[Federal Register Volume 62, Number 90 (Friday, May 9, 1997)]
[Rules and Regulations]
[Pages 25502-25514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12062]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8718]
RIN 1545-AS49


Arbitrage Restrictions on Tax-Exempt Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the arbitrage and 
related restrictions applicable to tax-exempt bonds issued by State and 
local governments. Changes to the applicable law were made by the Tax 
Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 
1988, the Revenue Reconciliation Act of 1989, and the Revenue 
Reconciliation Act of 1990. These regulations affect issuers of tax-
exempt bonds and provide guidance for complying with the arbitrage and 
related restrictions.

DATES: These regulations are effective May 9, 1997.
    For dates of applicability of these regulations, see Secs. 1.103-
8(a)(5), 1.142-4(d), 1.148-11, 1.148-11A, 1.149(d)-1(g)(3), and 1.150-
1(a)(2).

FOR FURTHER INFORMATION CONTACT: Brigitte Finley, (202) 622-3980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1347. Responses to these collections of information 
are required to obtain a benefit from treating a contract as a 
qualified hedge or treating certain general obligation bonds as a 
single issue.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated average annual burden hours per recordkeeper: 2 
hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, 
DC 20024, and to the Office of Management and Budget, Attn: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503.
    Books or records relating to collections 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 26 U.S.C. 6103.

Background

    Section 148 of the Internal Revenue Code restricts the use of 
proceeds of tax-exempt State and local bonds to acquire higher yielding 
investments. On June 18, 1993, final regulations (TD 8476) relating to 
the arbitrage restrictions and related rules under sections 103, 148, 
149, and 150 (the June 1993 regulations) were published in the Federal 
Register (59 FR 33510). Corrections to the June 1993 regulations were 
published in the Federal Register on August 23, 1993 (58 FR 44451), and 
May 11, 1994 (59 FR 24350).
    On May 10, 1994, temporary and final regulations (TD 8538) to 
clarify and revise certain provisions of the June 1993 regulations were 
published in the Federal Register (59 FR 24039). A notice of proposed 
rulemaking (FI-7-94) cross-referencing the temporary regulations and 
proposing additional changes to the June 1993 regulations was published 
in the Federal Register on the same day (59 FR 24094). Written comments 
were received, and a public hearing was held on September 25, 1995.
    After consideration of all the comments, the proposed regulations 
have been modified and are adopted in final form, and the corresponding 
temporary regulations are redesignated as final regulations. The 
principal changes to the regulations, as well as the major comments and 
suggestions, are discussed below. Comments relating to regulations 
under section 148 other than those in the proposed regulations also 
were received. The changes requested by those comments are not 
addressed in these final regulations, but are under consideration.

Explanation of Provisions

A. Section 1.142-4--Interest on Bonds To Finance Certain Exempt 
Facilities

    The proposed regulations provide generally that costs incurred 
before the issue date of an exempt facility bond may not be financed 
with the proceeds of that bond unless an official action was taken 
within 60 days of the date those costs were incurred. For tax-exempt 
bonds subject to Sec. 1.150-2, however, a reimbursement allocation may 
be made if the official action was taken within 60 days of the date 
that the costs were paid. One commentator requested that the official 
action and reimbursement allocation rules for exempt facility bonds be 
the same as the rules in Sec. 1.150-2. The final regulations generally 
adopt this suggestion. The final regulations also clarify that a 
refinancing of a taxable debt other than a State or local bond is not 
treated as a refunding for purposes of this rule. In addition, the 
final regulations redesignate this provision, which was previously 
contained in Sec. 1.103-8(a)(5), as new Sec. 1.142-4.

B. Section 1.148-1--Definitions and Elections

1. Bonds Financing a Working Capital Reserve
    The June 1993 regulations provide that replacement proceeds may 
arise if a working capital reserve is directly or indirectly financed 
with bond proceeds, but not to the extent the issuer has maintained a 
working capital reserve. The proposed regulations provide a method for 
determining whether an issuer has maintained a working capital reserve. 
This method is based on the average amount of working capital

[[Page 25503]]

maintained by the issuer before the issue date of the bonds.
    One commentator stated that start-up operations are unable to 
demonstrate any average reserves for past periods and, therefore, 
cannot show that they have not indirectly financed a working capital 
reserve with bond proceeds.
    The determination of whether an issuer has financed a working 
capital reserve with bond proceeds is based on facts and circumstances. 
The method in the proposed regulations provides one way of making that 
determination. An issuer may use alternative methods to establish that 
a working capital reserve is not indirectly financed with bond 
proceeds. Therefore, the final regulations adopt the provision in the 
proposed regulations.
2. Definition of Investment-Type Property
    The proposed regulations clarify that the definition of investment-
type property includes a contract that would be a hedge under 
Sec. 1.148-4(h) except that it contains a significant investment 
element. The proposed regulations also provide that 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, the cap hedges a bond that is not a variable rate debt 
instrument (VRDI) under Sec. 1.1275-5, or the cap rate is less than the 
on-market swap rate on the date the cap is entered into.
    Commentators requested that the provisions relating to whether an 
interest rate cap contains a significant investment element be deleted 
because they asserted that those conditions do not give rise to an 
expected return from the cap. One commentator stated that these rules 
were misplaced and should be included in the provision in Sec. 1.148-
4(h) dealing with significant investment element.
    The final regulations modify the proposed regulations in several 
ways. First, the provision that a cap contains a significant investment 
element if the cap rate is less than the on-market swap rate has been 
deleted. The deletion of this rule is balanced by another rule 
addressing the timing of payments for a cap. (See discussion below.) 
Second, the requirement relating to the pattern of payments for a cap 
and the prohibition on hedging an instrument other than a VRDI have 
been moved to Sec. 1.148-4(h). (See discussion below.) Third, the final 
regulations clarify that investment-type property includes only the 
investment element of a hedge that contains a significant investment 
element. This element does not necessarily include all payments on or 
receipts from a hedge.

C. Section 1.148-4--Yield on an Issue of Bonds

1. Yield on Certain Mortgage Revenue and Student Loan Bonds
    The proposed regulations provide that, for purposes of applying 
sections 148 and 143(g) to a variable yield issue of qualified mortgage 
bonds, qualified veterans' mortgage bonds, or qualified student loan 
bonds, the yield on the issue is computed over the term of the issue, 
and Sec. 1.148-4(d) (relating to conversion from a variable yield issue 
to a fixed yield issue) does not apply. The proposed regulations also 
address how to compute yield over the term of the issue.
    One commentator requested that this rule be amended so it applies 
only for yield restriction purposes or only to variable yield issues 
that are expected to convert to fixed yield issues. The commentator 
explained that applying the rule for rebate purposes may be 
inappropriate. The final regulations generally adopt this comment by 
providing that the rule applies only to issues that are expected to 
convert to a fixed yield and only for purposes of applying sections 148 
and 143(g) to purpose investments.
2. Qualified Hedging Transactions
    a. Definition of hedge. The final regulations expand the definition 
of hedge to include certain hedges of bonds of an issue that would 
otherwise be a fixed yield issue (a fixed-to-variable hedge). 
Generally, a fixed-to-variable hedge must be entered into no later than 
15 days after the issue date of the issue (or the deemed issue date 
under Sec. 1.148-4(d)) or no later than the expiration of another 
qualified hedge with respect to the bonds. The permitted fixed-to-
variable hedges are limited in this manner to minimize the complex 
computations and potential for abuse that may arise if an issue 
switches between fixed yield treatment and variable yield treatment 
during the term of the issue. Comments are requested on the extent to 
which other fixed-to-variable hedges should be treated as a hedge.
    b. Significant investment element. The definition of investment-
type property in the proposed regulations provides that an interest 
rate cap contains a significant investment element if the payments for 
the cap are made more quickly than in level annual installments. 
Commentators requested that this provision be deleted because they 
asserted that early payment of a cap premium never gives rise to an 
expected return from the cap.
    Amounts paid for an interest rate cap generally relate increasingly 
to the later years of the term of the cap. Thus, this rule reflects the 
concern that the issuer receives an arbitrage benefit by making a 
prepayment. This prepayment concern also arises in connection with 
other types of hedges when an issuer makes payments before the period 
to which those payments relate. Therefore, the final regulations 
provide that a hedge contains a significant investment element if the 
issuer's payments for the hedge are significantly front-loaded. In 
addition, a hedge contains a significant investment element if the 
issuer's payments are significantly back-loaded. The final regulations 
also include a special rule for caps that permits cap fees to be paid 
in level installments over the term of the cap.
    c. Interest based. The definition of investment-type property in 
the proposed regulations provides that an interest rate cap contains a 
significant investment element if the cap hedges a bond that is not a 
VRDI within the meaning of Sec. 1.1275-5. Commentators requested that 
this provision be deleted because they asserted that hedging a bond 
that is not a VRDI does not give rise to an expected return from the 
cap.
    The final regulations clarify that a contract meets the requirement 
that it be interest based only if, (i) before the contract is taken 
into account, each hedged bond is a type of obligation that is 
respected as solely tax-exempt debt under the original issue discount 
regulations (i.e., a fixed rate bond, a VRDI within the meaning of 
Sec. 1.1275-5 that is not based on an objective rate other than a 
qualified inverse floating rate or a qualified inflation rate, a tax-
exempt obligation described in Sec. 1.1275-4(d)(2), or an inflation-
indexed debt instrument within the meaning of Sec. 1.1275-7T), and (ii) 
after the contract is taken into account, each hedged bond is 
substantially the same as one of these types of debt instruments.
    d. Timing and allocation of payments. The proposed regulations 
provide that the period to which a payment made by the issuer relates 
is based on general Federal income tax principles, and that generally a 
payment received by the issuer is taken into account in the period that 
the interest payment that the payment hedges is required to be made. 
The final regulations amend these rules to provide that payments made 
or received by the issuer under a qualified hedge are taken into 
account in the period that those amounts would be treated as income or 
deductions under Sec. 1.446-4 (without regard to the

