HomeMy Public PortalAbout13-8719 Tax Exempt Bonds Sponsored by: City Manager
RESOLUTION NO. 13-8719
A RESOLUTION OF THE CITY OF OPA-LOCKA,FLORIDA APPROVING
THE CITY'S POST-ISSUANCE COMPLIANCE GUIDE FOR TAX-EXEMPT
BONDS; AND PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City of Opa-Locka, Florida (the "City") has issued, and expects in the future to
issue, tax-exempt bonds (collectively, the"Bonds"); and
WHEREAS, the City desires to formally memorialize, in a single document, its policies and
procedures relating to compliance with the applicable requirements of the Internal Revenue Code of 1986,as
amended,and its continuing disclosure undertakings pursuant to Rule 15(c)2(12)of the Securities Exchange
Commission following issuance of Bonds.
NOW,THEREFORE,BE IT RESOLVED BY THE CITY COMMISSION OF THE CITY OF
OPA-LOCKA, FLORIDA that:
SECTION 1. The Post-Issuance Compliance Guide for Tax-Exempt Bonds in the form
attached hereto as Exhibit A is hereby adopted and approved.
SECTION 2. This resolution shall be effective immediately upon adoption.
PASSED AND ADOPTED this 26th day of November, 2013.
4.
. KELLEY
VIA E YOR
Attest to:
• -� �
Joanna Flores
City Clerk
Approved as to orm and legal sufficie y:
Ili
° Joseph Geller ��
GR NSPOON MARDER P.A.
City Attorney
9662390.1
Resolution No. 13-8719
Moved by: COMMISSIONER HOLMES
Seconded by: COMMISSIONER JOHNSON
Commission Vote: 3-0
Commissioner Holmes: YES
Commissioner Johnson: YES
Commissioner Santiago: NOT PRESENT
Vice-Mayor Kelley: YES
Mayor Taylor: NOT PRESENT
9662390.1
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City of Opa-Locka
Agenda Cover Memo
Commission Meeting Item Type: Resolution Ordinance Other
Date: Nov. 26th, 2013 X
(EnterXin box)
Fiscal Impact: Ordinance Reading: 1st Reading 2nd Reading
(Enter X in box) Yes No (Enter X in box)
X Public Hearing: Yes No Yes No
(EnterXin box) X
Funding Source: (Enter Fund&Dept) Advertising Requirement: Yes No
(Enter Acct No.) N/A (Enter X in box) X
ITEM BUDGETED:
YES
NO
Contract/P.O.Required: Yes No RFP/RFQ/Bid#:
(EnterXin box) X N/A
Strategic Plan Related Yes No Strategic Plan Priority Area: Strategic Plan Obj./Strategy: (list the
(Enter X in box) X specific objective/strategy this item will address)
Enhance Organizational 0
Bus.&Economic Dev ED
Public Safety p N/A
Quality of Education 0
Qual.of Life&City Image •
Communcation
Sponsor Name City Manager Department: Finance
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Short Title:
A Resolution of the City Commission to approve the City of Opa-locka post-issuance
compliance guide for tax-exempt Bonds.
Staff Summary:
The City of Opa-locka has issued and expects in the future to issue tax-exempt bonds. The City
is required to formally memorialize in a single document, its policies and procedures relating to
compliance with applicable requirements of the Internal Revenue Code of 1986, as amended,
and its continuing disclosure undertakings pursuant to Rule 15 (C) 2 (12) of the Securities
Exchange Commission following issuance of the Bonds.
Proposed Action:
Staff recommends approval.
Attachment:
Post-Issuance Compliance Guide for tax-exempt Bonds.
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•
MEMORANDUM
TO: Myra L.Taylor, Mayor
Joseph L. Kelley,Vice Mayor
Timothy Holmes, Commis- oner
Dorothy Johnson, Commis-'oner
Luis B. Santiago, Commissi. er
FROM: Kelvin L. Baker,Sr., City Man. =
DATE: November 21,2013
RE: A Resolution of the City of Opa-locka Approving the City's Post-Issuance Guide For Tax-Exempt
Bonds
Request:
A Resolution of the City Commission to adopt the City of Opa-locka, Florida Post-Issuance
Compliance Guide For Tax-Exempt Bonds
Background:
The City of Opa-locka has issued and expects in the future to issue tax-exempt bonds. The City is required to formally memorialize in
a single document, its policies and procedures relating to compliance with applicable requirements of the Internal Revenue Code of
1986, as amended, and its continuing disclosure undertakings, pursuant to Rule 15 (C) 2(12)of the Securities Exchange Commission
following issuance of the Bonds.
Description:
Compliance Guide/Policies and Procedures.
Financial Impact:
There will be no financial impact.
Implementation Time Line:
Immediately.
Legislative History:
None.
Staff Recommendation
Staff recommends approval of the attached resolution.
Attachment(s)
Draft Resolution and City of Opa-locka, Florida, Post-Issuance Compliance Guide for Tax-Exempt Bonds.
Prepared By:
Susan Gooding-Liburd, CPA, Finance Director
Elbert Waters, J.D., Planning Consultant
CITY OF OPA-LOCKA,FLORIDA
POST-ISSUANCE COMPLIANCE GUIDE
FOR
TAX-EXEMPT BONDS
Adopted November 26, 2013
9662233.1
TABLE OF CONTENTS
Page
PURPOSE 1
RESPONSIBILITY 1
PRIVATE ACTIVITY LIMITATIONS 1
Definitions 2
Bond-Financed Property 3
Private Activity Review 3
Recordkeeping 6
ARBITRAGE COMPLIANCE 6
Recordkeeping 9
BOND COVENANT AND CONTINUING DISCLOSURE UNDERTAKING COMPLIANCE 9
TAB I PRIVATE ACTIVITY RESTRICTIONS ON PRIVATE BUSINESS USE
GOVERNMENTAL BONDS I-1
TAB II PRIVATE BUSINESS USE QUESTIONNAIRE -GOVERNMENTAL BONDS II-1
TAB III REMEDIAL ACTIONS -GOVERNMENTAL BONDS III-1
TAB IV INTERNAL REVENUE SERVICE—TAX EXEMPT BONDS IV-1
TAB V ARBITRAGE LETTER OF INSTRUCTIONS V-1
RM:8162349:4
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PURPOSE
The City of Opa-Locka, Florida (the "City") periodically issues its tax-exempt bonds to finance
the construction, renovation, and/or acquisition of various public facilities and improvements and
related equipment. Section 141 of the Internal Revenue Code of 1986, as amended (the "Code")
contains limitations on the extent to which proceeds of tax-exempt bonds can benefit persons
other than a state or local governmental unit. In addition, Section 148 of the Code imposes
limitations on the investment of proceeds of tax-exempt bonds and required rebate of excess
earnings to the federal government. The procedures set forth herein are intended to reduce the
risk of jeopardizing the tax-exempt status of the City's outstanding tax-exempt bonds by
establishing procedures for: (1) identifying uses that may constitute private use, (2) managing
and tracking changes in use, (3) accomplishing remedial action when necessary, and (4) assuring
compliance with the arbitrage requirements of the Code. The procedures set forth herein also
address matters relating to the City's continuing disclosure undertakings and compliance with
bond covenants. The City has not acted, and does not currently anticipate acting, as a conduit
issuer of tax-exempt bonds. However, in the event the City elects in the future to act as a conduit
issuer of tax-exempt bonds, it will require each conduit borrower to (a)represent at the closing of
the bond issue that such borrower has written policies and procedures in place with respect to the
matters addressed herein and (b) covenant that it will annually certify to the City compliance
with such borrower's policies and procedures.
RESPONSIBILITY
In order to facilitate continuing compliance with the federal income tax requirements relating to
the tax-exempt status of its outstanding tax-exempt bond issues, an individual or entity shall
serve as the City's Tax Compliance Officer with primary responsibility to monitor the City's
compliance with federal income tax requirements for the City's tax-exempt bonds (as more fully
defined herein, the "Bonds"). The initial Tax Compliance Officer shall be the City's Finance
Director. The City Manager may, from time to time, appoint another individual or entity to act as
the Tax Compliance Officer.
The federal income tax requirements include both limitations on the private use of facilities
financed by Bonds and arbitrage limitations on the investment of proceeds of Bonds under the
Code. The general responsibilities of the Tax Compliance Officer with respect to bond
compliance shall include, but not be limited to, communication of monitoring procedures for
Bonds (as outlined herein) to applicable Departments of the City, confirming consistent
application of these procedures, monitoring the completeness of documentation required by these
procedures, and conferring with Bond Counsel as necessary. The Tax Compliance Officer will
also monitor the City's compliance with other covenants in its bond documents and its
continuing disclosure undertakings. Set forth below are the procedures that will be undertaken.
The City will supplement and update these procedures as appropriate to provide a continuing
source of guidance on these requirements.
PRIVATE ACTIVITY LIMITATIONS
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Definitions
1. Governmental Bonds. — Governmental Bonds are Bonds that are not Private Activity
Bonds.
2. Private Activity Bonds. - A Bond is a private activity bond if the bond issue meets: (i)
both the private business use test and the private payment or security test; or (ii) the
private loan financing test. The tests are applied on a basis of reasonable expectations of
the City on the date of each issue of Bonds and by taking into account deliberate actions
of the City while such Bonds are outstanding. In many cases a deliberate action that
causes Bonds to become private activity bonds can be cured by taking remedial actions.
3. Private Business Use Test. The private business use test is met if the amount of
proceeds of Bonds that are used in a private business use is more than ten percent of total
proceeds. A five percent limit is used in lieu of a ten percent limit if the private use is
unrelated to a governmental use or related but disproportionate to a governmental use.
Private Business Use means use, directly or indirectly, in a trade or business carried on
by any person other than the issuer or another state or local governmental unit, including
a use by a 501(c)(3) organization or the federal government. All private business uses
over the life of the bonds are aggregated in determining whether the limitations are met.
4. Private Payment or Security Test- The private security or payment test is met if the
payment of debt service on more than ten percent of the issue of Bonds is directly or
indirectly (i) secured by any interest in property used for a private business use or
payments in respect of such property or (ii) derived from payments in respect of property
or borrowed money used for a private business use. A five percent limit is used in lieu of
a ten percent limit if the private use is unrelated to a governmental use or related but
disproportionate to a governmental use. Private payments are not taken into account to
the extent properly allocated to ordinary and necessary expenses directly attributable to
the operation and maintenance of the Bond-Financed Property (hereinafter defined) used
by the private user.
5. Private Loan Financing Test. The Private Loan Financing Test is met if the issuer uses
proceeds of Bonds to make loans to private persons exceeding the lesser of 5% of the
proceeds or$5 million.
6. Management Contract—A Management Contract is a management, service or incentive
payment contract between a governmental unit and a non-governmental service provider
under which the service provider provides services involving all, a portion of, or any
function of a facility. A management contract with respect to financed property generally
results in a private business use if the contract provides for compensation of services
rendered with compensation based, in whole or in part, on a share of net profits from the
operation of the facility. Revenue Procedure 97-13 provides safe harbors pursuant to
which qualifying management contracts would not be treated as constituting private use
of a financed facility.
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7. Bonds — The term Bonds includes bonds, notes, and installment sale or financing lease
arrangements issued on a tax-exempt basis.
Bond-Financed Property
The first step in undertaking a review of private use limitations is to identify all of the property
that was financed by a particular issue of Bonds. In many cases a particular property or project
may have been partially financed or refinanced with multiple issues and a change in the use of
that property or project could affect all those issues. The Tax Compliance Officer will identify
all outstanding Bonds of the City by reference to the audited financial statements for each fiscal
year and any interim unaudited financial statements. The Tax Compliance Officer will establish
and maintain books and records that reflect the actual expenditure of proceeds of particular
Bonds on specific projects (the"Bond-Financed Property").
Private Activity Review
Reference should be made to the Private Activity Restrictions on Private Business Use and
accompanying attachments, attached as Tab I, for further guidance on the Private Activity
Limitations of Section 141 of the Code.
In order to demonstrate compliance with the Private Activity Limitations of the Code, the Tax
Compliance Officer will make inquiry of representatives of each Department of the City
responsible for the construction and operation of Bond-Financed Property ("Department
Designees") on a periodic basis as to the ownership and use of such Bond-Financed Property. A
form of Private Business Use Questionnaire that can be utilized for this inquiry is attached as
Tab II. The Tax Compliance Officer will identify the potential occurrence of any of the events
set forth below (a"Tax Event")with respect to any Bond-Financed Property:
Change of ownership or use of the Bond-Financed Property -- the ownership
of any portion of the Bond-Financed Property is transferred to anyone, prior to the earlier
of the end of the expected economic life of the property, or the latest maturity date of any
of the Bonds financing (or refinancing) the Bond-Finance Property or any restriction on
the ability of the general public to access the Bond-Financed Property occurs.
Private business use of the Bond-Financed Property -- any portion of the
Bond-Financed Property will be used by anyone other than a State or local governmental
unit, such as the City, or members of the general public who are not using the property in
the conduct of a trade or business. Examples of uses that can give rise to private business
use include use by a person as an owner, lessee, purchaser of the output of facilities under
a "take" or "take or pay" contract, purchaser or licensee of research, a manager or
independent contractor under certain management or professional service contracts or any
other arrangement that conveys special legal entitlements (e.g., arrangement that conveys
priority rights to the use or capacity of the Bond-Financed Property) for beneficial use of
the Bond-Finance Property.
Leases of the Bond-Financed Property -- any portion of the Bond-Financed
Property is to be leased, or otherwise subject to an agreement which gives possession of
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any portion of the Bond-Financed Property to anyone, other than a state or local
governmental unit.
Management agreement or service agreement -- any portion of the Bond-
Financed Property is to be used under a management contract or professional service
contract, other than a contract for services that are solely incidental to the primary
function of Bond-Financed Property, such as janitorial services or office equipment
repair.
Sale of Output from Bond-Financed Facility — any output of the Bond-
Financed Property is to be sold to or otherwise used by any person other than a state or
local governmental unit or a member of the general public.
Naming rights agreements for the Bond-Financed Property -- any portion of
the Bond-Financed Property will become subject to a naming rights or sponsorship
agreement, other than a"brass plaque" dedication.
Research using the Bond-Financed Property -- any portion of the Bond-
Financed Property will be used for the conduct of research under the sponsorship, or for
the benefit of, any organization other than a state or local governmental unit.
Private Loan of Bond Proceeds -- any portion of the proceeds of any issue of
Bonds (including any investment earnings thereon) is to be loaned by the City.
The existence of private uses may trigger a need to review whether there have also been
payments received by the City either from a non-governmental party, such as lease payments, or
payments with respect to Bond-Financed Property. If at any time there is a question or potential
problem that arises with respect to private payments, it should be brought to the attention of the
Tax Compliance Officer as soon as possible and Bond Counsel should be consulted on the
application of the private payment test.
Responsible Persons
The Tax Compliance Officer is responsible for monitoring and enforcing compliance with
policies and procedures relating to private use of Bond-Financed Property. It is the
responsibility of each Department of the City that oversees the construction and operation of
Bond-Financed Property to track the planned and actual use thereof while the related issue of
Bonds is outstanding. The Tax Compliance Officer shall review all private uses and work with
the Department Designees and Bond Counsel to make certain that no private use is undertaken
which might adversely affect the tax-exempt status of any Bonds. A further breakdown of the
procedures to carry out these responsibilities is detailed below.
Expected Use of Proceeds
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At the time of issuance of each issue of Bonds, the Department Designee and Tax Compliance
Officer will work with operating personnel to determine and document planned uses of Bond-
Finance Property relating to the applicable issue of Bonds. On completion of the projects
included in Bond-Financed Property and final expenditure of proceeds of the related issue of
Bonds, the Department Designee and Tax Compliance Officer will review and document the
allocation of proceeds of such Bonds to particular costs and note the existence and amount of any
private use on a schedule of private use.
A final allocation of proceeds of each issue of Bonds to expenditures will be made and retained
with the records of the issue of Bonds not later than 18-months after the later of the expenditure
of the proceeds of such Bonds or the placed in service date for the related Bond-Financed
Property. To the extent necessary and possible, non-Bond proceeds will be allocated to the
financing of any Bond-Financed Property expected to have significant private use and such
allocation will be documented at the time of final allocation.
Ongoing Review
The Tax Compliance Officer will disseminate to, and discuss the list of Tax Events with,
Department Designees and will attempt to identify a potential Tax Event before it occurs. The
Tax Compliance Officer should work closely on a regular basis with each Department involved
with the operations involving Bond-Financed Property to learn about potential and actual
changes as they are contemplated. By understanding potential changes in use that may affect
private use of bond financed facilities, the Tax Compliance Officer and Department Designee
can evaluate, on an ongoing basis, whether such changes could affect the tax-exempt status of
any issue of Bonds before the change occurs.
Once a potential Tax Event has been identified, the Tax Compliance Officer shall work with the
Department Designee and potential private user, if applicable, to determine the parameters for
the new use. Some of the parameters to consider include whether the use will be available to
other organizations or the public, rents or compensation for use, costs of use to the City and
square footage to be used, management contracts, leases, service, etc. These use parameters will
determine if the use constitutes a non-qualified use and/or new private use of the facilities. The
Department Designee shall update the schedule summarizing private use.
Upon a change in use in a management or service contract, the Tax Compliance Officer will
direct Bond Counsel to review the contract to determine if a safe harbor applies that would avoid
private use from occurring. These types of agreements should be submitted to the Tax
Compliance Officer in the early stages of discussions prior to going to the City for approval.
Early Bond Counsel review of the contracts may help avoid private use problems.
On or prior to the occurrence of any Tax Event, including, without limitation, the proposed sale
of any Bond-Financed Property, the Tax Compliance Officer will consult with Bond Counsel to
ascertain what effect, if any, a contemplated Tax Event may have on the tax-exemption of
interest on the related Bonds. Bond Counsel also should be consulted regarding questions of
measurement of private use and available safe harbors for management or service contracts. In
certain circumstances, if the private use causes a limitation on the overall issue to be exceeded, it
may be necessary for the City to take a remedial action under Treasury Regulation Section
1.141-12 to preserve the tax-exempt status of interest on the related issue of Bonds. See Tab III
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regarding available remedial actions. Timely identification of a Tax Event is necessary to take a
remedial action. In certain cases, remedial action may not be available and the City may need to
consider a voluntary closing agreement with the IRS.
Annual Review
The Tax Compliance Officer and Department Designees shall be responsible for reviewing the
City's outstanding Bonds on a yearly basis. This review will involve analyzing the planned uses
for the Bond-Financed Property, as documented on the summaries and schedules indicated
above, and determining whether any changes in use are contemplated and or have occurred and
whether any sales or transfers of Bond-Financed Property are contemplated. This review shall
include information and/or documentation concerning users of the Bond-Financed Property for
any proposed or actual changes identified within the past year (e.g. changes in square footage,
increased public or private uses, changes in activities including additions/deletions of specific
activities). Such information and/or documentation may include, but is not limited to, the factual
details of the proposed or actual change in use, policies and procedures related to use, expenses
related to use, improvements made, etc.
