General Allocation and Accounting Regulations Under Section 141, 56072-56084 [06-8202]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 186 (Tuesday, September 26, 2006)]
[Proposed Rules]
[Pages 56072-56084]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-8202]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-140379-02; REG-142599-02]
RIN 1545-BC07; 1545-BB23


General Allocation and Accounting Regulations Under Section 141

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations on the allocation 
of, and accounting for, tax-exempt bond proceeds for purposes of the 
private activity bond restrictions that apply under section 141 of the 
Internal Revenue Code (Code) and that apply in modified form to 
qualified 501(c)(3) bonds under section 145 of the Code. The proposed 
regulations provide State and local governmental issuers of tax-exempt 
bonds with guidance for applying the private activity bond 
restrictions. This document also provides notice of a public hearing on 
these proposed regulations.

DATES: Written or electronic comments must be received by December 26, 
2006. Requests to speak with outlines of topics to be discussed at the 
public hearing scheduled for January 11, 2007, must be received by 
December 26, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-140379-02; REG-
142599-02), room 5203, Internal Revenue Service, PO Box 7604, Ben 
Franklin Station, Washington, DC 20044. Submissions may be hand 
delivered Monday through Friday between the hours of 8 a.m. to 4:30 
p.m. to CC:PA:LPD:PR (REG-140379-02; REG-142599-02), Internal Revenue 
Service, Crystal Mall 4, 1941 Jefferson Davis Hwy., 1901 S. Bell St., 
room 108, Arlington, Virginia 22202. Alternatively, submissions may be 
made electronically to the IRS Internet Site at www.irs.gov/regs or via 
the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-140379-
02). The public hearing will be held in the auditorium of the New 
Carrollton Federal Building, 5000 Ellin Rd., Lanham, Maryland 20706.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Johanna Som de Cerff (202) 622-3980; concerning submissions and the 
hearing, Kelly D. Banks, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

[[Page 56073]]

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by December 26, 2006. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The recordkeeping requirement in this proposed regulation is in 
Sec.  1.141-6(a)(4). The recordkeeping requirement will apply only to 
State and local governmental issuers of tax-exempt bonds used to 
finance a facility that will be used for both governmental use and more 
than a de minimis amount of private business use. The recordkeeping is 
voluntary to obtain a benefit. The records will enable the Service to 
examine compliance by State and local governmental issuers of tax-
exempt bonds used to finance a facility that will be used for both 
governmental use and more than a de minimis amount of private business 
use.
    Estimated total annual recordkeeping burden: 3000 hours.
    Estimated average annual burden hours per recordkeeper: 3 hours.
    Estimated number of recordkeepers: 1000.
    Estimated annual frequency of responses: the frequency of responses 
will depend on how often the recordkeeper issues tax-exempt bonds used 
to finance a facility that will be used for both governmental use and 
more an a de minimis amount of private business use, which will vary 
from rarely to a few times a year.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1. Final 
regulations (TD 8712) under section 141 of the Internal Revenue Code 
(Code) were published in the Federal Register on January 16, 1997 (62 
FR 2275) (the 1997 Final Regulations) to provide comprehensive guidance 
on most aspects of the private activity bond restrictions. The 1997 
Final Regulations, however, reserved most of the general allocation and 
accounting rules for purposes of section 141. An advance notice of 
proposed rulemaking was published in the Federal Register on September 
23, 2002 (REG-142599-02) (67 FR 59767) (the 2002 Advance Notice) 
regarding allocation and accounting rules for tax-exempt bond proceeds 
used to finance mixed-use output facilities.
    This document amends the Income Tax Regulations under section 141 
by proposing rules for the allocation of, and accounting for, tax-
exempt bond proceeds. Special rules for allocating proceeds used to 
finance mixed-use facilities and rules regarding the treatment of 
partnerships as owners or users of facilities for purposes of section 
141 are also included. This document also amends regulations under 
section 145 by proposing rules on certain related matters that apply to 
qualified 501(c)(3) bonds. These regulations are published as proposed 
regulations (the Proposed Regulations) to provide an opportunity for 
public review and comment.

Explanation of Provisions

I. Introduction

    In general, the interest on State and local governmental bonds is 
excludable from gross income under section 103 of the Code upon 
satisfaction of certain requirements. Interest on a private activity 
bond, other than a qualified private activity bond within the meaning 
of section 141, is not excludable under section 103. Section 141 
provides certain tests used to determine whether a State or local bond 
is a private activity bond. These tests look to whether the proceeds of 
tax-exempt bonds comply with certain restrictions, including private 
business use restrictions, private payment restrictions, and private 
loan restrictions. Similar restrictions apply in modified form to 
qualified 501(c)(3) bonds under section 145.
    In general, these private activity bond restrictions permit certain 
de minimis amounts of private business use for proceeds of tax-exempt 
governmental bonds without causing such bonds to be classified as 
private activity bonds under section 141 (de minimis permitted private 
business use). De minimis permitted private business use generally 
means private business use of not more than 10% of the proceeds. 
Section 141(b)(3) further limits this de minimis permitted private 
business use to a 5% amount for certain unrelated or disproportionate 
use. Sections 141(b)(4) and 141(b)(5) further limit this de minimis 
permitted private business use to a prescribed $15 million nonqualified 
amount for certain output facility issues generally and for certain 
larger issues absent volume cap allocations for private business use in 
excess of the $15 million nonqualified amount.
    The Proposed Regulations provide guidance regarding general 
allocation and accounting rules for purposes of the private activity 
bond restrictions under section 141. The Proposed Regulations provide 
guidance regarding allocations of proceeds of an issue of tax-exempt 
bonds (proceeds) and other funds to expenditures (as contrasted with 
investments), to property, and to uses (that is, governmental use or 
private business use).
    The Proposed Regulations include certain special accounting rules 
for projects which have both governmental use and private business use 
(mixed-use projects), as described further herein. One purpose of these 
special accounting rules is to provide flexibility to allow issuers to 
use tax-exempt governmental bonds to finance the portion of a mixed-use 
project to be used for governmental use where private business use of 
the entire project may exceed the amount of de minimis permitted 
private business use.
    The Proposed Regulations provide several general allocation rules. 
First, proceeds and other sources of funds

