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Martha Bradley Washington University in St' Louis

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Title: Martha Bradley Washington University in St' Louis


1
Post-Issuance Compliance Plans for Tax Exempt
Bond Issues
CACUBO 2009 Annual Meeting
  • Martha Bradley Washington University in St.
    Louis
  • Jeff Lewis Ice Miller LLP
  • James Betley Ice Miller LLP

October 4, 2009
2
Post-Issuance Compliance Plan
  • Agenda
  • Overview of Compliance Rules
  • IRS Enforcement
  • Private Use Monitoring
  • Bond Compliance Programs
  • The Washington University Experience
  • Template for Comprehensive Plan

3
Post-Issuance Tax Compliance
"Post-issuance tax compliance begins with the
debt issuance process itself and provides for a
continuing focus on investments of bond proceeds
and use of bond-financed property. It will
require identifying existing policies, the
responsible people, the applicable procedures,
and the affected population."
"After the Bonds Are Issued Then What?" Advisory
Committee on Tax Exempt and Government
Entities June 13, 2007
4
Continuum of Requirements
  • Where are you on continuum?
  • A___________________________B
  • Continuum based on size, character and complexity
    of
  • Institution
  • Debt structure
  • Type of entity

5
Overview
  • 4 Basic Elements
  • Federal Tax Rules under IRC Sections 103 and
    141-150, principally
  • Private Use
  • Arbitrage
  • Continuing Disclosure obligations under Rule
    15c2-12
  • Indenture/Loan/Reimbursement Agreement covenant
    compliance
  • LOC renewals/other maintenance requirements
  • Rating Agency/Insurer surveillance
  • State oversight entities

6
Overview
  • Why Do a Compliance Program?
  • IRS ENFORCEMENT THREATS
  • Coordinate Disparate Responsibilities and
    Reporting Centers to Enhance Compliance
  • Reduce Liabilities and Risks

7
Overview
  • Why Do a Compliance Program?
  • Reallocation of bond proceeds and equity/other
    sources after the fact to maximize benefits
  • Manage use of facilities and related liabilities
  • Recordkeeping Regimen
  • FACILITATE REFUNDINGS

8
Overview
  • We urge a comprehensive approach
  • Better compliance
  • Better risk management
  • Better decision making
  • See Appendix A
  • Focus on Tax Compliance Today

9
Post-Issuance Tax Compliance A Brief History
  • A post-issuance compliance questionnaire was
    issued to 207 charities in 2007 to assess the
    compliance practices and procedures employed by
    charities with respect to their bonds.
  • On September 11, 2008, the IRS released a report
    presenting its analysis and preliminary
    conclusions on the data, which suggested
    potential problems related to
  • inadequate record retention,
  • failure to pay arbitrage rebate,
  • substantial private use of facilities, and
  • other weaknesses related to debt management and
    monitoring.

10
Post-Issuance Tax Compliance A Brief History
  • IRS "FY 2009 Tax Exempt Bonds Work Plan" suggests
    that additional soft contacts are planned in
    order to elicit compliance data through
    increased use of compliance check initiatives
    and correspondence examinations.
  • Revised Form 990, which includes Schedule K,
    Supplemental Information on Tax-Exempt Bonds.
  • Different rules for 501(c)(3)s and public
    universities
  • Whos who?

11
Post-Issuance Tax Compliance What It Means
  • What the IRS is Looking For
  • Written procedures and guidelines.
  • An individual identified to coordinate the plan.
  • Record keeping and retention guidelines.
  • Education and training.
  • Monitoring of arbitrage and rebate requirements.
  • Private business use monitoring.

12
Post-Issuance Compliance Schedule K
  • IRS Form 990, Schedule K See attached Appendix
    B
  • Only 501(c)(3)s not governmental.
  • Represents a substantial expansion of Bond
    reporting requirements.
  • Requires detailed annual reporting on the
    outstanding 501(c)(3) Bond issues of an
    organization (over 100,000 if issued after
    December 31, 2002).
  • Schedule K has 4 parts that focus on Bond issues,
    Proceeds, Private Business Use and Arbitrage.
  • All 4 parts must be completed for tax year 2009.
  • Certification of answers is made under penalty of
    perjury.

13
Post-Issuance Compliance Schedule K
  • Part III Private Business Use
  • Private business use compliance
  • is the most difficult area for
  • most institutions.

14
Post-Issuance Compliance Schedule K
  • Private Business Use General Rules
  • Private Business Use means use in a trade or
    business carried on by any person other than an
    exempt entity for its exempt purposes.
  • For a Public Institution, an exempt entity is any
    state or local governmental entity.
  • No more than the lesser 15m or 10 of the
    proceeds of a bond issue for a Public Institution
    (owned and operated by a state or local
    governmental entity) may be used for any Private
    Business Use.
  • 5 test for 501(c)(3) bonds exempt entities
    include governmental and (c)(3) entities.

15
Post-Issuance Compliance Schedule K
  • Private Business Use Specific Arrangements
  • Is the organization a partner in a
    partnership/member of a LLC . . .
  • Does the organization have any
  • Lease arrangements . . .
  • Management service contracts . . .
  • Research agreements . . .
  • which may result in "private business use?"

16
Post-Issuance Compliance Private Use Rules
  • Private Business Use Types of Private Use
  • Ownership
  • Leases and similar arrangements
  • Management contracts
  • Short term facilities use
  • Research contracts
  • Other beneficial use arrangements

17
Post-Issuance Compliance Private Use Rules
  • Private Business Use Exceptions
  • General Public Use
  • Short Term Use
  • Incidental Use
  • Safe Harbors
  • Management Contracts
  • Research Contracts

18
Post-Issuance Compliance Schedule K
  • Private Business Use - UBIT
  • Only a bond compliance issue for 501(c)(3) bonds.
  • What percentage of financed property is used in
    private business use by entities other than a
    501(c)(3) organization or a state or local
    government?
  • What percentage of financed property used in a
    private business use as a result of unrelated
    trade or business activity carried on by your
    organization or another 501(c)(3) organization?