On an annual basis, the Department Designees will review the actual use of each issue of Bonds
to determine whether the actual use has changed from the plan and will file an annual report to
the Tax Compliance Officer. Where the actual use is different, the Department Designee will
document how it is different and the effects of the differences on the private use calculations.
The Tax Compliance Officer shall review all new private uses and work with each Department
and the City's Bond Counsel to make certain that no private use has been undertaken that might
affect the qualified status of each issue of Bonds.
The Tax Compliance Officer will prepare an annual report summarizing current Bonds
outstanding and the status of each based on the data provided in the annual departmental update
reports. The Tax Compliance Officer will report to the City Manager and/or the City
Commission of the City any potential problems that may arise that could threaten the tax-exempt
status of Bonds and the steps being taken to resolve the potential problem. Discussions will be
held with Bond Counsel as to the steps required to be taken.
Recordkeeping
The Internal Revenue Service has advised issuers of tax-exempt bonds that they have post-
issuance recordkeeping responsibilities that are necessary to satisfy the Internal Revenue Service
in the event of any future audit of the bonds. See IRS FAQs on Record Retention, attached as
Tab IV. The Tax Compliance Officer shall maintain a file for each issue of Bonds. The file
shall include a copy of the bond documents, detailed project schedule, cost schedule, amount of
private use by project, and economic life of the project. The file shall contain a copy of all
management or service contracts, leases, or agreements and documentation that any private use
does not exceed permissible limits. The file shall contain annual reports from Departments
managing Bond-Financed Property summarizing all recalculations of private use percentage and
private payment summaries. This file must be maintained for each issue of Bonds for the life of
the issue plus three years.
ARBITRAGE COMPLIANCE
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The arbitrage restrictions imposed under the Code include restrictions on the investment of
proceeds of Bonds at an unrestricted yield and the rebate of excess investment earnings to the
federal government, as more fully described in the Tax Certificates for each of issue of Bonds
and the Arbitrage Letter of Instructions, attached as Tab V.
Arbitrage Review
For each issue of Bonds, the Tax Compliance Officer will maintain the records and documents
described below under "Recordkeeping." For each issue of Bonds, the Tax Compliance Officer
will establish a timeline for review of arbitrage-related issues as more fully described below.
Temporary Period
For all issues of Bonds, the Tax Compliance Officer will note the date of expiration of the three
year temporary period for unrestricted investment of the proceeds of such Bonds. The three year
temporary period runs from the date of issue of the original new money issue and is unaffected
by note rollovers. Note, however, that the issuance of advance refunding bonds will terminate
the three year temporary period of any issue that is advance refunded. For all Bonds which have
unexpended proceeds held beyond the temporary period, the Tax Compliance Officer will assure
that the proceeds are yield restricted. The relevant yield will be the yield on the original Bonds
until those obligations are paid with the proceeds of another issue of Bonds (a "Refunding
Issue"), at which time the relevant yield will be the yield on the Refunding Issue. Yield
restriction will be accomplished through either an actual investment below the relevant yield or
the making of yield reduction payments, as described in Section 3(b) of the Arbitrage Letter of
Instructions found in Tab V. The Tax Compliance Officer will work with its auditor or other
arbitrage consultant to make timely yield reduction payments.
Rebate
For each issue of Bonds the Tax Compliance Officer will note from the Tax Certificate delivered
by the City in connection with the issuance of the Bonds whether a rebate exception is available
for the issue. The rebate exceptions include the bona fide debt service fund exception and the
spending exceptions described in Section 4(a)(ii) of the Arbitrage Letter of Instructions found in
Tab V. If the issue of Bonds is expected to meet one of the three spending exceptions to rebate,
the six-month exception, the 18-month exception or the 2-year construction exception, the Tax
Compliance Officer will establish a timeline of six month intervals following the date of issue of
the Bonds and note whether the spending requirements related to that exception are met at the
end of each period.
If no rebate exception is expected to apply or if a spending requirement is not met, the Tax
Compliance Officer will establish a timeline for rebate analysis for each issue of Bonds. For
bond issues, the timeline will provide for a rebate analysis to be conducted every five years and
when the bonds are discharged, as more fully described in Section 4 of the Arbitrage Letter of
Instructions. For note issues the timeline will provide for a rebate analysis to be undertaken at
the time of the retirement of the note issue. The Tax Compliance Officer will consult with its
auditor or other arbitrage consultant and make timely filing of any rebate amount with the
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Internal Revenue Service, as more fully described in Section 4 of the Arbitrage Letter of
Instructions.
Arbitrage Consultant
The Tax Compliance Officer will maintain a contract with a third party arbitrage consultant for
the purpose of providing arbitrage consulting services including but not limited to:
1. annual analysis of all Bonds.
2. arbitrage rebate calculations
3. yield restriction calculations.
4. technical support on an ad-hoc basis.
The arbitrage consultant will provide on an annual basis, an analysis of all Bonds for potential
liability, rebate, yield restriction or other arbitrage related issues. The Tax Compliance Officer
will review the arbitrage analysis and coordinate with the Departments and the consultant to
prepare the necessary filings and payments. The Tax Compliance Officer will timely file with
the Internal Revenue Service the appropriate IRS arbitrage rebate and yield restriction reports,
Form 8038-T, along with any payments due for any Bonds.
Sinking Funds
To avoid creating a "sinking fund" that is subject to restriction on the yield at which it may be
invested, payments of principal of and interest on the Issuer's tax-exempt bonds are to be derived
from current revenues, not directly or indirectly from the Issuer's set-aside funds. The Tax
Compliance Officer is responsible for maintaining accounting and cash flow practices that will
satisfy this requirement. If funds are received that bear a close relationship to bond-financed
capital costs (e.g., because it is designated for a Bond-Financed Property or otherwise), the funds
generally should be (i) used to pay capital costs of the project not financed with bond proceeds,
or (ii) deposited into the debt service fund for the issue within 30 days of being received and
entirely used for the next payment of debt service on the bonds. If these approaches are not
feasible (for example, because the amount of the funds exceeds the amount of the next debt
service payment, or there are insufficient other capital costs to which the gift may be applied),
Bond Counsel should be consulted, who can advise whether in this situation the funds will need
to be yield-restricted.
CONTINUING EDUCATION
The City will continue to consult regularly with its bond counsel regarding the federal tax rules
applicable to its outstanding tax-exempt debt and changes to the federal tax law, and the Issuer
will regularly update these Policies and Procedures to reflect any such changes. Applicable City
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finance personnel will attend seminars and conferences regarding debt compliance and issuance
matters as practical.
Recordkeeping
In order to satisfy the arbitrage recordkeeping requirements, the Tax Compliance Officer shall
create and maintain, or cause to be created and maintained, records of:
1. Purchases or sales of investments made with proceeds of Bonds (including
amounts treated as "gross proceeds" as a result being part of a sinking fund or pledge
fund) and receipts of earnings on those investments;
2. The final allocation of the proceeds of each issue of Bonds to expenditures,
together with purchase contracts, construction contracts, invoices, and cancelled checks;
3. Information and records showing that investments made with unspent proceeds of
each issue of Bonds after the expiration of the applicable temporary period were not
invested in higher-yielding investments;
4. Information, if applicable, that will be sufficient to demonstrate to the Internal
Revenue Service upon an audit of any issue of Bonds that such Bonds have complied
with one or more available spending exceptions to the arbitrage rebate requirement with
respect of such Bonds;
5. Information and calculations, when applicable, that will be sufficient to
demonstrate to the Internal Revenue Service, upon an audit of any issue of Bonds, for
which an exception to the arbitrage rebate requirement was not applicable, that the rebate
amount, if any, that was payable to the United States of America with respect to
investments made with gross proceeds of such Bonds was calculated and timely paid with
Form 8038-T timely filed with the Internal Revenue Service;
6. Information and records showing that investments held in yield-restricted advance
refunding or defeasance escrows for Bonds were not invested in higher-yielding
investments; and
7. The Tax Certificate delivered by the City as part of the record of proceedings for
each issue of Bonds.
BOND COVENANT AND CONTINUING DISCLOSURE UNDERTAKING
COMPLIANCE
The Tax Compliance Officer will become familiar with the various covenants in the
applicable financing documents relating to each issue of Bonds, including the applicable bond
resolution, trust indenture, loan agreement and/or agreement with credit enhancers. The Tax
Compliance Officer will prepare and regularly update a written summary of the bond covenants
and review on an annual basis the status of the City's compliance with such covenants. These
covenants typically include matters such as the requirement to provide audited financial
statements and/or annual budgets to bond trustees on an annual basis, the requirement to
maintain specified insurance coverage, and monitoring compliance with rate covenants. The Tax
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Compliance Officer will consult with Department Designees to the extent necessary to obtain
information to permit the City to comply with such covenants.
With respect to compliance with Rule 15c2-12 of the Securities and Exchange
Commission (the "Rule"), subject to the requirements of the specific written undertaking in
connection with each issue of Bonds subject to the Rule, the City will be required to annually
provide to the Electronic Municipal Market Access (EMMA) audited financial statements
prepared in accordance with generally accepted accounting principles and updates of other
financial and operating data, including revenues, annual debt service requirements and historical
debt coverage, which is included in its Official Statements. The Tax Compliance Officer will
review each written continuing disclosure agreement relating to any issue of Bonds subject to the
Rule and takes steps to ensure that the City is in compliance with its continuing disclosure
undertakings. The City will provide in a timely manner to EMMA or the Municipal Securities
Rulemaking Board notice of any of the Material Events listed in the Rule in connection with
each issue of Bonds subject to the Rule. Any submissions to the MSRB or EMMA in connection
with an issue of Bonds may be made through a third-party dissemination agent engaged by the
City for that purpose, subject to the requirements of any applicable written continuing disclosure
agreement relating to that issue of Bonds.
Attachments
Tab I Private Activity Restrictions on Private Business Use
Tab II Private Business Use Questionnaire
Tab III Remedial Actions
Tab IV IRS FAQs on Record Retention
Tab V Arbitrage Letter of Instructions
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TAB I
9662233.1
TAB I
PRIVATE ACTIVITY RESTRICTIONS ON PRIVATE BUSINESS USE
GOVERNMENTAL BONDS
Introduction
The Internal Revenue Code of 1986, as amended (the "Code") limits the amount of proceeds of
tax-exempt governmental bonds (including short term obligations such as notes) that can be used
for the benefit of private businesses. Section 141 of the Code treats as a taxable private activity
bond a bond issued as part of an issue that meets the private business use test and the private
security or payment test, or the private loan test. The private business use test is met if the
amount of proceeds of bonds that are used in a private business use is more than ten percent of
total proceeds. The private security or payment test is met if the payment of debt service on
more than 10 percent of the issue is directly or indirectly (i) secured by any interest in property
used for a private business use or payments in respect of such property or (ii) derived from
payments in respect of property or borrowed money used for a private business use. A five
percent limit is used in lieu of a ten percent limit if the private use is unrelated to a governmental
use or related but disproportionate to a governmental use. For purposes of Section 141, the term
private business includes nonprofit, 501(c)(3) organizations as well as the federal government.
Private business use generally
Private business use can arise from almost any use of tax-exempt bond-financed property by
anyone other than a state or local governmental unit ("Governmental Unit") or members of the
general public who are not using the property in the conduct of a trade or business. Examples of
uses which can give rise to private business use include use (a) by a person as (i) an owner, (ii) a
lessee, (iii) a purchaser of the output of facilities under a "take and pay" or "take or pay"
contract, (iv) a purchaser, sponsor or licensee of research and (v) a manager or independent
contractor under certain management or professional service contracts, (b) pursuant to an
arrangement that conveys (i) special legal entitlements (e.g., an arrangement that conveys
priority rights to the use or capacity of the financed property) for beneficial use of the property
financed with proceeds of tax exempt debt or (ii) other special economic benefits, (c) use by the
United States government and its agencies and instrumentalities and (d) use by nonprofit
corporations.
The purpose of this Summary is to assist employees of a Governmental Unit in recognizing uses,
actions or other arrangements with respect to tax-exempt bond-financed property which may not
comply with the requirements of the Internal Revenue Code of 1986, as amended, and which
could jeopardize the tax exempt status of bonds issued to finance such property. It is not
exhaustive and may not be relied upon as legal advice. Before any use, action or other
arrangement described herein is commenced, such use, action or other arrangement should be
reviewed by bond counsel to the Governmental Unit.
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Leases of the Financed Property. Leases and certain other agreements which transfer
possession of tax exempt financed property will result in a private business use if the party to
whom the property is leased is not an Governmental Unit. Examples include leases of space for
book stores and cafeterias.
Priority Rights. Arrangements that convey special legal entitlements (e.g., arrangements that
convey priority rights to the use or capacity of the financed property) for control or beneficial use
of property financed with proceeds of tax exempt debt are treated as private business uses.
Examples of such arrangements are contracts with research companies to set aside space for the
testing of new products or arrangements pursuant to which a person which is not an
Governmental Unit is entitled to limit, or control charges for, access to all or a portion of tax-
exempt Bond-Financed Property.
Naming Rights and Sponsorship Payments. Agreements which permit a private company or
organization to make payments for the right to have its name or logo used in connection with
property financed with tax exempt debt may result in private business use. The rules in this area
continue to evolve but "qualified sponsorship payments" should not give rise to a private
business use. A qualified sponsorship payment means any payment made by any person
engaged in a trade or business with respect to which there is no arrangement or expectation that
such person will receive any substantial return benefit other than the use or acknowledgement of
the sponsor's name or logo in connection with the activities of the Governmental Unit. Such use
or acknowledgement may not include advertising such person's products or services. The
qualified sponsorship payment would not include (a) any payment that is contingent upon
attendance at events or (b) any payment that entitles the payor to the use or acknowledgement of
the payor's name or logo in regularly scheduled and printed material published by or on behalf of
the Governmental Unit. This would allow donations in exchange for the usual "brass plaque"
but call into question arrangements such as the right to name a facility of the Governmental Unit
and control how that facility is referred to in publications and press releases.
Research Arrangements. Research conducted under the sponsorship or for the benefit of
organizations other than Governmental Units, including research sponsored by any branch of the
Federal government, can result in the private business use of any property financed with tax
exempt debt which is used in the conduct of the research. The Internal Revenue Service has
published guidance on the circumstances under which a research agreement does not result in
private business use. The guidance for safe harbor research arrangements is set forth in Rev.
Proc. 2007-47 (2007 IRB LEXIS 570; 2007-29 I.R.B. 108) attached hereto as Exhibit 1.
Management and Service Contracts. Both contracts for the management of property financed
with tax exempt debt and certain contracts for the provision of services in connection with
property financed with tax exempt debt can result in private business use. Contracts which may
result in a private business use include management, service, or incentive payment contracts
between the Governmental Unit and a service provider under which the service provider
provides services involving all, a portion of, or any function of, a facility financed with tax
exempt debt. For example, a contract for the provision of management services for an entire
facility, and a contract for management services for a specific portion of a facility, such as a
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cafeteria are each treated as a management contract. However, contracts for services that are
solely incidental to the primary function of the property financed with tax exempt debt, such as
janitorial services or office equipment repair, are not regarded as management or service
contracts for this purpose. The Internal Revenue Service has published safe harbor guidance on
the circumstances under which a management or service agreement does not result in private
business use. The guidance is set forth in Rev. Proc. 97-13 (1997-1 C.B. 632; 1997 IRB LEXIS
14; 1997-5 I.R.B. 18, as modified by Rev. Proc. 2001-39, 2001 IRB LEXIS 229; 2001-28 I.R.B.
38) attached hereto as Exhibit 2. The chart below summarizes the safe harbor guidance:
Maximum Length of Contract' Permitted Fee Arrangement2
Lesser of 15 years or 80% of the economic 95%periodic fixed fee with single, one
life of the property time(stated dollar amount) incentive
payment)
Lesser of 10 years or 80%of property life 80%periodic fixed fee
5 years—cancelable by Governmental Unit (i) at least 50%must be a periodic fixed
upon reasonable notice at end of the third fee, (ii) 100% capitation fee3 or(iii)mixed
year capitation and periodic fixed fee
3 years cancelable upon reasonable notice 100%per unit fee or combination of per
by Governmental Unit at end of the second unit and periodic fixed fee
year
2 years cancelable upon reasonable notice Percentage of fees charged or a
by Governmental Unit at end of the first combination of a per unit fee and a
year percentage of revenue or expense fee4
'Contract term includes any legally enforceable renewal right.
2No portion of the fee may be a net profits interest.
3A fixed amount per person for a given period of time.
4This option is restricted to contracts to provide services to third parties or contracts
during an initial startup period of a facility.
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Output Facilities. Occasionally a Governmental Unit will acquire facilities such as co-
generation facilities. The sale of output (as distinguished from consumption of the output by the
Governmental Unit) from an output type facility can result in a private business use.
Joint Ventures. Joint venture arrangements between a Governmental Unit and persons other
than a Governmental Unit may result in private business use. These arrangements need to be
examined to see if they are viewed as partnerships for federal tax purposes.
Exclusions from Private Business Use
Incidental Uses. A very limited spectrum of incidental uses are not treated as private business
uses if certain conditions are met. Those conditions are: (a) except for vending machines, pay
telephones, kiosks and similar uses, the use must not involve the transfer to the private user of
possession and control of space that is separated from the other areas of the facility by a physical
barrier; (b) the use must not be functionally related to another use of the facility by the same
private user; and (c) such incidental uses may not, in the aggregate involve more that 2.5 percent
of the facility. Examples of incidental uses include pay telephones, vending machines and
advertising displays.
General Public Use. Use of facilities intended for general public use is not considered "use"by
nongovernmental persons in a trade or business if such persons use the facilities in their trade or
business on the same basis as other members of the public. Use of the financed facilities by
organizations such as school groups, church groups, and fraternal organizations and numerous
commercial organizations for a short period of time on a rate scale basis will not be considered
use by nongovernmental persons in a trade or business if the rights of such a user are only those
of a transient occupant rather than the full legal possessory interests of a lessee. Any
arrangement that conveys priority rights to the use or capacity of the financed property will be
treated as a private business use.
Short Term Uses. Certain short term uses will not be treated as private use. Use by a
nongovernmental person is not private use if either:
(9) (A) the term of the use under the arrangement, including all renewal options is not
longer than 200 days, and (B) the use of the financed property under the same or similar
arrangements is predominantly by natural persons who are not engaged in a trade or business; or
(ii) (A) the term of the use under the arrangement, including all renewal options,
is not longer than 100 days, and (B) the arrangement would be treated as general
public use, except that it is not available for use on the same basis by natural
persons not engaged in a trade or business because generally applicable and
uniformly applied rates are not reasonably available to natural persons not
engaged in a trade or business; or
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(iii) (A) the term of the use under the arrangement, including all renewal options,
is not longer than 50 days; and (B) the arrangement is a negotiated arm's-length
arrangement, and compensation under the arrangement is at fair market value.
