Firm Urges Aggregate Treatment for Certain Partnerships Under Private Activity Bond Regs

These comments are submitted in response to your solicitation of public comment with respect to the proposed partnership rules contained in the above-referenced regulations. You have asked for specific comments on the issue of whether favorable aggregate treatment should be accorded public/private partnerships where each partner's distributive share of each partnership item for federal income tax purposes is the same as each partner's respective interest in the partnership and those shares remain the same for the life of the bonds. In this limited situation in which there are straight-up allocations of all partnership items in accordance with constant percentage interests in the partnership, we urge your adoption of "aggregate treatment."

We represent a City that has joined with other public and private entities to form a partnership whose purpose is to jointly own transmission system assets. Pursuant to the Operating Agreement of the partnership, the City, and each other member of the partnership, contributed an initial cash capital contribution in exchange for member units in the partnership. Profits and losses of the partnership are allocated to the partners in accordance with their respective interests. The City and the other governmental entity partners together own approximately 25% of the member units of the partnership. All assets of the partnership accrue to its members upon dissolution.

Affording aggregate treatment to this partnership for purposes of Section 141 would further the legitimate interests of the City and would not lead to any abuse under the allocation and accounting rules. The City is authorized to acquire interests in power facilities for the purpose of providing electricity to its residents. It is authorized to finance such acquisitions with bonds. However, cost and regulatory processes make it impractical for the City directly to finance separate transmission facilities. The partnership of public and private entities allows the residents of City access to electricity at the lowest cost through economies of scale. The partnership maximizes efficient use of energy resources and reduces operating costs.

Allowing aggregate treatment of the partnership would allow the City to finance its cash capital partnership contribution to the partnership with tax-exempt bond proceeds and treat such bond proceeds as financing the City's ownership interest in the underlying electricity transmission system assets of the partnership. There would be no potential for the private entity partners to benefit from the tax-exempt financing because such financing would only relate to the City's interests which are measurable and constant based on member units.

As a general proposition, beyond the specific example explained above, under the limited exception being urged for private/public partnerships, there does not appear to be any possibility of abuse. So long as the partners' interests in the partnerships are constant and equal to each partners' contribution, there is no transfer of the benefit of tax-exempt financing from a governmental partner to a non-governmental partner. Accordingly, it would appear that there is no reason to deny aggregate treatment in this circumstance.