04 October 2017 Proposed regulations update rules for public approval of tax-exempt private activity bonds The IRS has released proposed regulations (REG-128841-07) that update and streamline the rules relating to the public approval requirement under Section 147(f) for private activity bonds issued by state and local governments. In general, under Section 103, interest received by investors on state and local government bonds is tax-exempt. However, a private activity bond qualifies for this tax-exempt treatment only if it satisfies the requirements for qualified bonds under Section 141. Section 141(e) requires, in part, that qualified bonds meet the public approval requirement of Section 147(f). In 2008, the IRS issued proposed regulations on the public approval requirement for tax-exempt bonds. See Tax Alert 2008-1413. In response to comments received on the 2008 proposed regulations and subsequent statutory changes, the IRS has decided to withdraw the 2008 proposed regulations and issue new proposed regulations. The new proposed regulations generally incorporate the amendments included in the withdrawn 2008 proposed regulations — which were also intended to update and streamline the rules for public approval of private activity bonds. However, the new proposed regulations adopt some changes: 1. The 2008 proposed regulations were written as a supplement to the partially outdated existing regulations, which would remain in effect to the extent that they were not inconsistent with the 2008 proposed regulations. The newly proposed regulations consolidate the rules on the public approval requirement under one section to prevent confusion and to provide further opportunity for public comment. 2. The IRS received comments both in favor of and against the streamlined information requirements in the 2008 proposed regulations regarding public notices of a public hearing or public approval. The IRS has determined that the streamlined information requirements in the 2008 proposed regulations are sufficient to permit public evaluation of new private activity bonds. Accordingly, the newly proposed regulations generally adopt these rules from the 2008 proposed regulations, as described further below. 3. With respect to "reasonable public notice," the 2008 proposed regulations (1) expanded the outlets for providing reasonable public notice to include governmental unit website postings and other state-law-permitted outlets in addition to newspaper publication, radio and television broadcasting; and (2) shortened the notice requirement from 14 days to seven days. The newly proposed regulations adopt the expanded list of outlets for providing notice but retain the 14-day notice requirement in the existing regulations. Generally, under Section 147(f), both the governmental unit that issues the bonds and a governmental unit with jurisdiction over the location of the financed project must approve an issue of private activity bonds (referred to as "issuer approval" and "host approval," respectively). With respect to host approval and issuer approval, the newly proposed regulations generally are consistent with the existing regulations. However, there are special provisions regarding the issuer approval and host approval requirements for certain financings involving airports, high-speed rail facilities, qualified scholarship funding corporations, and volunteer fire departments. For example, if the issuer is the owner or operator of the airport or high-speed rail facility, the issuer is the only governmental unit required to provide the host approval for that project. The requesting governmental unit of a qualified scholarship funding bond is the governmental unit on behalf of which the bond was issued for purposes of the issuer approval. And finally, the political subdivision of a state with respect to a volunteer fire department is the governmental unit on behalf of which the bond is issued for purposes of the issuer approval. Recognizing certain practical difficulties, the newly proposed regulations also specify that no host approval is necessary for mortgage revenue bonds, qualified student loan bonds, or qualified 501(c)(3) bonds used to finance working capital expenditures. Consistent with the 2008 proposed regulations, the new proposed regulations would expand the list of outlets that allow for reasonable public notice. Specifically, reasonable public notice may be by: (1) newspaper publication, radio or television broadcast; (2) postings on a governmental unit's public website; or (3) alternative methods permitted under a general state law for public notices for public hearings of a governmental unit. Under the existing regulations, reasonable public notice generally requires the following information: (1) a general, functional description of the type and use of the facility to be financed; (2) the maximum aggregate face amount of the bonds to be issued for the facility; (3) the initial owner, operator or manager of the facility; and (4) the location of the facility by street address or, if none, by a general description designed to inform readers of the specific location. The new proposed regulations streamline these requirements in several ways. Specifically, the new proposed regulations would: 1. Use the term "project" in lieu of "facility" to clarify that a financed project may consist of multiple buildings and multiple sites, as well as "projects" such as mortgage loans financed by mortgage revenue bonds, student loans