Unofficial Transcript of IRS Hearing on Proposed Allocation/ Accounting Regs Is Available

Internal Revenue Service

And today we have one speaker that has asked to speak in advance. And that is Carol Lew from the National Association of Bond Lawyers. Do we have anyone else that would like to speak today? Carol? Basically each speaker is allowed 10 minutes and then we'll have questions and answers. And the questions and answers do not count towards your time period.

MS. LEW: Don't start yet.

MS. SOM DE CERFF: No.

MS. LEW: Good morning. My name is Carol Lew and I am the president of the National Association of Bond Lawyers. NABL is dedicated to educating its members and others in the law relating to public finance, providing a forum for the exchange of ideas and improving the state-of-the-art in the field. NABL furthers its purpose by providing advice and comments on legislation, regulations, rulings and other actions affecting public finance.

NABL recognizes the importance of the proposed regulations relating to allocation and accounting under Section 141 of the Code. These regulations affect a broad range of public financing transactions. And NABL appreciates the extensive effort that was made by the Department of the Treasury and the Internal Revenue Service in drafting these regulations.

The proposed regulations provide for a general rule requiring a pro-rata allocation of bond proceeds and equity to a mixed-use project. The regulations permit an election to be made to specifically allocate equity to discrete portions of a facility. The regulations also permit an allocation of equity in certain instances to an undivided portion if an election is made under certain limited circumstances. To utilize this undivided allocation methodology, the private use and the governmental use must be simultaneous and on the same basis or at different periods of time.

We are concerned that the proposed regulations are highly technical and difficult to comply with, and may be difficult to enforce.

Okay, regarding the main structure of the rules. Our first and most important comment is that the undivided portion allocation method with certain minor modifications and clarifications should be the general rule rather than the pro-rata rule. This rule allows us to address in a workable fashion common issues faced by issuers and conduit borrowers in allocating equity to a wide range of different fact patterns for mixed-use facilities.

We believe this rule will eliminate complexity and be consistent with the current practice of practitioners and the recent thinking of the Internal Revenue Service in recent rulings that we have found incredibly helpful, such as Private Letter Ruling 2003-23006, which allow the allocation of equity to private use resulting from naming rights. And Private Letter Ruling 2003-04015, which addressed an allocation of equity to an undivided portion of the facility used over time.

To be consistent with such rulings and to eliminate complexity, we suggest that the limitations on the use of the undivided portion allocation method be eliminated.

Our second main point regarding structure is we are concerned that the election requirement to allocate equity other than on a pro- rata rate to a mixed-use project is something that should be eliminated because it's a trap for the unwary.

Issuers generally expect when they put equity into a project that it will be allocated to the privately used property in a mixed use project. That's the purpose typically of putting equity into a transaction. We are further concerned that the timing rules which require the election to be made either on the placement service date or on the issue date are difficult to apply and may result in unintended consequences.

Issuers need flexibility to deal with changing circumstances after the bonds are issued and the project is placed in service regarding where, when, and how private use will occur. We therefore suggest that the election structure be rethought and eliminated.

Our third main point regarding structure: We strongly suggest that the new fair-market value restriction should be eliminated. We understand that the proposed fair market value limitation states that fair market value must be taken into account if it is "significantly greater" and that similar language is contained in an existing anti- abuse rule. We are concerned that the new proposed fair market value rule, if finalized, particularly if the rule is quantified, will generally be unworkable.

And this is why. Many bond counsel will feel compelled to require an appraisal to provide evidence that an allocation was properly done. In addition to the time and expense of an appraisal, many common governmental facilities do not lend themselves well to be appraised, such as common infrastructure facilities such as bridge. Therefore we recommend that the rule be eliminated.

The structure of 141 of the Code is generally based upon cost, not fair market value. If such a rule is retained, at the very least, it should be unquantified and left as an anti-abuse rule, or alternatively, if it's quantified, done so in a very broad manner.

Our fourth point regarding structure: We believe that the current definition of "project" is too complicated and may result in unintentional effects. The proposed regulation states that a project includes functionally related and integrated facilities on the same side, expected to be placed in service within the same 12-month period and financed pursuant to the same plan of financing. This definition can result in unintended consequences.

One example illustrating this problem is tax exempt bonds being utilized to finance an acute care pavilion and then within 12 months of the placement service date, a medical office building is constructed and placed in service. If without an election and it were treated under the pro-rata rule, the equity that the issuer thought was going to medical office-building may wind up being allocated pro- rata through the pavilion and the medical office building and could inadvertently result in a private activity bond problem.

To avoid such a result and to reduce complexity, we suggest in our comments that the project definition should simply be what is financed with the proceeds of the bonds. And once you follow through with our comments on the recommendation for the undivided portion methodology, the emphasis on what is the project becomes, I believe, less significant.

