The Internal Revenue Service has ruled that an agency consisting of several governments can finance the acquisition of gas wells with tax-exempt bonds even though it does not meet all the regulatory requirements.
In a private-letter ruling that was publicly released last month, the IRS determined that the agency could refinance the acquisition of gas wells with tax-exempt bonds, even though the governments lacked the specific statutory authority to form the agency, as required by an IRS revenue ruling on the matter.
It also determined that the agency could issue tax-exempt debt even though it would share the wells with private business users.
The ruling, dated April 15, did not identify the bonds, agency, or governments. Private-letter rulings, while technically applicable only to the issuer that requested them, are seen as important guidance on the IRS' thinking on tax matters.
The decision surprised and pleased bond attorneys, who said it indicated more flexibility from the IRS on these types of situations than previously thought.
David Caprera, a partner at Kutak Rock LLP in Denver, said many attorneys have long believed that an "on behalf of" issuer of this sort is only cleared to issue tax-exempt debt if it meets every criteria in revenue ruling 57-187, which addresses boards or agencies that issue tax-exempt debt on behalf of several municipalities.
"This ruling says, 'The agency met most of the requirements,' " he said. "I don't think most practitioners in the past thought close was good enough in this context."
In the ruling, the IRS said that most of the facts in this ruling are the same as the facts in revenue ruling 57-187, and therefore it determined that the bonds can be considered issued on behalf of the governments and would be tax-exempt.
Tom Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis, said the ruling is indicative of a shift in IRS thinking on the required statutory language. He said the fact that each government adopted a resolution, not a specific law, to authorize the creation of the agency may have been sufficient.
"More recently, the IRS has suggested (although perhaps not in a written form) that it is enough that the member political subdivisions approve the creation of the specific joint-powers agency," he said in an e-mail. "To the extent the IRS is consciously taking the position that this is sufficient, and that it no longer requires an activity-specific state statute, it is a welcome clarification."
Even though he was pleased with the ruling, Caprera said he would not likely offer unqualified opinions based on it. He said one ruling, which could involve specific and relevant facts not mentioned in the document, was not sufficient for him to drastically change his stance on the matter.
"This is the first ruling that deviates from what I believe had been the historic view of this matter, and for me, one private-letter ruling with specific facts isn't going to be enough," he said. "If they came out with several more rulings that were on the same bent, maybe I'd come into the fold, but at the moment ... I'm having trouble accepting it."
Vander Molen said he would at least need to speak with IRS officials about the ruling to get a better sense of their position on the issue before rethinking the way he offers opinions about these agencies.
However, both attorneys praised the second portion of the ruling, where the IRS determined that even though the agency shares the gas wells with private enterprises, they are considered mixed-use facilities, meaning no private business use has occurred under the bond-financed endeavor.
Caprera praised the ruling as "absolutely correct," saying, "It stands for the proposition that you can split the ownership into property interests, and treat each property interest as separate."
"If you can identify a separate property interest, then you can finance it without considering the owners of the other interests as being users of the bond proceeds," he added. "It's a good approach."
"It properly and sensibly reaffirms in a new context the focus on the use of the financed portion of a mixed-use facility and the separate ownership interests in such facilities," Vander Molen said.
