[Federal Register Volume 68, Number 93 (Wednesday, May 14, 2003)]
[Proposed Rules]
[Pages 25845-25850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11926]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-113007-99]
RIN 1545-AU98
Obligations of States and Political Subdivisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations on the definition
of private activity bond applicable to tax-exempt bonds issued by State
and local governments. These regulations affect issuers of tax-exempt
bonds and provide needed guidance for applying the private activity
bond restrictions to refunding issues. This document also contains a
notice of public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by August 19,
2003. Outlines of topics to be discussed at the public hearing
scheduled for September 9, 2003, at 10 a.m., must be received by August
19, 2003.
ADDRESSES: Send submissions to CC:PA:RU (REG-113007-99), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG-113007-99),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively, taxpayers may submit comments
electronically to the IRS Internet site at www.irs.gov/regs. The public
hearing will be held in the IRS Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gary W.
Bornholdt, (202) 622-3980; concerning submissions and the hearing,
Treena Garrett, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
In general, under section 103 of the Internal Revenue Code (Code),
gross income does not include the interest on any State or local bond.
However, this exclusion does not apply to private activity bonds (other
than certain qualified bonds). Section 141(a) defines a private
activity bond as any bond issued as part of an issue that meets either
(1) the private business use test in section 141(b)(1) and the private
security or payment test in section 141(b)(2) (the private business
tests) or (2) the private loan financing test in section 141(c) (the
private business tests and the private loan financing test are referred
to collectively as the ``private activity bond tests'').
The private business use test is met if more than 10 percent of the
proceeds of an issue are to be used for any private business use.
Section 141(b)(6) defines private business use as use directly or
indirectly in a trade or business that is carried on by any person
other than a governmental unit.
The private security or payment test is met if the payment of the
principal of, or the interest on, more than 10 percent of the proceeds
of an issue is directly or indirectly (1) secured by an interest in
property used or to be used for a private business use, (2) secured by
an interest in payments in respect of such property, or (3) to be
derived from payments, whether or not to the issuer, in respect of
property, or borrowed money, used or to be used for a private business
use.
The private loan financing test is satisfied if more than the
lesser of $5 million or 5 percent of the proceeds of an issue are to be
used to make or finance loans to persons other than governmental units.
In 1994, proposed regulations (FI-72-88) were published in the
Federal Register (59 FR 67658) (the 1994 Proposed Regulations) to
provide guidance under the Code with respect to the application of the
private activity bond tests. Generally, the 1994 Proposed Regulations
provide that the private business use of a facility is equal to the
greatest percentage of private business use of that facility for any
one year period during the term of the bonds. The amount of private
security or private payments is determined by comparing the present
value of the private security or private payments to the present value
of the debt service to be paid over the term of the issue, using the
bond yield as the discount rate.
With respect to refunding issues, the 1994 Proposed Regulations
provide that the determination of whether a refunding issue satisfies
either the private business tests or the private loan financing test is
made without regard to whether the prior issue satisfied those tests.
In general, under the 1994 Proposed Regulations, the private business
tests and the private loan financing test are applied to a refunding
issue by treating the proceeds of the refunding issue as used for the
same purposes as the proceeds of the prior issue, but disregarding any
use of the property financed with the prior issue that occurred before
the issue date of the refunding issue. In addition, in applying the
private business tests to a refunding issue under the 1994 Proposed
Regulations, an issuer may treat the refunding issue as a continuation
of the prior issue.
On January 16, 1997, final regulations (TD 8712) relating to the
definition of private activity bond and related rules under sections
103, 141, 142, 144, 145, 147, 148, and 150 were published in the
Federal Register (62 FR 2275) (the Final Regulations). Under the Final
Regulations, the amount of private business use of property financed by
an issue is equal to the average percentage of private business use of
that property during a defined measurement period. The measurement
period begins on the later of the issue date of the issue or the
[[Page 25846]]
date that the property is placed in service and ends on the earlier of
the last date of the reasonably expected economic life of the property
or the latest maturity date of any bond of the issue financing the
property (determined without regard to any optional redemption dates).
