CFR-2000-TITLE26-VOL2-SEC1-150-2.PDF

Internal Revenue Service, Treasury § 1.150–2
(A) A refunding issue that is issued controls all entities controlled, di-
not more than 180 days before the last rectly or indirectly, by the controlled
expenditure of any proceeds of the re- entity or entities.
funding issue for the payment of prin- (3) Exception for general purpose gov-
cipal or interest on the prior issue; or ernmental entities. An entity is not a
(B) A refunding issue if the prior controlled entity under this paragraph
issue had a term of less than 3 years (e) if the entity possesses substantial
and was sold in anticipation of perma- taxing, eminent domain, and police
nent financing, but only if the aggre- powers. For example, a city possessing
gate term of all prior issues sold in an- substantial amounts of each of these
ticipation of permanent financing was sovereign powers is not a controlled en-
less than 3 years. tity of the state.
(4) Advance refunding issue. Advance
refunding issue means a refunding issue [T.D. 8476, 58 FR 33549, June 18, 1993; 58 FR
that is not a current refunding issue. 44453, Aug. 23, 1993, as amended by T.D. 8538,
(5) Prior issue. Prior issue means an 59 FR 24046, May 10, 1994; T.D. 8712, 62 FR
2304, Jan. 16, 1997; T.D. 8718, 62 FR 25513, May
issue of obligations all or a portion of
9, 1997]
the principal, interest, or call premium
on which is paid or provided for with § 1.150–2 Proceeds of bonds used for
proceeds of a refunding issue. A prior reimbursement.
issue may be issued before, at the same
time as, or after a refunding issue. If (a) Table of contents. This table of
the refunded and unrefunded portions contents contains a listing of the head-
of a prior issue are treated as separate ings contained in § 1.150–2.
issues under § 1.148–9(i), for the pur- (a) Table of contents.
poses for which that section applies, (b) Scope.
except to the extent that the context (c) Definitions.
clearly requires otherwise, references (d) General operating rules for reimburse-
to a prior issue refer only to the re- ment expenditures.
funded portion of that prior issue. (1) Official intent.
(e) Controlled group means a group of (2) Reimbursement period.
entities controlled directly or indi- (3) Nature of expenditure.
rectly by the same entity or group of (e) Official intent rules.
entities within the meaning of this (1) Form of official intent.
paragraph (e). (2) Project description in official intent.
(1) Direct control. The determination (3) Reasonableness of official intent.
of direct control is made on the basis of (f) Exceptions to general operating rules.
all the relevant facts and cir- (1) De minimis exception.
cumstances. One entity or group of en- (2) Preliminary expenditures exception.
tities (the controlling entity) generally (g) Special rules on refundings.
controls another entity or group of en- (1) In general—once financed, not reim-
tities (the controlled entity) for purposes bursed.
of this paragraph if the controlling en- (2) Certain proceeds of prior issue used for
reimbursement treated as unspent.
tity possesses either of the following
(h) Anti-abuse rules.
rights or powers and the rights or pow-
(1) General rule.
ers are discretionary and non-ministe-
(2) One-year step transaction rule.
rial—
(i) Authority of the Commissioner to pre-
(i) The right or power both to ap- scribe rules.
prove and to remove without cause a (j) Effective date.
controlling portion of the governing (1) In general.
body of the controlled entity; or (2) Transitional rules.
(ii) The right or power to require the
use of funds or assets of the controlled (b) Scope. This section applies to re-
entity for any purpose of the control- imbursement bonds (as defined in para-
ling entity. graph (c) of this section) for all pur-
(2) Indirect control. If a controlling en- poses of sections 103 and 141 to 150.
tity controls a controlled entity under (c) Definitions. The following defini-
the test in paragraph (e)(1) of this sec- tions apply:
tion, then the controlling entity also Issuer means—
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§ 1.150–2 26 CFR Ch. I (4–1–00 Edition)
(1) For any private activity bond (ex- (A) The date the original expenditure
cluding a qualified 501(c)(3) bond, quali- is paid; or
fied student loan bond, qualified mort- (B) The date the project is placed in
gage bond, or qualified veterans’ mort- service or abandoned, but in no event
gage bond), the entity that actually more than 3 years after the original ex-
issues the reimbursement bond; and penditure is paid.
