Airport may use a floating cost allocation to keep tax-exempt bonds away from liquor-store space

Plain-English summary

An airport authority is rebuilding a boarding area and financing part of the
work with tax-exempt exempt-facility bonds (the kind allowed for airports under
section 142). A wrinkle: section 147(e) bars using tax-exempt bond proceeds to
provide certain disfavored facilities, including a store whose principal
business is selling alcohol for off-premises consumption. The boarding area
will have rotating third-party shops, some of which may be such liquor stores,
and their locations are expected to move around over the life of the bonds. The
authority asked whether it could allocate bond proceeds to the qualified space
and its own non-bond money ("Equity") to the non-qualified (liquor-store) space
on an undivided, floating basis, based on the cost of whatever portions are used
that way at any given time, rather than pinning the allocation to fixed
locations. The IRS said yes. Drawing on the legislative history of the skybox
and liquor-store restrictions, it concluded this is a reasonable allocation
method: bond proceeds never fund the non-qualified use, so long as the floating
allocation never exceeds the amounts allocated to the boarding area. This
matters to airports and other issuers with mixed-use, changing tenant space
because it lets them use tax-exempt financing for the qualifying parts of a
project without tainting the whole thing when disfavored uses shift locations.

Ruling snapshot

• Question: May an airport bond issuer allocate bond proceeds and equity to qualified and non-qualified uses of a boarding area on an undivided, floating (cost-based) basis for section 147(e) compliance?
• Outcome: approved (floating undivided-portion allocation is a reasonable method)
• Key authorities: IRC §§ 103, 141, 142(a)(1), 147(e)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201847001 Third Party Communication: None
Release Date: 11/23/2018 Date of Communication: Not Applicable
Index Number: 141.05-00, 142.03-00,
147.05-00 Person To Contact:
-----------------, ID No. --------------
------------------------------------------------------------ Telephone Number:
-------------- ----------------------
---------------------------------------------- Refer Reply To:
------------------------------------------------ CC:FIP:B05
--------------------- PLR-104077-18
------------------------------------------------- Date:
August 09, 2018

LEGEND:

Issuer = ------------------------------------------------------------------------
----------------------------------------------

Airport = ------------------------------------------------

Terminal Complex = ------------------------------------------------------------------------

Boarding Area = ------------------------------------------------------------------------

City = ----------------------------------------------

State = --------------

Bonds = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
--------------------------------------------

Dear ---------------:

This responds to your request for a ruling that, for purposes of compliance with § 147(e)
of the Internal Revenue Code (Code), the Issuer may allocate proceeds of the Bonds
and Equity (as defined below) to the Boarding Area on an undivided portion basis, such
that it may allocate the proceeds and Equity to qualified and non-qualified uses (as
PLR-104077-18 2

defined below), respectively, regardless of the location of those uses within the
Boarding Area during the term of the Bonds.

Facts and Representations

Issuer owns and operates the Airport. The Airport includes the Terminal Complex, as
well as runways, taxiways, and support facilities. The Terminal Complex includes
boarding areas, which have a wide variety of retail shops, bars, restaurants, coffee
shops, and similar passenger amenities (“Terminal Shops”) that are operated by third-
party private operators under leases from Issuer. The nature, size, variety, and scope
of Terminal Shops change over time based on consumer trends, style and overall
economic conditions; however, none of the Terminal Shops will be described in
§ 142(c)(2).

Issuer is in the process of making substantial renovations to portions of the Terminal
Complex (the “Renovations”), including the complete demolition and reconstruction of
the Boarding Area, and will finance part of the costs of the Renovations with the
proceeds of the Bonds. Issuer expects to receive proposals from private
concessionaires for one or more Terminal Shops to be located within the reconstructed
Boarding Area and expects that such Terminal Shops will include retail locations the
principal business of which is the sale of alcoholic beverages for consumption off
premises within the meaning of § 147(e) (“non-qualified use”; use not described in §
147(e) is referred to herein as “qualified use”). Issuer expects that, during the expected
term of the Bonds, Terminal Shops with non-qualified use will be relocated to other
Terminal Shop locations within the Boarding Area.

Issuer intends to use funding sources that are not proceeds of any tax-exempt or other
tax-advantaged bond (“Equity”) to finance at least the costs of the Renovations
allocable to the Terminal Shops in the Boarding Area that it expects to be used for non-
qualified use. Issuer intends to use proceeds of the Bonds, which were issued as
exempt facility bonds pursuant to § 142(a)(1), to finance costs of the renovations to the
Boarding Area. Issuer will allocate the Equity no later than the placed in service date of
the Boarding Area. Issuer will allocate the proceeds and the Equity to the qualified and
non-qualified uses of the Boarding Area, respectively, on a floating basis over the term
of the Bonds, based on the costs of the portions of the Boarding Area being so used, up
to, but not exceeding, the amounts of proceeds and Equity allocated to the Boarding
Area.

Law and Analysis

Section 103(a) provides that, except as provided in § 103(b), gross income does not
include interest on any State or local bond. Section 103(b) provides, in part, that
§ 103(a) shall not apply to any private activity that is not a qualified bond (within the
meaning of § 141).
PLR-104077-18 3

Section 141(a) provides that a bond is a private activity bond if the bond is issued as
part of an issue that meets the private business use test of § 141(b)(1) and the private
security or payment test of § 141(b)(2) or the private loan financing test of § 141(c).

