(2) in the case of certain newly-operational facilities, compensation was based on a percentage of gross revenues from the facility, for a period which generally could not exceed one year. To qualify under (1) or (2) above, the owner of the facilities and the management company could not be subject to common control, with allowances for de minimis cases. (See, Rev. Proc. 82-14, 1982-1 C.B. 459.) Similar principles were applied in determining whether advance rulings would be issued, when bond-financed hospitals or similar facilities were used by nonexempt persons other than employees (e.g., use of public or private, nonprofit charitable hospitals by private physicians). (See, Rev. Proc. 82-15, 1982-1 C.B. 460.) Concept of loan In addition to the concept of use, the concept of loan was used under prior law to determine whether interest on bonds of qualified governmental units was tax-exempt (i.e., the private loan bond restriction, described above). A loan could result from the direct lending of bond proceeds or could arise from transactions in which indirect benefits that were the economic equivalent of a loan were conveyed. Thus, the determination of whether a loan was made depended on the substance of a transaction, as opposed to its form. For example, a lease or other contractual arrangement (e.g., a management contract or an output or take-or-pay contract) could in substance constitute a loan even if on its face, such an arrange ment did not purport to involve the lending of bond proceeds. A lease or other deferred payment agreement with respect to a bondfinanced facility that was not in form a loan generally was not treated as a loan of bond proceeds unless the agreement transferred tax ownership to a nongovernmental person. Similarly, an output or management contract with respect to a bond-financed facility generally was not treated as a loan of bond proceeds unless the agreement in substance shifted significant burdens and benefits of ownership to the purchaser or manager. The concepts of loan and use were related in that in every case in which a loan was present, the borrower was a user of bond proceeds or bond-financed property. On the other hand, certain limited uses of bond proceeds or bond-financed property did not give rise substantively to a loan. Exceptions for certain bonds for nongovernmental persons Industrial development bonds As indicated above, under prior law, IDBs were obligations issued as part of an issue (1) more than 25 percent of the proceeds of which were to be used in a trade or business carried on by a nonexempt person (i.e., any person other than a governmental unit or a section 501(c)(3) organization), and (2) the payment of more than 25 percent of the principal or interest on which was to be derived from or secured by money or property used in a trade or business. Interest on IDBs was tax-exempt only if the bonds were issued to finance certain specified exempt activities, were used for development of industrial park sites, or were exempt small issues. Exempt-activity IDBs One of the exceptions pursuant to which interest on IDBs was tax-exempt was when the proceeds of the bonds were used to finance an exempt activity. Under prior law, the following exempt activities were eligible for tax-exempt financing: (1) Airports.-Tax-exempt IDBS could be issued to finance airports, including related storage or training facilities (sec. 103(b)(4)(D)). Treasury Department regulations provided that airport property eligible for tax-exempt financing included facilities that were directly related and essential to servicing aircraft, enabling aircraft to take off and land, or transferring passengers or cargo to or from aircraft (e.g., terminals, runways, hangars, loading facilities, repair shops, and radar installations). The regulations further provided that airports included other functionally related and subordinate facilities located at or adjacent to the airport which were of a character and size commensurate with the character and size of the airport in question. For example, Treasury Department regulations provided that a hotel at or adjacent to an airport could be financed with exempt-activity IDBS under prior law if the number of guest rooms was reasonable in relation to the size of the airport (taking into account current and projected passenger usage) and the number and size of meeting rooms (if any) was in reasonable proportion to the number of guest rooms. A maintenance hangar for airplanes similarly was treated as a related structure; however, an office or a computer serving a regional function of an airline company was not functionally related and subordinate property. (See, Treas. Reg. sec. 1.103-8(e)(2)(ii).) In addition to hotels, the Treasury regulations specified that airport facilities eligible for tax-exempt financing included ground transportation, parking areas, and restaurants and retail stores located in terminal buildings. Finally, noise abatement land (i.e., land adjacent to an airport that is impaired by a significant level of airport noise) could be treated as part of an airport under specified circumstances. (2) Docks and wharves.-Exempt-activity IDBS could be used to provide docks, wharves, and related storage and training facilities. Docks and wharves included the structures alongside which vessels dock, equipment needed to discharge cargo and passengers from vessels (e.g., cranes and conveyers), and related storage, handling, office, and passenger areas. (Šee, Treas. Reg. sec. 1.103-8(e)(2)(iii).) Related storage facilities included adjacent grain elevators, warehouses, or oil and gas storage tanks. (See, Treas. Reg. sec. 1.1038(e)(3).) (3) Mass commuting facilities.