(2) For any bond not described in (ii) Special rule for small issuers. In ap-
paragraph (1) of this definition, either plying paragraph (d)(2)(i) of this sec-
the entity that actually issues the re-
tion to an issue that satisfies section
imbursement bond or, to the extent
148(f)(4)(D)(i) (I) through (IV), the ‘‘18
that the reimbursement bond proceeds
month’’ limitation is changed to ‘‘3
are to be loaned to a conduit borrower,
years’’ and the ‘‘3-year’’ maximum re-
that conduit borrower.
Official intent means an issuer’s dec- imbursement period is disregarded.
laration of intent to reimburse an (iii) Special rule for long-term construc-
original expenditure with proceeds of tion projects. In applying paragraph
an obligation. (d)(2)(i) to a construction project for
Original expenditure means an expend- which both the issuer and a licensed ar-
iture for a governmental purpose that chitect or engineer certify that at least
is originally paid from a source other 5 years is necessary to complete con-
than a reimbursement bond. struction of the project, the maximum
Placed in service means, with respect reimbursement period is changed from
to a facility, the date on which, based ‘‘3 years’’ to ‘‘5 years.’’
on all the facts and circumstances— (3) Nature of expenditure. The original
(1) The facility has reached a degree expenditure is a capital expenditure, a
of completion which would permit its cost of issuance for a bond, an expendi-
operation at substantially its design ture described in § 1.148–6(d)(3)(ii)(B)
level; and (relating to certain extraordinary
(2) The facility is, in fact, in oper- working capital items), a grant (as de-
ation at such level.
fined in § 1.148–6(d)(4)), a qualified stu-
Reimbursement allocation means an al-
dent loan, a qualified mortgage loan, or
location in writing that evidences an
a qualified veterans’ mortgage loan.
issuer’s use of proceeds of a reimburse-
ment bond to reimburse an original ex- (e) Official intent rules. An official in-
penditure. An allocation made within tent satisfies this paragraph (e) if:
30 days after the issue date of a reim- (1) Form of official intent. The official
bursement bond may be treated as intent is made in any reasonable form,
made on the issue date. including issuer resolution, action by
Reimbursement bond means the por- an appropriate representative of the
tion of an issue allocated to reimburse issuer (e.g., a person authorized or des-
an original expenditure that was paid ignated to declare official intent on be-
before the issue date. half of the issuer), or specific legisla-
(d) General operating rules for reim- tive authorization for the issuance of
bursement expenditures. Except as other- obligations for a particular project.
wise provided, a reimbursement alloca- (2) Project description in official in-
tion is treated as an expenditure of tent—(i) In general. The official intent
proceeds of a reimbursement bond for generally describes the project for
the governmental purpose of the origi- which the original expenditure is paid
nal expenditure on the date of the re- and states the maximum principal
imbursement allocation only if: amount of obligations expected to be
(1) Official intent. Not later than 60
issued for the project. A project in-
days after payment of the original ex-
cludes any property, project, or pro-
penditure, the issuer adopts an official
gram (e.g., highway capital improvement
intent for the original expenditure that
program, hospital equipment acquisition,
satisfies paragraph (e) of this section.
(2) Reimbursement period—(i) In gen- or school building renovation).
eral. The reimbursement allocation is (ii) Fund accounting. A project de-
made not later than 18 months after scription is sufficient if it identifies, by
the later of— name and functional purpose, the fund
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Internal Revenue Service, Treasury § 1.150–2
or account from which the original ex- rehabilitation of a project, other than
penditure is paid (e.g., parks and recre- land acquisition, site preparation, and
ation fund—recreational facility capital similar costs incident to commence-
improvement program). ment of construction.