Now, lastly, turning to the rules for anticipatory redemptions, we believe the proposed regulations are unduly restrictive. We do not believe that the rules for anticipatory redemption should be more limiting than those currently in place for changing use under 1.141-12. It does not seem right from a policy perspective to further restrict issuers that are attempting to be proactive in addressing changed circumstances in situations similar to those involved in a change in use. We therefore request similar rules.

In closing, we greatly appreciate the opportunity to comment on the proposed regulations and to testify. We welcome the opportunity to confer or assist if necessary regarding the finalization of the rules. And we welcome any comments or questions.

MS. HARRIGAL: Looking through the NABL comments, on page 17 you have a paragraph in here that deals with the rated average maturity of the bonds.

MS. LEW: Yes.

MS. HARRIGAL: Now, the proposed rules require that if you have several issues that go into the project, then they have to be allocated proportionally throughout the project, pro-rata through out the project.

MS. LEW: Right.

MS. HARRIGAL: And you raise a concern that, well, what happens if bond proceeds finance -- if one bond financed a 10-year life, and one bond financed a 30-year life, and by doing that aren't you ruining up that weighted average life --

MS. LEW: Right.

MS. HARRIGAL: Now, the fact that this applies for 141 and only for 141, doesn't that take care of your concern?

MS. LEW: It might. But I think if you step back to our overall comment I think about the allocation of different series of bonds to a project, the bigger one, and I didn't touch on it with my comments, is that we don't believe that the pro-rata allocation issue should be required. It is inconsistent with long-standing practice and what we believed was -- that they came up to this point, the IRS in this area.

The issuer should be able to issue different series of bonds and be able to specifically allocate those issues to those projects. I also think, getting back to your question, yes, that may be true, but it introduces a heck of a lot of complexity. And if you can follow through and adopt a structure where issuers have a little bit more freedom, and I'm not sure there is a public policy reason when we talk about -- or a tax policy reason for why you can't specifically allocate different series of bonds to different portions of the facility.

When we start getting at issues under 141, this is the way it's allocated, under 147 it's different, I think it creates unnecessarily a lot of complexity, and if there is a simpler way to do it that allows issuers some flexibility on where they allocate the bond proceeds, I think that would be better.

MS. HARRIGAL: Let me just keep on that for one minute.

MS. LEW: Okay.

MS. HARRIGAL: So if you have two bond issues of finance stability, one with a 10-year maturity and one with a 30-year maturity, and the issuer allocates the 10-year maturity into floor one of a two-story building, and the 30-year maturity to floor two, at the end of 10 years they no longer need to be concerned about private investments use on the first floor, and in effect treats the first -- the amount that went into the bonds for the first floor as equity for the building. Should we be concerned with that? Is it --

MS. LEW: Not necessarily. I mean, you should be concerned that there is enough cost out there and that people are properly allocating bond proceeds to real out-of-pocket costs. And I'm not sure there is a problem with that actual scenario; the issuer chose to only have their bonds out for 10 years. They only burn the market for 10 years. So I'm not quite sure that there should be a problem with that situation that you are posing.

MS. SOM DE CERFF: I want to just talk a little bit more on the same --

MS. LEW: Okay.

MS. SOM DE CERFF: -- same thing, about project. I mean the difficulty is trying to strike a balance between things that are very specific asset-by-asset versus what's a group. And what I see there is, yes, maybe you can target specifically, but then in terms of our allocation of equity, there needs to be enough dollars within the asset.

And perhaps -- let me give you an example here. We have got this now, maybe equipment with a shorter life; you want to have different bonds. But what about the situation when you have perhaps a group of cars or a group of buildings and they are really functionally used as one unity, and if were to go on the one extreme to a single asset, building one as bonds and building two as equity, you couldn't then cross those, as for the use. You really perhaps want to functionally operate as one big two-building projects.

So what we are trying to do with your comments in this definition of project is figure out what is sort of one unit that would leave the property for purposes of --

MS. LEW: To draw --

MS. SOM DE CERFF: -- measuring that unit because we have a chicken and the egg kind of problem. In order to know to know what the bond finance property is, we have to know where the bonds are.

MS. LEW: Right. And that --

MS. SOM DE CERFF: -- and that's where the measurement units will be.

MS. LEW: And I think that is one of the toughest points in the present structure of the regulations because I think once you have that pro-rata test, you have to have a band to determine what it is. But if we can look to trying to figure out a set of rules -- and I think there is a lot of good things in here, I mean, we have to get to this point and then start thinking about what pieces of it work better than others.

But if you could get away from a pro-rata methodology, or at least not having that be the first step, the significance of having a band and knowing what the project is I think becomes less because other than pro-rata, you are left with either this direct tracing discrete facility part or this undivided portion concept, I don't think you need that band.

MS. SOM DE CERFF: Well, let me ask you about that. You know, I just want to explore this further --

MS. LEW: Yeah.

