WASHINGTON - Tax-exempt bonds cannot be used to finance a local government program to lease water-conserving irrigation equipment to farmers, the Internal Revenue Service said in one of five bond-related private letter rulings published recently.
The ruling, which did not identify the parties involved, concluded the irrigation equipment would not qualify as "facilities for the furnishing of water" that, under the tax code, can be financed with tax-exempt private-activity bonds.
The IRS said the equipment would not meet tax law standards because it would not be part of a public water system.
"All that the farmers would be doing would be pumping their own water and using it for their own systems," one IRS official said in an interview.
Bond lawyers said they were not surprised at the negative ruling.
"It seemed harsh but that was probably the right result," said one lawyer in the Midwest.
The bond program had been proposed by an underground water conservation district formed under state law and charged with conserving ground water. The water conservation district had proposed issuing tax-exempt bonds to finance leasing center-pivot irrigation systems to farmers within its jurisdiction so they would use less water when irrigating their crops.
But the IRS said in its ruling that Congress, in a 1978 conference report, established three standards for such facilities to qualify for tax-exempt financing.
First, the facility must be a component of a system or project that furnishes water. Second, the facility must be operated by a governmental unit or by an investor-owned regulated public water utility. And finally, the water furnished by the facility must be made available to the general public.
The IRS said the irrigation equipment in the proposed bond program would not be part of a system to furnish water, but would instead use water as part of a production process. The IRS also said the water would be used only by local farmers, and not the general public.
"Accordingly, we have concluded that the proposed facility will not constitute a 'facility for the furnishing of water'" under the tax code, the IRS said in the ruling, PLR 9220036.
The IRS also issued the following four bond-related private letter rulings:
* PLR 9221028 -- Multifamily housing bonds would not lose their tax-exempt status after the trustee bought the apartment project the bonds financed. The trustee was the only bidder at the sheriff's auction where the project was sold. The auction resulted from foreclosure proceedings after the developer defaulted on its loan agreement.
The trustee told the IRS that it might not be able to find a suitable buyer for the project until after the one-year period during which the developer still has the right to re-purchase the project. But the trustee assured the IRS that the project had met, and would continue to meet, low- and moderate-income requirements.
* PLR 9220016 -- A corporation would not be able to exclude all unforeseen additional expenditures from counting toward a $10 million limit on capital expenditures that cannot be exceeded in connection with tax-exempt small-issue private-activity bonds sold to finance a hazardous waste disposal facility.
* PLR 9220033 -- A small amount of accrued but unpaid interest from the investment of 501(c)(3) bond proceeds being used to reimburse a nonprofit hospital for renovation expenses will not keep the issuer from meeting the six-month spending exemption from rebate requirements.
The letter-ruling notes that the issuer had incurred expenses that could have been reimbursed with the accrued interest during the six-month period had the issuer not thought it had spent all the money in the account.
* PLR 9220032 -- A corporation's unanticipated use of excess tax-exempt bond proceeds to acquire a manufacturing facility related to, and close by, another facility first financed with the bonds is an "insubstantial deviation" from public notice requirements and will not jeopardize the issuer's compliance with those requirements.
A description of the acquired facility had not been included in the public notice and hearing for the first facility financed with the bonds. But the IRS noted in its ruling that the two facilities would be integrated and would be adjacent, if not for an intervening road.