1. Tax-exempt debt compliance for bond-financed Projects
Purpose of presentation:
Overview of tax-exempt debt compliance
Make you aware of the Post Issuance Compliance Questionnaire that will be sent out
Oklahoma State University
University Accounting
July 17, 2013

2. Overview Who What When Why What is the IRS looking for?
What do you need to know?
Exceptions
Key contacts for questions

3. Who is Involved? University Accounting Legal Counsel General Counsel
Grants and Contracts Financial Administration
Office of University Research Services
Budget and Asset Management
Departments with current or potential projects located in any tax-exempt bond financed facility
Various individuals and departments from across campus must collaborate for effective and efficient bond compliance.
The last bullet applies to most of you. If your facility is on the facility list, it is financed with tax-exempt debt and the compliance rules apply to you.

4. What is tax-exempt debt compliance?
Tax-exempt Debt Compliance Policy 30:
Debt Issuance and Management Guidelines
OSU is implementing new compliance procedures relating to its tax-exempt bonds
Questionnaires and information gathered by OSU for review to ensure adherence to IRS guidelines
Not every question will be applicable to your specific project – please only answer those that apply
There are many new documents, procedures, and forms that have been created to aid in the new compliance procedures.
Show the questionnaires. Did everyone who needs one get one? There is also a facility list (83 properties) that details out the facilities financed with tax-exempt debt. If the facility you are responsible for is on that list, you must complete a questionnaire.

5. When is this taking place?
The tax-exempt debt compliance process needs to begin immediately.
The first questionnaires are due back August 14, 2013 and then on an annual basis.
Training and Education – July 2013
Call with questions!

6. Why?
In order to satisfy that bonds issued by OSU System will retain their tax-exempt status by adhering to IRS guidelines outlined in this presentation.
The IRS may evaluate whether and to what extent tax-exempt bonds are being used to fund for-profit entities unrelated to the mission of the University.
The IRS has increased its surveillance of University bond issuers. We also need to prepare ourselves in the eventuality of an IRS audit request.
The consequence of exceeding PBU limit may be that the bond issue becomes taxable retroactively and prospectively. If you have a written policy, the penalty from the IRS for errors is less. It is from the date the error was discovered as opposed to the date it happened.
IRS enforcement has increased in recent years. Tax Exempt Bonds (TEB) is a division of the Governmental Entities (GE) division of the Tax Exempt and Governmental Entities Division (TE/GE) of the Internal Revenue Service. 
The mission of TEB is to administer Federal tax laws applicable to tax-advantaged bonds and to provide our customers with top quality service by applying tax laws with integrity and fairness. TEB has hired the brightest and most experienced to work in their division. They are staffed with experienced/talented staff.

7. What is the IRS looking for?
Private Business Use
Use of bond financed property in a trade or business by a private user, which is anyone other than a state or local government.
A “qualified user” is a state or local government
The federal government and a 501c3 is NOT a qualified user
No more than the lesser of $15M or 10% of the proceeds of a bond issue for the University may be used for any private business use.
Limits are applied on an issue-by-issue basis and compliance is required over the entire term of the bond issue.

8. What is the IRS looking for?
Common Private Business Use
Operating Leases
Certain Management or Service Contracts with for-profit companies
Certain Research Agreements
Certain arrangements with the Federal Government or any agency thereof
Joint Purchasing or Shared-Service Agreements with non tax-exempt entities.
“Special Benefits” to non-qualified user
All of these are a possible issue if with a private business user (anyone but state and local government).
Joint Purchasing: Creation of buyer power, which will lead to lower prices or better quality products or services. Between purchasers and suppliers. Benefits: efficiency gains and downward pressure on supplier’s prices.
Shared-service agreements: agreement between two or more organizations to set up and operate shared services. To reduce expenses.
A special benefit would be a naming right

9. Not All Management and Service Contracts Create Private Business Use
A management or service contract is an agreement with a private business user under which the user provides services with respect to bond-financed property
Ex: food service contract or parking garage management agreement
There are IRS guidelines that create “safe harbors”
If a management or service contract meets the requirements of a safe harbor it does not constitute private business use
Method of compensation and term of contract are factors in safe harbor analysis
Generally looking for compensation that is reasonable and not based on net profits from the operation of the facility
“A safe harbor is a provision of a statute or a regulation that reduces or eliminates a party's liability under the law, on the condition that the party performed its actions in good faith or in compliance with defined standards.”
To qualify for the safe harbor, the agreement: 1. Must not provide the service provider with a share of net profits from the bond-financed facility. 2. The agreement must be limited with respect to the length of the term and the amount of variable compensation payable to the service provider (the shorter the agreement term, the greater the variable portion of compensation that may be paid.) 3. The service provider must not have any role or relationship with the borrower that limits the borrower’s ability to exercise its rights under the contract.

