General Allocation and Accounting Regulations Under Section 141; Remedial Actions for Tax-Exempt Bonds, 65637-65646 [2015-27328]
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Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations
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Executive Order 13132
This rulemaking does not have
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This rule does not impose a new
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For the reasons set out above, 21 CFR
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PART 1308—SCHEDULES OF
CONTROLLED SUBSTANCES
1. The authority citation for 21 CFR
part 1308 continues to read as follows:
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Authority: 21 U.S.C. 811, 812, 871(b),
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2. In § 1308.22, remove the product
listed in the table for the company,
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below:
■
§ 1308.22
Excluded substances.
*
*
*
*
*
EXCLUDED NONNARCOTIC PRODUCTS
Company
Trade name
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*
Proctor & Gamble Co., The ..................
*
Vicks VapoInhaler
*
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NDC code
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37000–686–01
*
Dated: October 20, 2015.
Louis J. Milione,
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IN
Internal Revenue Service
26 CFR Part 1
[TD 9741]
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RIN 1545–BB23; 1545–BC07; 1545–BH48
General Allocation and Accounting
Regulations Under Section 141;
Remedial Actions for Tax-Exempt
Bonds
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document contains final
regulations on allocation and
SUMMARY:
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Levmetamfetamine
(l-Desoxyephedrine).
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DEPARTMENT OF THE TREASURY
BILLING CODE 4410–09–P
(mg or mg/ml)
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[FR Doc. 2015–27266 Filed 10–26–15; 8:45 am]
Controlled
substance
Form
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accounting, and certain remedial
actions, for purposes of the private
activity bond restrictions under section
141 of the Internal Revenue Code that
apply to tax-exempt bonds issued by
State and local governments. The final
regulations provide State and local
governmental issuers of tax-exempt
bonds with guidance for applying the
private activity bond restrictions.
Effective Date: These regulations
are effective on October 27, 2015.
Applicability Date: For dates of
applicability, see § 1.141–15.
DATES:
FOR FURTHER INFORMATION CONTACT:
Johanna Som de Cerff or Zoran
Stojanovic, (202) 317–6980 (not a tollfree number).
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SUPPLEMENTARY INFORMATION:
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Paperwork Reduction Act
The collection of information
contained in these regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1451. The collection of
information in these final regulations is
in § 1.141–12(d)(3), which requires an
issuer to make a declaration of official
intent to remediate bonds. This
collection of information is necessary
for an issuer’s redemption or defeasance
of bonds to be treated as a remedial
action under § 1.141–12 to preserve the
tax-exempt status of the bonds. This
collection of information is an increase
in the total annual burden under control
number 1545–1451. The respondents
are State and local government issuers
of tax-exempt bonds.
Estimated total annual reporting
burden is 30,250 hours.
Estimated average annual burden per
respondent is 3 hours.
Estimated number of respondents is
10,100.
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 section 6103.
Background
In general, interest on State and local
governmental bonds is excludable from
gross income under section 103 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 that
are used to determine whether a State or
local bond is a private activity bond.
These tests include the private business
use test and the private security or
payment test in section 141(b), and the
private loan financing test in section
141(c). Section 145 provides similar
tests that apply in modified form to
qualified 501(c)(3) bonds.
Final regulations (TD 8712) under
section 141 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
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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 (REG–142599–02) was
published in the Federal Register on
September 23, 2002 (67 FR 59767),
regarding allocation and accounting
rules for tax-exempt bond proceeds used
to finance mixed-use output facilities. A
notice of proposed rulemaking and
notice of public hearing (REG–140379–
02; REG–142599–02) was published in
the Federal Register on September 26,
2006 (71 FR 56072), regarding allocation
and accounting rules for tax-exempt
bond proceeds, including special rules
for mixed-use projects, and rules
regarding the treatment of partnerships
for purposes of section 141 (the
Proposed Allocation Regulations). The
Proposed Allocation Regulations also
included amendments to regulations
under section 145 on related matters
that apply to qualified 501(c)(3) bonds.
A public hearing was held on January
11, 2007. This document amends the
Income Tax Regulations under sections
141 and 145 by adopting final rules on
these topics. Certain provisions of the
Proposed Allocation Regulations are not
being finalized and are withdrawn. A
partial withdrawal of notice of proposed
rulemaking is published elsewhere in
this edition of the Federal Register.
A notice of proposed rulemaking and
notice of public hearing (REG–132483–
03) was published in the Federal
Register on July 21, 2003 (68 FR 43059),
regarding the amount and allocation of
nonqualified bonds for purposes of
certain remedial actions under sections
141 and 142 (the Proposed Remedial
Action Regulations). The public hearing
was cancelled because no requests to
speak were received. Final regulations
(TD 9150) were published in the
Federal Register on August 13, 2004 (69
FR 50065), adopting the portions of the
Proposed Remedial Action Regulations
relating to section 142. Because of the
interrelationship between the remedial
action provisions under section 141 and
the allocation and accounting rules, the
portions relating to section 141 were not
finalized at that time. This document
adopts final rules regarding the amount
and allocation of nonqualified bonds for
purposes of the remedial action
provisions under section 141. We refer
to the Proposed Remedial Action
Regulations and the Proposed
Allocation Regulations collectively as
the Proposed Regulations.
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Explanation and Summary of
Comments
I. Introduction
After consideration of the public
comments, the Treasury Department
and the IRS adopt the Proposed
Regulations, with revisions, as final
regulations (the Final Regulations). This
section discusses significant aspects of
the public comments and the revisions
made in the Final Regulations.
II. General Allocation Rules
The Proposed Regulations provided
several allocation rules. Among these
were rules regarding the allocation of
proceeds of an issue of bonds that are
obligations of a state or political
subdivision under section 103(c)(1) (see
§ 1.150–1(b)) (proceeds) and all other
sources of funds (other funds) to
expenditures, to the project, and to the
uses of the project (that is, governmental
use or private business use). The
Proposed Regulations provided that
proceeds and other funds generally may
be allocated to expenditures using any
reasonable, consistently applied
accounting method, and that the
allocation of proceeds and other funds
to expenditures must be consistent with
the allocation of proceeds and other
funds for purposes of the arbitrage
investment restrictions under section
148.
Commenters expressed concern that
the consistency requirement was in
conflict with the allowance of more than
one method for allocating proceeds and
other funds to projects. Commenters
further questioned whether allocations
of proceeds to expenditures were
necessary other than for purposes of the
arbitrage investment restrictions. The
Final Regulations clarify that the
issuer’s allocation of proceeds to
expenditures for purposes of the
arbitrage investment restrictions also
apply to expenditures for purposes of
the private activity bond tests.
The Proposed Regulations provided
generally that proceeds and other funds
allocated to capital expenditures for a
capital project are treated as allocated
ratably throughout the project in
proportion to the relative amounts of
proceeds and other funds spent on that
project. The Proposed Regulations
further provided that generally proceeds
and other funds are allocated to both
governmental use and private business
use of the project in proportion to the
relative amounts of each source of
funding spent on the project. The Final
Regulations adopt these general pro rata
allocation rules as proposed.
The Proposed Regulations defined a
project to include functionally related or
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integrated facilities located on the same
site, or on geographically proximate
sites, that are reasonably expected to be
placed in service within the same 12month period. The Proposed
Regulations provided certain special
rules for the treatment of subsequent
improvements to, and replacements of,
a project. These proposed special rules
treated subsequent improvements and
replacements made more than 12
months after the original project was
placed in service as part of the same
project if the improvements and
replacements were within the size,
function, and usable space or the
original design of the project.
Commenters expressed various
concerns about the definition of project
in the Proposed Regulations. Some
commenters were concerned that the
narrow definition of project, which
includes only geographically proximate
facilities placed in service within a
short period, is inconsistent with the
private activity bond tests generally,
which apply to all facilities financed by
the proceeds of a single issue of bonds.
Commenters also questioned how the
definition of project would apply in the
context of a capital improvement
program financed by the proceeds of a
single issue of bonds that involves
multiple facilities in different locations
(for example, different school buildings
within a district) placed in service over
more than 12 months. Conversely, other
commenters expressed concern that the
definition of project is so broad that it
would allow properties that have
different owners, types of ownership
interests, or types of financing (that is,
are financed from different sources) to
be considered a single project.
Commenters inferred that the
treatment of subsequent improvements
meant that the funds, which could
include proceeds and equity, for the
original project and the subsequent
improvements would be allocated
throughout the original project and the
subsequent improvements, possibly
subjecting assets financed solely with
equity to the private activity bond
restrictions. They expressed concerns
that the special allocation rules for
mixed-use projects (discussed in section
III. in this preamble) would be
unavailable for these improvements due
to the timing requirement applicable to
the election.
The Final Regulations simplify the
definition of project to cover all
facilities or capital projects financed in
whole or in part with proceeds of a
single issue of bonds. This definition
permits an issuer in its bond documents
to identify as a single project all of the
properties to be financed by proceeds of
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a single bond issue. Under this rule,
issuers may identify specific properties
or portions of properties regardless of
the properties’ locations or placed-inservice dates. This approach to the
definition of project comports with the
application of the private activity bond
tests generally, which apply at the issue
level. The Final Regulations also clarify
through the examples that
improvements financed with a later
issue are a separate project.
Commenters requested clarification
that, consistent with longstanding
practice, each undivided ownership
interest in an output facility be treated
separately for purposes of applying the
allocation rules. The Final Regulations
provide this clarification.
Commenters also recommended
extending the separate facility treatment
for output facilities under the Proposed
Regulations to other types of facilities.
The Final Regulations do not adopt this
recommendation because the use of
output facilities is measured differently
from the use of other facilities. The use
of an output facility generally is
measured in the amount of output
purchased as a percentage of the
facility’s total available output. The
amount of use by each user reflects the
proportionate benefit of the available
output to such user. Uses of other types
of facilities are measured in various
ways depending on how that use occurs
(for example, in different discrete
portions, at different times, or
simultaneously) and may reflect
simultaneous use by more than one user
on a different, rather than proportionate,
basis. Even without separate facility
treatment, however, issuers may use
proceeds to finance the governmental
use portion of an eligible mixed-use
project.
III. Special Allocation Rules for Eligible
Mixed-Use Projects
A. In General
The Proposed Regulations provided
special elective allocation rules for
mixed-use projects. In general, these
special rules gave effect to congressional
intent to permit funding of mixed-use
projects in part with tax-exempt bonds
and in part with other funds using
reasonable, proportionate allocation
methods that reflect proportionate
benefits to the various users. See H.R.
Rep. No. 99–426, at 538 (1985). The
Proposed Regulations defined a mixeduse project as a project that is
reasonably expected to be used for more
than the de minimis amount (generally
10 percent) of private business use
permitted under the private activity
bond tests (de minimis permitted
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private business use). The Proposed
Regulations provided two alternative
elective allocation methods for a mixeduse project, the discrete physical
portion allocation method (discrete
portion method) and the undivided
portion allocation method. The
Proposed Regulations required the
issuer to make a timely, written
election, including preliminary and
final allocations of proceeds and other
funds, to use one of these alternative
methods.
The discrete portion method allowed
for dividing a mixed-use project into
physically discrete portions and
allocating the different sources of funds
to the various discrete portions using a
reasonable, consistently applied method
that reflects the proportionate benefit to
be derived by the various users of the
project. The discrete portion method
had a number of limitations, including
the physical constraints of a discrete
portion under the proposed project
definition, limitations on measurement
of a discrete portion, limitations
associated with the fair market value of
a discrete portion, and comparability
conditions on reallocations of discrete
portions within a project.
Under the undivided portion
allocation method, projects were
divided into governmental use and
private business use portions on a
notional, rather than physical, basis
with tax-exempt proceeds allocated to
the governmental use portion and the
other funds allocated to the private
business use portion. The availability of
the proposed undivided portion
allocation method was limited to
circumstances in which the issuer
reasonably expected that governmental
use and private business use of the
project would occur simultaneously on
the same basis, or at different times.
Commenters criticized the complexity
of the Proposed Regulations’ two special
allocation methods and the
administrative burdens associated with
the election requirement for mixed-use
allocations. Commenters also criticized
the discrete portion method’s overly
rigid treatment of reallocations or
‘‘floating’’ allocations. To simplify these
rules, commenters recommended
expanding the availability of the
undivided portion allocation method to
include all measureable use, adopting
the undivided portion allocation
method as the general rule for allocating
proceeds and other sources to the uses
of a mixed-use project, and eliminating
the discrete portion method.
The Final Regulations adopt the
recommendation to expand the
availability of the undivided portion
allocation method to include all
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measureable use and to make the
undivided portion allocation method
the exclusive allocation method for
eligible mixed-use projects. Consistent
with this change, the Final Regulations
eliminate the discrete portion method
and the election requirement. The
Treasury Department and the IRS
believe that the expanded version of the
undivided portion allocation method in
the Final Regulations generally will be
simpler and more administrable than
the two proposed allocation methods
and will cover all circumstances
otherwise covered by the discrete
portion method under the Proposed
Regulations. For example, unlike the
proposed discrete portion method,
which had significant constraints on
‘‘floating’’ allocations for
administrability reasons, the undivided
portion allocation method in the Final
Regulations inherently allows floating
allocations without further action or
special tracking in that it involves
allocations for an entire mixed-use
project. Section III.B. in this preamble
further discusses the undivided portion
allocation method under the Final
Regulations.