[[Page 25504]]

exclusion from Sec. 1.446-4 for tax-exempt obligations).
    e. Certain variable yield bonds treated as fixed yield bonds--
certain terminations disregarded. Under the June 1993 regulations, a 
variable yield issue is treated as a fixed yield issue if the issuer 
enters into a qualified hedge that meets certain requirements. The 
proposed regulations in general provide that upon a termination of this 
type of qualified hedge, the issue of which the hedged bonds are a part 
is treated for purposes of Sec. 1.148-3 (relating to rebate) as if it 
were reissued as of the termination date. The proposed regulations also 
provide that the termination will be disregarded (i.e., the issue will 
continue to be treated as a fixed yield issue) if (i) the issuer 
immediately replaces the terminated hedge and there is no change in the 
yield or (ii) the termination is caused by the bankruptcy or insolvency 
of the hedge provider and the Commissioner determines that the 
termination occurred without any action by the issuer. The final 
regulations modify the proposed regulations by deleting the provision 
relating to terminations of a qualified hedge caused by the bankruptcy 
or insolvency of the hedge provider because, unless the issuer enters 
into a replacement hedge, any termination of the hedge may cause a 
change in the yield on the bonds.
    f. Certain acquisition payments. The proposed regulations provide 
that if an issuer receives a single, up-front payment relating to the 
off-market portion of an otherwise qualified hedge, the hedge does not 
fail to be a qualified hedge as long as the off-market rates are 
separately identified and are not taken into account in determining 
yield on the bonds. The proposed regulations also provide that the on-
market rates are determined as of the date the parties enter into the 
contract. The final regulations adopt this rule. In the case of hedges 
entered into before the issue date (e.g., a forward swap), the on-
market rate is the forward on-market rate on the date the parties enter 
into the hedge.
    g. Treatment of hedges entered into before issue date of hedged 
bonds. The proposed regulations provide that a hedge entered into 
before the issue date may be a qualified hedge, even if the payments 
received by the issuer do not correspond to interest payments on the 
hedged bonds. Commentators requested clarification about what other 
special rules apply to these types of hedges. In particular, 
commentators suggested that payments made or received by an issuer 
before the issue date should not prevent these types of hedges from 
treatment as a qualified hedge.
    The final regulations clarify the treatment of two different types 
of hedges entered into before the issue date. First, if an issuer 
expects that a hedge will be closed in connection with the issuance of 
bonds, payments on the hedge made or received, or deemed made or 
received, adjust the issue price of the hedged bonds. For this purpose, 
issue price is adjusted by taking into account the future value as of 
the issue date of the payments made or received before the issue date. 
Second, if an issuer does not expect that a hedge will be closed in 
connection with the issuance of the bonds and does not close the hedge 
in connection with the issuance of the bonds, the payments and receipts 
on the hedge adjust payments and receipts on the hedged bonds in the 
same manner as other qualified hedges. Payments on the hedge made by 
the issuer before the issue date, however, are not taken into account 
for purposes of determining yield on the hedged bond.
    h. Authority of Commissioner. The proposed regulations permit the 
Commissioner to determine that a contract is not a qualified hedge if 
treating the contract as a qualified hedge provides a material 
potential for arbitrage. In addition, the proposed regulations permit 
the Commissioner to recompute the yield on an issue by taking into 
account a hedge if the issuer fails to meet the qualified hedge rules 
and the failure distorts the yield or otherwise fails to clearly 
reflect the economic substance of the transaction.
    Some commentators asserted that this grant of authority is too 
broad and adds uncertainty about the proper treatment of certain 
transactions that are not specifically addressed by the regulations, 
such as asset hedges.
    In general, an issuer may choose whether a hedge is treated as a 
qualified hedge, as long as that choice is prospective. Section 1.148-
10(e) gives the Commissioner the authority to depart from the rules of 
Secs. 1.148-1 through 1.148-11 to reflect the economic substance of a 
transaction if a principal purpose of the transaction is to obtain an 
arbitrage benefit that is inconsistent with the purposes of section 
148. Therefore, in general a separate anti-abuse rule is unnecessary. 
The final regulations amend Sec. 1.148-10(e) to clarify that the 
actions the Commissioner may take to clearly reflect the economic 
substance of a transaction include treating a hedge as a qualified 
hedge or treating a hedge as other than a qualified hedge. Because 
special considerations apply to identification of hedges entered into 
before the issue date of the hedged bonds, the final regulations also 
provide that this type of hedge will be treated as a hedge of bonds 
that are similar to the bonds that the issuer expected to issue when it 
entered into the hedge.
    i. Asset hedging. The proposed regulations do not provide specific 
rules for the treatment of hedges of assets allocable to the proceeds 
of tax-exempt bonds. One commentator suggested that the regulations 
extend the integration principles currently applicable to qualified 
hedges to include comparable principles for hedges of assets allocable 
to the proceeds of tax-exempt bonds. The final regulations do not adopt 
this comment or provide specific rules for asset hedging. However, 
comments are requested relating to the proper treatment of asset hedges 
for purposes of section 148.

D. Section 1.148-5--Yield and Valuation of Investments

1. Permissive Application of Single Investment Rules to Certain Yield 
Restricted Investments for all Purposes of Section 148
    The proposed regulations provide that for all purposes of section 
148, an issuer may blend the yield of all yield restricted, nonpurpose 
investments in a refunding escrow and a sinking fund that is reasonably 
expected as of the issue date to be maintained to reduce the yield on 
the investments in the refunding escrow. Commentators requested that 
this rule be amended to permit blending of the yield on all yield 
restricted nonpurpose investments. The final regulations do not adopt 
this comment because a more flexible yield blending rule could permit 
avoidance of the requirement that rebatable arbitrage must be paid for 
periods of no greater than 5 years. In addition, the final regulations 
clarify that the rule applies only to sinking funds that are reasonably 
expected as of the issue date to be established and maintained solely 
to reduce the yield on the investments in the refunding escrow. For 
example, the rule does not apply to investments in a reasonably 
required reserve fund that the issuer intends to use to reduce the 
yield on the investments in a refunding escrow.
2. Manner of Payment of Yield Reduction Payments
    The proposed regulations provide that yield reduction payments must 
be made at the same time and in the same manner as rebate amounts are 
required to be paid under Sec. 1.148-3(f), and that the date a payment 
is required to be

[[Page 25505]]

paid is determined without regard to Sec. 1.148-3(h), which allows the 
issuer to pay a penalty in lieu of loss of tax-exemption in certain 
situations. The proposed regulations also provide that a yield 
reduction payment that is paid untimely is not taken into account 
unless the Commissioner determines that the failure to pay timely is 
not due to willful neglect.
    One commentator noted that this rule imposes a procedural standard 
that is different from the rules regarding late rebate payments and 
requested that this rule be amended to eliminate the requirement of 
action by the Commissioner and to otherwise conform to the rules for 
late payment of rebate. The final regulations adopt this comment.
3. External Commingled Funds
    The June 1993 regulations provide that an issuer that invests in a 
commingled fund may take indirect administrative costs of the 
commingled fund into account for purposes of determining payments and 
receipts on nonpurpose investments if certain requirements are met. In 
general, the issuer and any related parties must not own more than 10 
percent of the beneficial interest in the fund. The proposed 
regulations provide a test for determining whether the 10 percent limit 
is met.
    One commentator stated that under the method for determining 
whether the 10 percent requirement is met the investor is uncertain 
whether its deposit will cause it to exceed the 10 percent limit, 
whether actions of another investor will cause it to exceed the 10 
percent limit at any time for the duration of this investment, whether 
the whole fund is tainted if one investor exceeds the 10 percent limit, 
whether the impact is limited to those days that the 10 percent limit 
is exceeded, how the 10 percent limit is measured, and whether the 
semiannual period is a fixed or a floating period. The commentator 
suggested that the test should be applied only at the time that a 
deposit is made and the result should not be affected by simultaneous 
or subsequent activity in the pool.
    The final regulations generally adopt this suggestion. The final 
regulations clarify that this rule applies only to widely held 
commingled funds and that the determination of whether a fund is widely 
held is based on the average number of investors during the immediately 
preceding, fixed, semiannual period chosen by the fund (e.g., 
semiannual periods ending June 30 and December 31). Thus, the 
determination of whether any issuer that has invested in a commingled 
fund may take indirect administrative costs into account may change 
from one 6-month period to another. The final regulations also provide 
that the determination of whether an investor exceeds the 10 percent 
limit is made on the date of deposit into the commingled fund and 
whether that investor exceeds the 10 percent limit is not affected by 
subsequent actions of investors in the fund. In addition, if any 
investor exceeds the 10 percent limit, no investor in the fund may take 
indirect administrative costs into account until that investor makes 
sufficient withdrawals from the fund to meet the 10 percent limit. 
Thus, if a fund continues to be widely held and does not accept any 
deposits from an investor that exceeds the 10 percent limit, all 
issuers that have invested tax-exempt bond proceeds in the fund may 
take the indirect administrative costs of the fund into account.
4. Qualified Administrative Costs of Guaranteed Investment Contracts
    The June 1993 regulations generally provide that administrative 
costs must be reasonable in order to be qualified administrative costs. 
The proposed regulations provide that a broker's commission for a 
guaranteed investment contract is treated as an administrative cost and 
is not a qualified administrative cost to the extent that the present 
value of the fee exceeds the present value of annual payments equal to 
.05 percent of the weighted average amount reasonably expected to be 
invested each year during the term of the contract. The final 
regulations clarify that a broker's commission is a qualified 
administrative cost to the extent it does not exceed the lesser of a 
reasonable amount or the .05 percent limit. No inference should be 
drawn that there are necessarily any situations in which a commission 
equal to .05 percent is reasonable.

