified as a “deliberate action.”

Next, on line 44, the IRS asks whether “the issuer has established written procedures to monitor the requirements of Section 148.” Section 148 addresses arbitrage, yield restriction, and rebate requirements.

These new questions do not create new rules or impose new obligations on issuers. However, issuers’ failure to implement written procedures could increase the risk of audit.
 

By Angela W. Adolph

The Internal Revenue Code restricts the amount of private business use that can occur in facilities financed with tax-exempt bond proceeds, but there are a number of exceptions to this general rule. Certain facilities (“exempt facilities”) that are privately used are eligible for tax-exempt bond financing if they benefit the general public or implement specific Congressional policies. In August, the IRS issued final regulations for determining whether a facility is a “solid waste disposal facility” that qualifies for tax-exempt bond financing.

By Angela W. Adolph

Last week, the United States Department of the Treasury announced the approval of applications from Louisiana and a handful of other states for State Small Business Credit Initiative (“SSBCI”) funding. The SSBCI is an important component of the Small Business Jobs Act (“the Act”) that was signed into law last fall. This funding is intended to provide support to state-level programs, and is designed to generate billions in additional small-business lending and help create new private sector jobs.

Under the Act, these states’ programs may receive a total of $360 million in SSBCI funds. Under the SSBCI, states must demonstrate a reasonable expectation that each $1 in federal funding will generate a minimum of $10 in new private lending. Accordingly, this $360 million allocation is expected to support more than $3.6 billion in new private lending.

The states approved for SSBCI funding are: Alabama ($31.3 million), Florida ($97.7 million), Idaho ($13.2 million), Iowa ($13.2 million), Louisiana ($13.2 million), Mississippi ($13.2 million), Ohio ($55.1 million), Oregon ($16.5 million), Tennessee ($29.7 million), Texas ($46.6 million), Virginia ($18.0 million), and Washington, D.C. ($13.2 million).

The Louisiana Department of Economic Development will use its funds to support two existing programs: the Louisiana Small Business Loan Guarantee Program and the Louisiana Seed Capital Program, a venture capital program.
 

By Angela W. Adolph

In today’s political and economic environment, in which public resources available for infrastructure development and maintenance are increasingly scarce, Public-Private Partnerships (PPPs) offer a welcome alternative to traditional financing and operation models. A PPP is a contractual agreement between a public agency (federal, state or local) entity and a private sector entity to deliver a service or facility for public use. The Louisiana Supreme Court has recognized the public benefits of PPPs, finding that “public-private partnerships that take advantage of the special expertise of the private sector are among the most effective programs to encourage and maintain economic development, and that it is in the best interest of the State and its local governments to encourage, create, and support public-private partnerships.” See Board of Directors of Indus. Devel. Bd. of City of Gonzales, Louisiana, Inc. v. All Taxpayers, Property Owners, Citizens of City of Gonzales, 938 So.2d 11, 17 (La. 2006).