Acquisition of Existing Property (I.R.C. § 147(d))

Existing Property

Existing Property

General Overview:

Under Section 147(d), net proceeds of private activity bonds cannot be used to acquire property unless the “first use” of the property is pursuant to the acquisition, unless a qualifying amount of rehabilitation expenditures is made in connection with the acquisition.  See PLR 8929073.

The restriction under Section 147(d) does not apply to qualified mortgage bonds, qualified veterans’ mortgage bonds, qualified student loan bonds and qualified 501(c)(3) bonds.

From PLR 8929073: “We believe that the general prohibition in section 147(d)(1) against the use of qualified bonds to finance existing property does not necessarily apply to all property that contains some used parts. Rather, if only a small portion of the cost basis of the property is attributable to used components, the property should be treated as new property. Moreover, by analogy to the reference to section 48(g)(2)(B) in the provisions of section 147(d)(3)(B), we believe reference to the provisions of section 48 and the regulations thereunder is useful in determining whether property containing used components should be treated as used property or as new property.”

Rehabilitation:

Expenditures of a seller of the property on behalf of the buyer under a sales contract are treated as made by the buyer.

Certain expenditures are not rehabilitation expenditures, such as expenditures that must use straight line depreciation, acquisition costs, enlargements, expenditures attributable to the rehab of certain historic structures, expenditures for the rehab of tax-exempt use property, expenditures of a lessee.  See I.R.C. 47(c)(2)(B).

References:

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

PLR 8831033 (Expenditure for rehabilitation): Walkway from building to garage that protrudes beyond the outer walls of the building does not qualify as a rehabilitation expenditure because it is an enlargement, whereas interior modifications to the building to provide for the walkway will qualify.

PLR 8929073 (Expenditure for rehabilitation): Purchase of used rails for port authority’s commodity transfer terminal’s railroad track is not considered existing property for purposes of the rehabilitation requirement and therefore may be financed.  Discusses distinction between used property and property that contains some used parts.

PLR 8952028 (Time limitations):  Borrower failed to meet the 15% expenditure test where financial and accounting problems prevented the borrower from expending the funds for rehabilitation.  The borrower had sold the facility and redeemed the bonds before the 15% expenditure test was met.

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