FEDERAL TAX ISSUES

John R. McQueen, Esq.

Tax-Exempt Bonds as a Financing Toolfor Construction of New College and University Facilities

June 28, 2007

MAJOR ISSUES

• Reimbursement Resolutions

• Capital Campaigns

• Limitations on Physician Agreements and Management Contracts

• Corporate-Sponsored Research

• Financial Covenants

• Tax Enforcement

Reimbursement Resolutions

• Types of Costs Covered

• Timing Requirements

• Content of Reimbursement Resolution

Types of Costs Covered

• Preliminary Expenditures Up to 20% Not Subject

• Capital Expenditures

• Land Acquisitions and Site Preparation

Timing Requirements

• 60-day Period Prior Covered

• Reimbursement of Hard Costs Within 18 Months of Placed-in-Service Date

• Reimbursement Within 3 Years of Original Expenditure

Content of Reimbursement Resolution

• General Project Description

• Maximum Principal Amount of Bonds

• Not Applicable to Prior Financing

Capital Campaigns

• “Sufficiently Direct Nexus”

• Replacement Proceeds Concept

• Potential Nexus Situations

Capital Campaigns

• Donor-Restricted Gifts

• Capital Campaign Purposes

• Preliminary Earmarking Not Fatal

Capital Campaigns

• Wording of Campaign Materials Crucial

• Include Broad Number of Purposes

• Campaign for Debt Service

• Campaign for Operating Expenses

Physician Agreements and Management Contracts

• Types of Private Business Use

• Leases

• Corporate-Sponsored Research

• Management Contracts

• Special Legal Entitlements

Management Contracts

• Term of Agreement

• Type of Compensation

• No Net Profit-Sharing

Management Contracts

• 15-Year Safe Harbor

• 10-Year Safe Harbor

• 5-Year Safe Harbor

• 3-Year Per-Unit Contracts

• 2-Year Revenue Contracts

Measurement of Private Business Use

• 5% Limit

• Square Footage Approach

• Fair Rental Value Approach

Corporate-Sponsored Research

• Basic Research

• Competitive Price

• No Pre-Set Royalties

Cooperative Research

• Basic Research – Multiple Sponsors

• 501(c)(3) Controls

• Patent Owned by 501(c)(3)

• Non-Exclusive Royalty-Free License

Financial Covenants

• Potential Arbitrage Issues

• Liquidity Covenants

Liquidity Covenant Safe Harbor

• Semi-Annual Testing

• Amount

• Reasonable Needs

• Provide Senior Lien

Tax Enforcement

• Phase I – 501(c)(3) Audit Program

• Issues

• Large Survey of Record Retention