19
Post-Issuance Compliance Schedule K
  • Private Business Use UBIT
  • Use of bond proceeds or bond-financed facilities
    by an exempt organization in an unrelated trade
    or business activity is considered private
    business use.
  • Whether an activity is an unrelated trade or
    business activity is determined in accordance
    with IRC section 513.
  • Two things to remember
  • Although the use of a bond financed property may
    not be considered an unrelated business use under
    IRC section 513, it may still be private use for
    purposes of IRC section 145.
  • Unrelated trade or business involving
    bond-financed property will generally constitute
    private business use regardless of whether the
    trade or business gives rise to a liability for
    unrelated business income tax .

20
Measurement
  • Per Issue, not per Project
  • Period
  • Over the life of the bond
  • Annual computation
  • Methods
  • Discrete space
  • Simultaneous use
  • Common areas

21
Measurement
  • 4 Steps in Calculation Process
  • Compute amount of bad use
  • Convert amount of BU to
  • Convert BU to of Bonds
  • Time conversion for life of Bonds--running
    calculation over Measurement Period

22
Measurement
  • Step 1
  • facility based calculation
  • first take equity allocations into account
  • any reasonable basis consistently applied --
    space, time, simultaneous/proportionate
  • highly fact sensitive and dynamic over time

23
Measurement
  • Steps 2 - 4
  • less commonly understood than step 1
  • examples in Appendix C to illustrate 2 and 3

24
Post-Issuance Compliance Schedule K
  • Private Business Use Retention of Bond Counsel
    Practices and
  • Procedures
  • Does the organization routinely engage bond
    counsel or other outside counsel to review any
    management or service contract or research
    agreements relating to the financed property?
  • Has the organization adopted management practices
    and procedures to ensure post-issuance compliance?

25
Post-Issuance Compliance
  • Consequences of a Failure to Comply
  • Loss of tax-exempt status for bonds
  • Liability to IRS or bondholders
  • Damage to reputation
  • Limit access to tax-exempt bond market.

26
Post-Issuance Compliance
  • Why establish a Post-Issuance Compliance Program?
  • Maintain tax-exempt status of bonds
  • Prepare for the possibility of an IRS audit or
    other "soft contact"
  • For 501(c)(3) borrowers, completion of Schedule
    K
  • Facilitate refundings
  • Limit potential liability to IRS or bondholders
  • Easy and cost-effective review process at time of
    a refunding.

27
Case Study --
  • Founded in 1853, Washington University is an
    independent co-educational, nondenominational
    research University with over 11,900
    degree-seeking students in a broad range of
    academic programs offered through the
    Universitys seven schools.
  • 2.0 billion operating revenue in FY 2009.
    Diverse revenue base includes federal research
    awards of 440 million in 2008, or 23 of revenue.

28
How a Representative Institution Might Structure
a Compliance Program
  • Debt Strategy Team
  • Treasurer Chair
  • Office of the General Counsel
  • Capital Planning
  • Facilities Planning and Management
  • Plant Accounting
  • Tax Planning/Accounting

29
How a Representative Institution Might
Structure a Compliance Program
  • Pre-Issuance Planning/ Post-Issuance Spending
  • Plan projects and financing requirements
  • Carve out segments with private use
  • Plan spend down of proceeds
  • Calculate amount that can be spent within
    allowable timeframe
  • Calculate reimbursement amount
  • Monitor spending of bond proceeds over draw
    period
  • Plant Accounting prepares monthly drawdown
    Allocates draws to eligible expenditures
    Includes ongoing update of percentage spent
    Works with Treasury and Facilities to note
    construction delays
  • Treasurer approves draw request to Trustee

30
How a Representative Institution Might
Structure a Compliance Program
  • Record retention policy
  • Indicates parties responsible for specific
    documents
  • Plant accounting maintains records of
    invoices/expenditures
  • Facilities maintains certificates of substantial
    completion
  • Policy on private use
  • Developed by Office of the General Counsel
  • Compliance Training
  • Periodic seminars with qualified bond counsel

31
How a Representative Institution Might Monitor
Private Use
  • Prior method Use simplifying assumption
  • Utilize space tracking system and research
    database
  • System flags space financed with tax exempt debt
  • Manual survey of primary sources who use the
    space
  • Include sponsored research agreements, clinical
    trials, drug studies, leases, management
    agreements
  • Overlay manual survey information onto space
    tracking system
  • Assume all nongovernmental use is private use
  • If below allowable percentage, no further review

32
How a Representative Institution Might Monitor
Private Use
  • Procedure changes due to Form 990 specific use
    analysis
  • Challenge how to filter/sort through private
    use for various categories of agreements
  • Clinical trials
  • Material transfer agreements
  • Research agreements
  • Other (e.g. sales and service agreements)
  • Who will be the arbiter for each category
  • Record keeping requirements for each category

33
How a Representative Institution Might Monitor
Private Use
  • Revise policy and procedures for approving
    private use
  • Update/amend written guidelines
  • Include decision tree analysis for end users
  • Update/detail procedures to seek approval of
    private use
  • Establish budget tracking code in financial
    information system
  • Track sales related to use
  • Track funding source for each space
  • Establish field in space tracking system to track
    safe harbor agreements
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