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November 17, 2017

Pending Tax Legislation Update

To date, the U.S. Senate Finance Committee and U.S. House of Representatives have split over whether tax-exempt private activity bonds ("PABs") will be permitted after 2017. Under current law, PABs are used for financing, among other things, affordable housing and facilities for 501(c)(3) entities, including hospitals, universities, museums and social welfare organizations.

The House, which approved its Tax Cuts and Jobs Act (the "House Bill") this afternoon, would eliminate all PABs (both new money and refunding), while the Senate Finance Committee, which released a description of its tax proposal last week (the "Senate Proposal"), would preserve PABs.

Further action is expected soon, with the Senate Finance Committee currently marking up its proposal for possible committee action this week, as well. The full Senate is not expected to consider whatever bill emerges from the Senate Finance Committee until after Thanksgiving.

Both the House Bill and the Senate Proposal also provide for the elimination of all tax-exempt advance refunding bonds after 2017. Under current law, governmental purpose bonds (but not PABs) may be advance refunded one time.

The House Bill, but not the Senate Proposal, further provides for the elimination of all tax credit bonds after 2017. Under current law, tax credit bonds include qualified forestry conservation bonds, new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds and qualified school construction bonds.

If the full Senate ultimately approves a bill consistent with the Senate Proposal, a joint House and Senate conference committee would have to attempt to resolve the differences. Assuming the conference committee could agree on a bill, that bill would then need to be approved by both the full House and the full Senate, and signed by the President, in order to become law.

Some commentators have predicted that any new tax legislation will be adopted no earlier than late in the first quarter of 2018. If correct, this would not necessarily mean that provisions affecting tax-exempt bonds would not take effect until the legislation became law. When Congress last undertook a major change in tax law in the mid-1980s, certain proposals relating to tax-exempt bonds had retroactive effective dates, the existence of which prevented bond issuance after the stated effective dates but prior to enactment of the proposed legislation.

Until and unless definitive clarification is provided by Congress, one consequence of the House Bill with its January 1, 2018 effective date could be to halt all post-2017 issuance of PABs. Neither the House Bill nor the Senate Proposal have any "transition" provisions.

In light of this situation, issuers of PABs and obligors on PABs of conduit issuers should review all pending issues of PABs to see whether the issues could be closed in 2017, under existing law, and thereby avoid the threat of a change in federal tax law. Similarly, any issuer of, or obligor on, outstanding PABs that has been contemplating a refunding should consider whether the refunding could be accomplished this year. We or other public finance professionals can review with you possible means to issue bonds this year.

The House Bill prohibition on the refunding of PABs could also affect the future tax status of outstanding PABs that (i) were purchased by an institutional lender and (ii) are subject to a future interest rate adjustment determined by the lender. If the lender's right to adjust the rate is coupled with an issuer's (or a conduit borrower's) right to prepay, the rate adjustment constitutes a "modification" of the PAB. If a PAB is subject to a "significant" modification, the unmodified PAB is deemed to be exchanged at the time of the modification for a "new" modified PAB, which is deemed issued at the time of the modification.

For purposes of federal tax law, such a "significant" modification and deemed exchange is treated as a current refunding. Hence, under the House Bill, any such modification and deemed exchange after 2017 would result in the interest on the modified PAB losing its tax-exempt status. Generally speaking, an interest rate change of a debt instrument is deemed to be "significant" if the annual yield on the modified instrument varies more than one-quarter of one percent (.25%) from the annual yield on the original instrument.

Institutions that hold any such PABs (and their borrowers) should contemplate whether action can be taken in 2017 to reduce the risk of a possible loss of tax-exemption as a result of a rate modification after 2017.

Please note that a multimodal issue with interest rate reset procedures that rely on market rates ordinarily do not constitute a deemed reissuance.

Under current law, PABs include:

  • qualified 501(c)(3) bonds issued to finance facilities of non-profit medical institutions, colleges and universities, social welfare agencies and other charities;
  • qualified residential rental project bonds used by non-governmental affordable housing developers to finance housing for families and seniors meeting certain income requirements;
  • qualified small issue manufacturing bonds, for financing smaller manufacturing facilities; and
  • qualified exempt facility bonds for financing, despite private business use, airports, water and sewage facilities, and solid waste disposal facilities, among others.

For further information please contact M. Cornelia Cahill at, Garrett E. DeGraff at, Jean S. Everett at or Susan R. Katzoff at


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