Under the Final Regulations, the
undivided portion allocation method is
available for ‘‘eligible mixed use
projects.’’ The Final Regulations define
an ‘‘eligible mixed-use project’’ as a
project that is financed with proceeds of
bonds that purport to be governmental
bonds when issued and qualified equity
(discussed under Definition of qualified
equity in section III.C. in this preamble)
pursuant to the same plan of financing
(discussed under Same plan of
financing in section III.D. in this
preamble). Further, to qualify, the
project must be wholly owned by one or
more governmental persons or by a
partnership in which at least one
governmental person is a partner. (See
discussion under Partnerships in
section IV. in this preamble.)
B. Allocations to Uses of a Project
Under the Proposed Regulations, the
undivided portion allocation method
limited the targeting of qualified equity
to private business use of the project to
that percentage of the private business
use equal to the percentage of capital
expenditures of the project financed by
the qualified equity, and similarly
limited the targeting of proceeds to
government use of the project to that
percentage of the government use equal
to the percentage of capital expenditures
of the project financed by the proceeds.
For projects other than output facilities,
these limits applied to each one-year
period of the measurement period.
Commenters requested that unused
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qualified equity be carried over from
one year to another or, in lieu of a
carryover provision, revising the limit
from an annual limit to one spanning
the entire measurement period.
The Final Regulations do not adopt
these recommendations. The general
private business measurement rules, in
contrast to those for use arising from
output contracts, require a
determination of the private business
use of the proceeds on an annual basis
as a preliminary step to determining the
average private business use of the
proceeds during the measurement
period. When the amount of private
business use of the project in any oneyear period is less than the percentage
of qualified equity, that qualified equity
is not unused but, as the Final
Regulations clarify, is allocated to
governmental use of the project that is
in excess of the percentage of proceeds.
To allow carryover of private business
use of the proceeds or in an amount
determined solely over the
measurement period would require
revision of the measurement rules plus
additional rules to prevent potentially
abusive situations, thereby increasing
complexity. The Final Regulations do,
however, clarify that the annual limit
only applies to use measured under the
general measurement rules and not to
use arising from output contracts.
C. Definition of Qualified Equity
The Proposed Regulations defined
qualified equity to mean proceeds of
taxable bonds and funds not derived
from a borrowing that are spent on the
same project as proceeds of the
purported governmental bonds to which
the private activity bond tests will be
applied (the applicable bonds). The
Proposed Regulations further provided
that qualified equity does not include
equity interests in real property or
tangible personal property. Commenters
suggested expanding the definition of
qualified equity to include the value of
contributed property not purchased
with proceeds of tax-advantaged bonds,
arguing that this contribution should be
treated as the equivalent of cash.
Commenters also suggested that
qualified equity include funds used to
redeem bonds.
The Final Regulations adopt the
proposed definition of qualified equity,
with modifications. In recognition of the
advent of expanded types of bonds that
provide a Federal tax benefit (a taxadvantaged bond), which include, for
example, a qualified tax credit bond
under section 54A on which the interest
on the bond is taxable, the Final
Regulations clarify that ‘‘taxable bonds’’
that give rise to qualified equity exclude
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any tax-advantaged bond. The Final
Regulations do not adopt the suggestion
to include contributions of existing
property as qualified equity for a project
because that treatment would raise
difficult issues of valuation and
administrability and would be
inconsistent with the rules governing
allocations of proceeds of
reimbursement bonds.
The Final Regulations do not adopt
the comment recommending that
amounts (other than proceeds) used to
redeem bonds be treated as qualified
equity because permitting increased
private business use for the redemption
of bonds in the ordinary course would
be inconsistent with the private activity
bond restrictions on the issue of bonds
being redeemed. The 1997 Final
Regulations already address the use of
funds to redeem bonds under certain
conditions in which bond redemptions
serve as a remedial action to cure
violations of the private business use
restrictions. Further, as discussed under
Anticipatory redemptions in section
V.A. in this preamble, the Final
Regulations add a new remedial action
provision permitting early redemption
in anticipation of increased private
business use.
D. Same Plan of Financing
The definition of ‘‘project’’ in the
Proposed Regulations required spending
the proceeds and other sources on the
properties pursuant to the same plan of
financing. Commenters requested
clarification of the meaning of the same
plan of financing. The Final Regulations
clarify that ‘‘same plan of financing’’ has
the same meaning as in § 1.150–
1(c)(1)(ii) and that qualified equity is
spent under the same plan of financing
as proceeds of the applicable bonds if
the qualified equity is spent on capital
expenditures of the project no earlier
than the earliest date on which the
expenditure would be eligible for
reimbursement were the bonds from
which the proceeds are derived issued
as reimbursement bonds and no later
than the date that is the beginning of the
measurement period for the project
(other than amounts retained for
reasonable purposes relating to the
project as defined under the arbitrage
investment restrictions).
E. Allocation of Proceeds of Multiple
Issues
The Proposed Regulations provided
that if proceeds of more than one issue
are allocated to capital expenditures of
a mixed-use project to which the issuer
elects to apply the discrete physical
portion or undivided portion allocation
method, then proceeds of those issues
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are allocated ratably to a discrete
portion or undivided portion to which
any proceeds are allocated in proportion
to their relative shares of the total
proceeds of such issues used for the
project (the multiple issue rule).
Commenters suggested eliminating this
rule to permit issuers to allocate
proceeds of the different issues
financing a project to take maximum
advantage of the overall private business
use permitted, such as
disproportionately allocating proceeds
of a larger issue or a general obligation
issue (that is, one paid from generally
applicable taxes, for which private
business use may be 100 percent
because the private security or payment
test will not be met) to private business
use.
The Treasury Department and the IRS
are concerned that a non-pro rata
method of allocating proceeds of more
than one issue to the uses of a project
could not only lead to more private
business use than when proceeds of a
single issue are allocated, but would
also be difficult to administer.
Furthermore, this approach also would
be inconsistent with the general
allocation rule that allocates proceeds of
two issues on a proportionate basis to
the uses of a project that is not an
eligible mixed-use project.
Commenters also suggested that the
proposed multiple issue rule would
create a barrier to tax-exempt financing
of projects, such as airports, that
traditionally have been financed with a
combination of tax-exempt
governmental bonds and qualified
private activity bonds to reflect the
governmental and qualified private
business use occurring, respectively, in
different discrete portions of a project,
as neither type of bond would meet the
criteria for tax-exempt status if the
proceeds of both types were allocated to
the same portions. The Treasury
Department and the IRS recognize that
certain projects contain portions that, if
treated as separate facilities, would be
eligible for financing with different
types of tax-exempt bonds. The Final
Regulations remove this barrier to taxexempt financing of projects through the
definition of ‘‘project,’’ which allows
each issuer to identify the different
projects financed by its separate issues
of governmental bonds and qualified
private activity bonds.
IV. Partnerships
The Proposed Regulations generally
treated a partnership as an entity that is
a nongovernmental person for purposes
of the private activity bond tests.
However, if all of the partners in a
partnership were governmental persons,
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the Proposed Regulations provided a
limited exception that would treat the
partnership as an aggregate of its
partners (that is, as governmental
persons) for these purposes. The
preamble to the Proposed Regulations
specifically requested comments on the
usefulness of aggregate treatment for a
partnership of governmental persons (or
501(c)(3) organizations for qualified
501(c)(3) bonds) and private businesses.
The preamble to the Proposed
Regulations further indicated that the
Treasury Department and the IRS were
considering aggregate treatment in at
least the limited circumstance of
partnerships involving a constant
percentage (‘‘straight up’’) allocation of
all partnership items. Commenters were
in favor of aggregate treatment for such
partnerships.
In recognition of the development of
various financing and management
structures for government (or 501(c)(3)
organization) facilities that involve the
participation of private businesses, to
provide flexibility to accommodate
public-private partnerships, and to
remove barriers to tax-exempt financing
of the government’s (or 501(c)(3)
organization’s) portion of the benefit of
property used in joint ventures, the
Final Regulations provide aggregate
treatment for all partnerships. The Final
Regulations further provide a rule for
measuring the private business use of
financed property resulting from the use
of the property by a partnership that
includes a partner that is a
nongovernmental person. The amount
of such use is the nongovernmental
partner’s share of the amount of the use
of the property by the partnership, with
such share defined as the
nongovernmental partner’s greatest
percentage share of any of the specified
partnership items attributable to the
time during the measurement period
that the partnership uses the property.
The Final Regulations also provide that
an issuer may determine the
nongovernmental partner’s share under
guidance published in the Internal
Revenue Bulletin.
The definition of qualified 501(c)(3)
bonds under section 145(a) includes the
private activity bond tests (with certain
modifications) and an ownership test
under which the property financed with
qualified 501(c)(3) bonds must be
owned by a 501(c)(3) organization or a
governmental unit. In applying the
private activity bond tests for purposes
of qualified 501(c)(3) bonds, the
Proposed Regulations treated a
partnership as an aggregate if each of the
partners was either a governmental
person or a 501(c)(3) organization. The
Proposed Regulations, however, did not
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apply such aggregate treatment for
purposes of the ownership test.
Commenters recommended applying
aggregate treatment to partnerships for
purposes of the ownership test, seeing
no reason to distinguish between
ownership for purposes of the
ownership test and for purposes of the
private activity bond tests, which also
look to ownership of the financed
property. The Final Regulations adopt
this comment.
V. Remedial Actions
A. Anticipatory Redemptions
The Proposed Allocation Regulations
permitted proceeds of taxable bonds and
funds not derived from borrowing that
are used to retire tax-exempt
governmental bonds to be treated as
qualified equity under certain
circumstances. This allows targeting of
funds other than tax-exempt bond
proceeds to finance portions of projects
that are expected to be used for private
business use in the future. The intent of
this proposed rule is to encourage
retirement of tax-exempt bonds before
the occurrence of nonqualified use. The
Proposed Allocation Regulations
addressed when the bond must be
retired, the issuer’s reasonable
expectations regarding use of the
project, actual use of the project prior to
the redemption, and the length of the
term of the issue of which the bond to
be retired is a part. Specifically, the
bond to be redeemed was required to be
retired at least five years before its
otherwise-scheduled maturity date and
within a period that starts one year
before the deliberate act and ends 91
days before the deliberate act. Further,
the issuer must not have expected that
the project would be a mixed-use
project. Thus, under the Proposed
Allocation Regulations, an issuer could
not use this anticipatory redemption for
a project for which it had elected the
special mixed-use allocation rules.
Most commenters stated that the
proposed provision would be of limited
use and that the eligibility requirements
are contrary to the policy of encouraging
redemption of tax-exempt bonds earlier
rather than later. Commenters
recommended that the conditions for
anticipatory redemption not be stricter
than those under the existing remedial
action regime for private business use,
which permits a curative redemption or
defeasance of nonqualified bonds
within 90 days of the deliberate action
causing the private activity bonds tests
to be met. Commenters further
suggested adding a provision to the
remedial action rules permitting an
issuer to redeem or defease bonds at any
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time in advance of a deliberate action
that would cause the private business
tests to be met. The suggested provision
would require the issuer to declare its
intent to redeem or defease the bonds
that potentially could become the
nonqualified bonds and identify the
financed property. To encourage early
redemption of tax-exempt bonds
without imposing another set of rules
for projects with unanticipated private
business use, the Final Regulations
adopt this recommendation to expand
the remedial action rules to address this
point.
B. Nonqualified Bonds
The Proposed Remedial Action
Regulations included amendments
relating to the amount and allocation of
nonqualified bonds to be remediated as
a result of a deliberate action causing
the private business tests or the private
loan financing test to be met. The
Proposed Remedial Action Regulations
provided that the amount of the
nonqualified bonds is that portion of the
outstanding bonds in an amount that, if
the remaining bonds were issued on the
date on which the deliberate action
occurs, the remaining bonds would not
meet the private business use test or
private loan financing test, as
applicable. For this purpose, the amount
of private business use is the greatest
percentage of private business use in
any one-year period commencing with
the one-year period in which the
deliberate action occurs.
Commenters requested that the
amount of nonqualified bonds be
determined using the average amount of
private business use over the entire
measurement period rather than the
highest private business use in any oneyear period. The Final Regulations do
not adopt this recommendation because
this request is inconsistent with the
limitations on annual allocations of
proceeds and qualified equity to the
uses of the project. The Final
Regulations adopt the amendment to the
provision regarding the amount of
nonqualified bonds as proposed.
Commenters generally agreed with the
proposed change that allows any bonds
of any issue to be treated as the
nonqualified bonds provided that the
redemption or defeasance does not have
the effect of extending the weighted
average maturity (WAM) of the issue.
Commenters, however, stated that some
bond indentures require optional
redemptions of a portion of a term bond
to be used first to reduce the earliest
mandatory sinking fund payments on
the bond. In this case, the redemption
or defeasance of the longest bonds
would result in the extension of the
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WAM. Commenters recommended that
the regulations permit bonds with
longer maturities to be treated as the
nonqualified bonds, as is permitted
under the existing regulations. The
Final Regulations adopt the rule as
proposed, but provide a transition rule
for outstanding bonds similar to that
provided with respect to outstanding
exempt facility bonds.
