TAX COMPLIANCE PROCEDURES
TAX EXEMPT LEASES
The City’s Finance Director (the “Oversight Officer”) will be responsible for overall administration and coordination of these procedures and policies relating to tax-exempt leases1 entered into by the City.
A. Purpose
Issuers of tax-exempt “State or local bonds”, which include tax-exempt leases, must comply with federal tax rules pertaining to expenditure of proceeds for qualified costs, rate of expenditure, use of bond-financed or leased property, investment of proceeds in compliance with arbitrage rules, and retention of records. The following procedures and policies are intended to establish compliance by Salt Lake City, Utah (the “City”), with these rules in connection with the execution and delivery of tax-exempt leases. These Tax Compliance Procedures may also be used by the City to ensure compliance with federal tax rules for its currently outstanding tax exempt leases.
B. Delegation of Responsibility
To the extent that any of the responsibilities set forth in these Tax Compliance Procedures are delegated to any other party, the City will keep a record of such delegations with respect to each lease.
C. Schedule of Reviews
The City will establish routines for monitoring on-going compliance that are consistent with discovering any noncompliance in a timely manner so that it may be corrected. While specific review processes are described in detail below, timing for such reviews will be as follows:
1. Private (Non-Exempt) Use: All contracts, subleases or other arrangements providing special legal entitlement to the use of leased property will be reviewed before execution to ensure that they will not cause private use limits to be exceeded with respect to any lease.
2. Arbitrage Compliance: With respect to each lease, the City will ensure that it understands at the time of closing which funds and accounts may become subject to yield-restriction investment rules and will keep a record of the dates upon which such rules will begin to apply.
3. Rebate Compliance: While rebate calculations may be performed more often, the City will ensure upon the fifth anniversary date of entering into the lease, every five years thereafter, and upon termination of the lease, that either no rebate is owed or provision has been made for the payment of any rebate owed within 60 days.
4. Change in Use/Ownership: Before executing any contract, sublease or other document that would materially change the use of the leased property or, to the extent applicable, selling any leased property, the City will (i) confirm that such change will not require a remedial action to be taken with respect to any lease, (ii) take a remedial action, if necessary, or (iii) discuss with bond counsel whether a voluntary closing agreement with the Internal Revenue Service is appropriate.
D. Tax Requirements Associated with a Lease
Review and retention of tax documents related to a lease will be generally supervised by the Oversight Officer.
1. Issue Price. To the extent applicable, the “issue price,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”), of the lease will be documented at the time of execution of the lease. Certifications of an underwriter, placement agent, purchaser or lessor and a final numbers package (if applicable) will establish “issue price” and will be reviewed and included in the lease transcript or other records maintained for the lease.
2. Weighted Average Maturity. The weighted average maturity of the lease will be documented at the time of execution of the lease.
3. Economic Life of Leased Assets. As estimated average economic life of the expected leased assets will be documented at the time of execution of the lease.
4. Information Reporting. Form 8038-G will be reviewed and filed not later than the 15th day of the 2nd calendar month following the quarter in which the lease is executed. Filing of the Form 8038-G will be coordinated by the Oversight Officer.
E.
Expenditure of Proceeds for Qualified Costs
Expenditure of any proceeds
of the lease will be reviewed by the Oversight Officer or other appropriate
department head or designee.
1. Requisitions. The Oversight Officer will establish a form and procedures for preparation and review of requisitions of proceeds, if any, of the lease, and maintain records of the date, amount and purpose of the disbursement. Requisitions must identify the leased property in conformity with any tax certificate executed by the City at closing, including any certifications as to the location and character of the leased property.
2. Investment Earnings. Investment earnings on any proceeds of the lease will be tracked and will be requisitioned only for appropriate expenditures.
3. Capital Expenditures. The City will verify that all costs for which it requisitions proceeds of a lease are capital expenditures, except as otherwise permitted by the tax certificate executed by the City at closing.
4. Reserve Funds. Any reserve funds funded by lease proceeds cannot exceed the least of (i) 10% of the “par amount” of the lease (or the “issue price” of the lease, if there is more than a de minimis amount of original issue discount or premium), (ii) maximum annual debt service, and (iii) 125% of average annual debt service. The initial funding of any reserve fund will be measured against this limit.
