2014 MSBA/MASA Annual Conference Restrictions on Use of Bond-Financed Property Toni Stegeman & James...
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Transcript of 2014 MSBA/MASA Annual Conference Restrictions on Use of Bond-Financed Property Toni Stegeman & James...
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2014 MSBA/MASA Annual Conference
Restrictions on Use of Bond-Financed Property
Toni Stegeman & James DummittGilmore & Bell, P.C.
andLinda Quinley
Columbia Public Schools
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Why are we here?
WHY are there restrictions on use of property financed with tax-exempt bonds?
WHY do we care?
WHAT are the restrictions?
HOW do we comply with the restrictions?
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WHY are there restrictions?
Tax-exempt bonds and leases = lower interest rates, because bondholders/lenders don’t pay income tax on the interest received.
IRS views the difference between the tax-exempt and taxable interest rates as a loss to the U.S. Treasury; therefore, a grant to the school district.
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Disadvantage of Tax-Exempt Financing
Strings!
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Types of Debt
Tax-advantaged debt
Tax-exempt bonds (TEBs)
Build America Bonds (BABs)
Qualified School Construction Bonds (QSCBs)
Qualified Zone Academy Bonds (QZABs)
Rules apply to all tax-advantaged debt – bonds, notes, financing leases, COPs, etc.
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WHY Do We Care?
Tax-exempt rate approximately 1.5% lower than taxable rate
Why? Investor does not pay federal income tax on the interest.
Benefit – allows District to finance more project with same revenues, because less money needed for interest
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3 Main Areas of Tax Compliance
Accounting for Expenditures
Accounting for Investment of Bond Proceeds
Accounting for Use of Bond-Financed Assets
How do you do this?
Tax-Exempt Financing Compliance Policy and Regulation or Procedure
Adequate Recordkeeping
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WHAT Are The Restrictions?
In order to qualify for tax exemption, bond-financed property must be used in a “qualified use”
“Private business use” means use of property by a person or entity that is not a State or local governmental entity in furtherance of a business Qualified Users – state and local governments Non-Qualified Users – private businesses
(including non-profits); federal government and agencies
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When Do the Restrictions Apply?
Reasonable Expectations and Actual Facts How do you expect to use the property? How has the property actually been used? Rules generally apply during the entire
term of the bonds (including refunding bonds)
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HOW To Comply
Final Allocation Identifying and accounting for bond-
financed property Allocation of financing sources
Periodic Monitoring compliance checklists and questionnaires consultation with tax/bond counsel
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Types of Private Business Use
What is “private business use” – some special legal right to use facilities
Ownership
Lease
Service or Management Contracts
Miscellaneous Arrangements
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Types of Private Business Use
Ownership – sale of financed assets (buildings, furniture, equipment, etc.)
Lease – operating lease of financed assets Athletic teams, YMCA, after-school groups,
churches, colleges, etc. General public use exception Short-term exceptions Incidental use exception (vending, janitorial,
advertising displays, etc.)
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Types of Private Business Use
Service or Management Contracts
Concessions, school stores, bus fleet, cafeteria, etc.
Exceptions for incidental services (janitorial, office equipment repair, etc.)
Safe harbors (IRS Revenue Procedure 97-13)
Miscellaneous arrangements – vending machines; advertising displays; exclusivity contracts; cell towers; pouring rights
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Best Practices
Develop and implement policy on facility usage
Standardize contracts and rates
Final Allocation & Annual Compliance Checklist
Contact Bond Counsel if questions or variations
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Final Allocation
What is a final allocation? Accounting of sources and uses of project
funds and expenditures Identifies the bond-financed property
What is the purpose of a final allocation? Details the expenditure of bond funds Starting point for monitoring use of
property and compliance Substantiates efforts to comply
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Annual Compliance Checklist
What is an annual compliance checklist? Simple checklist with targeted questions
relating to how the bond-financed project(s) is used
Designed to catch and remediate non-compliance
What is the purpose of an annual compliance checklist? Identifies potential non-compliance Substantiates efforts to comply Reminder to perform compliance efforts
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Annual Compliance Checklist
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Annual Compliance Checklist
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Annual Compliance Checklist
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Annual Compliance Checklist
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Annual Compliance Checklist
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Non-Compliance or Change-in-Use
What if non-compliance is discovered or the use of property changes?
Options/Outcomes Remedial action (voluntary) VCAP (voluntary) IRS audit (involuntary)
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Remedial Action
Certain conditions and prerequisites to taking remedial action
Timing Element
No payment to IRS (but may involve paying down bonds)
Effect – cures private business use problems
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Voluntary Closing Agreement Program
IRS Voluntary Closing Agreement Program (VCAP)
Settlement payment negotiated with IRS
Generally available if remedial action not an option and bonds not under audit
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IRS Audit
What happens if IRS audits bonds and concludes there is a problem?
Hammer – declare bonds taxable (in practice, a settlement payment by the District for treasury’s lost revenue)
Transactional costs
Pay off bonds or taxable refinancing
Damaged reputation in public markets
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Examples
Project: Bonds issued to finance acquisition, construction, equipping and furnishing of a new high school
Primary buildings – classrooms, administrative, cafeteria, etc.
Athletic Facilities Computers and other equipment and
furnishings
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Examples
What counts when determining tax compliance? District’s good-faith, reasonable
expectations? Actual use of bond proceeds? District’s allocation of bond proceeds?
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Examples
Buildings/Classrooms Lease to ACT prep company for
classes
Lease to non-profit community group for weekly meeting
Personal property - computers, equipment, furniture, etc.
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Examples
Buildings/Classrooms Contract with
maintenance/cleaning company
Cell tower easement to phone company
Food service contract with catering company for cafeteria
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Examples
Athletic Facilities Lease of aquatic center to YMCA
Lease of stadium to neighboring district for football games
Naming rights to private donor
Advertising
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Examples
What does the district do with the existing or previous school?
Bond-financed? Bonds outstanding?
Remedial action?
VCAP?
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Today’s Takeaways
Bond compliance is important and doesn’t end when all of the money is spent!
Don’t be afraid to ask questions early and often – answers often turn on the specific circumstances
Keep good documentation to support efforts
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Questions?
Gilmore & Bell, P.C.2405 Grand Blvd. Suite #1100
Kansas City, MO 64108816-221-1000
www.gilmorebell.com
Toni Stegeman ([email protected])James Dummitt ([email protected])