Member Article

The IRS recently modernized the public approval process (“TEFRA approval”) for private activity bonds (“bonds”) for TEFRA approvals given on or after April 1, 2019.  States and political subdivisions issuing bonds, or on whose behalf bonds are issued (“issuers”), and states and political subdivisions whose geographic jurisdiction contain the site of a project (“hosts”) may take advantage of these new rules.  Below are some of the changes made to the TEFRA approval process by the IRS.

The IRS now permits issuers and hosts to publish notices of public hearings about the issuance of bonds to finance a project (“TEFRA notices”) seven days prior to the public hearing instead of fourteen.  Also, TEFRA notices can now be published on the issuer’s, on-behalf-of issuer’s, and host’s primary public website in an area used to inform residents about events affecting them.  For governmental entities wishing to publish TEFRA notices on their primary public websites, the homepage should include “Public Hearing” and/or “News and Events” sections, and TEFRA notices should be posted continuously in these sections for at least seven days prior to the public hearing.  If a TEFRA notice is published on a website then the issuer of the bonds must maintain records evidencing that a TEFRA notice containing the requisite information was posted to the appropriate website in a timely fashion.

The IRS has modified the information required in TEFRA notices in order to ensure that they convey the scope of the proposed project to be financed by the bonds and that each individual host understands what it is being asked to approve.  TEFRA notices must provide:

• A general functional description of the type and use of the project, such as the type of bond and section of the Internal Revenue Code of 1986, as amended (the “Code”), which authorizes this type, along with a general description of the project. For example, a qualified 501(c)(3) bond as defined in section 145 for a hospital facility and working capital expenditures;
• The maximum stated principal amount of bonds to be used for each project, which may include contingencies, such as cost overruns regardless of whether such contingencies are reasonably expected, and which usually, but not always, will require the maximum stated principal amount of bonds to be used for each facility in a separate host jurisdiction;
• The name of the expected initial legal owner or principal user (as defined in Section 144(a) of the Code), or a significant true beneficial party of interest for such legal owner or principal user (such as a sole member of an LLC or a general partner of a partnership), of each project; and
• A general description of the prospective location of each project by street address, boundary streets or other geographic boundaries, or other description of the specific geographic location that is reasonably designed to inform the public of the proposed location.

The term “project” has replaced the term “facility” and is intended to permit more flexibility. A project is land, capital projects, facilities, equipment, and other property subject to TEFRA approval that are (1) located on the same site, (2) located on adjacent or proximate sites used for similar purposes, or (3) used in an integrated operation. Unless land, capital projects, facilities, equipment, and other property are part of an integrated operation, each of these located in a separate jurisdiction will almost always be a separate project.

The IRS clarified that TEFRA approvals remain effective for one year after the date the TEFRA approval is given. The IRS also clarified that one year between the public hearing and the TEFRA approval is acceptable and a longer period may be acceptable in some circumstances.  Finally, the IRS has clarified that the following situations are substantial deviations from the TEFRA approval and therefore may result in taxable bonds unless cured:

• There is a change in the fundamental nature or type of project;
• The actual amount of bonds used for a project is more than ten percent greater than the amount authorized in the TEFRA approval; or
• The actual legal owner or principal user of the project differs from those authorized in the TEFRA approval, unless the actual legal owner or principal user of the project is a related party (as defined in Treas. Reg. §1.150-1(b)) to the authorized legal owner or principal user.

Substantial deviations can be cured to permit bond proceeds to be used outside of the scope of the initial TEFRA approval if (1) the original TEFRA approvals satisfied the regulations, (2) on the issue date of the bonds, the issuer reasonably expected there would be no substantial deviations between the stated use or amount of proceeds of the issue and the actual use or amount of proceeds of the issue, (3) the issuer determines to use proceeds in an amount or manner outside of the scope of the TEFRA approval due to unexpected events or unforeseen changes in circumstances occurring after the issue date of the bonds and (4) the issuer obtains TEFRA approval from both the issuer and the relevant host that satisfies the regulations before the issuer uses proceeds of the bonds outside of the scope of the original TEFRA approval.

Please contact your Dinsmore & Shohl bond counsel for more information regarding the new TEFRA approval process.