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The U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) announced the withdrawal of proposed regulations to re-define the term “political subdivision” under § 103 of the Internal Revenue Code (“IRC”) for purposes of determining which public entities are eligible to issue tax-exempt obligations such as municipal bonds. The proposed regulations would have added significant new criteria to the definition that could eliminate the recognition of many special taxing entities created under state law and currently authorized to issue tax-exempt bonds.

§ 103(a) of the IRC provides that, subject to certain exceptions, gross income does not include interest on any state or local bond. § 103(c)(1) defines “state or local bond” as an obligation of a state or political subdivision thereof. Current Treasury Regulations define the term “political subdivision” as “any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit.” These “sovereign powers” include: taxation, eminent domain, and police power. Under current regulations, authority for only one of the three powers was sufficient to confer status on the public entity.

The proposed regulations would have added to existing requirements various layers of supplemental tests. These include: whether the entity serves and actually carries out a governmental purpose; whether the entity is subject to oversight and control by a state or local government body; whether the entity operates in a manner that provides a significant public benefit with no more than incidental private benefit; and, if governed by electors (rather than a local governing body), whether the controlling electors are sufficiently large and diverse so as not to constitute “an unreasonably small number of private persons.” Most of these determinations would have been subject to “facts and circumstances” guidance and tests, by necessity, arrived at over time.

Current regulations recognize that various state-created political subdivisions “may or may not” satisfy existing sovereign powers criteria. Applying applicable tests, however, many Missouri and Illinois public entities including Community Improvement Districts (“CIDs”) and Transportation Development Districts (“TDDs”), as well as various road, water, drainage, and levee districts have been recognized as exercising requisite sovereign powers. Under supplemental tests contained in the proposed regulations, many of these entities could have lost the ability to issue tax exempt obligations, increasing their financing costs and potentially impairing their core missions. Under even the best circumstances, uncertainty resulting from imposition of these proposed regulations would likely have caused significant disruption in municipal finance markets.

Although originally offered in 2016, the proposed regulations were re-visited under Executive Order 13789 (Identifying and Reducing Tax Regulatory Burdens). During the review period many commenters argued that the proposed regulations would force costly and burdensome changes in entity structure to meet the new requirements and that existing requirements that a “political subdivision” possess sovereign powers were sufficient. In withdrawing the proposed regulations, Treasury and the IRS now believe that because of the far-reaching impact on existing legal structures the proposed regulations are not justified. However, Treasury and IRS continue to believe that some enhanced standards for qualifying as a political subdivision may be appropriate and may propose more targeted guidance in the future after further study.

In its opposing comments, the National Association of Bond Lawyers (“NABL”) noted that the genesis of the proposed regulations stems from a determination in an IRS examination that two community development districts in Florida, although created by state statute as political subdivisions, were not eligible to issue tax-exempt bonds. This position was solidified and its reach expanded in the subsequently released Technical Advice Memorandum 201334038 (the “2013 TAM”).

Although the proposed regulations have been withdrawn, the 2013 TAM apparently remains in effect. Thus the status as “political subdivisions” under IRC Section 103 of various entities, particularly those CIDs and TTDs which are subject to developer control, remains in question. Given the importance of this issue to the tax-exempt bond community generally and to various affected public entities specifically, community leaders in Missouri and Illinois would do well to remain vigilant to this issue, particularly to any future similar regulations or guidance Treasury or IRS may propose. For more information, feel free to contact Tom Cunningham at tom@municipalfirm.com.




In the past, many communities have “stacked” sales taxes by enacting more than one version of the same tax. See, for example, an article by CVR’s Dan Vogel entitled The Truth About “Sales Tax Stacking” appearing in the Missouri Municipal Review, June 2009 edition. In its most recent session, the Missouri General Assembly passed a series of unique “stacking” caps and limitations on municipal general sales taxes and certain county additional, special purpose sales taxes.

The language affecting these sales taxes was contained in SB 49, ostensibly pertaining to the St. Louis City-County zoo tax. Relevant portions of the bill amend § 95.510.2 of the Revised Statutes of Missouri by adding the following language: “Beginning August 28, 2017, no city shall submit to the voters any proposal that results in a combined rate of sales taxes adopted under this section in excess of two percent.” The bill also amends § 67.547 of the County Sales Tax Act to provide that: “Beginning August 28, 2017, no county shall submit to the voters any proposal that results in a combined rate of sales taxes adopted under this section in excess of one percent.” In addition, the bill prohibits submittal to the voters of any sales tax proposed under § 67.547 for a two year period from the date of any previous election under this section “regardless of whether the initial proposed sales tax was approved or disapproved by the voters.” (SB 49, 99th General Assembly, 1st Reg. Session (2017)).

Although curiously written, the caps effect only the general municipal sales tax found in §§ 94.500 to 94.550 and the county additional sales tax authorized in § 67.547. Other sales taxes, such as capital improvement sales taxes (which are also frequently stacked), are not affected. The St. Louis County Sales Tax found in §§ 66.600 to 66.630 and sales taxes imposed by municipalities in St. Louis County authorized in §§ 94.850 to 94.857 remain similarly unaffected.

The stacking caps are prospective only; existing sales taxes in excess of the caps are not affected. However, if existing municipal sales taxes have a sunset provision they may not be renewed if passage by the voters would put the total sales tax under § 94.510 over the 2% limit.




The 8th Circuit Court of Appeals recently ruled in favor of Twin Oaks, Missouri in a lawsuit (Havlack v. Village of Twin Oaks, (8th Cir. July 26, 2017)) that challenged Twin Oaks’ ordinance requiring a license for commercial activity in the city park. The Twin Oaks park has many photogenic features, including a gazebo, waterfall, bridge, and other garden structures. The park became an attraction for commercial photographers. To protect the park from excessive commercial activity and its effects, and to balance the interests of all park patrons, Twin Oaks passed an ordinance prohibiting all commercial activity in the park without a permit. The ordinance required a $100 fee for the permit, and an application period of either 48 hours or 14 days (depending on the size and duration) in advance of the activity. The plaintiff, a commercial photographer, filed a lawsuit claiming the ordinance violated her First Amendment rights. The Court rejected the photographer’s claim and found that even if plaintiff’s photography was protected speech, the ordinance was a reasonable regulation. In rejecting the plaintiff’s challenge, the Court explained that the demonstrated intent behind the licensing ordinance was not to burden speech, but to address legitimate concerns, including safety. The Court also disagreed with the photographer’s contention that the application periods “chilled” artistic expression and that the $100 fee was too high. The advance application periods enabled the Board to adequately review and process permit applications, and the $100 fee offset administrative costs and the cost of having a police officer present in the park during the commercial activities. The Court also noted that the ordinance did not allow Twin Oaks unlimited discretion in reviewing the permits, because it contained standards and objective factors to be considered.