Bonds

Montana will end the state tax exemption for certain bonds

Bond issuers in Montana and Texas have separately reported an adverse impact on the tax-exempt status of their bonds in new public disclosures with the Municipal Securities Rulemaking Board.

In Texas, the MSRB filing involved Series 2015 El Paso County General Obligation Refunding Bonds.

The Internal Revenue Service sent a letter dated April 28 informing El Paso County of a preliminary determination that the bonds are taxable retroactively to the date of issuance.

The reason given by the IRS is alleged noncompliance with Section 149(g) of the Internal Revenue Code, which prescribes timely expenditure of tax-exempt bond proceeds, and Treasury Regulation 1.148-10(c), which prescribes limitations on the gross proceeds generated with advance refunding bonds.

“This is a preliminary determination, not a proposed adverse determination or a final determination,” El Paso said in its filing.

In Montana, two school districts and the state government reported that a new state law signed by the governor on May 6 will end the state tax deduction for certain school bonds after 2023 if those bonds are federally taxable.

“The interest on most Montana municipal bonds is exempt from federal income tax and therefore such bonds are not impacted by this legislative change,” Billings Public Schools said in its public filing.

However, the termination of the federal tax deduction for advance refundings in combination with low interest rates has led to an increase of federally taxable issuances.

There also are federally taxable direct-pay bonds that were issued 10 or more years ago.

The Billings, Montana school district reported Monday that the Montana Legislature’s action will end the deduction from state income taxes for seven series of bonds.

Montana taxes income at a 5% to 6.9% rate beginning with a taxable income of $11,000.

The Billings bond issuances include direct-pay Qualified Zone Academy Bonds, Qualified Energy Conservation Bonds, and Qualified School Construction Bonds from 2010 and 2012.

The most recent issuance is $81.3 million in Series 2021 General Obligation Refunding Bonds.

The Gallatin County issuance is $3.5 million in 2011 Qualified School Construction Bonds.

Gallatin County noted in its filing Friday that the state legislature meets biennially.

“Changes to the state’s income tax provisions have been and will continue to be proposed and considered throughout each legislative session,” Gallatin County stated. “It cannot be predicted if changes will be adopted in the 2023 session or any future sessions that would change the tax treatment of interest on bonds as detailed in SB 399.”

The Montana state bonds are $24.865 million in Taxable Series 2020J general obligation bonds issued for the Water Pollution Control State Revolving Fund Program.

So far this calendar year there have only been two other IRS related EMMA database public disclosure filings.

One involved an IRS audit of $28.6 million in 2012 general obligation refunding bonds issued by the city of Winchester, Virginia. The bonds were used for a tax-exempt advance refunding of bonds issued in 2001, 2004, 2005, and 2006.

The other involved a preliminary IRS determination that 2017 tax-exempt refunding bonds for the Santa Cruz Jail District in Arizona for county jail and law enforcement center should be treated as retroactively taxable.

The IRS said in a March 10 letter the $29.5 million in jail refunding bonds issued in 2017 by Santa Cruz County meet the private business use and private payments test that make them taxable because part of the facility is under contract to house federal prisoners.

The Tony Estrada Law Enforcement Center adjoining the Santa Cruz County Courthouse is a 100,000-square-foot facility in Nogales that began housing prisoners in March 2011. Nogales is located along the southern border of Arizona adjacent to its much larger Mexican sister city of Nogales, Sonora.