PHOENIX — Lawyers generally agree that the existence of pending federal legislation that could affect the tax-exempt status of bonds needs to be disclosed, while the decision about whether to issue a clean opinion is less clear.
The issue arises from provisions of tax reform legislation that was passed by the House on Nov. 2 and is pending before the Senate, with a vote by that chamber possible later this week.
The House bill would terminate private activity bonds, advance refunding bonds by the end of the year. It would also prohibit tax-exempt bonds from being used for professional sports stadiums and arenas by Nov. 2, 2017. The bill in the Senate would terminate advance refunding bonds by the end of the year. It would retain PABs and even enhance them by eliminating the alternative minimum tax.
Republicans are trying to get the tax bill through the Senate and then resolve differences between the bills in the House and Senate through negotiations without having to go through a formal conference. They would like to have a final tax bill on President Trump's desk by Christmas, though it remains to be seen whether they can do that. If tax bill deliberations go into next year, the bills will have retroactive effective dates.
Bond lawyers are wrestling with how to approach their roles in writing opinions that such deals are taxable if the law is still pending and still contains those provisions in another month.
Howard Zucker, a partner at Hawkins Delafield & Wood in New York City has circulated a memo stating that bond counsel would be hard-pressed to issue clean opinions for securities that would be affected by eventual passage of the bill in its current form. Zucker cited a May 2000 piece published by the National Association of Bond Lawyers during his presidency of NABL in which the group laid out its opinion on retroactive legislation in the tax-exempt market.
“Buyers will not purchase bonds bearing a tax-exempt rate of interest unless the bonds are accompanied by an unqualified opinion of bond counsel that interest on the bonds is excluded from gross income for federal income tax purposes,” NABL said then. “Bond counsel cannot render a customary unqualified opinion regarding the tax-exempt status of interest on the bonds if a bill that would adversely affect that status is pending with a retroactive effective date. The bonds may be exempt from tax under existing law, but bond counsel's opinion must be qualified by reference to the pending bill and its retroactive effective date.”
Zucker said he thinks that in a case where such legislation remains pending, such deals are basically unable to move forward at all because bond counsel can’t give a clean tax opinion and an opinion qualified by reference to the pending law would make the bonds unmarketable.
“Investors won’t take that risk,” Zucker said.
Some other lawyers agreed.
“The effective date provisions in the pending tax legislation are problematic and while they might ultimately change, there is a significant risk that they might not,” said Darren McHugh, a shareholder at Stradling Yocca Carlson & Rauth in Denver. He said he has not yet had to deal with a potentially affected deal, but believes firms would feel unable to proceed with the legislation still pending.
“I think that firms would refuse to render bond opinions on those types of transactions,” he said.
Roger Davis, chair of the public finance practice at Orrick, Herrington & Sutcliffe in San Francisco said that lawyers could still issue clean tax opinions as long as the potential risk is disclosed in the offering documents. But he also agreed that the marketability of the bonds would be adversely affected.
“The bond opinion speaks as of its date and as of its date in your hypothetical the law still supports tax exemption,” Davis said. “The fact that there is pending legislation that, if enacted in its current form and effective date, would change the law upon which that tax exemption depends is a disclosure matter. That disclosure will be in the official statement and may also appear in the opinion. We don’t think the occasion will arise a lot because it will be difficult to sell bonds with that risk and disclosure, although there will be some special situations where this issue will arise.”
Some market participants have said they expect a rush of deals in December heading to market to make it in ahead of the effective date. It remains to be seen whether any or all of the House and Senate bill provisions will remain in any final legislation.