WASHINGTON - The Treasury Department cannot prohibit the use of bonds backed by payments in lieu of taxes to finance sports stadiums under current tax law, the Treasury's assistant secretary of tax policy told Rep. Dennis Kucinich in a recent letter.

Kucinich, an Ohio Democrat, has argued that the Treasury should not permit PILOT bonds to be used to finance sports stadiums because stadiums mostly benefit private parties and do not spur economic development in the surrounding areas. The congressman, who chairs the House Oversight and Government Reform Committee's panel on domestic policy, plans to hold a hearing here sometime in September on PILOT bond financing of stadiums, including the new Yankee Stadium that is under construction in New York.

But the Treasury's Eric Solomon, in a 16-page letter that was dated July 23 though not publicly released until yesterday, told Kucinich: "It is critical to understand that ... the statutory framework gives state and local governments discretion and flexibility to use tax-exempt governmental bonds to finance whatever kind of projects they deem important, including stadiums."

Solomon was responding to a letter Kucinich sent the Treasury and Internal Revenue Service last month, contending that the departments should reconsider two private-letter rulings issued in 2006 that permitted PILOT bonds to be used to finance stadiums in New York City.

Kucinich said Solomon inaccurately interpreted the rulings when he testified before the subcommittee last October about whether public funds should be used for infrastructure rather than stadiums. IRS chief counsel Donald Korb similarly testified before the panel in a March 2007 hearing on the same matter.

The IRS is expected to also respond to Kucinich's letter, largely to weigh in on the letter rulings, but officials would not comment on when they might respond or what they might say.

The domestic policy subcommittee that Kucinich chairs had been scheduled to hold a hearing on stadiums and PILOTs yesterday, but decided to postpone the hearing until September after a New York state lawmaker on Monday suggested that the city may have overestimated to the IRS the land value for the new Yankees Stadium, which is being financed with over $900 million of PILOT bonds.

Assemblyman Richard Brodsky said that New York City appraised the value of the land at $21 million for its own purposes but told the IRS the land was worth $204 million.

Kucinich announced last week that he "has broadened the subcommittee's investigation of tax-exempt public financing of professional sports stadiums to include specific document requests relating to the valuation of the new Yankee Stadium."

The stadium was the subject of one of the two controversial IRS private-letter rulings, with the other addressing PILOT bonds issued for the new Mets stadium.

The Yankees had been seeking an additional $336 million in public financing for the stadium construction, but must again request IRS approval because the agency tightened its rules on issuing PILOTs after approving the initial stadium issue.

At the October hearing, Solomon said that current laws attempt to both ensure that tax-exempt debt is issued for critical government projects and allow municipalities to use such debt to finance projects with some private use. So long as a government uses a generally applicable tax, which includes PILOTs, the Treasury cannot write regulations to prohibit the practice, he testified.

However, Kucinich maintained in his letter that the Treasury in the past has debated regulatory language on PILOT bonds as potentially too broad and that, as a result, there was room in the regulations to prohibit the practice without a statutory change.

In proposed PILOT regulations released in October, the Treasury expressed concern that current regulations could be interpreted to restrict nearly all PILOT bond deals.

"Logic and the Treasury Department's own discussion of the issue in its rulemaking demonstrate that the provision could be reasonably interpreted to effect such a prohibition," Kucinich said in his letter.

However, Solomon maintained in his letter : "We do not believe that regulatory authority under the existing statutory structure would permit a regulatory prohibition on the use of tax-exempt governmental bonds to finance stadiums when the bonds are payable from payments, including PILOTs, that are, in substance, generally applicable taxes."

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