[Federal Register Volume 68, Number 93 (Wednesday, May 14, 2003)]
[Proposed Rules]
[Pages 25845-25850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11926]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113007-99]
RIN 1545-AU98


Obligations of States and Political Subdivisions

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 definition 
of private activity bond applicable to tax-exempt bonds issued by State 
and local governments. These regulations affect issuers of tax-exempt 
bonds and provide needed guidance for applying the private activity 
bond restrictions to refunding issues. This document also contains a 
notice of public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by August 19, 
2003. Outlines of topics to be discussed at the public hearing 
scheduled for September 9, 2003, at 10 a.m., must be received by August 
19, 2003.

ADDRESSES: Send submissions to CC:PA:RU (REG-113007-99), 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 4 p.m. to CC:PA:RU (REG-113007-99), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically to the IRS Internet site at www.irs.gov/regs. The public 
hearing will be held in the IRS Auditorium, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gary W. 
Bornholdt, (202) 622-3980; concerning submissions and the hearing, 
Treena Garrett, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    In general, under section 103 of the Internal Revenue Code (Code), 
gross income does not include the interest on any State or local bond. 
However, this exclusion does not apply to private activity bonds (other 
than certain qualified bonds). Section 141(a) 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 tests and the private loan financing test are referred 
to collectively as the ``private activity bond tests'').
    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.
    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.
    The private loan financing test is satisfied if more than the 
lesser of $5 million or 5 percent of the proceeds of an issue are to be 
used to make or finance loans to persons other than governmental units.
    In 1994, proposed regulations (FI-72-88) were published in the 
Federal Register (59 FR 67658) (the 1994 Proposed Regulations) to 
provide guidance under the Code with respect to the application of the 
private activity bond tests. Generally, the 1994 Proposed Regulations 
provide that the private business use of a facility is equal to the 
greatest percentage of private business use of that facility for any 
one year period during the term of the bonds. The amount of private 
security or private payments is determined by comparing the present 
value of the private security or private payments to the present value 
of the debt service to be paid over the term of the issue, using the 
bond yield as the discount rate.
    With respect to refunding issues, the 1994 Proposed Regulations 
provide that the determination of whether a refunding issue satisfies 
either the private business tests or the private loan financing test is 
made without regard to whether the prior issue satisfied those tests. 
In general, under the 1994 Proposed Regulations, the private business 
tests and the private loan financing test are applied to a refunding 
issue by treating the proceeds of the refunding issue as used for the 
same purposes as the proceeds of the prior issue, but disregarding any 
use of the property financed with the prior issue that occurred before 
the issue date of the refunding issue. In addition, in applying the 
private business tests to a refunding issue under the 1994 Proposed 
Regulations, an issuer may treat the refunding issue as a continuation 
of the prior issue.
    On January 16, 1997, final regulations (TD 8712) relating to the 
definition of private activity bond and related rules under sections 
103, 141, 142, 144, 145, 147, 148, and 150 were published in the 
Federal Register (62 FR 2275) (the Final Regulations). Under the Final 
Regulations, the amount of private business use of property financed by 
an issue is equal to the average percentage of private business use of 
that property during a defined measurement period. The measurement 
period begins on the later of the issue date of the issue or the

[[Page 25846]]

date that the property is placed in service and ends on the earlier of 
the last date of the reasonably expected economic life of the property 
or the latest maturity date of any bond of the issue financing the 
property (determined without regard to any optional redemption dates). 
The Final Regulations retain the basic approach in the 1994 Proposed 
Regulations relating to the measurement of private security and private 
payments.
    The Final Regulations reserve Sec.  1.141-13 for rules regarding 
the application of the private business tests and the private loan 
financing test to refunding issues. This document amends the Income Tax 
Regulations (26 CFR part 1) under section 141 by proposing rules on the 
application of the private business tests and the private loan 
financing test to refunding issues. This document also amends the 
Income Tax Regulations under sections 145, 149 and 150 by proposing 
rules on certain related matters. These regulations are published as 
proposed regulations (the proposed regulations) to provide an 
opportunity for public review and comment.