The Final Regulations retain the basic approach in the 1994 Proposed
Regulations relating to the measurement of private security and private
payments.
The Final Regulations reserve Sec. 1.141-13 for rules regarding
the application of the private business tests and the private loan
financing test to refunding issues. This document amends the Income Tax
Regulations (26 CFR part 1) under section 141 by proposing rules on the
application of the private business tests and the private loan
financing test to refunding issues. This document also amends the
Income Tax Regulations under sections 145, 149 and 150 by proposing
rules on certain related matters. These regulations are published as
proposed regulations (the proposed regulations) to provide an
opportunity for public review and comment.
Explanation of Provisions
A. Application of Private Activity Bond Tests to Refunding Issues
1. In General
The proposed regulations provide that, in general, a refunding
issue and a prior issue are tested separately under section 141. Thus,
the determination of whether a refunding issue consists of private
activity bonds generally does not depend on whether the prior issue
consists of private activity bonds.
The proposed regulations apply to determine whether a refunding
issue satisfies the private business tests or the private loan
financing test, but do not impact the methodology used to determine
whether the prior issue satisfies those tests. For example, following a
refunding, the private business use test continues to apply to a prior
issue based on the measurement period for the prior issue.
2. Allocation of Proceeds
The proposed regulations provide that, in applying the private
business tests and the private loan financing test to a refunding
issue, the proceeds of the refunding issue are allocated to the same
purpose investments (including any private loan under section 141(c))
and expenditures as the proceeds of the prior issue.
3. Measurement of Private Business Use
The proposed regulations generally provide that the amount of
private business use of a refunding issue is determined based on the
separate measurement period for the refunding issue under Sec. 1.141-
3(g) (for example, without regard to any private business use that
occurred before the issue date of the refunding issue). Thus, for
instance, if an issuer refunds a taxable bond or an exempt facility
bond, any private business use of the refinanced facilities before the
issue date of the refunding issue is disregarded in applying the
private business use test to the refunding issue.
In the case of a refunding issue that refunds a prior issue of
governmental bonds, however, the amount of private business use is
generally determined based on a combined measurement period. For
purposes of the proposed regulations, a governmental bond is any bond
that, when issued, purported to be either a governmental bond, as
defined in Sec. 1.150-1(b), or a qualified 501(c)(3) bond, as defined
in section 145(a). The combined measurement period is the period that
begins on the first day of the measurement period (as defined in Sec.
1.141-3(g)) for the prior issue (or the first issue of governmental
bonds in the case of a series of refundings of governmental bonds) and
ends on the last day of the measurement period for the refunding issue.
As an alternative to the combined measurement period approach, the
proposed regulations permit issuers to measure private business use
based on the separate measurement period of the refunding issue, but
only if the prior issue of governmental bonds does not satisfy the
private business use test during a shortened measurement period. The
shortened measurement period begins on the first day of the measurement
period of the prior issue (or the first issue of governmental bonds in
the case of a series of refundings of governmental bonds) and ends on
the issue date of the refunding issue. Whether a prior issue satisfies
the private business use test during the shortened measurement period
is determined based on the actual use of proceeds, without regard to
the reasonable expectations test of Sec. 1.141-2(d).
4. Measurement of Private Security and Private Payments
If the amount of private business use is determined based on the
separate measurement period for the refunding issue, then the amount of
private security and private payments allocable to the refunding issue
is determined under Sec. 1.141-4 by treating the refunding issue as a
separate issue. On the other hand, if the amount of private business
use is determined based on a combined measurement period, then the
amount of private security and private payments allocable to the
refunding issue is determined under Sec. 1.141-4 by treating the
refunding issue and all earlier issues taken into account in
determining the combined measurement period as a combined issue. The
proposed regulations contain specific rules for determining the present
value of the debt service on, and the private security and private
payments allocable to, a combined issue.
The proposed regulations also permit an issuer to use the yield on
a prior issue of governmental bonds to determine the present value of
private security or private payments under arrangements that were not
entered into in contemplation of the refunding issue. For this purpose,
any arrangement that was entered into more than one year before the
issue date of the refunding issue will be treated as not entered into
in contemplation of the refunding issue.
