Stanford must satisfy various requirements to remain in compliance with the rules regulating tax-exempt bonds. Guidelines and practices must be followed for tax-exempt bonds to keep their tax-exempt status. Compliance is required both upon the issuance of the bonds and through the life of the bonds, with post issuance compliance monitoring.
Stanford issues tax-exempt debt through the California Educational Facilities Authority (CEFA). Stanford must satisfy various requirements to remain in compliance with the rules regulating tax-exempt bonds. Stanford is required to certify that we are in compliance with bond and tax compliance at the time of signing, as well as throughout the issuance of the bond and all subsequent tax-exempt refinancings. Failure to comply can result in financial penalties for the university as well as adverse publicity and loss of tax-exemption on the existing bonds.
Annual Bond Compliance
As part of post-issuance compliance, Stanford is required to provide annual certification to the state, IRS and, if necessary, public postings, that the university is abiding by terms of the bond documents. This process involves all schools and departments that have an internal loan as well as other central departments.
Each year, in conjunction with the audit process, representatives from schools and departments certify that Stanford is in compliance with bond covenants, including that there is no private use, no religious use has taken place in facilities financed with tax-exempt bonds and that tax-exempt bond proceeds have not been used in situations that would give rise to tax arbitrage. The list of specific conditions that schools and departments attest to is on the Annual Bond Compliance Schedule.
Tax Compliance: Private Use and Arbitrage
Interest on bonds issued by not-for-profit institutions is exempt from federal gross income tax if certain requirements are met. Compliance is required both upon the issuance of the bonds and during the post-issuance phase, which extends through and beyond the life of the bonds. Failure to comply can result in financial penalties for the university as well as adverse publicity and loss of tax-exemption on the existing bonds.
Private Use Restrictions
Private use is defined as the use of tax-exempt bond proceeds or use of bond-financed facilities for the benefit of the trade or business of an entity other than the university (or for an unrelated trade or business of the university). The use does not have to result in unrelated business income to be considered private use.
Examples of private use include: conducting research solely for the benefit of a private corporation or displaying corporate names on a named space, building or outdoor facility and other activities giving rise to unrelated business income (UBI). For more examples, review the UBI tutorial.
Please consult the Capital Accounting Bond/Tax Compliance Analyst if private use in a tax-exempt financed facility is contemplated.
Tax law restricts, with certain exceptions, the amount of investment income Stanford can earn on tax-exempt bond proceeds. When tax-exempt debt is “deemed” to fund investment earnings, it creates a potential tax arbitrage situation. Tax arbitrage can occur when: investing proceeds from tax-exempt bonds in higher yielding investments, designating an investment fund to service tax-exempt debt and investing gifts restricted to use for a particular project while borrowing tax-exempt debt. Excess and unallowable earnings must be returned to the IRS.
For more details regarding tax compliance, refer to the Compliance Guidelines for Tax-Exempt Bonds document.
California state law restricts the use of tax-exempt financed facilities for sectarian instruction or as a place of religious worship.
Please consult the Capital Accounting Bond/Tax Compliance Analyst if religious use is contemplated in a tax-exempt financed facility. Please consult the Capital Accounting/Tax Compliance Analyst if you are not familiar with the funding sources of your building and related spaces.