Treatment of Payments in Lieu of Taxes Under Section 141, 63372-63375 [E8-25333]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 207 (Friday, October 24, 2008)]
[Rules and Regulations]
[Pages 63372-63375]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-25333]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9429]
RIN 1545-BF87


Treatment of Payments in Lieu of Taxes Under Section 141

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations which modify the 
standards for treating certain payments in lieu of taxes or other tax 
equivalency payments (PILOTs) as generally applicable taxes for 
purposes of the private security or payment test under section 141 of 
the Internal Revenue Code (Code). This action is being taken in order 
to provide issuers of tax-exempt bonds with guidance on whether PILOTs 
are eligible to be treated as generally applicable taxes for this 
purpose. The regulations affect State and local governmental issuers of 
tax-exempt bonds.

DATES: Effective Date: These regulations are effective on October 24, 
2008.
    Applicability Dates: For dates of applicability, see Sec.  1.141-
15(k).

FOR FURTHER INFORMATION CONTACT: Carla Young at (202) 622-3980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends the Income Tax Regulations (26 CFR part 1) 
under section 141 to modify and clarify the standards for treating 
PILOTs as generally applicable taxes for purposes of the private 
security or payment test under section 141.
    Final regulations under section 141 were published in the Federal 
Register on January 16, 1997 (62 FR 2275) (1997 Regulations), to 
provide comprehensive guidance on most aspects of the private activity 
bond restrictions. On October 19, 2006, the IRS published a notice of 
proposed rulemaking in the Federal Register (71 FR 61693) (Proposed 
Regulations) regarding the standards for treating PILOTs as generally 
applicable taxes for purposes of the private security or payment test 
under section 141. In the Proposed Regulations, the Treasury Department 
and the IRS solicited public comments and invited interested parties to 
a public hearing scheduled for February 13, 2007. On January 30, 2007, 
the Treasury Department and the IRS cancelled the public hearing 
because no requests to speak at the hearing were received, and 
published a notice of such cancellation in the Federal Register (72 FR 
4220).
    The Treasury Department and the IRS received a number of written 
comments on the Proposed Regulations. After consideration of the 
written comments, the Proposed Regulations are adopted, with revisions, 
as final regulations by this Treasury decision (Final Regulations). The 
revisions are discussed in the preamble.

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) (private 
business use test) and the private security or payment test under 
section 141(b)(2) (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 1997 Regulations provide 
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

[[Page 63373]]

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) of the 1997 Regulations 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. Thus, 
Sec.  1.141-4(e)(1) provides that for purposes of the private security 
or payment test, generally applicable taxes are not taken into account 
(that is, are not payments from a nongovernmental person and are not 
payments in respect of property used for a private business use). 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) of the 1997 Regulations 
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.
    Section 1.141-4(e)(4)(i) provides that a tax does not have a 
generally applicable manner of determination and collection to the 
extent that one or more taxpayers make any impermissible agreements 
relating to the payment of those taxes. Section 1.141-4(e)(4)(ii) and 
(iii) of the 1997 Regulations set forth permissible and impermissible 
agreements for this purpose. An example of a permissible agreement that 
does not cause a tax to fail to have a generally applicable manner of 
determination and collection includes an agreement to reduce or limit 
the amount of taxes collected to further a bona fide governmental 
purpose. For example, an agreement to abate taxes to encourage a 
property owner to rehabilitate property in a distressed area is a 
permissible agreement.
    Section 1.141-4(e)(3) of the 1997 Regulations provides that a 
payment does not qualify as a generally applicable tax if it is a 
special charge for a special privilege granted or service rendered. 
This provision further provides that special assessments paid by 
property owners benefiting from financed improvements are not generally 
applicable taxes. This provision includes an example that a tax or 
PILOT that is limited to the property or persons benefited by an 
improvement is not a generally applicable tax.
    The Proposed Regulations generally did not address the special 
charge limitation on generally applicable taxes. Commentators suggested 
clarifying the scope of this special charge limitation and its 
application in the context of PILOTs.
    The Final Regulations clarify and illustrate the scope of the 
special charge limitation on generally applicable taxes. The Final 
Regulations provide that a special charge includes a payment for a 
special privilege granted or regulatory function (for example, a 
license fee), a service rendered (for example, a sanitation services 
fee), a use of property (for example, rent), or a payment in the nature 
of a special assessment to finance capital improvements that is imposed 
on a limited class of persons based on benefits received from the 
capital improvements financed with the assessment. The Final 
Regulations illustrate that a special assessment to finance 
infrastructure improvements in a new industrial park (such as 
sidewalks, streets, streetlights, and utility infrastructure 
improvements) that is imposed on a limited class of persons composed of 
property owners within the industrial park who benefit from those 
improvements is a special charge. The Final Regulations also illustrate 
that, by contrast, an otherwise-qualified generally applicable tax (for 
example, a generally applicable ad valorem tax on all real property 
within a governmental taxing jurisdiction) or an eligible PILOT that is 
based on such a generally applicable tax is not treated as a special 
charge merely because the taxes or PILOTs received are used for 
governmental or public purposes in a manner that benefits particular 
property owners.