The Final Regulations reduce the
amount of nonqualified bonds. An
issuer who chooses to redeem or defease
the nonqualified bonds need only
redeem or defease sufficient bonds such
that the remaining bonds would not
meet the private business use or private
loan financing test. Thus, unlike under
the previous definition of nonqualified
bonds, not all of the private business
use or private loan, as calculated under
the remedial action rules, necessarily
will be remediated. To take into account
any such remaining unremediated
private business use or loan should a
subsequent deliberate action occur, a
conforming change is needed pertaining
to continuing compliance. The Final
Regulations include this change.
VII. Effective/Applicability Dates
The Final Regulations generally apply
to bonds sold on or after January 25,
2016. The rules regarding remedial
actions, however, apply to deliberate
actions that occur on or after January 25,
2016. The Final Regulations allow
permissive application of (1) the
partnership provisions, the allocation
and accounting rules, and certain
corresponding rules for qualified
501(c)(3) bonds in whole, but not in
part, to bonds to which the 1997 Final
Regulations apply; and (2) the
multipurpose rule to bonds to which the
refunding rules apply.
Special Analyses
Certain IRS regulations, including this
one, are exempt from the requirements
of Executive Order 12866, as
supplemented and reaffirmed by
Executive Order 13563. Therefore, a
regulatory impact assessment is not
required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. It is
hereby certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small
governmental jurisdictions. This
certification is based upon the fact that
few small governmental issuers are
expected to take an anticipatory
remedial action and that the amount of
time required to meet the recordkeeping
requirement is not significant.
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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 Internal Revenue Code, the
notices of proposed rulemaking
preceding these regulations were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small governmental
jurisdictions. No comments were
received.
Drafting Information
The principal author of these
regulations is Johanna Som de Cerff,
Office of Associate Chief Counsel
(Financial Institutions & Products), IRS.
However, other personnel from the IRS
and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
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 § 1.141–1(e),
revising entries for § 1.141–6 and
§ 1.141–12(d)(3) through (5), adding an
entry for § 1.141–12(d)(6), revising the
heading for § 1.141–15, and adding
entries for § 1.141–15(b)(4), (e)(1), (e)(2),
(l) and (m) to read as follows:
■
§ 1.141–0
Table of contents.
*
*
*
*
*
§ 1.141–1 Definitions and rules of general
application.
*
*
*
*
*
*
*
(e) Partnerships.
*
*
*
§ 1.141–6 Allocation and accounting rules.
(a) Allocation of proceeds to expenditures,
projects, and uses in general.
(1) Allocations to expenditures.
(2) Allocations of sources to a project and
its uses.
(3) Definition of project.
(b) Special allocation rules for eligible
mixed-use projects.
(1) In general.
(2) Definition of eligible mixed-use project.
(3) Definition of qualified equity.
(4) Same plan of financing.
(c) Allocations of private payments.
(d) Allocations of proceeds to common
costs of an issue.
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(e) Allocations of proceeds to bonds.
(f) Examples.
*
*
*
*
partner’s share of partnership items
varies, with the greatest share being 25
percent, then that nongovernmental
partner’s share of the partnership’s use
of property is 25 percent.
(B) An issuer may determine a
nongovernmental partner’s share of the
partnership’s use of the property under
guidance published in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
*
*
*
*
*
■ Par. 5. Section 1.141–6 is revised to
read as follows:
*
§ 1.141–12
Remedial actions.
*
*
*
*
*
(d) * * *
(3) Anticipatory remedial action.
(4) Notice of defeasance.
(5) Special limitation.
(6) Defeasance escrow defined.
*
*
*
*
*
§ 1.141–15
Effective/applicability dates.
*
*
*
*
*
(b) * * *
(4) Certain remedial actions.
*
*
*
*
*
§ 1.141–6
(e) * * *
(1) In general.
(2) Transition rule for pre-effective date
bonds.
*
*
*
*
*
(l) Applicability date for certain regulations
related to allocation and accounting.
(1) In general.
(2) Permissive application.
(m) Permissive retroactive application of
certain regulations.
*
*
*
*
*
Par. 3. Section 1.141–1 is amended by
adding paragraph (e) to read as follows:
■
§ 1.141–1 Definitions and rules of general
application.
*
*
*
*
*
(e) Partnerships. A partnership (as
defined in section 7701(a)(2)) is treated
as an aggregate of its partners, rather
than as an entity.
Par. 4. Section 1.141–3 is amended by
redesignating paragraph (g)(2)(v) as
paragraph (g)(2)(vi) and adding new
paragraph (g)(2)(v) to read as follows:
■
§ 1.141–3
use.
Definition of private business
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*
*
*
*
*
(g) * * *
(2) * * *
(v) Special rule for partners that are
nongovernmental persons—(A) The
amount of private business use by a
nongovernmental person resulting from
the use of property by a partnership in
which that nongovernmental person is a
partner is that nongovernmental
partner’s share of the amount of use of
the property by the partnership. For this
purpose, except as otherwise provided
in paragraph (g)(2)(v)(B) of this section,
a nongovernmental partner’s share of
the partnership’s use of the property is
the nongovernmental partner’s greatest
percentage share under section 704(b) of
any partnership item of income, gain,
loss, deduction, or credit attributable to
the period that the partnership uses the
property during the measurement
period. For example, if a partnership
has a nongovernmental partner and that
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Allocation and accounting rules.
(a) Allocations of proceeds to
expenditures, projects, and uses in
general—(1) Allocations to
expenditures. The allocations of
proceeds and other sources of funds to
expenditures under § 1.148–6(d) apply
for purposes of §§ 1.141–1 through
1.141–15.
(2) Allocations of sources to a project
and its uses. Except as provided in
paragraph (b) of this section (regarding
an eligible mixed-use project), if two or
more sources of funding (including two
or more tax-exempt issues) are allocated
to capital expenditures (as defined in
§ 1.150–1(b)) for a project (as defined in
paragraph (a)(3) of this section), those
sources are allocated throughout that
project to the governmental use and
private business use of the project in
proportion to the relative amounts of
those sources of funding spent on the
project.
(3) Definition of project—(i) In
general. For purposes of this section,
project means one or more facilities or
capital projects, including land,
buildings, equipment, or other property,
financed in whole or in part with
proceeds of the issue.
(ii) Output facilities. If an output
facility has multiple undivided
ownership interests (respectively owned
by governmental persons or by both
governmental and nongovernmental
persons), each owner’s interest in the
facility is treated as a separate facility
for purposes of this section, provided
that all owners of the undivided
ownership interests share the ownership
and output in proportion to their
contributions to the capital costs of the
output facility.
(b) Special allocation rules for eligible
mixed-use projects—(1) In general. The
sources of funding allocated to capital
expenditures for an eligible mixed-use
project (as defined in paragraph (b)(2) of
this section) are allocated to undivided
portions of the eligible mixed-use
project and the governmental use and
private business use of the eligible
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65643
mixed-use project in accordance with
this paragraph (b). Qualified equity (as
defined in paragraph (b)(3) of this
section) is allocated first to the private
business use of the eligible mixed-use
project and then to governmental use,
and proceeds are allocated first to the
governmental use and then to private
business use, using the percentages of
the eligible mixed-use project financed
with the respective sources and the
percentages of the respective uses. Thus,
if the percentage of the eligible mixeduse project financed with qualified
equity is less than the percentage of
private business use of the project, all of
the qualified equity is allocated to the
private business use. Proceeds are
allocated to the balance of the private
business use of the project. Similarly, if
the percentage of the eligible mixed-use
project financed with proceeds is less
than the percentage of governmental use
of the project, all of the proceeds are
allocated to the governmental use, and
qualified equity is allocated to the
balance of the governmental use of the
project. Further, if proceeds of more
than one issue finance the eligible
mixed-use project, proceeds of each
issue are allocated ratably to the uses to
which proceeds are allocated in
proportion to the relative amounts of the
proceeds of such issues allocated to the
eligible mixed-use project. For private
business use measured under § 1.141–
3(g), qualified equity and proceeds are
allocated to the uses of the eligible
mixed-use project in each one-year
period under § 1.141–3(g)(4). See
Example 1 of paragraph (f) of this
section.
(2) Definition of eligible mixed-use
project. Eligible mixed-use project
means a project (as defined in paragraph
(a)(3) of this section) that is financed
with proceeds of bonds that, when
issued, purported to be governmental
bonds (as defined in § 1.150–1(b)) (the
applicable bonds) and with qualified
equity pursuant to the same plan of
financing (within the meaning of
§ 1.150–1(c)(1)(ii)). An eligible mixeduse project must be wholly owned by
one or more governmental persons or by
a partnership in which at least one
governmental person is a partner.
(3) Definition of qualified equity. For
purposes of this section, qualified equity
means proceeds of bonds that are not
tax-advantaged bonds and funds that are
not derived from proceeds of a
borrowing that are spent on the same
eligible mixed-use project as the
proceeds of the applicable bonds.
Qualified equity does not include equity
interests in real property or tangible
personal property. Further, qualified
equity does not include funds used to
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redeem or repay governmental bonds.
See §§ 1.141–2(d)(2)(ii) and 1.141–12(i)
(regarding the effects of certain
redemptions as remedial actions).
(4) Same plan of financing. Qualified
equity finances a project under the same
plan of financing that includes the
applicable bonds if the qualified equity
pays for capital expenditures of the
project on a date that is no earlier than
a date on which such expenditures
would be eligible for reimbursement by
proceeds of the applicable bonds under
§ 1.150–2(d)(2) (regardless of whether
the applicable bonds are reimbursement
bonds) and, except for a reasonable
retainage (within the meaning of
§ 1.148–7(h)), no later than the date on
which the measurement period begins.
(c) Allocations of private payments.
Except as provided in this paragraph (c),
private payments for a project are
allocated in accordance with § 1.141–4.
Payments under an output contract that
result in private business use of an
eligible mixed-use project are allocated
to the same source of funding
(notwithstanding § 1.141–4(c)(3)(v)
(regarding certain allocations of private
payments to equity)) allocated to the
private business use from such contract
under paragraph (b) of this section.
(d) Allocations of proceeds to
common costs of an issue. Proceeds
used for expenditures for common costs
(for example, issuance costs, qualified
guarantee fees, or reasonably required
reserve or replacement funds) are
allocated in accordance with § 1.141–
3(g)(6). Proceeds, as allocated under
§ 1.141–3(g)(6) to an eligible mixed-use
project, are allocated to the uses of the
project in the same proportions as the
proceeds allocated to the uses under
paragraph (b) of this section.
(e) Allocations of proceeds to bonds.
In general, proceeds are allocated to
bonds in accordance with the rules for
allocations of proceeds to bonds for
separate purposes of multipurpose
issues in § 1.141–13(d). For an issue that
is not a multipurpose issue (or is a
multipurpose issue for which the issuer
has not made a multipurpose
allocation), proceeds are allocated to
bonds ratably in a manner similar to the
allocation of proceeds to projects under
paragraph (a)(2) of this section.
(f) Examples. The following examples
illustrate the application of this section:
Example 1. Mixed-use project. City A
issues $70x of bonds (the Bonds) and
finances the construction of a 10-story office
building costing $100x (the Project) with
proceeds of the Bonds and $30x of qualified
equity (the Qualified Equity). To the extent
that the private business use of the Project
does not exceed 30 percent in any particular
year, the Qualified Equity is allocated to the
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private business use. If private business use
of the Project were, for example, 44 percent
in a year, the Qualified Equity would be
allocated to 30 percent ($30x) private
business use and proceeds of the Bonds
would be allocated to the excess (that is, 14
percent or $14x), resulting in private
business use of the Bonds in that year of 20
percent ($14x/$70x). Conversely, if private
business use of the Project were 20 percent,
Qualified Equity would be allocated to that
20 percent. The remaining Qualified Equity
(that is, 10 percent or $10x) would be
allocated to the governmental use in excess
of the 70 percent to which the proceeds of
the Bonds would be allocated.
Example 2. Mixed-use output facility.
Authority A is a governmental person that
owns and operates an electric transmission
facility. Several years ago, Authority A used
its equity to pay capital expenditures of
$1000x for the facility. Authority A wants to
make capital improvements to the facility in
the amount of $100x (the Project). Authority
A reasonably expects that, after completion
of the Project, it will sell 46 percent of the
available output of the facility, as determined
under § 1.141–7, under output contracts that
result in private business use and it will sell
54 percent of the available output of the
facility for governmental use. On January 1,
2017, Authority A issues $60x of bonds (the
Bonds) and uses the proceeds of the Bonds
and $40x of qualified equity (the Qualified
Equity) to finance the Project. The Qualified
Equity is allocated to 40 of the 46 percent
private business use resulting from the
output contracts. Proceeds of the Bonds are
allocated to the 54 percent governmental use
and thereafter to the remaining 6 percent
private business use.
Example 3. Subsequent improvements and
replacements. County A owns a hospital,
which opened in 2001, that it financed
entirely with proceeds of bonds it issued in
1998 (the 1998 Bonds). In 2017, County A
finances the cost of an addition to the
hospital with proceeds of bonds (the 2017
Bonds) and qualified equity (the 2017
Qualified Equity). The original hospital is a
project (the 1998 Project) and the addition is
a project (the 2017 Project). Proceeds of the
2017 Bonds and the 2017 Qualified Equity
are allocated to the 2017 Project. The 2017
Qualified Equity is allocated first to the
private business use of the 2017 Project and
then to the governmental use of the 2017
Project. Proceeds of the 2017 Bonds are
allocated first to the governmental use of the
2017 Project and then to the private business
use of that project. Neither proceeds of the
2017 Bonds nor 2017 Qualified Equity is
allocated to the uses of the 1998 Project.
