18 March 2016 Final tax-exempt bond rules permit private loans in public-private partnerships, Treasury official says According to comments from a Treasury official reported by Bloomberg BNA,1 private loans are permitted in public-private joint ventures under the look-through rule included in the final tax-exempt bond regulations issued last fall. In October 2015, the IRS released final regulations (T.D. 9741) on allocation and accounting of tax-exempt bonds, as well as certain remedial actions. To remove barriers to tax-exempt financing of the government's (or Section 501(c)(3) organization's) portion of the benefit of property used in joint ventures, the final regulations specified that partnerships will be treated as aggregates of their partners, rather than entities. This rule expanded on the rule included in the proposed regulations, which had limited aggregate treatment to partnerships that consisted only of governmental (or Section 501(c)(3) organizations) partners. For further discussion of the final regulations, see Tax Alert 2015-2075. Treasury Associate Tax Legislative Counsel John J. Cross stated that the look-through treatment applicable to public-private partnerships under the final regulations applies to private loans as well. Bloomberg BNA quotes Cross as saying that such loans would be considered private "only to the extent of the share of the partnership that is private. You wouldn't have a private loan for 100% of the loan." Cross's statements address questions that he received at a National Association of Bond Lawyers tax conference on the application of the look-through rules in the final regulations to public-private partnerships. His comments clarify that the look-through applies not just to the government-financed portion of such partnerships. Cross noted that the look-through rule in the final regulations is part of an effort to enhance flexibility in public-private partnerships. The comments offered by Treasury Associate Tax Legislative Counsel John J. Cross clarify that the final bond regulations allow for the use of private loans in public-private joint venture projects that are financed by tax-exempt bonds. By extending the aggregate principal and look-through treatment to all partnerships for purposes of the private activity bond tests, the final bond regulations offered more flexible treatment of partnerships in general. The comments provided by the Treasury Department now confirm that the new look-through treatment for partnerships under the final bond regulations also applies to private loans. Now, when calculating the private business use of a bond issue, a loan financed by non-governmental or other Section 501(c)(3) organizations will be considered private only to the extent of the share of the partnership that is private. This is welcome news for many state and local governments that are currently partnering with private companies to finance and construct their projects. Further, in an effort to provide even more flexibility for public-private partnerships, Cross also noted that, under the final bond regulations, a partnership could likely be a conduit borrower directly. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
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