Treatment of Payments in Lieu of Taxes Under Section 141, 61693-61695 [E6-17408]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 202 (Thursday, October 19, 2006)]
[Proposed Rules]
[Pages 61693-61695]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-17408]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-136806-06]
RIN 1545-BF87


Treatment of Payments in Lieu of Taxes Under Section 141

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: 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.

DATES: 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.

ADDRESSES: 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 https://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, 
Maryland 20706.

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).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1). Final regulations (TD 8712) 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

[[Page 61694]]

regulations to provide an opportunity for public review and comment.

Explanation of Provisions

I. Introduction

    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 business use.

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, Sec.  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 Sec.  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 Applicable 
Taxes

    In addition, existing Sec.  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 Sec.  1.141-4(e)(3)). Existing Sec.  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 Sec.  
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 Sec.  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 Sec.  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.

Proposed Effective Date

    The proposed regulations are proposed to apply to bonds that are 
sold on or after February 16, 2007.

Special Analyses

    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 small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any

[[Page 61695]]

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.

Drafting Information

    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.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    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:


Sec.  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 paragraph 
(e)(5)(ii).
* * * * *
    Par. 3. Section 1.141-15 is amended by adding paragraph (m) to read 
as follows:


Sec.  1.141-15  Effective dates.

* * * * *
    (m) Effective date for certain regulations relating to payments in 
lieu of tax. The rules of Sec.  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,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E6-17408 Filed 10-18-06; 8:45 am]
BILLING CODE 4830-01-P