67 The Alabama Lawyer 192 (2006). Gulf Opportunity Zone Act of 2005.

• Author: BY FRANK D. MCPHILLIPS

The Alabama Lawyer

2006.

67 The Alabama Lawyer 192 (2006).

Gulf Opportunity Zone Act of 2005

Gulf Opportunity Zone Act of 2005BY FRANK D. MCPHILLIPS On December 1, 2005, President Bush signed the Gulf Opportunity Zone Act of 2005 ("GOZA" or the "Act"), just in time to provide sorely needed Christmas cheer to areas devastated by hurricanes Katrina, Rita and Wilma. GOZA is a major piece of legislation patterned after the Liberty Zone Act, which galvanized the reconstruction of New York City following the 9/11 terrorist disaster. GOZA offers substantial benefits to both public and private entities in the areas of Louisiana, Mississippi and Alabama which comprise the Gulf Opportunity Zone (the "GO Zone"). It also provides some significant relief to governmental entities and 501(c)(3) corporations located throughout the State of Alabama, including areas outside the GO Zone. This article will address many of the highlights of this important legislation. The purpose of this article is not to summarize or analyze every aspect of GOZA. For a thorough explanation of GOZA, readers should read the Act itself and the report prepared by the Staff of the Joint Committee on Taxation, which can be obtained online at www.house.gov/jct/x-88-05.pdf.

Gulf Opportunity Zone

Within Alabama, the GO Zone consists of 11 counties, including Mobile, Baldwin, Washington, Clarke, Choctaw, Marengo, Sumter, Greene, Hale, Pickens, and Tuscaloosa. These are the only Alabama counties in which President Bush declared a major disaster immediately following Hurricane Katrina and determined that individual and public federal assistance was warranted under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Although most of the benefits offered by GOZA are available only to public and private entities located or operating in these counties, the Act does furnish an additional advance refunding opportunity to governmental entities and 501(c)(3) corporations located throughout the state, as discussed in greater detail below.

Bonding Authority for Private Projects Within GO Zone

Section 103 of the Internal Revenue Code permits state and local governments to finance governmental projects with tax-exempt bonds. The effect of this tax exemption is to enable public entities to incur substantially lower borrowing costs than private corporations. The spread between taxable and tax-exempt rates on a 20-year bond historically has ranged between 150 to 200 basis points. That spread will likely increase if long-term interest rates increase or federal income tax rates increase, both of which may likely occur.

Income on bonds issued to finance facilities used by a private entity in its trade or business is generally subject to federal income taxation unless the bonds are issued for certain specifically permitted purposes. For example, it is permissible under certain circumstances to issue tax-exempt industrial development bonds to finance small manufacturing projects so long as the user of the financed facilities is able to comply with fairly restrictive capital expenditure rules. These bonds are known as "qualified small issue bonds." It is also permissible to issue tax-exempt bonds to finance capital investments in certain specifically enumerated projects which have substantial private use, such as docks and wharves, solid waste disposal facilities and qualified residential rental projects. These bonds are known as "exempt facility bonds." Even when a private facility is eligible for tax-exempt financing, the tax treatment of such bonds is less favorable than governmental bonds because qualified small issue bonds and exempt facility bonds are subject to the alternative minimum tax. The alternative minimum tax may cause such bonds to trade at a yield which is 20-30 basis points higher than governmental bonds. This spread between AMT bonds and non-AMT bonds will most certainly increase as the alternative minimum tax begins to affect more and more middle class taxpayers. Conversely, if the alternative minimum tax is ever repealed, the attractiveness of non-AMT bonds will decrease and the spread will be eliminated.

The GOZA legislation is significant because it permits the issuance of tax-exempt bonds to finance a broad range of private facilities that previously could only be financed with taxable bonds or conventional bank...