E. Section 1.150-1--Definitions

    The proposed regulations define ``issue'' for all purposes of 
sections 103 and 141 through 150. The final regulations adopt the 
definition as proposed with one modification. The final regulations 
delete the rule that a variable yield bond is treated as sold on its 
issue date and clarify that the definition of ``sale date'' applies to 
all bonds.
    The proposed regulations also provide a special rule relating to 
the treatment of general obligation bonds sold and issued on the same 
dates pursuant to a single offering document as part of the same issue. 
Commentators expressed concern that this special rule is mandatory and 
conflicts with other rules relating to the determination of whether 
bonds are part of a single issue. The commentators requested that the 
relationship of the rules be clarified and that the general obligation 
rule not be mandatory.
    The final regulations generally adopt these comments by permitting 
an issuer to elect to treat tax-exempt general obligation bonds sold 
and issued on the same dates pursuant to a single offering document as 
part of the same issue. However, taxable bonds still must be treated as 
a separate issue. A proposed amendment to the exception for taxable 
bonds in Sec. 1.150-1(c)(2), proposed in regulations published in the 
Federal Register on December 30, 1994, is not addressed by these final 
regulations.

F. Effective Dates

    The final regulations generally are effective for bonds issued on 
or after July 8, 1997. An issuer generally may apply the final 
regulations to bonds that are outstanding on July 8, 1997 and to which 
certain prior regulations apply. In addition, the rules in the 
temporary regulations have been redesignated as Secs. 1.148-1A through 
1.148-6A, 1.148-9A, 1.148-10A, 1.148-11A, 1.149(d)-1A, and 1.150-1A 
and, together with the applicable provisions of the June 1993 
regulations, continue to apply to bonds issued before July 8, 1997.

Special Analysis

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and because the notice of proposed 
rulemaking preceding the regulations was issued prior to March 29, 
1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Brigitte Finley and 
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.

[[Page 25506]]

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for Sec. 1.148-11T to read in part as follows:

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

    Par. 2. In Sec. 1.103-8, paragraph (a)(5) is revised to read as 
follows:


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

    (a) * * *
    (5) Limitation. (i) A facility qualifies under this section only to 
the extent that there is a valid reimbursement allocation under 
Sec. 1.150-2 with respect to expenditures that are incurred before the 
issue date of the bonds to provide the facility and that are to be paid 
with the proceeds of the issue. In addition, if the original use of the 
facility begins before the issue date of the bonds, the facility does 
not qualify under this section if any person that was a substantial 
user of the facility at any time during the 5-year period before the 
issue date or any related person to that user receives (directly or 
indirectly) 5 percent or more of the proceeds of the issue for the 
user's interest in the facility and is a substantial user of the 
facility at any time during the 5-year period after the issue date, 
unless--
    (A) An official intent for the facility is adopted under 
Sec. 1.150-2 within 60 days after the date on which acquisition, 
construction, or reconstruction of that facility commenced; and
    (B) For an acquisition, no person that is a substantial user or 
related person after the acquisition date was also a substantial user 
more than 60 days before the date on which the official intent was 
adopted.
    (ii) A facility, the original use of which commences (or the 
acquisition of which occurs) on or after the issue date of bonds to 
provide that facility, qualifies under this section only to the extent 
that an official intent for the facility is adopted under Sec. 1.150-2 
by the issuer of the bonds within 60 days after the commencement of the 
construction, reconstruction, or acquisition of that facility. 
Temporary construction or other financing of a facility prior to the 
issuance of the bonds to provide that facility will not cause that 
facility to be one that does not qualify under this paragraph 
(a)(5)(ii).
    (iii) For purposes of paragraph (a)(5)(i) of this section, 
substantial user has the meaning used in section 147(a)(1), related 
person has the meaning used in section 144(a)(3), and a user that is a 
governmental unit within the meaning of Sec. 1.103-1 is disregarded.
    (iv) Except to the extent provided in Secs. 1.142-4(d), 1.148-
11A(i), and 1.150-2(j), this paragraph (a)(5) applies to bonds issued 
after June 30, 1993, and sold before July 8, 1997. See Sec. 1.142-4(d) 
for rules relating to bonds sold on or after July 8, 1997.
* * * * *


Sec. 1.103-8T  [Removed]

    Par. 3. Section 1.103-8T is removed.
    Par. 4. Section 1.142-4 is added to read as follows:


Sec. 1.142-4  Use of proceeds to provide a facility.

    (a) In general. [Reserved].
    (b) Reimbursement allocations. If an expenditure for a facility is 
paid before the issue date of the bonds to provide that facility, the 
facility is described in section 142(a) only if the expenditure meets 
the requirements of Sec. 1.150-2 (relating to reimbursement 
allocations). For purposes of this paragraph (b), if the proceeds of an 
issue are used to pay principal of or interest on an obligation other 
than a State or local bond (for example, temporary construction 
financing of the conduit borrower), that issue is not a refunding 
issue, and, thus, Sec. 1.150-2(g) does not apply.
    (c) Limitation on use of facilities by substantial users--(1) In 
general. If the original use of a facility begins before the issue date 
of the bonds to provide the facility, the facility is not described in 
section 142(a) if any person that was a substantial user of the 
facility at any time during the 5-year period before the issue date or 
any related person to that user receives (directly or indirectly) 5 
percent or more of the proceeds of the issue for the user's interest in 
the facility and is a substantial user of the facility at any time 
during the 5-year period after the issue date, unless--
    (i) An official intent for the facility is adopted under 
Sec. 1.150-2 within 60 days after the date on which acquisition, 
construction, or reconstruction of that facility commenced; and
    (ii) For an acquisition, no person that is a substantial user or 
related person after the acquisition date was also a substantial user 
more than 60 days before the date on which the official intent was 
adopted.
    (2) Definitions. For purposes of paragraph (c)(1) of this section, 
substantial user has the meaning used in section 147(a)(1), related 
person has the meaning used in section 144(a)(3), and a user that is a 
governmental unit within the meaning of Sec. 1.103-1 is disregarded.
    (d) Effective date--(1) In general. This section applies to bonds 
sold on or after July 8, 1997. See Sec. 1.103-8(a)(5) for rules 
applicable to bonds sold before that date.
    (2) Elective retroactive application. An issuer may apply this 
section to any bond sold before July 8, 1997.
    Par. 5. In Sec. 1.148-0, paragraph (c) is amended as follows:
    1. An entry for Sec. 1.148-1, paragraph (e) is added.
    2. The entries for Sec. 1.148-4, paragraph (h)(4) and (h)(5) are 
revised.
    3. An entry for Sec. 1.148-4, paragraph (h)(6) is added.
    4. An entry for Sec. 1.148-11, paragraph (b)(3) is added.
    5. Entries for Sec. 1.148-11, paragraphs (c)(1) and (g) are 
revised.
    6. Entries for Sec. 1.148-11, paragraphs (h) and (i) are removed.
    The revised and added provisions read as follows:


Sec. 1.148-0  Scope and table of contents.

* * * * *
    (c) * * *

Sec. 1.148-1  Definitions and elections.

* * * * *
    (e) Investment-type property.
* * * * *

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

* * * * *
    (h) * * *
    (4) Certain variable yield bonds treated as fixed yield bonds.
    (5) Contracts entered into before issue date of hedged bond.
    (6) Authority of the Commissioner.
* * * * *

Sec. 1.148-11  Effective dates.

* * * * *
    (b) * * *
    (3) No elective retroactive application for hedges of fixed rate 
issues.
    (c) * * *
    (1) Retroactive application of overpayment recovery provisions.
* * * * *
    (g) Provisions applicable to certain bonds sold before effective 
date.

