City of New York v. Comm'r of Internal Revenue
| Decision Date | 11 October 1994 |
| Docket Number | No. 27960–92B.,27960–92B. |
| Citation | 103 T.C. No. 27,103 T.C. 481 |
| Parties | CITY OF NEW YORK, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James S. Kaplan, Helene Jaffa, Robert Firestone, and Amy F. Nogid, New York City, for petitioner.
Marsha A. Keyes, Rebecca L. Caldwell–Harrigal, and Richard L. Carlisle, Washington, DC, for respondent.
Petitioner, a municipal corporation of the State of New York, seeks a declaratory judgment that the bonds it proposes to issue will be exempt from taxation under sec. 103(a), I.R.C. Petitioner proposes to use $15 million of the $100 million bond issuance to finance advances to nongovernmental borrowers for purposes of rehabilitating low-income housing units. The advances will be structured as loans that must be repaid in full by the borrowers, and will bear interest rates below the market rate reflected in the yield on the bonds. Held, petitioner may not use time value of money principles to bifurcate the advances into a loan portion and a grant portion for purposes of applying the private loan financing test of sec. 141(c), I.R.C. Held, further, the $15 million principal amount of the advances exceeds the $5 million private loan financing test threshold of sec. 141(c), I.R.C. Held, further, the proposed bonds constitute private activity bonds under sec. 141(a), I.R.C., and the interest thereon will not be exempt from taxation under sec. 103(a), I.R.C.
This is an action for declaratory judgment pursuant to section 7478.1 Petitioner requested respondent to rule that general obligation bonds (Bonds) in the face amount of $100 million that petitioner proposes to issue will be obligations described in section 103(a), so that the interest thereon will be excludable from the bondholders' gross income. After administrative review, respondent denied petitioner's request on the grounds that the proposed Bonds are private activity bonds within the meaning of section 141(a)(2).
All of the jurisdictional requirements for a declaratory judgment action have been satisfied. See Rule 210(c). The burden of proof is on petitioner, see Rule 217(c)(2)(A), and our decision is based upon the administrative record and the parties' stipulation of fact. See Rule 217(a). We accept as true those facts represented in the administrative record and the parties' stipulation of fact. See Rule 217(b)(1). Only those facts necessary to our decision are set forth.
The issue for decision is whether the proposed Bonds are obligations described in section 103(a). Resolution of this issue depends on whether the Bonds are private activity bonds under the private loan financing test of section 141(c). For the reasons set forth below, we agree with respondent that the proposed Bonds are private activity bonds. Accordingly, we hold that the proposed Bonds are not obligations described in section 103(a).
Petitioner City of New York (hereinafter petitioner or the City) is a municipal corporation of the State of New York. In order to combat the deterioration of much of its housing stock in low and moderate income neighborhoods, petitioner has developed a variety of programs. The six such programs involved in the present case are referred to as the Programs.2
Petitioner proposes to issue Bonds with a total face amount of $100 million. Petitioner will use $15 million of the Bond proceeds to finance the Programs. Petitioner will apply the remaining $85 million to projects that have no private use.
The $15 million of Bond proceeds earmarked for the Programs will be advanced by petitioner in the form of loans (Advances). No portion of the Advances is structured as a grant. Although the specific structure of the Advances varies with each Program, all the Advances share several common characteristics. The Advances will be made to homeowners, groups of homeowners, private developers, or court-appointed administrators (collectively, the Borrowers), who will use the proceeds to renovate either City-owned or privately owned buildings. All the Advances must be repaid to the City over a fixed term (generally 30 years), and bear interest at below-market rates. All Advances must be repaid in full by the Borrowers, and no portion of the Advances will be forgiven. In order to ensure that the purposes of the Programs are achieved, Borrowers must comply with various City-imposed restrictions on the operation of the buildings, such as rent guidelines.
As the foregoing indicates, two relevant financial transactions are contemplated: (1) The City will receive $100 million pursuant to the Bond issue, and (2) the City will transfer $15 million of the Bond proceeds to the Borrowers pursuant to the Advances. Because the Bonds will be general obligation bonds, repayment of the Bonds will be made from the City's general revenues. The City will be solely responsible for the payments to the bondholders, and the bondholders will not receive any security interest in the Borrowers' repayments of the Advances to the City or in the buildings being renovated under the Programs.
The actual yield on the Bonds will be determined by a bid process. For purposes of its ruling request, petitioner represented that the yield on the Bonds will equal 8.5 percent per annum. In contrast, the interest rate on the outstanding Advances will range from 0 to 3 percent per annum. The present value of all the payments that the City will receive from the Borrowers in repayment of the Advances, discounted at the assumed 8.5 percent yield on the Bonds, equals $4,789,324, which is less than the $15 million principal amount of the Advances.
Section 103(a) 3 provides generally that gross income does not include interest on any State or local bond. The City is a political subdivision of the State of New York, and the proposed Bonds will be obligations of the City. Accordingly, the proposed Bonds fall within the general rule of section 103(a). See sec. 103(c)(1). Section 103(a), however, is qualified by the exceptions contained in section 103(b).
