UNDERSTANDING PRIVATE BUSINESS USE OF TAX EXEMPT · PDF filePost‐issuance tax compliance...
Transcript of UNDERSTANDING PRIVATE BUSINESS USE OF TAX EXEMPT · PDF filePost‐issuance tax compliance...
UNDERSTANDINGPRIVATEBUSINESSUSEOFTAXEXEMPTBONDS
Presented by:Caleb Lansky, BLX Group
PRIVATE BUSINESS USE OVERVIEW AND EXCEPTIONS
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The hardest thing to understand in the world is the income tax. Albert Einstein
Postissuancetaxcompliancebeginswiththedebtissuanceandrequiresacontinuingfocusoninvestmentofbondproceedsanduseofbondfinancedproperty.
AftertheBondsAreIssuedThenWhat?AdvisoryCommitteeonTaxExemptandGovernmentalEntities
POSTISSUANCE COMPLIANCEOVERVIEW
501(c)(3)BondRequirements Atleast95%ofthenetproceeds ofthebondissuemustbeusedinamannerrelatedtotheexemptpurposesoftheSection501(c)(3)organization
Nomorethan5%ofthenetproceeds ofthebondissuecanbeusedforaprivatebusinessuseoranunrelatedtradeorbusinessuse
Forthispurpose,costsofissuanceofthebondspaidwithbondproceedsaretreatedasaprivatebusinessuse
Allbondfinancedpropertymustbeownedbya501(c)(3)organizationorStateorlocalgovernmentalunit
2%costsofissuancelimit
PRIVATE BUSINESS USE OVERVIEW
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GovernmentalBondRequirements Generally,atleast90%oftheproceedsofthebondissuemustbeusedforgovernmentalpurposes
Aggregateprivatebusinessusegenerallycannotexceedthelesserof90%,95%or$15million
Costsofissuanceofthebondspaidwithbondproceedsarenottreatedasaprivatebusinessuse
PRIVATE BUSINESS USE OVERVIEW
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$800milliongovernmentalbondissue
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Need to be mindful of this lesser of concept
Par Amount $800 million $800 million $800 million
Tax Code Limit 10% 5% $15million
Maximum PBU $80 million $40 million $15 million
BasicTaxAnalysisinGovernmentalBondFinancings Arethebondfinancedassetsusedbymembersofthegeneralpublic?
DoesapartyotherthanaStateorLocalGovernmentagencyorentityhaveaspeciallegalentitlementtousethebondfinancedassets?
Privatebusinessusecanariseunderamanagementcontractevenif theassetsservethegeneralpublic
Useofbondfinancedassetsbyacharitableorganization(e.g.,aSection501(c)(3)organization)willgenerallygiverisetoprivatebusinessuse
Contractswiththefederalgovernmentwillgenerallygiverisetoprivatebusinessuse
PRIVATE BUSINESS USE OVERVIEW
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501(c)(3)BondsandPrivateBusinessUse Useofbondfinancedpropertybyotherthana501(c)(3)organizationorastateorlocalgovernment
Examples: Leasestoforprofitentity
Certainmanagementcontractswithforprofitentity
Certainsponsoredresearchcontractswithforprofitentity
Intheseexamples,thetradeorbusinessisprovidedrightstothefacility(i.e.,aspeciallegalentitlement)
PRIVATE BUSINESS USE OVERVIEW
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UnrelatedTradeorBusinessUse Useofbondfinancedpropertybya501(c)(3)organizationinanunrelatedtradeorbusinessactivity
Fortaxexemptbonds thefocusisactivity
Unrelatedtradeorbusinessuseinvolvingbondfinancedpropertywillgenerallyconstituteprivatebusinessuseevenifitdoesnotgiverisetoataxpaymentforunrelatedbusinessuse
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Contractsthatmay giverisetoprivatebusinessuseinclude: ManagementContracts
GiftShop/BookstoreContracts Physician/PhysicianGroupContracts FoodService/Concession/CafeteriaContracts ParkingManagementContracts
ResearchContracts Federal BusinessSponsored
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Contractsthatwill generallygiverisetoprivatebusinessuse:
Bydefinition,aleasewillalmostalwayscreateprivatebusinessuse.