[[Page 25507]]

Secs. 1.148-1T, 1.148-2T, 1.148-3T, 1.148-4T, 1.148-5T, 1.148-6T, 
1.148-9T, 1.148-10T, and 1.148-11T  [Redesignated as Secs. 1.148-1A, 
1.148-2A, 1.148-3A, 1.148-4A, 1.148-5A, 1.148-6A, 1.148-9A, 1.148-10A, 
and 1.148-11A]

    Par. 6. Sections 1.148-1T, 1.148-2T, 1.148-3T, 1.148-4T, 1.148-5T, 
1.148-6T, 1.148-9T, 1.148-10T, and 1.148-11T are redesignated as 
Secs. 1.148-1A, 1.148-2A, 1.148-3A, 1.148-4A, 1.148-5A, 1.148-6A, 
1.148-9A, 1.148-10A, and 1.148-11A, respectively, and added under an 
undesignated centerheading immediately preceding the undesignated 
centerheading ``Deductions for Personal Exemptions'' to read as 
follows:
    Regulations Applicable to Certain Bonds Sold Prior to July 8, 1997.
    Par. 6a. The section headings of newly designated Secs. 1.148-1A, 
1.148-2A, 1.148-3A, 1.148-4A, 1.148-5A, 1.148-6A, 1.148-9A, 1.148-10A, 
and 1.148-11A are amended by removing the language ``(temporary)''.
    Par. 7. Section 1.148-1 is amended as follows:
    1. Paragraph (b) is amended by revising the definition of 
Investment-type property, by adding the definition of Replacement 
proceeds in alphabetical order, and by adding a new sentence at the end 
of the definition of Sale proceeds.
    2. Paragraph (c)(4)(ii)(A) is revised.
    3. Paragraph (e) is added.

The revised and added provisions read as follows:


Sec. 1.148-1  Definitions and elections.

* * * * *
    (b) * * *
* * * * *
    Investment-type property is defined in paragraph (e) of this 
section.
* * * * *
    Replacement proceeds is defined in paragraph (c) of this section.
* * * * *
    Sale proceeds * * * See also Sec. 1.148-4(h)(5) treating amounts 
received upon the termination of certain hedges as sale proceeds.
* * * * *
    (c) * * *
    (4) * * *
    (ii) Bonds financing a working capital reserve--(A) In general. 
Except as otherwise provided in paragraph (c)(4)(ii)(B) of this 
section, replacement proceeds arise to the extent a working capital 
reserve is, directly or indirectly, financed with the proceeds of the 
issue (regardless of the expenditure of proceeds of the issue). Thus, 
for example, if an issuer that does not maintain a working capital 
reserve borrows to fund a working capital reserve, the issuer will have 
replacement proceeds. To determine the amount of a working capital 
reserve maintained, an issuer may use the average amount maintained as 
a working capital reserve during annual periods of at least 1 year, the 
last of which ends within 1 year before the issue date. For example, 
the amount of a working capital reserve may be computed using the 
average of the beginning or ending monthly balances of the amount 
maintained as a reserve (net of unexpended gross proceeds) during the 1 
year period preceding the issue date.
* * * * *
    (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. For this purpose, 
production of income includes any benefit based on the time value of 
money, including the benefit from making a prepayment.
    (2) Non-customary prepayments. Except as otherwise provided in this 
paragraph (e), a prepayment for property or services gives rise to 
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 does not give 
rise to 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 the 
investment element of a contract that is a hedge (within the meaning of 
Sec. 1.148-4(h)(2)(i)(A)) and that contains a significant investment 
element because a payment by the issuer relates to a conditional or 
unconditional obligation by the hedge provider to make a payment on a 
later date. See Sec. 1.148-4(h)(2)(ii) relating to hedges with a 
significant investment element.
    Par. 8. In Sec. 1.148-2, paragraph (b)(2)(ii) is revised to read as 
follows:


Sec. 1.148-2  General arbitrage yield restriction rules.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Exceptions to certification requirement. An issuer is not 
required to make a certification for an issue under paragraph (b)(2)(i) 
of this section if--
    (A) The issuer reasonably expects as of the issue date that there 
will be no unspent gross proceeds after the issue date, other than 
gross proceeds in a bona fide debt service fund (e.g., equipment lease 
financings in which the issuer purchases equipment in exchange for an 
installment payment note); or
    (B) The issue price of the issue does not exceed $1,000,000.
* * * * *
    Par. 9. In Sec. 1.148-3, the last sentence of paragraph (h)(3) is 
revised to read as follows:


Sec. 1.148-3  General arbitrage rebate rules.

* * * * *
    (h) * * *
    (3) * * * For purposes of this paragraph (h)(3), willful neglect 
does not include a failure that is attributable solely to the 
permissible retroactive selection of a short first bond year if the 
rebate amount that the issuer failed to pay is paid within 60 days of 
the selection of that bond year.
* * * * *
    Par. 10. Section 1.148-4 is amended as follows:
    1. Paragraphs (b)(5), (g), (h)(1), (h)(2) introductory text, and 
(h)(2)(i) are revised.
    2. Paragraph (h)(2)(vi) and (h)(2)(vii) are removed.
    3. Paragraphs (h)(2)(ii) through (h)(2)(v) are redesignated as 
paragraphs (h)(2)(iii) through (h)(2)(vi) and paragraphs (h)(2)(viii) 
and (h)(2)(ix) are redesignated as paragraphs (h)(2)(vii) and 
(h)(2)(viii).
    4. New paragraph (h)(2)(ii) is added.
    5. Newly designated paragraphs (h)(2)(iv), (h)(2)(v), (h)(2)(vi), 
and (h)(2)(viii) and paragraphs (h)(3), (h)(4), and (h)(5) are revised.
    6. Paragraph (h)(6) is added.
    The revised and added provisions read as follows:


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

* * * * *
    (b) * * *
    (5) Special aggregation rule treating certain bonds as a single 
fixed yield bond. Two variable yield bonds of an issue are treated in 
the aggregate as a single fixed yield bond if--
    (i) Aggregate treatment would result in the single bond being a 
fixed yield bond; and
    (ii) The terms of the bonds do not contain any features that could 
distort the aggregate fixed yield from what the

[[Page 25508]]

yield would be if a single fixed yield bond were issued. For example, 
if an issue contains a bond bearing interest at a floating rate and a 
related bond bearing interest at a rate equal to a fixed rate minus 
that floating rate, those two bonds are treated as a single fixed yield 
bond only if neither bond may be redeemed unless the other bond is also 
redeemed at the same time.
* * * * *
    (g) Yield on certain mortgage revenue and student loan bonds. For 
purposes of section 148 and this section, section 143(g)(2)(C)(ii) 
applies to the computation of yield on an issue of qualified mortgage 
bonds or qualified veterans' mortgage bonds. For purposes of applying 
section 148 and section 143(g) with respect to purpose investments 
allocable to a variable yield issue of qualified mortgage bonds, 
qualified veterans' mortgage bonds, or qualified student loan bonds 
that is reasonably expected as of the issue date to convert to a fixed 
yield issue, the yield may be computed over the term of the issue, and, 
if the yield is so computed, paragraph (d) of this section does not 
apply to the issue. As of any date, the yield over the term of the 
issue is based on--
    (1) With respect to any bond of the issue that has not converted to 
a fixed and determinable yield on or before that date, the actual 
amounts paid or received to that date and the amounts that are 
reasonably expected (as of that date) to be paid or received with 
respect to that bond over the remaining term of the issue (taking into 
account prepayment assumptions under section 143(g)(2)(B)(iv), if 
applicable); and
    (2) With respect to any bond of the issue that has converted to a 
fixed and determinable yield on or before that date, the actual amounts 
paid or received before that bond converted, if any, and the amount 
that was reasonably expected (on the date that bond converted) to be 
paid or received with respect to that bond over the remaining term of 
the issue (taking into account prepayment assumptions under section 
143(g)(2)(B)(iv), if applicable).
    (h) Qualified hedging transactions--(1) In general. Payments made 
or received by an issuer under a qualified hedge (as defined in 
paragraph (h)(2) of this section) relating to bonds of an issue are 
taken into account (as provided in paragraph (h)(3) of this section) to 
determine the yield on the issue. Except as provided in paragraphs 
(h)(4) and (h)(5)(ii)(E) of this section, the bonds to which a 
qualified hedge relates are treated as variable yield bonds from the 
issue date of the bonds. This paragraph (h) applies solely for purposes 
of sections 143(g), 148, and 149(d).
    (2) Qualified hedge defined. Except as provided in paragraph (h)(5) 
of this section, the term qualified hedge means a contract that 
satisfies each of the following requirements:
    (i) Hedge--(A) In general. The contract is entered into primarily 
to modify the issuer's risk of interest rate changes with respect to a 
bond (a hedge). For example, the contract may be an interest rate swap, 
an interest rate cap, a futures contract, a forward contract, or an 
option.
    (B) Special rule for fixed rate issues. If the contract modifies 
the issuer's risk of interest rate changes with respect to a bond that 
is part of an issue that, absent the contract, would be a fixed rate 
issue, the contract must be entered into--
    (1) No later than 15 days after the issue date (or the deemed issue 
date under paragraph (d) of this section) of the issue; or
    (2) No later than the expiration of a qualified hedge with respect 
to bonds of that issue that satisfies paragraph (h)(2)(i)(B)(1) of this 
section; or
    (3) No later than the expiration of a qualified hedge with respect 
to bonds of that issue that satisfies either paragraph (h)(2)(i)(B)(2) 
of this section or this paragraph (h)(2)(i)(B)(3).
    (C) Contracts with certain acquisition payments. If a hedge 
provider makes a single payment to the issuer (e.g., a payment for an 
off-market swap) in connection with the acquisition of a contract, the 
issuer may treat a portion of that contract as a hedge provided--
    (1) The hedge provider's payment to the issuer and the issuer's 
payments under the contract in excess of those that it would make if 
the contract bore rates equal to the on-market rates for the contract 
(determined as of the date the parties enter into the contract) are 
separately identified in a certification of the hedge provider; and
    (2) The payments described in paragraph (h)(2)(i)(C)(1) of this 
section are not treated as payments on the hedge.
    (ii) No significant investment element--(A) In general. The 
contract does not contain a significant investment element. Except as 
provided in paragraph (h)(2)(ii)(B) of this section, a contract 
contains a significant investment element if a significant portion of 
any payment by one party relates to a conditional or unconditional 
obligation by the other party to make a payment on a different date. 
Examples of contracts that contain a significant investment element are 
a debt instrument held by the issuer; an interest rate swap requiring 
any payments other than periodic payments, within the meaning of 
Sec. 1.446-3 (periodic payments) (e.g., a payment for an off-market 
swap or prepayment of part or all of one leg of a swap); and an 
interest rate cap requiring the issuer's premium for the cap to be paid 
in a single, up-front payment.
    (B) Special level payment rule for interest rate caps. An interest 
rate cap does not contain a significant investment element if--
    (1) All payments to the issuer by the hedge provider are periodic 
payments;
    (2) The issuer makes payments for the cap at the same time as 
periodic payments by the hedge provider must be made if the specified 
index (within the meaning of Sec. 1.446-3) of the cap is above the 
strike price of the cap; and
    (3) Each payment by the issuer bears the same ratio to the notional 
principal amount (within the meaning of Sec. 1.446-3) that is used to 
compute the hedge provider's payment, if any, on that date.
* * * * *
    (iv) Hedged bonds. The contract covers, in whole or in part, all of 
one or more groups of substantially identical bonds in the issue (i.e., 
all of the bonds having the same interest rate, maturity, and terms). 
Thus, for example, a qualified hedge may include a hedge of all or a 
pro rata portion of each interest payment on the variable rate bonds in 
an issue for the first 5 years following their issuance. For purposes 
of this paragraph (h), unless the context clearly requires otherwise, 
hedged bonds means the specific bonds or portions thereof covered by a 
hedge.
    (v) Interest based contract. The contract is primarily interest 
based. A contract is not primarily interest based unless--
    (A) The hedged bond, without regard to the contract, is either a 
fixed rate bond, a variable rate debt instrument within the meaning of 
Sec. 1.1275-5 provided the rate is not based on an objective rate other 
than a qualified inverse floating rate or a qualified inflation rate, a 
tax-exempt obligation described in Sec. 1.1275-4(d)(2), or an 
inflation-indexed debt instrument within the meaning of Sec. 1.1275-7T; 
and
    (B) As a result of treating all payments on (and receipts from) the 
contract as additional payments on (and receipts from) the hedged bond, 
the resulting bond would be substantially similar to either a fixed 
rate bond, a variable rate debt instrument within the meaning of 
Sec. 1.1275-5 provided the rate is not based on an objective rate other 
than a qualified inverse floating rate or a