5. Multipurpose Issue Allocations
Section 1.148-9(H) permits an issuer to treat the portion of a
multipurpose issue allocable to a separate purpose as a separate issue
for certain of the arbitrage provisions of section 148. The proposed
regulations allow an issuer to apply Sec. 1.148-9(h) to a multipurpose
issue for certain purposes under section 141. An allocation will not be
reasonable for this purpose if it achieves more favorable results under
section 141 than could be achieved with actual separate issues. In
addition, allocations under the proposed regulations and Sec. 1.148-
9(h) must be consistent for purposes of sections 141 and 148. The
proposed regulations do not permit allocations for purposes of section
141(c)(1) (relating to the private loan financing test) or section
141(d)(1) (relating to certain restrictions on acquiring
nongovernmental output property).
6. Application of Reasonable Expectations Test to Certain Refunding
Bonds
Section 1.141-2(d) of the Final Regulations provides that an issue
consists of private activity bonds if the issuer (1) reasonably
expects, as of the issue date, that the issue will meet either the
private business tests or the private loan financing test, or (2) takes
a deliberate action, subsequent to the issue date, that causes the
conditions of either the private business tests or the
[[Page 25847]]
private loan financing test to be satisfied. In general, a deliberate
action is any action taken by the issuer that is within its control.
The proposed regulations provide that an action that would
otherwise cause a refunding issue to satisfy the private business tests
or the private loan financing test is not taken into account under the
reasonable expectations test of Sec. 1.141-2(d) if (1) the action is
not a deliberate action within the meaning of Sec. 1.141-2(d)(3), and
(2) the weighted average maturity of the refunding bonds is not greater
than the remaining weighted average maturity of the prior bonds.
B. Treatment of Issuance Costs Financed by Prior Issue of Qualified
501(c)(3) Bonds
Under the Final Regulations, the use of proceeds of an issue of
qualified 501(c)(3) bonds to pay issuance costs of the issue is treated
as a private business use. The proposed regulations provide that,
solely for purposes of applying the private business use test to a
refunding issue, the use of proceeds of the prior issue (or any earlier
issue in a series of refundings) to pay issuance costs of the prior
issue (or the earlier issue) is treated as a government use.
C. Limitation on Advance Refundings of Private Activity Bonds
Under section 149(d)(2), interest on a bond is not excluded from
gross income if any portion of the issue of which the bond is a part is
issued to advance refund a private activity bond (other than a
qualified 501(c)(3) bond). The proposed regulations provide that, for
purposes of section 149(d)(2), the term private activity bond includes
a qualified bond described in section 141(e) (other than a qualified
501(c)(3) bond), regardless of whether the refunding issue consists of
private activity bonds under the proposed regulations. The proposed
regulations also provide that, for purposes of section 149(d)(2), the
term private activity bond does not include a taxable bond.
Proposed Effective Date
The proposed regulations will apply to bonds that are (1) sold on
or after the date of publication of final regulations under Sec.
1.141-13 in the Federal Register and (2) subject to the Final
Regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (preferably a signed original and eight copies) to the IRS. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for September 9, 2003, at 10
a.m. in the IRS Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the lobby more than
30 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments by August 19, 2003 and submit an outline of the
topics to be discussed and the amount of time to be devoted to each
topic by August 19, 2003.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Comments are requested on all aspects of the proposed regulations.
In addition, comments are specifically requested on the application of
the private loan financing test to refunding issues.
Drafting Information
The principal authors of these regulations are Bruce M. Serchuk and
Gary W. Bornholdt, Office of Chief Counsel (Tax-exempt and Government
Entities), Internal Revenue Service and Stephen J. Watson, Office of
Tax Legislative Counsel, Department of the Treasury. However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
1. The authority citation for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
2. Section 1.141-0 is amended by adding entries to the table in
numerical order for Sec. Sec. 1.141-13 and 1.141-15(j) to read as
follows:
Sec. 1.141-0 Table of contents
* * * * *
Sec. 1.141-13 Refunding Issues.
(a) In general.
(b) Application of private business use test and private loan
financing test.