MS. SOM DE CERFF: -- and I'm going to take this opportunity. Undivided: So there's going to be X percentage of bonds and there is going to be Y percentage to all other equity within something. And again, I think we need some band to say, "Okay, this is the property that's created by this -- it's two parts of money." So again, we are trying to sort of draw a line of what's the whole within which we are going to allocate the two undivided portions.

MS. LEW: Well, if it's an undivided piece, let's say, of a conference center, for example, and you are considering use over time of that conference center, we deal with these questions day to day right now.

MS. SOM DE CERFF: Right.

MS. LEW: Before the regulations we would look at the rooms of conference center and ask over what times of the day are they -- and we come up with a percentage. And we look at it based on cost of that building being built. And we wouldn't so much worry about is there some other building on the side. I mean we look at it from a pure function standpoint.

And the more you attempt to define project and put emphasis on it and take some of the judgment call away from us, I think the more complicated and technical and harder to apply it's going to be because there's a lot of different fact patterns.

And I don't think it's been -- that has been the problem in practice. It hasn't been a question of most of time we worried for a judgment call standpoint. It's a room or is it three rooms in the building and they are all under one contract and being used over time. These issues just start coming up and so --

MS. SOM DE CERFF: So you know it's the conference center, and that's the --

MS. LEW: We know it's the conference center.

MS. SOM DE CERFF: So it's --

MS. LEW: And so we don't really even need that rule to tell us what it is because we would say if an undivided portion allocation methodology was permitted which appears based on some of the rulings that it was, that, okay, we can allocate equity to an undivided portion of that conference center. Now we do get into questions such as the common areas. You know, that are perhaps ruling type questions that someone might ask: "What's the common area around the conference center?" These are not unusual questions or things that we haven't already dealt with in 141 of the Code. You know, is the parking lot, how much is allocable to the building, that kind of thing.

But that question about meeting that project definition, if you get away from having that pro-rata rule, I think it really does because less significant and something that you need to worry about.

MS. HARRIGAL: If I have -- and I guess this goes to several of the points that you made, you know, the difficulty of the definition of project and with the bands. But if I have a building and part of it is bond financed and part of it is not, and I hear you saying to me, that should be enough. We should only look at the -- we should treat the bond finance facility as that piece of it where the bond proceeds are, where we define that piece and only look at use there, then because it is an integrated building, how do I know the proportionate benefit that the two users, the private user and the user of the bond finance piece, are getting from that building?

The fact that the bond finance piece is in there might add value to the other piece and if I define it only as a bond finance piece, I'm ignoring that proportionate benefit that comes to the users from the whole building.

MS. LEW: Well, this is --

MR. CROSS: Or stated differently, aren't you effectively suggesting that by just looking at the bond proceeds for the definition of project, you are essentially assuming away the entire question of how much credit you should get for equity and when?

MS. LEW: I --

MR. CROSS: The whole point of the definition of project is to figure out some reasonably proximate arena of things that should -- in which you should be able to count your equity along with your bond proceeds in defining a unity for accounting purposes.

MS. LEW: Okay. Let's take the office building for example and the equity you want to allocate to the first floor. And you want the rest of the facility to be bond financed. And I understand the technical point, and I guess it perhaps relates to fair market value and whether or not you've properly allocated the piece of the building.

But I suggest that these are rules that are -- the rules will have to be applied to highly factually specific situations. And getting back to our comments on the appraisal, that it's going to be very difficult, I think, to draft more black and white rules, to try to say, "Deal with it this way." It's going to be difficult to get away from a cost, square-footage type analysis in most situations.

That's the type of allocation methodology we have been utilizing based on what we believe was the current thinking of the IRS in the rulings; looking at the cost and square footage. And if you couldn't do it that way, we would look at revenues. And it is very difficult. When you construct a facility you are going to know what your various costs are. You can get an engineer or an architect to tell you which portion of the building should be properly allocated.

But trying to make these judgment calls about has the bond -- putting bond proceeds into the building or putting equity somehow increased the value, I don't know. Maybe it could have in certain circumstances, but I think these are things that may make the rules un-administrable.

MR. CROSS: I guess I'd like to go back and explore a number of your main points in a couple of ways. First, as a general comment, we really appreciate NABL's very extensive and active comments on this and we take very seriously the goals of both simplification and administrability. At one point in your comments, you made the point "We want the rules to be simple and flexible."

MS. LEW: Yes.

MR. CROSS: You should understand that those can be diametrically opposed and that there's a real balance between simple rules and the flexibility to do very specific targeting of bond proceeds to minimize bad private use problems. But I just want to go through each of your main points and ask you a couple of questions about them. One, you start with the theme of "Let's use the undivided portion method as the general rule."