Explanation of Provisions

A. Application of Private Activity Bond Tests to Refunding Issues

1. In General
    The proposed regulations provide that, in general, a refunding 
issue and a prior issue are tested separately under section 141. Thus, 
the determination of whether a refunding issue consists of private 
activity bonds generally does not depend on whether the prior issue 
consists of private activity bonds.
    The proposed regulations apply to determine whether a refunding 
issue satisfies the private business tests or the private loan 
financing test, but do not impact the methodology used to determine 
whether the prior issue satisfies those tests. For example, following a 
refunding, the private business use test continues to apply to a prior 
issue based on the measurement period for the prior issue.
2. Allocation of Proceeds
    The proposed regulations provide that, in applying the private 
business tests and the private loan financing test to a refunding 
issue, the proceeds of the refunding issue are allocated to the same 
purpose investments (including any private loan under section 141(c)) 
and expenditures as the proceeds of the prior issue.
3. Measurement of Private Business Use
    The proposed regulations generally provide that the amount of 
private business use of a refunding issue is determined based on the 
separate measurement period for the refunding issue under Sec.  1.141-
3(g) (for example, without regard to any private business use that 
occurred before the issue date of the refunding issue). Thus, for 
instance, if an issuer refunds a taxable bond or an exempt facility 
bond, any private business use of the refinanced facilities before the 
issue date of the refunding issue is disregarded in applying the 
private business use test to the refunding issue.
    In the case of a refunding issue that refunds a prior issue of 
governmental bonds, however, the amount of private business use is 
generally determined based on a combined measurement period. For 
purposes of the proposed regulations, a governmental bond is any bond 
that, when issued, purported to be either a governmental bond, as 
defined in Sec.  1.150-1(b), or a qualified 501(c)(3) bond, as defined 
in section 145(a). The combined measurement period is the period that 
begins on the first day of the measurement period (as defined in Sec.  
1.141-3(g)) for the prior issue (or the first issue of governmental 
bonds in the case of a series of refundings of governmental bonds) and 
ends on the last day of the measurement period for the refunding issue.
    As an alternative to the combined measurement period approach, the 
proposed regulations permit issuers to measure private business use 
based on the separate measurement period of the refunding issue, but 
only if the prior issue of governmental bonds does not satisfy the 
private business use test during a shortened measurement period. The 
shortened measurement period begins on the first day of the measurement 
period of the prior issue (or the first issue of governmental bonds in 
the case of a series of refundings of governmental bonds) and ends on 
the issue date of the refunding issue. Whether a prior issue satisfies 
the private business use test during the shortened measurement period 
is determined based on the actual use of proceeds, without regard to 
the reasonable expectations test of Sec.  1.141-2(d).
4. Measurement of Private Security and Private Payments
    If the amount of private business use is determined based on the 
separate measurement period for the refunding issue, then the amount of 
private security and private payments allocable to the refunding issue 
is determined under Sec.  1.141-4 by treating the refunding issue as a 
separate issue. On the other hand, if the amount of private business 
use is determined based on a combined measurement period, then the 
amount of private security and private payments allocable to the 
refunding issue is determined under Sec.  1.141-4 by treating the 
refunding issue and all earlier issues taken into account in 
determining the combined measurement period as a combined issue. The 
proposed regulations contain specific rules for determining the present 
value of the debt service on, and the private security and private 
payments allocable to, a combined issue.
    The proposed regulations also permit an issuer to use the yield on 
a prior issue of governmental bonds to determine the present value of 
private security or private payments under arrangements that were not 
entered into in contemplation of the refunding issue. For this purpose, 
any arrangement that was entered into more than one year before the 
issue date of the refunding issue will be treated as not entered into 
in contemplation of the refunding issue.
5. Multipurpose Issue Allocations
    Section 1.148-9(H) permits an issuer to treat the portion of a 
multipurpose issue allocable to a separate purpose as a separate issue 
for certain of the arbitrage provisions of section 148. The proposed 
regulations allow an issuer to apply Sec.  1.148-9(h) to a multipurpose 
issue for certain purposes under section 141. An allocation will not be 
reasonable for this purpose if it achieves more favorable results under 
section 141 than could be achieved with actual separate issues. In 
addition, allocations under the proposed regulations and Sec.  1.148-
9(h) must be consistent for purposes of sections 141 and 148. The 
proposed regulations do not permit allocations for purposes of section 
141(c)(1) (relating to the private loan financing test) or section 
141(d)(1) (relating to certain restrictions on acquiring 
nongovernmental output property).
6. Application of Reasonable Expectations Test to Certain Refunding 
Bonds
    Section 1.141-2(d) of the Final Regulations provides that an issue 
consists of private activity bonds if the issuer (1) reasonably 
expects, as of the issue date, that the issue will meet either the 
private business tests or the private loan financing test, or (2) takes 
a deliberate action, subsequent to the issue date, that causes the 
conditions of either the private business tests or the

