Monday, April 7, 2014

Tax Break for Debt of Volunteer Fire Departments

There is no federal income tax on interest from tax-exempt bonds, which are bonds normally issued by state and local governments.  A very special rule provides that tax-exempt bonds can also be issued by volunteer fire departments.

The special tax-exempt bond rule for volunteer fire departments was created in 1981, as a somewhat belated response to the landmark 1962 case of Seagrave Corp. v. Commissioner.  The Tax Court concluded that interest on the debts of volunteer fire departments were not tax-exempt because the debts were not issued by a state or local government.

The volunteer fire departments were just a bunch of guys running around in a firetruck, and they were not under control of any government or created by the government.  The departments made money from membership fees, by charging non-members for putting out fires, and by selling lottery cards and beer at the clubhouse.

New rules were enacted in 1981, to apply to debts of volunteer fire departments issued after December 31, 1980.  The new rules also applied to debts issued between 1970 and 1980 that were held by the First Bank and Trust Company of Indianapolis, Indiana (and no one else!). 

Under the new rules, Internal Revenue Code section 150(e) (formerly section 103(i)) provides that debts of volunteer fire departments can be tax-exempt bonds.  But in order to prevent volunteer fire departments from being the newest tax shelter, several stringent rules were imposed:

1.  95% or more of the debt proceeds must be used to acquire or improve a firehouse or firetruck used by the department.

2.  The volunteer fire department must have a written agreement with the government to actually provide firefighting services.

3. The volunteer fire department must be operating in an area without other firefighting services.  But Congress anticipated that this tax rule might create a "Gangs of New York"-style firefighter-fighting bloodbath [clip], and the existence of other volunteer fire departments is okay under this rule as long as the rival fire departments have been continuously providing firefighting services to the area since January 1, 1981.

Wednesday, April 2, 2014

Tax Break for Lobbying Local Governments and Indian Tribes

Political contributions and lobbying expenses have not been deductible under the Internal Revenue Code since 1915.  This prohibition applies even if the expenses would otherwise be deductible business expenses, such as amounts spent by beer dealers to urge voters to vote against anti-liquor legislation that would have put the dealers out of business

In a remarkable feat of meta-lobbying, a very special exception provides that lobbying expenses are deductible for lobbying in local councils and similar governing bodies.  A similar body specifically includes an Indian tribal government. 

The Internal Revenue Code provides a helpful list of examples of deductible lobbying expenses, which include traveling expenses, cost of preparing testimony, and other business expenses for appearing before local council committees or sending communications to the committees or their individual members. The lobbying has to be for issues "of direct interest" to the taxpayer. 

Political contributions to local council members are not deductible, just like political contributions to all other types of politicians.  In addition, expenditures for "grass-roots lobbying" are never deductible.

The special local lobbying exception was created by the Revenue Reconciliation Act of 1993.  From 1962 to 1993, certain lobbying expenses were deductible for all levels of government, but limited to local government after 1993. 

President Bill Clinton explained that the lobbying deductions were cut back because “The deduction for lobbying expenses inappropriately subsidizes corporations and special interest groups for intervening in the legislative process.”  But he did not explain why the lobbying subsidy continues for local governments and Indian tribes