Treasury and IRS Finalize TEFRA Regulations
On December 28, 2018, the Internal Revenue Service (“IRS”) released Final Regulations (the “Final Regulations”) under Section 147(f) of the Internal Revenue Code relating to the TEFRA public notice, hearing, and approval requirements (the “TEFRA Requirements”) for tax-exempt private activity bonds. The Final Regulations replace controlling temporary regulations issued in 1983 (the “Existing Regulations”) and finalize, with certain modifications, proposed regulations that were issued on September 28, 2017 (the “2017 Proposed Regulations”). The Final Regulations make a number of modifications to the TEFRA Requirements, but the general parameters of the requirements, which are dictated by statute, remain in place. Some highlights are discussed below.
1. Additional Methods for Publication of the Notice of Public Hearing. The Existing Regulations require a notice of public hearing to be given by published notice in at least one newspaper of general circulation available to residents of the locality of the financed facility or by radio or television broadcast to the residents of the governmental unit. The Final Regulations now allow publication by electronic posting on “the approving governmental unit’s primary public website.” Website publication of the notice of public hearing should be in an area used to inform the governmental unit’s residents about events affecting the residents, such as the portion of the website that publishes notices of public meetings. Notice of public hearings for on-behalf-of issuers may be published on the website of the on-behalf-of issuer as an alternative to publishing a notice on the website of the approving governmental unit.
The requirement in the 2017 Proposed Regulations for an alternative publication method when publishing the notice of public hearing on a website was eliminated and not included in the Final Regulations. In addition, the Final Regulations require that the governmental unit maintain records that demonstrate that the (i) contents of the notice of the public hearing meets the publication requirements, (ii) notice of the public hearing was timely posted on the website, and (iii) notice of the public hearing was posted in the appropriate part of the website. The Final Regulations also provide that in order to meet state law public hearing requirements, a single notice of public hearing can be utilized as long as both the state law requirements and the TEFRA Requirements are satisfied. The Final Regulations do not allow publication of the notice of public hearing by webinar or teleconference.
2. Clarification on Flexibility in Conduct of Public Hearings. Much like both the Existing Regulations and the 2017 Proposed Regulations, the Final Regulations give the governmental unit reasonable flexibility in how the hearing is conducted, such as requiring people desiring to speak to make a written request at least 24 hours in advance and limiting the time allotted to any speaker. In a helpful change, the IRS eliminated a reference in the Existing Regulations to a 10-minute-per-speaker time limit to instead provide individual speakers a “prescribed time,” which allows government units to adjust the time limits to accommodate the number of people wishing to speak.
3. Shortening the Notice Period. The Existing Regulations and the 2017 Proposed Regulations presume notice of a public hearing to be reasonably provided if given no fewer than 14 days before the hearing. The Final Regulations shorten this time frame to 7 calendar days before the hearing.
4. Simplification of Contents of Notice. The Final Regulations simplify the requirements for the contents of a notice of public hearing.
(a) Project Description. It is now sufficient if the notice merely identifies the particular category of tax-exempt bonds to be issued (e.g., a qualified 501(c)(3) bond under IRC Section 145) together with the type and use of the project to be financed (e.g., construction of a hospital building). The Existing Regulations require “a general, functional description of the type and use of the facility to be financed (e.g., ‘a 10,000 square foot machine shop …,’ ‘400-room airport hotel building …’),” a requirement that sometimes proved difficult.
(b) Name of Owner or User. The Existing Regulations, which require the notice to state the “initial owner, operator, or manager of the facility,” created issues when there was an expected or unexpected change in the identity of the project users. The Final Regulations provide that the notice must include either “the name of the expected initial legal owner or principal user” or, alternatively, the name of the true beneficial party of interest for the legal owner or user. The Final Regulations provide that the general partner of a partnership that owns the project can be considered a true beneficial party of interest and be included as such in the notice of public hearing.
(c) Project Location. The Final Regulations allow the location of the project to be described by a street address or by a description of the boundary streets or any other geographic boundary “that is reasonably intended to inform readers of the location.” The Final Regulations make it clear that the location of a project involving multiple sites within a confined geographic area may be described by the outside street boundaries of the area.
(d) Allocation of Bonds Among Projects. The Final Regulations provide clarification that, where there are multiple projects involved (whether by category or separate site locations that are not treated as a single project), the maximum stated principal amount for each project to be financed must be included in the notice rather than providing only the aggregate principal amount of bonds to be issued for all projects to be financed by that bond issue.
5. Definition of “Project.” The 2017 Proposed Regulations and the Final Regulations define “project” as one or more capital projects or facilities, including land, buildings, equipment, and other property, located on the same site, adjacent sites, or proximate sites. The Final Regulations expand the definition of “project” to include “integrated operations” on non-proximate sites. As such, capital projects or facilities located on non-proximate sites can constitute a single project if the capital projects or facilities constitute an “integrated operation.” Determination of an “integrated operation” would reduce the need to provide a separate maximum stated principal amount of the bonds for each project or facility. The Final Regulations do not provide a definition of “proximate sites,” and even though the “integrated operation” concept is contained in the Existing Regulations, determining whether capital projects or facilities constitute an “integrated operation” may continue to prove challenging in some instances.
6. Insubstantial Deviations. The Existing Regulations state that insubstantial deviations in the actual facts from the facts described in the public hearing notice do not cause an issue to fail the TEFRA public approval process. Both the Existing Regulations and the Final Regulations provide that what constitutes a substantial, as opposed to an insubstantial, deviation depends on all facts and circumstances. However, the Final Regulations provide a safe harbor for the following deviations:
(a) The issuance of bonds for a project in an amount different than the amount stated in the notice for the project so long as an overage is not greater than 10 percent of the maximum principal amount stated in the notice for the project.
(b) A change in the use of proceeds where the proceeds are used to pay working capital expenditures directly related to a project specified in the public notice.
(c) A change in the initial legal owner or principal user of the project where the entities are related parties (as that term is defined in Treasury Regulations Section 1.150-1).
The Final Regulations also allow a substantial deviation to be cured with a subsequent public approval process (including holding another public hearing pursuant to a compliant notice) so long as (i) the TEFRA Requirements were met at issuance, (ii) the deviation was not reasonably expected on the issue date, and (iii) the deviation is due to unforeseen events that occur after the issue date.
7. Special Rules for Certain Bonds. The Final Regulations provide special rules for application of the TEFRA Requirements for pooled financings with qualified 501(c)(3) bonds, airport and high-speed rail bonds, qualified mortgage bonds, qualified veterans’ mortgage bonds, qualified student loan bonds, and working capital financings with qualified 501(c)(3) bonds.
8. Effective Date. Issuers should begin reviewing their procedures for TEFRA public notices, hearings, and public approvals. The Final Regulations apply to bonds issued pursuant to a public approval occurring on or after April 1, 2019. Note that the Existing Regulations remain operative if the TEFRA public notice, hearing, and approval all occur prior to April 1, 2019.
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