FEDERAL TAX ISSUES

1
FEDERAL TAX ISSUES

• John R. McQueen, Esq.
• Tax-Exempt Bonds as a Financing Tool
• for Construction of New College and University
  Facilities
• April 18, 2008

2
MAJOR ISSUES

• Reimbursement Resolutions
• Capital Campaigns
• Limitations on Management Contracts
• Corporate-Sponsored Research
• Financial Covenants
• Tax Enforcement
• Auction Rate Bonds/Bond Insurer Problems

3
Reimbursement Resolutions

• Types of Costs Covered
• Timing Requirements
• Content of Reimbursement Resolution

4
Types of Costs Covered

• Preliminary Expenditures Up to 20 Not Subject
• Capital Expenditures
• Land Acquisitions and Site Preparation

5
Timing Requirements

• 60-day Period Prior Covered
• Reimbursement of Hard Costs Within 18 Months of
  Placed-in-Service Date
• Reimbursement Within 3 Years of Original
  Expenditure

6
Content of Reimbursement Resolution

• General Project Description
• Maximum Principal Amount of Bonds
• Not Applicable to Prior Financing

7
Capital Campaigns

• Sufficiently Direct Nexus
• Replacement Proceeds Concept
• Potential Nexus Situations

8
Capital Campaigns

• Donor-Restricted Gifts
• Capital Campaign Purposes
• Preliminary Earmarking Not Fatal

9
Capital Campaigns

• Wording of Campaign Materials Crucial
• Include Broad Number of Purposes
• Campaign for Debt Service
• Campaign for Operating Expenses

10
Management Contracts

• Types of Private Business Use
• Leases
• Corporate-Sponsored Research
• Management Contracts
• Special Legal Entitlements

11
Management Contracts

• Term of Agreement
• Type of Compensation
• No Net Profit-Sharing

12
Management Contracts

• 15-Year Safe Harbor
• 10-Year Safe Harbor
• 5-Year Safe Harbor
• 3-Year Per-Unit Contracts
• 2-Year Revenue Contracts

13
Measurement of Private Business Use

• 5 Limit
• Square Footage Approach
• Fair Rental Value Approach

14
Corporate-Sponsored Research

• Basic Research
• Competitive Price
• No Pre-Set Royalties

15
Cooperative Research

• Basic Research Multiple Sponsors
• 501(c)(3) Controls
• Patent Owned by 501(c)(3)
• Non-Exclusive Royalty-Free License
• Federal Rights under Bayh-Dole Act

16
Financial Covenants

• Potential Arbitrage Issues
• Liquidity Covenants

17
Liquidity Covenant Safe Harbor

• Semi-Annual Testing
• Amount
• Reasonable Needs
• Provide Senior Lien

18
Tax Enforcement

• Phase I 501(c)(3) Audit Program
• Issues
• Compliance Check Questionnaire
• New IRS Form 990, Schedule K

19
Auction Rate Bonds/VariableRate Demand Bonds

• Conversion from Auction Rate No Reissuance
• Purchases by LOC Bank or Conduit Borrower Do Not
  Retire Debt
• Purchases by Conduit Borrower Do Not
  ViolateProgram Investment Rules