The Internal Revenue Service (IRS) has proposed new regulations for determining whether an entity is a political subdivision and permitted to issue tax-exempt bonds.
This proposed definition leaves open the question of whether development districts should qualify as a political subdivision. Development districts are heavily relied upon in some areas of the country to finance and promote residential development.
The IRS has proposed a three-pronged test for determining whether a bond issuer qualifies as a political subdivision. Only political subdivisions may issue tax-exempt bonds. Under the proposed regulations, a political subdivision would need to meet tests based on sovereign powers, government purpose and governmental control.
The government control requirement may present challenges for development districts during the initial development period when, according to the IRS, “one or two private developers elect the district’s governing body and no other governmental control exists.” The IRS also raises questions about the “potential for excessive private control by individual developers, and attendant impact of excessive issuance of tax-exempt bonds, and the inappropriate private benefits from this Federal subsidy.”
The IRS specifically is seeking comments on possible relief for development districts. After fully evaluating the proposal, NAHB will submit comments, which are due in May.
For more information, contact J.P. Delmore at 800-368-5242 x8412.