Bonds issued for skyboxes, airplanes, gambling establishments, etc. (I.R.C. 147(e))

March 31, 2014


Section 147(e) provides the following regarding the prohibition to issue bonds for skyboxes, airplanes, gambling establishments, etc.:

(e) No portion of bonds may be issued for skyboxes, airplanes, gambling establishments, etc. A private activity bond shall not be a qualified bond if issued as part of an issue and any portion of the proceeds of such issue is to be used to provide any airplane, skybox or other private luxury box, health club facility, facility primarily used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises.


PLR 8626047 (Mar. 27, 1986): Project includes a hotel building with bar, restaurant, indoor swimming pool, whirlpool, sauna, fitness center, meeting rooms and convention facilities.  Bond proceeds and equity are used to finance the facility.  The costs of the restaurant, swimming pool, whirlpool, sauna and fitness center are paid from the partners’ equity contributions.  Common costs will be split in proportion to relative usage of those bad facilities in comparison to usage of the hotel rooms. “Because no more than 25 percent of the bond proceeds are allocable to portions of the facility which will be used primarily for retail food or beverage service or for the provision of recreation or entertainment, we conclude that the primary purpose of the hotel building and the 1.31 acre site is for the provision of lodging for the hotel guests.  Therefore, the proceeds of the Bonds will not be used to provide a facility the primary purpose of which is retail food and beverage services or the provision of recreation or entertainment, nor will any portion of the proceeds be used to provide a country club or hot tub facility within the meaning of section 103(b)(6)(O) of the Code.  In addition, we conclude that no portion of the proceeds of the bonds will be used to provide any health club facility within the meaning of section 103(b)(18) of the Code.”

PLR 201847001 (Aug. 9, 2018): Describing history of I.R.C. 147(e) and allowing the floating allocation of equity to airport stores.

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

October 11, 2013
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.”


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).


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.

Related Person, Related Party

May 10, 2013

Related Party:

“Related party” is defined in Treas. Reg. 1.150-1(b).  The definition is a “way finder” – it does not directly define the term but tells the reader whether the applicable definition is found in one section or another, depending on the situation being addressed.  In reference to a governmental unit or a 501(c)(3) organization, “related party” means any member of the same “controlled group.”  In reference to any other type of person, “related party” actually means “related person” as defined in I.R.C. 144(a)(3).  Therefore, when a section of 103 and 141-150 states a rule concerning related parties and governmental units or 501(c)(3) organizations, think “controlled group” – the definition of which is in Treas. Reg. 1.150-1(e).

Controlled Group:

A controlled group, within the meaning of Treas. Reg. 1.150-1(e), is a group of organizations that is controlled by the same entity or group of entities, either directly or indirectly.  The regulations describe what it means to have direct control and indirect control.

An organization is controlled directly by another if the facts and circumstances so indicate.  Relevant considerations to determine control are:

  • Does the controlling organization the right to approve and remove the members of the governing body of the other entity?
  • Does the controlling organization have the effective power to make such approvals and removals?
  • Does the controlling organization have the right to require the use of funds or assets of the controlled organization for any purposes of the controlling entity?
  • Does the controlling organization have the power to require such use of funds or assets?

Indirect control of an organization can arise from a chain of control relationships.  The “parent” organization is considered to be indirectly controlling any entities that are directly or indirectly controlled by an organization the parent controls directly.

Related Person:

I.R.C. 144(a)(3) explains that a person is a related person to another person (and that such persons are “related persons”) if:

  1. the relationship between the persons would result in a disallowance of losses under I.R.C. 267 or I.R.C. 707(b); or
  2. such persons are members of the same controlled group of corporations (defined in I.R.C. 1563(a), except that “more than 50 percent” is used instead of “at least 80 percent” each place in such section).

I.R.C. 267 describes when losses and other tax attributes in transactions between related taxpayers are disallowed.  Generally, such attributes are disallowed (or suspended) when the persons have any of the following relationships:

  1. Members of a family;
  2. An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
  3. Two corporations that are members of the same controlled group (I.R.C. 1563(a), which the exceptions shown above);
  4. Certain grantors, fiduciaries and beneficiaries of trusts;
  5. A person and a 501 organization that is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
  6. A corporation and a partnership, if the same persons own (A) more than 50 percent in value of the outstanding stock of the corporation, and (B) more than 50 percent of the capital interest or profits interest in the partnership;
  7. An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;
  8. An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or
  9. Certain executors and beneficiaries of estates.

I.R.C. 707(b) describes certain disallowed attributes for controlled partnerships.  Such controlled partnerships include:

  1. A partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership; or
  2. Two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests.

I.R.C. 1563(a) describes what a controlled group of corporations is.  The section describes parent-subsidy controlled groups, brother-sister controlled groups, combined groups and certain insurance companies:

  1. Parent-subsidy controlled groups are one or more chains of corporations connected through stock ownership with a common parent if: 80 percent vote or value of stock is owned by one or more of the other corporations in the chain;
  2. Brother-sister controlled group is a group of two or more corporations if 5 or fewer persons who are individuals, estates or trusts own stock possessing more than 50 percent of the total combined vote or value of the stock of each corporation.