[[Page 25509]]

qualified inflation rate, a tax-exempt obligation described in 
Sec. 1.1275-4(d)(2), or an inflation-indexed debt instrument within the 
meaning of Sec. 1.1275-7T. For this purpose, differences that would not 
prevent the resulting bond from being substantially similar to another 
type of bond include a difference between the index used to compute 
payments on the hedged bond and the index used to compute payments on 
the hedge where one index is substantially the same, but not identical 
to, the other; the difference resulting from the payment of a fixed 
premium for a cap (e.g., payments for a cap that are made in other than 
level installments); and the difference resulting from the allocation 
of a termination payment where the termination was not expected as of 
the date the contract was entered into.
    (vi) Payments closely correspond. The payments received by the 
issuer from the hedge provider under the contract correspond closely in 
time to either the specific payments being hedged on the hedged bonds 
or specific payments required to be made pursuant to the bond 
documents, regardless of the hedge, to a sinking fund, debt service 
fund, or similar fund maintained for the issue of which the hedged bond 
is a part.
* * * * *
    (viii) Identification. The contract must be identified by the 
actual issuer on its books and records maintained for the hedged bonds 
not later than 3 days after the date on which the issuer and the hedge 
provider enter into the contract. The identification must specify the 
hedge provider, the terms of the contract, and the hedged bonds. The 
identification must contain sufficient detail to establish that the 
requirements of this paragraph (h)(2) and, if applicable, paragraph 
(h)(4) of this section are satisfied. In addition, the existence of the 
hedge must be noted on the first form relating to the issue of which 
the hedged bonds are a part that is filed with the Internal Revenue 
Service on or after the date on which the contract is identified 
pursuant to this paragraph (h)(2)(viii).
    (3) Accounting for qualified hedges--(i) In general. Except as 
otherwise provided in paragraph (h)(4) of this section, payments made 
or received by the issuer under a qualified hedge are treated as 
payments made or received, as appropriate, on the hedged bonds that are 
taken into account in determining the yield on those bonds. These 
payments are reasonably allocated to the hedged bonds in the period to 
which the payments relate, as determined under paragraph (h)(3)(iii) of 
this section. Payments made or received by the issuer include payments 
deemed made or received when a contract is terminated or deemed 
terminated under this paragraph (h)(3). Payments reasonably allocable 
to the modification of risk of interest rate changes and to the hedge 
provider's overhead under this paragraph (h) are included as payments 
made or received under a qualified hedge.
    (ii) Exclusions from hedge. If any payment for services or other 
items under the contract is not expressly treated by paragraph 
(h)(3)(i) of this section as a payment under the qualified hedge, the 
payment is not a payment with respect to a qualified hedge.
    (iii) Timing and allocation of payments. Except as provided in 
paragraphs (h)(3)(iv) and (h)(5) of this section, payments made or 
received by the issuer under a qualified hedge are taken into account 
in the same period in which those amounts would be treated as income or 
deductions under Sec. 1.446-4 (without regard to Sec. 1.446-
4(a)(2)(iv)) and are adjusted as necessary to reflect the end of a 
computation period and the start of a new computation period.
    (iv) Termination payments--(A) Termination defined. A termination 
of a qualified hedge includes any sale or other disposition of the 
hedge by the issuer or the acquisition by the issuer of an offsetting 
hedge. A deemed termination occurs when the hedged bonds are redeemed 
or when a hedge ceases to be a qualified hedge of the hedged bonds. In 
the case of an assignment by a hedge provider of its remaining rights 
and obligations under the hedge to a third party or a modification of 
the hedging contract, the assignment or modification is treated as a 
termination with respect to the issuer only if it results in a deemed 
exchange of the hedge and a realization event under section 1001 to the 
issuer.
    (B) General rule. A payment made or received by an issuer to 
terminate a qualified hedge, including loss or gain realized or deemed 
realized, is treated as a payment made or received on the hedged bonds, 
as appropriate. The payment is reasonably allocated to the remaining 
periods originally covered by the terminated hedge in a manner that 
reflects the economic substance of the hedge.
    (C) Special rule for terminations when bonds are redeemed. Except 
as otherwise provided in this paragraph (h)(3)(iv)(C) and in paragraph 
(h)(3)(iv)(D) of this section, when a qualified hedge is deemed 
terminated because the hedged bonds are redeemed, the fair market value 
of the qualified hedge on the redemption date is treated as a 
termination payment made or received on that date. When hedged bonds 
are redeemed, any payment received by the issuer on termination of a 
hedge, including a termination payment or a deemed termination payment, 
reduces, but not below zero, the interest payments made by the issuer 
on the hedged bonds in the computation period ending on the termination 
date. The remainder of the payment, if any, is reasonably allocated 
over the bond years in the immediately preceding computation period or 
periods to the extent necessary to eliminate the excess.
    (D) Special rules for refundings. To the extent that the hedged 
bonds are redeemed using the proceeds of a refunding issue, the 
termination payment is accounted for under paragraph (h)(3)(iv)(B) of 
this section by treating it as a payment on the refunding issue, rather 
than the hedged bonds. In addition, to the extent that the refunding 
issue is redeemed during the period to which the termination payment 
has been allocated to that issue, paragraph (h)(3)(iv)(C) of this 
section applies to the termination payment by treating it as a payment 
on the redeemed refunding issue.
    (E) Safe harbor for allocation of certain termination payments. A 
payment to terminate a qualified hedge does not result in that hedge 
failing to satisfy the applicable provisions of paragraph (h)(3)(iv)(B) 
of this section if the payment is allocated in accordance with this 
paragraph (h)(3)(iv)(E). For an issue that is a variable yield issue 
after termination of a qualified hedge, an amount must be allocated to 
each date on which the hedge provider's payment, if any, would have 
been made had the hedge not been terminated. The amounts allocated to 
each date must bear the same ratio to the notional principal amount 
(within the meaning of Sec. 1.446-3) that would have been used to 
compute the hedge provider's payment, if any, on that date, and the sum 
of the present values of those amounts must equal the present value of 
the termination payment. Present value is computed as of the day the 
qualified hedge is terminated, using the yield on the hedged bonds, 
determined without regard to the termination payment. The yield used 
for this purpose is computed for the period beginning on the first date 
the qualified hedge is in effect and ending on the date the qualified 
hedge is terminated. On the other hand, for an issue that is a fixed 
yield issue after termination of a qualified hedge, the termination 
payment is taken into account as a single payment on the date it is 
paid.

