Opinion ID: 4466387
Heading Depth: 3
Heading Rank: 1

Heading: Private Activity Bonds

Text: Under 26 U.S.C. § 103(a) of the Internal Revenue Code (“Code”), interest on state or local bonds is generally not subject to federal taxation. 26 U.S.C. § 103(a). However, a PAB issued by state or local governments to finance private activities is not tax-exempt unless it is a “qualified bond.” Id. § 103(b)(1). As the District Court explained: Congress has authorized interest earned on certain types of PABs to be exempted from federal taxation. See 26 U.S.C. §§ 103, 141. Because this exemption allows the bondholder to keep all the interest, bond issuers can sell the bond at a lower interest rate. . . . 5 Section 141 outlines certain types of PABs that can constitute “qualified bond[s],” including “exempt facility bond[s].” Id. § 141(e)(1)(A). Under § 142(a), a bond is an “exempt facility bond” if at least 95% of proceeds from its issue are used to finance one of fifteen enumerated categories of projects. Id. § 142(a). One such category is “qualified highway or surface freight transfer facilities.” Id. § 142(a)(15). Section 142(m) defines “qualified highway or surface freight transfer facilities,” id. § 142(m)(1), and authorizes the Secretary of Transportation, “in such manner as [she] determines appropriate,” id. § 142(m)(2)(C), to allocate up to $15 billion of PAB authority to eligible projects, id. § 142(m)(2)(A). Put simply, Congress has enacted a mechanism through which the Secretary can allocate tax exemptions to bonds used to finance construction of, or improvements to, certain types of facilities. These exemptions lower the cost of selling the bonds, better enabling state and local governments to finance the projects. The Secretary’s allocation is necessary . . . for a bond to be tax-exempt because it finances a “qualified highway or surface freight transfer facilit[y].” Id. § 142(m)(2)(A). Indian River Cty., 348 F. Supp. 3d at 28 (alterations in original) As noted, an “exempt facility bond” includes a bond whose proceeds from its issue are used to finance “qualified highway or surface freight transfer facilities.” 26 U.S.C. § 142(a)(15). Section 142(m)(1)(A) defines “qualified highway or surface freight transfer facilities” as “any surface transportation project which receives Federal assistance under title 23, United States Code.” Title 23, in turn, authorizes 6 federal funding for, inter alia, “the elimination of hazards of railway-highway crossings.” 23 U.S.C. § 130(a).