Bill Offered to Give Issuers More Flexibility with Research Arrangements
Rep. Dan Lipinski, D-Ill., has introduced a bill that would create more flexible standards under which research arrangements at tax-exempt bond-financed research facilities would not give rise to private-business use.
The bill, H.R. 1819, is similar to a proposal in President Obama' fiscal 2016 budget. It was introduced on April 15 and has been referred to the House Ways and Means Committee.
"The purpose of this bill is to simplify tax-free bond-financing rules to promote research collaboration between industry and universities," Lipinski said. "The best science rises to the top when researchers work together across institutions to generate ideas. Unfortunately, private-public research agreements are not always treated consistently under tax law. It is difficult to determine whether collaborative agreements are eligible to draw on tax-exempt bond financing. We should make these determinations simpler so that researchers can focus on developing their ideas and universities are not forced to jump through arbitrary bureaucratic hoops."
Under federal tax law, bonds are private-activity bonds if more than 10% of the proceeds are used for private business and more than 10% of the debt service is paid from, or secured by, private parties. PABs are taxable unless they are used for projects that fall within certain categories.
Contractual arrangements between state and local governments and private parties in bond-financed projects can give rise to private business use. One type of such arrangement would be between public and private parties involving the conduct of research at tax-exempt bond financed facilities.
The legislative history of the Tax Reform Act of 1986 provided that research arrangements have to have certain features to avoid giving rise to private business use. For example, corporate-sponsored research at a bond-financed university facility will not be considered private business use if the sponsor pays a competitive price for the use of the technology developed and the price is determined at the time the technology is available for use, rather than when the research agreement is entered into, Treasury Department officials said in the "Greenbook" explanations of revenue proposals in the president's budget.
Treasury and the Internal Revenue Service have provided safe harbors for when certain research arrangements don't give rise to private business use that "reflect the constraints enumerated in the legislative history," according to the Greenbook.
Treasury officials pointed out that research benefits society and involves a great deal of investment and uncertainty. "More flexible standards for public-private research arrangements for purposes of the private business limits on tax-exempt bonds than those allowed under existing safe harbors potentially would foster greater investment in research, greater technological innovation, and broader benefits to society at large," they said.
Lipinski's bill and President Obama's budget proposal would provide that basic research arrangements at tax-exempt bond financed research facilities would not count toward the private business use limits if two requirements are met.
The first is that a state or local government or a 501(c)(3) nonprofit organization would have to own the research facility. The second is that the government or nonprofit enters into a bona fide, arm's-length arrangement with the private business sponsor about the terms for sharing the economic benefits of products resulting from the basic research. The arrangements can determine how the economic benefits are shared at the time the parties enter into the contract.
Lipinski serves on the House Transportation and Infrastructure Committee and the House Science, Space and Technology Committee. The congressman has also recently sponsored bills that would index the federal gasoline and diesel taxes to inflation and that would require states to allocate some of their annual transportation funding to local projects through a competitive grant process.
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