Arbitrage Investment Restrictions on Tax-Exempt Bonds, 27302-27303 [2018-12565]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Proposed Rules]
[Pages 27302-27303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12565]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / 
Proposed Rules

[[Page 27302]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106977-18]
RIN 1545-BO77


Arbitrage Investment Restrictions on Tax-Exempt Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the 
arbitrage investment restrictions under section 148 of the Internal 
Revenue Code (Code) applicable to tax-exempt bonds and other tax-
advantaged bonds issued by State and local governments. The proposed 
regulations would clarify existing regulations regarding the definition 
of ``investment-type property'' covered by arbitrage restrictions by 
expressly providing an exception for investments in capital projects 
that are used in furtherance of the public purposes of the bonds. The 
proposed regulations affect State and local governmental issuers of 
these bonds and potential investors in capital projects financed with 
these bonds.

DATES: Comments and requests for a public hearing must be received by 
September 10, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106977-18), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
106977-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (REG-106977-18).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Spence Hanemann, (202) 317-6980; concerning submissions of comments and 
requesting a hearing, Regina L. Johnson, (202) 317-6901 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) on the arbitrage investment restrictions 
under section 148 of the Code (Proposed Regulations).

1. In General

    In general, under section 103, interest received by holders of 
eligible bonds issued by State and local governments is exempt from 
Federal income tax. As a result, tax-exempt State or local bonds 
generally have lower borrowing costs. To qualify for the tax exemption, 
State or local bonds must satisfy various eligibility requirements 
under sections 141 to 150, including the arbitrage investment 
restrictions under section 148. The arbitrage investment restrictions 
under section 148 limit the investment of proceeds of tax-exempt bonds 
in higher yielding investments and require rebate to the Federal 
government of certain excess earnings on higher yielding investments.
    On June 18, 1993, the Department of the Treasury (Treasury 
Department) and the IRS published comprehensive final regulations in 
the Federal Register (TD 8476, 58 FR 33510) on the arbitrage investment 
restrictions and related provisions for tax-exempt bonds under sections 
103, 148, 149, and 150 and, since that time, those final regulations 
have been amended in certain limited respects (these 1993 regulations 
and the amendments thereto collectively are referred to as the Existing 
Regulations).

2. Investment Property Covered by Arbitrage Restrictions

    Section 148(a) defines a taxable ``arbitrage bond'' generally to 
mean any bond issued as part of an issue any portion of the proceeds of 
which are reasonably expected to be used or are intentionally used to 
acquire ``higher yielding investments'' or to replace funds so used. 
Section 148(b)(1) defines the term ``higher yielding investments'' to 
mean any ``investment property'' that produces a yield over the term of 
the issue that is materially higher than the yield on the issue. 
Section 148(b)(2) defines the term ``investment property'' to include 
any security (within the meaning of section 165(g)(2)(A) or (B)), any 
obligation, any annuity contract, certain residential real property for 
family units located outside the jurisdiction of the issuer that is 
financed with bonds other than private activity bonds, and any 
``investment-type property.''
    Section 1.148-1(e)(1) of the Existing Regulations defines a catch-
all category of ``investment-type property'' to include any property 
(other than securities, obligations, annuity contracts, and covered 
residential real property for family units under section 148(b)(2)(A), 
(B), (C), and (E)) ``that is held principally as a passive vehicle for 
the production of income.'' For this purpose, Sec.  1.148-1(e)(1) of 
the Existing Regulations provides that the production of income 
includes any benefit based on the time value of money.

