[Federal Register Volume 67, Number 184 (Monday, September 23, 2002)]
[Proposed Rules]
[Pages 59767-59768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24138]



  Federal Register / Vol. 67, No. 184 / Monday, September 23, 2002 / 
Proposed Rules  

[[Page 59767]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-142599-02]
RIN 1545-BB23


Guidance Regarding Mixed Use Output Facilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: This document describes and illustrates rules the IRS and 
Treasury Department expect to propose in a notice of proposed 
rulemaking with respect to the issuance of tax-exempt bonds for the 
government use portion of an output facility that is used for both a 
government use and a private business use. This document also invites 
comments from the public regarding these rules. Issuers may rely on 
this advance notice of proposed rulemaking for issues sold before the 
notice of proposed rulemaking is issued.

DATES: Written and electronic comments must be submitted by December 
23, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-142599-02), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered between the hours of 8 a.m. 
and 5 p.m. to: CC:ITA:RU (REG-142599-02), courier's desk, Internal 
Revenue Service, 1111 Constitution Avenue NW., Washington, DC. 
Alternatively, submissions may be made electronically to the IRS 
Internet site at http://www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning submissions, Guy Traynor, 
(202) 622-7180; concerning the proposals, Rose M. Weber, (202) 622-3980 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    In general, under section 103 of the Internal Revenue Code, gross 
income does not include the interest on any State or local bond. 
However, this exclusion generally does not apply to private activity 
bonds. Section 141(a)(1) defines a private activity bond as any bond 
issued as part of an issue that meets either (1) the private business 
use test in section 141(b)(1) and the private security or payment test 
in section 141(b)(2) (the private business tests) or (2) the private 
loan financing test in section 141(c).
    The private business use test is met if more than 10 percent of the 
proceeds of an issue are to be used for any private business use. 
Section 141(b)(6) defines private business use as use directly or 
indirectly in a trade or business that is carried on by any person 
other than a governmental unit. Section 141(b)(7) defines government 
use as any use other than a private business use.
    The private security or payment test is met if the payment of the 
principal of, or the interest on, more than 10 percent of the proceeds 
of an issue is directly or indirectly (1) secured by an interest in 
property used or to be used for a private business use, (2) secured by 
an interest in payments in respect of such property, or (3) to be 
derived from payments, whether or not to the issuer, in respect of 
property, or borrowed money, used or to be used for a private business 
use.
    Section 1.141-7 of the Income Tax Regulations provides rules under 
which the purchase pursuant to a contract by a nongovernmental person 
of available output of an output facility (output contract) may be 
taken into account under the private business tests. Section 1.141-1(b) 
defines output facility as electric and gas generation, transmission, 
distribution, and related facilities, and water collection, storage, 
and distribution facilities.
    Section 141(b)(4) contains a special limitation under which an 
issue five percent or more of the proceeds of which are to be used with 
respect to any output facility (other than a facility for the 
furnishing of water) will be treated as meeting the private business 
tests if the nonqualified amount for the issue exceeds the excess of 
$15 million, over the aggregate nonqualified amounts with respect to 
all prior tax-exempt issues 5 percent or more of the proceeds of which 
are or will be used with respect to such facility (or any other 
facility which is part of the same project). Section 141(b)(8) defines 
nonqualified amount as the lesser of (1) the proceeds used for a 
private business use, or (2) the proceeds with respect to which there 
are payments, property or borrowed money taken into account under the 
private security or payment test.
    The Conference Committee Report to the Tax Reform Act of 1986, H.R. 
Conf. Rep. No. 841, 99th Cong., 2d Sess. II-690 (1986), 1986-3 (Vol. 4) 
C.B. 686 (the Conference Report), contains an example that illustrates 
the treatment under section 141(b)(4) of an output facility the output 
of which is sold for both a government use and a private business use 
(a mixed use output facility), but the amount of private business use 
and private payments would cause bonds to be private activity bonds if 
they financed the entire facility. In the Conference Report example, a 
single issue of tax-exempt bonds is contemplated to finance the 
acquisition of a $500 million electric generating facility. Ten percent 
of the output of the facility will be sold to an investor-owned utility 
under an output contract that gives rise to private business use. The 
Conference Report example concludes that $465 million of tax-exempt 
bonds may be used to acquire the facility, $450 million for the 90 
percent of the facility that is used for a government use, plus $15 
million for the allowable private business use portion under section 
141(b)(4). Section 1.141-8(c) contains an example that is substantially 
the same as the example contained in the Conference Report.
    The IRS and Treasury Department are reviewing the application of 
section 141 to mixed use output facilities. This Announcement describes 
and illustrates rules that the IRS and Treasury Department expect to 
propose in a notice of proposed rulemaking (the proposed regulations) 
as part of the 2002-2003 Guidance Priority Plan. The proposed 
regulations will provide guidance regarding the issuance of tax-exempt 
bonds for the government use portion of a mixed use output facility 
without the bonds being characterized as private activity bonds.