Under § 141(b)(1) an issue meets the private business use test if more than 10 percent
of the proceeds of an issue are to be used for any private business use. Private
business use is defined in § 141(b)(6) as use (directly or indirectly) in a trade or
business carried on by any person other than a governmental unit. For this purpose,
any activity carried on by a person other than a natural person is treated as a trade or
business.

Section 141(b)(2) provides, in general, that an issue meets the private security or
payment test if the payment of the principal of, or the interest on, more than 10 percent
of the proceeds of an issue is directly or indirectly (1) secured by an interest in property
used or to be used for a private business use, (2) secured by an interest in payments in
respect of such property, or (3) to be derived from payments, whether or not to the
issuer, in respect of property, or borrowed money, used or to be used for a private
business use.

Section 141(e)(1)(A) defines a qualified bond to include any private activity bond that (1)
is an exempt facility bond; (2) meets the applicable requirements of § 146 (volume cap);
and (3) meets the applicable requirements of § 147.

Section 142(a)(1) defines an exempt facility bond to include any bond issued as part of
an issue 95 percent or more of the net proceeds of which are to be used to provide
airports.

Section 147(e) states that a private activity bond shall not be a qualified bond if issued
as part of an issue and any portion of the proceeds of such issue is to be used to
provide any airplane, skybox or other private luxury box, health club facility, facility
primarily used for gambling, or store the principal business of which is the sale of
alcoholic beverages for consumption off premises.

The statutory predecessor to § 147(e) is § 103(b)(18) of the Internal Revenue Code of
1954 (1954 Code), which was added by § 627(c) of the Deficit Reduction Act of 1984,
Pub. L. 98-367, 98 Stat. 630 (1984). The legislative history to § 103(b)(18) includes the
following language in reference to the prohibition on the use of bond proceeds for any
skybox or other private luxury box:

   In the case of skyboxes or other private luxury boxes, the committee
   does not intend to prohibit the use of [Industrial Development Bonds
   (IDBs)] to finance the construction, renovation or refurbishing of a facility
   solely because skyboxes are included in the project, so long as the

PLR-104077-18 4

  project otherwise qualifies for tax-exempt financing. Rather, no portion of
  the proceeds of the IDB may be used to provide any skybox. For this
  purpose, the skybox shall be deemed to include the interior furnishings of
  the box (e.g., the box’s plumbing, electrical and decorating costs) and the
  structural components required for the box (e.g., the box’s walls, ceilings,
  special enclosures), but does not include the normal components of the
  stadium, such as structural supports, to the extent they would have been
  required for the remaining portion of the stadium if no skyboxes (and no
  regular seats in lieu of skyboxes) had been built. House Supplemental
  Report, H.R. Rep. No. 98-432, pt. 2, at 1693 (1984).

See also H. R. Rep. No. 99-426, at 528 (1985) (discussing financing of mixed-use
airport facilities under § 142).

Issuer expects to have Terminal Shops in the reconstructed Boarding Area that have
non-qualified use. Moreover, Issuer expects that such Terminal Shops will, during the
term of the Bonds, be relocated to other Terminal Shop locations within the Boarding
Area. Issuer will finance the costs allocable to such Terminal Shops with Equity and
seeks a ruling that the amount of the Equity may be allocated to the Boarding Area on
an undivided basis, rather than to a specific location or discrete portion, to
accommodate the relocations of the Terminal Shops with non-qualified use.

The legislative history described above supports applying a reasonable allocation
method to avoid using the proceeds of tax-exempt bonds for non-qualified costs while
still being able to finance with proceeds of tax-exempt bonds those portions of the
facility that otherwise qualify for such financing. Within the Boarding Area, consistent
with the legislative history to the predecessor to § 147(e), Issuer will use Bond proceeds
only for the costs of the areas to be used for qualified use and will use Equity for the
costs of the Terminal Shops with expected non-qualified use. Issuer will allocate the
proceeds and the Equity to the qualified and non-qualified uses, respectively, on a
floating basis over the term of the Bonds, based on the costs of the portions of the
Boarding Area being so used, up to, but not exceeding, the respective amounts of
proceeds and Equity allocated to the Boarding Area. Accordingly, we conclude, under
the facts described above, that this is a reasonable allocation method.

Conclusion

Under the facts and circumstances of this case, we conclude that for purposes of
compliance with § 147(e) of the Code, Issuer may allocate proceeds of the Bonds and
the Equity on an undivided portion basis to the Boarding Area, and Issuer may allocate
such funds during the term of the Bonds to the qualified and non-qualified uses of the
Boarding Area, respectively, regardless of the specific location, based on the costs of
the portions of the Boarding Area being so used, up to but not exceeding the amounts
of proceeds and Equity allocated to the Boarding Area.
PLR-104077-18 5

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any transaction or item discussed or referenced in this letter,
including whether the Bonds meet the requirements for the exclusion of interest from
gross income under § 103.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

In accordance with a Power of Attorney on file with this office, a copy of this letter is
being sent to each of Issuer’s authorized representatives.

The ruling contained in this letter is based upon information and representations
submitted by Issuer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the materials submitted in
support of the request for a ruling, it is subject to verification upon examination.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Financial Institutions & Products)

                                       By: _________________________
                                           Timothy L. Jones
                                           Senior Counsel, Branch 5

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