This session will focus on issues surrounding tax exempt bonds and techniques for completing Schedule K, refunding issues, considerations surrounding deemed reissuance and more.

1. 22nd Annual Health Sciences
Tax Conference
Tax-exempt bonds
December 4, 2012

2. Disclaimer
► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
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3. Disclaimer
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Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-
serving member firm of Ernst & Young Global Limited operating in the US. For more
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Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
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4. Presenters
► Melinda Grady ► Debi Heiskala
Tax Director Ernst & Young LLP
St. Luke’s Episcopal Health San Diego, CA
System +1 858 535 7355
Houston, TX debra.heiskala@ey.com
► Ken Garner
Ernst & Young LLP
Fort Worth, TX
+1 817 348 6073
ken.garner@ey.com
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5. Objectives
► Form 990 reporting
► Post-compliance policies and procedures
► Internal Revenue Service (IRS) updates
► Best practices
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6. Schedule K update and issues

7. Line 24a — tax-exempt bond issues
► US$100,000 outstanding — 12/31/2002
► Parent or affiliates may report (not both)
► Not limited to “tax-exempt bonds” (other tax-exempt
obligations)
► Be aware of any “reissuance”
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8. Line 24b — temporary period exceptions
► Temporary period exceptions to yield restriction
► Capital projects — three years
► Certain certified construction projects — five years
► Investment proceeds — one year (from receipt), etc.
► Yield reduction payments allowed when temporary period
exceeded
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9. Line 24c — escrow account
Line 24d — “on behalf of” issuer
► Instructions distinguish “defeasance escrow” from
“refunding escrow”
► Line 24c key — “other than refunding escrow”
► “On behalf of” issuer:
► Rev. Rul. 63-20 corporations
► Constituted authority organized to issue bonds for public purposes
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10. Schedule K — overview
► Transition relief
► Bonds issued after 12/31/2002
► Special rules for refundings of pre-2003 issues
► Flexible “reporting years”
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11. Schedule K: Part I — bond issues

12. Schedule K: Part I — bond issues
► Columns (a) – (e): Should be consistent with Form 8038,
Information Return for Tax-Exempt Private Activity Bond
Issues
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13. Schedule K: Part I — bond issues (cont.)
► Column (b) — Issue price
(See Part III, Form 8038.)
► Column (f) — purpose
► Multiplepurposes — state each purpose
► Refunding prior issues — include issue date
► Use Part VI for lengthy descriptions
Page 13 Tax-exempt bonds

14. Schedule K: Part I — bond issues (cont.)
► Column (g) — Defeased
► Defeasance escrow or refunding escrow
► Indicates refunded bonds are listed (if post-2003 issue)
► Column (h) — “On behalf of” issuer
► Rev. Rul. 63-20
► Includes “constituted authorities” organized by state/local
government
Page 14 Tax-exempt bonds

15. Part II — proceeds

16. Schedule K: Part II — definitions
► Retired bonds
► Legally defeased bonds
► Reserve fund
► Capitalized interest
► Credit enhancement
► Refunding escrows
► Final allocation of proceeds
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17. Schedule K: Part II — proceeds
► Part I row corresponds to Part II columns
► Aggregate amounts on lines 4–12 may not equal line 3
► Line 4 requires “gross proceeds” — see
Form 8038 Part IV
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18. Schedule K: Part II — proceeds (cont.)
► Unspent proceeds — not in reserve fund or escrow
► Current/advance refundings — check Form 8038
► “Substantial completion” — last year, if multiple projects
► “Final allocation” of proceeds — within five years
(at the latest)
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19. Part III — private business use

20. Pre-2003 refunding — example
At 12/31/2011: ► Complete Parts I, II and IV for the
refunding bonds
2011 ► Need not complete Part III for the
US$1,000,000 refunding bonds or the
refunded bonds
► For a refunding bond that also
Refunding has new money, can complete
Part III for just the new
money portion
1998
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21. Schedule K: Part III — private business use
► Lines 2, 3a and 3c — reports existence of
contracts even if safe harbor is available
► Lines 3b and 3d — routinely engage bond
counsel/outside counsel to review contracts
during the reporting year
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22. Schedule K: Part III — private business use
(cont.)
► Lines 4 and 5 — average percentage of private use during
the reporting year
► Do not include the private use from safe harbor contracts
► Only use of “bond financed” property — consider “equity”
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23. Schedule K: Part III — private business use
(cont.)
► Not required for refundings of pre-2003 bonds
► Requires quantification of private use
► Types of private business use requiring
disclosure:
► Partnership/LLC — any time during the year
► Leases
► Management and/or research contracts
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24. Management contracts
Rev. Proc. 97-13:
► A management, service or incentive payment contract
with 501(c)(3) under which contractor provides services
involving all, a portion of or any function of, a facility
► Cafeteria
► Radiology services
► Emergency room services
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25. Management contracts (cont.)
Rev. Proc. 97-13 (cont.):
► Incidental services exception (e.g., janitorial, office
equipment repair, hospital billing or similar services), or
the mere granting of admitting privileges by a hospital to a
doctor
► Permitted compensation
► Must be reasonable
► Must not be based on a percentage of net income
► See 97-13 template and related resources
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26. Management contracts (cont.)
Rev. Proc. 97-13 (cont.):
► Permitted contract term
► Permitted term depends on type of compensation
► Longer-term contracts are permitted where the relative portion of
fixed compensation is increased
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27. Management contracts (cont.)
Rev. Proc. 97-13 (cont.):
► “Periodic fixed fee”
► Stated dollar amount for services for a specific period
► “Capitation fee”
► Fee for each person for whom provider assumes responsibility
► “Per-unit fee”
► Based on a unit of service specified
► May increase by a specified external standard (Consumer Price
Index)
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28. Management contracts (cont.)
Rev. Proc. 97-13 (cont.):
Safe harbor term limits:
► 95% fixed fee ► 15 years
► 80% fixed fee ► 10 years
► 50% fixed fee ► 5 years (3 year “out”)
► 100% capitation fee ► 5 years (3 year “out”)
► 100% per-unit fee ► 3 years (2 year “out”)
► 100% percentage of fees ► 2 years (1 year “out”)
charged (e.g., gross
revenue)
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29. Private business use
Rev. Proc. 97-13 (cont.):
► Renewal options
► Disregard if solely in the hands of the exempt user
► Disregard if automatic and subject to cancellation by either party
► Other renewal options count toward the maximum term of the
contract
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30. Effective private business use limit
For 501(c)(3) issuers:
5% net bond proceeds *
(2% cost of issuance)
3% effective limit **
* Adjusted by original issue discount/original issue premium
deposit to reserve fund
** Applicable to each bond issue
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31. Part IV — arbitrage

