The Catholic University of America

Summary of Federal Laws

 

Tax

Compliance Partners

General Counsel

Director of Conferences and Pryzbyla Management

Controller

EA to VP For Finance

VP for Finance and Treasurer

Related Policy

Private Use of University Facilities

 

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 The Taxpayer Relief Act of 1997 repealed the $150 million bond cap for I.R.C. § 501(c)(3) organizations.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

Avoiding Troubled Tax-Advantaged Bonds: A Study of Issues Compliance Considerations by The IRS Office of Tax Exempt Bonds (March 8, 2013)

 

July 5, 2011 Ropes and Gray Alert on Changes to Form 990: Form 990 for the 2011 reporting year (Schedule K) will ask If the Borrrower maintains written Bond Procedures. Written Procedures should cover private business use and arbitrage compliance, and should make reference to correcting potential violations.

Tax Exempt Bonds Questionnaire Project: Final Report on Governmental and Charitable Financings

IRS report, July 2011

Congressional Budget Office Report April 2010 Tax Arbitrage by Colleges and Universities

Study by CBO on whether IHES gain a significant benefit from *indirect arbitrage*. 

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

 

updated 4/23/13 to add IRS bond publication

Updated 6/26/13 CCR