[[Page 56074]]

generally may be allocated to expenditures using any reasonable, 
consistently applied accounting method that is consistent with how 
proceeds are allocated for purposes of the arbitrage investment 
restrictions of section 148. Second, under a general pro rata 
allocation method (which also applies to mixed-use projects absent an 
election to use one of two elective special allocation rules), proceeds 
and other sources allocated to capital expenditures for a capital 
project generally are treated as allocated ratably throughout the 
project in proportion to the relative amounts of proceeds and other 
funds spent on that project (general pro rata allocation method). 
Third, allocations of sources of funds to uses, for example, 
governmental use and private business use, generally are made in a 
manner that reasonably corresponds to the relative amounts of the 
sources of funding spent on the property.
    The Proposed Regulations provide special elective allocation rules 
for mixed-use projects. In general, the intent of these special 
allocation rules is to provide reasonable flexibility to allow issuers 
to finance portions of projects that are reasonably expected to be used 
for governmental use with tax-exempt governmental bonds, provided that 
the portions can be reasonably determined and measured in administrable 
ways. In particular, the Proposed Regulations provide two special 
elective allocation methods, the discrete physical portion allocation 
method and the undivided portion allocation method. These two special 
elective allocation methods permit proceeds to be allocated to a 
portion of a mixed-use project using certain prescribed reasonable, 
consistent allocation methods that properly reflect the proportionate 
benefit to be derived by the various users of the mixed-use project. 
These two special allocation methods for dividing mixed-use projects 
for financing purposes are based on principles similar to those used 
for measuring ongoing use under Sec.  1.141-3(g) and are closely 
coordinated with those measurement rules. These methods may be elected 
for mixed-use projects only if they meet certain eligibility criteria. 
Absent a proper election to use one of these two special elective 
allocation methods, the general pro rata allocation method applies to a 
mixed-use project. The special allocation rules for mixed-use projects 
are described further herein.
    In addition to general allocation and accounting rules and special 
allocation rules for mixed-use projects, the Proposed Regulations also 
provide guidance on certain related topics.

II. General Allocation Rules for Proceeds: General Pro Rata Allocation 
Method

    The Proposed Regulations provide a general pro rata allocation 
method under which proceeds and other funds, if any, allocated under 
section 148 and Sec.  1.141-6(a)(1) to capital expenditures for a 
project are treated as being allocated ratably throughout the project 
in proportion to the relative amounts of proceeds and other funds spent 
on the project. Generally, the project is the bond-financed property 
for purposes of section 141. Except where the issuer has elected to use 
one of the special allocation methods permitted for certain mixed-use 
projects, the Proposed Regulations provide that a general pro rata 
allocation method applies to mixed-use projects. Except as otherwise 
provided in the Proposed Regulations, if financed property is financed 
with two or more sources of funding (including two or more tax-exempt 
governmental bond issues), those sources of funding must be allocated 
to multiple uses (that is, governmental use and private business use) 
of that financed property in proportion to the relative amounts of 
those sources of funding expended on that financed property.
    The Proposed Regulations prescribe the manner and timing of 
elections to use the special allocation rules for mixed-use projects 
and rules regarding final allocations of sources of funding to a 
project generally.

III. Mixed-Use Projects

(A) In General
    The Proposed Regulations provide two special allocation methods 
that issuers may elect to use for certain mixed-use projects. Here, a 
mixed-use project refers to a project (as defined in the Proposed 
Regulations) that, absent the application of the special proposed 
rules, is reasonably expected to have both governmental use and private 
business use, and where the private business use is expected to be in 
excess of the amount of de minimis permitted private business use under 
section 141 for a project financed with an issue of tax-exempt 
governmental bonds.
    The Proposed Regulations treat property as part of the same defined 
project if the property consists of capital projects that have 
reasonable nexus characteristics based upon functional and physical 
proximity, time of placement in service, and a common plan of financing 
for proceeds and other sources of funds expended on the capital 
projects.
    The Proposed Regulations provide two special elective methods of 
allocating proceeds of tax-exempt governmental bonds and other funds, 
that is, proceeds of taxable bonds and funds that are not derived from 
proceeds of a borrowing (qualified equity), to capital expenditures 
within mixed-use projects: The discrete physical portion allocation 
method and the undivided portion allocation method. Absent eligibility 
and a proper election by an issuer to use one of these special elective 
allocation methods for mixed-use projects, the general pro rata 
allocation method applies.
(B) Discrete Physical Portion Allocation Method
    In general, the discrete physical portion allocation method allows 
allocations for a mixed-use project based on dividing the project into 
physically discrete portions. Under the discrete physical portion 
allocation method, the percentage of capital expenditures that is 
allocable to a particular discrete portion of a mixed-use project is 
determined using a reasonable, consistently applied method that 
reflects the proportionate benefit to be derived by the various users 
of the mixed-use project. The Proposed Regulations provide several 
objective proportionate benchmarks (for example, cost, space, or fair 
market value) to determine the measure of a discrete portion.
    An anti-abuse rule requires use of relative fair market values to 
measure the discrete portions when an allocation to a discrete portion 
expected to be used by a private business is significantly greater 
using relative fair market values than such allocation would be under 
the otherwise-chosen measure. This anti-abuse rule is comparable to a 
similar existing anti-abuse rule regarding the ongoing measurement of 
private business use under Sec.  1.141-3(g)(4)(v). The Treasury 
Department and the IRS solicit public comment on this anti-abuse rule 
and whether quantifying the significantly greater than under fair 
market value standard (for example, an allocation under the fair market 
value standard is significantly greater if it exceeds an allocation 
made under another measure by more than X percent) would assist 
taxpayers in making effective use of the discrete physical portion 
allocation method.
    In order to allow for targeting of tax-exempt bond proceeds to 
governmental use, an issuer generally may determine which source or 
sources of funds spent on a mixed-use project are allocated to a 
particular discrete portion. For example, an issuer may allocate tax-
exempt bond proceeds to one discrete portion of a mixed-use courthouse