5. Reimbursement. Requisitions for costs that were paid before the execution of the lease are, in general, limited to costs paid after, or not more than 60 days before, the date a “declaration of intent” to reimburse the costs was adopted by the City. If proceeds are used for reimbursement, a copy of the declaration will be obtained and included in the records for the lease, if not already part of the lease transcript.
6. Final Allocation. Requisitions will be summarized in a “final allocation” of proceeds to uses not later than 18 months after the in-service date of the leased property (and in any event not later than 5 years and 60 days after the execution of the lease).
7. Timing of Expenditures. Expenditure of proceeds will be measured against the City’s expectations, as set forth in any tax certificate executed in connection with the particular lease, to spend or commit 5% of net lease proceeds within 6 months, to spend 85% of net lease proceeds within 3 years, and to proceed with due diligence to complete the project and fully spend the net lease proceeds. Expected expenditure schedules, project timelines, and plans and specifications (or documentation of the proposed scope of work, as applicable) will be maintained to support expectations. Reasons for failure to meet the expected schedule will be documented and retained in the records for the lease.
8. Rebate Spending Exceptions. Expenditure of any proceeds of a lease will be monitored for compliance with spending exceptions to the rebate requirement, as follows:
a. If the
six-month spending exception applies, expenditure of gross proceeds will be
monitored against the following schedule.
100%
within 6 months
b. If the
18-month spending exception applies, expenditure of gross proceeds will be
monitored against the following schedule.
15%
within 6 months
60% within 12
months
100% within 18 months
c. If the
two-year spending exception applies, expenditure of “available construction
proceeds” will be measured against the following
schedule.
10% within 6
months
45% within 12
months
75% within 18
months
100% within 24 months
F. Use of Leased Property
Use of leased property when completed and placed in service will be reviewed by the Oversight Officer or other appropriate department head or designee. Use of leased property must be measured separately for each lease.
1. Limit on Private (Non-Exempt) Use. Average annual private use of leased property over the life of the lease cannot exceed 10% of the proceeds (or 5% if the use is unrelated to the governmental use or disproportionate to the governmental use). Private use will be determined annually as a percentage of total use of proceeds of the lease.
2. Review of Contracts and Agreements. Contracts and agreements with private business users for the sublease, management, sponsored research, or any other potential private/non-exempt use of leased property will be reviewed before execution for compliance with the private use limits. This review will include a determination of whether any arrangement meets the safe harbors of Internal Revenue Service Rev. Proc. 97-13, as modified by Rev. Proc. 2001-39, or, with respect to research arrangements, Rev. Proc. 2007-47. It will also include a determination of whether any arrangement meets the exception for incidental use under Treas. Reg. § 1.141-3(d)(5), the exception for general public use under Treas. Reg. § 1.141-3(c), or the exception for certain short-term arrangements under Treas. Reg. § 1.141-3(d)(3).
3. Tracking Private (Non-Exempt) Use. Agreements with private business users or non-profit organizations for sublease or management or services contracts or other private business use involving leased property will be tracked and aggregated with other private business uses for compliance with the 10% (or 5%) limit, as set forth in any tax certificate for the applicable lease.
4. Change in Use. No item of leased property will be sold or transferred to a non-exempt party without advance arrangement of a “remedial action” under the applicable Treasury Regulations (see Treasury Regulations § 1.141-12).
G. Investments and IRS Filings
Investment of any proceeds of the lease in compliance with the arbitrage rules and the rebate of arbitrage will be supervised by the Oversight Officer.
1. Guaranteed Investment Contracts. Guaranteed investment contracts (“GIC”) will be purchased only using the three-bid “safe harbor” (see Treasury Regulations § 1.148-5(d)(6)(iii)), in compliance with fee limitations on GIC brokers (see Treasury Regulations § 1.148-5(e)(2)(iii)); provided, however, that to the extent that the safe harbor provisions cannot be met, the City will consult with bond counsel.