[[Page 25847]]

private loan financing test to be satisfied. In general, a deliberate 
action is any action taken by the issuer that is within its control.
    The proposed regulations provide that an action that would 
otherwise cause a refunding issue to satisfy the private business tests 
or the private loan financing test is not taken into account under the 
reasonable expectations test of Sec.  1.141-2(d) if (1) the action is 
not a deliberate action within the meaning of Sec.  1.141-2(d)(3), and 
(2) the weighted average maturity of the refunding bonds is not greater 
than the remaining weighted average maturity of the prior bonds.

B. Treatment of Issuance Costs Financed by Prior Issue of Qualified 
501(c)(3) Bonds

    Under the Final Regulations, the use of proceeds of an issue of 
qualified 501(c)(3) bonds to pay issuance costs of the issue is treated 
as a private business use. The proposed regulations provide that, 
solely for purposes of applying the private business use test to a 
refunding issue, the use of proceeds of the prior issue (or any earlier 
issue in a series of refundings) to pay issuance costs of the prior 
issue (or the earlier issue) is treated as a government use.

C. Limitation on Advance Refundings of Private Activity Bonds

    Under section 149(d)(2), interest on a bond is not excluded from 
gross income if any portion of the issue of which the bond is a part is 
issued to advance refund a private activity bond (other than a 
qualified 501(c)(3) bond). The proposed regulations provide that, for 
purposes of section 149(d)(2), the term private activity bond includes 
a qualified bond described in section 141(e) (other than a qualified 
501(c)(3) bond), regardless of whether the refunding issue consists of 
private activity bonds under the proposed regulations. The proposed 
regulations also provide that, for purposes of section 149(d)(2), the 
term private activity bond does not include a taxable bond.

Proposed Effective Date

    The proposed regulations will apply to bonds that are (1) sold on 
or after the date of publication of final regulations under Sec.  
1.141-13 in the Federal Register and (2) subject to the Final 
Regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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 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 Public Hearing

    Before these proposed regulations are adopted as final regulations, 
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.
    A public hearing has been scheduled for September 9, 2003, at 10 
a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Because of access 
restrictions, visitors will not be admitted beyond the lobby more than 
30 minutes before the hearing starts.
    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 August 19, 2003 and submit an outline of the 
topics to be discussed and the amount of time to be devoted to each 
topic by August 19, 2003.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the 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.
    Comments are requested on all aspects of the proposed regulations. 
In addition, comments are specifically requested on the application of 
the private loan financing test to refunding issues.

Drafting Information

    The principal authors of these regulations are Bruce M. Serchuk and 
Gary W. Bornholdt, 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 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

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

    Authority: 26 U.S.C. 7805 * * *
    2. Section 1.141-0 is amended by adding entries to the table in 
numerical order for Sec. Sec.  1.141-13 and 1.141-15(j) to read as 
follows:


Sec.  1.141-0  Table of contents

* * * * *


Sec.  1.141-13  Refunding Issues.

