[Congressional Record Volume 145, Number 95 (Wednesday, June 30, 1999)]
[Extensions of Remarks]
[Page E1445]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E1445]]



            PRIVATE ACTIVITY BOND CLARIFICATION ACT OF 1999

                                 ______
                                 

                             HON. TOM DeLAY

                                of texas

                    in the house of representatives

                        Wednesday, June 30, 1999

  Mr. DeLAY. Mr. Speaker, today I introduce the Private Activity Bond 
Clarification Act of 1999. This legislation, which will clarify 
existing law with respect to the use of tax exempt bonds, is needed to 
protect taxpayer dollars from being used to subsidize essentially 
private activities. The bill will also ensure a level playing field for 
other businesses which are excluded from, or do not seek, subsidies 
from the American taxpayer through tax-exempt bond financing.
  As most of our colleagues know, interest on bonds issued by State and 
local governments is generally exempt from federal income tax. The 
federal tax exemption allows the bonds to carry lower interest rates, 
which in turn lowers the cost of borrowing. State and local governments 
are then better able to finance schools, roads, public transportation 
and other public infrastructure projects.
  At the same time, federal tax law and regulations issued by the 
Treasury Department have been carefully tailored--as they should be--to 
ensure that this tax exemption is not abused for private gain. Tax-
exempt bonds should not be used to give private individuals or 
businesses a preferential benefit at the expense of the American 
taxpayer.
  For example, under current law, if facilities financed with State and 
local government bonds are used more than 10 percent of the time 
directly, or indirectly, in a trade or business by a private person or 
business, the IRS may consider the bonds ``private activity bonds'' and 
interest paid on them generally will not be excluded from a 
bondholder's taxable income. For purposes of determining whether this 
10 percent test is met, use of a financed facility is treated as a 
direct use of the proceeds, and any activity carried on by a private 
person is treated as a trade or business. When a financed facility is 
used by several private persons, use by all private entities is 
aggregated for purposes of determining whether the 10% private business 
use threshold is met.
  For the most part, private business use of a facility is only deemed 
to occur if a private person, group, or business has a special legal 
entitlement to the use of the financed facility under an arrangement 
with the state or local government that issued the bonds. Typically, 
such an arrangement would involve the ownership or lease of the 
facility, or a management contract involving the facility, that grants 
priority rights in using the facility.
  Although it appears that existing tax law, as interpreted by the 
Treasury regulations, may be adequate to assure that all businesses and 
members of the general public are treated fairly in matters involving 
the use of facilities constructed with tax-exempt bonds adoption of the 
legislation I introduce today to codify key elements of the regulatory 
rules will help to ensure that this valuable--and costly--tax subsidy 
is not misused for the benefit of private individuals instead of the 
taxpayers. I emphasize that the bill leaves the ultimate determination 
as to whether the law has been violated in a specific case up to the 
IRS as it is under current law.
  You see, Mr. Speaker, while tax-exempt bond financing is largely 
carried out in a manner consistent with the purposes set forth in the 
tax law and regulations, as with just about any federal program in 
which a tax subsidy is involved, there are always those who are looking 
for ways to ``push the envelope'' to gain the benefit of a tax subsidy 
for their own private business purposes.
  The impetus for this legislation was prompted by press reports of a 
proposal to build, with tax-exempt bonds, a massive new Convention 
Center in Las Vegas. However, my concern is not with that community per 
se, but rather with the potential implications for all American 
taxpayers, and the potential precedent which could be established, 
should financing of this facility go forth in the face of statutes and 
regulations which suggest it should be ineligible for tax-exempt 
treatment.
  According to press reports, a group of private businesses referred to 
as the Consortium, is currently seeking to take advantage of tax-exempt 
bond financing to promote construction in Las Vegas of a new 1.3 
million square foot convention center, which when completed, will be 
one of the largest such facilities in the country. It will be larger 
than the Astrodome, the George R. Brown Convention Center, the Dallas 
Convention Center and even the Javits Center in New York.

  I understand that once ground is broken for this facility, the 
members of the Consortium who have worked with local authorities to 
develop this facility will be provided with preferential rights to 
lease the facility for the purpose of putting on money-making trade 
shows. These preferential rights will allow Consortium members to 
``lock up'' more than 60 percent of the available rentable days for the 
new facility each year through 2009. Furthermore, from a business 
standpoint, the specific dates to be ``locked up'' by the Consortium 
are more valuable than those that will be left over for use by others. 
In effect, the benefits of the federal subsidy utilized in financing 
this facility are being largely transferred to the handful of 
businesses comprising this Consortium.
  The situation in Las Vegas raises the possibility that the lack of a 
specific definition of ``related parties'' may lead bond issuing 
authorities and their counsel to mistakenly conclude that only those 
business users related by law (e.g., corporations and their wholly-
owned subsidiaries) are to be treated as ``related parties.'' Such a 
narrow, legalistic interpretation could result in bonds being 
wrongfully issued in instances where, as in this case, a principal 
purpose for which the facility is being financed is for the use of a 
group of private parties who are related in fact. Parties that are not 
related by law can nevertheless by agreement act in such concert that 
they should, and presumably would, be treated by the IRS as related 
parties.
  Mr. Speaker, allow me at this point to reiterate that my concern here 
is not Las Vegas per se. However, I will point out that the new 
facility financed with the use of these federally tax-exempt bonds will 
both compete with convention facilities in Houston, and ``lock in'' to 
Las Vegas through 2009 these trade shows, effectively denying Houston 
and other communities the opportunity to attract these conventions to 
our region.
  In any event, it should be obvious that Congress did not intend to 
provide carte blanche to private businesses to band together to 
facilitate construction of a tax-exempt financed facility--which would 
then be largely made available to those businesses for their own 
commercial purposes. The legislation I introduce today will protect the 
taxpayer's interest in this regard by simply clarifying the definition 
of ``related parties'' already found in the Treasury regulations that 
implement the ``private business use'' limitations in the tax code.
  My bill would enable the IRS, acting on a case-by-case basis, to 
determine that parties should be treated as ``related parties'' if they 
have at any time acted in concert to negotiate an arrangement to 
facilitate the financing of a property financed with tax-exempt bonds, 
and enter into preferential arrangements for the use of such property. 
The collective use of a facility by related parties would be aggregated 
when applying the 30 and 90 days safe harbors (and the 180 days general 
limitation) found in the IRS' current regulations.
  I will point out that local governments can of course continue to 
avoid any potential uncertainty about the rules on ``related parties'' 
by applying for an advance ruling by the IRS that the limitations on 
``related parties'' do not apply to their particular proposals.
  To protect the interests of the American taxpayer, and to assure a 
level playing field for private business, it is important that Congress 
act to clarify the rules governing tax-exempt bond financing so that 
potentially hundreds of millions of dollars in of tax-exempt bonds are 
not mistakenly issued--whether in Las Vegas or elsewhere. So as to put 
the public on notice, and to help prevent any bond from being issued 
based on a mistaken interpretation of the rules governing private 
activity bonds, the legislation would apply to bonds issued after July 
1, 1999.

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