(1) Allocation of proceeds.
(2) Determination of amount of private business use.
(c) Application of private security or payment test.
(1) Separate issue treatment.
(2) Combined issue treatment.
(3) Special rule for arrangements not entered into in contemplation
of the refunding issue.
(d) Multipurpose issue allocations.
(1) In general.
(2) Exceptions.
(e) Application of reasonable expectations test to certain
refunding bonds.
(f) Examples.
* * * * *
Sec. 1.141-15 Effective dates.
* * * * *
(j) Effective dates for certain regulations relating to refundings.
* * * * *
3. In Sec. 1.141-1, paragraph (b) is amended by revising the
definition of governmental bond to read as follows:
Sec. 1.141-1 Definitions and rules of general application.
* * * * *
Governmental bond has the same meaning as in Sec. 1.150-1(b),
except that, for purposes of Sec. 1.141-13, governmental bond is
defined in Sec. 1.141-13(b)(2)(iv).
* * * * *
4. Section 1.141-13 is added to read as follows:
Sec. 1.141-13 Refunding Issues
(a) In general. Except as provided in this section, a refunding
issue and a
[[Page 25848]]
prior issue are tested separately under section 141. Thus, the
determination of whether a refunding issue consists of private activity
bonds generally does not depend on whether the prior issue consists of
private activity bonds.
(b) Application of private business use test and private loan
financing test-- (1) Allocation of proceeds. In applying the private
business use test and the private loan financing test to a refunding
issue, the proceeds of the refunding issue are allocated to the same
expenditures and purpose investments as the proceeds of the prior
issue.
(2) Determination of amount of private business use--(i) In
general. Except as provided in paragraph (b)(2)(ii) of this section,
the amount of private business use of a refunding issue is determined
under Sec. 1.141-3(g), based on the measurement period for that issue
(for example, without regard to any private business use that occurred
prior to the issue date of the refunding issue).
(ii) Refundings of governmental bonds. In applying the private
business use test to a refunding issue that refunds a prior issue of
governmental bonds, the amount of private business use of the refunding
issue is the amount of private business use--
(A) During the combined measurement period; or
(B) At the option of the issuer, during the period described in
paragraph (b)(2)(i) of this section, but only if, without regard to the
reasonable expectations test of Sec. 1.141-2(d), the prior issue does
not satisfy the private business use test, based on a measurement
period that begins on the first day of the combined measurement period
and ends on the issue date of the refunding issue.
(iii) Combined measurement period. For purposes of this section,
the combined measurement period is the period that begins on the first
day of the measurement period (as defined in Sec. 1.141-3(g)) for the
prior issue (or, in the case of a series of refundings of governmental
bonds, the first issue of governmental bonds in the series) and ends on
the last day of the measurement period for the refunding issue.
(iv) Governmental bond. For purposes of this section, the term
governmental bond means any bond that, when issued, purported to be a
governmental bond, as defined in Sec. 1.150-1(b), or a qualified
501(c)(3) bond, as defined in section 145(a).
(v) Special rule for refundings of qualified 501(c)(3) bonds with
governmental bonds. For purposes of applying this paragraph (b)(2) to a
refunding issue that refunds a qualified 501(c)(3) bond, any use of the
property refinanced by the refunding issue before the issue date of the
refunding issue by a 501(c)(3) organization with respect to its
activities that do not constitute an unrelated trade or business under
section 513(a) is treated as government use.
(c) Application of private security or payment test--(1) Separate
issue treatment. If the amount of private business use of a refunding
issue is determined based on the measurement period for that issue in
accordance with paragraph (b)(2)(i) or (b)(2)(ii)(B) of this section,
then the amount of private security and private payments allocable to
the refunding issue is determined under Sec. 1.141-4 by treating the
refunding issue as a separate issue.
