Martha Bradley Washington University in St' Louis

1
Post-Issuance Compliance Plans for Tax Exempt
Bond Issues
CACUBO 2009 Annual Meeting

• Martha Bradley Washington University in St.
  Louis
• Jeff Lewis Ice Miller LLP
• James Betley Ice Miller LLP

October 4, 2009
2
Post-Issuance Compliance Plan

• Agenda
• Overview of Compliance Rules
• IRS Enforcement
• Private Use Monitoring
• Bond Compliance Programs
• The Washington University Experience
• Template for Comprehensive Plan

3
Post-Issuance Tax Compliance
"Post-issuance tax compliance begins with the
debt issuance process itself and provides for a
continuing focus on investments of bond proceeds
and use of bond-financed property. It will
require identifying existing policies, the
responsible people, the applicable procedures,
and the affected population."
"After the Bonds Are Issued Then What?" Advisory
Committee on Tax Exempt and Government
Entities June 13, 2007
4
Continuum of Requirements

• Where are you on continuum?
• A___________________________B
• Continuum based on size, character and complexity
  of
• Institution
• Debt structure
• Type of entity

5
Overview

• 4 Basic Elements
• Federal Tax Rules under IRC Sections 103 and
  141-150, principally
• Private Use
• Arbitrage
• Continuing Disclosure obligations under Rule
  15c2-12
• Indenture/Loan/Reimbursement Agreement covenant
  compliance
• LOC renewals/other maintenance requirements
• Rating Agency/Insurer surveillance
• State oversight entities

6
Overview

• Why Do a Compliance Program?
• IRS ENFORCEMENT THREATS
• Coordinate Disparate Responsibilities and
  Reporting Centers to Enhance Compliance
• Reduce Liabilities and Risks

7
Overview

• Why Do a Compliance Program?
• Reallocation of bond proceeds and equity/other
  sources after the fact to maximize benefits
• Manage use of facilities and related liabilities
• Recordkeeping Regimen
• FACILITATE REFUNDINGS

8
Overview

• We urge a comprehensive approach
• Better compliance
• Better risk management
• Better decision making
• See Appendix A
• Focus on Tax Compliance Today

9
Post-Issuance Tax Compliance A Brief History

• A post-issuance compliance questionnaire was
  issued to 207 charities in 2007 to assess the
  compliance practices and procedures employed by
  charities with respect to their bonds.
• On September 11, 2008, the IRS released a report
  presenting its analysis and preliminary
  conclusions on the data, which suggested
  potential problems related to
• inadequate record retention,
• failure to pay arbitrage rebate,
• substantial private use of facilities, and
• other weaknesses related to debt management and
  monitoring.

10
Post-Issuance Tax Compliance A Brief History

• IRS "FY 2009 Tax Exempt Bonds Work Plan" suggests
  that additional soft contacts are planned in
  order to elicit compliance data through
  increased use of compliance check initiatives
  and correspondence examinations.
• Revised Form 990, which includes Schedule K,
  Supplemental Information on Tax-Exempt Bonds.
• Different rules for 501(c)(3)s and public
  universities
• Whos who?

11
Post-Issuance Tax Compliance What It Means

• What the IRS is Looking For
• Written procedures and guidelines.
• An individual identified to coordinate the plan.
• Record keeping and retention guidelines.
• Education and training.
• Monitoring of arbitrage and rebate requirements.
• Private business use monitoring.

12
Post-Issuance Compliance Schedule K

• IRS Form 990, Schedule K See attached Appendix
  B
• Only 501(c)(3)s not governmental.
• Represents a substantial expansion of Bond
  reporting requirements.
• Requires detailed annual reporting on the
  outstanding 501(c)(3) Bond issues of an
  organization (over 100,000 if issued after
  December 31, 2002).
• Schedule K has 4 parts that focus on Bond issues,
  Proceeds, Private Business Use and Arbitrage.
• All 4 parts must be completed for tax year 2009.
• Certification of answers is made under penalty of
  perjury.

13
Post-Issuance Compliance Schedule K

• Part III Private Business Use
• Private business use compliance
• is the most difficult area for
• most institutions.

14
Post-Issuance Compliance Schedule K

• Private Business Use General Rules
• Private Business Use means use in a trade or
  business carried on by any person other than an
  exempt entity for its exempt purposes.
• For a Public Institution, an exempt entity is any
  state or local governmental entity.
• No more than the lesser 15m or 10 of the
  proceeds of a bond issue for a Public Institution
  (owned and operated by a state or local
  governmental entity) may be used for any Private
  Business Use.
• 5 test for 501(c)(3) bonds exempt entities
  include governmental and (c)(3) entities.

15
Post-Issuance Compliance Schedule K

• Private Business Use Specific Arrangements
• Is the organization a partner in a
  partnership/member of a LLC . . .
• Does the organization have any
• Lease arrangements . . .
• Management service contracts . . .
• Research agreements . . .
• which may result in "private business use?"

16
Post-Issuance Compliance Private Use Rules

• Private Business Use Types of Private Use
• Ownership
• Leases and similar arrangements
• Management contracts
• Short term facilities use
• Research contracts
• Other beneficial use arrangements

17
Post-Issuance Compliance Private Use Rules

• Private Business Use Exceptions
• General Public Use
• Short Term Use
• Incidental Use
• Safe Harbors
• Management Contracts
• Research Contracts

18
Post-Issuance Compliance Schedule K

• Private Business Use - UBIT
• Only a bond compliance issue for 501(c)(3) bonds.
• What percentage of financed property is used in
  private business use by entities other than a
  501(c)(3) organization or a state or local
  government?
• What percentage of financed property used in a
  private business use as a result of unrelated
  trade or business activity carried on by your
  organization or another 501(c)(3) organization?