Proceeds of the 1998 Bonds are not allocated
to uses of the 2017 Project.
Par 6. Section 1.141–12 is amended
by:
■ a. Revising the last sentence of
paragraph (d)(1).
■ b. Redesignating paragraphs (d)(3)
through (d)(5) as (d)(4) through (d)(6).
■ c. Adding new paragraph (d)(3).
■ d. Revising paragraph (i)(1).
■ e. Redesignating paragraph (i)(2) as
(i)(3).
■
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f. Adding new paragraph (i)(2).
g. Revising paragraphs (j), and (k),
Example 8.
The revisions and additions read as
follows:
■
■
§ 1.141–12
Remedial actions.
*
*
*
*
*
(d) * * * (1) * * * Except as
provided in paragraph (d)(3) of this
section, if the bonds are not redeemed
within 90 days of the date of the
deliberate action, a defeasance escrow
must be established for those bonds
within 90 days of the deliberate action.
*
*
*
*
*
(3) Anticipatory remedial action. The
requirements of paragraphs (d)(1) and
(2) of this section for redemption or
defeasance of the nonqualified bonds
within 90 days of the deliberate action
are met if the issuer declares its official
intent to redeem or defease all of the
bonds that would become nonqualified
bonds in the event of a subsequent
deliberate action that would cause the
private business tests or the private loan
financing test to be met and redeems or
defeases such bonds prior to that
deliberate action. The issuer must
declare its official intent on or before
the date on which it redeems or defeases
such bonds, and the declaration of
intent must identify the financed
property or loan with respect to which
the anticipatory remedial action is being
taken and describe the deliberate action
that potentially may result in the private
business tests being met (for example,
sale of financed property that the buyer
may then lease to a nongovernmental
person). Rules similar to those in
§ 1.150–2(e) (regarding official intent for
reimbursement bonds) apply to
declarations of intent under this
paragraph (d)(3), including deviations in
the descriptions of the project or loan
and deliberate action and the
reasonableness of the official intent.
*
*
*
*
*
(i) * * *
(1) If a remedial action is taken under
paragraph (d) of this section, the amount
of private business use or private loans
resulting from the deliberate action that
is taken into account for purposes of
determining whether the bonds are
private activity bonds is that portion of
the remaining bonds that is used for
private business use or private loans (as
calculated under paragraph (j) of this
section);
(2) If a remedial action is taken under
paragraph (e) or (f) of this section, the
amount of private business use or
private loans resulting from the
deliberate action is not taken into
account for purposes of determining
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whether the bonds are private activity
bonds; and
*
*
*
*
*
(j) Nonqualified bonds—(1) Amount
of nonqualified bonds. The nonqualified
bonds are a portion of the outstanding
bonds in an amount that, if the
remaining bonds were issued on the
date on which the deliberate action
occurs, the remaining bonds would not
meet the private business use test or
private loan financing test, as
applicable. For this purpose, the amount
of private business use is the greatest
percentage of private business use in
any one-year period commencing with
the one-year period in which the
deliberate action occurs.
(2) Allocation of nonqualified bonds.
Allocations of nonqualified bonds must
be made on a pro rata basis, except that,
for purposes of paragraph (d) of this
section (relating to redemption or
defeasance), an issuer may treat any
bonds of an issue as the nonqualified
bonds so long as—
(i) The remaining weighted average
maturity of the issue, determined as of
the date on which the nonqualified
bonds are redeemed or defeased
(determination date), and excluding
from the determination the nonqualified
bonds redeemed or defeased by the
issuer in accordance with this section,
is not greater than
(ii) The remaining weighted average
maturity of the issue, determined as of
the determination date, but without
regard to the redemption or defeasance
of any bonds (including the
nonqualified bonds) occurring on the
determination date.
(k) * * *
Example 8. Compliance after remedial
action. In 2007, City G issues bonds with
proceeds of $10 million to finance a
courthouse. The bonds have a weighted
average maturity that does not exceed 120
percent of the reasonably expected economic
life of the courthouse. City G enters into
contracts with nongovernmental persons that
result in private business use of 10 percent
of the courthouse per year. More than 10
percent of the debt service on the issue is
secured by private security or payments. In
2019, in a bona fide and arm’s length
arrangement, City G enters into a
management contract with a
nongovernmental person that results in
private business use of an additional 40
percent of the courthouse per year during the
remaining term of the bonds. City G
immediately redeems the nonqualified
bonds, or 44.44 percent of the outstanding
bonds. This is the portion of the outstanding
bonds that, if the remaining bonds were
issued on the date on which the deliberate
action occurs, the remaining bonds would
not meet the private business use test,
treating the amount of private business use
as the greatest percentage of private business
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use in any one-year period commencing with
the one-year period in which the deliberate
action occurs (50 percent). This percentage is
computed by dividing the percentage of the
facility used for a government use (50
percent) by the minimum amount of
government use required (90 percent), and
subtracting the resulting percentage (55.56
percent) from 100 percent (44.44 percent).
For purposes of subsequently applying
section 141 to the issue, City G may continue
to use all of the proceeds of the outstanding
bonds in the same manner (that is, for the
courthouse and the private business use)
without causing the issue to meet the private
business use test. The issue continues to
meet the private security or payment test.
The result would be the same if City G,
instead of redeeming the bonds, established
a defeasance escrow for those bonds,
provided that the requirement of paragraph
(d)(5) of this section is met. If City G takes
a subsequent deliberate action that results in
further private business use, it must take into
account 10 percent of private business use in
addition to that caused by the second
deliberate act.
Par 7. Section 1.141–13 is amended
by revising paragraph (d)(1) and
paragraph (g), Example 5, to read as
follows:
■
§ 1.141–13
Refunding issues.
*
*
*
*
*
(d) Multipurpose issue allocations—
(1) In general. For purposes of section
141, unless the context clearly requires
otherwise, § 1.148–9(h) applies to
allocations of multipurpose issues (as
defined in § 1.148–1(b)), including
allocations involving the refunding
purposes of the issue. An allocation
under this paragraph (d) may be made
at any time, but once made, may not be
changed. An allocation is not reasonable
under this paragraph (d) if it achieves
more favorable results under section 141
than could be achieved with actual
separate issues. Each of the separate
issues under the allocation must consist
of one or more tax-exempt bonds.
Allocations made under this paragraph
(d) and § 1.148–9(h) must be consistent
for purposes of sections 141 and 148.
*
*
*
*
*
(g) * * *
Example 5. Multipurpose issue. (i) In 2017,
State D issues bonds to finance the
construction of two office buildings, Building
1 and Building 2. D expends an equal amount
of the proceeds on each building. D enters
into arrangements that result in private
business use of 8 percent of Building 1 and
12 percent of Building 2 during the
measurement period under § 1.141–3(g) and
private payments of 4 percent of the 2017
bonds in respect of Building 1 and 6 percent
of the 2017 bonds in respect of Building 2.
These arrangements result in a total of 10
percent of the proceeds of the 2017 bonds
being used for a private business use and
total private payments of 10 percent. In 2022,
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65645
D purports to make a multipurpose issue
allocation under paragraph (d) of this section
of the outstanding 2017 bonds, allocating the
issue into two separate issues of equal
amounts with one issue allocable to Building
1 and the second allocable to Building 2. An
allocation is unreasonable under paragraph
(d) of this section if it achieves more
favorable results under section 141 than
could be achieved with actual separate
issues. D’s allocation is unreasonable
because, if permitted, it would allow more
favorable results under section 141 for the
2017 bonds (that is, private business use and
private payments that exceed 10 percent for
the 2017 bonds allocable to Building 2) than
could be achieved with actual separate
issues. In addition, if D’s purported
allocation was intended to result in two
separate issues of tax-exempt governmental
bonds (versus tax-exempt private activity
bonds), the allocation would violate
paragraph (d) of this section in the first
instance because the allocation to the
separate issue for Building 2 would fail to
qualify separately as an issue of tax-exempt
governmental bonds as a result of its 12
percent of private business use and private
payments.
(ii) The facts are the same as in paragraph
(i) of this Example 5, except that D enters
into arrangements only for Building 1, and it
expects no private business use of Building
2. In 2022, D allocates an equal amount of the
outstanding 2017 bonds to Building 1 and
Building 2. D selects particular bonds for
each separate issue such that the allocation
does not achieve a more favorable result than
could have been achieved by issuing actual
separate issues. D uses the same allocation
for purposes of both sections 141 and 148.
D’s allocation is reasonable.
(iii) The facts are the same as in paragraph
(ii) of this Example 5, except that as part of
the same issue, D issues bonds for a privately
used airport. The airport bonds, if issued as
a separate issue, would be qualified private
activity bonds. The remaining bonds, if
issued separately from the airport bonds,
would be governmental bonds. Treated as
one issue, however, the bonds are taxable
private activity bonds. Therefore, D makes its
allocation of the bonds under paragraph (d)
of this section and § 1.150–1(c)(3) into 3
separate issues on or before the issue date.
Assuming all other applicable requirements
are met, the bonds of the respective issues
will be tax-exempt qualified private activity
bonds or governmental bonds.
*
*
*
*
*
Par. 8. Section 1.141–15 is amended
by:
■ a. Revising the heading and paragraph
(a).
■ b. Adding paragraph (b)(4),
■ c. Revising paragraphs (e) and (i).
■ d. Adding paragraphs (l) and (m).
The revisions and additions read as
follows:
■
§ 1.141–15
Effective/applicability dates.
(a) Scope. The effective dates of this
section apply for purposes of §§ 1.141–
1 through 1.141–14, 1.145–1 through
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1.145–2, and 1.150–1(a)(3) and the
definition of bond documents contained
in § 1.150–1(b).
(b) * * *
(4) Certain remedial actions—(i)
General rule. For bonds subject to
§ 1.141–12, the provisions of § 1.141–
12(d)(3), (i), (j), and (k), Example 8,
apply to deliberate actions that occur on
or after January 25, 2016.
(ii) Special rule for allocations of
nonqualified bonds. For purposes of
§ 1.141–12(j)(2), in addition to the
allocation methods permitted in
§ 1.141–12(j)(2), an issuer may treat
bonds with the longest maturities
(determined on a bond-by-bond basis) as
the nonqualified bonds, but only for
bonds sold before January 25, 2016.
*
*
*
*
*
(e) Permissive application of certain
sections—(1) In general. The following
sections may each be applied by issuers
to any bonds:
(i) Section 1.141–3(b)(4);
(ii) Section 1.141–3(b)(6); and
(iii) Section 1.141–12.
(2) Transition rule for pre-effective
date bonds. For purposes of paragraphs
(e)(1) and (h) of this section, issuers may
apply § 1.141–12 to bonds issued before
May 16, 1997, without regard to
paragraph (d)(5) thereof with respect to
deliberate actions that occur on or after
April 21, 2003.
*
*
*
*
*
(i) Permissive application of certain
regulations relating to output facilities.
Issuers may apply each of the following
sections to any bonds used to finance
output facilities:
(1) Section 1.141–6;
(2) Section 1.141–7(f)(3); and
(3) Section 1.141–7(g).
*
*
*
*
*
(l) Applicability date for certain
regulations relating to allocation and
accounting—(1) In general. Except as
otherwise provided in this section,
§§ 1.141–1(e), 1.141–3(g)(2)(v), 1.141–6,
1.141–13(d), and 1.145–2(b)(4), (b)(5),
and (c)(2) apply to bonds that are sold
on or after January 25, 2016 and to
which the 1997 regulations (as defined
in paragraph (b)(1) of this section)
apply.
(2) Permissive application. Issuers
may apply §§ 1.141–1(e), 1.141–
3(g)(2)(v), 1.141–6, and 1.145–2(b)(4),
(b)(5), and (c)(2), in whole but not in
part, to bonds to which the 1997
regulations apply.
(m) Permissive retroactive application
of certain regulations. Issuers may apply
§ 1.141–13(d) to bonds to which
§ 1.141–13 applies.
Par. 9. Section 1.145–2 is amended by
adding paragraphs (b)(4) and (b)(5) and
■
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16:49 Oct 26, 2015
Jkt 238001
revising the first sentence of paragraph
(c)(2) to read as follows:
§ 1.145–2 Application of private activity
bond regulations.
*
*
*
*
*
(b) * * *
(4) References to governmental bonds
in § 1.141–6 mean qualified 501(c)(3)
bonds.
(5) References to ownership by
governmental persons in § 1.141–6
mean ownership by governmental
persons or 501(c)(3) organizations.
(c) * * *
(2) Costs of issuance. Sections 1.141–
3(g)(6) and 1.141–6(d) do not apply to
the extent costs of issuance are allocated
among the other purposes for which the
proceeds are used or to portions of a
project. * * *
*
*
*
*
*
■ Par. 10. Section 1.150–5 is amended
by revising paragraph (a)(1) to read as
follows:
§ 1.150–5
Filing notices and elections.