(2) Combined issue treatment. If the amount of private business use
of a refunding issue is determined based on the combined measurement
period for that issue in accordance with paragraph (b)(2)(ii)(A) of
this section, then the amount of private security and private payments
allocable to the refunding issue is determined under Sec. 1.141-4 by
treating the refunding issue and all earlier issues taken into account
in determining the combined measurement period as a combined issue. For
this purpose, the present value of the private security and private
payments is compared to the present value of the debt service on the
combined issue (other than debt service paid with proceeds of any
refunding bond). Present values are computed as of the issue date of
the earliest issue taken into account in determining the combined
measurement period (the earliest issue). Except as provided in
paragraph (c)(3) of this section, present values are determined by
using the yield on the combined issue as the discount rate. The yield
on the combined issue is determined by taking into account payments on
the refunding issue and all earlier issues taken into account in
determining the combined measurement period (other than payments made
with proceeds of any refunding bond), and based on the issue price of
the earliest issue. In the case of a partial refunding, the unrefunded
debt service is not taken into account in determining the yield on the
combined issue.
(3) Special rule for arrangements not entered into in contemplation
of the refunding issue. In applying the private security or payment
test to a refunding issue that refunds a prior issue of governmental
bonds, the issuer may use the yield on the prior issue to determine the
present value of private security and private payments under
arrangements that were not entered into in contemplation of the
refunding issue. For this purpose, any arrangement that was entered
into more than 1 year before the issue date of the refunding issue is
treated as not entered into in contemplation of the refunding issue.
(d) Multipurpose issue allocations--(1) In general. For purposes of
section 141, unless the context clearly requires otherwise, Sec.
1.148-9(h) applies to allocations of multipurpose issues (as defined in
Sec. 1.148-1(b)), including allocations involving the refunding
purposes of the issue. An allocation is not reasonable under this
paragraph (d) if it achieves more favorable results under section 141
than could be achieved with actual separate issues. Allocations made
under this paragraph (d) and Sec. 1.148-9(h) must be consistent for
purposes of section 141 and section 148.
(2) Exceptions. This paragraph (d) does not apply for purposes of
sections 141(c)(1) and 141(d)(1).
(e) Application of reasonable expectations test to certain
refunding bonds. An action that would otherwise cause a refunding issue
to satisfy the private business tests or the private loan financing
test is not taken into account under the reasonable expectations test
of Sec. 1.141-2(d) if--
(1) The action is not a deliberate action within the meaning of
Sec. 1.141-2(d)(3); and
(2) The weighted average maturity of the refunding bonds is not
greater than the remaining weighted average maturity of the prior
bonds.
(f) Examples. The following examples illustrate the application of
this section.
Example 1. Measuring private business use. In 2002, Authority A
issues tax-exempt bonds that mature in 2032 to acquire an office
building. The measurement period for the 2002 bonds under Sec.
1.141-3(g) is 30 years. At the time A acquires the building, it
enters into a 10-year lease with a nongovernmental person under
which the nongovernmental person will use 5 percent of the building
in its trade or business during each year of the lease term. In
2007, A issues bonds to refund the 2002 bonds. The 2007 bonds mature
on the same date as the 2002 bonds and have a measurement period of
25 years under Sec. 1.141-3(g). Under paragraph (b)(2)(ii)(A) of
this section, the amount of private business use of the proceeds of
the 2007 bonds is 1.67 percent, which equals the amount of private
business use during the combined measurement period (5 percent of 1/
3rd of the 30-year combined measurement period). In addition, the
2002 bonds do not satisfy the private business use test, based on a
measurement period beginning on the first day of the measurement
period for the 2002 bonds and ending on the issue date of the 2007
bonds, because only 5 percent of the proceeds of the 2002 bonds are
used for a private business use during that period.
[[Page 25849]]
Thus, under paragraph (b)(2)(ii)(B) of this section, A may treat the
amount of private business use of the 2007 bonds as 1 percent (5
percent of 1/5th of the 25-year measurement period for the 2007
bonds). The 2007 bonds do not satisfy the private business use test.