[[Page 56075]]

project which will be used in public court proceedings for governmental 
use and the issuer may allocate qualified equity to another discrete 
portion of the courthouse which will be used in private retail business 
operations as a restaurant for private business use.
    Further, while final allocations generally may not be changed, an 
issuer may reallocate funds from one discrete portion to another if the 
discrete portions are comparable under certain criteria. For 
administrability reasons, the Proposed Regulations limit such 
reallocations to a frequency of not more than once every five years.
(C) Undivided Portion Allocation Method
    In general, the undivided portion allocation method permits 
separating a mixed-use project into a governmental use portion and a 
private business use portion, each of which represents a fixed 
percentage of the use of the entire mixed-use project (for example, a 
fixed percentage of unreserved parking spaces in a parking garage). 
Unlike the discrete physical portion method, the undivided portion 
allocation method involves the allocation of a mixed-use project 
between portions that are not physically distinct but that can be 
notionally represented by percentages based on objective proportionate 
measures. Certain eligibility conditions apply to the undivided portion 
allocation method. This method may be used only for mixed-use projects 
where private business use and governmental use may be measured under 
Sec.  1.141-3(g) because that use occurs: (1) At the same time and on 
the same basis (within the meaning of Sec.  1.141-3(g)(4)(iii)); or (2) 
at different times (within the meaning of Sec.  1.141-3(g)(4)(ii)). The 
issuer must reasonably expect as of the issue date that the undivided 
portion of the mixed-use project to be financed with proceeds of tax-
exempt governmental bonds will not have private business use in excess 
of the amount of de minimis permitted private business use. The total 
capital expenditures for the mixed-use project are allocated between 
two undivided portions based on measures of the proportionate benefit 
to be derived by the various users. The Proposed Regulations list some 
reasonable allocation methods for determining the relative size of the 
portions. The undivided portion allocation method has an anti-abuse 
rule similar to that described previously with respect to the discrete 
physical portion allocation method which requires use of relative fair 
market values to measure the portions in certain circumstances.
    Proceeds are allocated only to the undivided portion that is 
reasonably expected to be used for governmental use (and any de minimis 
permitted private business use). Qualified equity is allocated to the 
other undivided portion.
    A number of special rules apply to the undivided portion allocation 
method for purposes of allocating sources to uses. In general, the 
entire mixed-use project is treated as the bond-financed property whose 
use must be measured. Also, in measuring ongoing use of a mixed-use 
project under the undivided portion allocation method, the measurement 
rules in Sec.  1.141-3(g) (or Sec.  1.141-7 in the case of a mixed-use 
output facility) apply. The issuer must use the same method for 
measuring use that it used for determining the allocation of funds to 
the undivided portions of the mixed-use project. After use of the 
entire mixed-use project is measured, however, the governmental use and 
private business use are generally allocated to the undivided portions 
financed with proceeds and qualified equity, respectively. Generally, 
in any year, the percentage of governmental use and private business 
use that is specially allocated to an undivided portion is limited. 
That percentage of use cannot exceed the percentage of capital 
expenditures for the mixed-use project that makes up that undivided 
portion. For example, the percentage of private business use that is 
specially allocated to the undivided portion financed with qualified 
equity cannot exceed the percentage of capital expenditures for the 
mixed-use project that makes up that undivided portion. In determining 
whether the private business use test is met, only use of the undivided 
portion to which proceeds are allocated is taken into account.
(D) Operating Rules for Mixed-Use Projects
    The Proposed Regulations provide certain general operating rules 
for mixed-use project allocations. An issuer may elect to apply the 
discrete physical portion allocation method or the undivided portion 
allocation method only if the mixed-use project is wholly-owned by 
governmental persons. An exception to this rule applies to certain 
mixed-use output facilities. (See paragraph E. Special rules for mixed-
use output facilities.) Consistent with Sec.  1.141-1(b), common areas 
cannot be treated as discrete portions of the project. Proceeds and 
other sources of funds spent on common areas are allocated to the 
discrete portions in the same proportion as funds spent for the 
discrete portions are allocated.
    Under the Proposed Regulations, the funds that may be allocated 
under the discrete physical portion allocation method or the undivided 
portion allocation method to a particular mixed-use project include 
proceeds of one or more issues of tax-exempt governmental bonds and 
qualified equity. If a project is financed with more than one issue of 
governmental bonds, proceeds of those issues are allocated ratably to a 
discrete portion or undivided portion to which any proceeds are 
allocated in proportion to the amounts of proceeds from each issue used 
for the project.
(E) Special Rules for Mixed-Use Output Facilities
    The Proposed Regulations provide special rules for the application 
of the undivided portion allocation method to mixed-use projects that 
are output facilities. An issuer may apply the undivided portion 
allocation method to a mixed-use project that is an output facility if 
the facility is wholly-owned by governmental persons or if undivided 
ownership interests in the facility are owned by governmental persons 
or private businesses, provided that all owners of the undivided 
ownership interests share the ownership, output, and operating expenses 
in proportion to their contributions to the costs of the facility. The 
relative measures of the undivided portions of a mixed-use output 
facility are determined using the proportionate benefit to be derived 
by the users of the mixed-use project. For an output facility in which 
private business use arises from a private business owning an undivided 
ownership interest in the facility (with a governmental person owning 
the other undivided portion of the facility), the undivided portions 
are based on the ownership percentages. This rule implements the 
principles illustrated by Sec.  1.141-7(i), Example 1. When private 
business use of a facility solely owned by a governmental person or of 
an undivided ownership interest of a facility owned by a governmental 
person arises from an output contract that meets the benefits and 
burdens tests under Sec.  1.141-7, the undivided portions of that 
facility or ownership interest are determined by the proportionate 
shares of the available output of that project to be used for 
governmental use (and any de minimis permitted private business use) 
and for private business use. Section 1.141-7(h) controls allocation of 
output contracts to output facilities.