In addition, in each case the property must not be financed for the principal purpose of providing
that property for use by that non-Governmental Unit.
Qualified improvements. Proceeds of tax exempt bonds that provide a governmentally owned
improvement to a governmentally owned building (including its structural components and land
functionally related and subordinate to the building) are not used for a private business use if
(i) The building was placed in service more than 1 year before the
construction or acquisition of the improvement is begun;
(ii) The improvement is not an enlargement of the building or an improvement
of interior space occupied exclusively for any private business use;
(iii) No portion of the improved building or any payments in respect of the
improved building secures payment of the tax exempt bonds; and
(iv) No more than 15 percent of the improved building is used for a private
business use.
Measurement of Private Business Use
All private business uses of property financed by a bond issue are aggregated to determine if the
limitations have been exceeded. Private business use of property is measured on an average
basis over a measurement period that runs from the later of the issue date of the bonds or the date
property is placed in service, through the earlier of the last date of the expected economic life of
the property or the maturity date of the bonds or refunding bonds. The average percentage of
private business use is the average of the percentages of private business during one-year periods
within the measurement period. The percentage of private business use for any one-year period
is the average private business use for that year, determined by comparing the amount of private
business use during that year to the total amount of private business use and governmental use.
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EXHIBIT 1
RESEARCH CONTRACT GUIDELINES
Rev. Proc. 2007-47—Operating Guidelines for Research Agreements
(Also Part I, §§ 103, 141, 145; 1.141-3, 1.145-2)
June 26, 2007
SECTION 1. PURPOSE
The purpose of this revenue procedure is to set forth conditions under which a research
agreement does not result in private business use under § 141(b) of the Internal Revenue Code of
1986 (the Code). This revenue procedure also addresses whether a research agreement causes the
modified private business use test in § 145(a)(2)(B) of the Code to be met for qualified 501(c)(3)
bonds. This revenue procedure modifies and supersedes Rev. Proc. 97-14, 1997-1 C.B. 634.
SECTION 2. BACKGROUND
.01 Private Business Use.
(9) Under § 103(a) of the Code, gross income does not include interest on any State or local
bond. Under § 103(b)(1), however, § 103(a) does not apply to a private activity bond,
unless it is a qualified bond under § 141€. Section 141(a)(1) defines "private activity
bond" as any bond issued as part of an issue that meets both the private business use and
the private security or payment tests. Under § 141(b)(1), an issue generally meets the
private business use test if more than 10 percent of the proceeds of the issue are to be
used for any private business use. Under §141(b)(6)(A), private business use means
direct or indirect use in a trade or business carried on by any person other than a
governmental unit. Section 150(a)(2)provides that the term "governmental unit"does not
include the United States or any agency or instrumentality thereof. Section 145(a) also
applies the private business use test of §141(b)(1) to qualified 501(c)(3) bonds, with
certain modifications.
(2) Section 1.141-3(b)(1) of the Income Tax Regulations provides that both actual and beneficial
use by a nongovernmental person may be treated as private business use. In most cases, the
private business use test is met only if a nongovernmental person has special legal entitlements
to use the financed property under an arrangement with the issuer. In general, a nongovernmental
person is treated as a private business user of proceeds and financed property as a result of
ownership; actual or beneficial use of property pursuant to a lease, or a management or incentive
payment contract; or certain other arrangements such as a take or pay or other output-type
contract.
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(3) Section 1.141-3(b)(6)(i) provides generally that an agreement by a nongovernmental person
to sponsor research performed by a governmental person may result in private business use of
the property used for the research, based on all the facts and circumstances.
(4) Section 1.141-3(b)(6)(ii) provides generally that a research agreement with respect to
financed property results in private business use of that property if the sponsor is treated as the
lessee or owner of financed property for Federal income tax purposes.
(5) Section 1.141-1(b) provides that the term "governmental person" means a State or local
governmental unit as defined in § 1.103-1 or any instrumentality thereof. Section 1.141-1(b)
further provides that governmental person does not include the United States or any agency or
instrumentality thereof. Section 1.141-1(b) further provides that "nongovernmental person"
means a person other than a governmental person.
(6) Section 1.145-2 provides that §§ 1.141-0 through 1.141-15 apply to qualified 501(c)(3)bonds
under § 145(a) of the Code with certain modifications and exceptions. (7) Section 1.145-2(b)(1)
provides that, in applying §§ 1.141-0 through 1.141-15 to § 145(a) of the Code, references to
governmental persons include § 501(c)(3) organizations with respect to their activities that do
not constitute unrelated trades or businesses under § 513(a).
.02 Federal Government rights under the Bayh-Dole Act.
(9) The Patent and Trademark Law Amendments Act of 1980, as amended, 35 U.S.C. § 200
et seq. (2006) (the "Bayh-Dole Act"), generally applies to any contract, grant, or
cooperative agreement with any Federal agency for the performance of research funded
by the Federal Government.
(2) The policies and objectives of the Bayh-Dole Act include promoting the utilization of
inventions arising from federally supported research and development programs, encouraging
maximum participation of small business firms in federally supported research and development
efforts, promoting collaboration between commercial concerns and nonprofit organizations,
ensuring that inventions made by nonprofit organizations and small business firms are used in a
manner to promote free competition and enterprise, and promoting the commercialization and
public availability of inventions made in the United States by United States industry and labor.
(3) Under the Bayh-Dole Act, the Federal Government and sponsoring Federal agencies receive
certain rights to inventions that result from federally funded research activities performed by
non-sponsoring parties pursuant to contracts, grants, or cooperative research agreements with the
sponsoring Federal agencies. The rights granted to the Federal Government and its agencies
under the Bayh-Dole Act generally include, among others, nonexclusive, nontransferable,
irrevocable, paid-up licenses to use the products of federally sponsored research and certain so-
called "march-in rights" over licensing under limited circumstances. Here, the term "march-in
rights" refers to certain rights granted to the sponsoring Federal agencies under the Bayh-Dole
Act, 35 U.S.C. § 203 (2006), to take certain actions, including granting licenses to third parties to
ensure public benefits from the dissemination and use of the results of federally sponsored
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research in circumstances in which the original contractor or assignee has not taken, or is not
expected to take within a reasonable time, effective steps to achieve practical application of the
product of that research. The general purpose of these rights is to ensure the expenditure of
Federal research funds in accordance with the policies and objectives of the Bayh-Dole Act.
SECTION 3. DEFINITIONS
.01 Basic research, for purposes of§ 141 of the Code, means any original investigation for the
advancement of scientific knowledge not having a specific commercial objective. For example,
product testing supporting the trade or business of a specific nongovernmental person is not
treated as basic research.
.02 Qualified user means any State or local governmental unit as defined in § 1.1031 or any
instrumentality thereof. The term also includes a § 501(c)(3) organization if the financed
property is not used in an unrelated trade or business under § 513(a) of the Code. The term does
not include the United States or any agency or instrumentality thereof.
.03 Sponsor means any person, other than a qualified user, that supports or sponsors research
under a contract.
SECTION 4. CHANGES
This revenue procedure modifies and supersedes Rev. Proc. 97-14 by making changes that are
described generally as follows:
.01 Section 6.03 of this revenue procedure modifies the operating guidelines on cooperative
research agreements to include agreements regarding industry or federally sponsored research
with either a single sponsor or multiple sponsors.
.02 Section 6.04 of this revenue procedure provides special rules for applying the revised
operating guidelines under section 6.03 of this revenue procedure to federally sponsored
research. These special rules provide that the rights of the Federal Government and its agencies
mandated by the Bayh-Dole Act will not cause research agreements to fail to meet the
requirements of section 6.03, upon satisfaction of the requirements of section 6.04 of this
revenue procedure. Thus, under the stated conditions, such rights themselves will not result in
private business use by the Federal Government or its agencies of property used in research
performed under research agreements. These special rules do not address the use by third parties
that actually receive more than non-exclusive, royalty-free licenses as the result of the exercise
by a sponsoring Federal agency of its rights under the Bayh-Dole Act, such as its march-in
rights.
SECTION 5. SCOPE
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This revenue procedure applies when, under a research agreement, a sponsor uses property
financed with proceeds of an issue of State or local bonds subject to § 141 or §145(a)(2)(B) of
the Code
SECTION 6. OPERATING GUIDELINES FOR RESEARCH AGREEMENTS
.01 In general. If a research agreement is described in either section 6.02 or 6.03 of this revenue
procedure, the research agreement itself does not result in private business use. In applying the
operating guidelines under section 6.03 of this revenue procedure to federally sponsored
research, the special rules under section 6.04 of this revenue procedure (regarding the effect of
the rights of the Federal Government and its agencies under the Bayh-Dole Act) apply.
.02 Corporate-sponsored research. A research agreement relating to property used for basic
research supported or sponsored by a sponsor is described in this section 6.02 if any license or
other use of resulting technology by the sponsor is permitted only on the same terms as the
recipient would permit that use by any unrelated, non-sponsoring party (that is, the sponsor must
pay a competitive price for its use), and the price paid for that use must be determined at the time
the license or other resulting technology is available for use. Although the recipient need not
permit persons other than the sponsor to use any license or other resulting technology, the price
paid by the sponsor must be no less than the price that would be paid by any non-sponsoring
party for those same rights.
.03 Industry or federally-sponsored research agreements. A research agreement relating to
property used pursuant to an industry or federally-sponsored research arrangement is described
in this section 6.03 if the following requirements are met, taking into account the special rules set
forth in section 6.04 of this revenue procedure in the case of federally sponsored research—
(9) A single sponsor agrees, or multiple sponsors agree, to fund governmentally performed
basic research;
(2) The qualified user determines the research to be performed and the manner in which it is to
be performed(for example, selection of the personnel to perform the research);
(3) Title to any patent or other product incidentally resulting from the basic research lies
exclusively with the qualified user; and
(4)The sponsor or sponsors are entitled to no more than a nonexclusive, royalty-
free license to use the product of any of that research.
.04 Federal Government rights under the Bayh-Dole Act. In applying the operating guidelines on
industry and federally-sponsored research agreements under section 6.03 of this revenue
procedure to federally sponsored research, the rights of the Federal Government and its agencies
mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the
requirements of section 6.03, provided that the requirements of sections 6.03(2), and (3) are met,
and the license granted to any party other than the qualified user to use the product of the
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research is no more than a nonexclusive, royalty-free license. Thus, to illustrate, the existence of
march-in rights or other special rights of the Federal Government or the sponsoring Federal
agency mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the
requirements of section 6.03 of this revenue procedure, provided that the qualified user
determines the subject and manner of the research in accordance with section 6.03(2), the
qualified user retains exclusive title to any patent or other product of the research in accordance
with section 6.03(3), and the nature of any license granted to the Federal Government or the
sponsoring Federal agency (or to any third party nongovernmental person) to use the product of
the research is no more than a nonexclusive, royalty-free license.
SECTION 7. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 97-14 is modified and superseded.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for any research agreement entered into, materially modified,
or extended on or after June 26, 2007. In addition, an issuer may apply this revenue procedure to
any research agreement entered into prior to June 26, 2007.
SECTION 9. DRAFTING INFORMATION
The principal authors of this revenue procedure are Vicky Tsilas and Johanna Som de Cerff of
the Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this revenue procedure, contact Johanna Som de Cerff at (202) 622-3980
(not a toll-free call).
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EXHIBIT 2
MANAGEMENT CONTRACT GUIDELINES
Rev. Proc. 97-13, 1997-1 C.B. 632—Management Contract Guidelines (Supersedes Rev.
Proc. 93-19), as amended by Rev. Proc. 2001-39, 2001-2 C.B. 38
1997-1 C.B. 632; 1997 IRB LEXIS 14; 1997-5 I.R.B. 18; REV. PROV 97-13
(Also Part I, §§ 103, 141, 145; 1.141-3, 1.145-2)
February 3, 1997 , amended July 9, 2001.
SECTION 1. PURPOSE
The purpose of this revenue procedure is to set forth conditions under which a management
contract does not result in private business use under § 141(b) of the Internal Revenue Code of
1986. This revenue procedure also applies to determinations of whether a management contract
causes the test in § 145(a)(2)(B) of the 1986 Code to be met for qualified 501(c)(3)bonds.
SECTION 2. BACKGROUND
.01 Private Business Use.
(1) Under § 103(a) of the 1986 Code, gross income does not include interest on any state or
local bond. Under § 103(b)(1) of the 1986 Code, however, § 103(a) of the 1986 Code does not
apply to a private activity bond, unless it is a qualified bond under § 141€ of the 1986 Code.
Section 141(a)(1) of the 1986 Code defines "private activity bond" as any bond issued as part of
an issue that meets both the private business use and the private security or payment tests.
Under § 141(b)(1) of the 1986 Code, an issue generally meets the private business use test if
more than 10 percent of the proceeds of the issue are to be used for any private business use.
Under § 141(b)(6)(A) of the 1986 Code, private business use means direct or indirect use in a
trade or business carried on by any person other than a governmental unit. Section 145(a) of the
1986 Code also applies the private business use test of§ 141(b)(1) of the 1986 Code, with
certain modifications.
(2) Corresponding provisions of the Internal Revenue Code of 1954 set forth the requirements
for the exclusion from gross income of the interest on state or local bonds. For purposes of this
revenue procedure, any reference to a 1986 Code provision includes a reference to the
corresponding provision, if any, under the 1954 Code.
(3) Private business use can arise by ownership, actual or beneficial use of property pursuant to a
lease, a management or incentive payment contract, or certain other arrangements. The
Conference Report for the Tax Reform Act of 1986, provides as follows:
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The conference agreement generally retains the present-law rules under which use by persons
other than governmental units is determined for purposes of the trade or business use test. Thus,
as under present law, the use of bond-financed property is treated as a use of bond proceeds. As
under present law, a person may be a user of bond proceeds and bond-financed property as a
result of (1) ownership or (2) actual or beneficial use of property pursuant to a lease, a
management or incentive payment contract, or (3) any other arrangement such as a take-or-pay
or other output-type contract. 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. I1-687-688, (1986)
1986-3 (Vol. 4) C.B. 687-688 (footnote omitted).
(4) A management contract that gives a nongovernmental service provider an ownership or
leasehold interest in financed property is not the only situation in which a contract may result in
private business use.
(5) Section 1.141-3(b)(4)(i) of the Income Tax Regulations provides, in general, that a
management contract (within the meaning of§ 1.141-3(b)(4)(ii)) with respect to financed
property may result in private business use of that property, based on all the facts and
circumstances.
(6) Section 1.141-3(b)(4)(i) provides that a management contract with respect to financed
property generally results in private business use of that property if the contract provides for
compensation for services rendered with compensation based, in whole or in part, on a share of
net profits from the operation of the facility.
(7) Section 1.141-3(b)(4)(iii), in general, provides that certain arrangements generally are not
treated as management contracts that may give rise to private business use. These are—
(a) Contracts for services that are solely incidental to the primary governmental
function or functions of a financed facility (for example, contracts for janitorial,
office equipment repair, hospital billing or similar services);
(b) The mere granting of admitting privileges by a hospital to a doctor, even if
those privileges are conditioned on the provision of de minimis services, if those
privileges are available to all qualified physicians in the area, consistent with the size
and nature of its facilities;
(c) A contract to provide for the operation of a facility or system of facilities that
consists predominantly of public utility property (as defined in § 168(i)(10) of the
1986 Code), if the only compensation is the reimbursement of actual and direct
expenses of the service provider and reasonable administrative overhead expenses of
the service provider; and
(d) A contract to provide for services, if the only compensation is the
reimbursement of the service provider for actual and direct expenses paid by the
service provider to unrelated parties.
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(8) Section 1.145-2(a) provides generally that §§ 1.141-0 through 1.141-15 apply to § 145(a) of
the 1986 Code.
(9) Section 1.145-2(b)(1) provides that in applying §§ 1.141-0 through 1.141-15 to § 145(a) of
the 1986 Code, references to governmental persons include section 501(c)(3) organizations with
respect to their activities that do not constitute unrelated trades or businesses under § 513(a) of
the 1986 Code.
.02 Existing Advance Ruling Guidelines. Rev. Proc.. 93-19, 1993-1 C.B. 526, contains advance
ruling guidelines for determining whether a management contract results in private business use
under § 141(b) of the 1986 Code.
SECTION 3.DEFINITIONS
.01 Adjusted gross revenues means gross revenues of all or a portion of a facility, less allowances
for bad debts and contractual and similar allowances.
.02 Capitation fee means a fixed periodic amount for each person for whom the service provider
or the qualified user assumes the responsibility to provide all needed services for a specified
period so long as the quantity and type of services actually provided to covered persons varies
substantially. For example, a capitation fee includes a fixed dollar amount payable per month to
a medical service provider for each member of a health maintenance organization plan for whom
the provider agrees to provide all needed medical services for a specified period.A fixed periodic
amount may include an automatic increase according to a specified, objective, external standard
that is not linked to the output or efficiency of a facility. For example, the Consumer Price Index
and similar external indices that track increases in prices in an area or increases in revenues or
costs in an industry are objective external standards'. A capitation fee may include a variable
component of up to 20 percent of the total capitation fee designed to protect the service provider
against risks such as catastrophic loss.
.03 Management contract means a management, service, or incentive payment contract between
a qualified user and a service provider under which the service provider provides services
involving all, a portion of, or any function of, a facility. For example, a contract for the provision
of management services for an entire hospital, a contract for management services for a specific
department of a hospital, and an incentive payment contract for physician services to patients of
a hospital are each treated as a management contract. See §§ 1.141-3(b)(4)(ii) and 1.145-2.
.04 Penalties for terminating a contract include a limitation on the qualified user's right to
compete with the service provider; a requirement that the qualified user purchase equipment,
goods, or services from the service provider; and a requirement that the qualified user pay
liquidated damages for cancellation of the contract. In contrast, a requirement effective on
cancellation that the qualified user reimburse the service provider for ordinary and necessary
expenses or a restriction on the qualified user against hiring key personnel of the service provider
' Added by Rev.Proc. 2001-39,section 4.01.
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is generally not a contract termination penalty. Another contract between the service provider
and the qualified user, such as a loan or guarantee by the service provider, is treated as creating a
contract termination penalty if that contract contains terms that are not customary or arm's-
length that could operate to prevent the qualified user from terminating the contract (for
example, provisions under which the contract terminates if the management contract is
terminated or that place substantial restrictions on the selection of a substitute service provider).