IV. Certain Payments in Lieu of Taxes Treated as Generally Applicable 
Taxes

    Section 1.141-4(e)(5) of the 1997 Regulations treats 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)). Section 1.141-4(e)(5) of the 1997 Regulations 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 Proposed Regulations proposed to clarify and to tighten the 
commensurate standard for PILOTs to better ensure a reasonably close 
relationship between eligible PILOTs and generally applicable taxes. In 
particular, the Proposed Regulations proposed to define the 
commensurate standard to provide generally 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. Commentators 
suggested that the proposed commensurate standard was unduly 
restrictive and suggested allowing fixed-payment PILOTs. The Treasury 
Department and the IRS decline to adopt this suggestion to allow fixed-
payment PILOTs. The Final Regulations generally continue the approach 
to the commensurate standard in the Proposed Regulations because the 
Treasury Department and the IRS continue to believe that this approach 
will better ensure a reasonably close relationship between eligible 
PILOTs and generally applicable taxes.
    The Final Regulations refine the commensurate standard in certain 
technical respects in response to public comments. The Proposed 
Regulations proposed to permit only a single change in the measure of a 
PILOT in relation to an underlying generally applicable tax following 
completion of the development of the subject property. Commentators 
suggested allowing broader flexibility for phased adjustments to PILOTs 
during the development, construction, or initial start-up period of the 
property. The Final Regulations adopt this comment.
    The Proposed Regulations also proposed to treat any payment based 
in any way on debt service on an issue as impermissible under the 
commensurate standard. Commentators suggested that this limitation is 
overly broad and could prohibit any use of PILOTs to pay debt service 
on an issue. The Final Regulations do not prohibit any use of PILOTs to 
pay debt service on an issue, but provide that a PILOT is not 
commensurate with a generally applicable tax if the PILOT is set at a 
fixed dollar amount (for example, fixed debt service on a bond issue) 
that cannot vary with changes in the level of the generally applicable 
tax on which it is based.
    Section 1.141-4(e)(5) of the 1997 Regulations and the Proposed 
Regulations require designation of PILOTs for a ``public purpose.'' 
Section 1.141-4(e)(2) of the 1997 Regulations requires use of generally 
applicable taxes for ``governmental purposes.''

[[Page 63374]]

These references to the designation of PILOTs for a public purpose and 
to the use of generally applicable taxes for governmental purposes were 
intended to refer to the same standard. In this regard, longstanding 
Revenue Rulings on the definition of generally applicable taxes under 
section 164 on which the section 141 definition was based have 
consistently required the use of generally applicable taxes for 
``public or governmental purposes.'' See, for example, Rev. Rul. 71-49 
(1971-1 CB 103); Rev. Rul. 61-152 (1961-2 CB 42) (see Sec.  
601.601(d)(2)(ii)(b). To clarify the intended uniform standard for the 
use of generally applicable taxes and eligible PILOTs, the Final 
Regulations adopt consistent terminology to state this uniform 
standard.
    The 1997 Regulations and the Proposed Regulations require 
``designation'' of eligible PILOTs for public purposes. Commentators 
suggested clarifying this designation principle to require 
``application'' of PILOTs for public purposes or to deem PILOTs as duly 
designated upon commingling with other governmental taxes or revenues. 
In response to this comment, the Final Regulations require use of an 
eligible PILOT for governmental or public purposes for which the 
underlying generally applicable tax on which it is based may be used.
    The Proposed Regulations proposed to eliminate the example in the 
last sentence of Sec.  1.141-4(e)(5)(ii) of the 1997 Regulations, which 
illustrated that a PILOT made in consideration of the use of property 
financed with tax-exempt bonds is treated as a special charge. Most 
commentators supported this proposed change and one commentator 
objected to this proposed change. The Final Regulations remove this 
example, but address the issue raised in this example separately in 
clarifying guidance on the ``special charge'' limitation on generally 
applicable taxes under Sec.  1.141-4(e)(3). A payment made ``in 
consideration for the use of property'' is more properly characterized 
as rent or an installment sale payment for the use of property. The 
Final Regulations clarify that, among other special charges, a payment 
for the use of property (for example, rent) is treated as a special 
charge under Sec.  1.141-4(e)(3). Further, the reference to tax-exempt 
bond financing in the referenced example caused confusion because the 
presence or absence of tax-exempt bond financing properly is irrelevant 
to the determination of whether a payment, in substance, is in the 
nature of a special charge for the use of property or a generally 
applicable tax. The above-described revision with respect to the 
referenced example represents a technical clarification rather than a 
substantive change.