Note that I.R.C. 147(a) has a slightly different definition of “related person” for purposes of the substantial user limitation (where a bond is not a qualified bond if it is held by a person who is a substantial user of the facilities or a “related person” to such a substantial user).  For purposes of I.R.C. 147(a), “related person” has the same basic meaning, but is expanded to also include (1) a partnership and each of its partners (and their spouses and minor children), and (2) an S corporation and each of its shareholders (and their spouses and minor children).


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

May 9, 2013

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

$150 Million Volume Limitation for Qualified 501(c)(3) Bonds (Nonhospital)

May 23, 2011

Rules Relating to the $150 Million Volume Limitation:

The general rule is that, while “qualified 501(c)(3) bonds” are not subject to state volume cap rules of Section 146 of the Internal Revenue Code of 1986, as amended (the “Code”), an organization described under Section 501(c)(3) of the Code may not be the “beneficiary” of more than $150 million of outstanding bonds that not “qualified hospital bonds.”  This is called the “$150 million limitation.”

Whether an organization is a “beneficiary” within the meaning of the general rule is determined using the test-period beneficiary concept borrowed from the qualified small issue bond provisions.  Under these rules, an organization generally is a test-period beneficiary if it is an owner or principal user of bond-financed facilities during a three-year period beginning on the later of the date such facilities are placed-in-service or the date the bonds are issued.  Organizations under common management and control are treated as one organization and are subject to only the one $150 million limit. See PLR 9326027.  There are special approaches that attempt to describe when 501(c)(3) organizations are related to one another.

“Qualified hospital bonds” are bonds at least 95% of the net proceeds of which are used with respect to a “hospital.”  A “hospital” generally consists of an institution that is accredited by the Joint Commission (the JCAH) or another program of a qualified governmental unit in which such institution is located, is primarily used to provide to inpatients certain medical services, has a requirement that every patient be under the care and supervision of a physician and provides 24-hour nursing services.  A “hospital” expressly does not include rest or nursing homes, daycare centers, medical school facilities, research laboratories or ambulatory care facilities.  See also House Committee report section d regarding Section 1301 of the 1986 Act (p. 1469 in CCH Reports) (See HR Rep No 426, 99th Cong, 1st Session, December 7, 1985, pages 540 and 541 AND HR Rep No 841, 99th Cong., 2d Session., September 18, 1986, pages 725 and 726.)

The 1997 Act (P.L. 105-34) repealed the $150 million limitation for bonds that are issued after August  5, 1997, if at least 95% of the net proceeds of such bonds are used to finance capital expenditures.  The repeal does not apply to refunding bonds, to new money bonds issued to finance capital expenditures incurred on or before August 5, 1997 or to new money bonds more than 5% of the net proceeds of which are used to finance working capital expenditures.

See also Chapter XII of Fundamentals of Municipal Bond Law 2007 from which portions of the above summaries were taken.

Protected: Costs of Issuance

December 21, 2010

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Weighted Average Maturity (I.R.C. 147(b))

May 12, 2010

General Discussion

IRS Form 8038 (and certain other information returns for other types of issues) requires the identification of the “weighted average maturity” of the bonds.  Form 8038 defines weighted average maturity as follows:

[…] the weighted average maturity is the sum of the products of the issue price of each maturity and the number of years to maturity (determined separately for each maturity and by taking into account mandatory redemptions), divided by the issue price of the entire issue […]

See also the definition of “weighted average maturity” in Treas. Reg. 1.1273-1(e)(3).

Certain Issues Concerning Weighted Average Maturity

It is clear that mandatory redemptions identified for the bonds in the bond documents must be considered.  It is not clear whether mandatory redemptions required only by bank documents (for example, in continuing covenant agreements or reimbursement agreements) should be taken into account for calculation purposes.  Mandatory redemptions in bank documents frequently state that such redemptions are to be effected by the issuer pursuant to the optional redemption provisions contained in the bond documents. If the redemptions in such documents are required of the borrower and not the issuer (such as is often the case in continuing covenant agreements), and such redemptions are not required by the bonds themselves, then the redemptions should not typically be included in the weighted average maturity calculations.

In a transaction with bonds and registered coupons, how are the registered coupons treated for purposes of the WAM calculation? Some bond counsel will include the full “par” maturity value on the principal payment date on which the coupon is paid, which translates to an issue price taking into account the applicable sale price.  Other bond counsel may have a different approach to otherwise try to distinguish between the actual principal component of the payment on the maturity date versus the interest payment amount.  Those counsel may, for instance, show only the issue date amount of the coupon in the principal column, the differential between issue price and maturity value in the interest column, and a price of 100%.  It’s not clear what method is correct.  It may be least incorrect to use the latter method where the amount in the principal column and the interest column equal the maturity value of the coupon.