.05 Periodic fixed fee means a stated dollar amount for services rendered for a specified period of
time. For example, a stated dollar amount per month is a periodic fixed fee. The stated dollar
amount may automatically increase according to a specified, objective, external standard that is
not linked to the output or efficiency of a facility. For example, the Consumer Price Index and
similar external indices that track increases in prices in an area or increases in revenues or costs
in an industry are objective external standards. Capitation fees and per-unit fees are not periodic
fixed fees.
.06 Per-unit fee means a fee based on a unit of service provided specified in the contract or
otherwise specifically determined by an independent third party, such as the administrator of the
Medicare program, or the qualified user. For example, a stated dollar amount for each specified
medical procedure performed, car parked, or passenger mile is a per-unit fee. Separate billing
arrangements between physicians and hospitals generally are treated as per-unit fee
arrangements. A fee that is a stated dollar amount specified in the contract does not fail to be a
per-unit fee as a result of a provision under which the fee may automatically increase according
to a specified, objective, external standard that is not linked to the output or efficiency of a
facility. For example, the Consumer Price Index and similar external indices that track
increases in prices in an area or increases in revenues or costs in an industry are objective
external standards.2
.07 Qualified user means any state or local governmental unit as defined in § 1.103-1 or any
instrumentality thereof. The term also includes a section 501(c)(3) organization if the financed
property is not used in an unrelated trade or business under § 513(a) of the 1986 Code. The term
does not include the United States or any agency or instrumentality thereof.
.08 Renewal option means a provision under which the service provider has a legally enforceable
right to renew the contract. Thus, for example, a provision under which a contract is
automatically renewed for one-year periods absent cancellation by either party is not a renewal
option(even if it is expected to be renewed).
.09 Service provider means any person other than a qualified user that provides services under a
contract to, or for the benefit of, a qualified user.
2 Added by Rev.Proc. 2001-39,section 4.02.
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SECTION 4. SCOPE
This revenue procedure applies when, under a management contract, a service provider provides
management or other services involving property financed with proceeds of an issue of state or
local bonds subject to § 141 or § 145(a)(2)(B) of the 1986 Code.
SECTION 5. OPERATING GUIDELINES FOR MANAGEMENT CONTRACTS
.01 In general. If the requirements of section 5 of this revenue procedure are satisfied, the
management contract does not itself result in private business use. In addition, the use of
financed property, pursuant to a management contract meeting the requirements of section 5 of
this revenue procedure, is not private business use if that use is functionally related and
subordinate to that management contract and that use is not, in substance, a separate contractual
agreement (for example, a separate lease of a portion of the financed property). Thus, for
example, exclusive use of storage areas by the manager for equipment that is necessary for it to
perform activities required under a management contract that meets the requirements of section 5
of this revenue procedure, is not private business use.
.02 General compensation requirements.
(1)In general. The contract must provide for reasonable compensation for services rendered with
no compensation based, in whole or in part, on a share of net profits from the operation of the
facility. Reimbursement of the service provider for actual and direct expenses paid by the service
provider to unrelated parties is not by itself treated as compensation.
(2) Arrangements that generally are not treated as net profits arrangements. For purposes of§
1.141-3(b)(4)(i) and this revenue procedure, compensation based on—
(a) A percentage of gross revenues (or adjusted gross revenues) of a facility or a
percentage of expenses from a facility,but not both;
(b) A capitation fee; or
(c) A per-unit fee is generally not considered to be based on a share of net profits.
(3) Productivity reward. For purposes of§ 1.141-3(b)(4)(i) and this revenue procedure, a
productivity reward equal to a stated dollar amount based on increases or decreases in gross
revenues (or adjusted gross revenues), or reductions in total expenses (but not both increases in
gross revenues (or adjusted gross revenues) and reductions in total expenses) in any annual
period during the term of the contract, generally does not cause the compensation to be based on
a share of net profits.
(4) Revision of compensation arrangements. In general, if the compensation arrangements of a
management contract are materially revised, the requirements for compensation arrangements
under section 5 of this revenue procedure are retested as of the date of the material revision, and
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9662233.1
the management contract is treated as one that was newly entered into as of the date of the
material revision.
.03 Permissible Arrangements. The management contract must be described in section 5.03(1),
(2), (3), (4), (5), or(6) of this revenue procedure.
(1) 95 percent periodic fixed fee arrangements. At least 95 percent of the compensation for
services for each annual period during the term of the contract is based on a periodic fixed fee.
The term of the contract, including all renewal options, must not exceed the lesser of 80 percent
of the reasonably expected useful life of the financed property and 15 years. For purposes of this
section 5.03(1), a fee does not fail to qualify as a periodic fixed fee as a result of a one-time
incentive award during the term of the contract under which compensation automatically
increases when a gross revenue or expense target (but not both) is reached if that award is equal
to a single, stated dollar amount.
(2) 80 percent periodic fixed fee arrangements. At least 80 percent of the compensation for
services for each annual period during the term of the contract is based on a periodic fixed fee.
The term of the contract, including all renewal options, must not exceed the lesser of 80 percent
of the reasonably expected useful life of the financed property and 10 years. For purposes of this
section 5.03(2), a fee does not fail to qualify as a periodic fixed fee as a result of a one-time
incentive award during the term of the contract under which compensation automatically
increases when a gross revenue or expense target (but not both) is reached if that award is equal
to a single, stated dollar amount.
(3) Special rule for public utility property. If all of the financed property subject to the contract is
a facility or system of facilities consisting of predominantly public utility property (as defined
in § 168(i)(10) of the 1986 Code), then"20 years" is substituted—
(a) For"15 years" in applying section 5.03(1) of this revenue procedure; and
(b) For"10 years" in applying section 5.03(2) of this revenue procedure.
(4) 50 percent periodic fixed fee arrangements. Either at least 50 percent of the compensation for
services for each annual period during the term of the contract is based on a periodic fixed fee or
all of the compensation for services is based on a capitation fee or a combination of a capitation
fee and a periodic fixed fee. The term of the contract, including all renewal options, must not
exceed 5 years. The contract must be terminable by the qualified user on reasonable notice,
without penalty or cause, at the end of the third year of the contract term.
(5)Per-unit fee arrangements in certain 3-year contracts. All of the compensation for services is
based on a per-unit fee or a combination of a per-unit fee and a periodic fixed fee. The term of
the contract, including all renewal options, must not exceed 3 years. The contract must be
terminable by the qualified user on reasonable notice, without penalty or cause, at the end of the
second year of the contract term.
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(6) Percentage of revenue or expense fee arrangements in certain 2-year contracts. All the
compensation for services is based on a percentage of fees charged or a combination of a per-unit
fee and a percentage of revenue or expense fee. During the start-up period, however,
compensation may be based on a percentage of either gross revenues, adjusted gross revenues, or
expenses of a facility. The term of the contract, including renewal options, must not exceed 2
years. The contract must be terminable by the qualified user on reasonable notice, without
penalty or cause, at the end of the first year of the contract term. This section 5.03(6) applies
only to—
(a) Contracts under which the service provider primarily provides services to third
parties (for example, radiology services to patients); and
(b) Management contracts involving a facility during an initial start-up period for
which there have been insufficient operations to establish a reasonable estimate of the
amount of the annual gross revenues and expenses (for example, a contract for
general management services for the first year of operations).
.04 No Circumstances Substantially Limiting Exercise of Rights.
(1)In general. The service provider must not have any role or relationship with the qualified user
that, in effect, substantially limits the qualified user's ability to exercise its rights, including
cancellation rights, under the contract,based on all the facts and circumstances.
(2) Safe harbor. This requirement is satisfied if—
(a) Not more than 20 percent of the voting power of the governing body of the
qualified user in the aggregate is vested in the service provider and its directors,
officers, shareholders, and employees;
(b) Overlapping board members do not include the chief executive officers of the
service provider or its governing body or the qualified user or its governing body; and
(c) The qualified user and the service provider under the contract are not related
parties, as defined in § 1.150-1(b).
SECTION 6. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 93-19, 1993-1 C.B. 526, is made obsolete on the effective date of this revenue
procedure.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for any management contract entered into, materially
modified, or extended (other than pursuant to a renewal option) on or after May 16, 1997.
In addition, an issuer may apply this revenue procedure to any management contract entered into
prior to May 16, 1997.
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9662233.1
DRAFTING INFORMATION
The principal author of this revenue procedure is Loretta J. Finger of the Office of Assistant
Chief Counsel (Financial Institutions and Products). For further information regarding this
revenue procedure contact Loretta J. Finger on(202) 622-3980 (not a toll-free call).
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TAB II
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TAB II
PRIVATE BUSINESS USE QUESTIONNAIRE
GOVERNMENTAL BONDS
TO: [NAME]
[TITLE]
FROM: .
DATE: [CURRENT DATE]
RE: Use of Tax-Exempt Bond-Financed Property
In order to maintain the tax exempt status of bonds (including any short-term obligations such
as notes) which have been issued to finance facilities or equipment for the benefit of the City of
Opa-Locka, Florida(the"Issuer"), the ownership and certain uses of the Bond-Financed Property
must be monitored and recorded. In general, the ownership and use of the Bond-Financed
Property must be monitored and recorded from the date of issue of the bonds until the earlier of
the end of the expected life of the property, or the final maturity date of any bonds issued to
finance the property. Because it is the Internal Revenue Service's position that records be
maintained until 3 years after the final maturity date of any bonds issued to finance (or refinance)
the property, staff will be asked to update these records for changes in the use or ownership of
the property.
Attached is a schedule with a brief description of property financed with proceeds of tax exempt
bonds. Our records indicate the property is located at [NAME OF FACILITY]. Please review
your records and respond to each of the questions for the Bond-Financed Property listed,
including both the present use of the property and any past uses of it. Please do not skip
questions. If you are uncertain how to respond to a particular question please provide a brief
explanation in the space immediately following the question. If necessary one of my staff
members will contact you for clarification. Please refer to Tab I-A, Private Activity Restrictions
on Private Business Use, of the Post-Issuance Compliance Guide, for a brief description of types
of private use.
We recognize that some of the requested information and records may not be available.
However, your cooperation is necessary in order to collect as much of this information as
possible.
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SCHEDULE
USE OF TAX EXEMPT BOND BOND-FINANCED PROPERTY
Description of property: [Description] (the"Bond-Financed Property")
Location: [facility name]
Bond or Note Issue: [name of bonds or notes]
Survey Date: [current date]
PLEASE REVIEW APPENDIX A FOR APPLICABLE RULES ON PRIVATE USE
I. Familiarity with Uses
1.1 My familiarity with, and/or the records with respect to, the uses made of the
Bond-Financed Property, dates back to [insert date]
1.2 For information on uses of the Bond-Financed Property prior to the date set forth
in Section 1.1, I suggest contacting
II. Ownership and Use of the Bond-Financed Property.
2.1 When was the Bond-Financed Property placed in service?
2.2 Is the Bond-Financed Property still owned by the Issuer? Yes ❑ No ❑
2.3 If, no, on what day was the Bond-Financed Property disposed of?
What were the terms of the disposition?
2.4 Is the Bond-Financed Property still in use? Yes ❑ No ❑ If No, please explain
when it stopped being used and what its current state is.
2.5 Is the Bond-Financed Property still being used for its original purpose? Yes ❑
No ❑ If No, please explain how it is being used.
III. Leases of the Bond-Financed Property.
3.1 Has any portion of the Bond-Financed Property been leased to or been the subject
of a possessory interest, such as a license in, any person? YES ❑ NO ❑
3.2 If the answer to the preceding question is yes, describe the nature and the extent
of all such interests, including the lease payments, and identify the persons or organizations to
whom such interests have been given.
IV. Priority Rights.
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9662233.1
4.1 Has any portion of the Bond-Financed Property been the subject of an
arrangement with a person other than a Governmental Unit for priority use or for use of certain
capacity of the Bond-Financed Property? YES ❑ NO ❑
4.2 If the answer to the preceding question is Yes, describe the nature and the extent
of all such interests, including any payments, and identify the persons or organizations to whom
such interests have been given.
4.3 Has any portion of the Bond-Financed Property been used in the testing of
products under a contract with a person other than a Governmental Unit? YES ❑ NO ❑
4.4 If the answer to the preceding question is Yes, describe the nature and the extent
of all such arrangements, and identify the persons or organizations with whom such
arrangements have been entered into.
V. Naming Rights or Sponsorship Agreements.
5.1 Has any portion of the Bond-Financed Property been the subject of a contract or
other arrangement with anyone pursuant to which the that person will make a payment to the
Issuer in return for the right to have its name or logo used in connection with the Issuer or any
portion thereof? YES ❑ NO ❑ If Yes, please provide details of the arrangement.
VI. Research.
6.1 Has any portion of the Bond-Financed Property been used in research sponsored
by anyone other than a Governmental Unit? (Note that the federal government is not a
Governmental Unit.)YES ❑ NO ❑
6.2 If Yes, please describe the nature and the extent of all such arrangements, and
identify the persons or organizations with whom such arrangements have been entered into.
Please attach a copy of any contract or arrangement relating to such research.
VII. Management Agreements and Service Agreements.
7.1 Has any portion of the Bond-Financed Property been used in connection with any
type of service contract or management contract described below?
(a) A contract with a non-employee group, other than a Governmental Unit, to
provide services to, or manage any function of, the Issuer? YES ❑ NO. If Yes,
identify the person or organization that is a party to the contract.
(b) A contract with an employee to provide services to, or manage any
function of, the Issuer, where such contract contains an incentive compensation
arrangement? YES ❑ NO ❑ If Yes, identify the person or organization that is a
party to the contract.
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9662233.1
(c) A contract with a person other than a Governmental Unit to provide
services, such as food services to the Issuer? YES ❑ NO ❑ If Yes, identify the
person or organization that is a party to the contract.
7.2 For each contract identified in Section 7.1 answer the following questions, which
track the safe harbor requirements of Rev. Proc. 97-13. Identify the answer by the name of the
contracting party. Attach a copy of the contract to this questionnaire response.
(a) What is or was the term of the contract/agreement, including all renewal
options?
(b) Does the Issuer have the option to cancel the contract/agreement without
penalty or cause? YES ❑ NO ❑
(c) Is or was any of the compensation of the manager/service provider based
on a share of net profits? YES ❑ NO ❑
(d) What is or was the annual compensation arrangement for the
manager/service provider?
€ Does the governing body of the Issuer include the manager/service
provider or any of its directors, officers, shareholders, or employees? YES ❑
NO ❑
(f) Does the governing body of the manager/service provider include any of
the Issuer's governing body, officers, or employees? YES ❑ NO ❑
(g) Is the chief executive officer of either the Issuer or the manager/service
provider a member of the governing body of the other? YES ❑ NO ❑
(h) Does the manager/service provider have any role or relationship with the
Issuer that might limit the Issuer's ability to exercise its rights (including
cancellation rights) under the contract? YES ❑ NO ❑ This would include a
limitation on the Issuer's right to compete with the service provider; a
requirement that the Issuer purchase equipment, goods, or services from the
service provider; or a requirement that the Issuer pay liquidated damages for
cancellation of the contract.
(i) Will the members of the governing body of the Issuer own any interest in
the management company? YES ❑ NO ❑
VII. Output Facilities.
8.1 Is any portion of the Bond-Financed Property an output type facility? YES ❑
NO ❑
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9662233.1
8.2 If the answer to the preceding question is Yes, has any of the output from those
facilities been sold or been used to service facilities used in the trade or business of persons other
than Governmental Units? YES ❑ NO ❑
IX Joint Ventures.
9.1 Has any portion of the Bond-Financed Property been used in any joint venture
arrangement with any person other than a Governmental Unit? YES ❑ NO ❑ If Yes, please
provide details of the arrangement.
Date: By:
Name:
Title:
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9662233.1
TAB III
RM:8162349:4
9662233.1
TAB III
REMEDIAL ACTIONS
GOVERNMENTAL BONDS
Introduction
The Internal Revenue Code of 1986, as amended (the "Code") limits the amount of proceeds of
tax-exempt governmental bonds (including short-term obligations such as notes) that can be used
for the benefit of private businesses. Section 141 of the Code treats as a taxable private activity
bond a bond issued as part of an issue that meets the private business use test and the private
security or payment test, or the private loan test. The private business use test is met if the
amount of proceeds of bonds that are used in a private business use is more than ten percent of
total proceeds. The private security or payment test is met if the payment of debt service on
more than 10 percent of the issue is directly or indirectly (i) secured by any interest in property
used for a private business use or payments in respect of such property or (ii) derived from
payments in respect of property or borrowed money used for a private business use. A five
percent limit is used in lieu of a ten percent limit if the private use is unrelated to a governmental
use or related but disproportionate to a governmental use. For purposes of Section 141, the term
private business includes nonprofit, 501(c)(3) organizations as well as the federal government.
Deliberate Action
The Regulations promulgated by the Internal Revenue Service ("IRS") under Section 141 of the
Code, specifically provide that bonds will be treated as private activity bonds if the issuer takes a
deliberate action subsequent to the issue date that causes the tests for a private activity bond to be
met. An issuer cannot rely merely on its expectations on the date of issuance to avoid
jeopardizing the status of its bonds as governmental bonds. A deliberate action is any action
taken by an issuer, but not including an action, such as a condemnation, that would be treated as
an involuntary or compulsory conversion under Section 1033 of the Code, or an action that is
taken in response to a regulatory directive made by the federal government. A deliberate action is
deemed to occur when the issuer enters into a binding contract with a nongovernmental person
for use of the financed property that is not subject to any material contingencies. In most cases,
material conditions to closing a transaction will be treated as material contingencies so that the
date of deliberate action will be the date disposition proceeds are received.
Conditions to Remedial Action
Under the Regulations, in order to take a remedial action to preserve the tax-exempt status of
interest on bonds, the following conditions must be met:
(1) Reasonable expectations test. The issuer must reasonably have expected on the issue
date that neither the private business test nor the private loan test would be met. The period of
time that has elapsed since the bonds were issued will be a factor in evaluating the
reasonableness of expectations. Under certain conditions an expectation on the issue date to take
a deliberate action that would cause one of the tests to be met (e.g., a sale of the project) will be
RM:8162349:4
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9662233.1
disregarded if the issuer expected on the issue date that the financed property would be used for a
qualified purpose for a substantial period before such action, the issuer is required to redeem all
nonqualifying bonds (without regard to the amount of disposition proceeds) within 6 months of
the action, the redemption meets all the remedial action conditions (described below) and there
was no arrangement on the date of issue with a nongovernmental person or a non-501 (c)(3)
organization with respect to the activity;
(2) Maturity not unreasonably long. The term of the bond issue must not be longer than is
reasonably necessary for the governmental purpose of the issue. This requirement is met under a
safe harbor if the weighted average maturity of the bonds is not greater than 120 percent of the
average reasonably expected economic life of the financed property as of the issue date.
