§148 — Arbitrage
18 citing cases
Statute Text — 26 U.S.C. §148
For purposes of section 103, the term “arbitrage bond” means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly—
to acquire higher yielding investments, or
to replace funds which were used directly or indirectly to acquire higher yielding investments.
For purposes of this subsection, a bond shall be treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2).
For purposes of this section—
The term “higher yielding investments” means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue.
The term “investment property” means—
any security (within the meaning of section 165(g)(2)(A) or (B)),
any obligation,
any annuity contract,
any investment-type property, or
in the case of a bond other than a private activity bond, any residential rental property for family units which is not located within the jurisdiction of the issuer and which is not acquired to implement a court ordered or approved housing desegregation plan.
Except as provided in subparagraph (B), the term “investment property” does not include any tax-exempt bond.
With respect to an issue other than an issue a part of which is a specified private activity bond (as defined in section 57(a)(5)(C)), the term “investment property” includes a specified private activity bond (as so defined).
The term “investment-type property” does not include a prepayment under a qualified natural gas supply contract.
For purposes of this paragraph, the term “qualified natural gas supply contract” means any contract to acquire natural gas for resale by a utility owned by a governmental unit if the amount of gas permitted to be acquired under the contract by the utility during any year does not exceed the sum of—
the annual average amount during the testing period of natural gas purchased (other than for resale) by customers of such utility who are located within the service area of such utility, and
the amount of natural gas to be used to transport the prepaid natural gas to the utility during such year.
Natural gas used to generate electricity shall be taken into account in determining the average under subparagraph (B)(i)—
only if the electricity is generated by a utility owned by a governmental unit, and
only to the extent that the electricity is sold (other than for resale) to customers of such utility who are located within the service area of such utility.
If—
after the close of the testing period and before the date of issuance of the issue, the utility owned by a governmental unit enters into a contract to supply natural gas (other than for resale) for a business use at a property within the service area of such utility, and
the utility did not supply natural gas to such property during the testing period or the ratable amount of natural gas to be supplied under the contract is significantly greater than the ratable amount of gas supplied to such property during the testing period,
The average under subparagraph (B)(i) shall not exceed the annual amount of natural gas reasonably expected to be purchased (other than for resale) by persons who are located within the service area of such utility and who, as of the date of issuance of the issue, are customers of such utility.
then a contract shall not fail to be treated as a qualified natural gas supply contract by reason of supplying the additional natural gas under the contract referred to in subclause (I).
The Secretary may increase the average under subparagraph (B)(i) for any period if the utility owned by the governmental unit establishes to the satisfaction of the Secretary that, based on objective evidence of growth in natural gas consumption or population, such average would otherwise be insufficient for such period.
The amount otherwise permitted to be acquired under the contract for any period shall be reduced by—
the applicable share of natural gas held by the utility on the date of issuance of the issue, and
the natural gas (not taken into account under subclause (I)) which the utility has a right to acquire during such period (determined as of the date of issuance of the issue).
For purposes of the clause (i), the term “applicable share” means, with respect to any period, the natural gas allocable to such period if the gas were allocated ratably over the period to which the prepayment relates.
Subparagraph (A) shall cease to apply to any issue if the utility owned by the governmental unit engages in any intentional act to render the volume of natural gas acquired by such prepayment to be in excess of the sum of—
the amount of natural gas needed (other than for resale) by customers of such utility who are located within the service area of such utility, and
the amount of natural gas used to transport such natural gas to the utility.
For purposes of this paragraph, the term “testing period” means, with respect to an issue, the most recent 5 calendar years ending before the date of issuance of the issue.
For purposes of this paragraph, the service area of a utility owned by a governmental unit shall be comprised of—
any area throughout which such utility provided at all times during the testing period—
in the case of a natural gas utility, natural gas transmission or distribution services, and
in the case of an electric utility, electricity distribution services,
any area within a county contiguous to the area described in clause (i) in which retail customers of such utility are located if such area is not also served by another utility providing natural gas or electricity services, as the case may be, and
any area recognized as the service area of such utility under State or Federal law.
For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that the proceeds of the issue of which such bond is a part may be invested in higher yielding investments for a reasonable temporary period until such proceeds are needed for the purpose for which such issue was issued.
The temporary period referred to in paragraph (1) shall not exceed 6 months with respect to the proceeds of an issue which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons.
Subparagraph (A) shall be applied by substituting “3 months” for “6 months” with respect to the proceeds from the sale or repayment of any loan which are to be used to make or finance any loan. For purposes of the preceding sentence, a nonpurpose investment shall not be treated as a loan.
In the case of an issue described in subparagraph (A) any portion of which is used to make or finance loans for construction expenditures (within the meaning of subsection (f)(4)(C)(iv))—
rules similar to the rules of subsection (f)(4)(C)(v) shall apply, and
subparagraph (A) shall be applied with respect to such portion by substituting “2 years” for “6 months”.
This paragraph shall not apply to any qualified mortgage bond or qualified veterans’ mortgage bond.
For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of the issue of which such bond is a part may be invested in higher yielding investments which are part of a reasonably required reserve or replacement fund. The amount referred to in the preceding sentence shall not exceed 10 percent of the proceeds of such issue unless the issuer establishes to the satisfaction of the Secretary that a higher amount is necessary.
A bond issued as part of an issue shall be treated as an arbitrage bond if the amount of the proceeds from the sale of such issue which is part of any reserve or replacement fund exceeds 10 percent of the proceeds of the issue (or such higher amount which the issuer establishes is necessary to the satisfaction of the Secretary).
Notwithstanding subsections (a), (c), and (d), a bond issued as part of an issue shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of such issue (in addition to the amounts under subsections (c) and (d)) is invested in higher yielding investments if such amount does not exceed the lesser of—
5 percent of the proceeds of the issue, or
$100,000.
A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs (2) and (3) are not met with respect to such issue. The preceding sentence shall not apply to any qualified veterans’ mortgage bond.
An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of—
the excess of—
the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this subparagraph), over
the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus
any income attributable to the excess described in subparagraph (A),
is paid to the United States by the issuer in accordance with the requirements of paragraph (3).
Except to the extent provided by the Secretary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time payment of such installment is required will have been paid to the United States. The last installment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with respect to such issue. A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sentence if no bond which is part of any issue in such series has a maturity of more than 270 days or is a private activity bond. In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part.
In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2)—
any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and
any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000.
In the case of an issue no bond of which is a private activity bond, clause (ii) shall be applied without regard to the dollar limitation therein if the average maturity of the issue (determined in accordance with section 147(b)(2)(A)) is at least 5 years and the rates of interest on bonds which are part of the issue do not vary during the term of the issue.
Under regulations prescribed by the Secretary—
An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraph (2) if—
the gross proceeds of such issue are expended for the governmental purposes for which the issue was issued no later than the day which is 6 months after the date of issuance of the issue, and
the requirements of paragraph (2) are met with respect to amounts not required to be spent as provided in subclause (I) (other than earnings on amounts in any bona fide debt service fund).
In the case of an issue described in subclause (II), clause (i) shall be applied by substituting “1 year” for “6 months” each place it appears with respect to the portion of the proceeds of the issue which are not expended in accordance with clause (i) if such portion does not exceed 5 percent of the proceeds of the issue.
An issue is described in this subclause if no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond) or a tax or revenue anticipation bond.
For purposes of clause (i), in the case of an issue of tax or revenue anticipation bonds, the net proceeds of such issue (including earnings thereon) shall be treated as expended for the governmental purpose of the issue on the 1st day after the date of issuance that the cumulative cash flow deficit to be financed by such issue exceeds 90 percent of the proceeds of such issue.
For purposes of subclause (I), the term “cumulative cash flow deficit” means, as of the date of computation, the excess of the expenses paid during the period described in subclause (III) which would ordinarily be paid out of or financed by anticipated tax or other revenues over the aggregate amount available (other than from the proceeds of the issue) during such period for the payment of such expenses.
For purposes of subclause (II), the period described in this subclause is the period beginning on the date of issuance of the issue and ending on the earlier of the date 6 months after such date of issuance or the date of the computation of cumulative cash flow deficit.
For purposes of this subparagraph, payments of principal on the bonds which are part of an issue shall not be treated as expended for the governmental purposes of the issue.
Gross proceeds which are held in a bona fide debt service fund or a reasonably required reserve or replacement fund, and gross proceeds which arise after such 6 months and which were not reasonably anticipated as of the date of issuance, shall not be considered gross proceeds for purposes of subclause (I) only.
In the case of a construction issue, paragraph (2) shall not apply to the available construction proceeds of such issue if the spending requirements of clause (ii) are met.
The spending requirements of this clause are met if at least—
10 percent of the available construction proceeds of the construction issue are spent for the governmental purposes of the issue within the 6-month period beginning on the date the bonds are issued,
45 percent of such proceeds are spent for such purposes within the 1-year period beginning on such date,
75 percent of such proceeds are spent for such purposes within the 18-month period beginning on such date, and
100 percent of such proceeds are spent for such purposes within the 2-year period beginning on such date.
The spending requirement of clause (ii)(IV) shall be treated as met if—
such requirement would be met at the close of such 2-year period but for a reasonable retainage (not exceeding 5 percent of the available construction proceeds of the construction issue), and
100 percent of the available construction proceeds of the construction issue are spent for the governmental purposes of the issue within the 3-year period beginning on the date the bonds are issued.
For purposes of this subparagraph, the term “construction issue” means any issue if—
at least 75 percent of the available construction proceeds of such issue are to be used for construction expenditures with respect to property which is to be owned by a governmental unit or a 501(c)(3) organization, and
all of the bonds which are part of such issue are qualified 501(c)(3) bonds, bonds which are not private activity bonds, or private activity bonds issued to finance property to be owned by a governmental unit or a 501(c)(3) organization.
If—
all of the construction expenditures to be financed by an issue are to be financed from a portion thereof, and
the issuer elects to treat such portion as a construction issue for purposes of this subparagraph,
For purposes of this subparagraph—
The term “available construction proceeds” means the amount equal to the issue price (within the meaning of sections 1273 and 1274) of the construction issue, increased by earnings on the issue price, earnings on amounts in any reasonably required reserve or replacement fund not funded from the issue, and earnings on all of the foregoing earnings, and reduced by the amount of the issue price in any reasonably required reserve or replacement fund and the issuance costs financed by the issue.
The term “available construction proceeds” shall not include amounts earned on any reasonably required reserve or replacement fund after the earlier of the close of the 2-year period described in clause (ii) or the date the construction is substantially completed.
The term “available construction proceeds” shall not include payments on any obligation acquired to carry out the governmental purposes of the issue and shall not include earnings on such payments.