Example 2. Combined issue yield computation. (i) On January 1,
2000, County B issues 20-year bonds with an interest rate of 8% and
an issue price of $100 million. The debt service payments on the
2000 bonds are as follows:
------------------------------------------------------------------------
Date Debt service
------------------------------------------------------------------------
1/1/01.................................................. $10,306,800
1/1/02.................................................. 10,306,800
1/1/03.................................................. 10,306,800
1/1/04.................................................. 10,306,800
1/1/05.................................................. 10,306,800
1/1/06.................................................. 10,306,800
1/1/07.................................................. 10,306,800
1/1/08.................................................. 10,306,800
1/1/09.................................................. 10,306,800
1/1/10.................................................. 10,306,800
1/1/11.................................................. 10,306,800
1/1/12.................................................. 10,306,800
1/1/13.................................................. 10,306,800
1/1/14.................................................. 10,306,800
1/1/15.................................................. 10,306,800
1/1/16.................................................. 10,306,800
1/1/17.................................................. 10,306,800
1/1/18.................................................. 10,306,800
1/1/19.................................................. 10,306,800
1/1/20.................................................. 10,306,800
---------------
$206,136,000
------------------------------------------------------------------------
(ii) On January 1, 2005, B issues 15-year bonds to refund all of
the outstanding 2000 bonds. The 2005 bonds have an interest rate of 6%
and an issue price of $93,250,000. The debt service payments on the
2005 bonds are as follows:
------------------------------------------------------------------------
Date Debt service
------------------------------------------------------------------------
1/1/06.................................................. $9,657,800
1/1/07.................................................. 9,657,800
1/1/08.................................................. 9,657,800
1/1/09.................................................. 9,657,800
1/1/10.................................................. 9,657,800
1/1/11.................................................. 9,657,800
1/1/12.................................................. 9,657,800
1/1/13.................................................. 9,657,800
1/1/14.................................................. 9,657,800
1/1/15.................................................. 9,657,800
1/1/16.................................................. 9,657,800
1/1/17.................................................. 9,657,800
1/1/18.................................................. 9,657,800
1/1/19.................................................. 9,657,800
1/1/20.................................................. 9,657,800
---------------
$144,867,000
------------------------------------------------------------------------
(iii) For purposes of determining the amount of private security
and private payments with respect to the 2005 bonds, the 2005 bonds and
the 2000 bonds are treated as a combined issue under paragraph (c)(2)
of this section. The yield on the combined issue is 7.5036 percent per
year compounded semiannually, computed as follows:
----------------------------------------------------------------------------------------------------------------
Unrefunded new
Date money debt Refunding debt Total debt Present value on
service service service 1/1/00
----------------------------------------------------------------------------------------------------------------
1/1/00.............................. ................. ................. ................. ($100,000,000.00)
1/1/01.............................. $10,306,800 ................. $10,306,800 9,574,857.71
1/1/02.............................. 10,306,800 ................. 10,306,800 8,894,894.64
1/1/03.............................. 10,306,800 ................. 10,306,800 8,263,219.48
1/1/04.............................. 10,306,800 ................. 10,306,800 7,676,403.02
1/1/05.............................. 10,306,800 ................. 10,306,800 7,131,259.62
1/1/06.............................. ................. $9,657,800 9,657,800 6,207,676.64
1/1/07.............................. ................. 9,657,800 9,657,800 5,766,835.53
1/1/08.............................. ................. 9,657,800 9,657,800 5,357,300.97
1/1/09.............................. ................. 9,657,800 9,657,800 4,976,849.70
1/1/10.............................. ................. 9,657,800 9,657,800 4,623,416.36
1/1/11.............................. ................. 9,657,800 9,657,800 4,295,082.25
1/1/12.............................. ................. 9,657,800 9,657,800 3,990,064.95
1/1/13.............................. ................. 9,657,800 9,657,800 3,706,708.59
1/1/14.............................. ................. 9,657,800 9,657,800 3,443,474.92
1/1/15.............................. ................. 9,657,800 9,657,800 3,198,934.91
1/1/16.............................. ................. 9,657,800 9,657,800 2,971,761.03
1/1/17.............................. ................. 9,657,800 9,657,800 2,760,720.01
1/1/18.............................. ................. 9,657,800 9,657,800 2,564,666.17
1/1/19.............................. ................. 9,657,800 9,657,800 2,382,535.18
1/1/20.............................. ................. 9,657,800 9,657,800 2,213,338.32
--------------------
$51,534,000 $144,867,000 $196,401,000 0.00
----------------------------------------------------------------------------------------------------------------
Example 3. Refunding taxable bonds and qualified bonds. (i) In
1999, City C issues taxable bonds to finance the construction of a
facility for the furnishing of water. The bonds are secured by
revenues from the facility. The facility is managed pursuant to a
management contract with a nongovernmental person that gives rise to
private business use. In 2007, C terminates the management contract
and takes over the operation of the facility. In 2009, C issues
bonds to refund the 1999 bonds. On the issue date of the 2009 bonds,
C reasonably expects that the facility will not be used for a
private business use during the term of the 2009 bonds. In addition,
during the term of the 2009 bonds, the facility is not used for a
private business use. Under paragraph (b)(2)(i) of this section, the
2009 bonds do not satisfy the private business use test because the
amount of private business use is based on the measurement period
for those bonds and therefore does not take into account any private
business use that occurred pursuant to the management contract.
