Proposed IRS Regulations Could Limit Tax-Exempt Bonds

The Internal Revenue Service (IRS) recently issued proposed regulations altering the definition of “political subdivision” for the purpose of issuing tax-exempt bonds and use of tax-exempt financed facilities. The proposed language could have troubling implications for certain wastewater and stormwater utilities seeking to finance projects using tax-exempt bonds and/or use facilities built with tax-exempt financing.
The National Association of Clean Water Agencies (NACWA) is currently analyzing the proposal to determine potential impacts on Association members and would appreciate any feedback from the members on this issue by the end of next week.

Under current IRS regulations, a “political subdivision” is “any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit.” This has meant that a public entity able to exercise taxing, eminent domain, or police (regulatory) powers, is able to issue tax-exempt bonds and use tax-exempt financed facilities. However, the proposed new language imposes two additional requirements: 1) public purpose, and 2) governmental control.