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May 23 — Proposed IRS regulations defining whether an entity qualifies as a political subdivision that may issue tax-exempt bonds would interfere with states' rights, New York's Metropolitan Transportation Authority said.
Under the proposed Internal Revenue Service regulations (REG-129067-15) a political subdivision must be controlled by a state or local governmental unit, the MTA said in a May 20 letter. The group noted that the regulations speak specifically in terms of a “single” unit having control.
“The requirement that a single governmental entity control a political subdivision is an unnecessary requirement and should be deleted because it interferes with a state's right to structure its infrastructure and public transportation financing and delivery mechanisms,” the group said.
The MTA—which operates the largest public transportation network in the country servicing 15.1 million people in the 5,000-square-foot area spanning from New York City to Long Island—has a board consisting of members appointed by New York's governor with advice and consent from the state's Senate, in addition to members appointed based on recommendations from governmental stakeholders in the MTA Group's transportation system, including New York City.
“It is unnecessary for a governmental unit to control a majority of the governing body of the political subdivision if the political subdivision is intended to reflect the interests of multiple governmental units,” the group said.
“In the case of the MTA Group service area, such recognition is essential due to the interconnectedness and overlapping nature of the multiple jurisdictions being served and should be acceptable to the IRS so long as a demonstrated benefit to the public is being provided,” the MTA said.
The MTA also expressed concern with the regulations' requirement that a political subdivision must operate in a manner that provides a significant public benefit with no more than incidental private benefit. This criticism has been echoed in the comments of several entities (98 DTR G-1, 5/20/16).
“The proposed regulations provide no guidance as to the meaning of ‘significant public benefit' and it is concerning to us that the application of this requirement could be misconstrued or misinterpreted by IRS auditors,” the group said.
More importantly, the prohibition on providing an “incidental private benefit” is undefined and overly broad, the MTA said. “The MTA Group frequently works with nongovernmental persons in operating and managing the various parts of our transportation system,” the group said.
“These arrangements include everything from newsstands on subway platforms, to qualified management contracts with nongovernmental entities and ‘public-private partnership' arrangements for transportation projects,” the letter said.
The Securities Industry and Financial Markets Association—which self-identifies as the “voice of the U.S. securities industry” representing broker-dealers, banks and asset managers employing nearly 1 million individuals—said the proposed IRS regulations “if implemented would severely hinder new development,” and asked for them to be withdrawn.
The proposed rules would impose two new requirements for an entity to qualify as a political subdivision, the group said in a May 23 letter to the IRS. The first is that the entity must serve a governmental purpose and the second is that it must be governmentally controlled.
“These additional requirements would change the longstanding analysis used for determining whether an entity would qualify as a political subdivision and would do so to the detriment of state and local governments,” SIFMA said.
SIFMA also argued that the new standard for defining which entities would qualify as political subdivisions would have “chilling effects on special district financings, which are a long-standing and effective mechanism for financing new public infrastructure in many states.”
Political subdivisions are used to finance critical infrastructure needs such as roads, fire protection facilities, libraries, irrigation, storm and sanitary sewage, and electric power and utilities, the group said.
Several states including Alabama, Arizona, Texas, Colorado, California, Florida, Illinois, Nebraska, Virginia and Missouri have historically enacted legislation delegating a substantial amount of one or more of the sovereign powers of a political subdivision to developers or districts to provide public infrastructure instead of the city or county issuing debt, SIFMA said.
“The Proposed Regulations, if finalized, would result in a substantial decrease in the amount of new infrastructure that would be developed if the special district issuers could no longer qualify as political subdivisions due to the additional tests,” the group said.
Adding to the long list of public entities that are unhappy with the proposed regulations, the American Public Power Association also asked that the IRS rules be withdrawn.
“APPA is of the view that the Proposed Regulations disturb well settled law and, as such, create unnecessary confusion, uncertainty and do not improve administration of the federal income tax laws,” the group said in a May 23 letter.
Like several entities the power association expressed concern with the requirement that a political subdivision serve a “public purpose.”
Any regulatory notion that requires such a purpose must be flexible because the range and scope of government services will change over time and vary state to state, the group said. “Moreover, many services provided by state and local governments, such as health care and utility services, are also provided by the private sector,” APPA said.
If not withdrawn, the group asked that final regulations make it clear that any decisions “regarding a governmental/public purpose shall be determined exclusively and solely by state or local governments.”
APPA also asked that the phrase “among other things” be removed from the text when discussing how a governmental purpose is defined. Without further explanation, the phrase “suggests an open ended facts and circumstances test to be applied by the IRS in making such a determination,” the group said.
Specific to power issuers is a concern with entities referred to as “joint power authorities,” APPA said.
Although the majority of public power issuers are general purpose governmental entities or constituted authorities, output facilities are also funded by bonds issued by JPAs, the group said.
“Generally, a JPA is an entity formed by two or more governmental units” as opposed to a single entity as required by the proposed rules, the letter said. “The JPA structure does not present a concern for the IRS and Treasury given their inherent governmental structure.”
For these reasons, the group requested that the final regulations make it clear that JPAs are covered by the governmental control component of the regulations, if they are not withdrawn.
Comments sent to the IRS on the proposed political subdivision regulations came from groups of all sizes, ranging from ones as large as the Metropolitan Transportation Authority to some as small as Biggs Municipal Utilities, a utilities provider that services a city with a population of about 1,700.
The deadline for comments on the proposed regulations was May 23 at 11:59 p.m. As of 5 p.m., the IRS had received almost 70 comments.
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Texts of the MTA, SIFMA and APPA letters are in TaxCore.
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