[[Page 25510]]

    (4) Certain variable yield bonds treated as fixed yield bonds--(i) 
In general. Except as otherwise provided in this paragraph (h)(4), if 
the issuer of variable yield bonds enters into a qualified hedge, the 
hedged bonds are treated as fixed yield bonds paying a fixed interest 
rate if:
    (A) Maturity. The term of the hedge is equal to the entire period 
during which the hedged bonds bear interest at variable interest rates, 
and the issuer does not reasonably expect that the hedge will be 
terminated before the end of that period.
    (B) Payments closely correspond. Payments to be received under the 
hedge correspond closely in time to the hedged portion of payments on 
the hedged bonds. Hedge payments received within 15 days of the related 
payments on the hedged bonds generally so correspond.
    (C) Aggregate payments fixed. Taking into account all payments made 
and received under the hedge and all payments on the hedged bonds 
(i.e., after netting all payments), the issuer's aggregate payments are 
fixed and determinable as of a date not later than 15 days after the 
issue date of the hedged bonds. Payments on bonds are treated as fixed 
for purposes of this paragraph (h)(4)(i)(C) if payments on the bonds 
are based, in whole or in part, on one interest rate, payments on the 
hedge are based, in whole or in part, on a second interest rate that is 
substantially the same as, but not identical to, the first interest 
rate and payments on the bonds would be fixed if the two rates were 
identical. Rates are treated as substantially the same if they are 
reasonably expected to be substantially the same throughout the term of 
the hedge. For example, an objective 30-day tax-exempt variable rate 
index or other objective index may be substantially the same as an 
issuer's individual 30-day interest rate.
    (ii) Accounting. Except as otherwise provided in this paragraph 
(h)(4)(ii), in determining yield on the hedged bonds, all the issuer's 
payments on the hedged bonds and all payments made and received on a 
hedge described in paragraph (h)(4)(i) of this section are taken into 
account. If payments on the bonds and payments on the hedge are based, 
in whole or in part, on variable interest rates that are substantially 
the same within the meaning of paragraph (h)(4)(i)(C) of this section 
(but not identical), yield on the issue is determined by treating the 
variable interest rates as identical. For example, if variable rate 
bonds bearing interest at a weekly rate equal to the rate necessary to 
remarket the bonds at par are hedged with an interest rate swap under 
which the issuer receives payments based on a short-term floating rate 
index that is substantially the same as, but not identical to, the 
weekly rate on the bonds, the interest payments on the bonds are 
treated as equal to the payments received by the issuer under the swap 
for purposes of computing the yield on the bonds.
    (iii) Effect of termination--(A) In general. Except as otherwise 
provided in this paragraph (h)(4)(iii) and paragraph (h)(5) of this 
section, the issue of which the hedged bonds are a part is treated as 
if it were reissued as of the termination date of the qualified hedge 
covered by paragraph (h)(4)(i) of this section in determining yield on 
the hedged bonds for purposes of Sec. 1.148-3. The redemption price of 
the retired issue and the issue price of the new issue equal the 
aggregate values of all the bonds of the issue on the termination date. 
In computing the yield on the new issue for this purpose, any 
termination payment is accounted for under paragraph (h)(3)(iv) of this 
section, applied by treating the termination payment as made or 
received on the new issue under this paragraph (h)(4)(iii).
    (B) Effect of early termination. Except as otherwise provided in 
this paragraph (h)(4)(iii), the general rules of paragraph (h)(4)(i) of 
this section do not apply in determining the yield on the hedged bonds 
for purposes of Sec. 1.148-3 if the hedge is terminated or deemed 
terminated within 5 years after the issue date of the issue of which 
the hedged bonds are a part. Thus, the hedged bonds are treated as 
variable yield bonds for purposes of Sec. 1.148-3 from the issue date.
    (C) Certain terminations disregarded. This paragraph (h)(4)(iii) 
does not apply to a termination if, based on the facts and 
circumstances (e.g., taking into account both the termination and any 
qualified hedge that immediately replaces the terminated hedge), there 
is no change in the yield.
    (5) Contracts entered into before issue date of hedged bond--(i) In 
general. A contract does not fail to be a hedge under paragraph 
(h)(2)(i) of this section solely because it is entered into before the 
issue date of the hedged bond. However, that contract must be one to 
which either paragraph (h)(5)(ii) or (h)(5)(iii) of this section 
applies.
    (ii) Contracts expected to be closed substantially 
contemporaneously with the issue date of hedged bond--(A) Application. 
This paragraph (h)(5)(ii) applies to a contract if, on the date the 
contract is identified, the issuer reasonably expects to terminate or 
otherwise close (terminate) the contract substantially 
contemporaneously with the issue date of the hedged bond.
    (B) Contract terminated. If a contract to which this paragraph 
(h)(5)(ii) applies is terminated substantially contemporaneously with 
the issue date of the hedged bond, the amount paid or received, or 
deemed to be paid or received, by the issuer in connection with the 
issuance of the hedged bond to terminate the contract is treated as an 
adjustment to the issue price of the hedged bond and as an adjustment 
to the sale proceeds of the hedged bond for purposes of section 148. 
Amounts paid or received, or deemed to be paid or received, before the 
issue date of the hedged bond are treated as paid or received on the 
issue date in an amount equal to the future value of the payment or 
receipt on that date. For this purpose, future value is computed using 
yield on the hedged bond without taking into account amounts paid or 
received (or deemed paid or received) on the contract.
    (C) Contract not terminated. If a contract to which this paragraph 
(h)(5)(ii) applies is not terminated substantially contemporaneously 
with the issue date of the hedged bond, the contract is deemed 
terminated for its fair market value as of the issue date of the hedged 
bond. Once a contract has been deemed terminated pursuant to this 
paragraph (h)(5)(ii)(C), payments on and receipts from the contract are 
no longer taken into account under this paragraph (h) for purposes of 
determining yield on the hedged bond.
    (D) Relation to other requirements of a qualified hedge. Payments 
made in connection with the issuance of a bond to terminate a contract 
to which this paragraph (h)(5)(ii) applies do not prevent the contract 
from satisfying the requirements of paragraph (h)(2)(vi) of this 
section.
    (E) Fixed yield treatment. A bond that is hedged with a contract to 
which this paragraph (h)(5)(ii) applies does not fail to be a fixed 
yield bond if, taking into account payments on the contract and the 
payments to be made on the bond, the bond satisfies the definition of 
fixed yield bond. See also paragraph (h)(4) of this section.
    (iii) Contracts expected not to be closed substantially 
contemporaneously with the issue date of hedged bond--(A) Application. 
This paragraph (h)(5)(iii) applies to a contract if, on the date the 
contract is identified, the issuer does not reasonably expect to 
terminate the contract substantially contemporaneously with the issue 
date of the hedge bond.

[[Page 25511]]

    (B) Contract terminated. If a contract to which this paragraph 
(h)(5)(iii) applies is terminated in connection with the issuance of 
the hedged bond, the amount paid or received, or deemed to be paid or 
received, by the issuer to terminate the contract is treated as an 
adjustment to the issue price of the hedged bond and as an adjustment 
to the sale proceeds of the hedged bond for purposes of section 148.
    (C) Contract not terminated. If a contract to which this paragraph 
(h)(5)(iii) applies is not terminated substantially contemporaneously 
with the issue date of the hedged bond, no payments with respect to the 
hedge made by the issuer before the issue date of the hedged bond are 
taken into account under this section.
    (iv) Identification. The identification required under paragraph 
(h)(2)(viii) of this section must specify the reasonably expected 
governmental purpose, issue price, maturity, and issue date of the 
hedged bond, the manner in which interest is reasonably expected to be 
computed, and whether paragraph (h)(5)(ii) or (h)(5)(iii) of this 
section applies to the contract. If an issuer identifies a contract 
under this paragraph (h)(5)(iv) that would be a qualified hedge with 
respect to the anticipated bond, but does not issue the anticipated 
bond on the identified issue date, the contract is taken into account 
as a qualified hedge of any bond of the issuer that is issued for the 
identified governmental purpose within a reasonable interval around the 
identified issue date of the anticipated bond.
    (6) Authority of the Commissioner. The Commissioner, by publication 
of a revenue ruling or revenue procedure (see Sec. 601.601(d)(2) of 
this chapter), may specify contracts that, although they do not meet 
the requirements of paragraph (h)(2) of this section, are qualified 
hedges or, although they do not meet the requirements of paragraph 
(h)(4) of this section, cause the hedged bonds to be treated as fixed 
yield bonds.
    Par. 11. In Sec. 1.148-5, paragraphs (b)(2)(iii), (c)(2)(i), 
(c)(3)(ii), (d)(3)(ii), (e)(2)(ii)(B) and (e)(2)(iii) are revised to 
read as follows:


Sec. 1.148-5  Yield and valuation of investments.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Permissive application of single investment rules to certain 
yield restricted investments for all purposes of section 148. For all 
purposes of section 148, if an issuer reasonably expects as of the 
issue date to establish and maintain a sinking fund solely to reduce 
the yield on the investments in a refunding escrow, then the issuer may 
treat all of the yield restricted nonpurpose investments in the 
refunding escrow and that sinking fund as a single investment having a 
single yield, determined under this paragraph (b)(2). Thus, an issuer 
may not treat the nonpurpose investments in a reasonably required 
reserve fund and a refunding escrow as a single investment having a 
single yield under this paragraph (b)(2)(iii).
* * * * *
    (c) * * *
    (2) Manner of payment--(i) In general. Except as otherwise provided 
in paragraph (c)(2)(ii) of this section, an amount is paid under this 
paragraph (c) if it is paid to the United States at the same time and 
in the same manner as rebate amounts are required to be paid or at such 
other time or in such manner as the Commissioner may prescribe. For 
example, yield reduction payments must be made on or before the date of 
required rebate installment payments as described in Secs. 1.148-3(f), 
(g), and (h). The provisions of Sec. 1.148-3(i) apply to payments made 
under this paragraph (c).
* * * * *
    (3) * * *
    (ii) Exception to yield reduction payments rule for advance 
refunding issues. Paragraph (c)(1) of this section does not apply to 
investments allocable to gross proceeds of an advance refunding issue, 
other than--
    (A) Transferred proceeds to which paragraph (c)(3)(i)(C) of this 
section applies;
    (B) Replacement proceeds to which paragraph (c)(3)(i)(F) of this 
section applies; and
    (C) Transferred proceeds to which paragraph (c)(3)(i)(E) of this 
section applies, but only to the extent necessary to satisfy yield 
restriction under section 148(a) on those proceeds treating all 
investments allocable to those proceeds as a separate class.
    (d) * * *
    (3) * * *
    (ii) Exception to fair market value requirement for transferred 
proceeds allocations, universal cap allocations, and commingled funds. 
Paragraph (d)(3)(i) of this section does not apply if the investment is 
allocated from one issue to another issue as a result of the 
transferred proceeds allocation rule under Sec. 1.148-9(b) or the 
universal cap rule under Sec. 1.148-6(b)(2), provided that both issues 
consist exclusively of tax-exempt bonds. In addition, paragraph 
(d)(3)(i) of this section does not apply to investments in a commingled 
fund (other than a bona fide debt service fund) unless it is an 
investment being initially deposited in or withdrawn from a commingled 
fund described in Sec. 1.148-6(e)(5)(iii).
* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (B) External commingled funds. A widely held commingled fund in 
which no investor in the fund owns more than 10 percent of the 
beneficial interest in the fund. For purposes of this paragraph 
(e)(2)(ii)(B), a fund is treated as widely held only if, during the 
immediately preceding fixed, semiannual period chosen by the fund 
(e.g., semiannual periods ending June 30 and December 31), the fund had 
a daily average of more than 15 investors that were not related 
parties, and the daily average amount each investor had invested in the 
fund was not less than the lesser of $500,000 and 1 percent of the 
daily average of the total amount invested in the fund. For purposes of 
this paragraph (e)(2)(ii)(B), an investor will be treated as owning not 
more than 10 percent of the beneficial interest in the fund if, on the 
date of each deposit by the investor into the fund, the total amount 
the investor and any related parties have on deposit in the fund is not 
more than 10 percent of the total amount that all investors have on 
deposit in the fund. For purposes of the preceding sentence, the total 
amount that all investors have on deposit in the fund is equal to the 
sum of all deposits made by the investor and any related parties on the 
date of those deposits and the closing balance in the fund on the day 
before those deposits. If any investor in the fund owns more than 10 
percent of the beneficial interest in the fund, the fund does not 
qualify under this paragraph (e)(2)(ii)(B) until that investor makes 
sufficient withdrawals from the fund to reduce its beneficial interest 
in the fund to 10 percent or less.
    (iii) Special rule for guaranteed investment contracts. For a 
guaranteed investment contract, a broker's commission or similar fee 
paid on behalf of either an issuer or the provider is treated as an 
administrative cost and, except in the case of an issue that satisfies 
section 148(f)(4)(D)(i), is a qualified administrative cost to the 
extent that the present value of the commission, as of the date the 
contract is allocated to the issue, does not exceed the lesser of a 
reasonable amount within the meaning of paragraph (e)(2)(i) of this 
section or the present value of annual payments equal to .05 percent of 
the

[[Page 25512]]

weighted average amount reasonably expected to be invested each year of 
the term of the contract. For this purpose, present value is computed 
using the taxable discount rate used by the parties to compute the 
commission or, if not readily ascertainable, the yield to the issuer on 
the investment contract or other reasonable taxable discount rate.
* * * * *
    Par. 12. In Sec. 1.148-6, paragraph (d)(3)(iii)(C) is revised to 
read as follows:


Sec. 1.148-6  General allocation and accounting rules.

* * * * *
    (d) * * *
    (3) * * *
    (iii) * * *
    (C) Qualified endowment funds treated as unavailable. For a 
501(c)(3) organization, a qualified endowment fund is treated as 
unavailable. A fund is a qualified endowment fund if--
    (1) The fund is derived from gifts or bequests, or the income 
thereon, that were neither made nor reasonably expected to be used to 
pay working capital expenditures;
    (2) Pursuant to reasonable, established practices of the 
organization, the governing body of the 501(c)(3) organization 
designates and consistently operates the fund as a permanent endowment 
fund or quasi-endowment fund restricted as to use; and
    (3) There is an independent verification that the fund is 
reasonably necessary as part of the organization's permanent capital.
* * * * *
    Par. 13. In Sec. 1.148-9, paragraphs (c)(2)(ii)(B) and (h)(4)(vi) 
are revised to read as follows:


Sec. 1.148-9  Arbitrage rules for refunding issues.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (B) Permissive allocation of non-proceeds to earliest expenditures. 
Excluding amounts covered by paragraph (c)(2)(ii)(A) of this section 
and subject to any required earlier expenditure of those amounts, any 
amounts in a mixed escrow that are not proceeds of a refunding issue 
may be allocated to the earliest maturing investments in the mixed 
escrow, provided that those investments mature and the proceeds thereof 
are expended before the date of any expenditure from the mixed escrow 
to pay any principal of the prior issue.
* * * * *
    (h) * * *
    (4) * * *
    (vi) Exception for refundings of interim notes. Paragraph (h)(4)(v) 
of this section need not be applied to refunding bonds issued to 
provide permanent financing for one or more projects if the prior issue 
had a term of less than 3 years and was sold in anticipation of 
permanent financing, but only if the aggregate term of all prior issues 
sold in anticipation of permanent financing was less than 3 years.
* * * * *
    Par. 14. Section 1.148-10 is amended as follows:
    1. Paragraphs (b)(2), (c)(2)(viii) and (c)(2)(ix) are revised.
    2. Paragraph (c)(2)(x) is added.
    3. Paragraph (e) is revised.
    The revised and added provisions read as follows:


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

* * * * *
    (b) * * *
    (2) Application. The provisions of this paragraph (b) only apply to 
the portion of an issue that, as a result of actions taken (or actions 
not taken) after the issue date, overburdens the market for tax-exempt 
bonds, except that for an issue that is reasonably expected as of the 
issue date to overburden the market, those provisions apply to all of 
the gross proceeds of the issue.
    (c) * * *
    (2) * * *
    (viii) Replacement proceeds in a sinking fund for the refunding 
issue;
    (ix) Qualified guarantee fees for the refunding issue or the prior 
issue; and
    (x) Fees for a qualified hedge for the refunding issue.
* * * * *
    (e) Authority of the Commissioner to clearly reflect the economic 
substance of a transaction. If an issuer enters into a transaction for 
a principal purpose of obtaining a material financial advantage based 
on the difference between tax-exempt and taxable interest rates in a 
manner that is inconsistent with the purposes of section 148, the 
Commissioner may exercise the Commissioner's discretion to depart from 
the rules of Sec. 1.148-1 through Sec. 1.148-11 as necessary to clearly 
reflect the economic substance of the transaction. For this purpose, 
the Commissioner may recompute yield on an issue or on investments, 
reallocate payments and receipts on investments, recompute the rebate 
amount on an issue, treat a hedge as either a qualified hedge or not a 
qualified hedge, or otherwise adjust any item whatsoever bearing upon 
the investments and expenditures of gross proceeds of an issue. For 
example, if the amount paid for a hedge is specifically based on the 
amount of arbitrage earned or expected to be earned on the hedged 
bonds, a principal purpose of entering into the contract is to obtain a 
material financial advantage based on the difference between tax-exempt 
and taxable interest rates in a manner that is inconsistent with the 
purposes of section 148.
* * * * *
    Par. 15. Section 1.148-11 is amended as follows:
    1. Paragraphs (a), (b)(1), (c)(1), and (g) are revised.
    2. Paragraph (b)(3) is added.
    3. Paragraphs (h) and (i) are removed.
    The revised and added provisions read as follows:


Sec. 1.148-11  Effective dates.