At the election of the issuer, the term “available construction proceeds” shall not include earnings on any reasonably required reserve or replacement fund.
At the election of the issuer, paragraph (2) shall not apply to available construction proceeds which do not meet the spending requirements of clause (ii) if the issuer pays a penalty, with respect to each 6-month period after the date the bonds were issued, equal to 1½ percent of the amount of the available construction proceeds of the issue which, as of the close of such 6-month period, is not spent as required by clause (ii).
The penalty imposed by this clause shall cease to apply only as provided in clause (viii) or after the latest maturity date of any bond in the issue (including any refunding bond with respect thereto).
At the election of the issuer (made not later than 90 days after the earlier of the end of the initial temporary period or the date the construction is substantially completed), the penalty under clause (vii) shall not apply to any 6-month period after the initial temporary period under subsection (c) if the requirements of subclauses (I), (II), and (III) are met.
The requirement of this subclause is met if the issuer pays a penalty equal to 3 percent of the amount of available construction proceeds of the issue which is not spent for the governmental purposes of the issue as of the close of such initial temporary period multiplied by the number of years (including fractions thereof) in the initial temporary period.
The requirement of this subclause is met if the amount of the available construction proceeds of the issue which is not spent for the governmental purposes of the issue as of the close of such initial temporary period is invested at a yield not exceeding the yield on the issue or which is invested in any tax-exempt bond which is not investment property.
The requirement of this subclause is met if the amount of the available construction proceeds of the issue which is not spent for the governmental purposes of the issue as of the earliest date on which bonds may be redeemed is used to redeem bonds on such date.
If—
the construction to be financed by a construction issue is substantially completed before the end of the initial temporary period,
the issuer identifies an amount of available construction proceeds which will not be spent for the governmental purposes of the issue,
the issuer has made the election under clause (viii), and
the issuer makes an election under this clause before the close of the initial temporary period and not later than 90 days after the date the construction is substantially completed,
In the case of a failure (which is not due to willful neglect) to pay any penalty required to be paid under clause (vii) or (viii) in the amount or at the time prescribed therefor, the Secretary may treat such failure as not occurring if, in addition to paying such penalty, the issuer pays a penalty equal to the sum of—
50 percent of the amount which was not paid in accordance with clauses (vii) and (viii), plus
interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required for the period beginning on such date.
At the election of the issuer of an issue the proceeds of which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons, the periods described in clauses (ii) and (iii) shall begin on—
the date the loan is made, in the case of loans made within the 1-year period after the date the bonds are issued, and
the date following such 1-year period, in the case of loans made after such 1-year period.
For purposes of this subparagraph, payments of principal on the bonds which are part of the construction issue shall not be treated as an expenditure of the available construction proceeds of the issue.
Except as provided in this clause, clause (vii)(II), and the last sentence of clause (x), this subparagraph shall not apply to any refunding bond and no proceeds of a refunded bond shall be treated for purposes of this subparagraph as proceeds of a refunding bond.
For purposes of clause (v), any portion of an issue which is used to refund any issue (or portion thereof) shall be treated as a separate issue.
The requirements of paragraph (2) shall be treated as met with respect to earnings for any period if a penalty is paid under clause (vii) or (viii) with respect to such earnings for such period.
Any election under this subparagraph (other than clauses (viii) and (ix)) shall be made on or before the date the bonds are issued; and, once made, shall be irrevocable.
Any penalty under this subparagraph shall be paid to the United States not later than 90 days after the period to which the penalty relates.
If the spending requirements of clause (ii) are met with respect to the available construction proceeds of a construction issue, then paragraph (2) shall not apply to earnings on a bona fide debt service fund for such issue.
For purposes of this subparagraph, the term “construction” includes reconstruction and rehabilitation, and rules similar to the rules of section 142(b)(1)(B) shall apply.
An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraphs (2) and (3) if—
the issue is issued by a governmental unit with general taxing powers,
no bond which is part of such issue is a private activity bond,
95 percent or more of the net proceeds of such issue are to be used for local governmental activities of the issuer (or of a governmental unit the jurisdiction of which is entirely within the jurisdiction of the issuer), and
the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by such unit during the calendar year in which such issue is issued is not reasonably expected to exceed $5,000,000.
For purposes of subclause (IV) of clause (i)—
an issuer and all entities which issue bonds on behalf of such issuer shall be treated as 1 issuer,
all bonds issued by a subordinate entity shall, for purposes of applying such subclause to each other entity to which such entity is subordinate, be treated as issued by such other entity, and
an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of such subclause (IV) and all other entities benefiting thereby shall be treated as 1 issuer.
There shall not be taken into account under subclause (IV) of clause (i) any bond issued to refund (other than to advance refund) any bond to the extent the amount of the refunding bond does not exceed the outstanding amount of the refunded bond.
An issue issued by a subordinate entity of a governmental unit with general taxing powers shall be treated as described in clause (i)(I) if the aggregate face amount of such issue does not exceed the lesser of—
$5,000,000, or
the amount which, when added to the aggregate face amount of other issues issued by such entity, does not exceed the portion of the $5,000,000 limitation under clause (i)(IV) which such governmental unit allocates to such entity.
If any portion of an issue is issued to refund other bonds, such portion shall be treated as a separate issue which does not meet the requirements of paragraphs (2) and (3) by reason of this subparagraph unless—
the aggregate face amount of such issue does not exceed $5,000,000,
each refunded bond was issued as part of an issue which was treated as meeting the requirements of paragraphs (2) and (3) by reason of this subparagraph,
the average maturity date of the refunding bonds issued as part of such issue is not later than the average maturity date of the bonds to be refunded by such issue, and
no refunding bond has a maturity date which is later than the date which is 30 years after the date the original bond was issued.
If section 141(a) did not apply to any refunded bond, the issue of which such refunded bond was a part shall be treated as meeting the requirements of subclause (II) of clause (v) if—
such issue was issued by a governmental unit with general taxing powers,
no bond issued as part of such issue was an industrial development bond (as defined in section 103(b)(2), but without regard to subparagraph (B) of section 103(b)(3)) or a private loan bond (as defined in section 103(
o
)(2)(A), but without regard to any exception from such definition other than section 103(
o
)(2)(C)), and
the aggregate face amount of all tax-exempt bonds (other than bonds described in subclause (II)) issued by such unit during the calendar year in which such issue was issued did not exceed $5,000,000.
Each of the $5,000,000 amounts in the preceding provisions of this subparagraph shall be increased by the lesser of $10,000,000 or so much of the aggregate face amount of the bonds as are attributable to financing the construction (within the meaning of subparagraph (C)(iv)) of public school facilities.
For purposes of the preceding sentence, an entity which issues bonds on behalf of a governmental unit with general taxing powers shall be treated as a subordinate entity of such unit. An allocation shall be taken into account under subclause (II) only if it is irrevocable and made before the issuance date of such issue and only to the extent that the limitation so allocated bears a reasonable relationship to the benefits received by such governmental unit from issues issued by such entity.
Gross income shall not include the sum described in paragraph (2). Notwithstanding any other provision of this title, no deduction shall be allowed for any amount paid to the United States under paragraph (2).
For purposes of this subsection and subsections (c) and (d)—
The term “nonpurpose investment” means any investment property which—
is acquired with the gross proceeds of an issue, and
is not acquired in order to carry out the governmental purpose of the issue.
Except as otherwise provided by the Secretary, the gross proceeds of an issue include—
amounts received (including repayments of principal) as a result of investing the original proceeds of the issue, and
amounts to be used to pay debt service on the issue.
In the case of an issue which would (but for this paragraph) fail to meet the requirements of paragraph (2) or (3), the Secretary may treat such issue as not failing to meet such requirements if—
no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond),
the failure to meet such requirements is not due to willful neglect, and
the issuer pays to the United States a penalty in an amount equal to the sum of—
50 percent of the amount which was not paid in accordance with paragraphs (2) and (3), plus
interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required under paragraph (3) for the period beginning on such date.
The Secretary may waive all or any portion of the penalty under this paragraph.
Except to the extent otherwise provided in regulations, payments made by the Secretary of Education pursuant to section 438 of the Higher Education Act of 1965 are not to be taken into account, for purposes of subsection (a)(1), in determining yields on student loan notes.
For purposes of this section, the yield on an issue shall be determined on the basis of the issue price (within the meaning of sections 1273 and 1274).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
Treasury Regulations
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Treas. Reg. §1.148-0Scope and table of contents
(a) Overview. Under section 103(a), interest on certain obligations issued by States and local governments is excludable from the gross income of the owners. Section 148 was enacted to minimize the arbitrage benefits from investing gross proceeds of tax-exempt bonds in higher yielding investments and to remove the arbitrage incentives to issue more bonds, to issue bonds earlier, or to leave bonds outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes for which the bonds were issued. To accomplish these purposes, section 148 restricts the direct and indirect investment of bond proceeds in higher yielding investments and requires that certain earnings on higher yielding investments be rebated to the United States. Violation of these provisions causes the bonds in the issue to become arbitrage bonds, the interest on which is not excludable from the gross income of the owners under section 103(a). The regulations in §§ 1.148-1 through 1.148-11 apply in a manner consistent with these purposes.
(b) Scope. Sections 1.148-1 through 1.148-11 apply generally for purposes of the arbitrage restrictions on State and local bonds under section 148.
(c) Table of contents. This paragraph (c) lists the table of contents for §§ 1.148-1, 1.148-2, 1.148-3, 1.148-4, 1.148-5, 1.148-6, 1.148-7, 1.148-8, 1.148-9, 1.148-10 and 1.148-11.
(a) In general.
(b) Certain definitions.
(c) Definition of replacement proceeds.
(1) In general.
(2) Sinking fund.
(3) Pledged fund.
(4) Other replacement proceeds.
(d) Elections.
(e) Investment-type property.
(1) In general.
(2) Prepayments.
(3) Certain hedges.
(4) Exception for certain capital projects.
(f) Definition of issue price.
(1) In general.
(2) Bonds issued for money.
(3) Definitions.
(4) Other special rules.
(a) In general.
(b) Reasonable expectations.
(1) In general.
(2) Certification of expectations.
(c) Intentional acts.
(d) Materially higher yielding investments.
(1) In general.
(2) Definitions of materially higher yield.
(3) Mortgage loans.
(e) Temporary periods.
(1) In general.
(2) General 3-year temporary period for capital projects and qualified mortgage loans.
(3) Temporary period for working capital expenditures.
(4) Temporary period for pooled financings.
(5) Temporary period for replacement proceeds.
(6) Temporary period for investment proceeds.
(7) Other amounts.
(f) Reserve or replacement funds.
