Treasury Department and Internal Revenue Service officials are weighing industry feedback as they push toward finalizing proposed allocation and accounting regulations for bond-financed mixed-use facilities.
That approach was evident yesterday at a public hearing at IRS headquarters here, where federal tax regulators and municipal market participants discussed the intricacies of the regulations.
Proposed on Sept. 26, the rules set forth standards for “mixed-use” facilities, which in addition to governmental use have private business use in excess of the 10% permitted for tax-exempt private-activity bonds. They allow issuers to finance mixed-use facilities with a combination of municipal bonds and qualified equity, which can come from taxable bonds or other funds.
“We really do view this as a work in progress because it’s a very difficult set of topics, and we will look long and hard at all of the comments,” said Treasury Department associate tax legislative counsel John J. Cross 3d.
Cross, who works in Treasury’s Office of Tax Policy, was joined at the hearing by Rebecca Harrigal and Johanna Som de Cerff of the IRS Office of Chief Counsel, both of whom played key roles in the drafting process.
The regulations provide one default, or “pro rata,” method for allocating bond proceeds to such projects, and two elective methods as well. Proceeds would generally be allocated under the pro rata method unless an issuer makes a timely election to use either the discrete physical portion method or the undivided portion allocation method.
Under the discrete physical portion allocation method, the issuer would have to divide its project into physical portions, such as the floors of an office building, using a “reasonable, consistent” system and objective, proportionate benchmarks such as cost, space, or fair market value.
The undivided portion allocation method is more abstract and involves a fixed percentage of private use based on objective, proportionate measures of benefits to be derived by various users. If an issuer uses this method, the percentage of private use must not exceed the percentage of capital expenditure in the non-bond portion of the overall financing.
Many municipal market groups have argued in comments submitted since September that the rules are unduly complex, and Carol L. Lew, president of the National Association of Bond Lawyers and a partner with Stradling, Yocca, Carlson & Rauth in Newport Beach, Calif., reiterated the case for simplification at yesterday’s hearing.
“We believe the existing structure in the proposed regulations is going to be too complicated, and difficult to apply and enforce,” she said afterwards.
NABL and other market groups consider the undivided portion allocation method the most useful of the options contained in the proposed allocation and accounting rules. They say it should be the default method in all cases, with some modifications such as the clarification that a “fixed percentage” of a project’s use refers to the percent financed with equity, not the percent of private use.
“We’re asking for the undivided portion allocation methodology to be the general rule without the restriction that the types of use have to be at the same time and on the same basis,” Lew said.
Market groups have also expressed concern about the proposed regulations’ anti-abuse rule, which requires issuers to use fair market values to determine whether the amounts allocated to private business use are “‘significantly greater’ than would be obtained under an otherwise permitted methodology.”
“Care has to be taken that we don’t adopt a rule where ‘significantly greater’ is going to be interpreted in such a way that people will be worried, in every run-of-the-mill mixed-use allocation, that they may be close enough that they’ll have to get an appraisal,” Lew remarked. “I think you’ll run into a lot of trouble.”
The NABL president also said the rule’s emphasis should be placed on going after the “big distortions” or problems. “Giving a little here in the interest of simplification would be greatly appreciated,” she said.
Cross, Harrigal, and Som de Cerff peppered Lew with questions at the hearing and thanked NABL for its extensive work on the issue. The Treasury and IRS officials said they would consider integrating some of the industry’s recommendations, but did not provide a timeframe for the release of the final rules.
“I was very impressed that they had read the comments and had so many detailed questions,” Lew said after the hearing. “I thought Rebecca, Johanna, and John were very prepared and thinking about a lot of issues we had raised in the comments.
“They appeared to be very open and willing to consider practical problems the industry has in dealing with allocation and accounting,” she added.