    (a) In general. Except as otherwise provided in this section, 
Secs. 1.148-1 through 1.148-11 apply to bonds sold on or after July 8, 
1997.
    (b) Elective retroactive application in whole--(1) In general. 
Except as otherwise provided in this section, and subject to the 
applicable effective dates for the corresponding statutory provisions, 
an issuer may apply the provisions of Secs. 1.148-1 through 1.148-11 in 
whole, but not in part, to any issue that is outstanding on July 8, 
1997, and is subject to section 148(f) or to sections 103(c)(6) or 
103A(i) of the Internal Revenue Code of 1954, in lieu of otherwise 
applicable regulations under those sections.
* * * * *
    (3) No elective retroactive application for hedges of fixed rate 
issues. The provisions of Sec. 1.148-4(h)(2)(i)(B) (relating to hedges 
of fixed rate issues) may not be applied to any bond sold on or before 
July 8, 1997.
    (c) Elective retroactive application of certain provisions and 
special rules--(1) Retroactive application of overpayment recovery 
provisions. An issuer may apply the provisions of Sec. 1.148-3(i) to 
any issue that is subject to section 148(f) or to sections 103(c)(6) or 
103A(i) of the Internal Revenue Code of 1954.
* * * * *
    (g) Provisions applicable to certain bonds sold before effective 
date. Except for bonds to which paragraph (b)(1) of this section 
applies--
    (1) Section 1.148-11A provides rules applicable to bonds sold after 
June 6, 1994, and before July 8, 1997; and
    (2) Sections 1.148-1 through 1.148-11 as in effect on July 1, 1993 
(see 26 CFR part 1 as revised April 1, 1994), and Sec. 1.148-11A(i) 
(relating to elective retroactive application of certain provisions) 
provide rules applicable to

[[Page 25513]]

certain issues issued before June 7, 1994.
    Par. 16. In newly designated Sec. 1.148-11A, paragraph (i) is 
revised to read as follows:


Sec. 1.148-11A  Effective dates.

* * * * *
    (i) Transition rules for certain amendments--(1) In general. 
Section 1.103-8(a)(5), Secs. 1.148-1, 1.148-2, 1.148-3, 1.148-4, .148-
5, 1.148-6, 1.148-7, 1.148-8, 1.148-9, 1.148-10, 1.148-11, 1.149(d)-1, 
and 1.150-1 as in effect on June 7, 1994 (see 26 CFR part 1 as revised 
April 1, 1997), and Secs. 1.148-1A through 1.148-11A, 1.149(d)-1A, and 
1.150-1A apply, in whole, but not in part--
    (i) To bonds sold after June 6, 1994, and before July 8, 1997;
    (ii) To bonds issued before July 1, 1993, that are outstanding on 
June 7, 1994, if the first time the issuer applies Secs. 1.148-1 
through 1.148-11 as in effect on June 7, 1994 (see 26 CFR part 1 as 
revised April 1, 1997), to the bonds under Sec. 1.148-11 (b) or (c) is 
after June 6, 1994, and before July 8, 1997;
    (iii) At the option of the issuer, to bonds to which Secs. 1.148-1 
through 1.148-11, as in effect on July 1, 1993 (see 26 CFR part 1 as 
revised April 1, 1994), apply, if the bonds are outstanding on June 7, 
1994, and the issuer applies Sec. 1.103-8(a)(5), Secs. 1.148-1, 1.148-
2, 1.148-3, 1.148-4, 1.148-5, 1.148-6, 1.148-7, 1.148-8, 1.148-9, 
1.148-10, 1.148-11, 1.149(d)-1, and 1.150-1 as in effect on June 7, 
1994 (see 26 CFR part 1 as revised April 1, 1997), and Secs. 1.148-1A 
through 1.148-11A, 1.149(d)-1A, and 1.150-1A to the bonds before July 
8, 1997.
    (2) Special rule. For purposes of paragraph (i)(1) of this section, 
any reference to a particular paragraph of Secs. 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, or 1.150-1T shall be applied as a reference to the 
corresponding paragraph of Secs. 1.148-1A, 1.148-2A, 1.148-3A, 1.148-
4A, 1.148-5A, 1.148-6A, 1.148-9A, 1.148-10A, 1.148-11A, 1.149(d)-1A, or 
1.150-1A, respectively.
    (3) Identification of certain hedges. For any hedge entered into 
after June 18, 1993, and on or before June 6, 1994, that would be a 
qualified hedge within the meaning of Sec. 1.148-4(h)(2), as in effect 
on June 7, 1994 (see 26 CFR part 1 as revised April 1, 1997), except 
that the hedge does not meet the requirements of Sec. 1.148-
4A(h)(2)(ix) because the issuer failed to identify the hedge not later 
than 3 days after which the issuer and the provider entered into the 
contract, the requirements of Sec. 1.148-4A(h)(2)(ix) are treated as 
met if the contract is identified by the actual issuer on its books and 
records maintained for the hedged bonds not later than July 8, 1997.
    Par. 17. Section 1.149(d)-1 is amended as follows:
    1. Paragraph (f)(3) is revised.
    2. Paragraph (g)(3) is added.
    The revised and added provisions read as follows:


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

* * * * *
    (f) * * *
    (3) Application of savings test to multipurpose issues. Except as 
otherwise provided in this paragraph (f)(3), the multipurpose issue 
rules in Sec. 1.148-9(h) apply for purposes of the savings test. If any 
separate issue in a multipurpose issue increases the aggregate present 
value debt service savings on the entire multipurpose issue or reduces 
the present value debt service losses on that entire multipurpose 
issue, that separate issue satisfies the savings test.
    (g) * * *
    (3) Special effective date for paragraph (f)(3). Paragraph (f)(3) 
of this section applies to bonds sold on or after July 8, 1997 and to 
any issue to which the election described in Sec. 1.148-11(b)(1) is 
made. See Secs. 1.148-11A(i) for rules relating to certain bonds sold 
before July 8, 1997.


Sec. 1.149(d)-1T  [Redesignated as Sec. 1.149(d)-1A]

    Par. 18. Section 1.149(d)-1T is redesignated as Sec. 1.149(d)-1A, 
is transferred immediately following Sec. 1.148-11A, and the section 
heading is amended by removing the language ``(temporary)''.
    Par. 19. Section 1.150-1 is amended as follows:
    1. Paragraph (a)(2) is revised.
    2. Paragraphs (c)(1) and (c)(4)(iii) are revised.
    3. Paragraph (c)(6) is added.
    The revised and added provisions read as follows:


Sec. 1.150-1  Definitions.

    (a) * * *
    (2) Effective date--(i) In general. Except as otherwise provided in 
this paragraph (a)(2), this section applies to issues issued after June 
30, 1993 to which Secs. 1.148-1 through 1.148-11 apply. In addition, 
this section (other than paragraph (c)(3) of this section) applies to 
any issue to which the election described in Sec. 1.148-11(b)(1) is 
made.
    (ii) Special effective date for paragraphs (c)(1), (c)(4)(iii), and 
(c)(6). Paragraphs (c)(1), (c)(4)(iii), and (c)(6) of this section 
apply to bonds sold on or after July 8, 1997 and to any issue to which 
the election described in Sec. 1.148-11(b)(1) is made. See Sec. 1.148-
11A(i) for rules relating to certain bonds sold before July 8, 1997.
* * * * *
    (c) Definition of issue--(1) In general. Except as otherwise 
provided in this paragraph (c), the term issue means two or more bonds 
that meet all of the following requirements:
    (i) Sold at substantially the same time. The bonds are sold at 
substantially the same time. Bonds are treated as sold at substantially 
the same time if they are sold less than 15 days apart.
    (ii) Sold pursuant to the same plan of financing. The bonds are 
sold pursuant to the same plan of financing. Factors material to the 
plan of financing include the purposes for the bonds and the structure 
of the financing. For example, generally--
    (A) Bonds to finance a single facility or related facilities are 
part of the same plan of financing;
    (B) Short-term bonds to finance working capital expenditures and 
long-term bonds to finance capital projects are not part of the same 
plan of financing; and
    (C) Certificates of participation in a lease and general obligation 
bonds secured by tax revenues are not part of the same plan of 
financing.
    (iii) Payable from same source of funds. The bonds are reasonably 
expected to be paid from substantially the same source of funds, 
determined without regard to guarantees from parties unrelated to the 
obligor.
* * * * *
    (4) * * *
    (iii) Certain general obligation bonds. Except as otherwise 
provided in paragraph (c)(2) of this section, bonds that are secured by 
a pledge of the issuer's full faith and credit (or a substantially 
similar pledge) and sold and issued on the same dates pursuant to a 
single offering document may be treated as part of the same issue if 
the issuer so elects on or before the issue date.
* * * * *
    (6) Sale date. The sale date of a bond is the first day on which 
there is a binding contract in writing for the sale or exchange of the 
bond.
* * * * *


Sec. 1.150-1T  [Redesignated as Sec. 1.150-1A]

    Par. 20. Section 1.150-1T is redesignated as Sec. 1.150-1A, is 
transferred immediately following Sec. 1.149(d)-1A, and the section 
heading

[[Page 25514]]

is amended by removing the language ``(temporary)''.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 21. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 22. In Sec. 602.101, paragraph (c) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                            Current OMB 
   CFR part or section where identified and described       control No. 
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
1.150-1.................................................       1545-1347
                                                                        
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: May 1, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 97-12062 Filed 5-8-97; 8:45 am]
BILLING CODE 4830-01-U