CommonExamples: CafeteriaContracts Pharmacies PhysicianOfficeSpaces GiftShops CorporateEvents SolarPanels CellPhoneAntennas
PRIVATE BUSINESS USE OVERVIEW
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Manysocalledmanagementcontractsareinfactleases
Ifsomeoneispayingyourent($)orsplittingprofits($)fromanoperationinbondfinancedspacetheyarenotgenerallytreatedasamanagerunderthetaxrules
PRIVATE BUSINESS USE OVERVIEW
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MANAGEMENT &SERVICECONTRACTS
WhydoSomeManagementContractsGiveRisetoPrivateBusinessUse? Theyrepresentatransferofcontroloreconomicbenefitfromtheownertoaprivateparty
Theyprovideaspeciallegalentitlementtousebondfinancedproperty
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MANAGEMENT &SERVICECONTRACTS
ManagementContractGuidelines Rev.Proc.9713andIRSNotice201467 Safeharborcontractualrequirementsthatifmet,thecontractdoesnotcauseprivatebusinessuse
Sharingorsplittingofnetprofitsisneverpermittedunderthemanagementcontractguidelines
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MANAGEMENT &SERVICECONTRACTS
ManagementContractGuidelines Rev.Proc.9713andIRSNotice201467 TypesofCompensationArrangementsaddressed:
fixedfee capitationfee perunitfee percentageofrevenueorvariablerate variouscombinationsthereof
Durationofcontract Longtermagreementsarerequiredtohavelargerportionoffixedcompensation
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MANAGEMENT &SERVICECONTRACTS
ContractsforaTermof5YearsorLess IRSsignificantlyrelaxedrulesformanagementcontractswithatermof5yearsorless
Compensationbasedonstatedamount,periodicfixedfee,capitationfee,perunitfee,percentageofgrossrevenues,adjustedgrossrevenues,orexpenses(oranycombinationoftheforegoing)arepermitted
Thecontractneednotbeterminablebythegovernmentalunit/501(c)(3)entitypriortotheendoftheterm
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MANAGEMENT AND SERVICE CONTRACTS SAFE HARBORS
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CompensationtoServiceProvider MaximumTerm*underRev.Proc.9713 MaximumTerm*underNotice201467
Atleast95%periodicfixedfee(e.g.,$95peryearfixedfee,withpossibilityofupto$5variableadditionalcomp) 15years Nochange
Atleast80%periodicfixedfee(e.g.,$80peryearfixedfee,withpossibilityofupto$20variableadditionalcomp) 10years Nochange
Atleast50%periodicfixedfee(e.g.,$50peryearfixedfee,withpossibilityofupto$50variableadditionalcomp)
5yearsandcancellablewithoutcausenolaterthan
endof3rdyear
Nochange
Capitationfee(e.g.,perpatientfeeformedicalservices)ormixoffixedfeeandcapitationfee
5years,nocancellationrequirement
Perunitfee(e.g.,$xforeachserviceprovided)
oramixofperunitfeeandperiodicfixedfee(e.g.,$yforeachserviceprovided,plus$xperyear)
3yearsandcancellablewithoutcausenolaterthan
endof2ndyear
%ofgrossrevenues,%ofadjustedgrossrevenues,or%ofexpenses 2yearsandcancellablewithoutcausenolaterthanendoffirstyear
Compensationbasedonastatedamount;**periodicfixedfee;acapitationfee;aperunitfee;oracombinationofthepreceding. Compensationmayalsoincludea%ofgrossrevenues,adjustedgrossrevenues,orexpensesofthefacility(butnotbothrevenuesandexpenses).
NotaSafeHarborunderRev.Proc.9713
5years,nocancellationrequirement
*The maximum term of the contract also cannot exceed 80% of the useful life of the assets. **Includes a productivity award if (a) eligibility for the productivity award is based on quality of services rather than increases or decreases in revenue in expenses of the facility; and (b) the amount of the productivity award is a stated dollar amount, a periodic fixed fee, or a tiered system of stated dollar amounts or periodic fixed fees based solely on level of performance achieved with respect to the applicable measure.
IncidentalContractsorArrangements Janitorialservices
Equipmentrepair
Billingactivitiesorsimilarservices
Landscaping
PRIVATE BUSINESS USE EXCEPTIONS
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ShortTermUse 50DayExceptionforLeases Termofusepursuanttothecontract,includingrenewaloptions,isnotlongerthan50days
Note,focusisontotaluse daysnottermofcontract
Thecontractisanegotiatedarmslengtharrangementandcompensationisatfairmarketrule
Thepropertyisnotfinancedforaprincipalpurposeofprovidingthatpropertyforusebythatparty
* Shorttermuseexceptionsdonotapplytounrelatedactivitiesofthe501(c)(3)organization
PRIVATE BUSINESS USE EXCEPTIONS
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SPONSORED RESEARCH CONTRACTS
UnderTaxRules,SponsoredResearchContractsMayGiveRiseToPrivateUseofBondFinancedProperty Trendingovernmentalandnonprofitorganizationstoundertakemoreresearchactivities
Thesponsoroftheresearchcanvary: NIH Otherfederalgovernment Privatebiotechcompany Pharmaceuticalcompany 501(c)(3) Stateorlocalgovernment
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ResearchContractGuidelines Rev.Proc.2007 47 Permitscertaintypesofsponsoredresearchtobeconductedwithinbondfinancedspacewithoutresearchbeingtreatedasprivatebusinessuse
Appliesonlytobasicresearch anyoriginalinvestigationfortheadvancementofsciencenothavingacommercialobjective
SPONSORED RESEARCH CONTRACTS
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SafeHarbor1 Thesponsormayhaveexclusiveuse andownership ofthelicenseorresultingtechnology
Thepricepaidbythesponsormustbedeterminedatthetimethelicenseorotherresultingtechnologyisavailableforuse(mustpayfairmarketvalue)
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SafeHarbor2 Titletoanyproductproducedbyresearchliesexclusively withthe501(c)(3)organization
Sponsor(s)getsonlyanonexclusive,royaltyfreelicensetouseproductofthatresearch
GenerallycoversNIH/BayhDoleActresearch therightsofthefederalgovernment,includingmarchinrights,mandatedbythesuchactwillnotinandofthemselvescausearesearchagreementtofailthesafeharbor
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Whatyouneedtoknowtodetermineprivatebusinessuse Whoisusing thefacilities employees,students,outsidegroups,researchagreements,managementcontracts,shorttermuse
Howcontracts relatingtousearestructured safeharborcompliant?Anyleasesofspace?
Hasanyportionofthebondfinancedpropertybeensold
Specifically, howbondproceedswereexpended buildings/facilities/equipment
PRIVATE BUSINESS USE OVERVIEW
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BondProceedsExpenditures Bondrequisitionsoftendontcategorizeexpendituresinamannerconducivetocalculatingprivatebusinessuse.
Aspecific,perhapsmoredeliberateac