Opinion ID: 778880
Heading Depth: 3
Heading Rank: 4

Heading: Method by Which the Aid is Issued

Text: 70 The method by which the tax exempt bonds are to be issued to Lipscomb University is significant. Any institution seeking a tax exempt bond must arrange the financing by locating exclusively private lenders of the funds. The purchaser of a bond has recourse for repayment against Lipscomb University only; the holder of a bond has no recourse against the Board or Metro in the event of nonpayment. No government funds are involved in the entire transaction. The interest paid to the bond holders by Lipscomb University is not subject to federal, state or local income taxes. Since the bonds are tax exempt, Lipscomb University reaps the benefit of a lower interest rate than that paid to a lender paying income taxes on the interest received. Only by the potential loss of tax revenue does the conduit financing involve any impact on public funds. 71 Initially, we note that a governmental body must issue the bonds. While at first blush such fact would indicate governmental endorsement of religion, the reason for the issuance of the bonds by a governmental agency stems from the simple fact that the Internal Revenue Code excludes from income taxation only interest paid on industrial revenue bonds issued and approved by a state or local governmental unit. 28 U.S.C. § 147(f)(2)(A). Such qualifying bonds need not finance a governmental function (such as water or sewer lines), but may be issued to promote a variety of purposes, including economic development and higher education. Further, Tennessee law requires such bonds serve the furtherance of the educational purposes of such institution, including but not limited to classroom, laboratory, housing, administrative, physical education, and medical research and treatment facilities. Tenn.Code Ann. §§ 7-53-101(11)(A)(vii). 72 The federal government has continuously provided an exemption for interest on bonds issued by or on behalf of states and localities since the inception of a federal income tax in 1913. Tariff Act of 1913, Pub.L. No. 63-16, ch. 16, 38 Stat. 114. Although states and localities first took advantage of this exception by issuing general obligation bonds, they later issued revenue bonds to help finance private business activities for the ostensible purpose of promoting economic growth. Stuart C. Johnson, Multi-Family Housing Bonds: Can the Tax Code Provide an Efficient and Effective Low-Income Housing Program, 5 Va. Tax. Rev. 497, 498-99 (1986) (citations omitted). Congress provided for an exemption from income taxation for industrial revenue bonds issued in connection with a project intended to benefit a local economy. The Internal Revenue Service explicitly legitimized this practice in 1954. Rev. Rul. 54-106, 1954-1 C.B. 28, 28-29. 8 Such bonds have been typically issued by a governmental authority, even though such authority does not actually borrow the funds nor is such authority liable for repayment. A revenue bond is repaid solely from the revenues generated by the facilities constructed with bond proceeds. In the issuance of this type of bond, the political subdivision acts solely as a conduit for issuing the bonds. It has no obligation to use its tax revenues to finance any shortfall. Zimmerman, Limiting the Growth of Tax-Exempt Industrial Development Bonds: An Economic Evaluations (1984) (Cong. Research Serv. Rep. No. 84-37E). 73 In addition, by requiring local governmental authorities to issue tax-exempt industrial revenue bonds, Congress delegated to such governmental units an element of control over local economic development. The revenue bonds serve as a means of financing local preferences. See Clayton P. Gillette, Fiscal Federalism and the Use of Municipal Bond Proceeds, 58 N.Y.U.L.Rev. 1030 (1983) (discussing Section 103 of the Internal Revenue Code, which provides a federal tax exemption for interest earned on state and municipal bonds). 9 For example, a local government might conclude that the issuance of an industrial revenue bond to a new business could give a competitive disadvantage to an existing business which had not received such conduit financing and result in economic displacement, rather than development. 74 It is clear from the record that industrial revenue bonds are issued to a wide variety of businesses, schools, universities, charities and other organizations. It is without question that a religious organization may receive general government benefits consistent with the Establishment Clause. Zobrest v. Catalina Foothills Sch. Dist., 509 U.S. 1, 8, 113 S.Ct. 2462, 125 L.Ed.2d 1 (1993). As the Supreme Court noted in Widmar v. Vincent, 454 U.S. 263, 274, 275, 102 S.Ct. 269, 70 L.Ed.2d 440 (1981), If the Establishment Clause barred the extension of general benefits to religious groups `a church could not be protected by the police and fire departments or have its public sidewalk kept in repair'. citing Roemer v. Bd. of Pub. Works., 426 U.S. 736, 747, 96 S.Ct. 2337, 49 L.Ed.2d 179 (1976). We conclude that the issuance of tax exempt bonds on a neutral basis is the conference of a generally available governmental benefit. 75