Specific Issues for Consideration by Banks, Financial Advisors and 501(c)(3) Organizations arising from the Proposed Tax Cuts and Jobs Act

Some of the potential impacts of the proposed Tax Cuts and Jobs Act (the “Act”), as currently drafted and described in our prior alert are summarized below for consideration.

  1. Draw-down bonds with an outstanding amount to be drawn may need to be drawn and/or escrowed prior to the effective date of the Act (currently proposed as December 31, 2017) to avoid potential characterization of post-effective date draws as newly issued bonds. There is some support for the concept that each draw of a draw-down bond is a separate issue, and consequently there is the possibility that after the effective date of the Act, draws could be deemed to be new issues and not eligible to be tax-exempt.
  2. Borrowers and banks may want to consider amending, before the effective date of the Act, any bank-held bonds that bear interest based upon LIBOR with no alternative rate stated in the existing bond documents to allow for a specific alternative rate when LIBOR is no longer available. Alternative rate amendments made after the effective date of the Act may trigger a reissuance (at which time the bonds could be deemed taxable) if transitional rules do not provide relief for reissuances of existing tax-exempt bonds. See “A note on the history of transitional rules” below.
  3. Borrowers and banks alike will want to examine how a decrease in the corporate tax rate would affect the interest rate under existing bond documents. Banks should review their existing bond documents to determine exactly what rights they have in connection with such a decrease. If the bank waives any adjustment or there is discretion involved in implementing any adjustment, that may trigger a reissuance and, if not permitted under the Act, may make the bonds taxable. Banks should examine their policy on this and determine if they will require amendments to any provisions now to avoid reissuances after the effective date of the Act in case the Act as ultimately enacted does not allow reissuances of existing tax-exempt bonds.
  4. Any entity that was considering an advance refunding in the near term or any 501(c)(3) organization considering a current refunding in the near term may want to accelerate it to close prior to the effective date of the Act. A rush to the market to issue prior to the effective date of the Act, however, could drive interest rates up, eliminating the savings necessary to justify the refunding.
  5. 501(c)(3) organizations should consider examining budgets for future fiscal years if they contemplated any issuances of tax-exempt debt and prepare for a potential increase in capital costs as a result of the potential inability to access the tax-exempt market.
  6. Banks holding bonds that have a periodic put provision, which allows a bank to re-price as of the put date, should review their existing bond documents for potential issues with reissuances if transitional rules do not provide relief for reissuances of existing tax-exempt bonds. Similarly, borrowers of proceeds of variable rate demand bonds that are currently in the variable rate mode and allow the borrower to fix the rate should also review existing bond documents to determine whether an election to fix the rate after the effective date of the Act would trigger a reissuance that would cause the bonds to be taxable.

Background on the process of enacting the proposed tax reform legislation:

The Act originated from the House Committee on Ways and Means, which is the first step to enactment of tax reform legislation.  As input is received from various sources, including members of Congress, the Treasury, the Internal Revenue Service (IRS) and others, amendments may be made. The Senate Finance Committee has stated it will also draft its own bill addressing tax reform issues. The Joint Committee on Taxation (comprised of members from both the House of Representatives and the Senate) with input from both Chambers of Congress; the IRS and Treasury will then attempt to reach a final bill for approval by both Houses. In prior years, a Conference Committee formed from the Joint Committee, the so called Conferees, and the Conferees then drafted a Conference Report, which became the final bill. The current proposed bill’s tax-exempt bond provisions contradict what had previously been told to the tax-exempt bond community and, consequently, may receive increased scrutiny from Treasury.  

A note on the history of transitional rules:

In many cases in the past, final transitional relief was added by the final Conference Committee. Virtually all major tax legislation over the last 40 years has contained transitional relief, routinely allowing current refundings or reissuances of previously issued bonds affected by the legislation, subject to limitations on amounts and weighted average maturity changes. Though prior tax legislation has included transitional relief, whether the Act in its final form will contain similar relief and the exact content of such transitional relief remain unknowable at this point. Thus, we have provided this list of issues for consideration pending Congressional enactment so that banks, financial advisors and 501(c)(3) organizations are aware of the complicated issues arising from the Act and are in a better position to consider appropriate responses if transitional relief is not provided or insufficient to address one or more of the foregoing issues.

This blog was written by Melissa Messina at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.