[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11103]


[[Page Unknown]]

[Federal Register: May 10, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[FI-7-94]
RIN 1545-AS49

 

Arbitrage Restrictions on Tax-Exempt Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations.

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SUMMARY: In the Rules and Regulations portion of this issue of the 
Federal Register, the IRS is issuing temporary regulations relating to 
the arbitrage and related restrictions applicable to tax-exempt bonds 
issued by State and local governments. The text of the temporary 
regulations also serves as a portion of the text of these proposed 
regulations.

DATES: Written comments and requests for a public hearing must be 
received by July 11, 1994.

ADDRESSES: Send comments and requests for a public hearing to: Internal 
Revenue Service, POB 7604, Ben Franklin Station, Attn: CC:DOM:CORP:T:R 
(FI-7-94), room 5228, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: William P. Cejudo at 202-622-3980 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act (44 U.S.C. 
3504(h)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attention: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attention: IRS Reports Clearance Officer, PC:FP, Washington, 
DC 20224.
    The collection of information is in Sec. 1.148-4T(h)(2)(ix). This 
information is required by the IRS to verify that an issuer of tax-
exempt bonds is properly complying with the arbitrage restrictions 
under section 148. The recordkeepers are States and political 
subdivisions that issue bonds and entities that issue bonds on behalf 
of States or political subdivisions.

Estimated total annual recordkeeping burden: 6000 hours.
Estimated average annual burden per recordkeeper: 2 hours.
Estimated number of recordkeepers: 3000.

Background

    Sections 1.103-8, 1.148-1T, 1.148-2T, 1.148-3T, 1.148-4T, 1.148-5T, 
1.148-6T, 1.148-9T, 1.148-10T, 1.148-11T, 1.149(d)-1T, and 1.150-1T 
published in the rules and regulations portion of this issue of the 
Federal Register are issued to provide guidance on certain aspects of 
the arbitrage and related restrictions under sections 103, 148, 149(d), 
and 150 of the Internal Revenue Code. The text of those regulations 
also serves as the text of these proposed regulations. The preamble to 
the temporary regulations explains the regulations.
    This document also proposes to amend the definition of 
``investment-type property'' under the arbitrage regulations. Under 
Sec. 1.148-1T, which appears elsewhere in this issue of the Federal 
Register and serves as a portion of the comment document for this 
notice of proposed rulemaking, the term ``investment-type property'' 
includes a contract that would be a hedge except that it contains a 
significant investment element.
    For an issuer borrowing at tax-exempt rates, paying for an interest 
rate cap through an up-front payment or in annual installments presents 
concerns regarding the extent to which the issuer is receiving an 
arbitrage benefit similar to the benefit obtained by making a 
prepayment. This arbitrage benefit arises to the extent that payments 
for the interest rate cap are made earlier than the period to which the 
cap relates (e.g., an up-front payment for the portion of the cap fee 
that relates to later years under the cap).
    The proposed regulations provide specific situations in which 
interest rate caps contain a significant investment element, and, 
therefore, will be treated as investment-type property. First, the 
issuer may not pay for the cap more quickly than in level annual 
installments. Second, the cap may not hedge a bond unless that bond is 
a variable rate debt instrument within the meaning of the original 
issue discount regulations. Finally, the cap rate generally cannot be 
less than the on-market swap rate. These provisions would apply 
prospectively to bonds sold after the adoption of final regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that section 553(b) of the Administrative Procedures Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue 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 business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments that are submitted 
timely (a signed original and eight (8) copies) to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested by a person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is William P. 
Cejudo, Office of Assistant Chief Counsel (Financial Institutions and 
Products). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.103-8 (a)(5) is revised as follows:


Sec. 1.103-8  Interest on bonds to finance certain exempt facilities.

    [The text of proposed paragraph (a)(5) is the same as the text of 
Sec. 1.103-8T(a)(5) published elsewhere in this issue of the Federal 
Register].
    Par. 3. Section 1.148-1 is amended as follows:
    1. Paragraph (b) is amended by removing the definition of 
investment-type property.
    2. Paragraph (e) is added to read as follows:


Sec. 1.148-1  Definitions and elections.

* * * * *
    (e) Investment-type property--(1) In general. 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.
    (2) Non-customary prepayments. Except as otherwise provided, a 
prepayment for property or services is investment-type property if a 
principal purpose for prepaying is to receive an investment return from 
the time the prepayment is made until the time payment otherwise would 
be made. A prepayment is not investment-type property if--
    (i) The prepayment is made for a substantial business purpose other 
than investment return and the issuer has no commercially reasonable 
alternative to the prepayment, or
    (ii) Prepayments on substantially the same terms are made by a 
substantial percentage of persons who are similarly situated to the 
issuer but who are not beneficiaries of tax-exempt financing.
    (3) Certain hedges. Investment-type property also includes a 
contract that would be a hedge (within the meaning of Sec. 1.148-4(h)) 
except that it contains a significant investment element. An interest 
rate cap contains a significant investment element if the payments for 
the cap are made more quickly than in level annual installments over 
the term of the cap or the cap hedges a bond that is not a variable 
rate debt instrument under Sec. 1.1275-5. In addition, a cap generally 
contains a significant investment element if the cap rate is less than 
the on-market swap rate on the date the cap is entered into. This 
paragraph (e)(3) applies to bonds sold after [Insert the date 30 days 
after the date of publication of final regulations in the Federal 
Register].

    Par. 4. Section 1.148-1 is further amended as follows:


Sec. 1.148-1  Definitions and elections.

    [The text of the further amendments proposed for this section is 
the same as the text of Sec. 1.148-1T published elsewhere in this issue 
of the Federal Register].
    Par. 5. Section 1.148-2 is amended as follows:


Sec. 1.148-2  General arbitrage yield restriction rules.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-2T published elsewhere in this issue of the 
Federal Register].

    Par. 6. Section 1.148-3 is amended as follows:


Sec. 1.148-3  General arbitrage rebate rules.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-3T published elsewhere in this issue of the 
Federal Register].

    Par. 7. Section 1.148-4 is amended as follows:


Sec. 1.148-4  Yield on an issue of bonds.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-4T published elsewhere in this issue of the 
Federal Register].

    Par. 8. Section 1.148-5 is amended as follows:


Sec. 1.148-5  Yield and valuation of investments.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-5T published elsewhere in this issue of the 
Federal Register].

    Par. 9. Section 1.148-6 is amended as follows:


Sec. 1.148-6  General allocation and accounting rules.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-6T published elsewhere in this issue of the 
Federal Register].

    Par. 10. Section 1.148-9 is amended as follows:


Sec. 1.148-9  Arbitrage rules for refunding issues.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-9T published elsewhere in this issue of the 
Federal Register].

    Par. 11. Section 1.148-10 is amended as follows:


Sec. 1.148-10  Anti-abuse rules and authority of Commissioner.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-10T published elsewhere in this issue of the 
Federal Register].

    Par. 12. Section 1.148-11 is amended as follows:


Sec. 1.148-11  Effective dates.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.148-11T published elsewhere in this issue of the 
Federal Register].

    Par. 13. Section 1.149(d)-1 is amended as follows:


Sec. 1.149(d)-1  Limitations on advance refundings.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.149(d)-1T published elsewhere in this issue of 
the Federal Register].

    Par. 14. Section 1.150-1 is amended as follows:


Sec. 1.150-1  Definitions.

    [The text of the amendments proposed for this section is the same 
as the text of Sec. 1.150-1T published elsewhere in this issue of the 
Federal Register].
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-11103 Filed 5-5-94; 2:17 pm]
BILLING CODE 4830-01-U