    (a) In general.
    (b) Application of private business use test and private loan 
financing test.
    (1) Allocation of proceeds.
    (2) Determination of amount of private business use.
    (c) Application of private security or payment test.
    (1) Separate issue treatment.
    (2) Combined issue treatment.
    (3) Special rule for arrangements not entered into in contemplation 
of the refunding issue.
    (d) Multipurpose issue allocations.
    (1) In general.
    (2) Exceptions.
    (e) Application of reasonable expectations test to certain 
refunding bonds.
    (f) Examples.
* * * * *


Sec.  1.141-15  Effective dates.

* * * * *
    (j) Effective dates for certain regulations relating to refundings.
* * * * *
    3. In Sec.  1.141-1, paragraph (b) is amended by revising the 
definition of governmental bond to read as follows:


Sec.  1.141-1  Definitions and rules of general application.

* * * * *
    Governmental bond has the same meaning as in Sec.  1.150-1(b), 
except that, for purposes of Sec.  1.141-13, governmental bond is 
defined in Sec.  1.141-13(b)(2)(iv).
* * * * *
    4. Section 1.141-13 is added to read as follows:


Sec.  1.141-13  Refunding Issues

    (a) In general. Except as provided in this section, a refunding 
issue and a

[[Page 25848]]

prior issue are tested separately under section 141. Thus, the 
determination of whether a refunding issue consists of private activity 
bonds generally does not depend on whether the prior issue consists of 
private activity bonds.
    (b) Application of private business use test and private loan 
financing test-- (1) Allocation of proceeds. In applying the private 
business use test and the private loan financing test to a refunding 
issue, the proceeds of the refunding issue are allocated to the same 
expenditures and purpose investments as the proceeds of the prior 
issue.
    (2) Determination of amount of private business use--(i) In 
general. Except as provided in paragraph (b)(2)(ii) of this section, 
the amount of private business use of a refunding issue is determined 
under Sec.  1.141-3(g), based on the measurement period for that issue 
(for example, without regard to any private business use that occurred 
prior to the issue date of the refunding issue).
    (ii) Refundings of governmental bonds. In applying the private 
business use test to a refunding issue that refunds a prior issue of 
governmental bonds, the amount of private business use of the refunding 
issue is the amount of private business use--
    (A) During the combined measurement period; or
    (B) At the option of the issuer, during the period described in 
paragraph (b)(2)(i) of this section, but only if, without regard to the 
reasonable expectations test of Sec.  1.141-2(d), the prior issue does 
not satisfy the private business use test, based on a measurement 
period that begins on the first day of the combined measurement period 
and ends on the issue date of the refunding issue.
    (iii) Combined measurement period. For purposes of this section, 
the combined measurement period is the period that begins on the first 
day of the measurement period (as defined in Sec.  1.141-3(g)) for the 
prior issue (or, in the case of a series of refundings of governmental 
bonds, the first issue of governmental bonds in the series) and ends on 
the last day of the measurement period for the refunding issue.
    (iv) Governmental bond. For purposes of this section, the term 
governmental bond means any bond that, when issued, purported to be a 
governmental bond, as defined in Sec.  1.150-1(b), or a qualified 
501(c)(3) bond, as defined in section 145(a).
    (v) Special rule for refundings of qualified 501(c)(3) bonds with 
governmental bonds. For purposes of applying this paragraph (b)(2) to a 
refunding issue that refunds a qualified 501(c)(3) bond, any use of the 
property refinanced by the refunding issue before the issue date of the 
refunding issue by a 501(c)(3) organization with respect to its 