Effective/Applicability Dates

    The Proposed Regulations were published on October 19, 2006, and 
were proposed to apply to bonds sold on or after February 16, 2007. 
This proposed effective date was intended to accommodate completion of 
bond issues for projects in progress under the 1997 Regulations. 
Commentators indicated that the proposed effective date of the Proposed 
Regulations was insufficient to accommodate completion of bond issues 
for projects substantially in progress. Commentators also requested 
transitional relief for refundings of bonds issued before the effective 
date of the Proposed Regulations.
    The Final Regulations generally apply to bonds sold on or after 
October 24, 2008.
    In response to public comments, the Final Regulations provide a 
transitional rule for refundings. Under this transitional rule, the 
1997 Regulations may continue to be applied to certain refundings of 
bonds that were sold before the dates of applicability of the Final 
Regulations if they meet a prescribed weighted average maturity test 
set forth in the Final Regulations.
    In addition, in response to public comments, the Final Regulations 
also provide a transitional rule for certain bonds for projects 
substantially in progress at the time of the promulgation of the 
Proposed Regulations. Under this transitional rule, the 1997 
Regulations may continue to be applied to certain bonds issued within a 
prescribed time to finance certain projects that meet prescribed 
conditions set forth in the Final Regulations.

Special Analyses

    It has been determined that this Treasury decision 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, the proposed 
regulations preceding these regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal authors of these regulations are Carla Young and 
James Polfer, Office of Chief Counsel (Financial Institutions and 
Products). 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.141-0 is amended by adding a new entry for Sec.  
1.141-15(k) to read as follows:


Sec.  1.141-0  Table of contents.

* * * * *


Sec.  1.141-15  Effective dates.

* * * * *
    (k) Effective/applicability dates for certain regulations relating 
to generally applicable taxes and payments in lieu of tax.
* * * * *

0
Par. 3. Section 1.141-4 is amended by:
0
1. Paragraph (e)(2) the first sentence is revised.
0
2. Paragraphs (e)(3), (e)(5), (e)(5)(i), (e)(5)(ii) are revised and 
adding new paragraphs (e)(5)(iii) and (e)(5)(iv).
    The revisions and additions read as follows:


Sec.  1.141-4  Private Security or Payment Test.

* * * * *
    (e) * * *
    (2) * * * A generally applicable tax is 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 or public purposes. * * *
    (3) Special charges. A special charge (as defined in this paragraph 
(e)(3)) is not a generally applicable tax. For this purpose, a special 
charge means a payment for a special privilege granted or regulatory 
function (for example, a license fee), a service rendered (for example, 
a sanitation services fee), a use of property (for example, rent), or a