(a) * * *
(1) Section 1.141–12(d)(4);
*
*
*
*
*
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Approved: October 6, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2015–27328 Filed 10–26–15; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 552
RIN 1235–AA05
Application of the Fair Labor
Standards Act to Domestic Service;
Dates of Previously Announced 30-Day
Period of Non-Enforcement
Wage and Hour Division,
Department of Labor.
ACTION: Policy statement.
AGENCY:
The Department of Labor
(Department) previously announced that
it would not bring enforcement actions
against any employer for violations of
Fair Labor Standards Act (FLSA)
obligations resulting from amendments
to its domestic service regulations for 30
days after the U.S. Court of Appeals for
the District of Columbia issued a
mandate making effective its opinion
affirming the validity of the regulatory
SUMMARY:
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changes. The Court issued its mandate
on October 13, 2015; the Department’s
30-day non-enforcement period will
therefore conclude on November 12,
2015. From November 12, 2015 through
December 31, 2015, the Department will
exercise prosecutorial discretion
pursuant to its previously announced
time-limited non-enforcement policy.
DATES: The Department will not bring
enforcement actions against any
employer for FLSA violations resulting
from the revised domestic service
regulations before November 12, 2015.
FOR FURTHER INFORMATION CONTACT:
Mary Ziegler, Assistant Administrator,
Office of Policy, U.S. Department of
Labor, Wage and Hour Division, 200
Constitution Avenue NW., Room S–
3502, FP Building, Washington, DC
20210; telephone: (202) 693–0406 (this
is not a toll-free number), email:
HomeCare@dol.gov. Copies of this
Policy Statement may be obtained in
alternative formats (Large Print, Braille,
Audio Tape, or Disc), upon request, by
calling (202) 693–0675 (not a toll-free
number). TTY/TTD callers may dial tollfree (877) 889–5627 to obtain
information or request materials in
alternative formats.
SUPPLEMENTARY INFORMATION:
I. Non-Enforcement Period Until
November 12, 2015
The Department’s Final Rule
amending FLSA regulations regarding
domestic service employment, 78 FR
60454 (October 1, 2013), which extends
minimum wage and overtime
protections to most home care workers,
had an effective date of January 1, 2015.
The Department did not begin
enforcement of the Final Rule on that
date both because of its time-limited
non-enforcement policy, 79 FR 60974
(October 9, 2014), and because it was a
party to a federal lawsuit regarding the
amended regulations in which the U.S.
District Court for the District of
Columbia issued opinions and orders
vacating the rule’s major provisions.
Home Care Ass’n of Am. v. Weil, 76 F.
Supp. 3d 138 (D.D.C. 2014); Home Care
Ass’n of Am. v. Weil, 78 F. Supp. 3d 123
(D.D.C. 2015). On August 21, 2015, the
U.S. Court of Appeals for the District of
Columbia Circuit reversed the district
court’s judgment. Home Care Ass’n of
America v. Weil, 799 F.3d 1084 (D.C.
Cir. 2015). On September 14, 2015, the
Department announced that it would
not bring enforcement actions against
any employer for violations of FLSA
obligations resulting from the amended
domestic service regulations for 30 days
after the date the Court of Appeals
issued a mandate making its opinion
E:\FR\FM\27OCR1.SGM
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Agencies
[Federal Register Volume 80, Number 207 (Tuesday, October 27, 2015)]
[Rules and Regulations]
[Pages 65637-65646]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27328]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9741]
RIN 1545-BB23; 1545-BC07; 1545-BH48
General Allocation and Accounting Regulations Under Section 141;
Remedial Actions for Tax-Exempt Bonds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations on allocation and
accounting, and certain remedial actions, for purposes of the private
activity bond restrictions under section 141 of the Internal Revenue
Code that apply to tax-exempt bonds issued by State and local
governments. The final regulations provide State and local governmental
issuers of tax-exempt bonds with guidance for applying the private
activity bond restrictions.
DATES: Effective Date: These regulations are effective on October 27,
2015.
Applicability Date: For dates of applicability, see Sec. 1.141-15.
FOR FURTHER INFORMATION CONTACT: Johanna Som de Cerff or Zoran
Stojanovic, (202) 317-6980 (not a toll-free number).
[[Page 65638]]
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these regulations has
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control number 1545-1451. The collection of information in these
final regulations is in Sec. 1.141-12(d)(3), which requires an issuer
to make a declaration of official intent to remediate bonds. This
collection of information is necessary for an issuer's redemption or
defeasance of bonds to be treated as a remedial action under Sec.
1.141-12 to preserve the tax-exempt status of the bonds. This
collection of information is an increase in the total annual burden
under control number 1545-1451. The respondents are State and local
government issuers of tax-exempt bonds.
Estimated total annual reporting burden is 30,250 hours.
Estimated average annual burden per respondent is 3 hours.
Estimated number of respondents is 10,100.
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 section 6103.
Background
In general, interest on State and local governmental bonds is
excludable from gross income under section 103 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
that are used to determine whether a State or local bond is a private
activity bond. These tests include the private business use test and
the private security or payment test in section 141(b), and the private
loan financing test in section 141(c). Section 145 provides similar
tests that apply in modified form to qualified 501(c)(3) bonds.
Final regulations (TD 8712) under section 141 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
(REG-142599-02) was published in the Federal Register on September 23,
2002 (67 FR 59767), regarding allocation and accounting rules for tax-
exempt bond proceeds used to finance mixed-use output facilities. A
notice of proposed rulemaking and notice of public hearing (REG-140379-
02; REG-142599-02) was published in the Federal Register on September
26, 2006 (71 FR 56072), regarding allocation and accounting rules for
tax-exempt bond proceeds, including special rules for mixed-use
projects, and rules regarding the treatment of partnerships for
purposes of section 141 (the Proposed Allocation Regulations). The
Proposed Allocation Regulations also included amendments to regulations
under section 145 on related matters that apply to qualified 501(c)(3)
bonds. A public hearing was held on January 11, 2007. This document
amends the Income Tax Regulations under sections 141 and 145 by
adopting final rules on these topics. Certain provisions of the
Proposed Allocation Regulations are not being finalized and are
withdrawn. A partial withdrawal of notice of proposed rulemaking is
published elsewhere in this edition of the Federal Register.
A notice of proposed rulemaking and notice of public hearing (REG-
132483-03) was published in the Federal Register on July 21, 2003 (68
FR 43059), regarding the amount and allocation of nonqualified bonds
for purposes of certain remedial actions under sections 141 and 142
(the Proposed Remedial Action Regulations). The public hearing was
cancelled because no requests to speak were received. Final regulations
(TD 9150) were published in the Federal Register on August 13, 2004 (69
FR 50065), adopting the portions of the Proposed Remedial Action
Regulations relating to section 142. Because of the interrelationship
between the remedial action provisions under section 141 and the
allocation and accounting rules, the portions relating to section 141
were not finalized at that time. This document adopts final rules
regarding the amount and allocation of nonqualified bonds for purposes
of the remedial action provisions under section 141. We refer to the
Proposed Remedial Action Regulations and the Proposed Allocation
Regulations collectively as the Proposed Regulations.
Explanation and Summary of Comments
I. Introduction
After consideration of the public comments, the Treasury Department
and the IRS adopt the Proposed Regulations, with revisions, as final
regulations (the Final Regulations). This section discusses significant
aspects of the public comments and the revisions made in the Final
Regulations.
II. General Allocation Rules
The Proposed Regulations provided several allocation rules. Among
these were rules regarding the allocation of proceeds of an issue of
bonds that are obligations of a state or political subdivision under
section 103(c)(1) (see Sec. 1.150-1(b)) (proceeds) and all other
sources of funds (other funds) to expenditures, to the project, and to
the uses of the project (that is, governmental use or private business
use). The Proposed Regulations provided that proceeds and other funds
generally may be allocated to expenditures using any reasonable,
consistently applied accounting method, and that the allocation of
proceeds and other funds to expenditures must be consistent with the
allocation of proceeds and other funds for purposes of the arbitrage
investment restrictions under section 148.
Commenters expressed concern that the consistency requirement was
in conflict with the allowance of more than one method for allocating
proceeds and other funds to projects. Commenters further questioned
whether allocations of proceeds to expenditures were necessary other
than for purposes of the arbitrage investment restrictions. The Final
Regulations clarify that the issuer's allocation of proceeds to
expenditures for purposes of the arbitrage investment restrictions also
apply to expenditures for purposes of the private activity bond tests.
The Proposed Regulations provided generally that proceeds and other
funds allocated to capital expenditures for a capital project are
treated as allocated ratably throughout the project in proportion to
the relative amounts of proceeds and other funds spent on that project.
The Proposed Regulations further provided that generally proceeds and
other funds are allocated to both governmental use and private business
use of the project in proportion to the relative amounts of each source
of funding spent on the project. The Final Regulations adopt these
general pro rata allocation rules as proposed.
The Proposed Regulations defined a project to include functionally
related or
[[Page 65639]]
integrated facilities located on the same site, or on geographically
proximate sites, that are reasonably expected to be placed in service
within the same 12-month period. The Proposed Regulations provided
certain special rules for the treatment of subsequent improvements to,
and replacements of, a project. These proposed special rules treated
subsequent improvements and replacements made more than 12 months after
the original project was placed in service as part of the same project
if the improvements and replacements were within the size, function,
and usable space or the original design of the project.
Commenters expressed various concerns about the definition of
project in the Proposed Regulations. Some commenters were concerned
that the narrow definition of project, which includes only
geographically proximate facilities placed in service within a short
period, is inconsistent with the private activity bond tests generally,
which apply to all facilities financed by the proceeds of a single
issue of bonds. Commenters also questioned how the definition of
project would apply in the context of a capital improvement program
financed by the proceeds of a single issue of bonds that involves
multiple facilities in different locations (for example, different
school buildings within a district) placed in service over more than 12
months. Conversely, other commenters expressed concern that the
definition of project is so broad that it would allow properties that
have different owners, types of ownership interests, or types of
financing (that is, are financed from different sources) to be
considered a single project.
Commenters inferred that the treatment of subsequent improvements
meant that the funds, which could include proceeds and equity, for the
original project and the subsequent improvements would be allocated
throughout the original project and the subsequent improvements,
possibly subjecting assets financed solely with equity to the private
activity bond restrictions. They expressed concerns that the special
allocation rules for mixed-use projects (discussed in section III. in
this preamble) would be unavailable for these improvements due to the
timing requirement applicable to the election.
The Final Regulations simplify the definition of project to cover
all facilities or capital projects financed in whole or in part with
proceeds of a single issue of bonds. This definition permits an issuer
in its bond documents to identify as a single project all of the
properties to be financed by proceeds of a single bond issue. Under
this rule, issuers may identify specific properties or portions of
properties regardless of the properties' locations or placed-in-service
dates. This approach to the definition of project comports with the
application of the private activity bond tests generally, which apply
at the issue level. The Final Regulations also clarify through the
examples that improvements financed with a later issue are a separate
project.
Commenters requested clarification that, consistent with
longstanding practice, each undivided ownership interest in an output
facility be treated separately for purposes of applying the allocation
rules. The Final Regulations provide this clarification.
Commenters also recommended extending the separate facility
treatment for output facilities under the Proposed Regulations to other
types of facilities. The Final Regulations do not adopt this
recommendation because the use of output facilities is measured
differently from the use of other facilities. The use of an output
facility generally is measured in the amount of output purchased as a
percentage of the facility's total available output. The amount of use
by each user reflects the proportionate benefit of the available output
to such user. Uses of other types of facilities are measured in various
ways depending on how that use occurs (for example, in different
discrete portions, at different times, or simultaneously) and may
reflect simultaneous use by more than one user on a different, rather
than proportionate, basis. Even without separate facility treatment,
however, issuers may use proceeds to finance the governmental use
portion of an eligible mixed-use project.
III. Special Allocation Rules for Eligible Mixed-Use Projects
A. In General
The Proposed Regulations provided special elective allocation rules
for mixed-use projects. In general, these special rules gave effect to
congressional intent to permit funding of mixed-use projects in part
with tax-exempt bonds and in part with other funds using reasonable,
proportionate allocation methods that reflect proportionate benefits to
the various users. See H.R. Rep. No. 99-426, at 538 (1985). The
Proposed Regulations defined a mixed-use project as a project that is
reasonably expected to be used for more than the de minimis amount
(generally 10 percent) of private business use permitted under the
private activity bond tests (de minimis permitted private business
use). The Proposed Regulations provided two alternative elective
allocation methods for a mixed-use project, the discrete physical
portion allocation method (discrete portion method) and the undivided
portion allocation method. The Proposed Regulations required the issuer
to make a timely, written election, including preliminary and final
allocations of proceeds and other funds, to use one of these
alternative methods.
The discrete portion method allowed for dividing a mixed-use
project into physically discrete portions and allocating the different
sources of funds to the various discrete portions using a reasonable,
consistently applied method that reflects the proportionate benefit to
be derived by the various users of the project. The discrete portion
method had a number of limitations, including the physical constraints
of a discrete portion under the proposed project definition,
limitations on measurement of a discrete portion, limitations
associated with the fair market value of a discrete portion, and
comparability conditions on reallocations of discrete portions within a
project.
Under the undivided portion allocation method, projects were
divided into governmental use and private business use portions on a
notional, rather than physical, basis with tax-exempt proceeds
allocated to the governmental use portion and the other funds allocated
to the private business use portion. The availability of the proposed
undivided portion allocation method was limited to circumstances in
which the issuer reasonably expected that governmental use and private
business use of the project would occur simultaneously on the same
basis, or at different times.