19
Post-Issuance Compliance Schedule K

• Private Business Use UBIT
• Use of bond proceeds or bond-financed facilities
  by an exempt organization in an unrelated trade
  or business activity is considered private
  business use.
• Whether an activity is an unrelated trade or
  business activity is determined in accordance
  with IRC section 513.
• Two things to remember
• Although the use of a bond financed property may
  not be considered an unrelated business use under
  IRC section 513, it may still be private use for
  purposes of IRC section 145.
• Unrelated trade or business involving
  bond-financed property will generally constitute
  private business use regardless of whether the
  trade or business gives rise to a liability for
  unrelated business income tax .

20
Measurement

• Per Issue, not per Project
• Period
• Over the life of the bond
• Annual computation
• Methods
• Discrete space
• Simultaneous use
• Common areas

21
Measurement

• 4 Steps in Calculation Process
• Compute amount of bad use
• Convert amount of BU to
• Convert BU to of Bonds
• Time conversion for life of Bonds--running
  calculation over Measurement Period

22
Measurement

• Step 1
• facility based calculation
• first take equity allocations into account
• any reasonable basis consistently applied --
  space, time, simultaneous/proportionate
• highly fact sensitive and dynamic over time

23
Measurement

• Steps 2 - 4
• less commonly understood than step 1
• examples in Appendix C to illustrate 2 and 3

24
Post-Issuance Compliance Schedule K

• Private Business Use Retention of Bond Counsel
  Practices and
• Procedures
• Does the organization routinely engage bond
  counsel or other outside counsel to review any
  management or service contract or research
  agreements relating to the financed property?
• Has the organization adopted management practices
  and procedures to ensure post-issuance compliance?

25
Post-Issuance Compliance

• Consequences of a Failure to Comply
• Loss of tax-exempt status for bonds
• Liability to IRS or bondholders
• Damage to reputation
• Limit access to tax-exempt bond market.

26
Post-Issuance Compliance

• Why establish a Post-Issuance Compliance Program?
  
• Maintain tax-exempt status of bonds
• Prepare for the possibility of an IRS audit or
  other "soft contact"
• For 501(c)(3) borrowers, completion of Schedule
  K
• Facilitate refundings
• Limit potential liability to IRS or bondholders
• Easy and cost-effective review process at time of
  a refunding.

27
Case Study --

• Founded in 1853, Washington University is an
  independent co-educational, nondenominational
  research University with over 11,900
  degree-seeking students in a broad range of
  academic programs offered through the
  Universitys seven schools.
• 2.0 billion operating revenue in FY 2009.
  Diverse revenue base includes federal research
  awards of 440 million in 2008, or 23 of revenue.

28
How a Representative Institution Might Structure
a Compliance Program

• Debt Strategy Team
• Treasurer Chair
• Office of the General Counsel
• Capital Planning
• Facilities Planning and Management
• Plant Accounting
• Tax Planning/Accounting

29
How a Representative Institution Might
Structure a Compliance Program

• Pre-Issuance Planning/ Post-Issuance Spending
• Plan projects and financing requirements
• Carve out segments with private use
• Plan spend down of proceeds
• Calculate amount that can be spent within
  allowable timeframe
• Calculate reimbursement amount
• Monitor spending of bond proceeds over draw
  period
• Plant Accounting prepares monthly drawdown
  Allocates draws to eligible expenditures
  Includes ongoing update of percentage spent
  Works with Treasury and Facilities to note
  construction delays
• Treasurer approves draw request to Trustee

30
How a Representative Institution Might
Structure a Compliance Program

• Record retention policy
• Indicates parties responsible for specific
  documents
• Plant accounting maintains records of
  invoices/expenditures
• Facilities maintains certificates of substantial
  completion
• Policy on private use
• Developed by Office of the General Counsel
• Compliance Training
• Periodic seminars with qualified bond counsel

31
How a Representative Institution Might Monitor
Private Use

• Prior method Use simplifying assumption
• Utilize space tracking system and research
  database
• System flags space financed with tax exempt debt
• Manual survey of primary sources who use the
  space
• Include sponsored research agreements, clinical
  trials, drug studies, leases, management
  agreements
• Overlay manual survey information onto space
  tracking system
• Assume all nongovernmental use is private use
• If below allowable percentage, no further review

32
How a Representative Institution Might Monitor
Private Use

• Procedure changes due to Form 990 specific use
  analysis
• Challenge how to filter/sort through private
  use for various categories of agreements
• Clinical trials
• Material transfer agreements
• Research agreements
• Other (e.g. sales and service agreements)
• Who will be the arbiter for each category
• Record keeping requirements for each category

33
How a Representative Institution Might Monitor
Private Use

• Revise policy and procedures for approving
  private use
• Update/amend written guidelines
• Include decision tree analysis for end users
• Update/detail procedures to seek approval of
  private use
• Establish budget tracking code in financial
  information system
• Track sales related to use
• Track funding source for each space
• Establish field in space tracking system to track
  safe harbor agreements