[[Page 56076]]

IV. Redemption of Bonds in Anticipation of Nonqualified Private 
Business Use

    The Proposed Regulations provide a new special rule which permits 
certain proceeds of taxable bonds and certain funds that are not 
derived from proceeds of a borrowing that are used to retire tax-exempt 
governmental bonds (anticipatory redemption bonds) to be treated as 
qualified equity. In prescribed circumstances, this new special rule 
allows targeting of funds other than tax-exempt bond proceeds to redeem 
outstanding tax-exempt bonds and thereby to finance portions of 
projects which are expected to be used for nonqualified private 
business use in the future. This special rule has certain eligibility 
requirements. In general, the intent of this proposed rule is to 
encourage retirement of tax-exempt bonds before the occurrence of 
unqualified use to reduce the burden on the tax-exempt market. The 
eligibility requirements for this special rule address when the 
anticipatory redemption bond must be retired, the issuer's reasonable 
expectations regarding use of the project and actual use of the project 
prior to the redemption, and the length of the term of the issue of 
which the anticipatory redemption bond is a part.
    Amounts that are treated as qualified equity under this special 
rule may be allocated to a discrete portion or undivided portion of the 
project in a manner provided in the discrete physical portion 
allocation method or undivided portion allocation method if such 
allocation would have satisfied the applicable allocation method had 
that portion been identified for purposes of financing it in a new 
issue at the time of the retirement of the anticipatory redemption 
bond.

V. Allocations of Private Payments, Common Costs, and Bonds

    The Proposed Regulations provide that private payments generally 
are allocated in accordance with Sec.  1.141-4, subject to certain 
special rules for allocating payments under output contracts. Private 
payments from output contracts that meet the benefits and burdens test 
under Sec.  1.141-7 are allocated to the undivided portion financed 
with qualified equity (notwithstanding Sec.  1.141-4(c)(3)(v)) in the 
same manner as is the private business use from such contracts. Thus, 
private business use and private payments arising under such an output 
contract are both allocated to the undivided portion financed with 
qualified equity (to the extent all such contracts do not exceed the 
percentage of such portion) without regard to whether the qualified 
equity consists of proceeds of taxable bonds or funds that are not 
derived from proceeds of a borrowing.
    The Proposed Regulations provide ratable allocation rules for 
common costs (for example, issuance costs).
    The Proposed Regulations provide that proceeds generally are 
allocated to bonds in accordance with the rules for allocations of 
proceeds to bonds in multipurpose issues under Sec.  1.141-13(d). In 
the case of an issue that is not a multipurpose issue, proceeds are 
allocated to bonds ratably in a manner similar to the allocation of 
proceeds to projects under the general pro rata allocation method.

VI. Partnerships

    The Proposed Regulations generally treat a partnership as a 
separate entity that is a nongovernmental person for purposes of 
section 141. For purposes of section 141, a limited exception 
disregards a partnership as a separate entity if each of the partners 
is a governmental person and treats such a partnership as an aggregate 
of its partners (that is, as governmental persons) for these purposes. 
In applying the private business tests for purposes of qualified 
501(c)(3) bonds, the Proposed Regulations generally treat a partnership 
as an aggregate if each of the partners is either a governmental person 
or a section 501(c)(3) organization. The Proposed Regulations, however, 
do not apply such aggregate treatment for purposes of the ownership 
test under section 145(a)(1).
    In general, the proposed treatment of partnerships reflects certain 
administrability concerns with partnerships which have both 
governmental persons and private businesses as partners and the 
associated potential for shifting allocations of various partnership 
items. The Treasury Department and the IRS understand that governmental 
persons or section 501(c)(3) organizations may be partners in 
partnerships that include private businesses. Permitting tax-exempt 
bonds used to finance facilities owned by such partnerships to qualify 
as governmental bonds rather than private activity bonds would raise 
administrability issues, including but not limited to, questions of how 
to measure use by an owner and questions regarding common profit or 
cost reduction motives and allocation of partnership items. Permitting 
such ownership by partnerships without administrable rules for tracking 
these items has the potential to allow the benefits of tax-exempt 
financing to inure to private business users.
    One limited circumstance in which the Treasury Department and the 
IRS are considering favorable aggregate treatment for partnerships 
(that is, disregarding eligible partnerships as separate private 
business entities) and are soliciting specific comment is that of a 
partnership of governmental persons (or section 501(c)(3) organizations 
for 501(c)(3) bonds) and private businesses in which the respective 
partners receives the same distributive share of each partnership item 
for Federal tax purposes (including income, gain, deduction, loss, 
credit and basis) as their respective interests in the partnership and 
this share remains the same for the entire measurement period for the 
bonds or the entire period that the person is a partner. The Treasury 
Department and the IRS solicit specific public comment regarding 
whether it would be useful to treat such a partnership as an aggregate 
in this limited circumstance involving straight-up allocations of all 
partnership items in accordance with constant percentage interests in 
the partnership.
    The contemplated limited circumstance in which the Treasury 
Department and the IRS are considering aggregate treatment for 
partnerships for private activity bond purposes involves partnership 
allocations similar to those treated as qualified allocations to tax-
exempt entities for purposes of the tax-exempt use property provisions 
under section 168(h)(6).

VII. Multipurpose Issue Allocations

    In general, Sec.  1.141-13(d) provides guidance on multipurpose 
issue allocations for purposes of section 141. That guidance was 
included as part of the final regulations (TD 9234) under section 141 
that were published in the Federal Register on December 19, 2005 (70 FR 
242) (the 2005 Final Refunding Regulations) and that mainly provided 
rules for refunding bonds.
    The Proposed Regulations also make a clarifying change to Sec.  
1.141-13(d). In response to the 2005 Final Refunding Regulations, the 
Treasury Department and the IRS have received comments seeking 
clarification of how those multipurpose rules work under section 141 in 
relation to an existing general multipurpose issue allocation rule 
under Sec.  1.150-1(c)(3). The Proposed Regulations provide certain 
clarifying guidance on the multipurpose issue allocation rule under 
Sec.  1.141-13(d) and provide an expanded example to illustrate how 
those rules operate in various circumstances.

[[Page 56077]]

    In particular, the Proposed Regulations modify Sec.  1.141-13(d) 
regarding multipurpose issue allocations to clarify how that provision 
applies when an issuer wants to elect the multi-purpose issue rule for 
an issue that would consist of qualified private activity bonds in part 
and governmental bonds in part with an appropriate allocation. The 
Proposed Regulations amend Sec.  1.141-13(d) to eliminate a requirement 
that a multipurpose issue must consist of tax-exempt bonds prior to 
being allocated into separate issues. The Proposed Regulations retain 
the requirement that, after the multipurpose issue allocation, each of 
the separate issues must consist of tax-exempt bonds. This proposed 
amendment clarifies that an issuer may issue bonds intended to be 
qualified private activity bonds in part and governmental bonds in part 
as one issue (within the meaning of Sec.  1.150-1(c)(1)) and make 
allocations under the section 141 multipurpose issue allocation rule in 
Sec.  1.141-13(d) in conjunction with the general multipurpose issue 
allocation rule in Sec.  1.150-1(c)(3), to treat the qualified private 
activity bonds and governmental bonds as separate issues, respectively.