(1) General 10 percent limitation on funding with sale proceeds.
(2) Exception from yield restriction for reasonably required reserve or replacement funds.
(3) Certain parity reserve funds.
(g) Minor portion.
(h) Certain waivers permitted.
(a) In general.
(b) Definition of rebate amount.
(c) Computation of future value of a payment or receipt.
(d) Payments and receipts.
(1) Definition of payments.
(2) Definition of receipts.
(3) Special rules for commingled funds.
(4) Cost-of-living adjustment.
(e) Computation dates.
(1) In general.
(2) Final computation date.
(f) Amount of required rebate installment payment.
(1) Amount of interim rebate payments.
(2) Amount of final rebate payment.
(3) Future value of rebate payments.
(g) Time and manner of payment.
(h) Penalty in lieu of loss of tax exemption.
(1) In general.
(2) Interest on underpayments.
(3) Waivers of the penalty.
(4) Application to alternative penalty under § 1.148-7.
(i) Recovery of overpayment of rebate.
(1) In general.
(2) Limitations on recovery.
(3) Time and manner for requesting refund.
(j) Examples.
(k) Bona fide debt service fund exception.
(a) In general.
(b) Computing yield on a fixed yield issue.
(1) In general.
(2) Yield on certain fixed yield bonds subject to mandatory or contingent early redemption.
(3) Yield on certain fixed yield bonds subject to optional early redemption.
(4) Yield recomputed upon transfer of certain rights associated with the bond.
(5) Special aggregation rule treating certain bonds as a single fixed yield bond.
(6) Examples.
(c) Computing yield on a variable yield issue.
(1) In general.
(2) Payments on bonds included in yield for a computation period.
(3) Example.
(d) Conversion from variable yield issue to fixed yield issue.
(e) Value of bonds.
(1) Plain par bonds.
(2) Other bonds.
(f) Qualified guarantees.
(1) In general.
(2) Interest savings.
(3) Guarantee in substance.
(4) Reasonable charge.
(5) Guarantee of purpose investments.
(6) Allocation of qualified guarantee payments.
(7) Refund or reduction of guarantee payments.
(g) Yield on certain mortgage revenue and student loan bonds.
(h) Qualified hedging transactions.
(1) In general.
(2) Qualified hedge defined.
(3) Accounting for qualified hedges.
(4) Certain variable yield bonds treated as fixed yield bonds.
(5) Contracts entered into before issue date of hedged bond.
(6) Authority of the Commissioner.
(a) In general.
(b) Yield on an investment.
(1) In general.
(2) Yield on a separate class of investments.
(3) Investments to be held beyond issue's maturity or beyond temporary period.
(4) Consistent redemption assumptions on purpose investments.
(5) Student loan special allowance payments included in yield.
(c) Yield reduction payments to the United States.
(1) In general.
(2) Manner of payment.
(3) Applicability of special yield reduction rule.
(d) Value of investments.
(1) In general.
(2) Mandatory valuation of certain yield restricted investments at present value.
(3) Mandatory valuation of certain investments at fair market value.
(4) Special transition rule for transferred proceeds.
(5) Definition of present value of an investment.
(6) Definition of fair market value.
(e) Administrative costs of investments.
(1) In general.
(2) Qualified administrative costs on nonpurpose investments.
(3) Qualified administrative costs on purpose investments.
(a) In general.
(1) Reasonable accounting methods required.
(2) Bona fide deviations from accounting method.
(b) Allocation of gross proceeds to an issue.
(1) One-issue rule and general ordering rules.
(2) Universal cap on value of nonpurpose investments allocated to an issue.
(c) Fair market value limit on allocations to nonpurpose investments.
(d) Allocation of gross proceeds to expenditures.
(1) Expenditures in general.
(2) Treatment of gross proceeds invested in purpose investments.
(3) Expenditures for working capital purposes.
(4) Expenditures for grants.
(5) Expenditures for reimbursement purposes.
(6) Expenditures of certain commingled investment proceeds of governmental issues.
(7) Payments to related parties.
(e) Special rules for commingled funds.
(1) In general.
(2) Investments held by a commingled fund.
(3) Certain expenditures involving a commingled fund.
(4) Fiscal periods.
(5) Unrealized gains and losses on investments of a commingled fund.
(6) Allocations of commingled funds serving as common reserve funds or sinking funds.
(a) Scope of section.
(1) In general.
(2) Relationship of spending exceptions.
(3) Spending exceptions not mandatory.
(b) Rules applicable for all spending exceptions.
(1) Special transferred proceeds rules.
(2) Application of multipurpose issue rules.
(3) Expenditures for governmental purposes of the issue.
(4) De minimis rule.
(5) Special definition of reasonably required reserve or replacement fund.
(6) Pooled financing issue.
(c) 6-month exception.
(1) General rule.
(2) Additional period for certain bonds.
(3) Amounts not included in gross proceeds.
(4) Series of refundings.
(d) 18-month exception.
(1) General rule.
(2) Extension for reasonable retainage.
(3) Gross proceeds.
(4) Application to multipurpose issues.
(e) 2-year exception.
(1) General rule.
(2) Extension for reasonable retainage.
(3) Definitions.
(f) Construction issue.
(1) Definition.
(2) Use of actual facts.
(3) Ownership requirement.
(g) Construction expenditures.
(1) Definition.
(2) Certain acquisitions under turnkey contracts treated as construction expenditures.
(3) Constructed personal property.
(4) Specially developed computer software.
(5) Examples.
(h) Reasonable retainage definition.
(i) Available construction proceeds.
(1) Definition in general.
(2) Earnings on a reasonably required reserve or replacement fund.
(3) Reasonable expectations test for future earnings.
(4) Issuance costs.
(5) One and one-half percent penalty in lieu of arbitrage rebate.
(6) Payments on purpose investments and repayments of grants.
(7) Examples.
(j) Election to treat portion of issue used for construction as separate issue.
(1) In general.
(2) Example.
(k) One and one-half percent penalty in lieu of arbitrage rebate.
(1) In general.
(2) Application to reasonable retainage.
(3) Coordination with rebate requirement.
(l) Termination of 1
1/2 percent penalty.
(1) Termination after initial temporary period.
(2) Termination before end of initial temporary period.
(3) Application to reasonable retainage.
(4) Example.
(m) Payment of penalties.
(a) Scope.
(b) General taxing powers.
(c) Size limitation.
(1) In general.
(2) Aggregation rules.
(3) Certain refunding bonds not taken into account.
(d) Pooled financings—treatment of conduit borrowers.
(e) Refunding issues.
(1) In general.
(2) Multipurpose issues.
(a) Scope of application.
(b) Transferred proceeds allocation rule.
(1) In general.
(2) Special definition of principal amount.
(3) Relation of transferred proceeds rule to universal cap rule.
(4) Limitation on multi-generational transfers.
(c) Special allocation rules for refunding issues.
(1) Allocations of investments.
(2) Allocations of mixed escrows to expenditures for principal, interest, and redemption prices on a prior issue.
(d) Temporary periods in refundings.
(1) In general.
(2) Types of temporary periods in refundings.
(e) Reasonably required reserve or replacement funds in refundings.
(f) Minor portions in refundings.
(g) Certain waivers permitted.
(h) Multipurpose issue allocations.
(1) Application of multipurpose issue allocation rules.
(2) Rules on allocations of multipurpose issues.
(3) Separate purposes of a multipurpose issue.
(4) Allocations of bonds of a multipurpose issue.
(5) Limitation on multi-generation allocations.
(i) Operating rules for separation of prior issues into refunded and unrefunded portions.
(1) In general.
(2) Allocations of proceeds and investments in a partial refunding.
(3) References to prior issue.
(a) Abusive arbitrage device.
(1) In general.
(2) Abusive arbitrage device defined.
(3) Exploitation of tax-exempt interest rates.
(4) Overburdening the tax-exempt market.
(b) Consequences of overburdening the tax-exempt bond market.
(1) In general.
(2) Application.
(c) Anti-abuse rules on excess gross proceeds of advance refunding issues.
(1) In general.
(2) Definition of excess gross proceeds.
(3) Special treatment of transferred proceeds.
(4) Special rule for crossover refundings.
(5) Special rule for gross refundings.
(d) Examples.
(e) Authority of the Commissioner to prevent transactions that are inconsistent with the purpose of the arbitrage investment restrictions.
(f) Authority of the Commissioner to require an earlier date for payment of rebate.
(g) Authority of the Commissioner to waive regulatory limitations.
(a) In general.
(b) Elective retroactive application in whole.
(1) In general.
(2) No elective retroactive application for 18-month spending exception.
(3) No elective retroactive application for hedges of fixed rate issues.
(4) No elective retroactive application for safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow.
(c) Elective retroactive application of certain provisions.
(1) Retroactive application of overpayment recovery provisions.
(2) Certain allocations of multipurpose issues.
(3) Special limitation.
(d) Transition rule excepting certain state guarantee funds from the definition of replacement proceeds.
(1) Certain perpetual trust funds.
(2) Permanent University Fund.
(e) Transition rule regarding special allowance payments.
(f) Transition rule regarding applicability of yield reduction rule.
(g) Provisions applicable to certain bonds sold before effective date.
(h) Safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow.
(i) Special rule for certain broker's commissions and similar fees.
(j) Certain prepayments.
(k) Certain arbitrage guidance updates.
(1) In general.
(2) Valuation of investments in refunding transactions.
(3) Rebate overpayment recovery.
(4) Hedge identification.
(5) Hedge modifications and termination.
(6) Small issuer exception to rebate requirement for conduit borrowers of pooled financings.
(l) Permissive application of certain arbitrage updates.
(1) In general.
(2) Computation credit.
(3) Yield reduction payments.
(4) External commingled funds.
(m) Definition of issue price.
(n) Investment-type property.
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Treas. Reg. §1.148-0(a)In general.
In general.
-
Treas. Reg. §1.148-0(b)Elective retroactive application in whole.
Elective retroactive application in whole.
(1) In general.
(2) No elective retroactive application for 18-month spending exception.
(3) No elective retroactive application for hedges of fixed rate issues.
(4) No elective retroactive application for safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow.
-
Treas. Reg. §1.148-0(c)Elective retroactive application of certain provisions.
Elective retroactive application of certain provisions.
(1) Retroactive application of overpayment recovery provisions.
(2) Certain allocations of multipurpose issues.
(3) Special limitation.
-
Treas. Reg. §1.148-0(d)Transition rule excepting certain state guarantee funds from the definition of replacement proceeds.
Transition rule excepting certain state guarantee funds from the definition of replacement proceeds.
(1) Certain perpetual trust funds.
(2) Permanent University Fund.
