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2014 MSBA/MASA Annual Conference

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Tax-exempt bonds and leases = lower interest ... Accounting of sources and uses of project funds and expenditures Identifies the bond-financed property What is the ... – PowerPoint PPT presentation

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Title: 2014 MSBA/MASA Annual Conference


1
2014 MSBA/MASA Annual Conference Restrictions on
Use of Bond-Financed Property Toni Stegeman
James Dummitt Gilmore Bell, P.C. and Linda
Quinley Columbia Public Schools
2
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?

3
WHY are there restrictions?
  • Tax-exempt bonds and leases lower interest
    rates, because bondholders/lenders dont 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.

4
Disadvantage of Tax-Exempt Financing
  • Strings!

5
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.

6
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

7
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

8
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

9
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)

10
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

11
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

12
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.)

13
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

14
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

15
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

16
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

17
Annual Compliance Checklist
18
Annual Compliance Checklist
19
Annual Compliance Checklist
20
Annual Compliance Checklist
21
Annual Compliance Checklist
22
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)

23
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

24
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

25
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 treasurys
    lost revenue)
  • Transactional costs
  • Pay off bonds or taxable refinancing
  • Damaged reputation in public markets

26
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

27
Examples
  • What counts when determining tax compliance?
  • Districts good-faith, reasonable expectations?
  • Actual use of bond proceeds?
  • Districts allocation of bond proceeds?

28
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.

29
Examples
  • Buildings/Classrooms
  • Contract with maintenance/cleaning company
  • Cell tower easement to phone company
  • Food service contract with catering company for
    cafeteria

30
Examples
  • Athletic Facilities
  • Lease of aquatic center to YMCA
  • Lease of stadium to neighboring district for
    football games
  • Naming rights to private donor
  • Advertising

31
Examples
  • What does the district do with the existing or
    previous school?
  • Bond-financed? Bonds outstanding?
  • Remedial action?
  • VCAP?

32
Todays Takeaways
  • Bond compliance is important and doesnt end when
    all of the money is spent!
  • Dont be afraid to ask questions early and often
    answers often turn on the specific
    circumstances
  • Keep good documentation to support efforts

33
Questions? Gilmore Bell, P.C. 2405 Grand Blvd.
Suite 1100 Kansas City, MO 64108 816-221-1000 www
.gilmorebell.com Toni Stegeman
(tstegeman_at_gilmorebell.com) James Dummitt
(jdummitt_at_gilmorebell.com)
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