IRS blesses a port's method for measuring bond-financed property's economic life under the dock-and-wharf bond safe harbor

Plain-English summary

A public port authority financed dock and wharf improvements with tax-exempt
"exempt facility" bonds. Interest on those bonds stays tax-free only if the
financed property is government-owned, and a safe harbor lets property used
by a private operator still count as government-owned as long as the
operating agreement's term is no more than 80 percent of the property's
reasonably expected economic life. When the port extended its terminal
operating agreements with a private terminal operator, it needed a workable
way to measure that economic life, so it asked the IRS to approve its
proposed method. The port's method measures economic life as of the
amended-agreement date (not the original bond issue date), values each
improved asset as a whole rather than each separate improvement, computes a
weighted average by original bond proceeds allocated to each asset, and
excludes land costs because they are under 25 percent of the proceeds. The
IRS concluded that, given all the facts and circumstances, this method is
reasonable for applying the safe harbor. The ruling does not decide the
bonds' actual tax-exempt status or any depreciation questions. Port
authorities and other issuers of exempt facility bonds care because keeping
within the government-ownership safe harbor is what preserves the bonds'
tax exemption when private companies operate the facilities.

Ruling snapshot

• Question: Is the port's method of determining the economic life of bond-financed property reasonable for the § 142(b)(1)(B) government-ownership safe harbor?
• Outcome: Approved (method ruled reasonable under the facts and circumstances)
• Key authorities: IRC § 142(a)(2), (b)(1); IRC § 147(b); IRC § 103

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201918008 Third Party Communication: None
Release Date: 5/3/2019 Date of Communication: Not Applicable
Index Number: 142.02-01
Person To Contact:
---------- ----------, ID No. ----------
---------- ----------
---------- Telephone Number:
---------- ----------
---------- Refer Reply To:
CC:FIP:B05
PLR-121689-18
Date:
January 31, 2019

Legend

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

Port = ----------

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

Terminal 1 = ----------

Terminal 2 = ----------

Terminal 3 = ----------

Company = ----------

Date 1 = ----------

Date 2 = ----------

Date 3 = ----------

Date 4 = ----------

a = --
PLR-121689-18 2

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

This is in response to Issuer’s request for a ruling that, for purposes of § 142(b)(1)(B) of
the Internal Revenue Code (Code), the safe harbor for the government ownership
requirement (the safe harbor), Issuer may determine the reasonably expected economic
life (economic life) of property financed with proceeds of the Bonds using the method
described below.

FACTS AND REPRESENTATIONS

Issuer controls, manages, and operates the Port, which is a public port. Over the years,
Issuer has issued bonds to finance or refinance various assets and improvements to
Port facilities. The Bonds are the outstanding issues that financed or refinanced
expenditures related to property subject to the Amended Agreements (described
below). Generally, the expenditures financed or refinanced by the Bonds for the
property subject to the Amended Agreements (the Bond-financed Property1) relate to
improvements to portions of existing assets, such as upgrades or replacements of such
portions, rather than to construction or acquisition of an entire asset.

In managing and operating the Port, Issuer enters into agreements with maritime
terminal operators and other maritime-related businesses for the assignment of non-
exclusive preferential use of the Port facilities. On Dates 1, 2, and 3, Issuer entered into
such agreements with respect to Terminals 2, 1, and 3, respectively (the Agreements).
The Agreements for Terminals 2 and 3 were entered into with Company more than a
decade apart. The Agreement for Terminal 1 was entered into with a different party and,
some years later, was ultimately assigned to Company. Effective Date 4, Issuer and
Company amended the Agreements to provide, among other things, an extension of the
term of each of the Agreements for a years (as amended, the Amended Agreements),
subject to the Issuer receiving a ruling from the Internal Revenue Service approving
Issuer’s proposed method for determining the economic life of the Bond-financed
property.

The property that is subject to the Amended Agreements includes wharves/pilings,
buildings, and yards. Wharves/pilings are the dock areas at which container ships are
moored. Yards comprise all of the land improvements and utilities in the area in which
containers are temporarily stored and through which containers move during the loading
and unloading of ships. In addition, certain of the Amended Agreements provide for the
non-exclusive preferential use of Bond-financed cranes for the loading and unloading of
containers onto and from ships.

1
For purposes of this ruling, Bond-financed Property does not include property for which Issuer has taken
a remedial action with respect to the allocable bonds.
PLR-121689-18 3

Issuer proposes, for purposes of the safe harbor, to determine the economic life of the
Bond-financed Property as of Date 4, the effective date of each of the Amended
Agreements, based on an engineering assessment. Further, in the case of
improvements, Issuer will determine the economic life of the Bond-financed Property
based upon the economic life of each improved asset, i.e., each wharf/piling, building,
yard, or crane (rather than based upon the economic life of each separate improvement
to such asset). Issuer will then compute the weighted average economic life of the
Bond-financed Property subject to each respective Amended Agreement by multiplying
the economic life of each asset (or improved asset) to which Bond proceeds are
allocated by the amount of proceeds originally allocated to the cost of each such asset
(including the cost of the improvements). Issuer will not take the costs allocable to land
(including all costs capitalized to land) into account because such costs do not exceed
25 percent of the aggregate amount of proceeds allocated to the Bond-financed
Property subject to each respective Amended Agreement.

LAW

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)(1) provides that § 103(a)
shall not apply in the case of any private activity bond which is not a qualified bond
(within the meaning of § 141).

