Cornell University (“the university") has financed the acquisition and construction of, and improvements to, many facilities and other capital projects through the issuance of qualified 501(c)(3) tax-exempt bonds. As the issuer of tax-exempt bonds, Cornell is required to comply with federal tax rules that govern the expenditure of proceeds of tax-exempt, bond-financed property; investment of proceeds in compliance with arbitrage rules; and retention of records. To maintain compliance with federal regulations, the university is required to provide to the campus community written procedures governing the use of tax-exempt bond proceeds. These guidelines, which follow, identify compliance areas of tax-exempt bond financing and Cornell University’s procedure for fulfilling requirements in these areas. The university treasurer’s office requires units receiving capital project financing to comply with these procedures in their use of tax-exempt, bond-financed property and in the allowance of external research being performed in these facilities. Failure to follow these rules may result in the loss of the tax-exempt status of the bonds, significant penalties, and other consequences. Review of and compliance with most of the rules is required until the bond is paid in full or, if refinanced, until the refinanced bonds are paid in full. The university treasurer’s office is responsible for documenting compliance.
arbitrage: Investment earnings on bond proceeds in excess of the bond interest paid to bondholders during the construction period, adjusted for certain expenses
applicable federal law: Internal Revenue Code (IRC) and regulations, including IRC sections 145-150 and related regulations
Note: Internal Revenue Service (IRS) publication 4077, Tax-Exempt Bonds for 501(c)(3) Charitable Organizations Compliance Guide provides guidance and explanation for most areas of tax-exempt financing relevant to the university.
basic research: Any original investigation not having a specific commercial objective for the advancement of scientific knowledge
external party: Any person other than a member of the university faculty, staff, or student body
Private Business Use: Use of tax-exempt, bond-financed property in a trade or business by an external party or entity
qualified 501(c)(3) bonds: Tax-exempt bonds, the proceeds of which are used by a 501(c)(3) charitable organization in furtherance of its exempt purpose. The bonds are issued by a state or local government agency such as the Dormitory Authority of New York or Tompkins County Development Corporation
tax certificate: The agreement signed by the university at the closing of a bond issuance in which the charitable organization makes certain representations, warranties, and covenants relating to its 501(c)(3) status, the tax eligibility of the projects, and the organization's operations
unrelated trade or business: An activity that produces income that does not contribute importantly to the exempt purpose of the university
During the annual budget review process, the university issues a five-year capital plan that is approved by the university’s board of trustees. This plan identifies all capital projects over $2 million and appropriate project funding. The plan includes capital projects funded by all sources such as operating funds, gifts, State University Construction Fund (SUCF) funds, and debt. In determining the funding of the capital for the project, the department is responsible to comply with the University Capital Project Spending Guidelines. Once a project is determined to be funded with tax-exempt debt, additional documentation and approvals are necessary, such as:
Bond proceeds may be disbursed for the following reasons:
The university allocates debt proceeds to the various projects being funded with the tax-exempt debt. To be an eligible project, the property being financed must be (1) owned or, under certain circumstances, leased by the university; and (2) have an intended use that is consistent with the university’s 501(c)(3) exempt purposes. The default methodology used for making an allocation of bond proceeds is "specific tracing," meaning that proceeds are deemed to be spent on the expenditures to which they are traceable by the capital project account. The university allocates equity or taxable debt to the portion of a project used for private use (if any exists), to minimize the private use of the bonds.
Cornell’s Office of the University Treasurer tracks debt proceeds used to pay issuance costs related to tax-exempt debt to ensure that such costs do not exceed 2% of the "net proceeds" of such debt. In addition, the spending of the proceeds toward eligible project costs is tracked, as is the rate at which the proceeds are being spent. The university reconciles the monthly activity of the bond proceeds against the bond custodian accounts.
The university expects to comply with regulatory record retention requirements. Federal regulations provide that records relating to a tax-exempt debt transaction should be retained for so long as they are material in the administration of any federal tax law. Therefore, it is recommended that material records be kept for the life of the debt, including any refunding of the debt, plus three years. Agreements and contracts that do not give rise to private use will be retained according to “University Policy 4.7, Retention of University Records.”
Five percent or less of tax-exempt bond issue proceeds may be used for private business purposes, including the costs incurred to issue the debt, and such use may occur only if it is in accordance with tax certificate provisions and in compliance with applicable federal law.
Following the close of year-end and the annual audit, the university treasurer’s office conducts an annual survey of the use of bond-financed property to determine the amount of private business use of each outstanding bond issue for that year. The university treasurer’s office prepares a Private Use Questionnaire, which is distributed to the university finance groups to confirm space usage information (including information concerning management and service contracts, leases, and space rentals). The university treasurer’s office reviews this information to identify private business uses of bond-financed space and, as necessary to make this determination, obtains copies of relevant contracts.
In addition, the university treasurer’s office works with the Office of Sponsored Programs (OSP) to identify any sponsored research contracts for the fiscal year in question that may give rise to private use.
The university treasurer’s office also coordinates with the Tax Department to identify any arrangements that may be regarded as an “unrelated trade or business” for the fiscal year in question. To the extent private business use arose from any arrangement, the university treasurer’s office gathers any information necessary to identify and/or allocate the bond-financed space to private business use.
If any arrangements are not clearly categorized as private business use, or if it is unclear how mixed-use property should be allocated to private business use, the university treasurer’s office discusses the issue with counsel.
The university treasurer’s office then calculates the amount of private business use of each of the institution’s outstanding bond issues for the fiscal year. The purpose of the calculation is to confirm Cornell’s continued compliance with the limitations on private use, and to permit the university to meets its Form 990 reporting obligation.
The university anticipates that the annual compliance checks and other procedures will be effective in preventing any violation of federal law relating to its outstanding tax-exempt bond issues. However, the compliance check process is also intended to identify any potential violation.
Most private business use in a tax-exempt financed facility arises from the following arrangements:
In the event a potential violation is identified, through the annual compliance checks or otherwise, the individual identifying the potential violation should immediately refer the matter to the university treasurer’s office for review. The university treasurer’s office will examine the matter and consult with internal and/or external counsel, as necessary, to determine whether a violation has occurred, or if a violation has not yet occurred, what steps may be taken to avoid a violation. In the case of a new arrangement that may cause a potential private business use violation, it may be possible to avoid a violation by taking "remedial action" within the meaning of applicable federal law. If a violation has already occurred, the university may seek resolution through the IRS’s Tax-Exempt Bonds Voluntary Closing Agreement Program.
Federal tax law requires the university (through the bond issuer) to "rebate" to the federal government any amounts earned from the investment of bond proceeds at a yield in excess of the bond yield, unless an exception applies. The university retains an outside rebate computation firm to calculate its liability, if any, for rebate for each of its bond issues. The university treasurer’s office is responsible for maintaining the engagement with the firm, providing the firm with the documentation it requires, making sure the firm prepares calculations at the required intervals (including the retirement of a given bond issue), reviewing the firm’s calculations for obvious errors, coordinating with the issuer to remit any required rebate to the federal government, and retaining appropriate records. The university treasurer’s office is also responsible for monitoring the spending of bond proceeds and taking appropriate steps to qualify for a "spending exception" to rebate, to the extent practicable.
The controller's office is responsible to file the university's IRS Form 990. The Office of the University Treasurer assists with the completion of Schedule K of Form 990, related to bond activity.
Cornell departments are responsible for the following tasks:
The university treasurer has the primary responsibility of documenting and monitoring post-issuance compliance with tax-exempt bond regulations. The university treasurer has designated the director of Debt as responsible for monitoring compliance, including, but not limited to, the following tasks: