The term used in the Code to describe any bond issued as part of a bond issue that meets both of the private business tests or meets the private loan financing test.
Private Business Use (PBU) and Tests
Any use of Bond proceeds in a trade or business carried on by a person other than a governmental unit. A “trade or business” is broadly defined as any activity carried on by any person other than a natural person (as well as any trade or business use by a natural person). “Use” can occur in connection with the ownership, lease or management of Bond-financed property or any other arrangement resulting in a special benefit to a non-governmental entity. Revenue Procedure 2017-13 provides safe harbors under which a management contract will not result in Private Use of a Bond-financed facility. Revenue Procedure 2007-47 provides safe harbors under which an agreement by a private party to sponsor research activities that occur in a Bond-financed facility will not result in private use of that facility.
Private Business Tests
Under the Private Business Tests, Bonds are Private Activity Bonds if more than 10% of the proceeds of the Issue are to be used in the trade or business of any person other than a governmental unit (the “private business use test”) and more than 10% of the payment of the Principal of or Interest on the Issue is, directly or indirectly, secured by property used in a trade or business or derived from payments related to property used in a trade or business (the “private security or payment test”). These 10% limits are reduced to 5% for unrelated or disproportionate private use. In addition, there is a further limitation that applies to large bond issues. Even if the Issue does not satisfy the private business use test, the Issue will still constitute Private Activity Bonds if the private business use portion exceeds $15 million, unless an allocation of Volume Cap is made.
The private security or payment test is met if the payment of Debt Service on more than 10% of the Bond Issue is either (i) directly or indirectly derived from payment in respect of property or borrowed money, used or to be used for a private business use, or (ii) directly or indirectly secured by any interest in property used or to be used for a private business use or payments in respect of such property. Private payments include both direct and indirect payments made by private persons who are treated as using Bond proceeds regardless of whether those proceeds are formally pledged as Security or directly used to pay Debt Service on the Bonds. Payments made pursuant to an arrangement that constitutes private use generally constitutes private payments as well. Payments for operation and maintenance of the property are not included as payments for the use of the property and can be excluded.
Dive Deeper on Tax Issues
Learn more about how various aspects of tax law intersect with municipal securities.
One of the tests used in establishing whether a bond is a private activity bond (PAB) for tax purposes. The private loan financing test specifically determines whether more than $5 million or 5% of the proceeds of a bond issuer are used to directly or indirectly finance loans to one or more non-governmental persons.