Commenters criticized the complexity of the Proposed Regulations'
two special allocation methods and the administrative burdens
associated with the election requirement for mixed-use allocations.
Commenters also criticized the discrete portion method's overly rigid
treatment of reallocations or ``floating'' allocations. To simplify
these rules, commenters recommended expanding the availability of the
undivided portion allocation method to include all measureable use,
adopting the undivided portion allocation method as the general rule
for allocating proceeds and other sources to the uses of a mixed-use
project, and eliminating the discrete portion method.
The Final Regulations adopt the recommendation to expand the
availability of the undivided portion allocation method to include all
[[Page 65640]]
measureable use and to make the undivided portion allocation method the
exclusive allocation method for eligible mixed-use projects. Consistent
with this change, the Final Regulations eliminate the discrete portion
method and the election requirement. The Treasury Department and the
IRS believe that the expanded version of the undivided portion
allocation method in the Final Regulations generally will be simpler
and more administrable than the two proposed allocation methods and
will cover all circumstances otherwise covered by the discrete portion
method under the Proposed Regulations. For example, unlike the proposed
discrete portion method, which had significant constraints on
``floating'' allocations for administrability reasons, the undivided
portion allocation method in the Final Regulations inherently allows
floating allocations without further action or special tracking in that
it involves allocations for an entire mixed-use project. Section III.B.
in this preamble further discusses the undivided portion allocation
method under the Final Regulations.
Under the Final Regulations, the undivided portion allocation
method is available for ``eligible mixed use projects.'' The Final
Regulations define an ``eligible mixed-use project'' as a project that
is financed with proceeds of bonds that purport to be governmental
bonds when issued and qualified equity (discussed under Definition of
qualified equity in section III.C. in this preamble) pursuant to the
same plan of financing (discussed under Same plan of financing in
section III.D. in this preamble). Further, to qualify, the project must
be wholly owned by one or more governmental persons or by a partnership
in which at least one governmental person is a partner. (See discussion
under Partnerships in section IV. in this preamble.)
B. Allocations to Uses of a Project
Under the Proposed Regulations, the undivided portion allocation
method limited the targeting of qualified equity to private business
use of the project to that percentage of the private business use equal
to the percentage of capital expenditures of the project financed by
the qualified equity, and similarly limited the targeting of proceeds
to government use of the project to that percentage of the government
use equal to the percentage of capital expenditures of the project
financed by the proceeds. For projects other than output facilities,
these limits applied to each one-year period of the measurement period.
Commenters requested that unused qualified equity be carried over from
one year to another or, in lieu of a carryover provision, revising the
limit from an annual limit to one spanning the entire measurement
period.
The Final Regulations do not adopt these recommendations. The
general private business measurement rules, in contrast to those for
use arising from output contracts, require a determination of the
private business use of the proceeds on an annual basis as a
preliminary step to determining the average private business use of the
proceeds during the measurement period. When the amount of private
business use of the project in any one-year period is less than the
percentage of qualified equity, that qualified equity is not unused
but, as the Final Regulations clarify, is allocated to governmental use
of the project that is in excess of the percentage of proceeds. To
allow carryover of private business use of the proceeds or in an amount
determined solely over the measurement period would require revision of
the measurement rules plus additional rules to prevent potentially
abusive situations, thereby increasing complexity. The Final
Regulations do, however, clarify that the annual limit only applies to
use measured under the general measurement rules and not to use arising
from output contracts.
C. Definition of Qualified Equity
The Proposed Regulations defined qualified equity to mean proceeds
of taxable bonds and funds not derived from a borrowing that are spent
on the same project as proceeds of the purported governmental bonds to
which the private activity bond tests will be applied (the applicable
bonds). The Proposed Regulations further provided that qualified equity
does not include equity interests in real property or tangible personal
property. Commenters suggested expanding the definition of qualified
equity to include the value of contributed property not purchased with
proceeds of tax-advantaged bonds, arguing that this contribution should
be treated as the equivalent of cash. Commenters also suggested that
qualified equity include funds used to redeem bonds.
The Final Regulations adopt the proposed definition of qualified
equity, with modifications. In recognition of the advent of expanded
types of bonds that provide a Federal tax benefit (a tax-advantaged
bond), which include, for example, a qualified tax credit bond under
section 54A on which the interest on the bond is taxable, the Final
Regulations clarify that ``taxable bonds'' that give rise to qualified
equity exclude any tax-advantaged bond. The Final Regulations do not
adopt the suggestion to include contributions of existing property as
qualified equity for a project because that treatment would raise
difficult issues of valuation and administrability and would be
inconsistent with the rules governing allocations of proceeds of
reimbursement bonds.
The Final Regulations do not adopt the comment recommending that
amounts (other than proceeds) used to redeem bonds be treated as
qualified equity because permitting increased private business use for
the redemption of bonds in the ordinary course would be inconsistent
with the private activity bond restrictions on the issue of bonds being
redeemed. The 1997 Final Regulations already address the use of funds
to redeem bonds under certain conditions in which bond redemptions
serve as a remedial action to cure violations of the private business
use restrictions. Further, as discussed under Anticipatory redemptions
in section V.A. in this preamble, the Final Regulations add a new
remedial action provision permitting early redemption in anticipation
of increased private business use.
D. Same Plan of Financing
The definition of ``project'' in the Proposed Regulations required
spending the proceeds and other sources on the properties pursuant to
the same plan of financing. Commenters requested clarification of the
meaning of the same plan of financing. The Final Regulations clarify
that ``same plan of financing'' has the same meaning as in Sec. 1.150-
1(c)(1)(ii) and that qualified equity is spent under the same plan of
financing as proceeds of the applicable bonds if the qualified equity
is spent on capital expenditures of the project no earlier than the
earliest date on which the expenditure would be eligible for
reimbursement were the bonds from which the proceeds are derived issued
as reimbursement bonds and no later than the date that is the beginning
of the measurement period for the project (other than amounts retained
for reasonable purposes relating to the project as defined under the
arbitrage investment restrictions).
E. Allocation of Proceeds of Multiple Issues
The Proposed Regulations provided that if proceeds of more than one
issue are allocated to capital expenditures of a mixed-use project to
which the issuer elects to apply the discrete physical portion or
undivided portion allocation method, then proceeds of those issues
[[Page 65641]]
are allocated ratably to a discrete portion or undivided portion to
which any proceeds are allocated in proportion to their relative shares
of the total proceeds of such issues used for the project (the multiple
issue rule). Commenters suggested eliminating this rule to permit
issuers to allocate proceeds of the different issues financing a
project to take maximum advantage of the overall private business use
permitted, such as disproportionately allocating proceeds of a larger
issue or a general obligation issue (that is, one paid from generally
applicable taxes, for which private business use may be 100 percent
because the private security or payment test will not be met) to
private business use.
The Treasury Department and the IRS are concerned that a non-pro
rata method of allocating proceeds of more than one issue to the uses
of a project could not only lead to more private business use than when
proceeds of a single issue are allocated, but would also be difficult
to administer. Furthermore, this approach also would be inconsistent
with the general allocation rule that allocates proceeds of two issues
on a proportionate basis to the uses of a project that is not an
eligible mixed-use project.
Commenters also suggested that the proposed multiple issue rule
would create a barrier to tax-exempt financing of projects, such as
airports, that traditionally have been financed with a combination of
tax-exempt governmental bonds and qualified private activity bonds to
reflect the governmental and qualified private business use occurring,
respectively, in different discrete portions of a project, as neither
type of bond would meet the criteria for tax-exempt status if the
proceeds of both types were allocated to the same portions. The
Treasury Department and the IRS recognize that certain projects contain
portions that, if treated as separate facilities, would be eligible for
financing with different types of tax-exempt bonds. The Final
Regulations remove this barrier to tax-exempt financing of projects
through the definition of ``project,'' which allows each issuer to
identify the different projects financed by its separate issues of
governmental bonds and qualified private activity bonds.
IV. Partnerships
The Proposed Regulations generally treated a partnership as an
entity that is a nongovernmental person for purposes of the private
activity bond tests. However, if all of the partners in a partnership
were governmental persons, the Proposed Regulations provided a limited
exception that would treat the partnership as an aggregate of its
partners (that is, as governmental persons) for these purposes. The
preamble to the Proposed Regulations specifically requested comments on
the usefulness of aggregate treatment for a partnership of governmental
persons (or 501(c)(3) organizations for qualified 501(c)(3) bonds) and
private businesses. The preamble to the Proposed Regulations further
indicated that the Treasury Department and the IRS were considering
aggregate treatment in at least the limited circumstance of
partnerships involving a constant percentage (``straight up'')
allocation of all partnership items. Commenters were in favor of
aggregate treatment for such partnerships.
In recognition of the development of various financing and
management structures for government (or 501(c)(3) organization)
facilities that involve the participation of private businesses, to
provide flexibility to accommodate public-private partnerships, and to
remove barriers to tax-exempt financing of the government's (or
501(c)(3) organization's) portion of the benefit of property used in
joint ventures, the Final Regulations provide aggregate treatment for
all partnerships. The Final Regulations further provide a rule for
measuring the private business use of financed property resulting from
the use of the property by a partnership that includes a partner that
is a nongovernmental person. The amount of such use is the
nongovernmental partner's share of the amount of the use of the
property by the partnership, with such share defined as the
nongovernmental partner's greatest percentage share of any of the
specified partnership items attributable to the time during the
measurement period that the partnership uses the property. The Final
Regulations also provide that an issuer may determine the
nongovernmental partner's share under guidance published in the
Internal Revenue Bulletin.
The definition of qualified 501(c)(3) bonds under section 145(a)
includes the private activity bond tests (with certain modifications)
and an ownership test under which the property financed with qualified
501(c)(3) bonds must be owned by a 501(c)(3) organization or a
governmental unit. In applying the private activity bond tests for
purposes of qualified 501(c)(3) bonds, the Proposed Regulations treated
a partnership as an aggregate if each of the partners was either a
governmental person or a 501(c)(3) organization. The Proposed
Regulations, however, did not apply such aggregate treatment for
purposes of the ownership test. Commenters recommended applying
aggregate treatment to partnerships for purposes of the ownership test,
seeing no reason to distinguish between ownership for purposes of the
ownership test and for purposes of the private activity bond tests,
which also look to ownership of the financed property. The Final
Regulations adopt this comment.
V. Remedial Actions
A. Anticipatory Redemptions
The Proposed Allocation Regulations permitted proceeds of taxable
bonds and funds not derived from borrowing that are used to retire tax-
exempt governmental bonds to be treated as qualified equity under
certain circumstances. This allows targeting of funds other than tax-
exempt bond proceeds to finance portions of projects that are expected
to be used for private business use in the future. The intent of this
proposed rule is to encourage retirement of tax-exempt bonds before the
occurrence of nonqualified use. The Proposed Allocation Regulations
addressed when the bond must be retired, the issuer's reasonable
expectations regarding use of the project, actual use of the project
prior to the redemption, and the length of the term of the issue of
which the bond to be retired is a part. Specifically, the bond to be
redeemed was required to be retired at least five years before its
otherwise-scheduled maturity date and within a period that starts one
year before the deliberate act and ends 91 days before the deliberate
act. Further, the issuer must not have expected that the project would
be a mixed-use project. Thus, under the Proposed Allocation
Regulations, an issuer could not use this anticipatory redemption for a
project for which it had elected the special mixed-use allocation
rules.
Most commenters stated that the proposed provision would be of
limited use and that the eligibility requirements are contrary to the
policy of encouraging redemption of tax-exempt bonds earlier rather
than later. Commenters recommended that the conditions for anticipatory
redemption not be stricter than those under the existing remedial
action regime for private business use, which permits a curative
redemption or defeasance of nonqualified bonds within 90 days of the
deliberate action causing the private activity bonds tests to be met.
Commenters further suggested adding a provision to the remedial action
rules permitting an issuer to redeem or defease bonds at any
[[Page 65642]]
time in advance of a deliberate action that would cause the private
business tests to be met. The suggested provision would require the
issuer to declare its intent to redeem or defease the bonds that
potentially could become the nonqualified bonds and identify the
financed property. To encourage early redemption of tax-exempt bonds
without imposing another set of rules for projects with unanticipated
private business use, the Final Regulations adopt this recommendation
to expand the remedial action rules to address this point.
B. Nonqualified Bonds
The Proposed Remedial Action Regulations included amendments
relating to the amount and allocation of nonqualified bonds to be
remediated as a result of a deliberate action causing the private
business tests or the private loan financing test to be met. The
Proposed Remedial Action Regulations provided that the amount of the
nonqualified bonds is that portion of the outstanding bonds in an
amount that, if the remaining bonds were issued on the date on which
the deliberate action occurs, the remaining bonds would not meet the
private business use test or private loan financing test, as
applicable. For this purpose, the amount of private business use is the
greatest percentage of private business use in any one-year period
commencing with the one-year period in which the deliberate action
occurs.
Commenters requested that the amount of nonqualified bonds be
determined using the average amount of private business use over the
entire measurement period rather than the highest private business use
in any one-year period. The Final Regulations do not adopt this
recommendation because this request is inconsistent with the
limitations on annual allocations of proceeds and qualified equity to
the uses of the project. The Final Regulations adopt the amendment to
the provision regarding the amount of nonqualified bonds as proposed.