(3) Fair market value consideration. The terms of any change in use or loan arrangement are
bona fide and arms-length and the new user pays fair market value for the use of the financed
property. For this purpose fair market value may take into account restrictions on the use of the
financed property that serve a bona fide governmental purpose.
(4) Disposition proceeds treated as gross proceeds for arbitrage purposes. Any disposition
proceeds must be treated as gross proceeds for arbitrage purposes. This will require that the
issuer meet yield restriction or rebate requirements with respect to these funds. The issuer may
treat the date of receipt of the proceeds as an issue date for purposes of eligibility for temporary
periods and exemptions from rebate.
(5) Proceeds expended on a governmental purpose. Except where a redemption or
defeasance remedial action is taken, the proceeds must have been expended on a governmental
purposes before the date of the deliberate action.
Effect of Remedial Action
A remedial action is treated as curing a change in ownership or a private use or private loan of
proceeds, thereby preserving the tax-exempt status of existing bonds. It does not cure a failure to
meet the private payment or security interest limitation. In the case of advance refunding bonds,
remedial action taken with respect to the refunding bonds proportionally reduces the amount of
proceeds of the refunded bonds that is taken into account under the private business use or loan
test. In other words, the remedial action taken with respect to the refunding bonds proportionally
"cures" the refunded bonds.
Disposition Proceeds and Nonqualified Bonds
Generally, in order to take one of the remedial actions it is necessary to know what the
disposition proceeds are and how much of the disposition proceeds are allocated to particular
issues. Disposition proceeds arise in a sale, exchange or other disposition of bond-financed
property. Disposition proceeds do not arise, however, in an installment sale arrangement and the
bond proceeds remain allocated to the transferred property in that case. This distinction becomes
important when determining what remedial action is appropriate.
RM:8162349:4
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9662233.1
In the case of property financed from different sources of funding, the disposition proceeds are
first allocated to the outstanding bonds (both taxable and tax-exempt) that financed the property
in proportion to the principal amount of the outstanding bonds. Disposition proceeds may not be
allocated to bonds that are no longer outstanding or to revenues if the disposition proceeds are
not greater than the total principal amount of the outstanding bonds allocable to that property.
Only amounts in excess of that total may be allocated to another source.
Under the Regulations, the amount of nonqualified bonds that arise from a deliberate action is a
percentage of the outstanding bonds equal to the highest percentage of private business use in
any one-year period commencing with the deliberate action. Allocations to nonqualified bonds
must be made on a pro-rata basis except that for purposes of the redemption or defeasance
remedial action the issuer may treat bonds with longer maturities as the nonqualified bonds. This
treatment would be necessary, for example, where the bonds are required to be called in inverse
order of maturity rather than pro rata.
Permitted Remedial Actions
Redemptions or Defeasance
The first remedial action is redemption or defeasance which is available in the case of a
deliberate action taking the form of a sale, lease or nonqualified management contract or other
action. This remedial action probably will be the most frequently used remedial action in sale
transactions. Under this remedial action, other than in the case of an exclusively cash disposition,
all nonqualified bonds must be redeemed within 90 days of the deliberate action. Proceeds of
tax-exempt bonds may not be used to effect the redemption unless they are proceeds of qualified
private activity bonds (e.g., exempt facility bonds) taking into account the purchaser's use. If the
bonds are not currently redeemable, a defeasance escrow must be established for all nonqualified
bonds within 90 days of the deliberate action and notice of defeasance must be furnished to the
Commissioner of Internal Revenue within 90 days of the escrow establishment. Defeasance is
only available as a remedial action, however, if the period between the issue date and the first
call date is not more than 101/2 years. Thus, for example, if a bond-financed building is leased to
a private for-profit entity, all tax-exempt bonds that financed that building would have to be
redeemed or defeased within 90 days.
In the case of a disposition, a sale, exclusively for cash, if the disposition proceeds are less than
the amount of the nonqualified bonds, only an amount equal to the disposition proceeds must be
used to redeem or defease a pro rata portion of the nonqualified bonds.
Alternative Use of Disposition Proceeds
In the case of a disposition exclusively for cash, the issuer may, in lieu of redeeming or defeasing
bonds, expend the disposition proceeds on other qualifying facilities. The issuer must reasonably
expect to expend the disposition proceeds within two years of the deliberate action and must treat
the disposition proceeds as bond proceeds for purposes of Section 141. The issuer must not use
such proceeds in a manner that would cause the private business tests or the private loan test to
be met. Furthermore the issuer must not take any action subsequent to the date of deliberate
RM:8162349:4
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9662233.1
action to cause either of these tests to be met. This requirement precludes the issuer from
repeatedly taking advantage of the remedial action provisions with respect to the same bond
issue. If the issuer does not use all of the disposition proceeds for an alternative use it must use
the remaining proceeds to redeem or defease bonds as described above.
If the disposition proceeds are to be used by a 501(c)(3) organization, the nonqualified bonds
must, in addition, be treated as reissued and must, beginning on the date of the deliberate action,
meet all the requirements for qualified 501(c)(3) bonds. For example, this requires that a TEFRA
hearing be held and approval obtained with respect to the new uses of proceeds before the date of
the deliberate action.
Alternative Use of Facility
The third remedial action, alternative use of a facility, permits the bonds to remain outstanding if
the facility is now used for a qualifying purpose and the nonqualified bonds are treated as
reissued as of the date of deliberate action as qualified bonds, e.g., qualified 501(c)(3) bonds or
qualified exempt facility bonds. The nonqualified bonds must satisfy all the requirements for that
particular type of issue from the date of deliberate action, including the volume cap limitation of
Section 146 of the Code, if applicable. The Regulations specifically provide, however, that the
used property limitation of Section 147 will not apply. In the case of exempt facility bonds, and
other non-501(c)(3) qualified bonds, the interest will be treated as a preference item for
alternative minimum tax ("AMT") purposes (see discussion below). This remedial action is not
available if the deliberate action involves a disposition to a purchaser who finances the purchase
with tax-exempt bonds.
The Regulations provide that any disposition proceeds, including proceeds from an installment
sale, must be used to pay debt service on the bonds on the next available payment date or within
90 days of receipt, be deposited into a defeasance escrow, yield restricted and used to pay debt
service on the bonds on the next available payment date. The Regulations do not address under
this remedial action alternative how to deal with the change in status of interest from non-AMT
to AMT. This is addressed, however, in Rev. Proc. 97-1 5, discussed below.
Rev. Proc. 97-15
Rev. Proc. 97-15 provides a program under which an issuer may request a closing agreement as a
remedial action to prevent interest on outstanding bonds from being included in gross income or
to prevent interest from being treated as an item of tax preference for AMT purposes as a result
of a subsequent action. Closing agreements under this program will not resolve any other issue,
nor will they preclude an examination by the IRS of any matters not addressed in the closing
agreement. These closing agreements are not available with respect to an issue of outstanding
bonds that is under examination by the IRS.
Closing Agreement as to Exclusion from Gross Income
A number of procedural and substantive conditions to obtaining a closing agreement are set forth
in Rev. Proc. 97-15. In addition, in the case of a closing agreement that provides that interest will
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not be included in gross income, the issuer must agree to redeem the outstanding bonds at the
next redemption date. The issuer also must pay a closing agreement amount equal to the sum of
the present value amounts determined by multiplying the amount of interest accruing on the
nonqualified bonds in each year by .29 and present valuing each such number from April 15 of
the year after the interest accrues to the date on which the payment is sent to the IRS, using as
the discount rate the taxable applicable federal rate for a term equal to the period from the
subsequent action to the redemption date.
Alternative Minimum Tax Closing Agreement
In the case of a closing agreement that provides that the interest will not be treated as an item of
tax preference, among other conditions, the issuer must pay an amount equal to the sum of
certain present value amounts. These amounts are determined by multiplying the principal
amount of the nonqualified bonds that will be outstanding on January 1 in each calendar year
beginning in the year of the subsequent action and ending the first calendar year in which the
bonds will no longer be outstanding, by .0014 and present valuing each such number from April
15 of the year following each such calendar year to the date of payment to the IRS, using the
applicable federal rate for the period specified in the closing agreement as the discount rate.
VCAP
The IRS has adopted procedures for its Voluntary Closing Agreement Program ("VCAP") under
which issuers of tax exempt bonds can voluntarily resolve violations of the Code or Regulations
on behalf of their bondholders or themselves through closing agreements with the IRS. These
procedures are set forth in Internal Revenue Manual 7.2.3.1. If a deliberate action has occurred
that cannot be remedied with a remedial action, a VCAP should be considered.
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TAB IV
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TAB IV
INTERNAL REVENUE SERVICE—TAX EXEMPT BONDS
TAX EXEMPT BOND FAQs REGARDING
RECORD RETENTION REQUIREMENTS
During the course of an examination, IRS Tax Exempt Bonds (TEB) agents will request all
material records and information necessary to support a municipal bond issue's compliance with
section 103 of the Internal Revenue Code. The following information is intended solely to
answer frequently asked questions concerning how the broad record retention requirements
under section 6001 of the Code apply to tax-exempt bond transactions. Although this document
provides information with respect to many of the concerns raised by members of the municipal
finance industry about record retention, it is not to be cited as an authoritative source on these
requirements. TEB recommends that issuers and other parties to tax-exempt bond transactions
review section 6001 of the Code and the corresponding Income Tax Regulations in consultation
with their counsel.
These frequently asked questions and answers are provided for general information only and
should not be cited as any type of legal authority. They are designed to provide the user with
information required to respond to general inquiries. Due to the uniqueness and complexities of
Federal tax law, it is imperative to ensure a full understanding of the specific question presented,
and to perform the requisite research to ensure a correct response is provided.
The freely available Adobe Acrobat Reader software is required to view, print, and search the
questions and answers listed below.
1. Why keep records with respect to tax-exempt bond transactions?
2. Who may maintain records?
3. What are the basic records that should be retained?
4. Are these the only records that need to be maintained?
5. In what format must the records be kept?
6. How long should records be kept?
7. How does this general rule apply to refundings?
8. What happens if records aren't maintained?
9. Can a failure to properly maintain records be corrected?
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10. Are there exceptions to the general rule regarding record retention for certain
types of records?
Why keep records with respect to tax-exempt bond transactions?
Section 6001 of the Internal Revenue Code provides the general rule for the proper retention of
records for federal tax purposes. Under this provision, every person liable for any tax imposed
by the Code, or for the collection thereof, must keep such records, render such statements, make
such returns, and comply with such rules and regulations as the Secretary may from time to time
prescribe. Section 1.6001-1(a) of the Income Tax Regulations amplifies this general rule by
providing that any person subject to income tax, or any person required to file a return of
information with respect to income, must keep such books and records, including inventories, as
are sufficient to establish the amount of gross income, deductions, credits, or other matters
required to be shown by that person in any return of such tax or information.
The IRS regularly advises taxpayers to maintain sufficient records to support their tax
deductions, credits and exclusions. In the case of a tax-exempt bond transaction, the primary
taxpayers are the beneficial holders of the bonds. However, in most cases, the beneficial holders
of tax-exempt bonds will not have any records to support their exclusion of the interest paid on
those bonds. Instead, these records will generally be found in the bond transcript and the books
and records of the issuer, the conduit borrower, and other participants to the transaction.
Therefore, in order to ensure the continued exclusion of interest by the beneficial holders, it is
important that the issuer, the conduit borrower and other participants retain sufficient records to
support the continued exclusion being taken by the beneficial holders of the bonds. Pursuant to
this statutory regime, IRS agents conducting examinations of tax-exempt bond transactions will
look to these parties to provide books, records, and other information documents supporting the
bonds continued compliance with federal tax requirements.
Additionally, in the case of many private activity bonds, the conduit borrowers are also primary
taxpayers. For instance, the conduit borrower will generally deduct the interest indirectly paid
on the bond issue through the loan documents. Conduit borrowers are also often entitled to
claim depreciation deductions for bond-financed property. Consequently, conduit borrowers
should maintain sufficient records to support their interest deductions, depreciation deductions or
other tax deductions, exclusions or credits related to the tax-exempt bond issue.
Moreover, issuers and conduit borrowers should retain sufficient records to show that all tax-
exempt bond related returns submitted to the IRS are correct. Such returns include, for example,
IRS Forms 8038, 8038-G, 8038-GC, 8038-T, and 8038-R.
In addition to the general rules under section 6001, issuers and conduit borrowers are subject to
specific recordkeeping requirements imposed by various other Code sections and regulations.
For example, section 1.148-5(d)(6)(iii)(E) of the arbitrage regulations requires that an issuer
retain certain records necessary to qualify for the safe harbor for establishing fair market value
for guaranteed investment contracts and investments purchased for a yield restricted defeasance
escrow.
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Who may maintain records?
Read together, section 6001 of the Code and section 1.6001-1(a) of the Regulations apply to
taxpayers and persons filing tax returns, including returns related to tax-exempt bond
transactions (i.e., Forms 8038, 8038-G, 8038-GC, 8038-T, 8038-R, 8328, 8703). This
encompasses several parties to the bond transaction including:
1. issuers as the party responsible for satisfying the filing requirements under section
149(e) of the Code;
2. conduit borrowers for deductions taken for payment of interest on outstanding
bonds or depreciation of bond-financed facilities; and
3. bondholders, lenders, and lessors as recipients of exempt income from the interest
paid on the bonds.
Since many of the same records may be examined to verify, for example, both the tax-exempt
status of the bonds and the interest deductions of the conduit borrower, it is advisable for the
bond documents to specify which party will bear the responsibility for maintaining the basic
records relating to a bond transaction. Additional parties may also be responsible for
maintaining records under contract with any of the parties named above. For example, a trustee
may agree to maintain certain records pursuant to the trust indenture.
What are the basic records that should be retained?
Although the required records to be retained depend on the transaction and the requirements
imposed by the Code and the regulations, records common to most tax-exempt bond transactions
include:
Basic records relating to the bond transaction (including the trust
indenture, loan agreements, and bond counsel opinion);
Documentation evidencing expenditure of bond proceeds;
Documentation evidencing use of bond-financed property by
public and private sources (i.e., copies of management contracts
and research agreements);
Documentation evidencing all sources of payment or security for
the bonds; and
Documentation pertaining to any investment of bond proceeds
(including the purchase and sale of securities, SLGs subscriptions,
yield calculations for each class of investments, actual investment
income received the investment of proceeds, guaranteed
investment contracts, and rebate calculations).
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Are these the only records that need to be maintained?
No, the list above is very general and only highlights the basic records that are typically material
to many types of tax-exempt bond financings. Each transaction is unique and may, accordingly,
have other records that are material to the requirements applicable to that financing. The
decision as to whether any particular record is material must be made on a case-by-case basis and
could take into account a number of factors, including, for instance, the various expenditure
exceptions. Moreover, certain records may be necessary to support information related to certain
requirements applicable to specific types of qualified private activity bonds. With respect to
single and multifamily housing bonds as well as small issue industrial development bonds,
examples of such additional material records include:
Single Family Documents evidencing that at least 20% of proceeds were
Housing Bonds available for owner financing of targeted area residences.
Documentation evidencing proper notification of each
mortgagor of potential liability of the mortgage subsidy
recapture tax.
Multi-Family Documentation evidencing that the facility is not used on a
Housing Bonds transient basis.
Documentation evidencing compliance with the income set-
aside requirements.
Documentation evidencing timely correction, if any, of
noncompliance with the income set-aside requirements.
Small Issue Industrial Documentation evidencing compliance with the $10,000,000
Development Bonds limitation on the aggregate face amount of the issue.
Documentation evidencing that no test-period beneficiary has
been allocated more than $40,000,000 in bond proceeds.
In what format must the records be kept?
All records should be kept in a manner that ensures their complete access to the IRS for so long
as they are material. While this is typically accomplished through the maintenance of hard
copies, taxpayers may keep their records in an electronic format if certain requirements are
satisfied.
Rev. Proc. 97-22, 1997-1 C.B. 652 provides guidance to taxpayers that maintain books and
records by using an electronic storage system that either images their hardcopy (paper) books
and records, or transfers their computerized books and records, to an electronic storage media.
Such a system may also include reasonable data compression or formatting technologies so long
as the requirements of the revenue procedure are satisfied. The general requirements for an
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electronic storage system of taxpayer records are provided in section 4.01 of Rev. Proc. 97-22.
A summary of these requirements is as follows:
1. The system must ensure an accurate and complete transfer of the hardcopy books
and records to the electronic storage system and contain a retrieval system that
indexes, stores, preserves, retrieves, and reproduces all transferred information.
2. The system must include reasonable controls and quality assurance programs that
(a) ensure the integrity, accuracy, and reliability of the system; (b) prevent and
detect the unauthorized creation of, addition to, alteration of, deletion of, or
deterioration of electronically stored books and records; (c) institute regular
inspections and evaluations; and (d) reproduce hardcopies of electronically stored
books and records that exhibit a high degree of legibility and readability.
3. The information maintained in the system must be cross-referenced with the
taxpayer's books and records in a manner that provides an audit trail to the source
document(s).
4. The taxpayer must maintain, and provide to the Service upon request, a complete
description of the electronic storage system including all procedures relating to its
use and the indexing system.
5. During an examination, the taxpayer must retrieve and reproduce hardcopies of all
electronically stored books and records requested by the Service and provide the
Service with the resources necessary to locate, retrieve, read and reproduce any
electronically stored books and records.
6. The system must not be subject, in whole or in part, to any agreement that would
limit the Service's access to and use of the system.
7. The taxpayer must retain electronically stored books and records so long as their
contents may become material in the administration of federal tax law.
How long should records be kept?
Section 1.6001-1(e) of the Regulations provides that records should be retained for so long as the
contents thereof are material in the administration of any internal revenue law. With respect to a
tax-exempt bond transaction, the information contained in certain records support the exclusion
from gross income taken at the bondholder level for both past and future tax years. Therefore, as
long as the bondholders are excluding from gross income the interest received on account of
their ownership of the tax-exempt bonds, certain bond records will be material. Similarly, in a
conduit financing, the information contained in the bond records is necessary to support the
interest deduction taken by the conduit borrower for both past and future tax years for its
payment of interest on the bonds.
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To support these tax positions, material records should generally be kept for as long as the bonds
are outstanding, plus 3 years after the final redemption date of the bonds. This rule is consistent
with the specific record retention requirements under section 1.148-5(d)(6)(iii)(E) of the
arbitrage regulations.
Certain federal, state, or local record retention requirements may also apply.
How does this general rule apply to refundings?
For certain federal tax purposes, a refunding bond issue is treated as replacing the original new
money issue. To this end, the tax-exempt status of a refunding issue is dependent upon the tax-
exempt status of the refunded bonds. Thus, certain material records relating to the original new
money issue and all material records relating to the refunding issue should be maintained until 3
years after the final redemption of both bond issues.
