Substantial User Requirement (I.R.C. § 147(a))

In General:

Interest on private activity bonds is not excludible from gross income for federal income tax purposes for any period during which such bond is held by a person who is a “substantial user” of the facilities or by a “related person” of such a substantial user.  These rules do not apply to any qualified mortgage bond, qualified veterans’ mortgage bond, qualified student loan bond or qualified 501(c)(3) bonds.

Substantial User:

A substantial user is generally one that derives gross revenues from the financed facility in excess of five percent of the total derived by all users, or one who occupies more than five percent of the usable area of the facility (5% revenue/space test).  See Treas. Reg. 1.103-11.

Other evidence of substantial use includes:

  • having specifically constructed property;
  • having contractual or preemptive usage rights to the exclusive use of property or a portion of property;
  • the existence of a lease or sublease of all or any portion of the facility; and
  • having a license that provides for the regular use of the facility in a matter that is not merely a casual, infrequent or sporadic use.

Employees of a substantial user are generally not substantial users.

If a partnership is the user of all or a portion of the facility, all partners are “substantial users.”  There is no threshold partnership interest percentage under which a partner may escape treatment as a substantial user.

Special Reimbursement Matters:

See Treas. Reg. 1.103-8(a)(5) regarding rules concerning the interaction between the reimbursement rules and the substantial user limitation.  The following is example language that might be included in exempt facility tax documents:

No “substantial user” of the project within the meaning of I.R.C. 147(a) (or a “related person” thereto, within the meaning of I.R.C. 147(a)), during the five-year period preceding the date of issue of the bonds who will receive, directly or indirectly, five percent or more of the proceeds of the loan, will be a substantial user or a related person thereto (within the meaning of I.R.C. 147(a)) during the five-year period following the date of issuance of the bonds unless the requirements of Treas. Reg. 1.150-2 are satisfied and, for an acquisition, no person that is a substantial user or related person after the acquisition date was also a substantial user more than 60 days before __________ __, 2005, the date on which the issuer first declared its official intent to issue to the bonds.


Members of a CPA society may purchase bonds issued to finance CPA headquarters because the members do not receive significant economic or commercial benefits.  See PLR 8003059.

Each member of a cooperative who purchases IDBs to finance the construction of a slaughterhouse and marketing facility to be leased to the cooperative to slaughter their own cattle is a substantial user, even if none meets the 5% revenue/space test.  See Rev. Rul. 76-406.


PLR 8612045:  Forge IDB ruling.  Addresses substantial user determination in connection with a temporary lease for storage of seller’s equipment, acquisition of existing facilities


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