Commenters generally agreed with the proposed change that allows
any bonds of any issue to be treated as the nonqualified bonds provided
that the redemption or defeasance does not have the effect of extending
the weighted average maturity (WAM) of the issue. Commenters, however,
stated that some bond indentures require optional redemptions of a
portion of a term bond to be used first to reduce the earliest
mandatory sinking fund payments on the bond. In this case, the
redemption or defeasance of the longest bonds would result in the
extension of the WAM. Commenters recommended that the regulations
permit bonds with longer maturities to be treated as the nonqualified
bonds, as is permitted under the existing regulations. The Final
Regulations adopt the rule as proposed, but provide a transition rule
for outstanding bonds similar to that provided with respect to
outstanding exempt facility bonds.
The Final Regulations reduce the amount of nonqualified bonds. An
issuer who chooses to redeem or defease the nonqualified bonds need
only redeem or defease sufficient bonds such that the remaining bonds
would not meet the private business use or private loan financing test.
Thus, unlike under the previous definition of nonqualified bonds, not
all of the private business use or private loan, as calculated under
the remedial action rules, necessarily will be remediated. To take into
account any such remaining unremediated private business use or loan
should a subsequent deliberate action occur, a conforming change is
needed pertaining to continuing compliance. The Final Regulations
include this change.
VII. Effective/Applicability Dates
The Final Regulations generally apply to bonds sold on or after
January 25, 2016. The rules regarding remedial actions, however, apply
to deliberate actions that occur on or after January 25, 2016. The
Final Regulations allow permissive application of (1) the partnership
provisions, the allocation and accounting rules, and certain
corresponding rules for qualified 501(c)(3) bonds in whole, but not in
part, to bonds to which the 1997 Final Regulations apply; and (2) the
multipurpose rule to bonds to which the refunding rules apply.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. It is hereby certified that the collection of
information in these regulations will not have a significant economic
impact on a substantial number of small governmental jurisdictions.
This certification is based upon the fact that few small governmental
issuers are expected to take an anticipatory remedial action and that
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 Internal Revenue Code, the notices
of proposed rulemaking preceding these regulations were submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small governmental jurisdictions. No
comments were received.
Drafting Information
The principal author of these regulations is Johanna Som de Cerff,
Office of Associate Chief Counsel (Financial Institutions & Products),
IRS. However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
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 Sec. 1.141-12(d)(3)
through (5), adding an entry for Sec. 1.141-12(d)(6), revising the
heading for Sec. 1.141-15, and adding entries for Sec. 1.141-
15(b)(4), (e)(1), (e)(2), (l) and (m) to read as follows:
Sec. 1.141-0 Table of contents.
* * * * *
Sec. 1.141-1 Definitions and rules of general application.
* * * * *
(e) Partnerships.
* * * * *
Sec. 1.141-6 Allocation and accounting rules.
(a) Allocation of proceeds to expenditures, projects, and uses
in general.
(1) Allocations to expenditures.
(2) Allocations of sources to a project and its uses.
(3) Definition of project.
(b) Special allocation rules for eligible mixed-use projects.
(1) In general.
(2) Definition of eligible mixed-use project.
(3) Definition of qualified equity.
(4) Same plan of financing.
(c) Allocations of private payments.
(d) Allocations of proceeds to common costs of an issue.
[[Page 65643]]
(e) Allocations of proceeds to bonds.
(f) Examples.
* * * * *
Sec. 1.141-12 Remedial actions.
* * * * *
(d) * * *
(3) Anticipatory remedial action.
(4) Notice of defeasance.
(5) Special limitation.
(6) Defeasance escrow defined.
* * * * *
Sec. 1.141-15 Effective/applicability dates.
* * * * *
(b) * * *
(4) Certain remedial actions.
* * * * *
(e) * * *
(1) In general.
(2) Transition rule for pre-effective date bonds.
* * * * *
(l) Applicability date for certain regulations related to
allocation and accounting.
(1) In general.
(2) Permissive application.
(m) Permissive retroactive application of certain regulations.
* * * * *
0
Par. 3. Section 1.141-1 is amended by adding paragraph (e) to read as
follows:
Sec. 1.141-1 Definitions and rules of general application.
* * * * *
(e) Partnerships. A partnership (as defined in section 7701(a)(2))
is treated as an aggregate of its partners, rather than as an entity.
0
Par. 4. Section 1.141-3 is amended by redesignating paragraph (g)(2)(v)
as paragraph (g)(2)(vi) and adding new paragraph (g)(2)(v) to read as
follows:
Sec. 1.141-3 Definition of private business use.
* * * * *
(g) * * *
(2) * * *
(v) Special rule for partners that are nongovernmental persons--(A)
The amount of private business use by a nongovernmental person
resulting from the use of property by a partnership in which that
nongovernmental person is a partner is that nongovernmental partner's
share of the amount of use of the property by the partnership. For this
purpose, except as otherwise provided in paragraph (g)(2)(v)(B) of this
section, a nongovernmental partner's share of the partnership's use of
the property is the nongovernmental partner's greatest percentage share
under section 704(b) of any partnership item of income, gain, loss,
deduction, or credit attributable to the period that the partnership
uses the property during the measurement period. For example, if a
partnership has a nongovernmental partner and that partner's share of
partnership items varies, with the greatest share being 25 percent,
then that nongovernmental partner's share of the partnership's use of
property is 25 percent.
(B) An issuer may determine a nongovernmental partner's share of
the partnership's use of the property under guidance published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter).
* * * * *
0
Par. 5. Section 1.141-6 is revised to read as follows:
Sec. 1.141-6 Allocation and accounting rules.
(a) Allocations of proceeds to expenditures, projects, and uses in
general--(1) Allocations to expenditures. The allocations of proceeds
and other sources of funds to expenditures under Sec. 1.148-6(d) apply
for purposes of Sec. Sec. 1.141-1 through 1.141-15.
(2) Allocations of sources to a project and its uses. Except as
provided in paragraph (b) of this section (regarding an eligible mixed-
use project), if two or more sources of funding (including two or more
tax-exempt issues) are allocated to capital expenditures (as defined in
Sec. 1.150-1(b)) for a project (as defined in paragraph (a)(3) of this
section), those sources are allocated throughout that project to the
governmental use and private business use of the project in proportion
to the relative amounts of those sources of funding spent on the
project.
(3) Definition of project--(i) In general. For purposes of this
section, project means one or more facilities or capital projects,
including land, buildings, equipment, or other property, financed in
whole or in part with proceeds of the issue.
(ii) Output facilities. If an output facility has multiple
undivided ownership interests (respectively owned by governmental
persons or by both governmental and nongovernmental persons), each
owner's interest in the facility is treated as a separate facility for
purposes of this section, provided that all owners of the undivided
ownership interests share the ownership and output in proportion to
their contributions to the capital costs of the output facility.
(b) Special allocation rules for eligible mixed-use projects--(1)
In general. The sources of funding allocated to capital expenditures
for an eligible mixed-use project (as defined in paragraph (b)(2) of
this section) are allocated to undivided portions of the eligible
mixed-use project and the governmental use and private business use of
the eligible mixed-use project in accordance with this paragraph (b).
Qualified equity (as defined in paragraph (b)(3) of this section) is
allocated first to the private business use of the eligible mixed-use
project and then to governmental use, and proceeds are allocated first
to the governmental use and then to private business use, using the
percentages of the eligible mixed-use project financed with the
respective sources and the percentages of the respective uses. Thus, if
the percentage of the eligible mixed-use project financed with
qualified equity is less than the percentage of private business use of
the project, all of the qualified equity is allocated to the private
business use. Proceeds are allocated to the balance of the private
business use of the project. Similarly, if the percentage of the
eligible mixed-use project financed with proceeds is less than the
percentage of governmental use of the project, all of the proceeds are
allocated to the governmental use, and qualified equity is allocated to
the balance of the governmental use of the project. Further, if
proceeds of more than one issue finance the eligible mixed-use project,
proceeds of each issue are allocated ratably to the uses to which
proceeds are allocated in proportion to the relative amounts of the
proceeds of such issues allocated to the eligible mixed-use project.
For private business use measured under Sec. 1.141-3(g), qualified
equity and proceeds are allocated to the uses of the eligible mixed-use
project in each one-year period under Sec. 1.141-3(g)(4). See Example
1 of paragraph (f) of this section.
(2) Definition of eligible mixed-use project. Eligible mixed-use
project means a project (as defined in paragraph (a)(3) of this
section) that is financed with proceeds of bonds that, when issued,
purported to be governmental bonds (as defined in Sec. 1.150-1(b))
(the applicable bonds) and with qualified equity pursuant to the same
plan of financing (within the meaning of Sec. 1.150-1(c)(1)(ii)). An
eligible mixed-use project must be wholly owned by one or more
governmental persons or by a partnership in which at least one
governmental person is a partner.
(3) Definition of qualified equity. For purposes of this section,
qualified equity means proceeds of bonds that are not tax-advantaged
bonds and funds that are not derived from proceeds of a borrowing that
are spent on the same eligible mixed-use project as the proceeds of the
applicable bonds. Qualified equity does not include equity interests in
real property or tangible personal property. Further, qualified equity
does not include funds used to
[[Page 65644]]
redeem or repay governmental bonds. See Sec. Sec. 1.141-2(d)(2)(ii)
and 1.141-12(i) (regarding the effects of certain redemptions as
remedial actions).
(4) Same plan of financing. Qualified equity finances a project
under the same plan of financing that includes the applicable bonds if
the qualified equity pays for capital expenditures of the project on a
date that is no earlier than a date on which such expenditures would be
eligible for reimbursement by proceeds of the applicable bonds under
Sec. 1.150-2(d)(2) (regardless of whether the applicable bonds are
reimbursement bonds) and, except for a reasonable retainage (within the
meaning of Sec. 1.148-7(h)), no later than the date on which the
measurement period begins.
(c) Allocations of private payments. Except as provided in this
paragraph (c), private payments for a project are allocated in
accordance with Sec. 1.141-4. Payments under an output contract that
result in private business use of an eligible mixed-use project are
allocated to the same source of funding (notwithstanding Sec. 1.141-
4(c)(3)(v) (regarding certain allocations of private payments to
equity)) allocated to the private business use from such contract under
paragraph (b) of this section.
(d) Allocations of proceeds to common costs of an issue. Proceeds
used for expenditures for common costs (for example, issuance costs,
qualified guarantee fees, or reasonably required reserve or replacement
funds) are allocated in accordance with Sec. 1.141-3(g)(6). Proceeds,
as allocated under Sec. 1.141-3(g)(6) to an eligible mixed-use
project, are allocated to the uses of the project in the same
proportions as the proceeds allocated to the uses under paragraph (b)
of this section.
(e) Allocations of proceeds to bonds. In general, proceeds are
allocated to bonds in accordance with the rules for allocations of
proceeds to bonds for separate purposes of multipurpose issues in Sec.
1.141-13(d). For an issue that is not a multipurpose issue (or is a
multipurpose issue for which the issuer has not made a multipurpose
allocation), proceeds are allocated to bonds ratably in a manner
similar to the allocation of proceeds to projects under paragraph
(a)(2) of this section.
(f) Examples. The following examples illustrate the application of
this section:
Example 1. Mixed-use project. City A issues $70x of bonds (the
Bonds) and finances the construction of a 10-story office building
costing $100x (the Project) with proceeds of the Bonds and $30x of
qualified equity (the Qualified Equity). To the extent that the
private business use of the Project does not exceed 30 percent in
any particular year, the Qualified Equity is allocated to the
private business use. If private business use of the Project were,
for example, 44 percent in a year, the Qualified Equity would be
allocated to 30 percent ($30x) private business use and proceeds of
the Bonds would be allocated to the excess (that is, 14 percent or
$14x), resulting in private business use of the Bonds in that year
of 20 percent ($14x/$70x). Conversely, if private business use of
the Project were 20 percent, Qualified Equity would be allocated to
that 20 percent. The remaining Qualified Equity (that is, 10 percent
or $10x) would be allocated to the governmental use in excess of the
70 percent to which the proceeds of the Bonds would be allocated.
Example 2. Mixed-use output facility. Authority A is a
governmental person that owns and operates an electric transmission
facility. Several years ago, Authority A used its equity to pay
capital expenditures of $1000x for the facility. Authority A wants
to make capital improvements to the facility in the amount of $100x
(the Project). Authority A reasonably expects that, after completion
of the Project, it will sell 46 percent of the available output of
the facility, as determined under Sec. 1.141-7, under output
contracts that result in private business use and it will sell 54
percent of the available output of the facility for governmental
use. On January 1, 2017, Authority A issues $60x of bonds (the
Bonds) and uses the proceeds of the Bonds and $40x of qualified
equity (the Qualified Equity) to finance the Project. The Qualified
Equity is allocated to 40 of the 46 percent private business use
resulting from the output contracts. Proceeds of the Bonds are
allocated to the 54 percent governmental use and thereafter to the
remaining 6 percent private business use.