2. Fair Market Value of Investments. Other investments will be purchased only in market transactions.
3. Yield-Restriction. Before the purchase of any investment, the City will confirm that such purchase will not violate any rules relating to proceeds that must be invested at a yield not in excess of the yield on the applicable lease.
4. Rebate Calculations. Calculations of rebate liability will be performed by outside consultants at the end of construction or acquisition and at least every fifth year.
5. Rebate Payments. Rebate payments will be made with Form 8038-T no later than 60 days after (a) each fifth anniversary of the date of execution of the applicable lease and (b) the final termination or expiration of the lease.
6. Note First Rebate Due Date. The date for the first rebate payment will be identified and entered in the records for the lease at time of execution of the lease.
H. Corrective Actions
The City expects that its compliance with the procedures outlined above will prevent any violations of federal tax rules pertaining to the City’s outstanding tax-exempt leases. However, if the City discovers a potential violation through its ongoing monitoring or otherwise, it will determine in conjunction with its bond counsel whether a violation actually exists. If it is found that a violation actually exists, the City will determine whether (i) any remedial actions are available, or (ii) a voluntary closing agreement with the Internal Revenue Service is appropriate. Common examples of violations are as follows:
a. Failure to purchase 0% SLGs at the appropriate time.
b. Subsequent sale or other change in use of leased property.
c. Private (non-exempt) use of leased property resulting in overall private use not expected at closing and in excess of the 10% (or 5%) de minimis limit for the particular lease.
d. Post-execution change in the terms of the lease without proper reissuance analysis and actions, if necessary.
e. Failure to pay rebate in a timely manner.
f. Improper reimbursement of expenditures (too old or not capital).
I. Amendments and Modifications of Lease
Before executing any amendments or modifications to a tax-exempt lease, the City will (i) determine whether such amendments or modifications are deemed to be a reissuance by the Internal Revenue Service and (ii) if such amendments or modifications are deemed to be a reissuance, file with the Internal Revenue Service such documents, including a Form 8038-G, as are necessary to maintain the tax-exempt status of the lease.
J. Records
With the exception of 2.c. below, which records will be managed and retained by the appropriate department head or designee, management and retention of records related to a lease will be supervised by the Oversight Officer.
1. Records will be retained for the term of the lease plus three (3) years. Records may be in the form of documents or electronic copies of documents, appropriately indexed to specific leases and compliance functions.
2. Retainable records generally include:
a. The transcript documents executed in connection with the lease (including the authorizing documents, offering materials, Form 8038-G, and the tax certificate, and any elections made with respect to the lease, if applicable) and any amendments to such documents.
b. Records of expenditures of any proceeds of the lease include requisitions, account statements and the final allocation of proceeds.
c. Records of the use of leased property, including all agreements reviewed for private use.
d. Records pertaining to investments including GIC documents under the Treasury Regulations, records of purchase and sale of other investments, SLGS subscriptions, and records of investment activity sufficient to permit calculation of arbitrage rebate or demonstration that no rebate is due.
e. Records pertaining to rebate calculations and all rebated amounts paid to the United States Treasury.
f. Documentation evidencing sources of payment or security for the lease.
K. Training
The City will use its best efforts to ensure that any officers and employees responsible for carrying out these procedures are properly trained for that responsibility. Such training will include:
1. Ensuring access to the necessary records.
2. Ensuring that such persons have reviewed a copy of these procedures and the tax certificates and Forms 8038-G related to the relevant leases.
3. Permitting attendance on free educational conference calls or webinars sponsored by the Internal Revenue Service, lease or bond-related professional associations or law firms.
4. Permitting access to free educational websites, such as: http://www.irs.gov/taxexemptbond/index.html
Cost permitting, such training may also include attendance at educational conferences and maintaining tax-exempt lease-related reference materials.
APPROVED on February 13, 2013
By:
Gordon Hoskins
Finance Department Director
1 These Tax Compliance Procedures do not apply to facilities leased from the Local Building Authority of Salt Lake City, Utah, in connection with the issuance of lease revenue bonds, which are covered by the City’s Tax Compliance Procedures for Tax-Exempt Governmental Bonds.