WASHINGTON — The Treasury Department's
These projects were added to the list after market participants requested them. The National Association of Bond Lawyers and the tax-exempt financing committee of the American Bar Association's taxation section had each separately asked that these items be on the plan. Additionally, the tax-exempt bond subcommittee of an IRS advisory committee asked for updated safe harbors on management contracts in the report it released in June.
The Treasury and Internal Revenue Service use the annual guidance plan to identify and prioritize tax issues that they should address through regulations and other documents. This new plan, which was released last week, identifies projects that they intend to actively work on from July 2014 through June 2015.
With management contracts, Treasury and the IRS plan to work on a revenue procedure that will update one from 1997 that pertains to the conditions under which management contracts do not result in private business use.
Under federal tax law, governmental and 501(c)(3) tax-exempt bond-financed projects are generally subject to private-business use and payments restrictions. The 501(c)(3) financings are conduit deals done for charitable nonprofit organizations such as hospitals.
Bonds generally are considered PABs if more than 10% of the proceeds are used for private business and more than 10% of the debt service is payable from, or secured by, a private party. The thresholds for these "private business use" and "private payment" tests are lowered to 5% when determining whether bonds issued for 501(c)(3) organizations are tax exempt.
IRS revenue procedure 97-13 provides some safe harbors that, when followed, ensure management contracts will not result in private business use. Under the safe harbors, an issuer or borrower generally won't exceed the private use restriction if they limit the length of a contract and the methodology used to determine compensation under that contract.
But in the years since this guidance was released, there have been many legislative, regulatory, economic and business practice changes that make the safe harbors difficult to meet, so issuers and borrowers have found it increasingly useful to implement management contracts without them, , according to the advisory committee report.
The guidance project on the arrangement created under the Patient Protection and Affordable Care Act, called Accountable Care Organizations, would be related to the issues concerning management contracts. The act encourages the creation of ACOs.
But ACOs are health care organizations where doctors, hospitals and other providers join together to coordinate care for Medicare patients. They can include both taxable and tax-exempt participants, including hospitals and other organizations that are borrowers or issuers of tax-exempt bond financings.
Nonprofit hospitals are concerned that participating in an ACO with a for-profit entity would result in private business use. The American Hospital Association has said that the current rules for management contracts are a barrier to hospitals using ACOs and other arrangements encouraged by the Affordable Care Act.
In addition to guidance on ACOs and management contracts, the guidance plan includes a third item not specifically mentioned in the previous plan: regulations on allocation and accounting principles. Proposed regulations on this topic were published in 2006, but have never been finalized. The plan for 2013-2014 had a more general item about guidance relating to PABs.
Other projects were also on the 2013-2014 plan, including guidance on: reallocations of new clean renewable energy bonds, the definition of a political subdivision; and final regulations on public approval requirements for PABs. The proposed regulations on PAB public approval requirements were published in 2008.
In September 2013, Treasury and the IRS released proposed regulations about arbitrage investment restrictions — which included a definition of issue price that market groups believe is unworkable --and rebate overpayment. The 2014-2015 guidance plan includes arbitrage regulations and rebate overpayment final regulations.
One of the tax-exempt bond items on the plan — guidance to provide temporary relief after a disaster — has already been published. An item on the previous plan about reissuance regulations was closed without publication.