(iii) Reasonable deviations in project (g) Special rules on refundings—(1) In
description. Deviations between a general—once financed, not reimbursed.
project described in an official intent Except as provided in paragraph (g)(2)
and the actual project financed with of this section, paragraph (d) of this
reimbursement bonds do not invalidate section does not apply to an allocation
the official intent to the extent that to pay principal or interest on an obli-
the actual project is reasonably related gation or to reimburse an original ex-
in function to the described project. penditure paid by another obligation.
For example, hospital equipment is a Instead, such an allocation is analyzed
reasonable deviation from hospital under rules on refunding issues. See
building improvements. In contrast, a § 1.148–9.
city office building rehabilitation is not a (2) Certain proceeds of prior issue used
reasonable deviation from highway im- for reimbursement treated as unspent. In
provements. the case of a refunding issue (or series
(3) Reasonableness of official intent. On of refunding issues), proceeds of a prior
the date of the declaration, the issuer issue purportedly used to reimburse
must have a reasonable expectation (as original expenditures are treated as
defined in § 1.148–1(b)) that it will reim- unspent proceeds of the prior issue un-
burse the original expenditure with less the purported reimbursement was
proceeds of an obligation. Official in- a valid expenditure under applicable
tents declared as a matter of course or law on reimbursement expenditures on
in amounts substantially in excess of the issue date of the prior issue.
the amounts expected to be necessary (h) Anti-abuse rules—(1) General rule.
for the project (e.g., blanket declara- A reimbursement allocation is not an
tions) are not reasonable. Similarly, a expenditure of proceeds of an issue
pattern of failure to reimburse actual under this section if the allocation em-
original expenditures covered by offi- ploys an abusive arbitrage device under
cial intents (other than in extraor- § 1.148–10 to avoid the arbitrage restric-
dinary circumstances) is evidence of tions or to avoid the restrictions under
unreasonableness. An official intent sections 142 through 147.
declared pursuant to a specific legisla- (2) One-year step transaction rule—(i)
tive authorization is rebuttably pre- Creation of replacement proceeds. A pur-
sumed to satisfy this paragraph (e)(3). ported reimbursement allocation is in-
(f) Exceptions to general operating valid and thus is not an expenditure of
rules—(1) De minimis exception. Para- proceeds of an issue if, within 1 year
graphs (d)(1) and (d)(2) of this section after the allocation, funds cor-
do not apply to costs of issuance of any responding to the proceeds of a reim-
bond or to an amount not in excess of bursement bond for which a reimburse-
the lesser of $100,000 or 5 percent of the ment allocation was made are used in a
proceeds of the issue. manner that results in the creation of
(2) Preliminary expenditures exception. replacement proceeds (as defined in
Paragraphs (d)(1) and (d)(2) of this sec- § 1.148–1) of that issue or another issue.
tion do not apply to any preliminary The preceding sentence does not apply
expenditures, up to an amount not in to amounts deposited in a bona fide
excess of 20 percent of the aggregate debt service fund (as defined in § 1.148–
issue price of the issue or issues that fi- 1).
nance or are reasonably expected by (ii) Example. The provisions of para-
the issuer to finance the project for graph (h)(2)(i) of this section are illus-
which the preliminary expenditures trated by the following example.
were incurred. Preliminary expendi-
Example. On January 1, 1994, County A
tures include architectural, engineer-
issues an issue of 7 percent tax-exempt bonds
ing, surveying, soil testing, reimburse- (the 1994 issue) and makes a purported reim-
ment bond issuance, and similar costs bursement allocation to reimburse an origi-
that are incurred prior to commence- nal expenditure for specified capital im-
ment of acquisition, construction, or provements. A immediately deposits funds
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§ 1.150–4 26 CFR Ch. I (4–1–00 Edition)
corresponding to the proceeds subject to the § 1.150–4 Change in use of facilities fi-
reimbursement allocation in an escrow fund nanced with tax-exempt private ac-
to provide for payment of principal and in- tivity bonds.