As described, that method had some constraints that basically limit it to roughly comparable kinds of use and it's sort of a functionability concept. You then cite the naming rights ruling in 2003 as an example of a good workable kind of ruling. But I note that that depended on fair market value allocation concept. I guess on the undivided portion method -- now I -- we recognize --

MS. LEW: That they used --

MR. CROSS: We recognize that the pro-rata default method is restricted. I mean, it's basically aimed at telling you there's an exclusive universe here for mixed-use facilities and it's the undivided portion method and the discrete portion method.

Arguably the discreet portion method is more flexible in the sense that if you can color a piece of a project blue and say that's discrete, that's the only area where you have to track things. The undivided portion method is more restrictive in the sense that it has ongoing tracking across a whole broader project.

MS. LEW: Right.

MR. CROSS: And so my question is do you really want the undivided portion method as the exclusive method, or is the real concern the pro-rata default method?

MS. LEW: I think on the first level our real concern is the pro-rata default mechanism because I think it introduces a lot of complexity and the election structure is going to be very difficult to apply.

MR. CROSS: I think the -- just a point.

MS. LEW: Yeah.

MR. CROSS: The government, as a policy matter, had a concern about leaving the methods open-ended, and if we work in a leave-it pattern, you can have any reasonable method, for instance, and leave that undefined. So we want to provide what the universe is. Now, if you want a more specific universe that doesn't have tripping elections, you know, maybe -- we certainly can consider that.

MS. LEW: Yeah, I think that's one point to be considered because I think elections -- the more elections we have, the more complexity we have and the more problems could inadvertently occur. I think the pro-rata method is not something that we would like to see as the first level method if we have to have a first level method. I think that you're right that discrete allocation method is very helpful. Now, it's not as helpful as it could be. There is that 5-year limitation on being able to have floating use. Which I thought was great that that was -- that issue of floating use was addressed in the regulations. Even better if we didn't have it. When we compared the two methodologies, the undivided portion methodology and the discrete portion methodology, we looked at and said, boy, you know, without the limitations on the two, the undivided portion methodology seems to address a broader category of use problems than discrete --

MR. CROSS: An initial reaction though is that in making that suggestion you assume away fundamental constraints in the undivided portion method.

MS. LEW: Yes.

MR. CROSS: And --

MS. LEW: We do.

MR. CROSS: I am not sure it works to go down that rule. It almost seems too simple a suggestion to say well, let's just use that, but we don't want any of the constraints that go along with it.

MS. LEW: Well, let's look at what the constraints should be. I think that the thinking in the Internal Revenue Service went a long ways when that private letter ruling was released which dealt with use that was perhaps occurring at the same time, but was a different type of use. And I recognize some of the questions in the final regulations dealing with the present structure of the reg with simultaneous use, and I think we've addressed that in our comments about 100 percent.

But I felt that the current thinking went a long way in coming up with a way for counsel -- announce a way for counsel to address naming rights. And people have been following that. To tell issuers now that either it's unclear, or there isn't a rule now that will be helpful in allocating a facility dealing with naming rights is not helpful. It's better to have a rule, I think, that addresses it, because if they are over they are going to know. They need to put equity into the deal; they should be able to put equity into the deal to cover it.

So I thought that that undivided portion rule was broad enough, and maybe it needs be tinkered with more to address any policy concerns that you think may exist. But it's flexible enough, that concept, to address the use over time these questions that have been coming up for the last couple of years with private use resulting from some sort of intangible right, that you see that there should be some way that we can carve up the facility.

So it's -- I think it would be the wrong move to move back from that and not have a helpful rule addressing those kinds of factual situations. I cheered when I saw the naming rights ruling, and the one I just cited in my comments about being able to allocate private use over time. And because I think they are very helpful, they address very common fact patterns. And they just tell us what to do.

MR. CROSS: When you get to the -- on the undivided portion method, keeping in mind that part of that method is used to divide up something on day one, and say come finance it, I guess a question is if you just open that up to anything, how do you define the percentage in a way that it doesn't become apples and oranges when you are measuring it as compared to the other kinds of used in the facility?

MS. LEW: That's a difficult question. And you came up with some sort of rough justice type of approach for the naming rights. I think that one would just cost the facility (off mike) it's under the naming rights contract, and so I think there are going to be a variety of fact patterns. And one black and white rule may not fit all and there may be judgment calls that counsels are going to have to make, or ask for a private letter ruling on those kinds of questions.

But I think those are very common typical problems that we've been struggling with, and I think that the use of this undivided method will get to be -- a lot of them, and there may be some odd fact patterns where we are going to struggle with is it the revenues we're receiving from a contract for example, or you know, what should the numerator be, what should the denominator be.

MR. CROSS: Let me move on to another topic, which is the fair market value anti-abuse rule. And let me preface this with just the statement that, as you know, that concept has been in the private business use rules since 1997 on measuring use over time.