Example 3. Subsequent improvements and replacements. County A
owns a hospital, which opened in 2001, that it financed entirely
with proceeds of bonds it issued in 1998 (the 1998 Bonds). In 2017,
County A finances the cost of an addition to the hospital with
proceeds of bonds (the 2017 Bonds) and qualified equity (the 2017
Qualified Equity). The original hospital is a project (the 1998
Project) and the addition is a project (the 2017 Project). Proceeds
of the 2017 Bonds and the 2017 Qualified Equity are allocated to the
2017 Project. The 2017 Qualified Equity is allocated first to the
private business use of the 2017 Project and then to the
governmental use of the 2017 Project. Proceeds of the 2017 Bonds are
allocated first to the governmental use of the 2017 Project and then
to the private business use of that project. Neither proceeds of the
2017 Bonds nor 2017 Qualified Equity is allocated to the uses of the
1998 Project. Proceeds of the 1998 Bonds are not allocated to uses
of the 2017 Project.
0
Par 6. Section 1.141-12 is amended by:
0
a. Revising the last sentence of paragraph (d)(1).
0
b. Redesignating paragraphs (d)(3) through (d)(5) as (d)(4) through
(d)(6).
0
c. Adding new paragraph (d)(3).
0
d. Revising paragraph (i)(1).
0
e. Redesignating paragraph (i)(2) as (i)(3).
0
f. Adding new paragraph (i)(2).
0
g. Revising paragraphs (j), and (k), Example 8.
The revisions and additions read as follows:
Sec. 1.141-12 Remedial actions.
* * * * *
(d) * * * (1) * * * Except as provided in paragraph (d)(3) of this
section, if the bonds are not redeemed within 90 days of the date of
the deliberate action, a defeasance escrow must be established for
those bonds within 90 days of the deliberate action.
* * * * *
(3) Anticipatory remedial action. The requirements of paragraphs
(d)(1) and (2) of this section for redemption or defeasance of the
nonqualified bonds within 90 days of the deliberate action are met if
the issuer declares its official intent to redeem or defease all of the
bonds that would become nonqualified bonds in the event of a subsequent
deliberate action that would cause the private business tests or the
private loan financing test to be met and redeems or defeases such
bonds prior to that deliberate action. The issuer must declare its
official intent on or before the date on which it redeems or defeases
such bonds, and the declaration of intent must identify the financed
property or loan with respect to which the anticipatory remedial action
is being taken and describe the deliberate action that potentially may
result in the private business tests being met (for example, sale of
financed property that the buyer may then lease to a nongovernmental
person). Rules similar to those in Sec. 1.150-2(e) (regarding official
intent for reimbursement bonds) apply to declarations of intent under
this paragraph (d)(3), including deviations in the descriptions of the
project or loan and deliberate action and the reasonableness of the
official intent.
* * * * *
(i) * * *
(1) If a remedial action is taken under paragraph (d) of this
section, the amount of private business use or private loans resulting
from the deliberate action that is taken into account for purposes of
determining whether the bonds are private activity bonds is that
portion of the remaining bonds that is used for private business use or
private loans (as calculated under paragraph (j) of this section);
(2) If a remedial action is taken under paragraph (e) or (f) of
this section, the amount of private business use or private loans
resulting from the deliberate action is not taken into account for
purposes of determining
[[Page 65645]]
whether the bonds are private activity bonds; and
* * * * *
(j) Nonqualified bonds--(1) Amount of nonqualified bonds. The
nonqualified bonds are a portion of the outstanding bonds in an amount
that, if the remaining bonds were issued on the date on which the
deliberate action occurs, the remaining bonds would not meet the
private business use test or private loan financing test, as
applicable. For this purpose, the amount of private business use is the
greatest percentage of private business use in any one-year period
commencing with the one-year period in which the deliberate action
occurs.
(2) Allocation of nonqualified bonds. Allocations of nonqualified
bonds must be made on a pro rata basis, except that, for purposes of
paragraph (d) of this section (relating to redemption or defeasance),
an issuer may treat any bonds of an issue as the nonqualified bonds so
long as--
(i) The remaining weighted average maturity of the issue,
determined as of the date on which the nonqualified bonds are redeemed
or defeased (determination date), and excluding from the determination
the nonqualified bonds redeemed or defeased by the issuer in accordance
with this section, is not greater than
(ii) The remaining weighted average maturity of the issue,
determined as of the determination date, but without regard to the
redemption or defeasance of any bonds (including the nonqualified
bonds) occurring on the determination date.
(k) * * *
Example 8. Compliance after remedial action. In 2007, City G
issues bonds with proceeds of $10 million to finance a courthouse.
The bonds have a weighted average maturity that does not exceed 120
percent of the reasonably expected economic life of the courthouse.
City G enters into contracts with nongovernmental persons that
result in private business use of 10 percent of the courthouse per
year. More than 10 percent of the debt service on the issue is
secured by private security or payments. In 2019, in a bona fide and
arm's length arrangement, City G enters into a management contract
with a nongovernmental person that results in private business use
of an additional 40 percent of the courthouse per year during the
remaining term of the bonds. City G immediately redeems the
nonqualified bonds, or 44.44 percent of the outstanding bonds. This
is the portion of the outstanding bonds that, if the remaining bonds
were issued on the date on which the deliberate action occurs, the
remaining bonds would not meet the private business use test,
treating the amount of private business use as the greatest
percentage of private business use in any one-year period commencing
with the one-year period in which the deliberate action occurs (50
percent). This percentage is computed by dividing the percentage of
the facility used for a government use (50 percent) by the minimum
amount of government use required (90 percent), and subtracting the
resulting percentage (55.56 percent) from 100 percent (44.44
percent). For purposes of subsequently applying section 141 to the
issue, City G may continue to use all of the proceeds of the
outstanding bonds in the same manner (that is, for the courthouse
and the private business use) without causing the issue to meet the
private business use test. The issue continues to meet the private
security or payment test. The result would be the same if City G,
instead of redeeming the bonds, established a defeasance escrow for
those bonds, provided that the requirement of paragraph (d)(5) of
this section is met. If City G takes a subsequent deliberate action
that results in further private business use, it must take into
account 10 percent of private business use in addition to that
caused by the second deliberate act.
0
Par 7. Section 1.141-13 is amended by revising paragraph (d)(1) and
paragraph (g), Example 5, to read as follows:
Sec. 1.141-13 Refunding issues.
* * * * *
(d) Multipurpose issue allocations--(1) In general. For purposes of
section 141, unless the context clearly requires otherwise, Sec.
1.148-9(h) applies to allocations of multipurpose issues (as defined in
Sec. 1.148-1(b)), including allocations involving the refunding
purposes of the issue. An allocation under this paragraph (d) may be
made at any time, but once made, may not be changed. An allocation is
not reasonable under this paragraph (d) if it achieves more favorable
results under section 141 than could be achieved with actual separate
issues. Each of the separate issues under the allocation must consist
of one or more tax-exempt bonds. Allocations made under this paragraph
(d) and Sec. 1.148-9(h) must be consistent for purposes of sections
141 and 148.
* * * * *
(g) * * *
Example 5. Multipurpose issue. (i) In 2017, State D issues bonds
to finance the construction of two office buildings, Building 1 and
Building 2. D expends an equal amount of the proceeds on each
building. D enters into arrangements that result in private business
use of 8 percent of Building 1 and 12 percent of Building 2 during
the measurement period under Sec. 1.141-3(g) and private payments
of 4 percent of the 2017 bonds in respect of Building 1 and 6
percent of the 2017 bonds in respect of Building 2. These
arrangements result in a total of 10 percent of the proceeds of the
2017 bonds being used for a private business use and total private
payments of 10 percent. In 2022, D purports to make a multipurpose
issue allocation under paragraph (d) of this section of the
outstanding 2017 bonds, allocating the issue into two separate
issues of equal amounts with one issue allocable to Building 1 and
the second allocable to Building 2. An allocation is unreasonable
under paragraph (d) of this section if it achieves more favorable
results under section 141 than could be achieved with actual
separate issues. D's allocation is unreasonable because, if
permitted, it would allow more favorable results under section 141
for the 2017 bonds (that is, private business use and private
payments that exceed 10 percent for the 2017 bonds allocable to
Building 2) than could be achieved with actual separate issues. In
addition, if D's purported allocation was intended to result in two
separate issues of tax-exempt governmental bonds (versus tax-exempt
private activity bonds), the allocation would violate paragraph (d)
of this section in the first instance because the allocation to the
separate issue for Building 2 would fail to qualify separately as an
issue of tax-exempt governmental bonds as a result of its 12 percent
of private business use and private payments.
(ii) The facts are the same as in paragraph (i) of this Example
5, except that D enters into arrangements only for Building 1, and
it expects no private business use of Building 2. In 2022, D
allocates an equal amount of the outstanding 2017 bonds to Building
1 and Building 2. D selects particular bonds for each separate issue
such that the allocation does not achieve a more favorable result
than could have been achieved by issuing actual separate issues. D
uses the same allocation for purposes of both sections 141 and 148.
D's allocation is reasonable.
(iii) The facts are the same as in paragraph (ii) of this
Example 5, except that as part of the same issue, D issues bonds for
a privately used airport. The airport bonds, if issued as a separate
issue, would be qualified private activity bonds. The remaining
bonds, if issued separately from the airport bonds, would be
governmental bonds. Treated as one issue, however, the bonds are
taxable private activity bonds. Therefore, D makes its allocation of
the bonds under paragraph (d) of this section and Sec. 1.150-
1(c)(3) into 3 separate issues on or before the issue date. Assuming
all other applicable requirements are met, the bonds of the
respective issues will be tax-exempt qualified private activity
bonds or governmental bonds.
* * * * *
0
Par. 8. Section 1.141-15 is amended by:
0
a. Revising the heading and paragraph (a).
0
b. Adding paragraph (b)(4),
0
c. Revising paragraphs (e) and (i).
0
d. Adding paragraphs (l) and (m).
The revisions and additions read as follows:
Sec. 1.141-15 Effective/applicability dates.
(a) Scope. The effective dates of this section apply for purposes
of Sec. Sec. 1.141-1 through 1.141-14, 1.145-1 through
[[Page 65646]]
1.145-2, and 1.150-1(a)(3) and the definition of bond documents
contained in Sec. 1.150-1(b).
(b) * * *
(4) Certain remedial actions--(i) General rule. For bonds subject
to Sec. 1.141-12, the provisions of Sec. 1.141-12(d)(3), (i), (j),
and (k), Example 8, apply to deliberate actions that occur on or after
January 25, 2016.
(ii) Special rule for allocations of nonqualified bonds. For
purposes of Sec. 1.141-12(j)(2), in addition to the allocation methods
permitted in Sec. 1.141-12(j)(2), an issuer may treat bonds with the
longest maturities (determined on a bond-by-bond basis) as the
nonqualified bonds, but only for bonds sold before January 25, 2016.
* * * * *
(e) Permissive application of certain sections--(1) In general. The
following sections may each be applied by issuers to any bonds:
(i) Section 1.141-3(b)(4);
(ii) Section 1.141-3(b)(6); and
(iii) Section 1.141-12.
(2) Transition rule for pre-effective date bonds. For purposes of
paragraphs (e)(1) and (h) of this section, issuers may apply Sec.
1.141-12 to bonds issued before May 16, 1997, without regard to
paragraph (d)(5) thereof with respect to deliberate actions that occur
on or after April 21, 2003.
* * * * *
(i) Permissive application of certain regulations relating to
output facilities. Issuers may apply each of the following sections to
any bonds used to finance output facilities:
(1) Section 1.141-6;
(2) Section 1.141-7(f)(3); and
(3) Section 1.141-7(g).
* * * * *
(l) Applicability date for certain regulations relating to
allocation and accounting--(1) In general. Except as otherwise provided
in this section, Sec. Sec. 1.141-1(e), 1.141-3(g)(2)(v), 1.141-6,
1.141-13(d), and 1.145-2(b)(4), (b)(5), and (c)(2) apply to bonds that
are sold on or after January 25, 2016 and to which the 1997 regulations
(as defined in paragraph (b)(1) of this section) apply.
(2) Permissive application. Issuers may apply Sec. Sec. 1.141-
1(e), 1.141-3(g)(2)(v), 1.141-6, and 1.145-2(b)(4), (b)(5), and (c)(2),
in whole but not in part, to bonds to which the 1997 regulations apply.
(m) Permissive retroactive application of certain regulations.
Issuers may apply Sec. 1.141-13(d) to bonds to which Sec. 1.141-13
applies.
0
Par. 9. Section 1.145-2 is amended by adding paragraphs (b)(4) and
(b)(5) and revising the first sentence of paragraph (c)(2) to read as
follows:
Sec. 1.145-2 Application of private activity bond regulations.
* * * * *
(b) * * *
(4) References to governmental bonds in Sec. 1.141-6 mean
qualified 501(c)(3) bonds.
(5) References to ownership by governmental persons in Sec. 1.141-
6 mean ownership by governmental persons or 501(c)(3) organizations.
(c) * * *
(2) Costs of issuance. Sections 1.141-3(g)(6) and 1.141-6(d) do not
apply to the extent costs of issuance are allocated among the other
purposes for which the proceeds are used or to portions of a project. *
* *
* * * * *
0
Par. 10. Section 1.150-5 is amended by revising paragraph (a)(1) to
read as follows:
Sec. 1.150-5 Filing notices and elections.
(a) * * *
(1) Section 1.141-12(d)(4);
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: October 6, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-27328 Filed 10-26-15; 8:45 am]
BILLING CODE 4830-01-P