Firm Comments on Proposed Private Activity Bond Regs

Thank you for your consideration of these comments.

1. Undivided Portion Allocation Method

The undivided portion allocation method described in section 1141-6(d) of the proposed regulations represents a positive attempt to honor the Congressional intention that the Treasury Department adopt rules for allocating the costs of mixed use facilities according to any reasonable method that properly reflects the proportionate benefit to be derived, directly or indirectly, by the various users of the facility in order to permit tax-exempt financing of the costs that are not attributable to private business use. See H. Rep. No. 99-426, at 538 (1985), 1986-3 (Vol. 2) C.B. 538. Cf. H. Rep. No 98-432 (Part 2), at 1693 (1984) (the committee does not intend to prohibit the use of IDBs to finance the construction, renovation or refurbishing of a facility solely because skyboxes are included in the project, so long as the project otherwise qualifies for tax- exempt financing).

To fully implement this intention, however, the proposed regulations should be modified to clarify the application of the requirement that simultaneous private business use and governmental use will be on the same basis, within the meaning of section 1.141-3(g)(4)(iii) of the regulations A typical application of this requirement would be the mixed use of parking ramps with undesignated spaces. There are other types of uses, however, that warrant eligibility for the undivided portion allocation method that might not so clearly be seen to be on the same basis, but for which a reasonable method exists to properly reflect the proportionate benefit to be derived by the various users. One example is naming rights at an athletic facility. The governmental owner uses the facility to host athletic events; the owner of the naming rights obtains the benefits of publicity flowing from attendance at and media coverage of the events by others. The two uses are not identical, but they both relate directly to the same activities conducted at the facility, namely, the athletic events.

PLR 200323006 recognized the distinction under section 1.141-3(g)(4)(iii) between management contracts, on the one hand, where the entire facility should be considered to be used by the manager, and naming rights, on the other, where the use of the entire facility by the private user is not as pervasive. That ruling concluded that it would be inappropriate to treat the owner of the naming rights as using the entire facility.

Similar recognition of naming rights and similar uses in applying the same basis requirement should be provided explicitly in the regulations, whether in the statement of the rule or in an example. Such a clarification would be consistent not only with the legislative history and PLR 200323006, but also the longstanding regulatory authorization of partial tax-exempt financing for solid waste disposal and (under prior law) pollution control facilities that have multiple functions. See Treas. Reg. 17.1 (In the case of property which has both a solid waste disposal function and a function other than the disposal of solid waste, only the portion of the cost of the property allocable to the function of solid waste . . . is taken into account as an expenditure to provide solid waste disposal facilities. . . . The portion of the cost of property allocable to solid waste disposal is determined by allocating the cost of such property between the property's solid waste disposal function and any other functions by any method which, with reference to all the facts and circumstances with respect to such property, reasonably reflects a separation of costs for each function of the property. ); Prop. Reg. 1.103-8(g)(1) & (3) (allocation formula provided to permit partial tax-exempt financing of pollution control facilities with other functions). Cf. PLR 200629012 (apparently acquiescing in the allocation of taxable bond proceeds or private payments to the portion of the costs of a facility that were attributable to an undivided private business use).

2. Allocation of Private Payments

Section 1.141-6(h) of the proposed regulations provides that where an election is made to apply the undivided portion allocation method, private payments shall be allocated under section 1.141-3(c)(3) of the regulations without regard to the undivided portions, except in certain cases involving output contracts. In cases where specific private payments are attributable to one or more specific undivided uses, however, there is no apparent reason why private payments should not be allocated to the undivided portions to which they relate. The proposed rule seems inconsistent with section 1.141-4(c)(2)(B) of the regulations, which limits the amount of payments taken into account as private payments with reference to the percentage of the proceeds of the bond issue that is attributable to private business uses to which the payments relate. If private payments are made with respect to an undivided use that is not financed with tax-exempt bond proceeds, the private payments should not be taken into account with respect to such bonds. I encourage you to permit such an allocation in appropriate instances.

3. 501(c)(3) Partnerships

Section 1.145-2(c) (3) of the proposed regulations permits a partnership composed exclusively of governmental persons and section 501(c)(3) organizations to be treated as an aggregate of its partners for purposes of the private business use test of section 145(a)(2), but not for purposes of the ownership test of section 145(a)(1). There is no apparent reason for this distinction. Often, in my experience, governmental persons and section 501(c)(3) organizations find it advantageous to conduct joint activities using jointly financed and jointly used facilities. Their respective capital contributions to the joint venture are best protected if each participant retains proportionate ownership of the facilities through a partnership or a limited liability company that is treated as a partnership for federal income tax purposes. This legitimate mechanism would be hindered by a rule that requires, in effect, that not only title, but tax ownership, of the facility be vested in a single partner. I encourage you to extend the aggregation rule to the ownership test of section 145(a)(1).

December 22, 2006