And so it should be appreciated, the concept is not new, and you already have been having to live with it for, you know, nearly a decade. It was put in the 1997 final regulations as an anti-abuse rule, in full recognition of the balance between administrability and the difficulty and administrative burden associated with imposing appraisal requirements in fair market value testing on whole ranges of governmental facilities.

And so it was aimed at being sort of an outlier anti-abuse rule with naming right being the classic example where they have so much more fair market value than anything else.

MS. LEW: Right.

MR. CROSS: Inside. You know, the sign cost $100 and it's worth $100 million. And I guess I was surprised at the suggestion of eliminating the rule, but also not quantifying it. And I wanted to explore that with you a little bit, assuming that you already have the rule in measuring ongoing use, this is just a parallel rule in testing it upfront.

And I guess my question on administrability is, if anything, wouldn't it be simpler and clearer if we quantified it at some high threshold, so that what you are looking at is sort of an eyeball take at something that is really disproportionately out of whack with a standard cost or rental value or square feet kind of measure?

MS. LEW: I think that if it's kept as anti-abuse rule, and that if you did go the quantification route -- I think we suggest that as an alternative, if you quantify it in a broad way so that it is clear it's way out of whack, I think we decided on 40 percent, I don't if that's the right number. But something that is a --

MR. CROSS: We can quibble over the percentage but I --

MS. LEW: You can quibble over the percentage but -- if it's a big number --

MR. CROSS: But seriously --

MS. LEW: If it's a big number I think it's going to become less of a problem for people. And we do recognition that it was -- there was portions of in the final regulations. But I think care has to be taken that we don't adopt a rule where the significantly greater is going to be interpreted in such a way that people are going to be worried in every run of the mill mixed-se allocation, that they may be close enough that they are going to have to get an appraisal.

MR. CROSS: And I guess --

MS. LEW: Because I think we're going to run into a lot of trouble.

MR. CROSS: I have two points on that. One is I just we -- to reiterate that we appreciate, and it was a policy call in the '97 rules to not impose a fair market value rule across the board, because that is difficult, particularly with government facilities.

MS. LEW: Right.

MR. CROSS: The intent in setting it up here was really parallelism, and you already have that kind of anti-abuse test in the ongoing use. Why shouldn't you have a comparable anti-abuse test in the way you divide things up upfront, but you know, we can certainly consider how best to accomplish that.

MS. LEW: I think the emphasis should be on going after the big distortions. And that giving a little here in the interests of simplification would be greatly appreciated, because I think that there is going to be a lot of fine-line questions, it's incredibly difficult to value governmental use oftentimes.

And so I think the overriding concern of the vast majority of issues where it isn't that distorted, maybe it's off a little bit, but it's hard for people to tell. It would be -- if you intend to leave the rule in, then we suggest that you put a lot of emphasis on significantly greater, particularly if it's quantified and have it be a much bigger number, so that people are not going to be concerned they are going to be worrying about the big distortions, which they should be.

MR. CROSS: One other question on the anticipatory redemption concept. I guess we appreciate the idea that maybe we should sort of integrate that more closely with -- or the existing change of use rules. The fundamental point I think was a concern of, we don't want just all standard variety bond amortizations to result in the theory that well, I've now eliminated all my private use, because I have paid off some of my bonds.

MS. LEW: Right.

MR. CROSS: And so the goal was to try to have people identify something within a time-frame and some parameters so that it is obvious what they are doing.

MS. LEW: Right. And I completely understand the policy reason for that.

MR. CROSS: Beyond just kind of the "it seems too restrictive," is there a fundamental part of that that -- you know, what is the -- well, what's the biggest problem or issue with what's in there?

MS. LEW: Well, I think for me the biggest policy issue is the fact that oftentimes with the changing use we are -- the issuer becomes aware that some of the things coming down the pike, subsequent to the issue date, and that it could result in private use. I think it's in the government's interest to have flexible rules. At least as flexible as the existing change in use rules, so that the issuer can take care of that change in use, ahead of time. And I don't think they are -- these are not situations -- I understand the question of the amortization.

MR. CROSS: I think my question is really in what respect are these rules less flexible than the existing rule.

MS. LEW: Well, they don't permit defeasance. They have a -- they introduced a 5-year good use requirement that was in the old revenue procedure before the change in use treasury regulations, so that concept has found its way back in, but it's found its way back in just for anticipatory redemptions, but not for normal changes in use, which have more flexible language, it says for a substantial period of time.

So there's these concepts that have come back in just for anticipatory redemptions, but not for regular changes in use, where you are within the 90-day period of actually having the change in use. It seems to me that any issuer that's proactive enough to want to do their change in use ahead of time and defease their bonds should be treated as least as well as those that wait right up until the last moment, I just can't see from a policy perspective.