terest on its outstanding 1991 issue of 9 per-
(a) Scope. This section applies for
cent tax-exempt bonds (the prior issue). The
purposes of the rules for change of use
use of amounts corresponding to the pro-
ceeds of the reimbursement bonds to create a of facilities financed with private ac-
sinking fund for another issue within 1 year tivity bonds under sections 150(b)(3)
after the purported reimbursement alloca- (relating to qualified 501(c)(3) bonds),
tion invalidates the reimbursement alloca- 150(b)(4) (relating to certain exempt fa-
tion. The proceeds retain their character as cility bonds and small issue bonds),
unspent proceeds of the 7 percent issue upon 150(b)(5) (relating to facilities required
deposit in the escrow fund. Accordingly, the to be owned by governmental units or
proceeds are subject to the 7 percent yield 501(c)(3) organizations), and 150(c).
restriction of the 1994 issue instead of the 9 (b) Effect of remedial actions—(1) In
percent yield restriction of the prior issue. general. Except as provided in this sec-
(i) Authority of the Commissioner to tion, the change of use provisions of
prescribe rules. The Commissioner may sections 150(b) (3) through (5), and
150(c) apply even if the issuer takes a
by revenue ruling or revenue procedure
remedial action described in §§ 1.142–2,
(see § 601.601(d)(2)(ii)(b) of this chapter)
1.144–2, or 1.145–2.
prescribe rules for the expenditure of
(2) Exceptions—(i) Redemption. If non-
proceeds of reimbursement bonds in
qualified bonds are redeemed within 90
circumstances that do not otherwise days of a deliberate action under
satisfy this section. § 1.145–2(a) or within 90 days of the date
(j) Effective date—(1) In general. The on which a failure to properly use pro-
provisions of this section apply to all ceeds occurs under § 1.142–2 or § 1.144–2,
allocations of proceeds of reimburse- sections 150(b) (3) through (5) do not
ment bonds issued after June 30, 1993. apply during the period between that
(2) Transitional rules—(i) Official in- date and the date on which the non-
tent. An official intent is treated as qualified bonds are redeemed.
satisfying the official intent require- (ii) Alternative qualifying use of facil-
ment of paragraph (d)(1) of this section ity. If a bond-financed facility is used
if it— for an alternative qualifying use under
(A) Satisfied the applicable provi- §§ 1.145–2 and 1.141–12(f), sections 150(b)
sions of § 1.103–8(a)(5) as in effect prior (3) and (5) do not apply because of the
to July 1, 1993, (as contained in 26 CFR alternative use.
(iii) Alternative use of disposition pro-
part 1 revised as of April 1, 1993) and
ceeds. If disposition proceeds are used
was made prior to that date, or
for a qualifying purpose under §§ 1.145–
(B) Satisfied the applicable provi-
2 and 1.141–12(e), 1.142–2(c)(4), or 1.144–2,
sions of § 1.103–18 as in effect between
sections 150(b) (3) through (5) do not
January 27, 1992, and June 30, 1993, (as apply because of the deliberate action
contained in 26 CFR part 1 revised as of that gave rise to the disposition pro-
April 1, 1993) and was made during that ceeds after the date on which all of the
period. disposition proceeds have been ex-
(ii) Certain expenditures of private ac- pended on the qualifying purpose. If all
tivity bonds. For any expenditure that of the disposition proceeds are so ex-
was originally paid prior to August 15, pended within 90 days of the date of the
1993, and that would have qualified for deliberate action, however, sections
expenditure by reimbursement from 150(b) (3) through (5) do not apply be-
the proceeds of a private activity bond cause of the deliberate action.
under T.D. 7199, section 1.103–8(a)(5), (c) Allocation rules—(1) In general. If a
1972–2 C.B. 45 (see § 601.601(d)(2)(ii)(b)) of change in use of a portion of the prop-
this chapter, the requirements of that erty financed with an issue of qualified
section may be applied in lieu of this private activity bonds causes section
section. 150 (b)(3), (b)(4), or (b)(5) to apply to an
issue, the bonds of the issue allocable
[T.D. 8476, 58 FR 33551, June 18, 1993; 58 FR to that portion under section 150(c)(3)
44453, Aug. 23, 1993] are the same as the nonqualified bonds
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