The complexities of tax-exempt debt require the use of outside counsel to ensure compliance with the numerous legalities of issuing, paying, and retiring tax-exempt debt. To assist with compliance, the university established the Tax-Exempt Bond Compliance Committee.
This committee is composed of representatives from Debt Management, Tax Department, General Counsel, DSO Accounting, Finance & Accounting, Office of Research & Commercialization, Office of Resource Management, UCF Foundation, and UCF Business Services. From a tax perspective, the two main areas of concern for compliance with tax-exempt debt are private business use and arbitrage.
In its simplest form, the private business use rules generally mean that no more than ten percent of the use of the proceeds of a tax-exempt debt issuance may be used for nongovernmental purposes. This is measured over the life of the issuance, which typically lasts for thirty years. For example, if an exempt debt issuance is used to construct a 100,000 square foot building, and more than 10,000 square feet are occupied by a nongovernmental entity, the bond will be determined to be a Private Activity Bond, and the interest paid on the bond will be taxable to the bond holders.
A bond is an arbitrage bond, and thus the interest paid is taxable to bond holders, if part of the proceeds are reasonably expected to be used, directly or indirectly, to acquire materially higher yielding investments or to replace funds that were used to acquire materially higher yielding investments. An example is if an issuer of tax exempt debt were to use the proceeds to purchase shares of stock in a rapidly growing technology company.
Disclaimer: The University of Central Florida and its related organizations do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.