CHICAGO — Partnerships between governmental or nonprofit entities and private entities should be treated favorably under private-activity bond and 501(c)(3) bond rules, the National Association of Bond Lawyers told tax regulators.
NABL made the argument in written comments it submitted to Treasury Department and Internal Revenue Service officials about the treatment of partnerships on Wednesday, the same day the group started its annual Bond Attorneys' Workshop here. The comments supplement recommendations NABL made in 2006 and 2008.
NABL said that a partnership between a government or nonprofit and a for-profit entity should be treated as an aggregate of the partners, rather than as a standalone entity, at least in some situations. Under aggregate treatment, a partnership would be disregarded and each partner would be viewed as directly owning an interest of the partnership assets. As a result, a governmental or nonprofit partner would be able to use tax-advantaged bonds to finance the portion of a partnership-owned facility that it is using or owning, the group said.
Governments and nonprofits form partnerships with private entities to carry out projects that will benefit from being mixed use. "Public-private partnerships permit governments and 501(c)(3) organizations to take advantage of cost and economy of scale efficiencies in terms of project development and can often facilitate the ultimate delivery of services at lower cost than the public sector can achieve alone," NABL said.
However, it is currently difficult for the benefits of partnerships to be realized with tax-advantaged bonds, the group said. Under the proposed allocation and accounting regulations released in 2006, a partnership between a government or a nonprofit and a private entity would be treated as a standalone, nongovernmental entity for purposes of determining whether bonds meet the private-activity bond tests. Partnerships are also treated as separate entities for purposes of the ownership requirement for 501(c)(3) bonds.
If a public-private collaboration is treated as a standalone entity, there could be too much private business use or private ownership for tax-exempt bonds to be used to finance the facility that is to be used or owned by the partnership, said Matthias Edrich, a shareholder at Greenberg Traurig who was chair of the ad-hoc committee that drafted the paper.
Governmental bonds generally are PABs if more than 10% of the project is being used for private business use and more than 10% of the debt service is paid from private payments. PABs are taxable unless they are used for certain purposes. For 501(c)(3) bonds to be tax-exempt, they cannot exceed the private business use and private payment tests at a lower, 5% threshold. Additionally, 501(c)(3) bonds can only be tax-exempt if all the property they finance is owned by a nonprofit or governmental unit.
In the preamble to the proposed regulations, Treasury and the IRS said they were considering not viewing government-private partnerships (or nonprofit-private partnerships in the case of 501(c)(3) bonds) as standalone entities in cases where each partnership item — such as income, gains and losses, and credits — was divided on the same basis as the entities' interest in the partnership, and the shares remain constant. They asked the public to comment on whether it would be useful to treat this type of partnership favorably.
The proposed regulations already do not treat partnerships as separate entities for private business use purposes if all of the partners are governments or, in the case of 501(c)(3) bonds, all of the partners are governments or nonprofit organizations.
NABL said that favorable treatment of partnerships between public and for-profit entities would be in line with other tax rules and IRS conclusions. For example, in the case of jointly-owned output facilities like buildings used for electric and gas generation, a governmental unit can finance its portion of the facility with tax-exempt bonds and the ownership interest of any other joint owner is not treated as private business use. Additionally, in a 2011 fact sheet, the IRS said that the activities of partners in accountable care organizations, which are set up under the Affordable Care Act, should be attributed on an aggregate basis.
"NABL believes that the policies which aim to limit private business uses and ownership of bond-financed property, are not, in the context of economically advantageous public-private partnerships, in any way impaired by permitting aggregate treatment of public-private partnerships in cases where the attributes of ownership in the partnership are fixed for at least as long as any tax-advantaged bonds will remain outstanding," the group said.
The association submitted its comments after Treasury and IRS officials asked NABL to provide their thoughts on the topic. The regulators asked NABL to focus on how aggregate treatment of public-private partnerships would help promote policies of the Affordable Care Act, Edrich said.
Aggregate treatment of partnerships would make it easier for hospitals to undertake endeavors encouraged by the ACA, NABL said. An aim of the ACA is to "transform the delivery of health care services from a series of discrete actions by disparate entities to the provision of services along a continuum of care, with communication and coordination among participants," the group said. In order to achieve this goal, hospitals need to work with for-profit health care providers, and it may make sense for the entities to create partnerships.
Favorable treatment of these partnerships would allow tax-advantaged debt to be used for the public or nonprofit portion of the ventures and would prevent governmental and nonprofit hospitals from having to choose between issuing taxable debt or foregoing the partnerships, according to the paper.
The partnership issue is important because "the industry has had questions about the matter for a long time and there's been uncertainty on how to accomplish some projects that would promote the Affordable Care Act policies but currently can't be done," Edrich said.
While the paper focuses on health care, the partnership issue is relevant to other areas as well, including water projects, recreational facilities and hotel and conference facilities, he said.