-
Treas. Reg. §1.148-0(e)Transition rule regarding special allowance payments.
Transition rule regarding special allowance payments.
-
Treas. Reg. §1.148-0(f)Transition rule regarding applicability of yield reduction rule.
Transition rule regarding applicability of yield reduction rule.
-
Treas. Reg. §1.148-0(g)Provisions applicable to certain bonds sold before effective date.
Provisions applicable to certain bonds sold before effective date.
-
Treas. Reg. §1.148-0(h)Safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow.
Safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow.
-
Treas. Reg. §1.148-0(i)Special rule for certain broker's commissions and similar fees.
Special rule for certain broker's commissions and similar fees.
-
Treas. Reg. §1.148-0(j)Certain prepayments.
Certain prepayments.
-
Treas. Reg. §1.148-0(k)Certain arbitrage guidance updates.
Certain arbitrage guidance updates.
(1) In general.
(2) Valuation of investments in refunding transactions.
(3) Rebate overpayment recovery.
(4) Hedge identification.
(5) Hedge modifications and termination.
(6) Small issuer exception to rebate requirement for conduit borrowers of pooled financings.
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Treas. Reg. §1.148-0(l)Permissive application of certain arbitrage updates.
Permissive application of certain arbitrage updates.
(1) In general.
(2) Computation credit.
(3) Yield reduction payments.
(4) External commingled funds.
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Treas. Reg. §1.148-0(m)Definition of issue price.
Definition of issue price.
-
Treas. Reg. §1.148-0(n)Investment-type property.
Investment-type property.
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Treas. Reg. §1.148-1Definitions and elections
(a) In general. The definitions in this section and the definitions under section 150 apply for purposes of section 148 and §§ 1.148-1 through 1.148-11.
(b) Certain definitions. The following definitions apply:
Accounting method means both the overall method used to account for gross proceeds of an issue (e.g., the cash method or a modified accrual method) and the method used to account for or allocate any particular item within that overall accounting method (e.g., accounting for investments, expenditures, allocations to and from different sources, and particular items of the foregoing).
Annuity contract means annuity contract as defined in section 72.
Available amount means available amount as defined in § 1.148-6(d)(3)(iii).
Bona fide debt service fund means a fund, which may include proceeds of an issue, that—
(1) Is used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year; and
(2) Is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of:
(i) the earnings on the fund for the immediately preceding bond year; or
(ii) one-twelfth of the principal and interest payments on the issue for the immediately preceding bond year.
Bond year means, in reference to an issue, each 1-year period that ends on the day selected by the issuer. The first and last bond years may be short periods. If no day is selected by the issuer before the earlier of the final maturity date of the issue or the date that is 5 years after the issue date, bond years end on each anniversary of the issue date and on the final maturity date.
Capital project or capital projects means all capital expenditures, plus related working capital expenditures to which the de minimis rule under § 1.148-6(d)(3)(ii)(A) applies, that carry out the governmental purposes of an issue. For example, a capital project may include capital expenditures for one or more buildings, plus related start-up operating costs.
Commingled fund means any fund or account containing both gross proceeds of an issue and amounts in excess of $25,000 that are not gross proceeds of that issue if the amounts in the fund or account are invested and accounted for collectively, without regard to the source of funds deposited in the fund or account. An open-end regulated investment company under section 851, however, is not a commingled fund.
Computation date means each date on which the rebate amount for an issue is computed under § 1.148-3(e).
Computation period means the period between computation dates. The first computation period begins on the issue date and ends on the first computation date. Each succeeding computation period begins on the date immediately following the computation date and ends on the next computation date.
Consistently applied means applied uniformly within a fiscal period and between fiscal periods to account for gross proceeds of an issue and any amounts that are in a commingled fund.
De minimis amount means—
(1) In reference to original issue discount (as defined in section 1273(a)(1)) or premium on an obligation—
(i) An amount that does not exceed 2 percent multiplied by the stated redemption price at maturity; plus
(ii) Any original issue premium that is attributable exclusively to reasonable underwriters' compensation; and
(2) In reference to market discount (as defined in section 1278(a)(2)(A)) or premium on an obligation, an amount that does not exceed 2 percent multiplied by the stated redemption price at maturity.
Economic accrual method (also known as the constant interest method or actuarial method) means the method of computing yield that is based on the compounding of interest at the end of each compounding period.
Fair market value means fair market value as defined in § 1.148-5(d)(6).
Fixed rate investment means any investment whose yield is fixed and determinable on the issue date.
Fixed yield bond means any bond whose yield is fixed and determinable on the issue date using the assumptions and rules provided in § 1.148-4(b).
Fixed yield issue means any issue if each bond that is part of the issue is a fixed yield bond.
Gross proceeds means any proceeds and replacement proceeds of an issue.
Guaranteed investment contract includes any nonpurpose investment that has specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, and also includes any agreement to supply investments on two or more future dates (e.g., a forward supply contract).
Higher yielding investments means higher yielding investments as defined in section 148(b)(1).
Investment means any investment property as defined in sections 148(b)(2) and 148(b)(3), and any other tax-exempt bond.
Investment proceeds means any amounts actually or constructively received from investing proceeds of an issue.
Investment-type property is defined in paragraph (e) of this section.
Issue price means issue price as defined in paragraph (f) of this section.
Issuer generally means the entity that actually issues the issue, and, unless the context or a provision clearly requires otherwise, each conduit borrower of the issue. For example, rules imposed on issuers to account for gross proceeds of an issue apply to a conduit borrower to account for any gross proceeds received under a purpose investment. Provisions regarding elections, filings, liability for the rebate amount, and certifications of reasonable expectations apply only to the actual issuer.
Multipurpose issue means an issue the proceeds of which are used for two or more separate purposes determined in accordance with § 1.148-9(h).
Net sale proceeds means sale proceeds, less the portion of those sale proceeds invested in a reasonably required reserve or replacement fund under section 148(d) and as part of a minor portion under section 148(e).
Nonpurpose investment means any investment property, as defined in section 148(b), that is not a purpose investment.
Payment means a payment as defined in § 1.148-3(d) for purposes of computing the rebate amount, and a payment as defined in § 1.148-5(b) for purposes of computing the yield on an investment.
Plain par bond means a qualified tender bond or a bond—
(1) Issued with not more than a de minimis amount of original issue discount or premium;
(2) Issued for a price that does not include accrued interest other than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated, fixed rate or that is a variable rate debt instrument under section 1275, in each case with interest unconditionally payable at least annually; and
(4) That has a lowest stated redemption price that is not less than its outstanding stated principal amount.
Plain par investment means an investment that is an obligation—
(1) Issued with not more than a de minimis amount of original issue discount or premium, or, if acquired on a date other than the issue date, acquired with not more than a de minimis amount of market discount or premium;
(2) Issued for a price that does not include accrued interest other than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated, fixed rate or that is a variable rate debt instrument under section 1275, in each case with interest unconditionally payable at least annually; and
(4) That has a lowest stated redemption price that is not less than its outstanding stated principal amount.
Pre-issuance accrued interest means amounts representing interest that accrued on an obligation for a period not greater than one year before its issue date but only if those amounts are paid within one year after the issue date.
Proceeds means any sale proceeds, investment proceeds, and transferred proceeds of an issue. Proceeds do not include, however, amounts actually or constructively received with respect to a purpose investment that are properly allocable to the immaterially higher yield under § 1.148-2(d) or section 143(g) or to qualified administrative costs recoverable under § 1.148-5(e).
Program investment means a purpose investment that is part of a governmental program in which—
(1) The program involves the origination or acquisition of purpose investments;
(2) At least 95 percent (90 percent for qualified student loans under section 144(b)(1)(A)) of the cost of the purpose investments acquired under the program represents one or more loans to a substantial number of persons representing the general public, States or political subdivisions, 501(c)(3) organizations, persons who provide housing and related facilities, or any combination of the foregoing;
(3) At least 95 percent of the receipts from the purpose investments are used to pay principal, interest, or redemption prices on issues that financed the program, to pay or reimburse administrative costs of those issues or of the program, to pay or reimburse anticipated future losses directly related to the program, to finance additional purpose investments for the same general purposes of the program, or to redeem and retire governmental obligations at the next earliest possible date of redemption;
(4) The program documents prohibit any obligor on a purpose investment financed by the program or any related party to that obligor from purchasing bonds of an issue that finance the program in an amount related to the amount of the purpose investment acquired from that obligor; and
(5) The issuer has not waived the right to treat the investment as a program investment.
Purpose investment means an investment that is acquired to carry out the governmental purpose of an issue.
Qualified administrative costs means qualified administrative costs as defined in § 1.148-5(e).
Qualified guarantee means a qualified guarantee as defined in § 1.148-4(f).
Qualified hedge means a qualified hedge as defined in § 1.148-4(h)(2).
Reasonable expectations or reasonableness. An issuer's expectations or actions are reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations or take those same actions, based on all the objective facts and circumstances. Factors relevant to a determination of reasonableness include the issuer's history of conduct concerning stated expectations made in connection with the issuance of obligations, the level of inquiry by the issuer into factual matters, and the existence of covenants, enforceable by bondholders, that require implementation of specific expectations. For a conduit financing issue, factors relevant to a determination of reasonableness include the reasonable expectations of the conduit borrower, but only if, under the circumstances, it is reasonable and prudent for the issuer to rely on those expectations.
Rebate amount means 100 percent of the amount owed to the United States under section 148(f)(2), as further described in § 1.148-3.
Receipt means a receipt as defined in § 1.148-3(d) for purposes of computing the rebate amount, and a receipt as defined in § 1.148-5(b) for purposes of computing yield on an investment.
Refunding escrow means one or more funds established as part of a single transaction or a series of related transactions, containing proceeds of a refunding issue and any other amounts to provide for payment of principal or interest on one or more prior issues. For this purpose, funds are generally not so established solely because of—
(1) The deposit of proceeds of an issue and replacement proceeds of the prior issue in an escrow more than 6 months apart, or
(2) The deposit of proceeds of completely separate issues in an escrow.
Replacement proceeds is defined in paragraph (c) of this section.
Restricted working capital expenditures means working capital expenditures that are subject to the proceeds-spent-last rule in § 1.148-6(d)(3)(i) and are ineligible for any exception to that rule.
Sale proceeds means any amounts actually or constructively received from the sale of the issue, including amounts used to pay underwriters' discount or compensation and accrued interest other than pre-issuance accrued interest. Sale proceeds also include, but are not limited to, amounts derived from the sale of a right that is associated with a bond, and that is described in § 1.148-4(b)(4). See also § 1.148-4(h)(5) treating amounts received upon the termination of certain hedges as sale proceeds.
