1. Peck, Shaffer & Williams LLP 1 Federal Income Tax Issues Matthias Edrich Erick Stowe January 30, 2009

2. Peck, Shaffer & Williams LLP 2 Presenters Matthias Edrich, is a second year associate of Peck Shaffer with a focus on transaction structure, documents, disclosure and tax matters Erick Stowe, more than 30 years’ practice in public finance, partner at Peck Shaffer with a focus on tax matters

3. Peck, Shaffer & Williams LLP 3 Basic Tax Rule Interest on debt of a state or political subdivision is excluded from federal gross income unless the debt is a private activity bond (that is not a qualified private activity bond) and unless the debt is an arbitrage bond. There are also some technical rules that must be met.

4. Peck, Shaffer & Williams LLP 4 Issuers State or Local Governmental Issuer –State, D.C., Possession or Political Subdivision –On Behalf Of/Constituted Authority –63-20 Issuers –Indian Tribal Governments –Other

5. Peck, Shaffer & Williams LLP 5 Debt –Valid Exercise of Borrowing Power –Nonrecourse, Conduit or Revenue Financings –Debt Must Be Incurred –May be Lease or Installment Sale in Form -- Interest Must Be Separately Stated

6. Peck, Shaffer & Williams LLP 6 Private Activity Bonds Use of Proceeds –Governmental Bond –Qualified Private Activity Bond Private Business Use Test Private Loan Test

7. Peck, Shaffer & Williams LLP 7 Private Activity Bonds Two-Part Private Business Test: –More Than 10% Private Business Use AND –More Than 10% Private Payment or Security Reasonable Expectations

8. Peck, Shaffer & Williams LLP 8 Private Business Use? Use By a “Nongovernmental Person” –Federal Government –Section 501(c)(3) Organization –Other Private Entity (Corporation, Partnership, LLC)

9. Peck, Shaffer & Williams LLP 9 Private Business Use? Use Includes –Ownership –Lease/Sublease –Certain Management/Services Contracts –Certain Sponsored Research Agreements –Certain Output Contracts –“Special Legal Entitlement” –“Special Economic Benefit”

10. Peck, Shaffer & Williams LLP 10 Private Business Use? Exceptions –“General Public Use” –Short, Incidental and Temporary Use Measuring Private Business Use –Generally Measured Over Time –Allocation for Mixed Use Facilities

11. Peck, Shaffer & Williams LLP 11 Private Payment Test Measure Private Payments –Present Value (PV) of all Private Payments over Term of Bonds –All private Payments Benefiting Issuer –Limited to the Amount of Private Use –Excludes Operating Expenses –Generally applicable taxes are not private payments

12. Peck, Shaffer & Williams LLP 12 Private Loan Alternative to Private Business Test Measure Loans –In Amounts More Than the Lesser of 5% of the Bond Proceeds or $5 million Used to Make or Finance Loans to Nongovernmental Persons Tax Assessment Exception

13. Peck, Shaffer & Williams LLP 13 Qualified Private Activity Bonds 501(c)(3) Bonds Small Issue (Maximum $10 million) for Manufacturing and 1st Time Farmers Acquisition of Non-Government Output Facility Bonds Student Loan Bonds Qualified Redevelopment Bonds Low- and Moderate-Income Single Family Mortgage Bonds Exempt Facilities

14. Peck, Shaffer & Williams LLP 14 PABs – Exempt Facility Bonds Airports Docks and Wharves Mass Commuting Environmental Enhancement of Hydroelectric Facilities Residential Rental Facilities Water Furnishing Sewage Facilities Solid Waste Facilities Local Furnishing of gas or electricity Local District Heating or Cooling Qualified Hazardous Waste Facilities High Speed Intercity Rail Facilities Public Educational Facilities Enterprise Zone Facilities

15. Peck, Shaffer & Williams LLP 15 Requirements For All Bonds Reimbursement Rules –Declaration of Official Intent By Issuer of Bonds (or 501(c)(3) Organization) Specifying Project and Principal Amount –Can Reimburse Costs Paid No More Than 60 Days Before Declaration of Intent (Exceptions for Preliminary Expenditures and De Minimis Amount)

16. Peck, Shaffer & Williams LLP 16 Requirements For All Bonds Reimbursement Rules –Reimbursement Within 18 Months of Later of Date Expenditure Paid or Project Placed In Service (Overall 3 Year Limit From Date Expenditure Paid)

17. Peck, Shaffer & Williams LLP 17 Requirements For All Bonds Bonds Must Be In Registered Form Federal Guarantee Restriction –Exceptions For Housing Bonds, Refunding Escrows, Certain Agency Guarantees Information Reporting –Form 8038, Form 8038-G, Form 8038-GC –Filing Deadlines, Late Filing –Source of Information

18. Peck, Shaffer & Williams LLP 18 Arbitrage – Basic Rule Proceeds of an issue cannot be invested at above the yield on the bonds except during temporary periods, as part of a reasonable reserve, as part of a minor portion, and arbitrage earnings must generally be rebated.

