any private user ( including , for this purpose , the federal government and nonprofit organizations ) in that person ’ s trade or business . In general , private business use can arise from either actual or beneficial use by a private user that results is a special legal entitlement to use bond-financed property . As discussed in Bracewell ’ s Issue Spot on “ Identifying Private Business Use ,” examples of private business use arrangements include ownership , leases , management / service contracts , research agreements , output contracts , and a catch all for other types of special legal entitlements .
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The 10 percent limitation applies to the entire issue and not just a particular project financed by the issue . For example , in the case of a $ 100 million bond issue , it may be possible to lease an entire $ 9 million building to a private user because the issue has less than 10 percent private business use .
Subject to certain limitations , favorable Treasury Regulations allow an issuer to manage private business use for projects financed with multiple sources by allocating the private use to those other sources , but only so long as the project is financed pursuant to the same plan of financing .
The Private Payment or Security Test
An issue of bonds will meet the private payment or security test if the payment of the principal of or the interest on more than 10 percent ( and in certain limited circumstances , 5 percent ) of the proceeds of such issue is directly or indirectly ( i ) secured by any interest in property to be used for a private business use or payments in respect of such property or ( ii ) to be derived from payments ( whether or not to the issuer ) in respect of property , or borrowed money , used or to be used for a private business use .
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The private payment or security test can be met even if the private payments are not used for , or directly pledged to , the payment of the bonds . Thus , general obligation bonds may meet the private payment test even if debt service on the bonds will be paid from tax collections and not from the private payments relating to the bond-financed property .
Both direct and indirect payments made by a private user treated as using proceeds of the issue are taken into account as private payments during the time that the property is privately used . Further , such private payments are only taken into account to the extent allocable to proceeds used by that person . Thus , for example , if a private user is determined to use 5 percent of a bond-financed facility , the payments made by such person are taken into account only to the extent that the present value of such payments are equal to 5 percent of the present value of the debt service on the bond issue . In measuring private payments , the federal tax rules also allow issuers to exclude certain amounts , such as some operating and maintenance expenses .
Private Loan Financing Test
A governmental bond meets the private loan financing test if the amount of its proceeds used ( directly or indirectly ) to make or finance loans to private users exceeds the lesser of ( i ) 5 percent of the proceeds or ( ii ) $ 5 million . The federal tax rules look to the substance of the transaction to determine whether an arrangement is the economic equivalent of a loan . Therefore , any arrangement that shifts the benefits and burdens of ownership of a bondfinanced asset to a private user should be reviewed by a tax attorney . Furthermore , there are specific tax rules regarding tax assessments and prepayments for property and services .
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Subject to a facts-and-circumstances test , a grant of proceeds to a nongovernmental user will not be treated as a private loan .
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