Stated redemption price means the redemption price of an obligation under the terms of that obligation, including any call premium.
Transferred proceeds means transferred proceeds as defined in § 1.148-9 (or the applicable corresponding provision of prior law).
Unconditionally payable means payable under terms in which—
(1) Late payment or nonpayment results in a significant penalty to the borrower or reasonable remedies to the lender, and
(2) It is reasonably certain on the issue date that the payment will actually be made.
Value means value determined under § 1.148-4(e) for a bond, and value determined under § 1.148-5(d) for an investment.
Variable yield bond means any bond that is not a fixed yield bond.
Variable yield issue means any issue that is not a fixed yield issue.
Yield means yield computed under § 1.148-4 for an issue, and yield computed under § 1.148-5 for an investment.
Yield restricted means required to be invested at a yield that is not materially higher than the yield on the issue under section 148(a) and § 1.148-2.
(c) Definition of replacement proceeds—(1) In general. Amounts are replacement proceeds of an issue if the amounts have a sufficiently direct nexus to the issue or to the governmental purpose of the issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the issue were not used or to be used for that governmental purpose. For this purpose, governmental purposes include the expected use of amounts for the payment of debt service on a particular date. The mere availability or preliminary earmarking of amounts for a governmental purpose, however, does not in itself establish a sufficient nexus to cause those amounts to be replacement proceeds. Replacement proceeds include, but are not limited to, sinking funds, pledged funds, and other replacement proceeds described in paragraph (c)(4) of this section, to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue. A substantial beneficiary of an issue includes the issuer and any related party to the issuer, and, if the issuer is not a state, the state in which the issuer is located. A person is not a substantial beneficiary of an issue solely because it is a guarantor under a qualified guarantee.
(2) Sinking fund. Sinking fund includes a debt service fund, redemption fund, reserve fund, replacement fund, or any similar fund, to the extent reasonably expected to be used directly or indirectly to pay principal or interest on the issue.
(3) Pledged fund—(i) In general. A pledged fund is any amount that is directly or indirectly pledged to pay principal or interest on the issue. A pledge need not be cast in any particular form but, in substance, must provide reasonable assurance that the amount will be available to pay principal or interest on the issue, even if the issuer encounters financial difficulties. A pledge to a guarantor of an issue is an indirect pledge to secure payment of principal or interest on the issue. A pledge of more than 50 percent of the outstanding stock of a corporation that is a conduit borrower of the issue is not treated as a pledge for this purpose, unless the corporation is formed or availed of to avoid the creation of replacement proceeds.
(ii) Negative pledges. An amount is treated as pledged to pay principal or interest on an issue if it is held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the bondholders or a guarantor of the bonds. An amount is not treated as pledged under this paragraph (c)(3)(ii), however, if—
(A) The issuer or a substantial beneficiary may grant rights in the amount that are superior to the rights of the bondholders or the guarantor; or
(B) The amount does not exceed reasonable needs for which it is maintained, the required level is tested no more frequently than every 6 months, and the amount may be spent without any substantial restriction other than a requirement to replenish the amount by the next testing date.
(4) Other replacement proceeds—(i) Bonds outstanding longer than necessary—(A) In general. Replacement proceeds arise to the extent that the issuer reasonably expects as of the issue date that—
(1) The term of an issue will be longer than is reasonably necessary for the governmental purposes of the issue, and
(2) There will be available amounts during the period that the issue remains outstanding longer than necessary. Whether an issue is outstanding longer than necessary is determined under § 1.148-10. Replacement proceeds are created under this paragraph (c)(4)(i)(A) at the beginning of each fiscal year during which an issue remains outstanding longer than necessary in an amount equal to available amounts of the issuer as of that date.
(B) Safe harbor against creation of replacement proceeds. As a safe harbor, replacement proceeds do not arise under paragraph (c)(4)(i)(A) of this section—
(1) For the portion of an issue that is to be used to finance working capital expenditures, if that portion is not outstanding longer than the temporary period under § 1.148-2(e)(3) for which the proceeds qualify;
(2) For the portion of an issue (including a refunding issue) that is to be used to finance or refinance capital projects, if that portion has a weighted average maturity that does not exceed 120 percent of the average reasonably expected economic life of the financed capital projects, determined in the same manner as under section 147(b);
(3) For the portion of an issue that is a refunding issue, if that portion has a weighted average maturity that does not exceed the remaining weighted average maturity of the prior issue, and the issue of which the prior issue is a part satisfies paragraph (c)(4)(i)(B) (1) or (2) of this section; or
(4) For the portion of an issue (including a refunding issue) that is to be used to finance working capital expenditures, if that portion satisfies paragraph (c)(4)(ii) of this section.
(ii) Safe harbor for longer-term working capital financings. A portion of an issue used to finance working capital expenditures satisfies this paragraph (c)(4)(ii) if the issuer meets the requirements of paragraphs (c)(4)(ii)(A) through (E) of this section.
(A) Determine first testing year. On the issue date, the issuer must determine the first fiscal year following the applicable temporary period under § 1.148-2(e) in which it reasonably expects to have available amounts (first testing year), but in no event can the first day of the first testing year be later than five years after the issue date.
(B) Application of available amount to reduce burden on tax-exempt bond market. Beginning with the first testing year and for each subsequent fiscal year for which the portion of the issue that is the subject of this safe harbor remains outstanding, the issuer must determine the available amount as of the first day of each fiscal year. Then, except as provided in paragraph (c)(4)(ii)(D) of this section, within the first 90 days of that fiscal year, the issuer must apply that amount (or if less, the available amount on the date of the required redemption or investment) to redeem or to invest in eligible tax-exempt bonds (as defined in paragraph (c)(4)(ii)(E) of this section). For this purpose, available amounts in a bona fide debt service fund are not treated as available amounts.
(C) Continuous investment requirement. Except as provided in this paragraph (c)(4)(ii)(C), any amounts invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section must be invested continuously in such tax-exempt bonds to the extent provided in paragraph (c)(4)(ii)(D) of this section.
(1) Exception for reinvestment period. Amounts previously invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section that are held for not more than 30 days in a fiscal year pending reinvestment in eligible tax-exempt bonds are treated as invested in eligible tax-exempt bonds.
(2) Limited use of invested amounts. An issuer may spend amounts previously invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section within 30 days of the date on which they cease to be so invested to make expenditures for a governmental purpose on any date on which the issuer has no other available amounts for such purpose, or to redeem eligible tax-exempt bonds.
(D) Cap on applied or invested amounts. The maximum amount that an issuer is required to apply under paragraph (c)(4)(ii)(B) of this section or to invest continuously under paragraph (c)(4)(ii)(C) of this section with respect to the portion of an issue that is the subject of this safe harbor is the outstanding principal amount of such portion. For purposes of this cap, an issuer receives credit towards its requirement to invest available amounts in eligible tax-exempt bonds for amounts previously invested under paragraph (c)(4)(ii)(B) of this section that remain continuously invested under paragraph (c)(4)(ii)(C) of this section.
(E) Definition of eligible tax-exempt bonds. For purposes of paragraph (c)(4)(ii) of this section, eligible tax-exempt bonds means any of the following:
(1) A bond the interest on which is excludable from gross income under section 103 and that is not a specified private activity bond (as defined in section 57(a)(5)(C)) subject to the alternative minimum tax;
(2) An interest in a regulated investment company to the extent that at least 95 percent of the income to the holder of the interest is interest on a bond that is excludable from gross income under section 103 and that is not interest on a specified private activity bond (as defined in section 57(a)(5)(C)) subject to the alternative minimum tax; or
(3) A certificate of indebtedness issued by the United States Treasury pursuant to the Demand Deposit State and Local Government Series program described in 31 CFR part 344.
(d) Elections. Except as otherwise provided, any required elections must be made in writing, and, once made, may not be revoked without the permission of the Commissioner.
(e) Investment-type property—(1) In general. Except as otherwise provided in this paragraph (e), investment-type property includes any property, other than property described in section 148(b)(2)(A), (B), (C), or (E), that is held principally as a passive vehicle for the production of income. For this purpose, production of income includes any benefit based on the time value of money.
(2) Prepayments—(i) In general—(A) Generally. Except as otherwise provided in this paragraph (e)(2), a prepayment for property or services, including a prepayment for property or services that is made after the date that the contract to buy the property or services is entered into, also gives rise to investment-type property if a principal purpose for prepaying is to receive an investment return from the time the prepayment is made until the time payment otherwise would be made. A prepayment does not give rise to investment-type property if—
(1) Prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt financing;
(2) The prepayment is made within 90 days of the reasonably expected date of delivery to the issuer of all of the property or services for which the prepayment is made; or
(3) The prepayment meets the requirements of paragraph (e)(2)(iii)(A) or (B) of this section.
(B) Example. The following example illustrates an application of this paragraph (e)(2)(i):
(ii) Customary prepayments. The determination of whether a prepayment satisfies paragraph (e)(2)(i)(A)(1) of this section is generally made based on all the facts and circumstances. In addition, a prepayment is deemed to satisfy paragraph (e)(2)(i)(A)(1) of this section if—
(A) The prepayment is made for—
(1) Maintenance, repair, or an extended warranty with respect to personal property (for example, automobiles or electronic equipment); or
(2) Updates or maintenance or support services with respect to computer software; and
(B) The same maintenance, repair, extended warranty, updates or maintenance or support services, as applicable, are regularly provided to nongovernmental persons on the same terms.
(iii) Certain prepayments to acquire a supply of natural gas or electricity—(A) Natural gas prepayments. A prepayment meets the requirements of this paragraph (e)(2)(iii)(A) if—
(1) It is made by or for one or more utilities that are owned by a governmental person, as defined in § 1.141-1(b) (each of which is referred to in this paragraph (e)(2)(iii)(A) as the issuing municipal utility), to purchase a supply of natural gas; and
(2) At least 90 percent of the prepaid natural gas financed by the issue is used for a qualifying use. Natural gas is used for a qualifying use if it is to be—
(i) Furnished to retail gas customers of the issuing municipal utility who are located in the natural gas service area of the issuing municipal utility, provided, however, that gas used to produce electricity for sale shall not be included under this paragraph (e)(2)(iii)(A)(2)(i);
(ii) Used by the issuing municipal utility to produce electricity that will be furnished to retail electric customers of the issuing municipal utility who are located in the electricity service area of the issuing municipal utility;
(iii) Used by the issuing municipal utility to produce electricity that will be sold to a utility that is owned by a governmental person and furnished to retail electric customers of the purchaser who are located in the electricity service area of the purchaser;
(iv) Sold to a utility that is owned by a governmental person if the requirements of paragraph (e)(2)(iii)(A)(2)(i), (ii) or (iii) of this section are satisfied by the purchaser (treating the purchaser as the issuing municipal utility); or
(v) Used to fuel the pipeline transportation of the prepaid gas supply acquired in accordance with this paragraph (e)(2)(iii)(A).
(B) Electricity prepayments. A prepayment meets the requirements of this paragraph (e)(2)(iii)(B) if—
(1) It is made by or for one or more utilities that are owned by a governmental person (each of which is referred to in this paragraph (e)(2)(iii)(B) as the issuing municipal utility) to purchase a supply of electricity; and
(2) At least 90 percent of the prepaid electricity financed by the issue is used for a qualifying use. Electricity is used for a qualifying use if it is to be—
(i) Furnished to retail electric customers of the issuing municipal utility who are located in the electricity service area of the issuing municipal utility; or
(ii) Sold to a utility that is owned by a governmental person and furnished to retail electric customers of the purchaser who are located in the electricity service area of the purchaser.
(C) Service area. For purposes of this paragraph (e)(2)(iii), the service area of a utility owned by a governmental person consists of—
(1) Any area throughout which the utility provided, at all times during the 5-year period ending on the issue date—
(i) In the case of a natural gas utility, natural gas transmission or distribution service; and
(ii) In the case of an electric utility, electricity distribution service; and
(2) Any area recognized as the service area of the utility under state or Federal law.
(D) Retail customer. For purposes of this paragraph (e)(2)(iii), a retail customer is a customer that purchases natural gas or electricity, as applicable, other than for resale.
(E) Commodity swaps. A prepayment does not fail to meet the requirements of this paragraph (e)(2)(iii) by reason of any commodity swap contract that may be entered into between the issuer and an unrelated party (other than the gas or electricity supplier), or between the gas or electricity supplier and an unrelated party (other than the issuer), so long as each swap contract is an independent contract. A swap contract is an independent contract if the obligation of each party to perform under the swap contract is not dependent on performance by any person (other than the other party to the swap contract) under another contract (for example, a gas or electricity supply contract or another swap contract); provided, however, that a commodity swap contract will not fail to be an independent contract solely because the swap contract may terminate in the event of a failure of a gas or electricity supplier to deliver gas or electricity for which the swap contract is a hedge.
(F) Remedial action. Issuers may apply principles similar to the rules of § 1.141-12, including § 1.141-12(d) (relating to redemption or defeasance of nonqualified bonds) and § 1.141-12(e) (relating to alternative use of disposition proceeds), to cure a violation of paragraph (e)(2)(iii)(A)(2) or (e)(2)(iii)(B)(2) of this section. For this purpose, the amount of nonqualified bonds is determined in the same manner as for output contracts taken into account under the private business tests, including the principles of § 1.141-7(d), treating nonqualified sales of gas or electricity under this paragraph (e)(2)(iii) as satisfying the benefits and burdens test under § 1.141-7(c)(1).
(iv) Additional prepayments as permitted by the Commissioner. The Commissioner may, by published guidance, set forth additional circumstances in which a prepayment does not give rise to investment-type property.
(3) Certain hedges. Investment-type property also includes the investment element of a contract that is a hedge (within the meaning of § 1.148-4(h)(2)(i)(A)) and that contains a significant investment element because a payment by the issuer relates to a conditional or unconditional obligation by the hedge provider to make a payment on a later date. See § 1.148-4(h)(2)(ii) relating to hedges with a significant investment element.
(4) Exception for certain capital projects. Investment-type property does not include real property or tangible personal property (for example, land, buildings, and equipment) that is used in furtherance of the public purposes for which the tax-exempt bonds are issued. For example, investment-type property does not include a courthouse financed with governmental bonds or an eligible exempt facility under section 142, such as a public road, financed with private activity bonds.
(f) Definition of issue price—(1) In general. Except as otherwise provided in this paragraph (f), “issue price” is defined in sections 1273 and 1274 and the regulations under those sections.
(2) Bonds issued for money—(i) General rule. Except as otherwise provided in this paragraph (f)(2), the issue price of bonds issued for money is the first price at which a substantial amount of the bonds is sold to the public. If a bond is issued for money in a private placement to a single buyer that is not an underwriter or a related party (as defined in § 1.150-1(b)) to an underwriter, the issue price of the bond is the price paid by that buyer. Issue price is not reduced by any issuance costs (as defined in § 1.150-1(b)).
(ii) Special rule for use of initial offering price to the public. The issuer may treat the initial offering price to the public as of the sale date as the issue price of the bonds if the requirements of paragraphs (f)(2)(ii)(A) and (B) of this section are met.
(A) The underwriters offered the bonds to the public for purchase at a specified initial offering price on or before the sale date, and the lead underwriter in the underwriting syndicate or selling group (or, if applicable, the sole underwriter) provides, on or before the issue date, a certification to that effect to the issuer, together with reasonable supporting documentation for that certification, such as a copy of the pricing wire or equivalent communication.
(B) Each underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price that is higher than the initial offering price to the public during the period starting on the sale date and ending on the earlier of the following:
(1) The close of the fifth (5th) business day after the sale date; or
(2) The date on which the underwriters have sold a substantial amount of the bonds to the public at a price that is no higher than the initial offering price to the public.
(iii) Special rule for competitive sales. For bonds issued for money in a competitive sale, an issuer may treat the reasonably expected initial offering price to the public as of the sale date as the issue price of the bonds if the issuer obtains from the winning bidder a certification of the bonds' reasonably expected initial offering price to the public as of the sale date upon which the price in the winning bid is based.
(iv) Choice of rule for determining issue price. If more than one rule for determining the issue price of the bonds is available under this paragraph (f)(2), at any time on or before the issue date, the issuer may select the rule it will use to determine the issue price of the bonds. On or before the issue date of the bonds, the issuer must identify the rule selected in its books and records maintained for the bonds.
(3) Definitions. For purposes of this paragraph (f), the following definitions apply:
(i) Competitive sale means a sale of bonds by an issuer to an underwriter that is the winning bidder in a bidding process in which the issuer offers the bonds for sale to underwriters at specified written terms, if that process meets the following requirements:
(A) The issuer disseminates the notice of sale to potential underwriters in a manner that is reasonably designed to reach potential underwriters (for example, through electronic communication that is widely circulated to potential underwriters by a recognized publisher of municipal bond offering documents or by posting on an Internet-based Web site or other electronic medium that is regularly used for such purpose and is widely available to potential underwriters);
(B) All bidders have an equal opportunity to bid (within the meaning of § 1.148-5(d)(6)(iii)(A)(6));
(C) The issuer receives bids from at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds; and
(D) The issuer awards the sale to the bidder who submits a firm offer to purchase the bonds at the highest price (or lowest interest cost).
(ii) Public means any person (as defined in section 7701(a)(1)) other than an underwriter or a related party (as defined in § 1.150-1(b)) to an underwriter.
(iii) Underwriter means:
(A) Any person (as defined in section 7701(a)(1)) that agrees pursuant to a written contract with the issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the bonds to the public; and
(B) Any person that agrees pursuant to a written contract directly or indirectly with a person described in paragraph (f)(3)(iii)(A) of this section to participate in the initial sale of the bonds to the public (for example, a retail distribution agreement between a national lead underwriter and a regional firm under which the regional firm participates in the initial sale of the bonds to the public).
(4) Other special rules. For purposes of this paragraph (f), the following special rules apply:
(i) Separate determinations. The issue price of bonds in an issue that do not have the same credit and payment terms is determined separately. The issuer need not apply the same rule to determine issue price for all of the bonds in the issue.
(ii) Substantial amount. Ten percent is a substantial amount.
(iii) Bonds issued for property. If a bond is issued for property, the adjusted applicable Federal rate, as determined under section 1288 and § 1.1288-1, is used in lieu of the applicable Federal rate to determine the bond's issue price under section 1274.
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Treas. Reg. §1.148-1(a)In general.
In general. The definitions in this section and the definitions under section 150 apply for purposes of section 148 and §§ 1.148-1 through 1.148-11.
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Treas. Reg. §1.148-1(b)Certain definitions.
Certain definitions. The following definitions apply:
Accounting method means both the overall method used to account for gross proceeds of an issue (e.g., the cash method or a modified accrual method) and the method used to account for or allocate any particular item within that overall accounting method (e.g., accounting for investments, expenditures, allocations to and from different sources, and particular items of the foregoing).
Annuity contract means annuity contract as defined in section 72.
Available amount means available amount as defined in § 1.148-6(d)(3)(iii).
Bona fide debt service fund means a fund, which may include proceeds of an issue, that—
(1) Is used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year; and
(2) Is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of:
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Treas. Reg. §1.148-1(c)Definition of replacement proceeds—(1) In general.
Definition of replacement proceeds—(1) In general. Amounts are replacement proceeds of an issue if the amounts have a sufficiently direct nexus to the issue or to the governmental purpose of the issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the issue were not used or to be used for that governmental purpose. For this purpose, governmental purposes include the expected use of amounts for the payment of debt service on a particular date. The mere availability or preliminary earmarking of amounts for a governmental purpose, however, does not in itself establish a sufficient nexus to cause those amounts to be replacement proceeds. Replacement proceeds include, but are not limited to, sinking funds, pledged funds, and other replacement proceeds described in paragraph (c)(4) of this section, to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue. A substantial beneficiary of an issue includes the issuer and any related party to the issuer, and, if the issuer is not a state, the state in which the issuer is located. A person is not a substantial beneficiary of an issue solely because it is a guarantor under a qualified guarantee.
(2) Sinking fund. Sinking fund includes a debt service fund, redemption fund, reserve fund, replacement fund, or any similar fund, to the extent reasonably expected to be used directly or indirectly to pay principal or interest on the issue.
(3) Pledged fund—(i) In general. A pledged fund is any amount that is directly or indirectly pledged to pay principal or interest on the issue. A pledge need not be cast in any particular form but, in substance, must provide reasonable assurance that the amount will be available to pay principal or interest on the issue, even if the issuer encounters financial difficulties. A pledge to a guarantor of an issue is an indirect pledge to secure payment of principal or interest on the issue. A pledge of more than 50 percent of the outstanding stock of a corporation that is a conduit borrower of the issue is not treated as a pledge for this purpose, unless the corporation is formed or availed of to avoid the creation of replacement proceeds.
(ii) Negative pledges. An amount is treated as pledged to pay principal or interest on an issue if it is held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the bondholders or a guarantor of the bonds. An amount is not treated as pledged under this paragraph (c)(3)(ii), however, if—
(A) The issuer or a substantial beneficiary may grant rights in the amount that are superior to the rights of the bondholders or the guarantor; or
(B) The amount does not exceed reasonable needs for which it is maintained, the required level is tested no more frequently than every 6 months, and the amount may be spent without any substantial restriction other than a requirement to replenish the amount by the next testing date.
