General Allocation and Accounting Regulations Under Section 141; Remedial Actions for Tax-Exempt Bonds, 65637-65646 [2015-27328]

Download as PDF 65637 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations litigation, provide a clear legal standard for affected conduct, and promote simplification and burden reduction. Executive Order 13132 This rulemaking does not have federalism implications warranting the application of Executive Order 13132. The rule does not have substantial direct effects on the States, on the relationship between the Federal Government and the States, or the distribution of power and responsibilities among the various levels of government. Executive Order 13175 This rule does not have tribal implications warranting the application of Executive Order 13175. This rule does not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. 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For the reasons set out above, 21 CFR part 1308 is amended as follows: PART 1308—SCHEDULES OF CONTROLLED SUBSTANCES 1. The authority citation for 21 CFR part 1308 continues to read as follows: ■ Authority: 21 U.S.C. 811, 812, 871(b), unless otherwise noted. 2. In § 1308.22, remove the product listed in the table for the company, ‘‘Vicks Chemical Co’’ and Trade name, ‘‘Vicks Inhaler,’’ and add to the table, in alphabetical order, the product listed below: ■ § 1308.22 Excluded substances. * * * * * EXCLUDED NONNARCOTIC PRODUCTS Company Trade name * * Proctor & Gamble Co., The .................. * Vicks VapoInhaler * * NDC code * 37000–686–01 * Dated: October 20, 2015. Louis J. Milione, Deputy Assistant Administrator, Office of Diversion Control. IN Internal Revenue Service 26 CFR Part 1 [TD 9741] tkelley on DSK3SPTVN1PROD with RULES 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: VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 PO 00000 Frm 00031 Fmt 4700 * Levmetamfetamine (l-Desoxyephedrine). * * * DEPARTMENT OF THE TREASURY BILLING CODE 4410–09–P (mg or mg/ml) * * * [FR Doc. 2015–27266 Filed 10–26–15; 8:45 am] Controlled substance Form Sfmt 4700 50.00 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). E:\FR\FM\27OCR1.SGM 27OCR1 65638 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations SUPPLEMENTARY INFORMATION: tkelley on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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. PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 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 E:\FR\FM\27OCR1.SGM 27OCR1 tkelley on DSK3SPTVN1PROD with RULES Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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 PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 65639 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 E:\FR\FM\27OCR1.SGM 27OCR1 65640 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations tkelley on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 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 E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations tkelley on DSK3SPTVN1PROD with RULES 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, VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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 PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 65641 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 E:\FR\FM\27OCR1.SGM 27OCR1 65642 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations tkelley on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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. PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 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. E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations (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 tkelley on DSK3SPTVN1PROD with RULES * * * * * (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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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 PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 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 E:\FR\FM\27OCR1.SGM 27OCR1 65644 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations tkelley on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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). ■ PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 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 E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations tkelley on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:49 Oct 26, 2015 Jkt 238001 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, PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 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 E:\FR\FM\27OCR1.SGM 27OCR1 tkelley on DSK3SPTVN1PROD with RULES 65646 Federal Register / Vol. 80, No. 207 / Tuesday, October 27, 2015 / Rules and Regulations 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 ■ VerDate Sep<11>2014 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: PO 00000 Frm 00040 Fmt 4700 Sfmt 4700 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 27OCR1

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]


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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.

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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