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 debt 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.
During the annual budget review process, the university issues a one-year capital budget and five-year capital plan. The one-year capital budget is approved by the university’s board of trustees. The budget and plan includes capital projects funded by all sources such as operating funds, gifts, sponsored program funds, and debt. In determining the funding of the capital for the project, the department is responsible to comply with the. 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 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.
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 are not material will be retained according to University Policy 4.7, Retention of University Records.
Following the close of year-end and the annual audit, the university treasurer’s office conducts a review of the use of bond-financed property to determine the amount of private business use of each outstanding bond issue for that year, by either using a survey or reviewing the university space inventory system. The Private Use Questionnaire is distributed to the university's finance groups to confirm space usage information (including information concerning management and service contracts, leases, and space rentals). The space inventory system identifies space on campus that is utilized by external parties. 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 university counsel and 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.
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 meet 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. Most private business use in a tax-exempt financed facility arises from the following arrangements:
Use by Cornell in unrealted trade or business (reported as UBIT): Use of bond-financed facilities in an unrelated trade or business is private business use.
Beneficial use by third parties:
Lease and rentals: A lease or rental of bond-financed property by an external party constitutes private use, with the following exceptions:
Management or service contracts: An agreement with an external party in which the user provides management services with respect to the bond-financed property is considered private use. Management contracts include contracts for dining services or facility management. Exceptions to these contracts include arrangements that are "incidental" to the exempt use of the facility, such as janitorial services, office equipment repair, or elevator maintenance.
However, there are additional exceptsions for contracts meeting the safe harbors set forth in IRS Revenue Procedure 2016-44. In order to meet the Safe Harbors:
The university treasurer’s office recommends management and service contracts be reviewed by legal counsel for the safe harbor exceptions.
Research agreements: Sponsored research by an external party (including the federal government and its agencies) may result in private business use unless the terms of the sponsorship agreement meet the "safe harbors" qualifications set forth in IRS Revenue Procedure 2007-47, Research Agreements and Private Business Use.
Corporate Sponsored Research:
Federal Sponsored Research:
Research sponsored by other 501(c)(3) organizations: the arrangement should not give rise to private business use provided that the research is in furtherance of the exempt purposes of the university.
Clinical trial agreement: To support the position that clinical trials do not result in private business use, the university must demonstrate some or all of the following factors:
Naming rights: Naming rights to individuals donors not engaged in trade or business do not give rise to private use. By placing a name on the building, it would not provide the individual with legal right or entitlement to control the use of the facility. Naming rights to corporations may give rise to private use and the department should consult with the university treasurer’s office and university counsel.
Substantial economic benefit or special legal entitlement: Private business use may arise to the extent the bond-financed property provides a "substantial economic benefit" to a private business user, or private business user has a "special legal entitlement" to the property.
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, 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.
The university 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: