||November 20, 2006
Notice of Proposed Rulemaking and Notice of Public Hearing
Treatment of Payments in Lieu of Taxes
Under Section 141
Internal Revenue Service (IRS), Treasury.
Notice of proposed rulemaking and notice of public hearing.
This document contains proposed regulations modifying the standards
for treating payments in lieu of taxes (PILOTs) as generally applicable taxes
for purposes of the private security or payment test under section 141 of
the Internal Revenue Code (Code). The proposed regulations provide State and
local governmental issuers of tax-exempt bonds with guidance for applying
the private security or payment test. The proposed regulations affect State
and local governmental issuers of tax-exempt bonds. This document also provides
notice of a public hearing on these proposed regulations.
Written or electronic comments must be received by January 16, 2007.
Outlines of topics to be discussed at the public hearing scheduled for February
13, 2007, at 10 a.m., must be received by January 16, 2007.
Send submissions to: CC:PA:LPD:PR (REG-136806-06), Internal Revenue
Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions
may be hand-delivered to CC:PA:LPD:PR (REG-136806-06), Courier’s Desk,
Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell Street, Arlington,
Virginia, or sent electronically, via the IRS Internet site at www.irs.gov/regs or
via the Federal eRulemaking Portal at www.regulations.gov (IRS
REG-136806-06). The public hearing will be held in the auditorium, Internal
Revenue Service, New Carrollton Federal Building, 5000 Ellin Road, Lanham,
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, Vicky Tsilas or Carla Young, at
(202) 622-3980; concerning submissions of comments, the hearing and/or to
be placed on the building access list to attend the hearing, Kelly Banks,
at (202) 622-0392 (not toll-free numbers).
This document contains proposed amendments to the Income Tax Regulations
(26 CFR part 1). Final regulations (T.D. 8712, 1997-12 I.R.B. 4) under section
141 of the Code were published in the Federal Register on
January 16, 1997 (62 FR 2275) to provide comprehensive guidance on most aspects
of the private activity bond restrictions. This document amends the Income
Tax Regulations under section 141 of the Code by proposing modifications to
the standards for treating payments in lieu of taxes as generally applicable
taxes for purposes of the private security or payment test under section 141.
These regulations are published as proposed regulations to provide an opportunity
for public review and comment.
Explanation of Provisions
In general, interest on State and local governmental bonds is excludable
from gross income under section 103 of the Code. Interest on a private activity
bond, other than a qualified bond under section 141(e), is not excludable
from gross income. Section 141(a) classifies a bond as a private activity
bond if it is part of an issue that meets both the private business use test
under section 141(b)(1) (the private business use test) and the private security
or payment test under section 141(b)(2) (the private payment test). In addition,
section 141(a) independently treats a bond as a private activity bond if it
is part of an issue that meets the private loan test under section 141(c).
Section 141(b)(2) provides generally that an issue meets the private
payment test if the payment of the debt service on more than 10 percent of
the proceeds of such issue is (under the terms of such issue or any underlying
arrangement) directly or indirectly (1) secured by any interest in property
used or to be used for a private business use, or payments in respect of such
property, or (2) to be derived from payments (whether or not to the issuer)
in respect of property, or borrowed money, used or to be used for a private
II. Private Payment Test in General.
Sections 1.141-4(c) and 1.141-4(d) of the Income Tax Regulations provide
broad general rules for purposes of application of the private payment test.
Private payments generally include any payments made, directly or indirectly,
by any nongovernmental person that is a private business user of proceeds
during a period of private business use and any payments made with respect
to property financed with proceeds of an issue during a period of private
business use, whether or not made by a private business user. In addition,
private payments include property and payments in respect of property that
are used or to be used for private business use to the extent that any interest
in that property or payments serves as security for the payment of debt service
on an issue.
III. Generally Applicable Taxes Exception.
Section 1.141-4(e) provides an exception to the otherwise-broad scope
of payments taken into account under the private payment test in the case
of “generally applicable taxes.” In general, the purpose of the
generally applicable taxes exception is to allow eligible tax payments made
with respect to property or services to be used to pay debt service on an
issue without causing private payments. For this purpose, §1.141-4(e)(2)
defines a generally applicable tax to mean an enforced contribution exacted
pursuant to legislative authority in the exercise of the taxing power that
is imposed and collected for the purpose of raising revenue to be used for
governmental purposes. To qualify as a generally applicable tax, a tax must
have a uniform rate that is applied to all persons of the same classification
in the appropriate jurisdiction and the tax must have a generally applicable
manner of determination and collection. By contrast, under §1.141-4(e)(3),
a payment does not qualify as a generally applicable tax if it is a special
charge for a special privilege granted or service rendered (for example, a
payment limited to property or persons benefited by an improvement). Sections
1.141-4(e)(4)(ii) and (iii) set forth certain permissible and impermissible
agreements that bear upon whether or not a tax has a generally applicable
manner of determination and collection. For example, an agreement to reduce
or limit the amount of taxes collected to further a bona fide governmental
purpose is a permissible agreement.
IV. Certain Payments in Lieu of Taxes Treated as Generally
In addition, existing §1.141-4(e)(5) treats certain tax equivalency
payments or PILOTs as generally applicable taxes if (1) the payments are commensurate
with and not greater than the amounts imposed by the statute for a tax of
general application, and (2) the payments are designated for a public purpose
and are not special charges (as described in §1.141-4(e)(3)). Existing
§1.141-4(e)(5) further provides an example which states that a PILOT
made in consideration for the use of property financed with tax-exempt bonds
is treated as a special charge.