VIII. Proposed Effective Dates

    The Proposed Regulations are proposed to apply to bonds (1) that 
are sold on or after the date that is 60 days after the date of 
publication in the Federal Register of final regulations under Sec.  
1.141-6 and (2) that are subject to the 1997 Final Regulations. Issuers 
may apply Sec. Sec.  1.141-13(d) and 1.141-13(g) Example 5 of the 
Proposed Regulations to bonds sold before the date of publication of 
final regulations in the Federal Register to which Sec.  1.141-13 
applies. Except as otherwise provided in the preceding sentence, 
issuers may not apply or rely upon the rules contained in these 
Proposed Regulations until these rules are adopted as final regulations 
and made effective pursuant to a Treasury decision published in the 
Federal Register.

IX. Continued Reliance on Mixed-Use Output Notice

    Pursuant to the 2002 Advance Notice, the Treasury Department and 
the IRS provided previous limited guidance regarding certain allocation 
and accounting rules for mixed-use output facilities. Issuers may 
continue to rely on the rules in the 2002 Advance Notice for bonds sold 
before the date of publication in the Federal Register of final 
regulations under Sec.  1.141-6 (or such later effective date as may be 
specified in those final regulations or in future proposed 
regulations).

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that 5 U.S.C. 553(b) does not apply to this notice of proposed 
rulemaking. It is hereby certified that the collection of information 
(recordkeeping requirement) in this notice of proposed rulemaking will 
not have a significant economic impact on a substantial number of small 
governmental jurisdictions. This certification is based upon the fact 
few small governmental jurisdictions issue tax-exempt bonds to finance 
facilities that will be used for both governmental use and more than 
the amount of de minimis permitted private business use. Also, the 
amount of time required to meet the recordkeeping requirement is not 
significant. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Small Business Administration for 
comment on its impact on small governmental jurisdictions.

Comments and Public Hearing

    Before these Proposed Regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and IRS specifically request comments on 
the clarity of the proposed rules and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for January 11, 2007 at 10 
a.m., in the auditorium of the New Carrollton Federal Building, 5000 
Ellin Rd., Lanham, MD 20706. Due to building security procedures, 
visitors must enter at the main entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by December 26, 2006 and submit an outline of the 
topics to be discussed and the amount of time to be devoted to each 
topic (a signed original and eight (8) copies) by December 26, 2006. A 
period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Rebecca L. Harrigal, 
Johanna Som de Cerff, and Michael P. Brewer, Office of Division 
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), 
IRS. However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.141-0 is amended by adding an entry for Sec.  
1.141-1(e), revising entries for Sec.  1.141-6, and adding an entry for 
Sec.  1.141-15(k) and (l) as follows:


Sec.  1.141-0  Table of Contents

* * * * *


Sec.  1.141-1  Definitions and rules of general application

* * * * *
    (e) Partnerships.
    (1) In general.
    (2) Governmental partnerships.
* * * * *


Sec.  1.141-6  Allocation and accounting rules

(a) Allocation of proceeds to expenditures, property, and uses in 
general.
    (1) Allocations to expenditures.
    (2) Allocations within property; general pro rata allocation 
method.
    (3) Allocations of sources of funds to ultimate uses of financed 
property.

[[Page 56078]]

    (4) Manner and time for electing to apply special allocation 
methods for mixed-use projects; final allocations generally.
(b) Special rules on reasonable proportionate allocation methods for 
mixed-use projects.
    (1) In general.
    (2) Definition of a mixed-use project.
(c) The discrete physical portion allocation method.
    (1) In general.
    (2) The measure of a discrete portion.
    (3) Allocations to expenditures for discrete portions.
    (4) Allocations of uses to discrete portions.
    (5) Certain reallocations among discrete portions.
(d) The undivided portion allocation method.
    (1) In general.
    (2) The measure of an undivided portion.
    (3) Allocations to expenditures for undivided portions.
    (4) Allocations of uses to undivided portions.
(e) Certain general operating rules for mixed-use project 
allocations.
    (1) In general.
    (2) Governmental ownership requirement for undivided portion and 
discrete portion allocations.
    (3) Sources of funds for mixed-use project allocations.
    (4) Common areas.
    (5) Allocations regarding multiple issues.
(f) Special rules for bond redemptions in anticipation of 
unqualified use.
(g) Special rules for applying the undivided portion allocation 
method to mixed-use output facilities.
    (1) In general.
    (2) Governmental ownership requirement for mixed-use output 
facilities.
    (3) The measure of an undivided portion of a mixed-use output 
facility.
(h) Allocations of private payments.
(i) Allocations of proceeds to common costs of the issue.
(j) Allocations of proceeds to bonds.
(k) Examples.


Sec.  1.141-7  Special Rules for Output Facilities

* * * * *


Sec.  1.141-15  Effective dates

* * * * *
(k) Effective date for certain regulations related to allocation and 
accounting.
(l) Permissive retroactive application of certain regulations.
* * * * *
    Par. 3. Section 1.141-1 is amended by adding additional definitions 
under paragraph (b) and by adding a new paragraph (e) as follows:


Sec.  1.141-1  Definitions and rules of general application

* * * * *
    (b) Certain general definitions.
* * * * *
    De minimis permitted private business use means the amount of 
private business use permitted for proceeds of tax-exempt bonds without 
causing such bonds to be classified as private activity bonds under 
section 141.
* * * * *
    Financed property means, except as otherwise provided, any project 
(as defined in Sec.  1.141-6(b)(2)(ii)) to which proceeds of an issue 
of tax-exempt bonds are allocated under Sec.  1.141-6.
* * * * *
    Governmental use or government use means any use that is not 
private business use under Sec.  1.141-3.
* * * * *
    Private business use means use by a person other than a 
governmental person in a trade or business, as more particularly 
defined in Sec.  1.141-3.
* * * * *
    (e) Partnerships--(1) In general. Except as provided in paragraph 
(e)(2) of this section, a partnership (as defined under section 
7701(a)(2)) is treated as a separate entity that is a nongovernmental 
person for purposes of section 141.
    (2) Governmental partnerships. For purposes of section 141, in the 
case of a partnership (as defined in section 7701(a)(2)) in which each 
of the partners is a governmental person (as defined in Sec.  1.141-
1(b)), the partnership is disregarded as a separate entity and is 
treated as an aggregate of its partners.
    Par. 4. Section 1.141-6 is revised to read as follows:


Sec.  1.141-6  Allocation and accounting rules

    (a) Allocations of proceeds to expenditures, property, and uses in 
general--(1) Allocations to expenditures. Except as otherwise provided 
in this section, for purposes of Sec. Sec.  1.141-1 through 1.141-15, 
the provisions of Sec.  1.148-6(d) apply for purposes of allocating 
proceeds and other sources of funds to expenditures (as contrasted with 
investments). Except as otherwise provided in this section, allocations 
of proceeds and other sources of funds to expenditures generally may be 
made using any reasonable, consistently applied accounting method. 
Allocations of proceeds to expenditures under section 141 and section 
148 must be consistent with each other. For purposes of the consistency 
requirements in this paragraph (a), it is permissible to employ an 
allocation method under paragraph (a)(2), (c), or (d) of this section 
(for example, the general pro rata allocation method under paragraph 
(a)(2) of this section) to allocate sources of funds within a 
particular project for purposes of section 141 in conjunction with an 
accounting method allowed under Sec.  1.148-6(d) (for example, the 
first-in, first out method) to determine the allocation of proceeds or 
other sources of funds to expenditures for that project.
    (2) Allocations within property; the general pro rata allocation 
method. Except as otherwise provided in this section, proceeds and 
other sources of funds allocated to capital expenditures for a project 
(as defined in paragraph (b)(2)(ii) of this section) under section 148 
and paragraph (a)(1) of this section are treated as allocated ratably 
throughout that project in proportion to the relative amounts of 
proceeds and other funds spent on that project (the general pro rata 
allocation method). For example, if a building is financed with 
proceeds and other funds and the issuer allocates the proceeds and 
other funds to the capital expenditures of the building using a gross 
proceeds spent first allocation method under section 148 and paragraph 
(a)(1) of this section, the proceeds and other sources of funds so 
allocated to the building are treated as being allocated ratably 
throughout the building under this paragraph (a)(2).
    (3) Allocations of sources of funds to ultimate uses of financed 
property. Except as otherwise provided in this section, if financed 
property is financed with two or more sources of funding (including two 
or more tax-exempt governmental bond issues), those sources of funding 
must be allocated to multiple uses (that is, governmental use and 
private business use) of that financed property in proportion to the 
relative amounts of those sources of funding expended on that financed 
property.
    (4) Manner and time for electing to apply special allocation 
methods for mixed-use projects; final allocations generally. If an 
issuer is making an election under paragraph (c) or (d) of this section 
to use one of the special allocation methods for mixed-use projects, 
the issuer must make this election in writing by noting in its records 
the method of allocation chosen and the preliminary amounts and sources 
of funds it expects to allocate to specific discrete or undivided 
portions within the mixed-use project. The time for making this 
election is on or before the start of the measurement period. An issuer 
must make final allocations of proceeds and other funds under this 
section by noting in its records the final amounts of such allocations. 
The time for making these final allocations is set forth in the timing 
rules under Sec.  1.148-6(d)(1)(iii). Except as otherwise provided in 
this section, once the time for making final allocations under

[[Page 56079]]