Section 141(e)(1) provides, in part, that the term "qualified bond" includes an exempt
facility bond. Section 142(a)(2) provides that the term "exempt facility bond" includes
any bond issued as part of an issue 95 percent or more of the net proceeds of which are
to be used to provide facilities for docks and wharves.

Section 142(b)(1)(A) provides that an issue that provides a dock and wharf facility will
be treated as described in § 142(a)(2) only if all of the property to be financed by the net
proceeds of the issue is to be owned by a governmental unit.

Section 142(b)(1)(B) provides that for purposes of § 142(b)(1)(A), property leased by a
governmental unit shall be treated as owned by such governmental unit if: (i) the lessee
makes an irrevocable election (binding on the lessee and all successors in interest
under the lease) not to claim depreciation or an investment credit with respect to such
property, (ii) the lease term (as defined in § 168(i)(3)) is not more than 80 percent of the
reasonably expected economic life of the property (as determined under § 147(b)), and
(iii) the lessee has no option to purchase the property other than at fair market value (as
of the time such option is exercised). Section 142(b)(1)(B) further provides that similar
rules shall apply to management contracts and similar types of operating agreements.

Section 147(b)(1) provides that a private activity bond is not a qualified bond if it is
issued as part of an issue and the average maturity of the bonds issued as part of the
issue exceeds 120 percent of the reasonably expected economic life of the facilities
PLR-121689-18 4

being financed with the net proceeds of such issue. Section 147(b)(2)(B) provides that
for purposes of § 147(b)(1), the average reasonably expected economic life of the
facilities being financed with any issue is determined by taking into account the
respective cost of such facilities. Section 147(b)(3)(A) provides that for purposes of
§ 147(b), the reasonably expected economic life of any facility shall be determined as of
the later of the date on which the bonds are issued or the date on which the facility is
placed in service (or expected to be placed in service). Section 147(b)(3)(B) provides
that for purposes of § 147(b), land is not taken into account unless at least 25 percent of
the net proceeds of the issue are to be used for land costs (in which case land costs will
be given a 30-year life).

ANALYSIS

The governmental ownership requirement must be met with respect to all of the Bond-
financed Property. Under the safe harbor, the term of the arrangement must not exceed
80 percent of the economic life of the property (as determined under § 147(b)).
However, rather than using the date the Bonds are issued as the date as of which to
assess the economic life of the Bond-financed Property as under § 147(b)(3)(A), Issuer
will use the effective date of the Amended Agreements. Because the safe harbor
requires a comparison of the length of an arrangement to the economic life of the
property subject to that arrangement, we conclude that Issuer’s use of the effective date
of the Amended Agreements, as the starting date of the term of those agreements, is an
appropriate date as of which to assess the economic life of the Bond-financed Property
for purposes of the safe harbor.

Under § 147(b), the economic life of assets may be determined based on the economic
life with respect to the principal users of the assets taking into account all the facts and
circumstances. See H. R. Conf. Rep. 97-760, at p. 519-20 (1982). In the case of the
Bond-financed improvements (rather than construction or acquisition of whole assets),
Issuer proposes to determine the economic life of the Bond-financed Property based on
the economic life of each asset as a whole as improved by the expenditure of Bond
proceeds (in contrast to the economic life of the improvement to the asset separately).
We conclude that this approach is reasonable under the facts and circumstances of
Issuer’s expenditures of Bond proceeds.

Under § 147(b)(3)(B), for purposes of determining the economic life of the financed
property under § 147(b)(1)(B), land is not taken into account unless more than 25
percent of the net proceeds of the issue is used to finance land. However, Issuer will
not take costs allocable to land (including all costs capitalized to land) because such
costs do not exceed 25 percent of the aggregate amount of proceeds allocated to the
Bond-financed Property subject to each respective Amended Agreement. We conclude
that, for purposes of the safe harbor, determining whether to take such costs into
account based on the amount of proceeds allocated to the Bond-financed Property
subject to each Amended Agreement is appropriate.
PLR-121689-18 5

Under § 147(b)(2)(B), the average economic life of property financed by an issue is
determined by taking into account the respective amounts of bond proceeds allocable to
the costs of the property. See H. R. Conf. Rep. 97-760, at p. 519, n.6 (1982) (regarding
assets partially financed with bond proceeds). Issuer proposes to determine the
average economic life of the Bond-financed Property using the amounts of proceeds
originally allocated to the costs of the Bond-financed Property. However, rather than
calculating the average economic life of Bond-financed Property with respect to each
issue of the Bonds as under § 147(b)(1)(B), Issuer will calculate the average economic
life of the Bond-financed Property with respect to each Amended Agreement. Because
the safe harbor requires a comparison of the length of an arrangement to the economic
life of the property subject to that arrangement, we conclude that Issuer’s method of
calculating the average economic life of the Bond-financed Property for each Amended
Agreement is reasonable.

CONCLUSION

Accordingly, we conclude that Issuer’s method of determining the economic life of the
Bond-financed Property consistently applied for purposes of determining whether the
Bond-financed Property meets the safe harbor is reasonable under all the facts and
circumstances described above.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect 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 of the Code. In addition, this ruling does not
constitute a ruling on (1) the useful life of each Bond-financed property under § 167,
(2) the determination of the useful life of any asset under § 167 or any other
depreciation or amortization provision of the Code, (3) the application of § 168(i)(6) to
any addition or improvement, or (4) the placed-in-service date of each Bond-financed
property under § 167.

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
PLR-121689-18 6

in support of the request for rulings, it is subject to verification on examination.

                                    Sincerely,

                                    /S/

                                    Johanna Som de Cerff
                                    Senior Technician Reviewer
                                    (Financial Institutions & Products)