The Internal Revenue Service has determined that a nonprofit local development corporation qualifies as an issuer of bonds on behalf of the county that created it.
The service issued a private-letter ruling, dated May 28 but not released publicly until this week, that the corporation meets the criteria established in Revenue Ruling 57-187, which outlines the characteristics an "on behalf of" issuer must possess to issue tax-exempt debt.
According to that revenue ruling, the entity's creation must have been formally approved by the governing body, and its board of directors must be elected by that body, and its members cannot be paid.
In addition, any bonds the entity issues must be payable solely from revenues and receipts derived from the leasing or sale by the entity of its projects and the governing body cannot be liable for the payment of the principal or interest on the entity's bonds.
Further, the entity and the interest on its bonds must be exempt from all state taxes, its earnings cannot benefit a private person, and if and when it is dissolved, all its property must be transferred to the governing body that created it.
While the private-letter ruling did not identify the nonprofit local development corporation or other parties involved, the IRS found that the corporation was created by the county, its board was elected by the county, and its members are not compensated.
It also found that its tax-exempt debt issues are not backed by the full faith and credit of the county, but rather solely by the creditworthiness of the particular project they are funding.
Under state law, the corporation was created to acquire, rehabilitate, and improve for use industrial or manufacturing plants in the county, with the ultimate goal of reducing unemployment and providing new and better job opportunities for county residents. In pursuing these goals, the corporation also will be performing an essential government function, according to state law.
Furthermore, the corporation is subject to annual independent audits of its finances and must prepare and submit its annual budget to the county and state. It cannot modify its by-laws without first receiving approval from the chairman of the county's board.
Private-letter rulings are supposed to be applicable only to the issuers who request them and their particular facts and circumstances.
The IRS explicitly states that they cannot be cited or used as precedent in other tax matters. Nevertheless, these rulings are believed to provide insights into the agency's thinking, particularly on tax matters where little guidance exists or market participants have questions.
Bond attorneys said this week that the ruling is reasonable, expected given the facts and circumstances, and not particularly remarkable, as several rulings have been handed down in the past on this issue.
In fact, one bond attorney said he was surprised the corporation felt the need to seek a ruling, since its facts and circumstances appear to adhere to those outlined in the revenue ruling.