Sec.  1.148-6(d)(1)(iii) has passed, allocations cannot be changed.
    (5) References to proceeds. For purposes of this section, except 
where the context clearly requires otherwise (for example, in 
references to ``proceeds'' of taxable bonds) and regardless of whether 
expressly specified, references to proceeds generally are intended to 
refer to proceeds of tax-exempt governmental bonds.
    (b) Special rules on reasonable proportionate allocation methods 
for mixed-use projects--(1) In general. Once proceeds and other sources 
of funds are allocated to a mixed-use project (as defined in paragraph 
(b)(2) of this section) under section 148 and paragraph(a)(1) of this 
section, there are three methods for allocating those proceeds and 
other sources of funds to capital expenditures (as defined in Sec.  
1.150-1(b)) within the mixed-use project. These methods are the general 
pro rata allocation method in paragraph (a)(2) of this section, the 
discrete physical portion allocation method, and the undivided portion 
allocation method. Allocations will be made under the general pro rata 
allocation method unless the issuer elects to use either the discrete 
portion method or the undivided portion method and meets the 
requirements for making such election under paragraph (a)(4) of this 
section and using such a method. The discrete portion and undivided 
portion allocation methods are elective and permit, to the extent 
provided, proceeds to be allocated to a portion of a mixed-use project 
based on a consistent application of a permitted reasonable allocation 
method that properly reflects the proportionate benefit to be derived 
by the various users of those portions of the mixed-use project. 
Paragraph (c) of this section sets forth the rules for the discrete 
physical portion allocation method and paragraph (d) of this section 
sets forth the rules for the undivided portion allocation method. 
Paragraph (e) of this section sets forth certain general operating 
rules for all mixed-use project allocations. Paragraph (g) of this 
section provides special rules for applying the undivided portion 
allocation method to output facilities.
    (2) Definition of a mixed-use project--(i) In general. For purposes 
of this section, the term mixed-use project means a project (as defined 
in paragraph (b)(2)(ii) of this section) that, absent the application 
of the special elective allocation methods for mixed-use projects under 
paragraphs (c) and (d) of this section, is reasonably expected as of 
the issue date to have private business use in excess of de minimis 
permitted private business use.
    (ii) Definition of project--(A) In general. For purposes of this 
section, the term project means one or more facilities or capital 
projects, including land, buildings, equipment, or other property, that 
meets each of the following requirements:
    (1) The facilities or capital projects are functionally related or 
integrated and are located on the same site or on reasonably proximate 
adjacent sites;
    (2) The facilities or capital projects are reasonably expected to 
be placed in service within the same 12-month period; and
    (3) The proceeds and other sources of funds that are expended on 
the facilities or capital projects are expended pursuant to the same 
plan of financing.
    (B) Subsequent improvements or replacements. Subsequent 
improvements and replacements of portions of a project that are within 
the size, function, and usable space of the original design of the 
project are treated as part of that same project even if placed in 
service beyond the 12-month period in paragraph (b)(2)(ii)(A)(2) of 
this section. Thus, for example, improvements and replacements of 
damaged walls or worn-out fixtures within an original building that do 
not expand the scope or function of usable space are part of the 
original project.
    (c) Discrete physical portion allocation method--(1) In general. An 
issuer may elect the discrete physical portion allocation method when a 
mixed-use project can be separated into discrete portions (as defined 
in Sec.  1.141-1(b)). With a proper election, an issuer may use the 
discrete physical portion allocation method to allocate proceeds and 
qualified equity to capital expenditures for a discrete portion within 
a mixed-use project and to allocate those sources of funds to uses. The 
issuer must use a reasonable, consistently applied allocation method 
that reflects the proportionate benefits to be derived by the various 
users of the discrete portions to determine the aggregate amount of 
proceeds and qualified equity allocable to a particular discrete 
portion in a mixed-use project.
    (2) The measure of a discrete portion. An issuer is treated as 
using a reasonable allocation method that reflects the proportionate 
benefits if the issuer determines the amount of proceeds and qualified 
equity to be allocated to the discrete portions based on reasonable 
discrete portion benchmarks. These benchmarks generally include 
expected actual costs of the discrete portions, a percentage of total 
space of the mixed-use project to be used in the discrete portion, a 
percentage of the total fair market value of the mixed-use project that 
will be associated with the discrete portion, or another objective 
measure that is reasonable based on all the facts and circumstances. A 
discrete portion benchmark other than relative fair market value may 
not be used to make an allocation to a discrete portion that is 
reasonably expected to be used for private business use if an 
allocation to that same discrete portion using relative fair market 
value, determined as of the start of the measurement period, would 
result in a significantly greater percentage of the total capital 
expenditures of the project being allocated to such discrete portion.
    (3) Allocations to expenditures for discrete portions. Except as 
otherwise provided in this section, an issuer may determine how each 
source of funds (for example, proceeds or qualified equity) spent on a 
mixed-use project is allocated among discrete portions of that project. 
For example, proceeds may be specially allocated to capital 
expenditures for costs of a discrete portion that is reasonably 
expected to be used for governmental use (or for de minimis permitted 
private business use), and qualified equity may be specially allocated 
to capital expenditures for costs of a discrete portion that is 
reasonably expected to be used for private business use.
    (4) Allocations of uses to discrete portions. In applying the 
measurement rules under Sec.  1.141-3(g) to measure ongoing use of a 
discrete portion of a mixed-use project, the measurement rules under 
Sec.  1.141-3(g) generally apply to the same extent and in the same 
manner that they otherwise would. If an issuer properly elects to apply 
the discrete physical portion allocation method, the financed property 
is limited to the discrete portion to which any proceeds are allocated 
under paragraph (c)(3) of this section, and under Sec.  1.141-
3(g)(4)(iv), the only use of the mixed-use project that is taken into 
account is the use of the discrete portions to which proceeds are 
specially allocated.
    (5) Certain reallocations among discrete portions. An issuer may 
reallocate in whole, but not in part, proceeds and qualified equity 
that it allocated to capital expenditures for one discrete portion of a 
mixed-use project under paragraph (c)(3) of this section to another 
discrete portion of the same mixed-use project if the proportionate 
benefits to be derived by the users of the two discrete portions are 
reasonably comparable both at the time of the original allocation and 
at the time of the reallocation. For purposes of this

[[Page 56080]]