(ii) The facts are the same as in paragraph (i) of this Example
3, except that the 1999 bonds are issued as exempt facility bonds
under section 142(a)(4). The 2009 bonds do not satisfy the private
business use test.
Example 4. Multipurpose issue. In 2001, State D issues bonds to
finance the construction of two office buildings, Building 1 and
Building 2. D expends an equal amount of the proceeds on each
building. D enters into arrangements that result in 8 percent of
Building 1 and 12 percent of Building 2 being used for a private
business use during the measurement period under Sec. 1.141-3(g).
These arrangements result in a total of 10 percent of the proceeds
of the 2001 bonds being used for a private business use. In 2006, D
purports to allocate, under paragraph (d) of this section, an equal
amount of the outstanding 2001 bonds to Building 1 and Building 2. D
also enters into another private business use arrangement with
respect to Building 1 that results in 10 percent of Building 1 being
used for a private business use during the measurement period. An
allocation is not reasonable under paragraph (d) of this section if
it achieves more favorable results under section 141 than could be
achieved with actual separate
[[Page 25850]]
issues. D's allocation is unreasonable because, if permitted, would
result in more that 10 percent of the proceeds of the 2001 bonds
being used for a private business use.
5. Section 1.141-15 is amended by revising paragraphs (b)(1), (c),
(d) and (h) and adding paragraph (j) to read as follows:
Sec. 1.141-15 Effective dates.
* * * * *
(b) Effective Dates--(1) In general. Except as otherwise provided
in this section, Sec. Sec. 1.141-0 through 1.141-6(a), 1.141-9 through
1.141-12, 1.141-14, 1.145-1 through 1.145-2(c), and the definition of
bond documents contained in Sec. 1.150-1(b) (the 1997 regulations
contained in 26 CFR Part 1, revised as of April 1, 2003) apply to bonds
issued on or after May 16, 1997, that are subject to section 1301 of
the Tax Reform Act of 1986 (100 Stat. 2602).
* * * * *
(c) Refunding bonds. Except as otherwise provided in this section,
the 1997 regulations (contained in 26 CFR Part 1, revised as of April
1, 2003) do not apply to any bonds issued on or after May 16, 1997, to
refund a bond to which those regulations do not apply unless--
(1) The refunding bonds are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of the refunding bonds is
longer than--
(A) The weighted average maturity of the refunded bonds; or
(B) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a bond
anticipation note), 120 percent of the weighted average reasonably
expected economic life of the facilities financed; or
(ii) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans.
(d) Permissive application of regulations. Except as provided in
paragraph (e) of this section, the 1997 regulations (contained in 26
CFR Part 1, revised as of April 1, 2003) may be applied in whole, but
not in part, to actions taken before February 23, 1998, with respect
to--
(1) Bonds that are outstanding on May 16, 1997 and subject to
section 141; or
(2) Refunding bonds issued on or after May 16, 1997 that are
subject to 141.