You have rules in -12 of the 141 regulations that guard against the amortization problem by telling you what the non-qualified bonds should be. Those are the kinds of rules that should be appropriate, I think in this area. If we have a consistent set of rules between the two, anticipatory and you are within that short period -- or under a -12 I think we will have achieved a lot from a simplification standpoint. And I think from a policy standpoint it should be the same.

MR. CROSS: I mean, we definitely agree with the policy that it's a good idea to encourage people proactively to address the changes in use before they occur.

MS. LEW: Yeah.

MR. CROSS: And you know, we can just take a look at integrating that better I guess. One other question on projects, assuming for a moment that we don't adopt the suggestion that the project is just what you finance with the bond proceeds, as you suggested, do you have other thoughts on what is unduly constraining about the project definition? Is it the time frame, is it the -- you know, I mean the concepts in that definition are pretty standard fare in another -- a lot of tax exempt bond rules.

MS. LEW: Yes. I think if you move away from the rigid election requirement, the pressure will be off a little bit off that project definition. So the traps for the unwary about missing the timing, for example, with the medical office building and the acute care pavilion, if the issuer has some flexibility on, or the first rule as the undivided portion, or the discrete portion, and these rules are a little bit looser without some of the restrictions on them. I think that -- that we may be able to live better with that project definition. I think that it's the combination of all those restrictions coming into play at once, the pro-rata first, then the election, and then the project definition; that's the real problem.

MS. HARRIGAL: Johanna if I may? And so if you have a building, well, just say you have done the undivided portion, and then five years down the road, for -- you want to switch to the divided portion -- excuse me, the discrete portion, how do we figure out use -- what the use was of the bond finance property. Don't we have a real administrative problem then, if we allow allocations at any time?

MS. LEW: Well, I think there perhaps should be a period at some point where one should document how they have allocated their bond proceeds. And, I think, people are doing that now.

MS. HARRIGAL: Then do you know what that period would be?

MS. LEW: Well, right now, we have -- you have a rule, I think, a -- later of 18 months, an 18-month rule for making your final allocation. You know, that may be a sensible -- sensible type of rule.

MS. SOM DE CERFF: Did you -- I have a couple of little, sort of, pinkie or smaller -- smaller points. The idea that this regulation is dealing with government alliance, government use, and private use, and in one of the comments is that in the midst of equity the qualified private activity bonds should be considered qualified equity.

Because right now under the proposed reg you couldn't make something -- it is always an airport example that seems to come to the fore.

MS. LEW: Yeah.

MS. SOM DE CERFF: Because you do have some different structures if you will -- so hard, the vocabulary, have a project, and whatever.

And I'm wondering in terms of that, because obviously we are not making rules here for qualified private activity bonds per se, and wondering your reaction in terms of -- sort of coming at that.

Would it be this idea of the issue for identifying the property, a discrete portion or a discrete building, would that sort of, help to cure -- cure the problem. Or maybe a different way of asking that is if, if the two aspects of the airport could be considered discrete portions, how far would that go to solving the concern that we have not allowed for all that private activity bonds through part of the next year.

MS. LEW: I'm trying to understand what the policy reason would be, not to do that.

MS. SOM DE CERFF: Yeah, and I think it's more a question of, you know, the scope of this reg project. And we are trying to address governmental use, and again we are sort of building from the simple examples --

MS. LEW: Right.

MS. SOM DE CERFF: -- whether it is from project or whatever, not so much perhaps an intentional effort to say you can't do this, but just as -- we carve out an area to start with as building blocks, here.

MS. LEW: Right.

MS. SOM DE CERFF: And wondering, you know what, perhaps there is a middle ground or some way so that it is not really precluded, but that you know, how could we sort of tweak this a little bit.

MR. CROSS: Well, I guess just on that same thing. I mean, we thought about that issue and we want -- again, this was a Governmental 141 regulation, and I guess one thought was doesn't the Section 150 multipurpose rule, now, that would allow you to divide up a private activity bond into a separate issue, effectively, allow you to do that without getting to this. And maybe it doesn't or maybe it's unclear, but where would that get -- we appreciate it --

MS. SOM DE CERFF: Or if we get rid of the pro-rata rule -- the private issuers we made.

MR. CROSS: The point, it was really a -- I think a scope of regulation and the question whether or not that question either should be accommodated elsewhere or already was maybe.

MS. LEW: Well, I think aspects of it are accommodated elsewhere as you point out. And I think you have made the point correctly that if we got rid of the pro-rata rule, some of these problems are going to become less significant.

MS. SOM DE CERFF: So either targeting issues separately or somehow dividing the property.

MS. LEW: Right.

MS. SOM DE CERFF: There might be two different ways to --

MS. LEW: And once you get away from the rule that says every issue going in has to be pro-rata throughout the facilities, start -- stop worrying so much about the inter-relationship and how -- somehow messing it up, intruding within the 141 analysis with the governmental ones.