Explanation of Provisions

1. Proposed Sec.  1.148-1(e)(4): Exception to Investment-Type Property 
Definition for Certain Capital Projects

    Institutional investors have suggested clarification of the scope 
of the regulatory definition of investment-type property under Sec.  
1.148-1(e)(1) to ensure that the definition does not impede greater 
capital investment in public infrastructure.
    The legislative history to the Tax Reform Act of 1986, Public Law 
99-514, 100 Stat. 2085, indicates that Congress intended to limit the 
scope of the arbitrage restriction on investment-type property so that 
it did not extend to investments in capital projects in furtherance of 
the public purposes of the bonds. In this regard, the House Report to 
the Tax Reform Act of 1986 included the following statement about the 
intended scope of the definition of investment-type property: ``The 
restriction would not apply, however, to real or tangible personal 
property acquired with bond proceeds for reasons other than investment 
(e.g., courthouse facilities financed with bond proceeds).'' H.R. Rep. 
No. 99-426, at 552 (1985), 1986-3 (vol. 2) C.B. 457; see also S. Rep. 
No. 99-313, at 844 (1986), 1986-3 (vol. 3) C.B. 682 (containing a 
statement substantially identical to that in the House report); H.R. 
Rep. No. 99-

[[Page 27303]]

841, at II-747 (1986) (Conf. Rep.), 1986-3 (vol. 4) C.B. 608 (stating 
that the conference agreement follows the House bill and the Senate 
amendment on this restriction).
    To clarify the scope of the investment-type property definition 
consistent with Congressional intent reflected in the legislative 
history, the Proposed Regulations would provide an express exception to 
the definition of investment-type property for capital projects that 
further the public purposes for which the tax-exempt bonds were issued. 
For example, investment-type property does not include a courthouse 
financed with governmental bonds or an eligible exempt facility under 
section 142, such as a public road, financed with private activity 
bonds.

2. Applicability Dates and Reliance

    The proposed amendments to the definition of investment-type 
property in the Proposed Regulations are proposed to apply to bonds 
sold on or after the date that is 90 days after the date of publication 
of a Treasury Decision adopting these rules as final regulations in the 
Federal Register. Issuers may apply the Proposed Regulations to bonds 
that are sold before the applicability date provided in a Treasury 
Decision adopting these rules as final regulations in the Federal 
Register.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. Because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
entities.

Comments and Requests for Public Hearing

    Before the Proposed Regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the hearing will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Spence Hanemann of 
the Office of Associate Chief Counsel (Financial Institutions and 
Products) and Vicky Tsilas, formerly of the Office of Associate Chief 
Counsel (Financial Institutions and Products). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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 1.148-0(c) is amended by adding entries for Sec. Sec.  
1.148-1(e)(4) and 1.148-11(n) to read as follows:


Sec.  1.148-0  Scope and table of contents.

* * * * *
    (c) * * *


Sec.  1.148-1  Definitions and elections.

* * * * *
    (e) * * *
    (4) Exception for certain capital projects.
* * * * *


Sec.  1.148-11  Effective/applicability dates.

* * * * *
    (n) Investment-type property.
0
Par. 3. Section 1.148-1 is amended by:
0
1. Revising the first sentence of paragraph (e)(1).
0
2. Adding paragraph (e)(4).
    The revision and addition read as follows:


Sec.  1.148-1  Definitions and elections.

* * * * *
    (e) Investment-type property--(1) In general. Except as otherwise 
provided in this paragraph (e), investment-type property includes any 
property, other than property described in section 148(b)(2)(A), (B), 
(C), or (E), that is held principally as a passive vehicle for the 
production of income. * * *
* * * * *
    (4) Exception for certain capital projects. Investment-type 
property does not include real property or tangible personal property 
(for example, land, buildings, and equipment) that is used in 
furtherance of the public purposes for which the tax-exempt bonds are 
issued. For example, investment-type property does not include a 
courthouse financed with governmental bonds or an eligible exempt 
facility under section 142, such as a public road, financed with 
private activity bonds.
* * * * *
0
Par. 4. Section 1.148-11 is amended by adding paragraph (n) to read as 
follows:


Sec.  1.148-11  Effective/applicability dates.

* * * * *
    (n) Investment-type property. Section 1.148-1(e)(1) and (4) apply 
to bonds sold on or after the date that is 90 days after the date of 
publication of a Treasury Decision adopting these rules as final 
regulations in the Federal Register.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-12565 Filed 6-11-18; 8:45 am]
BILLING CODE 4830-01-P