On September 28, 2017, the Internal Revenue Service (IRS) released proposed regulations to update and streamline the public approval requirement provided in section 147(f) of the Internal Revenue Code applicable to tax-exempt private activity bonds issued by State and local governments.
Under the current framework, interest earned from private activity bonds is excludable from Federal income tax when the bonds meet certain requirement. Section 147(f) identifies several of these requirements, which include obtaining governmental approvals, providing notice to the public and holding a public hearing.
Host Approval and Issuer Approval
In a typical private activity bond issuance, both the governmental unit issuing the bonds (the issuer) and the governmental unit with jurisdiction over the location of the financed project (the host) must approve. However, this dual-approval requirement has generated confusion amongst bond issuers wishing to finance projects without a physical location. The proposed rule addresses this confusion by eliminating the host approval requirement for mortgage revenue bonds, qualified student loan bonds, and qualified 501(c)(3) bonds used to finance working capital expenditures.
Reasonable Public Notice and Public Hearing
The current regulations require the approving governmental units to provide reasonable public notice of the bond issuance as well as a public hearing. The current regulations specify reasonable public notice to mean publication in a newspaper of general circulation available to residents of the relevant locality or announcement by radio or television broadcast to those residents. The notice must precede the hearing by at least two weeks.
The proposed regulations expand the public notice methods to include postings on a governmental unit’s public Web site or any method permitted under a general State law for public notices for public hearings.
Content of Reasonable Public Notice and Public Approval
The current regulations require the public notice to contain specific information about the bond issuance, including a general functional description of the type of facility to be financed, the maximum aggregate face amount of the bonds to be issued, the initial owner, operator or manager of the facility, and the precise location of the facility. The proposed regulations lessen the degree of specificity required. First, they replace “facility” with “project,” thus more openly allowing for financings that involve multiple sites or no physical structures. Second, they only require the project description to identify the category of tax-exempt bonds to be issued and the type and use of the project – the regulations provide an example of a satisfactory description, stating “a qualified small issue bond for a manufacturing facility.” Third, the proposed regulations allow the public notice to state the project’s true beneficial party of interest instead of the project’s legal owner or user. Fourth, the proposed regulations allow the project to be described by geographical boundary lines instead of by an exact street address. Lastly, the proposed regulations allow the face amount of the bonds issued to exceed the amount stated in the public notice by up to 10%.