(4) Other replacement proceeds—(i) Bonds outstanding longer than necessary—(A) In general. Replacement proceeds arise to the extent that the issuer reasonably expects as of the issue date that—
(1) The term of an issue will be longer than is reasonably necessary for the governmental purposes of the issue, and
(2) There will be available amounts during the period that the issue remains outstanding longer than necessary. Whether an issue is outstanding longer than necessary is determined under § 1.148-10. Replacement proceeds are created under this paragraph (c)(4)(i)(A) at the beginning of each fiscal year during which an issue remains outstanding longer than necessary in an amount equal to available amounts of the issuer as of that date.
(B) Safe harbor against creation of replacement proceeds. As a safe harbor, replacement proceeds do not arise under paragraph (c)(4)(i)(A) of this section—
(1) For the portion of an issue that is to be used to finance working capital expenditures, if that portion is not outstanding longer than the temporary period under § 1.148-2(e)(3) for which the proceeds qualify;
(2) For the portion of an issue (including a refunding issue) that is to be used to finance or refinance capital projects, if that portion has a weighted average maturity that does not exceed 120 percent of the average reasonably expected economic life of the financed capital projects, determined in the same manner as under section 147(b);
(3) For the portion of an issue that is a refunding issue, if that portion has a weighted average maturity that does not exceed the remaining weighted average maturity of the prior issue, and the issue of which the prior issue is a part satisfies paragraph (c)(4)(i)(B) (1) or (2) of this section; or
(4) For the portion of an issue (including a refunding issue) that is to be used to finance working capital expenditures, if that portion satisfies paragraph (c)(4)(ii) of this section.
(ii) Safe harbor for longer-term working capital financings. A portion of an issue used to finance working capital expenditures satisfies this paragraph (c)(4)(ii) if the issuer meets the requirements of paragraphs (c)(4)(ii)(A) through (E) of this section.
(A) Determine first testing year. On the issue date, the issuer must determine the first fiscal year following the applicable temporary period under § 1.148-2(e) in which it reasonably expects to have available amounts (first testing year), but in no event can the first day of the first testing year be later than five years after the issue date.
(B) Application of available amount to reduce burden on tax-exempt bond market. Beginning with the first testing year and for each subsequent fiscal year for which the portion of the issue that is the subject of this safe harbor remains outstanding, the issuer must determine the available amount as of the first day of each fiscal year. Then, except as provided in paragraph (c)(4)(ii)(D) of this section, within the first 90 days of that fiscal year, the issuer must apply that amount (or if less, the available amount on the date of the required redemption or investment) to redeem or to invest in eligible tax-exempt bonds (as defined in paragraph (c)(4)(ii)(E) of this section). For this purpose, available amounts in a bona fide debt service fund are not treated as available amounts.
(C) Continuous investment requirement. Except as provided in this paragraph (c)(4)(ii)(C), any amounts invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section must be invested continuously in such tax-exempt bonds to the extent provided in paragraph (c)(4)(ii)(D) of this section.
(1) Exception for reinvestment period. Amounts previously invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section that are held for not more than 30 days in a fiscal year pending reinvestment in eligible tax-exempt bonds are treated as invested in eligible tax-exempt bonds.
(2) Limited use of invested amounts. An issuer may spend amounts previously invested in eligible tax-exempt bonds under paragraph (c)(4)(ii)(B) of this section within 30 days of the date on which they cease to be so invested to make expenditures for a governmental purpose on any date on which the issuer has no other available amounts for such purpose, or to redeem eligible tax-exempt bonds.
(D) Cap on applied or invested amounts. The maximum amount that an issuer is required to apply under paragraph (c)(4)(ii)(B) of this section or to invest continuously under paragraph (c)(4)(ii)(C) of this section with respect to the portion of an issue that is the subject of this safe harbor is the outstanding principal amount of such portion. For purposes of this cap, an issuer receives credit towards its requirement to invest available amounts in eligible tax-exempt bonds for amounts previously invested under paragraph (c)(4)(ii)(B) of this section that remain continuously invested under paragraph (c)(4)(ii)(C) of this section.
(E) Definition of eligible tax-exempt bonds. For purposes of paragraph (c)(4)(ii) of this section, eligible tax-exempt bonds means any of the following:
(1) A bond the interest on which is excludable from gross income under section 103 and that is not a specified private activity bond (as defined in section 57(a)(5)(C)) subject to the alternative minimum tax;
(2) An interest in a regulated investment company to the extent that at least 95 percent of the income to the holder of the interest is interest on a bond that is excludable from gross income under section 103 and that is not interest on a specified private activity bond (as defined in section 57(a)(5)(C)) subject to the alternative minimum tax; or
(3) A certificate of indebtedness issued by the United States Treasury pursuant to the Demand Deposit State and Local Government Series program described in 31 CFR part 344.
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Treas. Reg. §1.148-1(d)Elections.
Elections. Except as otherwise provided, any required elections must be made in writing, and, once made, may not be revoked without the permission of the Commissioner.
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Treas. Reg. §1.148-1(e)Investment-type property—(1) In general.
Investment-type property—(1) In general. Except as otherwise provided in this paragraph (e), investment-type property includes any property, other than property described in section 148(b)(2)(A), (B), (C), or (E), that is held principally as a passive vehicle for the production of income. For this purpose, production of income includes any benefit based on the time value of money.
(2) Prepayments—(i) In general—(A) Generally. Except as otherwise provided in this paragraph (e)(2), a prepayment for property or services, including a prepayment for property or services that is made after the date that the contract to buy the property or services is entered into, also gives rise to investment-type property if a principal purpose for prepaying is to receive an investment return from the time the prepayment is made until the time payment otherwise would be made. A prepayment does not give rise to investment-type property if—
(1) Prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt financing;
(2) The prepayment is made within 90 days of the reasonably expected date of delivery to the issuer of all of the property or services for which the prepayment is made; or
(3) The prepayment meets the requirements of paragraph (e)(2)(iii)(A) or (B) of this section.
(B) Example. The following example illustrates an application of this paragraph (e)(2)(i):
(ii) Customary prepayments. The determination of whether a prepayment satisfies paragraph (e)(2)(i)(A)(1) of this section is generally made based on all the facts and circumstances. In addition, a prepayment is deemed to satisfy paragraph (e)(2)(i)(A)(1) of this section if—
(A) The prepayment is made for—
(1) Maintenance, repair, or an extended warranty with respect to personal property (for example, automobiles or electronic equipment); or
(2) Updates or maintenance or support services with respect to computer software; and
(B) The same maintenance, repair, extended warranty, updates or maintenance or support services, as applicable, are regularly provided to nongovernmental persons on the same terms.
(iii) Certain prepayments to acquire a supply of natural gas or electricity—(A) Natural gas prepayments. A prepayment meets the requirements of this paragraph (e)(2)(iii)(A) if—
(1) It is made by or for one or more utilities that are owned by a governmental person, as defined in § 1.141-1(b) (each of which is referred to in this paragraph (e)(2)(iii)(A) as the issuing municipal utility), to purchase a supply of natural gas; and
(2) At least 90 percent of the prepaid natural gas financed by the issue is used for a qualifying use. Natural gas is used for a qualifying use if it is to be—
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Treas. Reg. §1.148-1(f)Definition of issue price—(1) In general.
Definition of issue price—(1) In general. Except as otherwise provided in this paragraph (f), “issue price” is defined in sections 1273 and 1274 and the regulations under those sections.
(2) Bonds issued for money—(i) General rule. Except as otherwise provided in this paragraph (f)(2), the issue price of bonds issued for money is the first price at which a substantial amount of the bonds is sold to the public. If a bond is issued for money in a private placement to a single buyer that is not an underwriter or a related party (as defined in § 1.150-1(b)) to an underwriter, the issue price of the bond is the price paid by that buyer. Issue price is not reduced by any issuance costs (as defined in § 1.150-1(b)).
(ii) Special rule for use of initial offering price to the public. The issuer may treat the initial offering price to the public as of the sale date as the issue price of the bonds if the requirements of paragraphs (f)(2)(ii)(A) and (B) of this section are met.
(A) The underwriters offered the bonds to the public for purchase at a specified initial offering price on or before the sale date, and the lead underwriter in the underwriting syndicate or selling group (or, if applicable, the sole underwriter) provides, on or before the issue date, a certification to that effect to the issuer, together with reasonable supporting documentation for that certification, such as a copy of the pricing wire or equivalent communication.
(B) Each underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price that is higher than the initial offering price to the public during the period starting on the sale date and ending on the earlier of the following:
(1) The close of the fifth (5th) business day after the sale date; or
(2) The date on which the underwriters have sold a substantial amount of the bonds to the public at a price that is no higher than the initial offering price to the public.
(iii) Special rule for competitive sales. For bonds issued for money in a competitive sale, an issuer may treat the reasonably expected initial offering price to the public as of the sale date as the issue price of the bonds if the issuer obtains from the winning bidder a certification of the bonds' reasonably expected initial offering price to the public as of the sale date upon which the price in the winning bid is based.
(iv) Choice of rule for determining issue price. If more than one rule for determining the issue price of the bonds is available under this paragraph (f)(2), at any time on or before the issue date, the issuer may select the rule it will use to determine the issue price of the bonds. On or before the issue date of the bonds, the issuer must identify the rule selected in its books and records maintained for the bonds.
(3) Definitions. For purposes of this paragraph (f), the following definitions apply:
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Treas. Reg. §1.148-1(i)Separate determinations.
Separate determinations. The issue price of bonds in an issue that do not have the same credit and payment terms is determined separately. The issuer need not apply the same rule to determine issue price for all of the bonds in the issue.
(ii) Substantial amount. Ten percent is a substantial amount.
(iii) Bonds issued for property. If a bond is issued for property, the adjusted applicable Federal rate, as determined under section 1288 and § 1.1288-1, is used in lieu of the applicable Federal rate to determine the bond's issue price under section 1274.
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Treas. Reg. §1.148-1(v)Used to fuel the pipeline transportation of the prepaid gas supply acquired in accordance with this paragraph (e)(2)(iii)(A).
Used to fuel the pipeline transportation of the prepaid gas supply acquired in accordance with this paragraph (e)(2)(iii)(A).