[[Page 63375]]

payment in the nature of a special assessment to finance capital 
improvements that is imposed on a limited class of persons based on 
benefits received from the capital improvements financed with the 
assessment. Thus, a special assessment to finance infrastructure 
improvements in a new industrial park (such as sidewalks, streets, 
streetlights, and utility infrastructure improvements) that is imposed 
on a limited class of persons composed of property owners within the 
industrial park who benefit from those improvements is a special 
charge. By contrast, an otherwise qualified generally applicable tax 
(such as a generally applicable ad valorem tax on all real property 
within a governmental taxing jurisdiction) or an eligible PILOT under 
paragraph (e)(5) of this section that is based on such a generally 
applicable tax is not treated as a special charge merely because the 
taxes or PILOTs received are used for governmental or public purposes 
in a manner which benefits particular property owners.
* * * * *
    (5) Payments in lieu of taxes. A tax equivalency payment or other 
payment in lieu of a tax (``PILOT'') is treated as a generally 
applicable tax if it meets the requirements of paragraphs (e)(5)(i) 
through (iv) of this section--
    (i) Maximum amount limited by underlying generally applicable tax. 
The PILOT is not greater than the amount imposed by a statute for a 
generally applicable tax in each year.
    (ii) Commensurate with a generally applicable tax. The PILOT is 
commensurate with the amount imposed by a statute for a generally 
applicable tax in each year under the commensurate standard set forth 
in this paragraph (e)(5)(ii). For this purpose, except as otherwise 
provided in this paragraph (e)(5)(ii), a PILOT is commensurate with a 
generally applicable tax only if it is equal to a fixed percentage of 
the generally applicable tax that would otherwise apply in each year or 
it reflects a fixed adjustment to the generally applicable tax that 
would otherwise apply in each year. A PILOT based on a property tax 
does not fail to be commensurate with the property tax as a result of 
changes in the level of the percentage of or adjustment to that 
property tax for a reasonable phase-in period ending when the subject 
property is placed in service (as defined in Sec.  1.150-2(c)). A PILOT 
based on a property tax must take into account the current assessed 
value of the property for property tax purposes for each year in which 
the PILOT is paid and that assessed value must be determined in the 
same manner and with the same frequency as property subject to the 
property tax. A PILOT is not commensurate with a generally applicable 
tax, however, if the PILOT is set at a fixed dollar amount (for 
example, fixed debt service on a bond issue) that cannot vary with 
changes in the level of the generally applicable tax on which it is 
based.
    (iii) Use of PILOTs for governmental or public purposes. The PILOT 
is to be used for governmental or public purposes for which the 
generally applicable tax on which it is based may be used.
    (iv) No special charges. The PILOT is not a special charge under 
paragraph (e)(3) of this section.
* * * * *

0
Par. 4. Section 1.141-15 is amended by adding paragraph (k) to read as 
follows:


Sec.  1.141-15  Effective Dates.

* * * * *
    (k) Effective/applicability dates for certain regulations relating 
to generally applicable taxes and payments in lieu of tax--(1) In 
general. Except as otherwise provided in paragraphs (k)(2) and (k)(3) 
of this section, revised Sec. Sec.  1.141-4(e)(2), 1.141-4(e)(3) and 
1.141-4(e)(5) apply to bonds sold on or after October 24, 2008 that are 
otherwise subject to the 1997 Regulations (defined in paragraph (b)(1) 
of this section).
    (2) Transitional rule for certain refundings. Paragraph (k)(1) does 
not apply to bonds that are issued to refund bonds if--
    (i) Either--
    (A) The refunded bonds (or the original bonds in a series of 
refundings) were sold before October 24, 2008, or
    (B) The refunded bonds (or the original bonds in a series of 
refundings) satisfied the transitional rule for projects substantially 
in progress under paragraph (k)(3) of this section; and
    (ii) The weighted average maturity of the refunding bonds does not 
exceed the remaining weighted average maturity of the refunded bonds.
    (3) Transitional rule for certain projects substantially in 
progress. Paragraph (k)(1) of this section does not apply to bonds 
issued for projects for which all of the following requirements are 
met:
    (i) A governmental person (as defined in Sec.  1.141-1) took 
official action evidencing its preliminary approval of the project 
before October 19, 2006, and the plan of finance for the project in 
place at that time contemplated financing the project with tax-exempt 
bonds to be paid or secured by PILOTs.
    (ii) Before October 19, 2006, significant expenditures were paid or 
incurred with respect to the project or a contract was entered into to 
pay or incur significant expenditures with respect to the project.
    (iii) The bonds for the project (excluding refunding bonds) are 
issued on or before December 31, 2009.

Steven Miller,
Deputy Commissioner for Services and Enforcement.
    Approved by: October 16, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E8-25333 Filed 10-20-08; 4:15 pm]
BILLING CODE 4830-01-P