WASHINGTON — In a favorable decision, the Internal Revenue Service ruled that assessment bonds and lease revenue bonds do not satisfy a private loan financing test, according to recently issued private letter rulings.
The IRS published the PLRs Aug. 20, but they weren’t made public until late last week.
The letters described that a lease revenue bond issuer and an assessment bond issuer were formed to assist a city finance and construct a convention and exhibition facility. The city entered into a non-binding memorandum of understanding with a company that would provide a general framework for continued negotiations and agree to build a portion of the new project. The city expected to collect new revenues attributable to the project that would be sufficient to pay the debt service on the lease revenue bonds, the letters said.
However, if the new revenue received by the city fell short of the debt service, the company agreed to reimburse the city for that shortfall, the letters said.
At issue was whether the lease revenue bonds satisfied the private loan financing test. A bond is considered a private activity bond if it meets either of two sets of conditions as outlined in Section 141 of the Internal Revenue Code.
The private loan financing test is one criteria which says the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5% of the proceeds or $5 million.
The IRS concluded that the lease revenue bonds did not satisfy the private loan financing test because the issuer “neither directly loaned proceeds of the bonds to the company nor conveyed to the company benefits that are the economic equivalent of a loan of such proceeds.”
The IRS said their conclusion was based on several items including: an examination of each element of the exhibition facility project, various contractual arrangements, the parity in value to be exchanged under those contracts, the bonds to be issued to finance the project and the sources of revenue that will pay debt service.
The facts do not support a conclusion that the lease revenue bond issuer, the assessment bond issuer or the city will advance proceeds of the bonds to the company because the company’s payments to the city in connection with the project cannot be repayment of any such advance, the IRS said.
The IRS also disclosed that their ruling did not concern any tax consequences related to the bonds issues.
“The issuers represented that private business use and private payments or security would not be a problem, but requested, and received, favorable rulings on the private loan test,” said Tom Vander Molen, a partner in Dorsey & Whitney LLP’s tax and public finance group.
Typically lease revenue bonds and assessment bonds don’t result in private loans, Vander Molen said. However, the issuers might have requested a PLR because of the agreement that the company would make up any shortfall in the revenue sources.
The IRS determined that the agreement regarding revenue shortfalls did not result in an indirect loan to the company because the city would own the financed Hall and there was only a remote possibility that the company would be called upon to reimburse the city for debt service, Vander Molen said.