[Federal Register Volume 64, Number 166 (Friday, August 27, 1999)]
[Proposed Rules]
[Pages 46876-46878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21877]
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DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-105565-99]
RIN 1545-AX22
Arbitrage Restrictions Applicable to Tax-Exempt Bonds Issued by
State and Local Governments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations on the arbitrage
restrictions applicable to tax-exempt bonds issued by State and local
governments. The proposed amendments affect issuers of tax-exempt bonds
and provide a safe harbor for qualified administrative costs for
brokers' commissions and similar fees incurred in connection with the
acquisition of a guaranteed investment contract or investments
purchased for a yield restricted defeasance escrow.
DATES: Written comments must be received by November 26, 1999.
Outlines of topics to be discussed at the public hearing scheduled
for December 14, 1999, at 10 a.m. must be received by Tuesday, November
23, 1999.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-105565-99), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-
105565-99), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS site at http://www.irs.ustreas.gov/tax__regs/regslist.html. The
public hearing is in the Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Rose M. Weber, (202) 622-3980; concerning submissions of comments, the
hearing, and/or requests to be placed on the building access list to
attend the hearing, Michael Slaughter, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 148 of the Internal Revenue Code provides rules addressing
the use of proceeds of tax-exempt State and local bonds to acquire
higher-yielding investments. On May 9, 1997, final regulations (TD
8718) relating to the arbitrage restrictions and related rules under
sections 103, 148, 149, and 150 were published in the Federal Register
(62 FR 25502). The final regulations (TD 8718) were amended on December
30, 1998 (63 FR 71748). This document proposes to modify Sec. 1.148-
5(e)(2) to provide a safe harbor for determining whether brokers'
commissions and similar fees incurred in connection with the
acquisition of guaranteed investment contracts or investments purchased
for a yield restricted defeasance escrow are treated as qualified
administrative costs.
Explanation of Provisions
Section 1.148-5(e)(2)(iii) and (iv) of the regulations provides
rules for determining whether a broker's commission or similar fee is
treated as a qualified administrative cost. Section 1.148-5(e)(2)(iii)
provides that, 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, generally, 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 or the present value
of annual payments equal to .05 percent of the weighted average amount
reasonably expected to be invested each year of the term of the
contract. 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.
Section 1.148-5(e)(2)(iv) provides that, for investments purchased
for a yield restricted defeasance escrow, a fee paid to a bidding agent
is a qualified administrative cost only if the fee is comparable to a
fee that would be
[[Page 46877]]
charged for a reasonably comparable investment if acquired with a
source of funds other than gross proceeds of tax-exempt bonds, and it
is reasonable. The fee is deemed to meet both the comparability and
reasonableness requirements if it does not exceed the lesser of $10,000
and .1 percent of the initial principal amount of investments deposited
in the yield restricted defeasance escrow.
Unlike Sec. 1.148-5(e)(2)(iv), Sec. 1.148-5(e)(2)(iii) does not
provide parameters under which the reasonableness test will be deemed
to have been met. Practitioners have noted that they are uncertain
about how to determine reasonableness and whether the .05% test may be
used as a safe harbor without regard to whether the resulting amount is
a reasonable fee.
Practitioners have also noted that the computation required by
Sec. 1.148-5(e)(2)(iii) is too complex and results in different fees
being paid for the same services provided.
Finally, having different rules for guaranteed investment contracts
and investments purchased for a yield restricted defeasance escrow
provides an unnecessary tax incentive to structure investments in a
certain manner.
To eliminate these complexities and to provide a rule that is
easily administered by issuers, the proposed regulations create a
single rule for qualified administrative costs that applies to a
broker's commission or similar fee incurred in connection with a
guaranteed investment contract or investments purchased for a yield
restricted defeasance escrow. The proposed regulations also set forth a
safe harbor, which allows a broker's commission or similar fee incurred
in connection with the acquisition of a guaranteed investment contract
or investments purchased for a yield restricted defeasance escrow to be
treated as a qualified administrative cost. To fairly compensate most
brokers, the proposed safe harbor provides a higher safe harbor limit
than is currently provided for in Sec. 1.148-5(e)(2)(iv).
The proposed safe harbor sets forth two requirements. Under the
first requirement, the amount of the broker's commission or similar fee
incurred in connection with the acquisition of a guaranteed investment
contract or other investments purchased for a yield restricted
defeasance escrow and treated by the issuer as a qualified
administrative cost cannot exceed the lesser of $25,000 and .2 percent
of the computational base. For guaranteed investment contracts, the
computational base is the aggregate amount reasonably expected to be
deposited over the term of the contract. For investments, other than
guaranteed investment contracts, deposited in a yield restricted
defeasance escrow, the computational base is the initial amount
invested in those investments. For example, for a guaranteed investment
contract purchased for a debt service fund, the aggregate amount
reasonably expected to be deposited includes all periodic deposits
reasonably expected to be made pursuant to the terms of the contract.