The Treasury Department and the IRS are concerned that additional guidance
may be needed regarding the existing standards for treating PILOTs as generally
applicable taxes and that those existing standards potentially could be interpreted
in an unduly broad manner to provide favorable treatment for certain PILOTs
which may have an insufficient link to generally applicable taxes. Conversely,
the Treasury Department and the IRS are concerned that the last sentence of
existing §1.141-4(e)(5)(ii), which provides as an example of a special
charge a PILOT paid in consideration for the use of property financed with
tax-exempt bonds, could be interpreted in an unduly restrictive manner to
prevent any PILOTs with respect to property financed with tax-exempt bonds
from being treated as generally applicable taxes.
To address these concerns, the Treasury Department and the IRS propose
to modify the standards to better assure a reasonably close relationship between
eligible PILOT payments and generally applicable taxes. The proposed clarification
provides that an eligible PILOT payment must represent a fixed percentage
of, or reflect a fixed adjustment to, the amount of generally applicable taxes
in each year, based on comparable current valuation assessments. In addition,
the Treasury Department and the IRS propose to eliminate the example in the
last sentence of §1.141-4(e)(5)(ii). Regarding this latter proposal,
the Treasury Department and the IRS believe that the existing definition of
special charge under §1.141-4(e)(3) adequately addresses this principle.
The proposed standards for treating PILOTs as generally applicable taxes
generally contemplate PILOTs based on property taxes. The Treasury Department
and the IRS also seek public comment regarding whether any special rules are
needed to address PILOTs based on other taxes, including sales taxes.
The proposed regulations are proposed to apply to bonds that are sold
on or after February 16, 2007.
It has been determined that this notice of proposed rulemaking is not
a significant regulatory action as defined in Executive Order 12866. Therefore,
a regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because the regulations do not impose
a collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the
Code, this proposed regulation has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight (8)
copies) or electronic comments that are submitted timely to the IRS. The
Treasury Department and the IRS specifically request comments on the clarity
of the proposed rules and how they may be made easier to understand. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for February 13, 2007, at 10 a.m.
in the auditorium of the Internal Revenue Service, New Carrollton Federal
Building, 5000 Ellin Road, Lanham, Maryland 20706. Due to building security
procedures, visitors must enter at the New Carrollton Federal Building main
entrance. In addition, all visitors must present photo identification to
enter the building. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 30 minutes before the
hearing starts. For information about having your name placed on the building
access list to attend the hearing, see the “FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or electronic
comments and an outline of the topics to be discussed and the amount of time
to be devoted to each topic (signed original and eight (8) copies) by January
16, 2007. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.141-4(e)(5) is revised to read as follows:
§1.141-4 Private Security or Payment Test.
* * * * *
(e) * * *
(5) Payments in lieu of taxes—(i) In
general. A tax equivalency payment or other payment in lieu of
a tax (PILOT) is treated as a generally applicable tax if—
(A) The payment is commensurate with and not greater than the amounts
imposed by a statute for a generally applicable tax in each year; and
(B) The payment is designated for a public purpose and is not a special
charge (as described in paragraph (e)(3) of this section).
(ii) Commensurate standard. For purposes of this
paragraph (e)(5), a payment is “commensurate” with generally applicable
taxes only if the amount of such payment represents a fixed percentage of,
or reflects a fixed adjustment to, the amount of generally applicable taxes
that otherwise would apply to the property in each year if the property were
subject to tax. For example, a payment is commensurate with generally applicable
taxes if it is equal to the amount of generally applicable taxes in each year,
less a fixed dollar amount or a fixed adjustment determined by reference to
characteristics of the property, such as size or employment. A payment does
not fail to be a fixed percentage or adjustment as a result of a single change
in the level of the percentage or adjustment following completion of development
of the subject property. The payment must be based on the current assessed
value of the property for property tax purposes for each year in which the
PILOTs are paid and that assessed value must be determined in the same manner
and with the same frequency as property subject to generally applicable taxes.
A payment is not commensurate if it is based in any way on debt service on
an issue or is otherwise set at a fixed dollar amount that cannot vary with
the assessed value of the property determined in the manner described in this
* * * * *
Par. 3. Section 1.141-15 is amended by adding paragraph (m) to read
§1.141-15 Effective Dates.
* * * * *
(m) Effective date for certain regulations relating to payments
in lieu of tax. The rules of §1.141-4(e)(5) apply to bonds
sold on or after [DATE THAT IS 120 DAYS AFTER PUBLICATION OF THIS DOCUMENT
IN THE Federal Register] that are subject
to section 141.
Mark E. Matthews,
Services and Enforcement.
(Filed by the Office of the Federal Register on October 18, 2006, 8:45
a.m., and published in the issue of the Federal Register for October 19, 2006,
71 F.R. 61693)
The principal authors of these regulations are Rebecca L. Harrigal,
Vicky Tsilas, and Carla Young, Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities), IRS. However, other personnel
from the IRS and the Treasury Department participated in their development.
* * * * *
Internal Revenue Bulletin 2006-47
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