MS. SOM DE CERFF: Right. Because we meant to leave that for another day in the legislative history on those ones --

MS. LEW: Yeah.

MS. SOM DE CERFF: -- this is actually you know pretty -- pretty descriptive than that. Another smaller -- smaller point -- we asked for comments on the partnership and related rules, and you've indicated they are straight-up partnerships.

MS. LEW: Yeah.

MS. SOM DE CERFF: Related to that there is a comment that I would like you to flush out if you could, is taking the output example and applying that to -- more broadly, to other types, facilities, the idea of tenants in common jointly owning -- which I see is sort of parallel --

MS. LEW: Right.

MS. SOM DE CERFF: -- to the straight-up partnerships you've got. Ownership you're sharing, you've got output, you're sharing the cost. Basically, straight-up across ownership --

MS. LEW: Right.

MS. SOM DE CERFF: Any particular types of facilities that are the real concern?

MS. LEW: Well.

MS. SOM DE CERFF: Here she -- where this would be applied almost useful.

MS. LEW: I think, the hospital merger situation is the fact pattern that this comes up most of the time. Although I have to say this does seem to arise -- there are other situations, and I have seen in housing, for example, partnerships with multiple 501(c)(3)s. And so I think, the thinking in our comments was -- we've already gone this far with respect to the use question, we would just take it one more step; this from the policy perspective on the ownership question. What is -- what is the reason why this should be treated differently?

MS. SOM DE CERFF: And just to press a little bit --

MS. LEW: Yes.

MS. SOM DE CERFF: -- further for clarification, so -- what if it's not a true partnership, what if it's just like the output example, you have sort of, tenants in common that own a facility together. And maybe it's a unique situation, I'm trying to, kind of, get a feel for that.

In the output example, they are really not partners in the, sort of, running the business. They both own the facility and they have agreed to share the output coming out in each cells, sort of, their own portion of the output. And so in getting your comment that this rule could be useful in non-output context. I'm trying to --

MS. LEW: Why don't -- I don't --

MS. SOM DE CERFF: -- to think of scenarios where you have joint ownership where it is not a partnership.

MS. LEW: There are a lot of situations in the -- as you know the output in the water area --

MS. SOM DE CERFF: Right. Yeah there's --

MS. LEW: That -- that do have those kinds of fact patterns. I think, the more likely case, are the ones where it's unclear whether it's a deemed partnership or not.

MS. SOM DE CERFF: Uh-huh.

MS. LEW: And so having the rule, the flexible rule, in the 501(c)(3) area, and the governmental bond area about being able to look through is incredibly helpful, because I think even with those examples in the treasury regulations and the legislative history there's always been some concern about whether they were implied partnerships for tax purposes.

MS. SOM DE CERFF: And in that case, how would the output, if you will, be sort of, shared? Will there have to be a similar arrangement to allocate the use of that, sharing the cost, sharing the use in some --

MS. LEW: Oh, but stock patterns --

MS. SOM DE CERFF: -- in some fashion.

MS. LEW: -- are very different --

MS. SOM DE CERFF: So it goes on --

MS. LEW: -- depending on the type of facility.

MS. SOM DE CERFF: Thank you. One other little pinkie question, we have, for the purposes of -- other than, you know, the actual output for the sort of, general type of facility, the rule indicates that the allocation to equity is on a year-by-year basis through the measurement period. That it's an annual, and that up to the amount of equities, and then it spills over to the bonds, if you will, for private use.

And the comment was made that there should be some allowance for a sort of, a carryover if you will, to unused private equity. I'm wondering if there are any thoughts in terms of that rather than if it is not wide open the way output seems to be a little more over the term, in terms of the way dash-7 is written.

MS. LEW: Right.

MS. SOM DE CERFF: But yet there's also the example in the dash-7 of swapping a point that if you're going to exchange output with a private party, within the three-year, it's a three-year window and it has to be equivalent, you know, within that window. And I'm wondering, for us to consider opening up, which is something other than an annual basis when the measurement rule seemed to comply that the measurement of bond finance property is -- you know done annually before, it's averaged. What -- what sort of a proportion or a margin -- how do we not allow massive front-loading side of private use, you know, what would be --

MS. LEW: But isn't that a different -- I mean that's a different point, the front-loading question to the -- I think, the overall comment which is after you've introduced the concept of use of over time, since you'll be able to really get a true average of the --

MS. SOM DE CERFF: But it's use of the bond finance property, and I think --

MS. LEW: Right.

MS. SOM DE CERFF: -- what we are saying conceptually here is that we have bond financed and we have equity financed.

MS. LEW: Yes.

MS. SOM DE CERFF: But it's sort of two conceptual pieces here.

MS. LEW: Yes.