Under the second requirement, for any issue of bonds, the issuer cannot
treat as qualified administrative costs more than $75,000 in brokers'
commissions and similar fees with respect to all guaranteed investment
contracts and investments for yield restricted defeasance escrows
purchased with gross proceeds of the issue.
The proposed regulations eliminate the special rule in Sec. 1.148-
5(e)(2)(iii) for issues that meet section 148(f)(4)(D)(i). These bond
issues will be permitted to use the safe harbor.
These regulations are proposed to apply to bonds sold on or after
the date 90 days after the issuance of the final regulations.
Special Analysis
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 Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because the regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the 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 electronic and written comments (a
signed original and eight (8) copies, if written) that are submitted
timely to the IRS. In particular, the IRS and Department of Treasury
specifically request comments on the clarity of the proposed rule and
how it may be made easier to understand. All comments will be available
for public inspection and copying.
A public hearing has been scheduled for Tuesday, December 14, 1999,
beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments by November 26, 1999, and submit an outline of the topics to
be discussed and the time to be devoted to each topic (signed original
and eight (8) copies) by November 23, 1999. A period of 10 minutes will
be allotted to each person for making comments. An agenda showing the
scheduling of speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal authors of these proposed regulations are Rose M.
Weber and Rebecca L. Harrigal, Office of the Assistant Chief Counsel
(Financial Institutions & 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. In Sec. 1.148-5, paragraph (e) is amended as follows:
1. Paragraph (e)(2)(iii) is revised.
2. Paragraph (e)(2)(iv) is removed.
The revision reads as follows:
[[Page 46878]]
Sec. 1.148-5 Yield and valuation of investments.
* * * * *
(e) * * *
(2) * * *
(iii) Special rule for guaranteed investment contracts and
investments purchased for a yield restricted defeasance escrow--(A) In
general. An amount paid for a broker's commission or similar fee with
respect to a guaranteed investment contract or investments purchased
for a yield restricted defeasance escrow is a qualified administrative
cost if the fee is reasonable within the meaning of paragraph (e)(2)(i)
of this section.
(B) Safe harbor. (1) A broker's commission or similar fee with
respect to the acquisition of a guaranteed investment contract or
investments purchased for a yield restricted defeasance escrow is
reasonable within the meaning of paragraph (e)(2)(i) of this section
if--
(i) The amount of the fee that the issuer treats as a qualified
administrative cost does not exceed the lesser of $25,000 and .2% of
the computational base; and
(ii) For any issue, the issuer does not treat as qualified
administrative costs more than $75,000 in brokers' commissions or
similar fees with respect to all guaranteed investment contracts and
investments for yield restricted defeasance escrows purchased with
gross proceeds of the issue.
(2) For purposes of paragraph (e)(2)(iii)(B)(1) of this section,
computational base shall mean--
(i) For a guaranteed investment contract, the amount the issuer
reasonably expects as of the issue date to be deposited in the
guaranteed investment contract over the term of the contract; and
(ii) For investments (other than guaranteed investment contracts)
to be deposited in a yield restricted defeasance escrow, the amount of
gross proceeds initially invested in those investments.
(C) Example. The following example illustrates an application of
the safe harbor in paragraph (e)(2)(iii)(B) of this section:
Example. The issuer of a multipurpose issue uses brokers to
purchase the following investments with gross proceeds of the issue:
a guaranteed investment contract for amounts to be deposited in a
debt service fund (debt service GIC), a guaranteed investment
contract for amounts to be deposited in a construction fund
(construction GIC), Treasury securities to be deposited in a yield
restricted defeasance escrow (Treasury investments) and a guaranteed
investment contract that will be used to earn a return on what would
otherwise be idle cash balances from maturing investments in the
yield restricted defeasance escrow (the float GIC). The issuer uses
$8,040,000 of the proceeds to purchase the Treasury investments and
deposits $14,000,000 into the construction GIC. Over the term of the
construction GIC, the issuer reasonably expects that no further
deposits will be made. Over the term of the float GIC, the issuer
reasonably expects that aggregate deposits of $600,000 will be made
to the float GIC. Over the term of the debt service GIC, the issuer
reasonably expects that it will make aggregate deposits of
$22,000,000, plus interest on the bond issue. The brokers' fees do
not exceed $16,080 for the Treasury investments, $25,000 for the
construction GIC, $1,200 for the float GIC, and $25,000 for the debt
service GIC. Assuming the issuer claims no further brokerage or
similar fees, the issuer can claim all $67,280 in brokerage fees for
these investments as qualified administrative costs because the fees
do not exceed the limitations described in paragraph (e)(2)(iii)(B)
of this section.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-21877 Filed 8-26-99; 8:45 am]
BILLING CODE 4830-01-P