A private entity considering a PPP must evaluate the federal tax implications of such an undertaking. For example, the private entity typically makes an up-front payment to a governmental entity to enter into a PPP. This up-front payment must be allocated among various rights in order to determine the federal tax consequences. To the extent the payment is allocated to a franchise right-that is, the right to charge tolls on the private highway-the private entity should be able to recover the payment on a straight-line basis over a 15-year period. To the extent the payment is allocated to a right-of-way-that is, the right to construct the private highway on land owned by the governmental entity- the private entity will only be able to recover the payment over the life of the agreement. In addition, amounts allocated to the right-of-way could cause non-U.S. private entities to be subject to additional U.S. taxes, as the right-of-way is viewed as an interest in U.S. real property. Accordingly, the allocation of the up-front payment between these various elements is an important part of the tax analysis and is often sup-ported by evidence such as a report from an economist. The private entity must also consider the deductibility of ongoing payments to the governmental entity, such as revenue-sharing payments and payments to construct new improvements on the property (and the period over which such depreciation deductions may be taken).
Private entities entering into a brownfield project must consider additional tax consequences with respect to the up-front payment. In a brownfield project, the private entity must allocate the up-front payment to the franchise right, right-of-way, and additionally, the existing improvements. The tax consequences of amounts allocated to existing improvements depend on whether the private entity is viewed, for tax purposes, as the owner of the existing improvements or as a lessee. As the owner of the existing improvements, the private entity will be able to take depreciation deductions for these amounts over a relatively short time period.238 However, if the private owner is treated as a lessee, it will only be able to deduct these amounts as an expense over the lifetime of the lease, typically a longer time period. The determination of whether the private entity is the owner or lessee will turn on which party bears the benefits and burdens of ownership for tax purposes under the agreement.
There are also property tax implications of a long-term lease or other arrangement that gives the private-sector possession and control over a highway facility. Such facilities and related property generally are exempt from state and local property taxes and special assessments when owned and controlled by government agencies. However, the long-term lease or other conveyance of such property to a private-sector consortium will not necessarily qualify for an exemption from such property taxes. The USDOT Model Legislation contains a provision that specifies that property used in a PPP facility is exempt from all such property taxes levied by the state or any political subdivision of the state.239
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238 Testimony Before the Subcommittee on Energy, Natural Resources, and Infrastructure, Committee on Finance, U.S. Senate, Highway Public-Private Partnerships: Securing Potential Benefits and Protecting the Public Interest Could Result from More Rigorous Up-Front Analysis, Statement of JayEtta Z. Hecker, Director, Physical Infrastructure Issues, U.S. Government Accountability Office, GAO-08-1052, July 24, 2008.
239 USDOT Model Legislation at § 1-109, available at http://www.apta.com/about/committees/public_private/documents/legis_model.pdf .