10. Research Contracts Raise Special Issues
The federal government and private companies often enter into agreements with universities to use research facilities and these agreements can create private business use.
Like management or service contracts, there are “safe harbors” for research agreements –if the agreement meets the requirements of a safe harbor it does not constitute private business use
Method of compensation and term of contract are factors in safe harbor analysis
Generally looking for compensation that is reasonable and not based on net profits from the operation of the facility

11. Research Contracts Raise Special Issues
“Basic Research” means an investigation advancement of scientific knowledge not having specific commercial objectives.
Product testing is not basic research
There are 3 Safe Harbors under IRS guidelines
SAFE HARBOR #1 –Corporate Sponsor
Basic Research supported or sponsored by a corporate sponsor is not private business use if the sponsor has to pay a fair market value to license any resulting technology and price paid for the license is determined at the time the license becomes available, not earlier
To qualify for the safe harbor, must be basic research

12. Research Contracts Raise Special Issues
SAFE HARBOR #2 –Corporate Sponsor
Basic Research supported or sponsored by a corporate sponsor is not private business use if:
Qualified user decides how research is to be performed
Qualified user retains title to any patent or product created
Sponsor gets no more than a non-exclusive royalty-free license to use the resulting product
Corporate sponsors can use either Safe Harbor #1 or Safe Harbor #2 –most will opt for #1 because they can get exclusivity if they pay fair market value.
OSU is the qualified user.

13. Research Contracts Raise Special Issues
SAFE HARBOR #3 –Federal Government Sponsor
Basic Research supported or sponsored by a Federal Government sponsor is not private business use if
Qualified user decides how research is to be performed
Qualified user retains title to any patent or product created
Any party other than qualified user gets no more than a non-exclusive royalty-free license to use the resulting intellectual property
Practically same rules as safe harbor #2

14. What do you need to know?
Arrangements for the use of the facility by third parties
The facilities, services, office space, equipment used or rented by board members, faculty, administrative staff, or other external entities
Athletic or residential facilities used for summer camps or private third parties
Leasing or rent of the facility for conferences
These are questions in the questionnaire

15. What do you need to know?
Service or Recharge Centers within the facility –known as “core labs”.
Other “special benefits” to a non-qualified user in conjunction with the bond-financed facility.
Naming rights (individual vs. corporate)
Also include any third parties providing a significant source of revenue for the facility.
“Service or recharge centers are centers that provide services to other University departments and would include printing services, graphic arts services or vehicle fleet management. In the research context, service or recharge centers are sometimes referred to as “core labs” or “research core facilities” and generally provide a specialized service or a piece of equipment for shared use by a variety of research teams. Examples include atomic microscope imaging services or the pharmacogenetics core lab.”
Naming Rights: An arrangement under which the borrower agrees to name a bond-financed facility, or a portion thereof, for a for-profit business. Naming a facility for an individual may give rise to private business use if the individual’s name is closely associated with a for-profit business (Trump Hall). In this situation, the borrower should consult with tax-exempt bond counsel to determine if PBU arises (and if so how much).

16. Exceptions
While we need to be careful in examining private use of facilities, some private use is allowed. Please clear all private use issues through University Accounting in advance.
General public use exception—100 day limit
Non-public use exception—50 day limit
“Incidental” Use
Incidental Services
10% or $15M of bond proceeds, whichever is less
Generally available use—100 day limit. A rental of property that is made generally available to third parties if 1. the term (including renewal options) does not exceed 100 days 2. the property is not financed for a principal purpose of providing it to an outside user 3. to the extent the property is not available to individuals, the reason is because “generally applicable and uniformly applied rates are not reasonably available to natural persons not engaged in a trade or business”
Non-public use exception: 50 day exception. Total number of days of use under the agreement can’t exceed 50 (including renewal options). Compensation must be arm’s length and FMV.
Incidental use exception applies to minor uses like advertising displays and ATM machines. 1. Must have no control of space set off from the rest of the building by walls or other partitions. 2. The use is not functionally related to any other use of the facility by the same party 3. All non-possessory uses of the facility do not involve more than 2.5% of the facility
Incidental services exception for services such as janitorial and office equipment repair.

17. Contact Information
If you have any questions regarding compliance and/or the forms, please contact University Accounting:
Michelle Tidwell, Debt Management Specialist
Susan Rackley
Lynette Venard
THANK YOU!
My last day at OSU is July 26th. After that date, please contact Susan or Lynette.