activities that do not constitute an unrelated trade or business under 
section 513(a) is treated as government use.
    (c) Application of private security or payment test--(1) Separate 
issue treatment. If the amount of private business use of a refunding 
issue is determined based on the measurement period for that issue in 
accordance with paragraph (b)(2)(i) or (b)(2)(ii)(B) of this section, 
then the amount of private security and private payments allocable to 
the refunding issue is determined under Sec.  1.141-4 by treating the 
refunding issue as a separate issue.
    (2) Combined issue treatment. If the amount of private business use 
of a refunding issue is determined based on the combined measurement 
period for that issue in accordance with paragraph (b)(2)(ii)(A) of 
this section, then the amount of private security and private payments 
allocable to the refunding issue is determined under Sec.  1.141-4 by 
treating the refunding issue and all earlier issues taken into account 
in determining the combined measurement period as a combined issue. For 
this purpose, the present value of the private security and private 
payments is compared to the present value of the debt service on the 
combined issue (other than debt service paid with proceeds of any 
refunding bond). Present values are computed as of the issue date of 
the earliest issue taken into account in determining the combined 
measurement period (the earliest issue). Except as provided in 
paragraph (c)(3) of this section, present values are determined by 
using the yield on the combined issue as the discount rate. The yield 
on the combined issue is determined by taking into account payments on 
the refunding issue and all earlier issues taken into account in 
determining the combined measurement period (other than payments made 
with proceeds of any refunding bond), and based on the issue price of 
the earliest issue. In the case of a partial refunding, the unrefunded 
debt service is not taken into account in determining the yield on the 
combined issue.
    (3) Special rule for arrangements not entered into in contemplation 
of the refunding issue. In applying the private security or payment 
test to a refunding issue that refunds a prior issue of governmental 
bonds, the issuer may use the yield on the prior issue to determine the 
present value of private security and private payments under 
arrangements that were not entered into in contemplation of the 
refunding issue. For this purpose, any arrangement that was entered 
into more than 1 year before the issue date of the refunding issue is 
treated as not entered into in contemplation of the refunding issue.
    (d) Multipurpose issue allocations--(1) In general. For purposes of 
section 141, unless the context clearly requires otherwise, Sec.  
1.148-9(h) applies to allocations of multipurpose issues (as defined in 
Sec.  1.148-1(b)), including allocations involving the refunding 
purposes of the issue. An allocation is not reasonable under this 
paragraph (d) if it achieves more favorable results under section 141 
than could be achieved with actual separate issues. Allocations made 
under this paragraph (d) and Sec.  1.148-9(h) must be consistent for 
purposes of section 141 and section 148.
    (2) Exceptions. This paragraph (d) does not apply for purposes of 
sections 141(c)(1) and 141(d)(1).
    (e) Application of reasonable expectations test to certain 
refunding bonds. An action that would otherwise cause a refunding issue 
to satisfy the private business tests or the private loan financing 
test is not taken into account under the reasonable expectations test 
of Sec.  1.141-2(d) if--
    (1) The action is not a deliberate action within the meaning of 
Sec.  1.141-2(d)(3); and
    (2) The weighted average maturity of the refunding bonds is not 
greater than the remaining weighted average maturity of the prior 
bonds.
    (f) Examples. The following examples illustrate the application of 
this section.