* * * * *
(h) Permissive retroactive application. Except as provided in
paragraphs (d), (e) or (i) of this section, Sec. Sec. 1.141-1 through
1.141-6(a), 1.141-7 through 1.141-14, 1.145-1 through 1.145-2,
1.149(d)-1(g), 1.150-1(a)(3), the definition of bond documents
contained in Sec. 1.150-1(b) and Sec. 1.150-1(c)(3)(ii) may be
applied by issuers in whole, but not in part, to--
(1) Outstanding bonds that are sold before the date of publication
of final regulations in the Federal Register, and subject to section
141; or
(2) Refunding bonds that are sold on or after the date of
publication of final regulations in the Federal Register, and subject
to section 141.
* * * * *
(j) Effective dates for certain regulations relating to refundings.
Except as otherwise provided in this section, Sec. Sec. 1.141-13,
1.145-2(d), 1.149(d)-1(g), 1.150-1(a)(3) and 1.150-1(c)(3)(ii) apply to
bonds that are sold on or after the date of publication of final
regulations in the Federal Register and that are subject to the 1997
regulations (contained in 26 CFR Part 1, revised as of April 1, 2003).
6. Section 1.145-0 is amended by adding an entry to the table in
numerical order for Sec. 1.145-2(d) to read as follows:
Sec. 1.145-0 Table of contents.
* * * * *
Sec. 1.145-2 Application of private activity bond regulations.
* * * * *
(d) Issuance costs financed by prior issue.
* * * * *
7. In Sec. 1.145-2, paragraph (d) is added to read as follows:
Sec. 1.145-2 Application of private activity bond regulations.
* * * * *
(d) Issuance costs financed by prior issue. Solely for purposes of
applying the private business use test to a refunding issue under Sec.
1.141-13, the use of proceeds of the prior issue (or any earlier issue
in a series of refundings) to pay issuance costs of the prior issue (or
the earlier issue) is treated as a government use.
8. Section 1.149(d)-1 is amended by revising paragraph (g) and
adding paragraph (h) to read as follows:
Sec. 1.149(d)-1 Limitations on advance refundings.
* * * * *
(g) Limitation on advance refundings of private activity bonds.
Under section 149(d)(2) and this section, interest on a bond is not
excluded from gross income if any portion of the issue of which the
bond is a part is issued to advance refund a private activity bond
(other than a qualified 501(c)(3) bond). For this purpose, the term
private activity bond--
(1) Includes a qualified bond described in section 141(e) (other
than a qualified 501(c)(3) bond), regardless of whether the refunding
issue consists of private activity bonds under Sec. 1.141-13; and
(2) Does not include a taxable bond.
(h) Effective dates--(1) In general. Except as provided in this
paragraph (h), this section applies to bonds issued after June 30,
1993, to which Sec. Sec. 1.148-1 through 1.148-11 apply, including
conduit loans that are treated as issued after June 30, 1993, under
paragraph (b)(4) of this section. In addition, this section applies to
any issue to which the election described in Sec. 1.148-11(b)(1) is
made.
(2) Special effective date for paragraph (b)(3). Paragraph (b)(3)
of this section applies to any advance refunding issue issued after May
28, 1991.
(3) Special effective date for paragraph (f)(3). Paragraph (f)(3)
of this section applies to bonds sold on or after July 8, 1997 and to
any issue to which the election described in Sec. 1.148-11(b)(1) is
made. See Sec. 1.148-11A(i) for rules relating to certain bonds sold
before July 8, 1997.
(4) Special effective date for paragraph (g). See Sec. 1.141-15
for the applicability date of paragraph (g) of this section.
9. Section 1.150-1 is amended by revising paragraphs (a)(3) and
(c)(3)(ii) to read as follows:
Sec. 1.150-1 Definitions.
(a) * * *
(3) Exceptions to general effective date. See Sec. 1.141-15 for
the applicability date of the definition of bond documents contained in
paragraph (b) of this section and the effective date of paragraph
(c)(3)(ii) of this section.
* * * * *
(c) * * *
(3) * * *
(ii) Exceptions. This paragraph (c)(3) does not apply for purposes
of sections 141, 144(a), 148, 149(d) and 149(g).
* * * * *
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 03-11926 Filed 5-9-03; 11:31 am]
BILLING CODE 4830-01-P