paragraph (c)(5), the proportionate benefits are reasonably comparable 
only if the measures of the discrete portion benchmarks are within five 
percent of each other. In determining whether the proportionate 
benefits of the discrete portions are reasonably comparable at the time 
of the reallocation, the same discrete portion benchmark used 
originally to determine the discrete portions and the fair market value 
of the discrete portions as of the time of the reallocation must be 
used. Reallocations under this paragraph (c)(5) may be made only once 
every five years.
    (d) The undivided portion allocation method--(1) In general. An 
issuer may elect the undivided portion allocation method to make 
allocations with respect to a mixed-use project, provided that the 
undivided portions to which the allocations are made generally 
represent fixed percentages of the use of the entire mixed-use project 
(for example, a fixed percentage of unreserved parking spaces in a 
parking garage). The measures of the undivided portions may be based on 
physical or nonphysical characteristics of the project. In addition, 
the undivided portion allocation method may be applied separately to a 
discrete portion within a mixed-use project for which the issuer has 
elected to apply the discrete physical portion allocation method in 
which event the references in this paragraph (d) to mixed-use project 
generally shall be deemed to mean that discrete portion within which 
the undivided portion allocation method is applied separately. Upon a 
proper election, an issuer may, to the extent provided, use the 
undivided portion allocation method both to allocate proceeds or 
qualified equity to capital expenditures for the undivided portions and 
to allocate those sources of funds to uses of the mixed-use project. 
The issuer must use a reasonable consistently applied allocation method 
that properly reflects the proportionate benefit to be derived by the 
various users of the mixed-use project to determine the amount of 
proceeds or qualified equity allocable to a particular undivided 
portion of a mixed use project. See paragraph (g) of this section for 
special rules for output facilities. To apply the undivided portion 
allocation method, the following conditions must be met:
    (A) The issuer must reasonably expect as of the start of the 
measurement period that private business use and governmental use of 
the mixed-use project will occur simultaneously and be on the same 
basis (within the meaning of Sec.  1.141-3(g)(4)(iii)) or will occur at 
different times (within the meaning of Sec.  1.141-3(g)(4)(ii)); and
    (B) The issuer must reasonably expect as of the start of the 
measurement period that private business use allocated to the proceeds 
under paragraph (d)(4) of this section will not exceed de minimis 
permitted private business use.
    (2) The measure of an undivided portion. An issuer is treated as 
using a reasonable allocation method that reflects the proportionate 
benefits if the issuer determines the amount of proceeds and qualified 
equity to be allocated to the undivided portions based on reasonable 
undivided portion benchmarks. Such benchmarks generally include a 
measure of how many units produced from the facility will be used by 
the various users, a percentage of the space in the mixed-use project 
to be used by the various users (for example, a percentage of the 
number of parking spaces or a percentage of square feet of usable 
leased office space), a percentage of the fair market value of the 
mixed-use project that will be used by the various users (for example, 
a dollar amount per parking space for a percentage of a total number of 
parking spaces or a dollar amount per square foot for a percentage of 
usable leased office space), a percentage of time that the project will 
be used by the various users (determined in a manner consistent with 
Sec.  1.141-3(g)(4)(ii)), or another objective measure, which may 
include the present value of reasonably expected revenues associated 
with each user's use in circumstances in which no other measure is 
reasonably workable (for example, expected revenues from space in a 
research facility in which the qualified and nonqualified research is 
operationally fungible), that is reasonable based on all the facts and 
circumstances. An undivided portion benchmark other than relative fair 
market value may not be used to make an allocation to an undivided 
portion that is reasonably expected to be used for private business use 
if an allocation to that same undivided portion using relative fair 
market values, determined as of the start of the measurement period, 
would result in a significantly greater percentage of the total capital 
expenditures of the project being allocated to such undivided portion. 
For example, if a private business and a governmental person use a 
financed facility each for 50 percent of the time, but the relative 
fair market value of the private business use is significantly greater 
than 50 percent because the private business uses the facility during 
prime hours, the relative fair market values of the undivided portions 
must be used as the undivided portion benchmark.
    (3) Allocations to expenditures for undivided portions. Except as 
otherwise provided in this section, proceeds are specially allocated to 
capital expenditures for costs of an undivided portion that is 
reasonably expected to be used for governmental use (or for de minimis 
permitted private business use). Qualified equity is specially 
allocated to capital expenditures for costs of an undivided portion of 
a mixed-use project that is reasonably expected to be used for private 
business use.
    (4) Allocations of uses to undivided portions--(i) General rule. If 
an issuer elects to apply the undivided portion allocation method, then 
for purposes of section 141, the financed property is the mixed-use 
project. In measuring ongoing use of a mixed-use project, the 
measurement rules under Sec.  1.141-3(g) (or Sec.  1.141-7 in the case 
of an undivided portion of a mixed-use project that is an output 
facility) apply to the same extent and in the same manner that they 
otherwise would to the mixed-use project. However, under the undivided 
portion allocation method, after measuring private business use of the 
mixed-use project, subject to the limits in this paragraph (d)(4)(ii) 
of this section, private business use of the mixed-use project is 
specially allocated to the undivided portion of that project financed 
with qualified equity (as contrasted with the entire mixed-use project) 
for purposes of determining whether the issue meets the private 
business use test. Corresponding allocation rules apply to the 
undivided portion of a mixed-use project that is financed with proceeds 
and that is reasonably expected to be used for governmental use (or for 
de minimis permitted private business use). Thus, subject to the 
limitations in paragraph (d)(4)(ii) of this section, governmental use 
is specially allocated to the undivided portion that is financed with 
proceeds. Private business use of the mixed-use project that is 
properly allocated under this paragraph to an undivided portion 
financed with qualified equity is not private business use of proceeds. 
To determine whether the undivided portion to which proceeds are 
allocated is used for private business use, the measurement rules under 
Sec.  1.141-3(g) (or Sec.  1.141-7 for output facilities) apply, taking 
into account the special allocation rules for the undivided portion 
allocation method under this section.
    (ii) Limit on amount targeted. In any year, the percentage of 
private business use of the mixed-use project, as

[[Page 56081]]

determined under the measurement rules for any one-year period under 
Sec.  1.141-3(g)(4), that is specially allocated to an undivided 
portion financed with qualified equity cannot exceed the percentage of 
capital expenditures of the mixed-use project used to determine that 
undivided portion and allocated to that undivided portion. The 
percentage of governmental use (and de minimis permitted private 
business use), as determined in the same manner, that is specially 
allocated to an undivided portion financed with proceeds cannot exceed 
the percentage of capital expenditures of the mixed-use project used to 
determine that undivided portion and allocated to that undivided 
portion. Similarly, for output facilities, the percentage of private 
business use of the mixed-use project, as determined under Sec.  1.141-
7, that may be targeted to an undivided portion cannot exceed the 
percentage of capital expenditures of the mixed-use project allocated 
to that undivided portion.
    (iii) Consistency requirement. In applying the measurement rules 
under Sec.  1.141-3(g) to a mixed-use project for which an issuer has 
employed the undivided portion allocation method, the issuer must use 
the same measurement method (for example, costs, quantity, or fair 
market value) that it used as its benchmark measure to make the 
allocations to the undivided portions of the mixed-use project under 
this section. For example, if the issuer made an allocation to an 
undivided portion using a time-based allocation, the issuer must 
measure private business use using a time-based allocation.
    (e) Certain general operating rules for mixed-use project 
allocations--(1) In general. This paragraph (e) provides certain 
general operating rules for allocations regarding mixed-use projects 
under this section.
    (2) Governmental ownership requirement for discrete physical 
portion and undivided portion allocation methods. Except in the case of 
an output facility, an issuer may make an election to apply the 
discrete physical portion or the undivided portion allocation method 
only if the mixed-use project is wholly-owned by governmental persons. 
An issuer may elect to apply the undivided portion method to a mixed-
use project that is an output facility in which non-governmental 
persons own undivided ownership interests if those interests meet the 
requirements of paragraph (g)(2) of this section.
    (3) Sources of funds for mixed-use project allocations--(i) In 
general. For purposes of applying the permitted allocation methods for 
mixed-use projects under paragraphs (c) and (d) of this section, the 
only sources of funds that may be allocated to the mixed-use project 
are proceeds and qualified equity (as defined in paragraph (e)(3)(ii) 
of this section).
    (ii) Definition of qualified equity. Except as otherwise provided 
in special rules for anticipatory redemption bonds in paragraph (f) of 
this section, for purposes of this section, the term qualified equity 
means only proceeds of taxable bonds and funds that are not derived 
from proceeds of a borrowing that are spent on the same mixed-use 
project as th