What happens if records aren't maintained?
During the course of an examination, TEB agents will request material records and information
in order to determine whether a tax-exempt bond transaction meets the requirements of the Code
and regulations. If these records have not been maintained, then the issuer, conduit borrower or
other party may have difficulty demonstrating compliance with all federal tax law requirements
applicable to that transaction. A determination of noncompliance by the IRS with respect to a
bond issue can have various outcomes, including a determination that the interest paid on the
bonds should be treated as taxable, that additional arbitrage rebate may be owed, or that the
conduit borrower is not entitled to certain deductions.
Additionally, a conduit borrower who fails to keep adequate records may also be subject to an
accuracy-related penalty under section 6662 of the Code on the underpayment of tax attributable
to any denied deductions. Section 6662 of the Code imposes a penalty on any portion of an
underpayment of tax required to be shown on a return that is attributable to one of several
factors, including negligence or disregard of rules or regulations. Section 1.6662-3(b)(1) of the
Regulations provides that negligence includes any failure by the taxpayer to keep adequate books
and records or to substantiate items properly. Under section 6662(a) of the Code, the penalty is
equal to 20 percent of the portion of the underpayment of tax attributable to the negligence.
Section 6664(c)(1) provides an exception to the imposition of accuracy-related penalties if the
taxpayer shows that there was reasonable cause for the underpayment and that the taxpayer acted
in good faith.
Can a failure to properly maintain records be corrected?
Yes, a failure to properly maintain records can be corrected through the Tax Exempt Bonds
Voluntary Closing Agreement Program (TEB VCAP). This program provides an opportunity for
state and local government issuers, conduit borrowers, and other parties to a tax-exempt bond
transaction to voluntarily come forward to resolve specific matters through closing agreements
with the IRS. For example, the TEB Office of Outreach, Planning & Review has resolved
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arbitrage rebate concerns in cases where issuers have approached the IRS and reported a failure
to retain sufficient records to determine, precisely, the correct amount of arbitrage rebate due on
a bond issue. Notice 2001-60, 2001-40 I.R.B. 304 provides more information about this program
including the procedures for submitting a VCAP request.
Are there exceptions to the general rule regarding record retention for certain types of
records?
No, but TEB encourages members of the municipal finance industry to submit comments and
suggestions for developing record retention limitation programs for specific types of bond
records, for specific classes of tax-exempt bond issues, or for specific segments of the bond
industry. Comments can be submitted in writing to TEB and sent to the following address:
Internal Revenue Service (TE/GE)
Attention: Clifford J. Gannett, Director, TEB
T:GE:TEB, Rm. 583
1111 Constitution Ave.,NW
Washington, DC 20224
You may also contact TEB by calling 202-283-2999 (not a toll-free call).
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TAB V
9662233.1
TAB V
ARBITRAGE LETTER OF INSTRUCTIONS
1. Definitions.
Capitalized terms not otherwise defined herein will have meanings given to them in
sections 103, 141, 148, 149 and 150 of the Code and the Treasury Regulations promulgated
thereunder.
"Available Construction Proceeds" means, in general, an amount equal to the sum of(a)
the issue price (within the meaning of sections 1273 and 1274 of the Code but without regard to
accrued interest) of the Construction Issue, (b) investment earnings on a Reasonably Required
Reserve or Replacement Fund allocable to the Construction Issue prior to the earlier of 2 years
after the date of issue of the Obligations and the date that construction is substantially completed,
and (c) the investment earnings on amounts described in (a) and (b), reduced by(i) the amount of
the issue price deposited in a Reasonably Required Reserve or Replacement Fund and (ii) the
amount of the issue price used to pay issuance costs. Available Construction Proceeds does not
include (a) Sale Proceeds or Investment Proceeds derived from Payments under any Purpose
Investment of the Construction Issue, (b) repayments of any Grants financed by the issue, (c)
investment earnings on accrued interest, (d) amounts that are not Gross Proceeds as a result of
the application of the Universal Cap under Treasury Regulations §1.148-6(b)(2) and (e), if the
Issuer has elected in its Tax Certificate, earnings with respect to any portion of a Reasonably
Required Reserve or Replacement Fund allocable to the Construction Issue. For purposes of
determining compliance with the spending requirements as of the end of each of the first three
spending periods, Available Construction Proceeds includes the amount of future earnings that
the Issuer reasonably expected as of the date of issue of the Obligations.
"Bid Records" means: (i) a copy of the Guaranteed Investment Contract actually
acquired or, in the case of Yield Restricted Defeasance Escrow Investments, a copy of the
purchase agreement or confirmations for the investments; (ii) the receipt or other record of the
amount actually paid by the Issuer for the investments, including a record of any administrative
costs paid by the Issuer, and the certification of the provider as to administrative costs; (iii) either
a written copy of each bid received or a written certification from the party receiving the bids
which lists for each bid that is submitted, the name of the person and entity submitting the bid,
the time and date of the bid, and the bid results; (iv) the bid solicitation form and, if the terms of
the Guaranteed Investment Contract or purchase agreement deviated from the bid solicitation
form or a submitted bid is modified, a brief statement explaining the deviation and stating the
purpose for the deviation; and (v) in the case of Yield Restricted Defeasance Escrow
Investments, a schedule showing the cost of the most efficient portfolio of SLGS, determined at
the time the bids were required to be submitted pursuant to the terms of the bid specifications.
"Bona Fide Debt Service Fund" means a bona fide debt service fund as defined in
Treasury Regulations §1.148-1, i.e., one or more funds (including portions of funds, to the extent
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that amounts deposited therein are reasonably expected to be used to pay debt service on an issue
of bonds) that are used primarily to achieve a proper matching of revenues and debt service
within each Bond Year and that is depleted at least once a year except for a reasonable carryover
amount (not to exceed the greater of(i) the earnings on the fund for the immediately preceding
Bond Year or (ii) one-twelfth the principal and interest payments on the issue for the
immediately preceding Bond Year).
"Bona Fide Solicitation" means a solicitation that meets all of the following
requirements: (i) the bid specifications are in writing and are timely forwarded to potential
providers; (ii) the bid specifications include all material terms of the bid, i.e., all terms that may
directly or indirectly affect the yield of the investment; (iii) the bid specifications include a
statement notifying potential providers that submission of a bid is a representation that the
potential provider did not consult with any other potential provider about its bid, that the bid was
determined without regard to any other formal or informal agreement that the potential provider
has with the Issuer or any other person (whether or not in connection with the Bond issue), and
that the bid is not being submitted solely as a courtesy to the Issuer or any other person for
purposes of satisfying the requirements that there be at least three bids from persons with no
Material Financial Interest, at least one of whom is a reasonably competitive provider; (iv) all the
terms of the bid specifications are commercially reasonable in that there is a legitimate business
purpose for the term other than to increase the purchase price or reduce the yield of the
investment; (v) in the case of a Guaranteed Investment Contract, the terms of the solicitation take
into account the Issuer's reasonably expected deposit and drawdown schedule for the amounts to
be invested; (vi) all potential providers have an equal opportunity to bid and no potential
provider is given the opportunity to review other bids before providing a bid; and (vii) at least
three reasonably competitive providers are solicited for bids.
"Bond Year" means, in connection with the calculation of the Rebate Amount, each
1-year period (or shorter period from the date of issue) that ends at the close of business on the
day in the calendar year that is selected by the Issuer. If no day is selected by the Issuer before
the earlier of the final maturity date of the Obligations or the date that is 5 years after the issue
date of the Obligations, each Bond Year ends at the close of business on the day preceding the
anniversary of the date of issuance of the Obligations.
"Capital Expenditure" means any cost of a type that is properly chargeable to a capital
account (or would be so chargeable with a proper election or with the application of the
definition of Placed in Service under Treasury Regulations §1.150-2(c)) under general federal
income tax principles.
"Code"means the Internal Revenue Code of 1986, as amended.
"Commingled Fund" means any fund or account containing both Gross Proceeds of an
issue and amounts in excess of$25,000 that are not Gross Proceeds of that issue if the amounts
in the fund or account are invested and accounted for collectively, without regard to the source of
funds deposited in the fund or account. An open-end regulated investment company under
section 851 of the Code, however, is not a Commingled Fund.
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9662233.1
"Computational Base" means (i) for a Guaranteed Investment Contract, the amount of
Gross Proceeds the Issuer reasonably expects, as of the date the Guaranteed Investment Contract
is acquired, to be deposited in the Guaranteed Investment Contract over the term of the
Guaranteed Investment Contract; and (ii) for investments (other than Guaranteed Investment
Contracts) to be deposited in a Yield Restricted Defeasance Escrow, the amount of Gross
Proceeds initially invested in those investments.
"Computation Period" means the period between the computation dates described in
Section 4(b) hereof. The first begins on the Issue Date of the Obligations and ends on the initial
rebate Computation Date. Each succeeding Computation Period begins on the date immediately
following the preceding rebate Computation Date and ends on the next rebate Computation Date.
"Construction Expenditures" mean construction expenditures as defined in Treasury
Regulations §1.148-7(g), i.e., Capital Expenditures that are allocable to the cost of real property
or "constructed personal property." In general, Construction Expenditures do not include
expenditures for acquisitions of interests in land or other existing real property. Expenditures are
not considered to be for the acquisition of an interest in existing real property, other than land, if
the contract between the seller and the Issuer requires the seller to build or install the property,
but only to the extent that the property has not been built or installed at the time the parties enter
into the contract. Constructed personal property means tangible personal property (or, if
acquired pursuant to a single acquisition contract, properties) or "specially developed computer
software" if: (a) a substantial portion of the property or properties is completed more than 6
months after the earlier of the date construction or rehabilitation commenced and the date the
Issuer entered into an acquisition contract; (b)based on the reasonable expectations of the Issuer,
if any, or representations of the person constructing the property, with the exercise of due
diligence, completion of construction or rehabilitation (and delivery to the Issuer) could not have
occurred within that 6-month period; and (c) if the Issuer itself builds or rehabilitates the
property, not more than 75 percent of the capitalizable cost is attributable to property acquired by
the Issuer. Specially developed computer software means any programs or routines used to
cause a computer to perform a desired task or set of tasks, and the documentation required to
describe and maintain those programs, provided that the software is specially developed and is
functionally related and subordinate to real property or other constructed personal property.
"Construction Issue" means, the portion (if any) of the Obligations determined to be a
Construction Issue for purposes of the section 148(f)(4)(C) of the Code, Treasury Regulations
§1.148-7(e) and Section 4 hereof. With respect to any issue refunded by the Obligations, or
which is a part of a series of issues refunded by the Obligations, "Construction Issue" means the
portion (if any) of the original obligations issued to finance an expenditure (the "original
obligations") determined in the Tax Certificate with respect to original obligations to be a
"Construction Issue" for purposes of the section 148(f)(4)(C) of the Code and Treasury
Regulations §1.148-7(e).
"Controlled Group" means a group of entities controlled directly or indirectly by the
same entity or group of entities. The determination of direct control is made on the basis of all
the relevant facts and circumstances. One entity or group of entities generally controls another
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entity or group of entities if(i) the controlling entity possesses either (A) the right or power both
to approve and to remove without cause a controlling portion of the governing body of the
controlled entity, or (B) the right or power to require the use of funds or assets of the controlled
entity for any purpose of the controlling entity; and (ii) the rights or powers are discretionary and
non-ministerial. If a controlling entity controls another entity under this test the controlling
entity also controls all entities controlled, directly or indirectly, by the controlled entity or
entities. However, an entity is not controlled by another entity if the putative controlled entity
possesses substantial taxing, eminent domain, and police powers.
"De Minimis Amount" means: (i) in reference to original issue discount (as defined in
section 1273(a)(1) of the Code) or premium on an obligation, an amount that does not exceed 2
percent multiplied by the stated redemption price at maturity; plus any original issue premium
that is attributable exclusively to reasonable underwriter's compensation; and (ii) in reference to
market discount (as defined in section 1278(a)(2)(A) of the Code) or premium on an obligation,
an amount that does not exceed 2 percent multiplied by the stated redemption price at maturity.
"Fair Market Value" shall have the meaning set forth in Section 3(d)hereof.
"501(c)(3) Organization" means an organization that is described in section 501(c)(3) of
the Code and is exempt from tax under section 501(a) of the Code.
"Fixed Rate Investment" means any investment whose yield is fixed and determinable on
the issue date of the investment.
"Future Value" means such term as defined in Treasury Regulations section 1.148-3(c) or
successor regulations applicable to the Obligations calculated based on the yield of the
Obligations.
"Guaranteed Investment Contract" means, in general, any Nonpurpose Investment that
has specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated
interest rate and includes any agreement to supply investments on two or more future dates (e.g.,
a forward supply contract), debt service fund forward agreements and debt service reserve fund
agreements (e.g., agreements to deliver United States Treasury Obligations). The term
"Guaranteed Investment Contract" does not include investments purchased for a yield restricted
defeasance escrow, other than escrow float contracts and similar agreements which provide
securities for the period of 90 days or less following the maturity of defeasance escrow
securities.
"Governmental Unit"means a governmental unit within the meaning of section 150(a)(2)
of the Code (i.e., any state or division of a state with a substantial amount of sovereign powers)
or instrumentality of a state or political subdivision thereof. The term Governmental Unit does
not include the United States or any agency or instrumentality of the United States.
"Grant" means a grant as defined in Treasury Regulations §1.148-6(d)(4)(iii), i.e., a
transfer for a governmental purpose of money or property to a transferee that is not a Related
Party to, or an agent of, the transferor. The transfer must not impose any obligation or condition
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(directly or indirectly) to repay any amount to the transferor. Obligations or conditions intended
solely to assure expenditure of the transferred moneys in accordance with the governmental
purpose of the transfer do not prevent a transfer from being a Grant.
"Gross Proceeds" means, except as otherwise indicated, gross proceeds as defined in
Treasury Regulations §1.148-1, i.e., any Proceeds and Replacement Proceeds of an issue.
"Investment Proceeds" means investment proceeds as defined in Treasury Regulations
§1.148-1, i.e., any amounts actually or constructively received from investing Proceeds of the
Obligations.
"Investment Property" means any investment which is: (i) a "security" (as defined in
section 165(g)(2)(A) or (B) of the Code), i.e., a share of stock in a corporation or a right to
subscribe for or to receive a share of stock in a corporation; (ii) an obligation other than a
Tax-exempt Bond, unless such obligation is a "specified private activity bond" within the
meaning of section 57(a)(5)(C) of the Code (i.e., a Tax-exempt Bond other than an obligation the
interest on which is subject to the alternative minimum tax imposed on individuals and
corporations); (iii) any "annuity contract" (as defined in section 72 of the Code); (iv) any
"investment-type property" (within the meaning of Treasury Regulations §1.148-1(b)), i.e., any
property(other than property described in (i), (ii), (iii) or(v)) that is held principally as a passive
vehicle for the production of income, including for this purpose, production of income includes
any benefit based on the time value of money; or (v) any residential rental property for family
units not located within the jurisdiction of the Issuer unless such property is acquired to
implement a court ordered or approved housing desegregation plan. A prepayment for property
or services is "investment-type property" if a principal purpose for prepaying is to receive an
investment return from the time the prepayment is made until the time payment otherwise would
be made. However, a prepayment will not be treated as "investment-type property" if it is made
for a substantial business purpose other than investment return and (i) the prepayment is on
substantially the same terms as are made by a substantial percentage of persons who are similarly
situated but who are not beneficiaries of tax exempt financing, (ii) the prepayment is made
within 90 days of the reasonably expected date of delivery to the Issuer of all of the property or
services for which the prepayment is made, (iii) the prepayment is made for maintenance, repair,
or an extended warranty with respect to personal property (for example, automobiles or
electronic equipment); or updates or maintenance or support services with respect to computer
software; and the same maintenance, repair, extended warranty, updates or maintenance or
support services, as applicable, are regularly provided to nongovernmental persons on the same
terms or (iv) the prepayment is made to acquire a supply of natural gas or electricity within the
meaning of Treasury Regulation §1.148-1(e)(2)(iii).
"Issuer"means Palm Beach County, Florida.
"Lowest Cost Bona Fide Bid" means, in the case of Yield Restricted Defeasance Escrow
Investments, either the lowest cost bid for the portfolio or, if the Issuer compares bids on an
investment by investment basis, the aggregate cost of a portfolio comprised of the lowest cost bid
for each investment. Any payment received by the Issuer from a provider at the time a
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Guaranteed Investment Contract (e.g., an escrow float contract) is purchased for a Yield
Restricted Defeasance Escrow under a bidding procedure that meets the requirements of clause
(iv) of the definition of Bona Fide Solicitation is taken into account in determining the lowest
cost bid. The Lowest Cost Bona Fide Bid must not be greater than the cost of the most efficient
portfolio comprised exclusively of SLGS determined at the time that bids are required to be
submitted pursuant to the terms of the bid specifications. This cost comparison is not required to
be made if SLGS are not available for purchase on the day the bids are required to be submitted
because sales of those securities have been suspended.
"Material Financial Interest" shall have the meaning set forth in Section 3(d)(v) hereof.
"Minor Portion" means, in general, a minor portion as defined in section 148(e) of the
Code and Treasury Regulation §1.148-2(g), i.e., the lesser of 5 percent of the Sale Proceeds of
the Obligations or$100,000.
"Net Sale Proceeds" means Sale Proceeds, less the portion of the Sale Proceeds invested
in a Reasonably Required Reserve or Replacement Fund under section 148(d) of the Code and as
part of the Minor Portion.
"New Money Portion"means the portion of an issue that is not a Refunding Issue.
"Nonconstruction Issue" means the Gross Proceeds of the Obligations other than the
portion of Gross Proceeds of the Obligations meeting the requirements of section 148(f)(4)(C) of
the Code, Treasury Regulations §1.148-7(e) and Section 4 hereof as a Construction Issue.
"Nonpurpose Investment" means an investment allocated to Gross Proceeds of the
Obligations that is not acquired to carry out the governmental purpose of an issue, i.e., all
Investment Property acquired or otherwise allocated to Gross Proceeds of the Obligations.
"Obligations"means any tax-exempt bonds or notes of the Issuer.
"Opinion of Counsel" means, an opinion of nationally recognized bond counsel
experienced in matters relating to the exclusion of interest on state and local governmental
obligations from gross income for purposes of federal income taxation.
