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Tax-Exempt Bond Compliance Procedures and Limitation on Private Use of Certain University Facilities

Introduction

Policy Statement

The purpose of this policy is to ensure appropriate use of tax-exempt bond funds as well as university facilities and equipment financed in whole or part with tax-exempt bonds.

Applicability

This policy applies to anyone: 1) involved in handling/managing tax-exempt bond funds; or 2) leasing space in university facilities financed in whole or in part with tax-exempt bonds.

Definitions

Arbitrage: (as defined by the IRS) "excess" returns on the investment of bond proceeds.

Private Use: Private business use includes unrelated trade or business use as determined in accordance with Internal Revenue Code §513(a), and use of the bond proceeds or tax-exempt bond financed facilities by other than the Internal Revenue Code §501(c)((3) organization borrowing the bond proceeds.

Tax-Exempt Bond Financed Facilities (Facilities): At W&L this means the Facilities set forth on Exhibit A (see above: Additional References), as it may be updated from time to time.

Policy

Tax-exempt bonds and the facilities and/or equipment they finance must be monitored for the life of the bond series (generally 30 years) to ensure compliance with IRS regulations restricting the use of bond proceeds. Certain uses of tax-exempt bond proceeds (e.g., private use of tax-exempt bond financed facilities) can result in significant monetary penalties to the university. The university seeks to monitor compliance with applicable IRS regulations through the following policy and procedure.

Procedures to Limit Private Use of Bond-Financed Facilities/Equipment

At the time tax-exempt bonds are issued, the University's Treasurer and Vice President for Finance and Administration ("Treasurer") will submit to the Office of General Counsel ("OGC") information related to each tax-exempt bond financed facility for which the university permits outside uses that might be considered to benefit a private party.

Any office on campus involved in leasing, renting or otherwise permitting use of any portion of a tax-exempt bond financed facility by a non-W&L party should obtain approval for such use from the Treasurer and should collect information on an ongoing basis to allow the Treasurer to continually monitor private use. The Treasurer shall issue appropriate procedures to ensure ongoing reporting.

Note in addition, that in advance of any new sale, lease or license, management contract, sponsored research agreement, or other arrangement involving private use of tax-exempt bond financed facilities, the proposed arrangement should be reviewed by the OGC in accord with the University's Contracts Administration Policy. Outside counsel will be consulted as necessary for any possible use of tax-exempt bond financed facilities.

Any time there is a potential change in use of a tax-exempt bond financed facility, the office proposing the change must discuss it with the Treasurer or OGC in advance to ensure that there is no adverse impact on maintenance of the tax-exempt status of the bonds. The Treasurer will also consult with OGC and its bond counsel on any potential change in the use. No tax-exempt bond financed facility may be sold without consulting legal counsel to ensure any compliance requirements have been met.

Compliance Monitoring

The Treasurer will conduct compliance checks at least annually, based on training received from attending various conferences dealing with IRS tax-exempt bond requirements. Such compliance checks will determine the amount of existing private use and/or arbitrage, and will otherwise verify that tax-exempt bond proceeds are being used for permissible purposes and in full compliance with applicable laws and regulations. The compliance checks are detailed in the University's Compliance Checks document.

To the extent that "excess earnings" (as defined by the IRS) were earned on the investment of bond proceeds, the Treasurer will prepare and file a Form 8038-T (Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate) or take other corrective action deemed necessary in consultation with the University's Office of General Counsel and/or outside counsel.

Reporting

The Treasurer's Office is responsible for filing IRS Form 990 and related schedules each year. The Treasurer's Office will report any arbitrage and/or private use of bond funded facilities on the Form 990 and as otherwise required.

Revenue from the private use of any university facility is subject to the unrelated business income tax (UBIT) (contact the University Controller with any questions about this issue).

To the extent that potential noncompliance is brought to the University's attention through compliance checks and/or otherwise, the Treasurer (or designee), in consultation with the University's Office of General Counsel (or outside bond counsel, if deemed appropriate), will conduct a thorough investigation of the matter. Any confirmed violation will be reported to the IRS through the agency's Voluntary Closing Agreement Program. Other remedial action will be taken as appropriate.

Records to Be Kept

Records to be kept include: 1) all documentation evidencing use of tax-exempt bond financed property by public and private sources, including copies of management contracts, research agreements, and facilities use agreements/leases; and 2) all documentation of use of bond proceeds, including any investment returns on bond proceeds. All records should be kept in a manner that ensures their complete access to the IRS for so long as they are material, which is as long as the bonds are outstanding, plus three (3) years after the final redemption of the bonds. Appropriate arrangements should be made for long term storage. See Rev. Proc. 97-22 for specifics on electronic retention of records.

A. Records kept by the Treasurer's Office

The Treasurer must maintain the following:

• Records that show how bond proceeds, including investment proceeds, were actually spent, when the assets were placed in service and remaining useful lives;
• Records as to the amount and use of equity contributions to a project;
• Records on expenditures of bond proceeds, investments of bond proceeds, and rebates until three (3) years after the bonds (or the bonds refunding such bonds) have been retired (this includes use of facilities that have been refunded); and records on ownership of all bond financed property.

B. Records kept by the office leasing space in a tax-exempt bond financed facility

Private use contracts and leases for space in tax-exempt bond financed facilities need to be archived on a basis consistent with the requirements above and with W&L's record retention policy.

Role of the General Counsel

Employees cannot enter into any type of use arrangement in a tax-exempt bond financed facility without the approval of the Treasurer, after consultation with the OGC. The Treasurer, in consultation with the Office of General Counsel, will determine whether such use will constitute private use and the measurement of such private use.