IRS: Change in PAB-Financed Project Location Okay

WASHINGTON — Using bond proceeds to construct a university athletic facility at a different location than the potential ones mentioned in a public notice will not cause the bonds to fail to meet public approval requirements, the Internal Revenue Service ruled.

Bond lawyers said the IRS' conclusion in the private-letter ruling was reasonable and similar to some, but not all, past rulings relating to public notice requirements.

The PLR was dated April 3 but not released until Friday. It was signed by James Polfer, chief of the tax-exempt bond branch in the IRS chief counsel's office. The ruling did not identify the issuer of the bonds or the borrower of the proceeds.

The issuer was generally described in the PLR as an authority that assists in financing educational services and facilities through loans to nonprofit corporations. The borrower is a 501(c)(3) organization that plans, finances, constructs, develops, maintains and operates sports facilities for exclusive use of a university and its athletics department, the IRS said.

Before the bonds were issued, the authority had published a notice in general-circulation newspapers that said it would hold a hearing about the proposed issuance and gave the maximum aggregate principal amount of the bonds.

The notice also indicated that the bond proceeds would be loaned to the borrower and used to finance three athletic facilities on the university's campus. The notice provided general descriptions of the location of the site for one of the facilities, two potential locations for the second facility and two potential locations for the third facility, according to the ruling.

But after the notice was published and the bonds were issued, the borrower and the university determined that the third facility had to be relocated to a different location on the university's campus. The revised location is no more than one-tenth of a mile from one of the potential sites for the facility that was described in the notice. The portion of the bond proceeds available for the facility will still be used for the purpose stated in the notice, according to the ruling.

Under federal tax law that was added to code by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 501(c)(3) bonds are only tax-exempt if they are approved by the governmental unit that issued the bonds or that the bonds were issued on behalf of. A bond issue is considered approved by a governmental unit if reasonable public notice is given for a hearing on the issue, the public hearing is held, and the bond issue is approved by the applicable elected representative.

Under tax regulations, a facility is within the scope of approval if the public hearing notice and the approval contain: a general description of the facility to be financed; the maximum aggregate amount of bonds to be issued to finance the facility; the identity of the initial owner, operator or manager of the facility; and the prospective location of the facility. "Insubstantial deviations" from what is listed in the notice are allowed.

The IRS wrote in its ruling that the proposed use of bond proceeds to construct the athletic facility at the slightly different location is an insubstantial deviation from what was included in the authority's notice.

"While the use of bond proceeds to construct [the facility] at the revised location was not expected or foreseen at the time the bonds were issued, the notice did not fail to put the public in the affected area on notice as to borrower's intention to use the bond proceeds to finance projects that consist of improvements to certain athletic facilities located on the campus of [the] university," the IRS wrote.

There have been other private-letter rulings over the years where the IRS found that projects whose location moved more than one-tenth of a mile from the original site were still insubstantial deviations from the public hearing notices, said Matthias Edrich, a tax partner at Kutak Rock LLP in Denver.

But in other cases, the IRS has given issuers unfavorable opinions when they have concluded that certain changes to the use of proceeds be ruled insubstantial deviations, said Linda Schakel, a partner at Ballard Spahr LLP in Washington.

The IRS and Treasury Department released proposed regulations on the public-approval requirements in 2008. They were generally received favorably but have not yet been finalized and cannot be relied upon.

Edrich said the recently released private-letter ruling is consistent with the theme of the proposed rules.

"The proposed regulations indicate that the notice and approval should provide a general description of the location in a manner that reasonably informs readers of the bond-financed project," he said. "As an example, the proposed regulations suggest that an approval identifying boundary streets of a university campus would be sufficient to give residents sufficient notice of projects anywhere within the campus."

The proposed regulations would provide two safe harbors under which certain changes would not be considered substantial deviations. It also would allow issuers in certain cases to cure substantial deviation from the information provided in public notices and approvals through subsequent public approvals.

"Determining whether a change from the project description contained in the notice of public hearing constitutes an insubstantial deviation is often difficult, as there isn't an objective standard to apply," said Mike Larsen, a partner at Parker Poe Adams & Bernstein LLP in Charleston, S.C. "This is the type of issue that the 2008 Proposed TEFRA Regulations, if adopted, would largely eliminate."

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