Summary of Federal Laws
Tax
Miscellaneous Tax Issues
Debt Structure/Use of Bond Financed Facilities
26 USC § 141 et seq
The IRS will look at the type of bond issued for the university’s benefit, and whether the funds are being used for exempt purpose or private activity. The general rule is that if a bond financed facility is used by an exempt organization for purposes not related to its exempt purpose, the use is treated as impermissible private use. If the use were to be found to be a private use, the bonds used to finance the facility might become taxable. The Taxpayer Relief Act of 1997 repealed the $150 million bond cap for I.R.C. § 501(c)(3) organizations.
The IRS issued Rev. Proc. 97-13, 1997-5 I.R.B. 18 relating to private activity bonds. This Revenue Procedures provides guidelines for determining whether the use of bond-financed facilities pursuant to a management contract with a private entity constitutes "private business use" under I.R.C. § 141(b). Revenue Procedure 97-13 seeks to keep the ultimate risk of gain/loss from the enterprise in the hands of the exempt organization-borrower. This procedure is effective for management contracts entered into, materially modified, or extended (other than under a renewal option) on or after May 16, 1997, and apply to bonds issued on or after that date. Determinations made under these guidelines affect whether or not the interest on the bonds are tax exempt.
Rev. Proc. 2007-47
This revenue procedure modifies and supersedes Rev. Proc. 97-14 by providing special rules for federally sponsored research. These special rules provide that the rights of the Federal Government and its agencies mandated by the Bayh-Dole Act will not cause research agreements to fail to meet the requirements of section 6.03 of the Revenue Procedure. Under the stated conditions, such rights themselves will not result in private business use by the Federal Government or its agencies of property used in research performed under research agreements. These special rules do not address the use by third parties that actually receive more than non-exclusive, royalty-free licenses as the result of the exercise by a sponsoring Federal agency of its rights under the Bayh-Dole Act, such as its march-in rights. See
IRS Releases Guidance on Federally Sponsored Research Agreements.
Q and A
Question: The University wants to make food available in the new dormitory for the purpose of relieving some of the pressure on the general food service facility during meal time. The food that will be available will be aimed at students and will entail the availability of food items that would constitute quick, convenient meals. The new dorm is a bond financed facility. Will this use constitute an impermissible use?
Answer: It is not an unrelated trade or business for the University to make food available to students, faculty and staff, including making it available in University dormitories. It has long been held by the IRS that, for example, cafeteria and other food services made available in a manner that it is not generally available to the public, but rather is made available to students, faculty and staff, is an activity related to the University's educational mission. Very limited casual and intermittent use by members of the general public does not transform the activity into an unrelated trade or business. Should the University choose to enter into a contract for a deli bar, the terms of the contract would need to meet the rules set forth in Revenue Procedure 97-13 which sets forth in great specificity how to create a “qualifying management contract”.
Question: When does the school choose to maintain post issuance compliance records by dollar amount of private business use and when does it make sense to count usage of space by square footage or time?
Answer: A square footage methodology is usually appropriate when bond-financed space is subject to fixed, exclusive uses. For example, if the ground floor of a 10-story building is leased to private users, and the remainder of the building is used for exempt uses, the PBU% of the building would typically be based on square footage, or 10%. By contrast, if the uses of bond-financed space are not fixed or exclusive, a methodology based on relative revenues or time of use may be appropriate. For example, regarding a research lab in which both compliant and noncompliant research contracts are performed, the PBU% of the lab could be measured based on relative revenues. As another example, the PBU% of an athletic facility that is used for PBU in the summer months and exempt uses at other times could be measured based on relative time of use.
Resources
NACUA Resource Page on tax exempt bonds and compliance ***Includes Feb. 2010 Seminar Materials
Section 501(c)(3) Bond Post Issuance Compliance: A 10 Step Program for Borrowers in Denial, 123 Tax Notes 15 (July 6, 2009) by Peter H. Serreze and A. L. Spitzer of Ropes and Gray
One of the clearest documents that exists on a complex topic.
Recent Tax Developments and Post Issuance Compliance March 2007 by Jennifer V. Powers, Quarles and Brady for the Wisconsin Health and Educational Facilities Authority
Tax Exempt Bond FAQs Regarding Record Retention Requirements
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Tax Exempt Bonds for 501(c)(3) Charitable Organizations (IRS Compliance Guide)
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Tax Exempt Bonds Compliance Check Questionnaire Initiative: Interim Report: Sept. 11, 2008
A 49 page report summarizing results of a survey of 200 non profit organizations with tax exempt bond liability. The goal was to identify overall knowledge of post issuance compliance.
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Redesigned 990-Forms and Instructions (August 2008)
Link to Internal Revenue Service (IRS) website with final forms and instructions for completion of the new form 990 which must be filed starting with tax year 2008 (filed in 2009) by most organizations exempt from taxation under Internal Revenue Code 501(a), including Sec. 501(c)(3) organizations. See Schedule K for supplemental information on tax exempt bonds.
See also the updated IRS web page that contains an explanation of key changes to the form and tips on how to get ready for the 2009 tax season. See the New Form 990 Series Phase In Chart for filing dates based upon financial activity.
updated by mlo to add Rev. Proc. 2007-47
links updated 6/17/08 rab
updated 10-19-08 by mlo to add more on bond financed facilities and resource section, as well as a Q and A
links updated 2/26/08 rab
updated 2/26/09 to add compliance partners and links checked
updated 5/7/09 to add compliance partners
compliance partner box updated 5/19/09 Rab
Ropes and Gray article added by mlo 7/8/09
updated 3/5/10 to add NACUA resource page
updated 3/10/10 to Serreze Answer on counting usage
Last Revised 09-Mar-10 02:38 PM.
