On December 31, 2018, the Department of the Treasury and the IRS issued final regulations (the “Final Regulations”) regarding the requirement for public notice, hearing, and approval of private activity bonds under section 147 of the Internal Revenue Code of 1986, as amended (the “Code”). The Final Regulations, Treas. Reg. § 1.147(f)-1, replace temporary regulations, Treas. Reg. § 5f.103-2 (the “Existing Regulations”), promulgated under the predecessor to section 147(f) of the Code by finalizing and amending proposed regulations issued in 2017 (the “Proposed 2017 Regulations”). The Final Regulations generally track the concepts outlined in the Proposed 2017 Regulations but contain several changes and clarifications, including: (i) a change in the notice requirement for a public hearing, (ii) a clarification of the information required in the public notice and approval, and (iii) a new definition of “project” to describe what is being financed.
Notice Requirement for Public Hearing
An issue of private activity bonds must be approved by a governmental unit following a public hearing for which there was reasonable public notice to qualify for tax exempt status. Under the Existing Regulations, public notice was presumed reasonable if the notice was published 14 days prior to the hearing. The Final Regulations reduce the public notice period from 14 days to 7 days.
The Existing Regulations provided that public notice of a hearing may be given by publishing the notice in one or more newspapers of general circulation available to residents of the governmental unit or by announcing the hearing by radio or television broadcasts to those residents. In addition to the methods listed in the Existing Regulations, the Final Regulations provide that public notice may also be given (i) in a reasonably accessible way that is permitted under a general state law for public notices for public hearings, or (ii) by posting notice on the approving governmental unit’s primary public website in an area used to inform residents about events affecting the residents. In certain circumstances, the notice may be posted on the website of an “on-behalf-of” issuer. The preamble to the Final Regulations indicate that issuers who rely on notices posted on a website must maintain records demonstrating that the notices satisfy the above stated requirements; those issuers should develop procedures to capture and retain the time and content data of the applicable website postings.
Information Requirements for Public Notice and Approval
The information required for a “reasonable public notice and public approval” under the Final Regulations is similar to the four requirements in the Existing Regulations but the Final Regulations are generally more detailed and precise. For example, with regard to the functional description requirement, the Final Regulations state that a description is sufficient if the description identifies the project by reference to a particular category of exempt facility bond to be issued; and for the amount requirement, the Final Regulations provides the maximum stated principal amount may be determined on any reasonable basis and may account for contingencies, regardless of whether such contingences are expected to occur at the time of notice. The Final Regulations also provide special rules for specific types of private activity bonds (i.e., mortgage revenue bonds, qualified student loan bonds, and certain qualified 501(c)(3) bonds).
The Final Regulations state that an issue generally will not meet the public approval requirement if there is a substantial deviation between the use or amount of proceeds of an issue included in the approval and the actual use or amount of proceeds. The Final Regulations provide, however, that a substantial deviation related to the use or amount of proceeds will not cause an issue to fail the public approval requirement if: (i) the original public approval hearing requirements were met and on the issue date, the issuer reasonably expected there would not be a substantial deviation with regard to the actual use or amount of the proceeds; (ii) the issuer determines to use proceeds in a manner or amount not provided in a public approval as a result of unexpected or unforeseen changes in circumstances after the issue date; and (iii) before using proceeds in a manner or amount not provided in public approval, the issuer obtains supplemental public approval.
Definition of Project
The Final Regulations also provide that the notice must identify the maximum principal amount of bonds to be allocated to each “project” financed with the bonds. A “project” is defined as “one or more capital projects or facilities . . . that are located on the same site, or adjacent or proximate sites used for similar purposes . . .” Further, capital projects or facilities that are not located on the same or adjacent or proximate sites may be treated as one project if they are used in an integrated operation. The Final Regulations, however, do not give any further guidance as to the meaning of “proximate” or “integrated operation”.
Applicability Date
The Final Regulations apply to bonds issued pursuant to a public approval occurring on or after April 1, 2019. Note that this effective date is tied to the date of the approval rather than the issue date or the date of public notice and, accordingly, the Existing Regulations apply to hearings and approvals for bonds issued on or after April l, 2019, if the approval was obtained prior to that date. In addition, an issuer may apply the rules related to deviations from information in a public approval (Treas. Reg. § 1.147(f)-1(f)(6) described above) in whole, but not in part, to bonds issued pursuant to a public approval occurring before April 1, 2019.
