WASHINGTON -- New York City officials are seeking relief from the federal tax law's limits on private loans, which they say unfairly penalize the city and other large tax-exempt bond issuers.
The 1986 Tax Reform Act limits to $5 million or 5%, whichever is less, the amount of tax-exempt governmental bond proceeds that can be loaned to private parties. A bond issue exceeding these limits is a private-activity bond issue that will be taxable if it is not used to finance specified projects.
New York City officials asked the Treasury Department in a recent letter to support the elimination of the $5 million limit. Large issuers, whose tax-exempt governmental bond issues are typically greater than $ 1 00 million, would then be subject to the 5% limit. This would allow them to use the same proportionate amount of tax-exempt bond proceeds for private loans as smaller issuers.
Roger Anderson, the city's acting deputy comptroller for finance, said in a letter to the Treasury that the $5 million limit is unfair to large issuers.
"We think this provision is unfairly and unnecessarily discriminatory against the city as a large issuer," Anderson said in the letter to Leslie B. Samuels, the Treasury's assistant secretary for tax policy.
At the same time, city officials are battling the Internal Revenue Service in the U.S. Tax Court for the right to take into account the time value of money in determining the amount of private loans that they can make under the 5% limit.
New York City, which is asking the tax court to overturn an unfavorable letter ruling issued by the IRS last year, contends that general tax principles should allow it to take into account the time value of money in determining the actual amount of its loans. The city wants to discount the loans at their present value to take into account the fact that low interest rates on the loans will not allow the city to recover its full interest costs.
If the city is permitted to use this method of accounting, the amount of money it could lend under the 5% limit would be increased because the loans would be valued at less than their face amount.
City officials say the private loan limits restrict their ability to use tax-exempt financing for six housing programs for the homeless and low- and moderate-income individuals.
The city has been unable to issue tax-exempt multifamily housing bonds for these programs because it cannot meet all the requirements for such bonds, city officials said.
The city, for example, believes it cannot get all of the landlords of the hundreds of projects financed with bond proceeds to provide annual certifications of the income levels of their tenants. Another problem is that some of the city's housing for the homeless is single-room occupancy, which cannot be financed with multi-family housing bonds, city officials said.
The city spends from $90 million to $122 million annually on these housing programs, but can only finance about $20 million of this total amount with the proceeds of the governmental bond issues it usually sells about four times a year. As a result, the city must finance most programs with taxable bon
Anderson told Samuels that, "Large cities, where the need for housing programs is greatest, should be able to use the same percentage of their bond issues for housing purposes as small issuers can."
Other large issuers face similar problems with the private loan limits for many social programs, not just housing, several bond lawyers said.
For years, New York City officials have been asking members of Congress for relief from the private loan limit but have been unsuccessful in part because of concerns that the removal of the cap would cause the federal government to lose revenues.
In the letter to the Treasury, Anderson complained that estimates of the revenue losses associated with removal of the cap have been overstated. He said that of the $1.4 billion in taxable bonds the city has sold since 1990, at least $430 million has been bought by investors, such as pension funds and foreigners, who do not pay federal taxes.
"From the standpoint of protecting the federal fisc, it should make no difference whether taxable bonds are held by nontaxpayers or more tax-exempt bonds are issued," Anderson said.