William Mitchell Law Review

Publication Information

31 William Mitchell Law Review 147 (2004-2005)


There are two areas where borrowers’ counsel can easily misstep when representing a charitable organization in a tax-exempt bond deal. The first is failing to recognize that “private business use” under § 145 can (and does) result in situations that would not constitute an “unrelated trade or business” of the borrower. The second occurs when borrowers’ counsel conflate the test for “unrelated business taxable income” under § 512 with the use of “unrelated trades or businesses” in the definition of a qualified 501(c)(3) bond under § 145. A mistake in either of these areas could lead to an erroneous opinion that the use of bond proceeds will not result in taxation of interest on the bonds. This article will explain these distinctions and include helpful examples. In addition, there are two areas where charitable organizations often take actions that subsequently preclude the use of tax-exempt bonds for an otherwise eligible project. The first of these involves the reimbursement of project expenses with bond proceeds advanced from the charity’s available funds. Borrowers’ counsel may not be aware of rules that require certain actions contemporaneous with the advances if the advanced funds ultimately will be reimbursed with the proceeds of tax-exempt debt. Similarly, charitable organizations may inadvertently use donation solicitation materials that foreclose the future use of tax-exempt bond financing for a specific project. Although borrowers’ counsel may be asked to review these materials before they are sent to potential donors, these counsel may not be sensitive to the application of the tax-exempt financing rules that govern the use of bonds to finance projects which are the subject of a capital campaign or other donation. This article will discuss the Treasury Regulations promulgated under § 148, defining arbitrage bonds and governing the creation of replacement proceeds, and their applicability to the reimbursement of advances and solicitation of donations.