"Payment" means, in general, a payment as defined in Treasury Regulations §1.148-5(b),
i.e., amounts to be actually or constructively paid to acquire the investment. For purposes of
calculating the Rebate Amount under Section 4 hereof"payment"means a payment as defined in
Treasury Regulations §1.148-3(d), i.e., (i) amounts actually or constructively paid to acquire a
Nonpurpose Investment (or treated as paid to a Commingled Fund); (ii) for a Nonpurpose
Investment that is first allocated to an issue on a date after it is actually acquired (e.g., an
investment that becomes allocable to Transferred Proceeds or to Replacement Proceeds) or that
becomes subject to the rebate requirement on a date after it is actually acquired (e.g., an
investment allocated to a Reasonably Required Reserve or Replacement Fund for a construction
issue at the end of the 2-year spending period), the value of that investment on that date; (iii) for
a Nonpurpose Investment that was allocated to an issue at the end of the preceding computation
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period, the value of that investment at the beginning of the computation period; (iv) on the last
day of each Bond Year during which there are amounts allocated to Gross Proceeds of the
Obligations that are subject to the rebate requirement, and on the final maturity date of the
Obligations, a computation credit in the amount provided under Treasury Regulation §1.148-
3(d)(1)(iv); and (v) Yield Reduction Payments on Nonpurpose Investments made pursuant to
Treasury Regulations §1.148-5(c).
"Placed in Service" means placed in service as defined in Treasury Regulations
§1.150-2(c), i.e., with respect to a facility, the date on which, based on all the facts and
circumstances the facility has reached a degree of completion that would permit its operation at
substantially its design level, and the facility is, in fact, in operation at such level.
"Plain Par Bond" means a qualified tender obligation or an obligation (i) that is issued
with not more than a De Minimis Amount of original issue discount or premium; (ii) that is
issued for a price that does not include accrued interest other than pre-issuance accrued interest;
(iii) that bears interest from the issue date at a single, stated, fixed rate or that is a variable rate
debt instrument under section 1275 of the Code, in each case with interest unconditionally
payable at least annually; and (iv) that has a lowest stated redemption price that is not less than
its outstanding stated principal amount.
"Plain Par Investment"means an investment that is an obligation (i) issued with not more
than a De Minimis Amount of original issue discount or premium, or, if acquired on a date other
than the issue date, acquired with not more than a De Minimis Amount of market discount or
premium; (ii) issued for a price that does not include accrued interest other than pre-issuance
accrued interest; (iii) that bears interest from the issue date at a single, stated, fixed rate or that is
a variable rate debt instrument under section 1275 of the Code, in each case with interest
unconditionally payable at least annually; and (iv) that has a lowest stated redemption price that
is not less than its outstanding stated principal amount.
"Preliminary Expenditures" mean preliminary expenditures as defined in Treasury
Regulations §1.150-2(f)(2), e.g., architectural, engineering, surveying, soil testing, costs of
issuance and similar costs that were incurred prior to commencement of acquisition, construction
or rehabilitation of a project, other than land acquisition, site preparation and similar costs
incident to commencement of construction.
"Present Value" is computed under the economic accrual method. For purposes of
computing the value of Obligations and yield on the Obligations, Present Value is computed
taking into account all the unconditionally payable Payments of principal, interest, and fees for a
Qualified Guarantee to be paid on or after that date and using the yield on that Obligation as the
discount rate, except that for purposes of Treasury Regulations §1.148-(6)(b)(2) (relating to the
Universal Cap) these values may be determined by consistently using the yield on the entire
issue of which such Obligations are a part. The Present Value of an investment on a date is equal
to the Present Value of all unconditionally payable Receipts to be received from and Payments to
be paid for the investment after that date, using the yield on the investment as the discount rate.
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9662233.1
"Prior Issue" means an issue of Obligations all or a portion of the principal, interest, or
call premium on which is paid or provided for with proceeds of a Refunding Issue.
"Proceeds" means, in general, any Sale Proceeds, Investment Proceeds, and Transferred
Proceeds of an issue. However, Proceeds do not include Qualified Administrative Costs that
may be recovered under Treasury Regulation §1.148-5(e).
"Purpose Investment"means an investment that is acquired to carry out the governmental
purpose of an issue.
"Qualified Administrative Costs" mean, with respect to Nonpurpose Investments
reasonable, direct administrative costs, other than carrying costs, such as separately stated
brokerage or selling commissions, but not legal and accounting fees, recordkeeping, custody, and
similar costs. General overhead costs and similar indirect costs of the Issuer such as employee
salaries and office expenses and costs associated with computing the Rebate Amount are not
qualified administrative costs. In general, administrative costs with respect to Nonpurpose
Investments are not reasonable unless they are comparable to administrative costs that would be
charged for the same investment or a reasonably comparable investment if acquired with a
source of funds other than Gross Proceeds of Tax-exempt Bonds. Qualified Administrative
Costs of Nonpurpose Investments include all reasonable administrative costs, without limitation
on indirect costs, incurred by a publicly offered regulated investment company (as defined in
section 67(c)(2)(B) of the Code) or by a Commingled Fund in which the Issuer and any Related
Parties do not own more than 10 percent of the beneficial interest in the fund. A broker's
commission or similar fee for a Guaranteed Investment Contract or a Yield Restricted
Defeasance Escrow Investment which is paid on behalf of either the Issuer or the provider is a
Qualified Administrative Cost to the extent that (a) the amount of the fee that the Issuer treats as
a Qualified Administrative Cost does not exceed the lesser of (i) $36,000 or (ii) 0.2% of the
Computational Base or, if more, $4,000, and (b) for any issue, the Issuer does not treat as
Qualified Administrative Costs more than $101,000 in broker's commissions or similar fees with
respect to all Guaranteed Investment Contracts or Yield Restricted Defeasance Escrow
Investments purchased with Gross Proceeds of the issue. All amounts referenced in the
preceding sentence reflect adjustments as of 2011, and all amounts for future calendar years shall
be increased by a cost of living adjustment as provided in Treasury Regulation §1.148-
5(e)(3)(B)(3). Qualified Administrative Costs of a Purpose Investment means costs or expenses
paid, directly or indirectly, to purchase, carry, sell, or retire the Purpose Investment, and except
with respect to a Program Investment, costs of issuing, carrying, or repaying the issue, and any
underwriters' discount.
"Qualified Guarantee" means a qualified guarantee as defined in Treasury Regulations
§1.148-4(0.
"Qualified Hedge" means a qualified hedge as defined in Treasury Regulations
§1.148-4(h)(2), i.e., (i) a contract entered into primarily to reduce the Issuer's risk of interest rate
changes with respect to a borrowing; (ii) the contract contains no significant investment element;
(iii) the contract is entered into between the Issuer and a provider that is not a Related Party; (iv)
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the hedge covers all of one or more groups of substantially identical Obligations; (v) changes in
the value of the contract are based primarily on interest rate changes; (vi) the contract does not
hedge an amount larger than the Issuer's risk with respect to interest rate changes on the hedged
Obligations; (vii) the payments to the Issuer under the contract correspond closely, in both time
and amount, to the specific interest payments being hedged; (viii) payments under the contract
do not begin to accrue under the contract on a date earlier than the issue date of the hedged
Obligations and do not accrue longer than the hedged interest payments on the hedged
Obligations; (ix) payments to the hedge provider are reasonably expected to be made from the
same source of funds that, absent the hedge, would be reasonably expected to be used to pay
principal and interest on the hedged Obligations; and (x) the contract is identified by the Issuer
on its books and records maintained for the hedged Obligations not later than three days after the
date on which the parties enter into the contract or the issue date of the hedged Obligations.
"Reasonable Retainage" means an amount not in excess of 5 percent of Available
Construction Proceeds as of the end of the fourth spending period (or in the case of the 18-month
Exception set forth Treasury Regulations §1.148-7(d) and Section hereof, 5 percent of the Net
Sale Proceeds on the date 18 months after the issue date) that is retained for reasonable business
purposes relating to the property financed with the proceeds of the issue.
"Reasonably Required Reserve or Replacement Fund" means, in general, a reasonably
required reserve or replacement fund as described in Treasury Regulations §1.148-2(0(2).
"Receipt" means, except as otherwise provided with respect to the rebate requirement, a
receipt as defined in Treasury Regulations §1.148-3(d), i.e., amounts to be actually or
constructively received from the investment, such as earnings and return of principal.
"Refunding Escrow" means one or more funds established as part of a single transaction
or a series of related transactions, containing proceeds of a Refunding Issue and any other
amounts to provide for payment of principal or interest on one or more Prior Issues. For this
purpose, funds are generally not so established solely because of(i) the deposit of Proceeds of an
issue and Replacement Proceeds of the Prior Issue in an escrow more than 6 months apart, or(ii)
the deposit of Proceeds of completely separate issues in an escrow.
"Refunding Issue" means, a refunding issue as defined in Treasury Regulations
§1.150-1(d). In general, a Refunding Issue means an issue (or the portion of an issue treated as a
separate Refunding Issue under Treasury Regulations §1.148-9(h)), the proceeds of which are
used to pay principal, interest, or redemption price on another issue.
"Related Party" means, in reference to a Governmental Unit or a 501(c)(3) Organization,
any member of the same Controlled Group, and, in reference to any person that is not a
Governmental Unit or 501(c)(3) Organization, a related person (as defined in section 144(a)(3)
of the Code).
"Replacement Proceeds" means replacement proceeds as defined in Treasury Regulation
§1.148-1(c).
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9662233.1
"Sale Proceeds" means any amounts actually or constructively received from the sale of
an issue, including amounts used to pay underwriter's discount or compensation and accrued
interest other than pre-issuance accrued interest.
"SLGS" means State and Local Government Series Securities purchased from the United
States Department of Treasury, Bureau of Public Debt.
"Substantial Beneficiary" of the obligations means the issuer, any related party to the
issuer and the State in which the Issuer is located.
"Tax-exempt Bond"means any obligation of a state or political subdivision thereof under
section 103(c)(1) of the Code (including financing leases and any other arrangements, however
labeled) the interest on which is excludable from gross income under section 103(a) of the Code.
Tax-exempt Bond includes an interest in a regulated investment company to the extent that at
least 95 percent of the income to the holder of the interest is interest that is excludable from gross
income under section 103(a) of the Code.
"Tax Certificate" means, with respect to each issue of Obligations, the Issuer's Tax
Certificate delivered as part of the record of proceedings with respect to the issuance of the
Obligations for the purpose of complying with Treasury Regulation §1.148(2)(b).
"Transferred Proceeds" means transferred proceeds as defined in Treasury Regulation
§1.148-9.
"Universal Cap"means, on any date, either(i) the present value of the Obligations
determined by taking into account all unconditionally payable payments of principal, interest and
fees for a Qualified Guarantee to be paid on or after that date, using the yield on the Obligations
as the discount rate, or(ii) in the case of any Obligations which are Plain Par Bonds, the
outstanding stated principal amount of such Obligations, plus accrued unpaid interest.
2. Allocation and Accounting.
(a) In General. Except as otherwise provided in this Section 2, the Issuer may
use any reasonable accounting method for purposes of accounting for Gross Proceeds,
investments, and expenditures, provided the accounting method is consistently applied.
An accounting method means both the overall method used to account for Gross
Proceeds of an issue (e.g., the cash method or a modified accrual method) and the method
used to account for or allocate any particular item within that overall accounting method
(e.g., accounting for investments, expenditures, allocations to and from different sources,
and particular items of the foregoing). Consistently applied means applied uniformly
within a fiscal period and between fiscal periods to account for Gross Proceeds of an
issue and any amounts that are in a Commingled Fund. An accounting method will not
fail to be reasonable and consistently applied solely because a different accounting
method is used for a bona fide governmental purpose to consistently account for a
particular item.
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9662233.1
(b) Allocation of Gross Proceeds to the Obligations. (i) In General. Gross
Proceeds will be allocated to the Obligations as Proceeds until those amounts are
properly allocated to an expenditure for a governmental purpose or are allocated to
Transferred Proceeds of another issue, or cease to be allocated to the Obligations under
the Universal Cap.
(i) Universal Cap. The Universal Cap provides an overall limitation
on the amount of Gross Proceeds allocable to an issue. Except as provided in
Section 2(b)(iii), unless the application of the Universal Cap would not result in a
reduction or reallocation of Gross Proceeds of the Obligations on a date the Issuer
will determine or cause to be determined the Universal Cap with respect to the
Obligations (A) as of the first day of each Bond Year, beginning with the first
Bond Year that commences after the second anniversary of the date hereof, and
(B) as of each date that, but for application of the Universal Cap, Proceeds of a
refunded issue would become Transferred Proceeds of the Obligations but need
not determine the Universal Cap in the Bond Year in which that date occurs.
(ii) If the Issuer reasonably expects, as of the issue date of the
Obligations that the Universal Cap will not reduce the amount of Gross Proceeds
allocable to the Obligations during the term of the Obligations, the Universal Cap
need not be calculated on any date on which: (A) no Replacement Proceeds are
allocable to the Obligations, other than Replacement Proceeds in a Bona Fide
Debt Service Fund or a Reasonably Required Reserve or Replacement Fund; (B)
the Net Sale Proceeds of the Obligations qualified for one of the temporary
periods provided in Treasury Regulations §1.148-2(e)(2), (e)(3), or (e)(4), and
those Net Sales Proceeds are in fact allocated to expenditures prior to the
expiration of the longest applicable temporary period; or the Net Sale Proceeds of
the Obligations were deposited in a Refunding Escrow and expended as originally
expected; (C) the Obligations do not refund an issue that, on any transfer date, has
unspent proceeds allocable to it; (D) none of the Obligations are retired prior to
the date on which those Obligations are treated as retired in computing the yield
on the Obligations; and (E) no Proceeds of the Obligations are invested in
"qualified student loans" or "qualified mortgage loans" (as defined in Treasury
Regulations §1.150-1).
(iii) If the value of all Nonpurpose Investments allocated to the Gross
Proceeds of the Obligations exceeds the Universal Cap on a date as of which the
Universal Cap is determined such Nonpurpose Investments allocable to Gross
Proceeds of the Obligations necessary to eliminate that excess will cease to be
allocated to the Obligations, in the following order of priority: (A) Nonpurpose
Investments allocable to Replacement Proceeds; (B) Nonpurpose Investments
allocable to Transferred Proceeds; and (C) Nonpurpose Investments allocable to
Sale Proceeds and Investment Proceeds.
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9662233.1
For this purpose Nonpurpose Investments may be valued (i) in the case of a Plain Par
Investment at its principal amount plus any accrued unpaid interest on that date; (ii) in the
case of fixed rate investments, at its Present Value on that date; or (iii) in the case of any
other investment, at its Fair Market Value.
(c) Allocations to Expenditures. (i) In General. Reasonable accounting
methods for allocating funds from different sources to expenditures for the same
governmental purpose include any of the following methods if consistently applied: a
specific tracing method; a Gross Proceeds spent first method; a first-in, first-out method;
or a ratable allocation. An allocation of Gross Proceeds of an issue to an expenditure
must involve a current outlay of cash for a governmental purpose of the issue. A current
outlay of cash means an outlay reasonably expected to occur not later than 5 banking
days after the date as of which the allocation of Gross Proceeds to the expenditure is
made. A payment of Gross Proceeds to a Related Party of the Issuer is not an
expenditure of those Gross Proceeds. Gross Proceeds paid to the Related Party are
expended only when the Gross Proceeds are properly allocable to an expenditure by the
Related Party.
(ii) Expenditures for Working Capital Purposes. Except as otherwise
provided in Section 2(c)(iii), Proceeds of the Obligations and Replacement
Proceeds of the Obligations that are allocated to the payment of expenditures or to
the reimbursement of expenditures other than expenditures that are (A) Capital
Expenditures; (B) Qualified Administrative Costs; (C) fees for Qualified
Guarantees of the issue or payments for a Qualified Hedge; (D) interest on the
Obligations for a period commencing on the issue date and ending on the date that
is the later of three years from the issue date or one year after the date on which
the Projects are Placed in Service; (E) a Rebate Amount or Yield Reduction
Payment paid to the United States; (F) costs that are directly related to Capital
Expenditures financed by the issue that, in total, do not exceed 5 percent of the
Sale Proceeds of the Obligations; (G) principal or interest on the Obligations paid
from unexpected excess Sale Proceeds or Investment Proceeds; (H) principal or
interest on the Obligations paid from investment earnings on a reserve or
replacement fund that are deposited in a Bona Fide Debt Service Fund; (I) to pay
for extraordinary, nonrecurring items that are not customarily payable from
current revenues, such as casualty losses or extraordinary legal judgments in
amounts in excess of reasonable insurance coverage; (J) for payment of principal,
interest, or redemption prices on a Prior Issue; and (K) for a crossover Refunding
Issue, interest on that issue will be treated as spent to the extent that those
working capital expenditures exceed available amounts (as defined in Treasury
Regulations §1.148-6(d)(3)(iii)) as of that date.
(iii) Commingled Investment Earnings. Notwithstanding Subsection
2(c)(ii), investment earnings on Sale Proceeds of the Obligations (other than
investment earnings held in a Refunding Escrow) may be allocated to
expenditures other than expenditures described in Subsection 2(c)(ii), if the
investment earnings are commingled for the purpose of accounting for
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9662233.1
expenditures with substantial tax or other substantial revenues from operations of
the Issuer and they are reasonably expected to be allocated (using any reasonable,
consistently applied accounting method) to expenditures for governmental
purposes of the Issuer within a period not to exceed six months from the date of
the commingling.
(d) Allocations of Gross Proceeds to Investments. Upon the purchase or sale
of a Nonpurpose Investment, Gross Proceeds of an issue will not be allocated to a
Payment for that Nonpurpose Investment in an amount greater than, or to a Receipt from
that Nonpurpose Investment in an amount less than, the Fair Market Value of the
Nonpurpose Investment (adjusted to take into account Qualified Administrative Costs
allocable to the investment) as of the purchase or sale date.
(e) Allocation of Investments Held by a Commingled Fund. (i) In General.
All Payments and Receipts (including deemed Payments and Receipts) on investments
held by a Commingled Fund must be allocated among the different "investors" in the
fund not less frequently than as of the close of each fiscal period. This allocation must be
based on a consistently applied reasonable, ratable allocation method. Reasonable ratable
allocation methods include, methods that allocate these items in proportion to either (A)
the average daily balances of the amounts in the Commingled Fund from different
"investors" during a fiscal period; or (B) the average of the beginning and ending
balances of the amounts in the Commingled Fund from different investors for a fiscal
period that does not exceed one month. For purposes of this Subsection 2(e), the term
"investor" means each different source of funds invested in a Commingled Fund. A
Commingled Fund may use any consistent fiscal period that does not exceed three
months.
(i) Expenditures from a Commingled Fund. If a ratable allocation
method is used to allocate expenditures from the Commingled Fund, the same
ratable allocation method must be used to allocate Payments and Receipts on
investments in the Commingled Fund under this Subsection.