32. Schedule K: Part IV — definitions
► Arbitrage
► Yield reduction
► Arbitrage rebate
► Hedge
► Guaranteed investment contracts (GICs)
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33. Schedule K: Part IV — arbitrage
► Answers may change from year to year
► Consider comparing Form 8038-T
► Qualified hedges
► GICs
► Safe harbor: three bona fide offers
► IRS investigations of “bid rigging”
Page 33 Tax-exempt bonds

34. Schedule K: Part IV — arbitrage —
exceptions
► Six-month 100 18 months
expenditure 80
12 months
60
40
6 months
20
► Eighteen-month 0
15% 60% 100%
expenditure
100 24 months
80 18 months
60 12 months
► Two-year
40
construction 20 6 months
0
10% 45% 75% 100%
Page 34 Tax-exempt bonds

35. Post-compliance policies and procedures —
Part III, Line 7 and Part V

36. Written procedures for post-issuance
compliance — Part III, Line 7
► Applies to both arbitrage and private use
► “Written management practices”
► “Adopted” — not part of original bond docs generally
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37. Implementing a monitoring process
Compliance
Record retention
Monitoring
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38. Tax-exempt bonds monitoring process —
minimum requirements
Written policies and procedures, at a minimum, should include the
following:
► Names of the officials with responsibility for monitoring compliance
► A description of the training provided to such responsible officials with regard
to monitoring compliance
► The frequency of compliance checks, which must be at least annually
► The nature of the compliance activities required to be undertaken
► The procedures used to timely identify and elevate the resolution of a
violation when it occurs or is expected to occur
► The procedures for retention of all records that are material for substantiating
compliance with the applicable federal tax requirements
► A demonstration of the awareness of the availability of the Voluntary Closing
Agreement Program (VCAP) and other remedial actions to resolve violations
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39. VCAP benefit to written policies for
monitoring (Part V of Schedule K)
► Errors must be “timely identified” and “corrected”
through VCAP if self-remediation is not available.
► The violation is assessed from the date of
discovery rather than the date of commission of
the error.
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40. Tax-exempt bonds monitoring process —
attachments
► Bond documents
► Board approval for bond issuance
► Planned source and use of funds
► Copies of formal allocation
► Detailed draw schedules
► Arbitrate and rebate calculations
► List of bond-financed facilities
► Floor plans
► Lease schedules
► List of bond-financed assets (other)
► Tracking of assets reports
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41. Tax-exempt bonds monitoring process —
attachments (cont.)
► Economic useful life calculations
► Private activity calculations (current)
► Management contracts
► Research contracts
► Relevant correspondence (i.e., IRS)
► Documentation of bond redemption
► Form 990-T
► Checklists (including use questionnaires)
► Listing of all bond issues
► Capital budgets
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42. Record retention
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43. IRS updates

44. IRS updates
► Targeted bond audits
► Moving from project focus to an annual focus on market
segments
► First market segment will be hospitals
► Estimate 20–40 hospitals will be chosen for bond audit
► Expect the focus to be on the hospital market segment
every three years
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45. IRS updates (cont.)
► Informal guidance regarding alternative use of disposition
proceeds on website
► Private business use created by contracts
► Amended after issued
► Concern about doctors and length of contract
► Arbitrage from liquidity covenants
► Replacement proceeds?
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46. IRS updates — questionnaires to advance
refunders
► Questionnaires to advance refunders:
► 88% had procedures for arbitrage rebate
► 41% of them had “written procedures”
► Advance refunding exams
► 100 returns selected (not from questionnaires)
► 16 still open with 6 advisory closes
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47. Best practices

48. Best practices
► “What if” analyses completed for any
new contracts
► Conduit borrower working with issuer in exam
► Tax-exempt versus taxable bonds
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49. Thank you!
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