19. Peck, Shaffer & Williams LLP 19 Arbitrage – Basic Questions Arbitrage- - Can you earn it? –Temporary Periods –Minor Portion ($100,000) –Invested at yield not materially higher

20. Peck, Shaffer & Williams LLP 20 Arbitrage Definition of Gross Proceeds –Sale Proceeds –Investment Proceeds –Replacement Funds (Sinking Fund, Pledged Fund, Negative Pledge) –Transferred Proceeds

21. Peck, Shaffer & Williams LLP 21 Arbitrage Temporary Periods –Construction or Other Capital Projects (3-Year) Must expect to satisfy “Expenditure Test” –Bona Fide Debt Service Fund

22. Peck, Shaffer & Williams LLP 22 Arbitrage Temporary Periods –Construction (3 years) –Refunding Escrow (30 days) –Investment Income (1 Year) –Replacement Proceeds (30 Days) –Working Capital (13 Months)

23. Peck, Shaffer & Williams LLP 23 Arbitrage Yield –General Calculation Method –Initial Offering Price –Guarantee Fees –Costs of Issuance Materially Higher –Generally 1/8 of 1% –Acquired Program Investment 1.5% –Replacement Proceeds and Restricted Escrows 1/1000 of 1%

24. Peck, Shaffer & Williams LLP 24 Reasonably Required Reserve Fund Sizing Limits –MADS, 125% AADS, 10% issue –Funding limit: 10% of issue “Reasonably Required”

25. Peck, Shaffer & Williams LLP 25 Rebate – Basic Rules Rebate- - Can you keep it? –Small Issuer Exception –6 month Exception (includes refundings) –18 Month Exception –2-Year Construction Exception Calculation Periods Yield Reduction Payments

26. Peck, Shaffer & Williams LLP 26 Rebate – Basic Rules Rebate- - Can you keep it? –Small Issuer Exception –6 month Exception (includes refundings) –18 Month Exception –2-Year Construction Exception Calculation Periods Yield Reduction Payments

27. Peck, Shaffer & Williams LLP 27 Voluntary Closing Agreement Program If ongoing post-issuance compliance efforts have not prevented violation of rules applicable to qualified 501(c)(3) bonds, voluntary closing agreement program (“VCAP”) is available in some situations

28. Peck, Shaffer & Williams LLP 28 CONCLUSION Where Do We Go From Here?

29. Peck, Shaffer & Williams LLP 29 A. Take Stock of Existing Bond Financings and Potential Issues ► May involve an outside consultant B. Addressing of Issues Discovered I. Bond Audit

30. Peck, Shaffer & Williams LLP 30 A. Designate Responsibility for Monitoring Compliance with Conditions Required to Maintain Tax Exemption of Interest on Bonds ► May be internal responsibility, external responsibility or combination ► Centralized responsibility II. Ongoing Compliance Program

31. Peck, Shaffer & Williams LLP 31 B. Rebate/Spend-Down Monitoring C. Tracking of Bond Proceeds ► Must know how bond proceeds were spent, what portions of facilities bond-financed

32. Peck, Shaffer & Williams LLP 32 D. Review of Management Contracts/Research Agreements by Bond Counsel to Ensure Compliance with Qualified Management Contract Rule E. Special Care for Investment of Bond Proceeds to Address IRS Concerns With Yield-Burning ► Involve Bond Counsel in process of bidding GICs

33. Peck, Shaffer & Williams LLP 33 F. Keep Records With Respect to Expenditures and Investment of Bond Proceeds Until 3-6 Years Following Retirement of Bonds ► Don’t rely on others for record-keeping

34. Peck, Shaffer & Williams LLP 34 Matthias Edrich and Erick Stowe Presenters’ Information Peck, Shaffer & Williams LLP Suite 1700 1801 Broadway Denver, Colorado 80202 (303) 296-3996 Main (877) 296-0333 WATTS (Toll Free) (303) 296-0344 Facsimile medrich@peckshaffer.com estowe@peckshaffer.com www.peckshaffer.com