financed by qualified student loan bonds, and working capital expenditures financed by qualified 501(c)(3) bonds 2. Limit the specificity required with respect to the general functional description of the type and use of the financed project, allowing issuers to satisfy the requirement by identifying the category of exempt facility bond 3. Continue to require that the public approval information include the name of the expected initial owner or the principal user of the project, but permit an issuer to name the true beneficial party of interest as an alternative to naming a legal owner or user 4. Clarify that a description by boundary streets or other geographic boundaries suffices to meet the location requirement The new proposed regulations add special rules for public approval of mortgage revenue bonds, qualified student loan bonds, and qualified 501(c)(3) bonds issued for pooled financings as described in Section 147(b)(4). 1. For mortgage revenue bonds, the new proposed regulations would require the public approval information to state that the bonds will finance residential mortgages, provide the maximum stated principal amount of the bonds, and generally describe the issuer's geographic jurisdiction in which the residences to be financed with the mortgage loans are expected to be located. No information relating to specific names of borrowers or locations of individuals residences is required. 2. For qualified student loan bonds, the new proposed regulations would require the public approval information to state that the bonds will finance student loans and provide the maximum stated principal amount of the bonds. Similar to the mortgage revenue bonds, no specific information is required with respect to identifying specific student loan borrowers. 3. For qualified 501(c)(3) bonds issued for pooled financings as described in Section 147(b)(4), the new proposed regulations would permit the issuer to choose to apply a special two-stage public approval process if the issuer has insufficient information at the time of the reasonable public notice or public approval to meet the general public approval information requirements. The new proposed regulations clarify when differences in information constitute insubstantial deviations versus substantial deviations. An issue may fail to meet the public approval requirement where there is a substantial deviation between (1) the stated use of proceeds of an issue included in the information required to be provided in the public notice and public approval and (2) the actual use of proceeds of the issue. Certain specified deviations from the public approval information would be considered insubstantial. These include: (1) a stated principal amount of bonds actually issued and used for the project that is no more than 10% greater than the maximum stated principal amount publicly approved for the project, and (2) a deviation between the initial owner or principal user of the project identified in the public approval information and the actual initial owner or principal user of the project if the parties are related on the issue date. The new proposed regulations provide that whether a deviation is substantial generally depends on all of the facts and circumstances; however, a fundamental change in nature or type of a project would qualify as a substantial deviation. The new proposed regulations would allow supplemental post-issuance public approvals to cure certain substantial deviations that result from certain unexpected events or unforeseen changes. The newly proposed regulations would apply to bonds issued pursuant to a public approval that occurs on or after the date that is 90 days after final regulations are published in the Federal Register. However, issuers may apply the new proposed regulations — in whole but not in part — to bonds that are issued pursuant to a public approval that occurs on or after September 28, 2017, and before the applicability date provided in a Treasury decision adopting the rules as final regulations. The new proposed regulations attempt to clear up some uncertainties from the old rules and offer more flexibility in defining projects as well as recognizing an electronic medium to provide notice. Some welcome changes and clarifications specific to approval for private activity bonds under Section 174 include: 2. A general description of the broader "project" definition, which now includes working capital expenditures, in addition to the general meaning of one or more capital projects or facilities, including land, buildings, equipment and other property 3. The general allowance of more time to multiple borrowers involved in a qualified 501(c)(3) bond pooled loan financing to gather the information required for the public approval process if they meet the requirements for the new two-stage public approval process It should be noted however that new regulations bring back the 14-day notice window versus the seven-day requirement offered under the 2008 regulations. As noted above, tax-exempt bond issuers may rely on these regulations for bonds issued pursuant to a public approval that occurs on or after September 28, 2017, and before the applicability date provided in a Treasury decision adopting the rules as final regulations. The newly proposed regulations are available for comment and request for a public hearing through December 27, 2017. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
Document ID: 2017-1628 | |||||||||||||||||||
