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FEDERAL TAX ISSUES

This article discusses the major federal tax issues related to using tax-exempt bonds as a financing tool for the construction of new college and university facilities. Topics covered include reimbursement resolutions, capital campaigns, limitations on physician agreements and management contracts, corporate-sponsored research, financial covenants, and tax enforcement.

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FEDERAL TAX ISSUES

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  1. FEDERAL TAX ISSUES John R. McQueen, Esq. Tax-Exempt Bonds as a Financing Tool for Construction of New College and University Facilities June 28, 2007

  2. MAJOR ISSUES • Reimbursement Resolutions • Capital Campaigns • Limitations on Physician Agreements and Management Contracts • Corporate-Sponsored Research • Financial Covenants • Tax Enforcement

  3. Reimbursement Resolutions • Types of Costs Covered • Timing Requirements • Content of Reimbursement Resolution

  4. Types of Costs Covered • Preliminary Expenditures Up to 20% Not Subject • Capital Expenditures • Land Acquisitions and Site Preparation

  5. Timing Requirements • 60-day Period Prior Covered • Reimbursement of Hard Costs Within 18 Months of Placed-in-Service Date • Reimbursement Within 3 Years of Original Expenditure

  6. Content of Reimbursement Resolution • General Project Description • Maximum Principal Amount of Bonds • Not Applicable to Prior Financing

  7. Capital Campaigns • “Sufficiently Direct Nexus” • Replacement Proceeds Concept • Potential Nexus Situations

  8. Capital Campaigns • Donor-Restricted Gifts • Capital Campaign Purposes • Preliminary Earmarking Not Fatal

  9. Capital Campaigns • Wording of Campaign Materials Crucial • Include Broad Number of Purposes • Campaign for Debt Service • Campaign for Operating Expenses

  10. Physician Agreements and Management Contracts • Types of Private Business Use • Leases • Corporate-Sponsored Research • Management Contracts • Special Legal Entitlements

  11. Management Contracts • Term of Agreement • Type of Compensation • No Net Profit-Sharing

  12. Management Contracts • 15-Year Safe Harbor • 10-Year Safe Harbor • 5-Year Safe Harbor • 3-Year Per-Unit Contracts • 2-Year Revenue Contracts

  13. Measurement of Private Business Use • 5% Limit • Square Footage Approach • Fair Rental Value Approach

  14. Corporate-Sponsored Research • Basic Research • Competitive Price • No Pre-Set Royalties

  15. Cooperative Research • Basic Research – Multiple Sponsors • 501(c)(3) Controls • Patent Owned by 501(c)(3) • Non-Exclusive Royalty-Free License

  16. Financial Covenants • Potential Arbitrage Issues • Liquidity Covenants

  17. Liquidity Covenant Safe Harbor • Semi-Annual Testing • Amount • Reasonable Needs • Provide Senior Lien

  18. Tax Enforcement • Phase I – 501(c)(3) Audit Program • Issues • Large Survey of Record Retention

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