(B) Electricity prepayments. A prepayment meets the requirements of this paragraph (e)(2)(iii)(B) if—
(1) It is made by or for one or more utilities that are owned by a governmental person (each of which is referred to in this paragraph (e)(2)(iii)(B) as the issuing municipal utility) to purchase a supply of electricity; and
(2) At least 90 percent of the prepaid electricity financed by the issue is used for a qualifying use. Electricity is used for a qualifying use if it is to be—
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Treas. Reg. §1.148-10Anti-abuse rules and authority of Commissioner
(a) Abusive arbitrage device—(1) In general. Bonds of an issue are arbitrage bonds under section 148 if an abusive arbitrage device under paragraph (a)(2) of this section is used in connection with the issue. This paragraph (a) is to be applied and interpreted broadly to carry out the purposes of section 148, as further described in § 1.148-0. Except as otherwise provided in paragraph (c) of this section, any action that is expressly permitted by section 148 or §§ 1.148-1 through 1.148-11 is not an abusive arbitrage device (e.g., investment in higher yielding investments during a permitted temporary period under section 148(c)).
(2) Abusive arbitrage device defined. Any action is an abusive arbitrage device if the action has the effect of—
(i) Enabling the issuer to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage; and
(ii) Overburdening the tax-exempt bond market.
(3) Exploitation of tax-exempt interest rates. An action may exploit tax-exempt interest rates under paragraph (a)(2) of this section as a result of an investment of any portion of the gross proceeds of an issue over any period of time, notwithstanding that, in the aggregate, the gross proceeds of the issue are not invested in higher yielding investments over the term of the issue.
(4) Overburdening the tax-exempt market. An action overburdens the tax-exempt bond market under paragraph (a)(2)(ii) of this section if it results in issuing more bonds, issuing bonds earlier, or allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes of the bonds, based on all the facts and circumstances. Whether an action is reasonably necessary to accomplish the governmental purposes of the bonds depends on whether the primary purpose of the transaction is a bona fide governmental purpose (e.g., an issue of refunding bonds to achieve a debt service restructuring that would be issued independent of any arbitrage benefit). An important factor bearing on this determination is whether the action would reasonably be taken to accomplish the governmental purpose of the issue if the interest on the issue were not excludable from gross income under section 103(a) (assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt interest rate). Factors evidencing an overissuance include the issuance of an issue the proceeds of which are reasonably expected to exceed by more than a minor portion the amount necessary to accomplish the governmental purposes of the issue, or an issue the proceeds of which are, in fact, substantially in excess of the amount of sale proceeds allocated to expenditures for the governmental purposes of the issue. One factor evidencing an early issuance is the issuance of bonds that do not qualify for a temporary period under § 1.148-2(e)(2), (e)(3), or (e)(4). One factor evidencing that bonds may remain outstanding longer than necessary is a term that exceeds the safe harbors against the creation of replacement proceeds under § 1.148-1(c)(4)(i)(B). These factors may be outweighed by other factors, such as bona fide cost underruns, an issuer's bona fide need to finance extraordinary working capital items, or an issuer's long-term financial distress.
(b) Consequences of overburdening the tax-exempt bond market—(1) In general. An issue that overburdens the tax-exempt bond market (within the meaning of paragraph (a)(4) of this section) is subject to the following special limitations—
(i) Special yield restriction. Investments are subject to the definition of materially higher yield under § 1.148-2(d) that is equal to one-thousandth of 1 percent. In addition, each investment is treated as a separate class of investments under § 1.148-5(b)(2)(ii), the yield on which may not be blended with that of other investments.
(ii) Certain regulatory provisions inapplicable. The provisions of § 1.148-5(c) (relating to yield reduction payments) and § 1.148-5(e) (2) and (3) (relating to recovery of qualified administrative costs) do not apply.
(iii) Restrictive expenditure rule. Proceeds are not allocated to expenditures unless the proceeds-spent-last rule under § 1.148-6(d)(3)(i) is satisfied, applied by treating those proceeds as proceeds to be used for restricted working capital expenditures. For this purpose, available amount includes a reasonable working capital reserve as defined in § 1.148-6(d)(3)(iii)(B).
(2) Application. The provisions of this paragraph (b) only apply to the portion of an issue that, as a result of actions taken (or actions not taken) after the issue date, overburdens the market for tax-exempt bonds, except that for an issue that is reasonably expected as of the issue date to overburden the market, those provisions apply to all of the gross proceeds of the issue.
(c) Anti-abuse rules on excess gross proceeds of advance refunding issues—(1) In general. Except as otherwise provided in this paragraph (c), an abusive arbitrage device is used and bonds of an advance refunding issue are arbitrage bonds if the issue has excess gross proceeds.
(2) Definition of excess gross proceeds. Excess gross proceeds means all gross proceeds of an advance refunding issue that exceed an amount equal to 1 percent of sale proceeds of the issue, other than gross proceeds allocable to—
(i) Payment of principal, interest, or call premium on the prior issue;
(ii) Payment of pre-issuance accrued interest on the refunding issue, and interest on the refunding issue that accrues for a period up to the completion date of any capital project for which the prior issue was issued, plus one year;
(iii) A reasonably required reserve or replacement fund for the refunding issue or investment proceeds of such a fund;
(iv) Payment of costs of issuance of the refunding issue;
(v) Payment of administrative costs allocable to repaying the prior issue, carrying and repaying the refunding issue, or investments of the refunding issue;
(vi) Transferred proceeds that will be used or maintained for the governmental purpose of the prior issue;
(vii) Interest on purpose investments;
(viii) Replacement proceeds in a sinking fund for the refunding issue;
(ix) Qualified guarantee fees for the refunding issue or the prior issue; and
(x) Fees for a qualified hedge for the refunding issue.
(3) Special treatment of transferred proceeds. For purposes of this paragraph (c), all unspent proceeds of the prior issue as of the issue date of the refunding issue are treated as transferred proceeds of the advance refunding issue.
(4) Special rule for crossover refundings. An advance refunding issue is not an issue of arbitrage bonds under this paragraph (c) if all excess gross proceeds of the refunding issue are used to pay interest that accrues on the refunding issue before the prior issue is discharged, and no gross proceeds of any refunding issue are used to pay interest on the prior issue or to replace funds used directly or indirectly to pay such interest (other than transferred proceeds used to pay interest on the prior issue that accrues for a period up to the completion date of the project for which the prior issue was issued, plus one year, or proceeds used to pay principal that is attributable to accrued original issue discount).
(5) Special rule for gross refundings. This paragraph (c)(5) applies if an advance refunding issue (the series B issue) is used together with one or more other advance refunding issues (the series A issues) in a gross refunding of a prior issue, but only if the use of a gross refunding method is required under bond documents that were effective prior to November 6, 1992. These advance refunding issues are not arbitrage bonds under this paragraph (c) if—
(i) All excess gross proceeds of the series B issue and each series A issue are investment proceeds used to pay principal and interest on the series B issue;
(ii) At least 99 percent of all principal and interest on the series B issue is paid with proceeds of the series B and series A issues or with the earnings on other amounts in the refunding escrow for the prior issue;
(iii) The series B issue is discharged not later than the prior issue; and
(iv) As of any date, the amount of gross proceeds of the series B issue allocated to expenditures does not exceed the aggregate amount of expenditures before that date for principal and interest on the series B issue, and administrative costs of carrying and repaying the series B issue, or of investments of the series B issue.
(d) Examples. The provisions of this section are illustrated by the following examples:
(e) Authority of the Commissioner to prevent transactions that are inconsistent with the purpose of the arbitrage investment restrictions. If an issuer enters into a transaction for a principal purpose of obtaining a material financial advantage based on the difference between tax-exempt and taxable interest rates in a manner that is inconsistent with the purposes of section 148, the Commissioner may exercise the Commissioner's discretion to depart from the rules of § 1.148-1 through § 1.148-11 as necessary to reflect the economics of the transaction to prevent such financial advantage. For this purpose, the Commissioner may recompute yield on an issue or on investments, reallocate payments and receipts on investments, recompute the rebate amount on an issue, treat a hedge as either a qualified hedge or not a qualified hedge, or otherwise adjust any item whatsoever bearing upon the investments and expenditures of gross proceeds of an issue. For example, if the amount paid for a hedge is specifically based on the amount of arbitrage earned or expected to be earned on the hedged bonds, a principal purpose of entering into the contract is to obtain a material financial advantage based on the difference between tax-exempt and taxable interest rates in a manner that is inconsistent with the purposes of section 148.
(f) Authority of the Commissioner to require an earlier date for payment of rebate. If the Commissioner determines that an issue is likely to fail to meet the requirements of § 1.148-3 and that a failure to serve a notice of demand for payment on the issuer will jeopardize the assessment or collection of tax on interest paid or to be paid on the issue, the date that the Commissioner serves notice on the issuer is treated as a required computation date for payment of rebate for that issue.
(g) Authority of the Commissioner to waive regulatory limitations. Notwithstanding any specific provision in §§ 1.148-1 through 1.148-11, the Commissioner may prescribe extensions of temporary periods, larger reasonably required reserve or replacement funds, or consequences of failures or remedial action under section 148 in lieu of or in addition to other consequences of those failures, or take other action, if the Commissioner finds that good faith or other similar circumstances so warrant, consistent with the purposes of section 148.
18 Citing Cases
103(a) provides that "[e]xcept as provided in subsection (b), gross income does not include interest on any State or local bond." Sec.
nd not the corporate agent, is the owner. See Commissioner v. Bollinger, supra at 345. The ordinary relationship of a stockbroker to a customer is that of an agent to a principal. See Galigher v. Jones, 129 U.S. 193 (1889); 12 Am. Jur. 2d, Brokers, sec. 148 (1997). Accordingly, a stockbroker is not taxable on the earnings, gains, or losses generated by transactions in securities it undertakes for its customer. Rather the customer, as owner of the securities involved in the transactions, is the t
along with an arbitrage rebate payment in respect of the 1994 BAN's based on the differential between the 4.25-percent interest rate on the City obligation and the yield on such BAN's. - 10 - inapplicable to any arbitrage bond within the meaning of section 148. Sec. 103(b). An arbitrage bond is defined in section 148(a) as follows: (a) Arbitrage Bond Defined.--For purposes of section 103, the term "arbitrage bond" means any bond issued as part of an issue any portion of the proceeds of which are
On February 20, 1991, the Commissioner notified the Housing Authority that the interest paid on the Bonds would be treated as taxable income to the bondholders unless the Housing Authority paid, to the United States, the amount required by section - 23 - 148(f), which the Commissioner determined to be $2,250,475 with respect to the Whitewater bonds, and $1,543,199 with respect to the Ironwood bonds.5 The Housing Authority refused to make such payments. OPINION Section 103(a) generally excludes
References to section 103 are to that section of the Internal Revenue Code of 1954, as amended, and references to section 148 are to that section of the Internal Revenue Code of 1986.