Explanation of Provisions

Mixed Use Allocations

1. In General
    The proposed regulations will provide that tax-exempt bonds may be 
issued to finance costs attributable to the government use portion of a 
mixed-use output facility (plus any costs attributable to de minimis 
private business use permitted under section 141) without the bonds 
being characterized as private activity bonds. For this purpose, the 
term facility includes an undivided ownership interest in a facility. 
With respect to arrangements for the purchase of output, the government 
use portion of an output facility is determined based on the percentage 
of the available output of the facility that is not used for a private 
business use (as determined under Sec.  1.141-7).
2. Allocation of Private Business Use and P+ayments
    The proposed regulations will provide that, in the case of a mixed 
use output facility, output contracts that result in private business 
use (including any payments thereunder) are allocated first to the 
portion of the facility that is

[[Page 59768]]

financed with equity. For this purpose, equity means any amount other 
than proceeds of a tax-exempt bond, including funds of the issuer that 
are not derived from a borrowing and proceeds of taxable bonds, but 
does not include any amount allocable to a tax-exempt bond that has 
been retired. With respect to each issue of bonds, the portion of the 
output facility financed with equity is determined based on 
expenditures of equity that are made contemporaneously with 
expenditures of proceeds of the issue as part of the same plan of 
financing. In order for an output contract to be allocated (in whole or 
in part) to the equity-financed portion of an output facility as 
described in this paragraph, it first must be allocable to the facility 
under the facts and circumstances test contained in Sec.  1.141-7(h). 
For example, an output contract that is allocable to two output 
facilities under Sec.  1.141-7(h) may not be allocated in its entirety 
to the equity-financed portion of one of the facilities.

B. Examples

    The provisions of the proposed regulations described above are 
illustrated by the following examples (although the examples involve 
only an electric transmission facility, the principles illustrated 
apply equally to all output facilities):

    Example 1. Authority is a governmental person that owns and 
operates an electric transmission facility. Prior to 2003, Authority 
incurred capital costs of $500 million for the facility. None of 
those costs was financed with tax-exempt bonds. In 2003, Authority 
needs to make repairs, upgrades and improvements to the facility in 
the amount of $50 million. On April 10, 2003, Authority issues an 
issue with proceeds of $30 million and uses those proceeds to pay 
capital costs of the facility. As part of the same plan of 
financing, Authority also uses $20 million of its own funds which 
are not derived from a borrowing to pay capital costs of the 
facility. With respect to the 2003 issue, 46 percent of the 
available output (as determined under Sec.  1.141-7) of the facility 
is sold under output contracts that result in private business use. 
Thus, of the $50 million of new capital costs, $27 million (54 
percent) are attributable to government use and $23 million (46 
percent) are attributable to private business use. In general, 
output contracts that result in private business use are allocated 
first to the portion of the output facility that is financed with 
equity. Therefore, of the $23 million of costs attributable to 
private business use, $20 million are allocable to Authority's 
equity and $3 million are allocable to the 2003 issue. Thus, $27 
million (90 percent) of the proceeds of the issue are used for a 
government use. The issue does not consist of private activity 
bonds.
    Example 2. The facts are the same as in Example 1, except that 
by 2010, only 75 percent of the original principal amount of the 
2003 issue remains outstanding. The retirement of a portion of the 
issue does not affect the amount of private business use of the 
facility that must occur in order for the issue to consist of 
private activity bonds.

Request for Comments

    Before the notice of proposed rulemaking is issued, consideration 
will be given to any written comments that are submitted timely 
(preferably a signed original and eight copies) to the IRS. All 
comments will be available for public inspection and copying. In 
addition to comments regarding allocation and accounting rules for 
mixed use output facilities, comments are also invited on allocation 
and accounting rules under section 141 for other facilities that are 
used for both a government use and a private business use.

Reliance on Announcement

    Issuers may rely on the rules described in this Announcement with 
respect to any issue that is sold before the date the proposed 
regulations are published in the Federal Register (or such later date 
as may be specified in the proposed regulations or final regulations). 
Issuers may rely on this Announcement with respect to bonds that are 
subject to the Internal Revenue Code of 1986 or the Internal Revenue 
Code of 1954.

Drafting Information

    The principal authors of this advance notice of proposed rulemaking 
are Bruce M. Serchuk and Rose M. Weber, Office of Chief Counsel (Tax-
exempt and Government Entities), Internal Revenue Service, and Stephen 
J. Watson, Office of Tax Legislative Counsel, Department of the 
Treasury. However, other personnel from the IRS and Treasury Department 
participated in its development.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-24138 Filed 9-19-02; 12:39 pm]
BILLING CODE 4830-01-P