-Mass commuting facilities eligible for IDB financing included real property, machinery, equipment, and furniture serving bus, subway, rail, ferry, or other commuters on a day-to-day basis, and related storage and training facilities. Mass commuting facilities also included terminals and functionally related and subordinate facilities such as parking garages, car barns, and repair shops. (See, Treas. Reg. sec. 1.1038(e)(2)(iv).)10 10 Tax-exempt financing for mass commuting vehicles (as opposed to terminals, etc.) previously was authorized as an exempt activity; that authorization expired for bonds issued after 1984. (4) Sewage disposal facilities. (6) Facilities for the furnishing of water, including water furnished for irrigation purposes. (7) Facilities for the local furnishing of electric energy or gas, in areas not exceeding two contiguous counties or a city and one contiguous county.11 (8) Local district heating and cooling facilities. (9) Projects for multifamily residential rental property.-Taxexempt IDBs could be issued to finance projects for multifamily residential rental property, if at least 20 percent of the units in the project (15 percent, in targeted areas) were "set aside" for occupancy by low- or moderate-income individuals (sec. 103(b)(4)(A)).12 The determination of low- or moderate-income was made by reference to rules established under section 8 of the Housing Act of 1937 for determining lower-income families, except that the percentage of family median gross income that qualified as low or moderate was 80 percent (regardless of whether section 8 of the Housing Act of 1937 established another percentage). Prior-law Treasury Department regulations did not provide specifically that adjustments for family size were to be made in determining the applicable percentage of median gross income to be used under these restrictions. However, the Treasury Department on November 7, 1985, proposed regulations requiring family size adjustments, effective for bonds issued after December 31, 1985 (Prop. Treas. Reg. sec. 1.103-8(b), 50 Fed. Reg. 46303 (Nov. 7, 1985)). Treasury regulations further provided that no unit could be consid ered to be occupied by low- or moderate-income individuals if all of its occupants were students (as determined under sec. 151(e)(4)), no one of whom was entitled to file a joint income tax return. The set-aside requirement had to be satisfied continuously during a prescribed "qualified project period" (i.e., 20 percent of the housing units had to continue to be occupied by qualifying low- or moderate-income tenants during this period.) If a tenant qualified as a low- or moderate-income tenant when he or she moved into an apartment, however, that tenant continued to be treated as a lowor moderate-income tenant throughout the period the apartment was occupied, regardless of subsequent increases in the tenant's income. A unit vacated by a low- or moderate-income tenant continued to be treated as occupied by such a tenant until the unit was reoccupied, other than for a temporary period (not exceeding 31 days). In addition to satisfying tenant income requirements, bond-financed multifamily residential rental property was required to remain rental housing throughout the qualified project period. The term qualified project period was defined as the period beginning on the first date on which at least 10 percent of the units in the project were first occupied (or the date on which the IDBS 11 Under the 1984 Act. two special exceptions were provided treating the Long Island Lighting Company and the Bradley Lake hydroelectric facility in Alaska as satisfying the local furnishing of electricity test (secs. 644 and 645 of the 1984 Act). 12 Bonds issued under section 11b of the United States Housing Act of 1937 that were in substance IDBs were required to satisfy all Internal Revenue Code requirements applicable to IDBS for multifamily residential rental property, in order to qualify for tax-exemption. This rule ap plied both to new money and refunding bonds issued after June 18, 1984. were issued) and ending on the latest of the date: (1) that was 10 years after the date on which at least 50 percent of the units were first occupied; (2) that was a number of days after the date on which any units were first occupied, equal to one-half of the number of days in the term of the bonds having the longest maturity; or (3) on which any assistance provided to the project under section 8 of the Housing Act of 1937 terminated. The low- or moderate-income set-aside requirement was reduced from 20 percent to 15 percent in targeted areas. For purposes of this reduced set-aside requirement, the term targeted area was defined as: (1) a census tract in which 70 percent or more of the families had incomes that were 80 percent or less of the applicable statewide median family income, or (2) an area of chronic economic distress as determined under statutory criteria. (See, former sec. 103A(k)(3).) Failure to comply with the set-aside and rental use requirements at any time during the qualified project period resulted in the interest on the bonds becoming taxable, retroactive to the date of issue. Under Treasury Department regulations, however, if noncompliance with the requirements was corrected within a reasonable period (at least 60 days) after the noncompliance reasonably should have been discovered, the tax-exempt status of the bond interest was not affected. (Treas. Reg. sec. 1.103-8(b)(6).) (10) Additional exempt activities.