(ii) Common Reserve Funds, Replacement Funds or Sinking Funds. If
a Commingled Fund serves as a common reserve fund, replacement fund, or
sinking fund for two or more issues, investments held by that Commingled Fund
must be allocated ratably (after any reallocations of Proceeds under Section 2(b))
among the issues served by the Commingled Fund according to (A) the relative
values of the bonds of those issues (as determined under Treasury Regulations
§1.148-4(e)); (B) the relative amounts of the remaining maximum annual debt
service requirements on the outstanding principal amounts of those issues; or (C)
the relative original stated principal amounts of the outstanding issues. Such
allocations must be made at least every three years and as of each date that an
issue first becomes secured by the Commingled Fund. If relative original
principal amounts are used to allocate, allocations must also be made on the
retirement of any issue secured by the Commingled Fund.
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9662233.1
3. Yield and Valuation of Investments. (a) Mark-to-Market Requirement. If Gross
Proceeds of the Obligations are invested in a Commingled Fund in which the Issuer and any
Related Party own more than 25 percent of the beneficial interests in the Commingled Fund, the
Commingled Fund must treat all its investments as if sold at Fair Market Value either on the last
day of the fiscal year or the last day of each fiscal period unless (i) the remaining weighted
average maturity of all investments held by the Commingled Fund during the fiscal year does not
exceed 18 months, and the investments held by the Commingled Fund during that fiscal year
consist exclusively of Obligations, or(ii)the Commingled Fund operates exclusively as a reserve
fund, sinking fund, or replacement fund for two or more issues of the same issuer. The net gains
or losses from any such deemed sales of investments must be allocated to all investors of the
Commingled Fund during the period since the last allocation. For purposes of this Subsection
the "fiscal year" of a Commingled Fund is the calendar year unless the Commingled Fund adopts
another"fiscal year."
(a) In General. Yield on an investment, the Present Value of an investment
and the Fair Market Value of an investment allocated to the Obligations will be computed
under the economic accrual method, using the same compounding interval and financial
conventions used to compute the yield on the Obligations. Except as otherwise provided
in this Section 3, the yield on an investment allocated to the Obligations is the discount
rate that, when used in computing the Present Value as of the date the investment is first
allocated to the issue of all unconditionally payable Receipts from the investment,
produces an amount equal to the Present Value of all unconditionally payable Payments
for the investment. The Present Value of an investment on a date is equal to the Present
Value of all unconditionally payable Receipts to be received from and Payments to be
paid for the investment after that date, using the yield on the investment as the discount
rate. The yield on a variable rate investment is determined in a manner comparable to the
determination of the yield on a variable rate issue of Tax-exempt Bonds for purposes of
section 148 of the Code. For purposes of the Investment Limitation described in the Tax
Certificate, the yield on investments made with Sale Proceeds of the Obligations or
investment earnings thereon that are subject to yield restriction will be computed
separately from the yield on investments not subject to yield restriction.
(b) Yield Reduction Payments to the United States. The yield on any
investments allocable to Sale Proceeds of the Obligations or investment earnings thereon
that qualified for one of the temporary periods described in the Tax Certificate, other than
Replacement Proceeds, may be calculated by taking into account any amount paid to the
United States in accordance with this Section 3(b), including any Rebate Amount, as a
Payment for that investment that reduces the yield on that investment. The yield on any
investments allocable to Sale Proceeds may be calculated by taking into account any
"Yield Reduction Payments," as described in this Section 3(b) (including any Rebate
Amount) as a Payment for that investment that reduces the yield on that investment.
Yield Reduction Payments include payments paid to the United States at the same time
and in the same manner as rebate amounts are required to be paid except:
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9662233.1
(i) No Yield Reduction Payments are required to be paid until 60 days
after the date on which the issue is no longer outstanding; and
(ii) For Yield Reduction Payments paid prior to the date on which the
Obligations are retired, the Issuer need not pay more than 75 percent of the
amount otherwise required to be paid as of the date to which the payment relates.
(c) Valuation of Investments. The value of an investment (including a
Payment or Receipt on the investment) on a date will be determined using one of the
following valuation methods consistently for all purposes of section 148 of the Code to
that investment on that date:
(i) A Plain Par Investment may be valued at its outstanding stated
principal amount, plus any accrued unpaid interest on that date.
(ii) A Fixed Rate Investment may be valued at its Present Value on
that date.
(iii) Any investment may be valued at its Fair Market Value on that
date.
(d) Fair Market Value. (i) In General. The Fair Market Value of an
investment is the price at which a willing buyer would purchase the investment from a
willing seller in a bona fide, arm's-length transaction. Fair Market Value generally is
determined on the date on which a contract to purchase or sell the Nonpurpose
Investment becomes binding. Except as otherwise provided in this Section, an
investment that is not of a type traded on an established securities market, within the
meaning of section 1273 of the Code, will not be considered acquired or disposed of for a
price that is equal to its Fair Market Value.
(i) Direct United States Treasury Obligations. The Fair Market Value
of a United States Treasury obligation that is purchased directly from the United
States Treasury is its purchase price.
(ii) Certificate of Deposit. The purchase price of a certificate of
deposit that has a fixed interest rate, a fixed payment schedule, and a substantial
penalty for early withdrawal may be treated as its Fair Market Value on the
purchase date if the yield on the certificate of deposit is not less than the yield on
reasonably comparable direct Obligations of the United States and the highest
yield that is published or posted by the provider to be currently available from the
provider on reasonably comparable certificates of deposit offered to the public.
(iii) Guaranteed Investment Contracts. The purchase price of a
Guaranteed Investment Contract is treated as its Fair Market Value on the
purchase date if: (A) the Issuer makes a Bona Fide Solicitation for a specified
Guaranteed Investment Contract; (B) the Issuer receives at least three bids from
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providers for the specified Guaranteed Investment Contract that the Issuer
solicited under a Bona Fide Solicitation that have no Material Financial Interest in
the issue, at least one of whom is a reasonably competitive provider, i.e., a
provider that has an established industry reputation as a provider of Guaranteed
Investment Contracts; (C) the Issuer purchases the highest-yielding Guaranteed
Investment Contract for which a qualifying bid is made (determined net of
broker's fees); (D) the obligor on the Guaranteed Investment Contract provides a
written certification specifying all amounts that it is paying (or expects to pay) to
third parties in connection with supplying the Guaranteed Investment Contract;
and (E) the Issuer retains the Bid Records with the bond documents until three
years after the last outstanding Obligation is redeemed.
(iv) Yield Restricted Defeasance Escrow Investment. The purchase
price of a Yield Restricted Defeasance Escrow Investment is treated as its Fair
Market Value on the purchase date if: (A) the Issuer makes a Bona Fide
Solicitation for the purchase of the investment; (B) the Issuer receives at least
three bids from providers that the Issuer solicited under a Bona Fide Solicitation
that have no Material Financial Interest in the issue, at least one of whom is a
reasonably competitive provider, i.e., a provider that has an established industry
reputation as a provider of the type of investment being purchased; (C) the
winning bid is the Lowest Cost Bona Fide Bid (including any broker's fees); (D)
the provider of the investments certifies the administrative costs that it is paying
(or expects to pay) to third parties in connection with supplying the investments;
and (E) the Issuer retains the Bid Records with the bond documents until three
years after the last Obligation is redeemed.
(v) Material Financial Interest. For purposes of paragraphs (iii) and
(iv) the following persons or entities are deemed to have a Material Financial
Interest in the issue: (A) the lead underwriter in a negotiated underwriting
transaction until 15 days after the issue date; (B) any entity acting as a financial
advisor with respect to the purchase of the investment at the time the bid
specifications are forwarded to potential providers; and (C) a Related Party to a
provider that has a Material Financial Interest in the issue.
(vi) Bidding. If the Issuer invests any Gross Proceeds of the
Obligations in a Guaranteed Investment Contract or purchases with Gross
Proceeds Yield Restricted Defeasance Escrow Investments, it will conduct, or will
have conducted on its behalf, a Bona Fide Solicitation. The Issuer will require the
agent to certify as to the bidding process as set forth in the form of Certificate of
Bidding Agent to be furnished by Bond Counsel, in the case of a Guaranteed
Investment Contract or in the case of Yield Restricted Defeasance Escrow
Investments. If the bidding process is not conducted through an agent, the Issuer
itself will provide a similar certificate. The Issuer will file such certification
together with the Bid Records, with the documents relating to the Obligations. If
the Issuer wishes to invest Gross Proceeds of the Obligations in Certificates of
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Deposit it will obtain from the provider a certification that the Certificate of
Deposit has a fixed rate, a fixed payment schedule and a substantial penalty for
early withdrawal, and the yield on the certificate of deposit is not less than (A) the
yield on reasonably comparable direct Obligations of the United States and (B)
the highest yield published by the provider and currently available from the
provider on reasonably comparable certificates of deposit offered to the public.
(e) Administrative Costs. Except for Qualified Administrative Costs, costs or
expenses paid, directly or indirectly, to purchase, carry, sell, or retire investments will not
increase Payments made for investments and will not reduce Receipts from Investments.
Qualified Administrative Costs will increase the Payments for, or decrease the Receipts
from, investments.
(f) Record Keeping. The Issuer shall keep, or cause to be kept, accurate
records of the status of compliance of the Obligations with respect to compliance with the
expenditure requirements at the end of each 6-month period described in Section
4(a)(ii)(C) hereof. The Issuer will keep, or cause to be kept, accurate records of each
investment it makes in Investment Property acquired, directly or indirectly, with Gross
Proceeds of the Obligations (other than revenues in a Bona Fide Debt Service Fund) and
each expenditure it makes with Gross Proceeds of the Obligations. Such records will
include all of the information necessary to compute the yield on each investment in
Investment Property to the Issuer, e.g., purchase price, nominal interest rate, dated date,
maturity date, type of property, frequency of periodic payments, period of compounding,
yield to maturity, amount actually or constructively received on disposition, disposition
date and evidence of the Fair Market Value of such property on the purchase date and
disposition date (or deemed purchase or disposition date) for each item of such
Investment Property.
4. Rebate Requirement.
(a) Calculation of the Rebate Amount. In general, the Rebate Amount, as of
any date is the excess of the"future value." as of that date, of all Receipts on Nonpurpose
Investments allocated to the Obligations over the "future value." as of that date, of all
Payments on Nonpurpose Investments allocated to the Obligations. The"future value" of
a Payment or Receipt at the end of any period is determined using the economic accrual
method and equals the value of that Payment or Receipt when it is paid or received (or
treated as paid or received), plus interest assumed to be earned and compounded over the
period at a rate equal to the yield on the Obligations, using the same compounding
interval and financial conventions used to compute the yield on the Obligations.
Amounts earned on certain Gross Proceeds of the Obligations either may not be, or are
not required to be, taken into account in determining the Rebate Amount. The earnings
on Gross Proceeds excepted from the calculation of the Rebate Amount include the
following:
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(i) Bona Fide Debt Service Fund. Amounts earned on a Bona Fide
Debt Service Fund for the Obligations and amounts earned on such amounts may
not be taken into account if the gross earnings on the Bona Fide Debt Service
Fund for the Bond Year is less than $100,000.
(ii) Spending Exceptions. Earnings with respect to certain Gross
Proceeds described in 4(a)(ii) of this Section are not required to be taken into
account in determining the Rebate Amount if requirements of 4(a)(ii)(B),
4(a)(ii)(C) or 4(a)(ii)(D) of this Section are met with respect to such Gross
Proceeds.
(A) Special Rules. For purposes of 4(a)(ii) of this Section the
following special rules will apply.
(I) If any portion of the Obligations is treated as a
separate Refunding Issue under Treasury Regulations §1.148-9(h),
that portion is treated as a separate issue.
(II) The only spending exception applicable to a
Refunding Issue is the 6-month Exception.
(III) Solely for purposes of determining whether or not
the expenditure requirement has been met under the 6-month
Exception for a Refunding Issue, proceeds of the refunded issue
that become Transferred Proceeds of the Refunding Issue are, in
general, not treated as "gross proceeds" of the Refunding Issue and
need not be spent for the Refunding Issue to satisfy that spending
exception. However, Transferred Proceeds of the Refunding Issue
that were from excluded "gross proceeds" of the refunded issue
under the special definition of "gross proceeds" described in
4(a)(ii)(A)(IX) of this Section, and Transferred Proceeds from any
prior taxable issue, are treated as "gross proceeds" of the
Refunding Issue under the 6-month Exception unless those
Transferred Proceeds are used in a manner that causes those
amounts to be excluded from gross proceeds under the special
definition described in 4(a)(ii)(A)(IX) of this Section. Transferred
Proceeds excluded from Gross Proceeds for purposes of
determining whether or not the expenditure requirement has been
met are subject to rebate as proceeds of the Refunding Issue unless
an exception to rebate applied to those proceeds as proceeds of the
refunded issue.
(IV) Proceeds of the refunded issue, which for other
purposes become Transferred Proceeds of the Obligations,
continue to be treated as unspent proceeds of the refunded issue for
purposes of applying the spending exceptions to an issue refunded
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by the Obligations.
(V) If the refunded issue satisfies one of the spending
exceptions, the proceeds of the refunded issue that are excepted
from rebate under that spending exception are not subject to rebate
either as proceeds of the refunded issue or as Transferred Proceeds
of the Obligations.
(VI) Expenditures for the governmental purpose of an
issue include payments for interest, but not principal, on the issue,
and for principal or interest on another issue of obligations. The
preceding sentence does not apply for purposes of the 18-month
Exception and 2-year Construction Exception if those payments
cause the issue to be a Refunding Issue.
(VII) Any failure to satisfy the final spending requirement
of the 18-month Exception or the 2-year Construction Exception
described in 4(a)(ii)(D) of this Section is disregarded if the Issuer
exercises due diligence to complete the Project and the amount of
the failure does not exceed the lesser of(1) 3 percent of the Issue
Price of the Nonconstruction Issue in the case of the 18-month
Exception or the Construction Issue in the case of the 2-year
Construction Exception or(2) $250,000.
(VIII) For purposes of this Section only, a Reasonably
Required Reserve or Replacement Fund also includes any fund to
the extent described in Treasury Regulations §1.148-5(c)(3)(i)(E)
or(G).
(IX) Solely for purposes of determining whether the
expenditure requirements with respect to the 6-month Exception
(as described in Section 4(a)(ii)(B)(I)) and the 18-month Exception
(as described in Section 4(a)(ii)(C)(I)) have been met, "gross
proceeds" does not include (1) amounts in a Bona Fide Debt
Service Fund; (2) amounts in a Reasonably Required Reserve or
Replacement Fund (as defined for purposes of this Section); (3)
amounts that, as of the date the Obligations are issued, are not
reasonably expected to be Gross Proceeds but that become Gross
Proceeds after the end of the 6-month spending period (or the
1-year spending period in the case of the Minor Portion) and the
third spending period in the case of the 18-month Exception; and
(4) amounts representing repayments of Grants financed by the
Obligations (if any).
(B) 6-month Exception. Earnings with respect to Gross
Proceeds of a Nonconstruction Issue or the Refunding Issue (treated as
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separate issues) during the 6-month period beginning on the date of issue
of the Obligations (the "6-month spending period") and earnings with
respect to an amount of Gross Proceeds of the Obligations not in excess of
the Minor Portion during the 1-year period beginning on the date of issue
of the Obligations (the "1-year spending period") need not be taken into
account if:
(I) The "gross proceeds" (as defined in this Section) of
the respective issue are allocated to expenditures for the
governmental purposes of the issue within the 6-month spending
period, other than Gross Proceeds not in excess of the Minor
Portion and such Minor Portion is allocated to expenditures for the
governmental purposes of the issue within the 1-year spending
period; and
(II) The rebate requirement is met for amounts not
required to be spent within the 6-month spending period
(excluding earnings on a Bona Fide Debt Service Fund) or the
1-year spending period for the Minor Portion.
(C) 18-month Exception. Earnings with respect to Gross
Proceeds of the New Money Portion of the Obligations need not be taken
into account if:
(I) The "gross proceeds" (as defined in this Section)
are allocated to expenditures for a governmental purpose of the
New Money Portion of the Obligations in accordance with the
following schedule: (1) at least fifteen percent (15%) within 6
months; (2) at least sixty percent (60%) within 12 months; and (3)
one hundred percent (100%) within 18 months (the "third spending
period"). The New Money Portion of the Obligations will not be
regarded as failing to satisfy the spending requirement for the third
spending period as a result of a Reasonable Retainage if the
Reasonable Retainage is allocated to expenditures within 30
months of the issue date.
(II) The rebate requirement is met for all amounts not
required to be spent in accordance with the 18-month expenditure
schedule(other than earnings on a Bona Fide Debt Service Fund).
(III) All of the "gross proceeds" (as defined in this
Section) of the New Money Portion of the Obligations qualify for
the initial temporary period under Treasury Regulations
§1.148-2(e)(2).
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(IV) No portion of the New Money Portion of the
Obligations is treated as meeting the exception from the rebate
requirement for certain proceeds used to finance construction
expenditures as provided in section 148(f)(4)(C) of Code and
Treasury Regulations 1.148-7(e), as described in (D) of this
Section.
(D) 2-year Construction Exception. Amounts earned on Gross
Proceeds which are Available Construction Proceeds of a Construction
Issue are not required to be taken into account if Available Construction
Proceeds of the Construction Issue are allocated to expenditures for the
governmental purposes of the Construction Issue in accordance with the
following schedule: (I) 10 percent or more within six months after the date
of issue of the New Money Portion of the Obligations; (II) 45 percent or
more within 1 year after the date of issue of the New Money Portion of the
Obligations; (III) 75 percent or more within 18 months after the date of
issue of the New Money Portion of the Obligations; and (IV) 100 percent
within 2 years after the date of issue of the New Money Portion of the
Obligations (the "fourth spending period"). The Construction Issue will
not be regarded as failing to satisfy the spending requirement for the
fourth spending period as a result of unspent amounts for Reasonable
Retainage if those amounts are allocated to expenditures within 3 years of
the issue date.
(b) Computation Dates. The Computation Date for the calculation of the
Rebate Amount required by this Section 4 for Obligations with a term of less than five
years will be the latest of: (i) the date that the Obligations are discharged; (ii) 8 months
after the date the Obligations were issued; or(iii) the date the Issuer no longer reasonably
expects that any of the spending exceptions under Treasury Regulations §1.148-7 (as
described in 4(a)(ii) of this Section) will apply to the Obligations. The Computation
Dates for the calculation of the Rebate Amount required by this Section 4 for Obligations
with a term of five years or more will be: (i) a date selected by the Issuer which is no later
than 5 years after the issue date of the Obligations, (ii) each fifth year thereafter, and (iii)
the date that the last of the Obligations are discharged (i.e., the date of the retirement of
the last maturity of the Obligations).
(c) Rebate Payments. The Issuer will pay the Rebate Amount to the United
States no later than 60 days after the Computation Date. Payment of a Rebate Amount
will be filed with the Internal Revenue Service Center, Ogden, Utah 84201. Payment of a
Rebate Amount will be accompanied by Form 8038-T.
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