In denying petitioner's ruling request, respondent relied on the exception set forth in section 103(b)(1), which provides that the general rule of section 103(a) does not apply to “Any private activity bond which is not a qualified bond (within the meaning of section 141).” 4 Section 141(a) defines a “private activity bond” as any bond that is part of an issue that meets either: (1) The private business tests of section 141(b), or (2) the private loan financing test of section 141(c). Respondent contends that the proposed Bonds are private activity bonds by reason of the private loan financing test of section 141(c), which provides in relevant part as follows:
Sec. 141(c) Private Loan Financing Test.—
(1) In General.—An issue meets the test of this subsection if the amount of the proceeds of the issue which are to be used (directly or indirectly) to make or finance loans * * * to persons other than governmental units exceeds the lesser of—
(A) 5 percent of such proceeds, or
(B) $5,000,000.
The parties agree that the Borrowers under the Programs are “persons other than governmental units”. Accordingly, if the amount of Bond proceeds that are used to make or finance loans under the Programs exceeds $5 million, 5 the Bonds will meet the private loan financing test and will constitute private activity bonds, the interest from which will not be excludable from the bondholders' gross income.
The parties' disagreement centers on the proper measurement of the amount of Bond proceeds that will be used “to make or finance loans” within the meaning of section 141(c). According to respondent, the full $15 million of Bond proceeds that will be used to fund the Advances will be used to make or finance loans to the Borrowers, thereby causing the proposed transaction to exceed the $5 million private loan financing test threshold. Respondent bases her argument on the fact that the Advances are structured as loans and the Borrowers are required to repay the Advances in full over a fixed time period.
Petitioner concedes that the Advances are structured as loans and that the $15 million face amount of the Advances exceeds the section 141(c) private loan financing threshold. Petitioner, however, argues that the $15 million face amount of the Advances is not the proper measurement of the amount of Bond proceeds that will be used to “to make or finance loans” under section 141(c). Instead, petitioner contends that the Advances, despite being structured in full as loans, consist of two distinct economic components: (1) A loan from the City to the Borrowers, and (2) a grant from the City to the Borrowers. Petitioner contends that only the amount of the loan component is relevant for purposes of the section 141(c) private loan financing test.
Petitioner bases this bifurcation argument on the fact that the City allows the Borrowers to repay the Advances at interest rates below the market rate reflected in the yield on the Bonds. Petitioner argues that the loan component of the Advances equals the present value of the repayments the Borrowers must make on the Advances, discounted at the assumed 8.5 percent market rate yield on the Bonds. Under this formula, the amount of Bond proceeds that will be used to make or finance loans equals $4,789,324, which is below the $5 million private loan financing test threshold of section 141(c).6 The remaining $10,210,676 ($15 million—$4,789,324) of the Advances, according to petitioner, constitutes a grant from the City to the Borrowers that is not subject to the private loan financing test.7
The present case centers on the proper interpretation of the private loan financing test of section 141(c). Specifically, we must decide whether section 141(c) permits petitioner to use present value discounting methods to calculate the amount of Bond proceeds “which are to be used (directly or indirectly) to...
To continue reading
Request your trial
-
ACM Partnership v. C.I.R.
...borrowed against the partnership assets it was to acquire. See app. at 137, 769-70.56 ACM also cites City of New York v. Commissioner, 103 T.C. 481, 487, 1994 WL 551412 (1994), aff'd, 70 F.3d 142 (D.C.Cir.1995), which analyzed whether I.R.C. § 141, in setting forth statutory distinctions ba......
-
Anderson v. Comm'r of Internal Revenue , No. 7425–02.
...Converium Ruckversicherung (Deutschland) AG, 335 F.3d 52, 57 (2d Cir.2003); Fincher v. Commissioner, supra; City of New York v. Commissioner, 103 T.C. 481, 489, 1994 WL 551412 (1994), affd. 70 F.3d 142 (D.C.Cir.1995). When a statute is ambiguous, the Court must find the interpretation that ......
-
Warbelow's Air Ventures, Inc. v. Comm'r of Internal Revenue
...statute. Burlington N. R.R. v. Okla. Tax Commn., 481 U.S. 454, 461, 107 S.Ct. 1855, 95 L.Ed.2d 404 (1987); City of New York v. Commissioner, 103 T.C. 481, 489, 1994 WL 551412 (1994), affd. 70 F.3d 142 (D.C.Cir.1995). From the face of the statute, it is not clear what is meant by “within”. W......
-
ASAT, Inc. v. Comm'r of Internal Revenue, 3173-95.
...v. Commissioner, 83 T.C. 742, 747-748 (1984). We may use legislative history to clarify an ambiguous statute. City of New York v. Commissioner, 103 T.C. 481, 489 (1994), affd. 70 F.3d 142 (D.C. Cir. 1995). Even where the statutory language appears clear, we may seek out any reliable evidenc......