-Prior law also allowed taxexempt IDB financing for sports facilities; convention or trade show facilities; parking facilities; and air or water pollution control facilities. An exemption for certain hydroelectric generating facilities generally expired after 1985.13 Public use requirement for facilities financed by exempt-activity IDBS.-Treasury Department regulations required that to qualify for financing with exempt-activity IDBS, a facility had to serve the general public or be available on a regular basis for general public use, as contrasted with similar types of facilities that were constructed for the exclusive use of a limited number of nonexempt persons in their trades or businesses. For example, the regulations provide that a private dock or wharf serving only a single manufacturing plant would not qualify as a facility for general public use; however, a dock or wharf at a port that served the general public (or a hangar or repair facility at a municipal airport) would qualify even if the specific bond-financed property was owned by, or leased to, a nonexempt person, provided that such nonexempt person directly served the general public (e.g., as a common carrier of passengers and/or cargo). Similarly, an airport owned or operated by a nonexempt person for general public use satisfied the public use requirement; however, a landing strip which, by reason of a formal or informal agreement or by reason of geographic location, would not be available for general public use did not satisfy the requirement. (See, Treas. Reg. sec. 1.103-8(a)(2).) Under the Treasury Department regulations, sewage or solid waste disposal facilities, as well as air or water pollution control 13 This provision was extended (through 1988) for property with respect to which an application for a license had been docketed by the Federal Energy Regulatory Commission (FERC) before January 1, 1986. 72-236 - 87 - 37 facilities, were considered to satisfy the general public use requirement even though they were part of an otherwise nonpublic facility. Industrial park IDBs Under prior law, tax-exempt IDBS could be used to finance the acquisition or development of land as a site for an industrial park. Small-issue IDBS In general.-Prior law also permitted tax-exemption for interest on certain small issues of IDBs, the proceeds of which were used for the acquisition, construction, or improvement of land or depreciable property (the "small-issue" exception).14 Under prior law, the small-issue exception generally was scheduled to expire after December 31, 1986; small-issue IDBS to finance manufacturing facilities could be issued for an additional two years, through 1988.15 Small-issue IDBs were issues having an aggregate authorized face amount (including certain outstanding prior issues) of $1 million or less. Alternatively, the aggregate face amount of the issue, together with the aggregate amount of certain related capital expenditures during the six-year period beginning three years before the date of the issue and ending three years after that date, could not exceed $10 million. 16 In determining whether an issue met the requirements of the small-issue exception, previous small issues (and in the case of the $10-million limitation, capital expenditures during a six-year period) were taken into account if (1) they were with respect to a facility located in the same incorporated municipality or the same county (but not in any incorporated municipality) as the facility being financed with the small-issue IDBs, and (2) the principal users of both facilities were the same, or two or more related, persons. Capital expenditures were not considered for purposes of the $10million limit if the expenditures (1) were made to replace property destroyed or damaged by fire, storm, or other casualty; (2) were required by a change in Federal, State, or local law made after the date of issue; (3) were required by circumstances that reasonably could not be foreseen on the date of issue; 17 or (4) were qualifying in-house research expenses (excluding research in the social sciences or humanities and research funded by outside grants or contracts). $40-million limitation.-Interest on small-issue IDBs was taxable if the aggregate face amount of all outstanding tax-exempt IDBS (both exempt-activity and small-issue) that would be allocated to any beneficiary of the small-issue IDBS exceeded $40 million. Bonds 14 The small-issue exception did not apply to obligations a significant portion of the proceeds of which was to be used to provide multifamily residential rental property. Thus, IDBS to finance residential rental property had to be issued under the exempt-activity IDB exception, discussed above. 15 Prior law precluded any refunding of small-issue IDBs after the scheduled termination date for originally issuing the type of bond involved. 16 In the case of facilities with respect to which an Urban Development Action Grant (UDAG grant) had been made (before issuance of the bonds) under the Housing and Community Development Act of 1974, capital expenditures of up to $20 million were allowed. "The excluded expenditures under this exception could not exceed $1 million. |