MS. SOM DE CERFF: And if the private use exceeds in any given year, it's really using the bond finance property. So we are measuring -- that's what we thought what we were doing was measuring on any annual basis the use of that. And it doesn't say that you can, you know, sort of exchange between two properties if you will. If you had two buildings to where the --

MS. LEW: But -- but that was the suggestion, because you're already in some ways doing that with that concept, it's addressing -- it's floating, use-type question and use changing over time. And I think our comments were addressing why not from the policy perspective, should she be able to get more of a true average of taking --

MS. SOM DE CERFF: Average of the whole --

MS. LEW: Exactly.

MS. SOM DE CERFF: -- as opposed to of the bond financed.

MS. LEW: Right. Right, and that, you know, focusing more on that true average, economically of what's going on between the private use and the governmental use, rather than looking at more of a rigid concept. Okay, this is the bond finance facility piece, and on this particular year it went over or under or whatever, and then that it's trapped, and you can't do anything with it in the subsequent year.

MS. SOM DE CERFF: It's put essentially -- and going back to what's the larger or what is the property, you know --

MS. LEW: That's exactly right.

MS. SOM DE CERFF: -- which is the bond, and you -- you think of it as bond finance versus equity finance, all you think of it is as one piece.

MS. LEW: Yeah.

MS. SOM DE CERFF: Sort of an exchange program between these two --

MS. LEW: Right.

MS. SOM DE CERFF: -- these two pieces.

MS. LEW: Uh-huh.

MS. SOM DE CERFF: If you think of it as two properties, as opposed to one -- well, it's gets faster -- yeah, what's your opinion --

SPEAKER: The bond question, yeah.

MS. SOM DE CERFF: -- yeah, bond question.

MS. LEW: It's getting back to the bond question, but I have to say, if you look back at what we think had been current practice, that one could go ahead and look through and sort of average. You wonder why shouldn't it -- there be -- why is there something wrong with it? In certain periods of time, the amount is like this and then in another it is much less. And why shouldn't she be able to average those pieces if you have gone the step of having the measurement over time.

MR. CROSS: I had one other kind of, technical question which is -- and I think it's probably been some misunderstanding of one of the triggers in the rules where we said that you need to expect to have more than the permitted amount of private business shares in order to trigger some of these rules.

And I think part of the intent there was to not send you into all these rules, all the special rules, if you just expected the garden variety less than 10 percent private business use. But that the fundamental premise here was that -- we're talking about the next year's projects where absent special targeted accounting rules, you're not going to bill use taxes and financing because you've got too much private business use. And I think we got a lot of comment of, well, we should be able to use these rules no matter what --

MS. LEW: Yeah, and I think part of that problem is, I know --

MR. CROSS: Because it's a structural --

MS. LEW: I know where -- I know it has a -- it's a structural, it's just -- I think it's just a definitional issue, because it's relating to Rebecca's question of the bond --

MR. CROSS: Uh-huh.

MS. LEW: -- and you wanted to have a definition for the bond, because you have the pro-rata rule. But it's very common that you may have, it's not -- I'll say that a better way. It doesn't relate to the issue. The 141 private activity bond test relates to a bond issue. It doesn't necessarily relate to a project.

MR. CROSS: Uh-huh.

MS. LEW: And so the way the definition is written right now, it's key to the project, not the bond issue.

MR. CROSS: Uh-huh.

MS. LEW: So if you have a particular bond -- bond project, it may -- that it may have two percent of private use, but you want to use a certain amount of bond proceeds of an issue on it, and you want to be able to figure out, "Okay, how much of that bond issue is tainted by that two percent."

Right now the definition is key to the project, and there is a disconnect with how I think it should work, which is keying it to the issue. Or having flexibility to use the rules with those projects that make "project" that may not have gone over the threshold; but you really should be counting private use towards an issue which may be doing a bunch of different projects. Do you follow me, sir?

MR. CROSS: Okay, I think you're probably right that that's a technical --

MS. LEW: It's a technical problem.

MR. CROSS: -- definition of the question.

MS. LEW: Yeah.

MR. CROSS: Okay.

MS. SOM DE CERFF: You know, it's a lot of circular things because of cross-referencing back and forth --

MS. LEW: Right.

MS. SOM DE CERFF: Because dash-3 says you will measure the use of the property, to which the bonds are allocated under dash -- you know, the dash-6 rules, so you know we can maybe keep going there.

MS. LEW: Uh-huh. Yeah.

MS. SOM DE CERFF: Rebecca, I'd like to reiterate John's comment that we really thank you now for putting a lot of work into a lot of detail that is a very helpful approach, and I also appreciate your time and willingness to dialogue back and forth, so we get the value of your -- of your input.

MR. CROSS: And we really do view this as a work in progress because it's a very difficult set of topics, and we will look long and hard at all comments.

MS. LEW: Thank you -- thank you very much for the opportunity.

MS. HARRIGAL: Thank you.

MS. SOM DE CERFF: We have no one else, so that concludes it. Thank you.