    Example 1. Measuring private business use. In 2002, Authority A 
issues tax-exempt bonds that mature in 2032 to acquire an office 
building. The measurement period for the 2002 bonds under Sec.  
1.141-3(g) is 30 years. At the time A acquires the building, it 
enters into a 10-year lease with a nongovernmental person under 
which the nongovernmental person will use 5 percent of the building 
in its trade or business during each year of the lease term. In 
2007, A issues bonds to refund the 2002 bonds. The 2007 bonds mature 
on the same date as the 2002 bonds and have a measurement period of 
25 years under Sec.  1.141-3(g). Under paragraph (b)(2)(ii)(A) of 
this section, the amount of private business use of the proceeds of 
the 2007 bonds is 1.67 percent, which equals the amount of private 
business use during the combined measurement period (5 percent of 1/
3rd of the 30-year combined measurement period). In addition, the 
2002 bonds do not satisfy the private business use test, based on a 
measurement period beginning on the first day of the measurement 
period for the 2002 bonds and ending on the issue date of the 2007 
bonds, because only 5 percent of the proceeds of the 2002 bonds are 
used for a private business use during that period.

[[Page 25849]]

Thus, under paragraph (b)(2)(ii)(B) of this section, A may treat the 
amount of private business use of the 2007 bonds as 1 percent (5 
percent of 1/5th of the 25-year measurement period for the 2007 
bonds). The 2007 bonds do not satisfy the private business use test.
    Example 2. Combined issue yield computation. (i) On January 1, 
2000, County B issues 20-year bonds with an interest rate of 8% and 
an issue price of $100 million. The debt service payments on the 
2000 bonds are as follows:

------------------------------------------------------------------------
                          Date                             Debt service
------------------------------------------------------------------------
1/1/01..................................................     $10,306,800
1/1/02..................................................      10,306,800
1/1/03..................................................      10,306,800
1/1/04..................................................      10,306,800
1/1/05..................................................      10,306,800
1/1/06..................................................      10,306,800
1/1/07..................................................      10,306,800
1/1/08..................................................      10,306,800
1/1/09..................................................      10,306,800
1/1/10..................................................      10,306,800
1/1/11..................................................      10,306,800
1/1/12..................................................      10,306,800
1/1/13..................................................      10,306,800
1/1/14..................................................      10,306,800
1/1/15..................................................      10,306,800
1/1/16..................................................      10,306,800
1/1/17..................................................      10,306,800
1/1/18..................................................      10,306,800
1/1/19..................................................      10,306,800
1/1/20..................................................      10,306,800
                                                         ---------------
                                                            $206,136,000
------------------------------------------------------------------------

    (ii) On January 1, 2005, B issues 15-year bonds to refund all of 
the outstanding 2000 bonds. The 2005 bonds have an interest rate of 6% 
and an issue price of $93,250,000. The debt service payments on the 
2005 bonds are as follows:

------------------------------------------------------------------------
                          Date                             Debt service
------------------------------------------------------------------------
1/1/06..................................................      $9,657,800
1/1/07..................................................       9,657,800
1/1/08..................................................       9,657,800
1/1/09..................................................       9,657,800
1/1/10..................................................       9,657,800
1/1/11..................................................       9,657,800
1/1/12..................................................       9,657,800
1/1/13..................................................       9,657,800
1/1/14..................................................       9,657,800
1/1/15..................................................       9,657,800
1/1/16..................................................       9,657,800
1/1/17..................................................       9,657,800
1/1/18..................................................       9,657,800
1/1/19..................................................       9,657,800
1/1/20..................................................       9,657,800
                                                         ---------------
                                                            $144,867,000
------------------------------------------------------------------------

    (iii) For purposes of determining the amount of private security 
and private payments with respect to the 2005 bonds, the 2005 bonds and 
the 2000 bonds are treated as a combined issue under paragraph (c)(2) 
of this section. The yield on the combined issue is 7.5036 percent per 
year compounded semiannually, computed as follows:

----------------------------------------------------------------------------------------------------------------
                                        Unrefunded new
                Date                      money debt       Refunding debt       Total debt      Present value on
                                           service            service            service             1/1/00
----------------------------------------------------------------------------------------------------------------
1/1/00..............................  .................  .................  .................  ($100,000,000.00)
1/1/01..............................        $10,306,800  .................        $10,306,800       9,574,857.71
1/1/02..............................         10,306,800  .................         10,306,800       8,894,894.64
1/1/03..............................         10,306,800  .................         10,306,800       8,263,219.48
1/1/04..............................         10,306,800  .................         10,306,800       7,676,403.02
1/1/05..............................         10,306,800  .................         10,306,800       7,131,259.62
1/1/06..............................  .................         $9,657,800          9,657,800       6,207,676.64
1/1/07..............................  .................          9,657,800          9,657,800       5,766,835.53
1/1/08..............................  .................          9,657,800          9,657,800       5,357,300.97
1/1/09..............................  .................          9,657,800          9,657,800       4,976,849.70
1/1/10..............................  .................          9,657,800          9,657,800       4,623,416.36
1/1/11..............................  .................          9,657,800          9,657,800       4,295,082.25
1/1/12..............................  .................          9,657,800          9,657,800       3,990,064.95
1/1/13..............................  .................          9,657,800          9,657,800       3,706,708.59
1/1/14..............................  .................          9,657,800          9,657,800       3,443,474.92
1/1/15..............................  .................          9,657,800          9,657,800       3,198,934.91
1/1/16..............................  .................          9,657,800          9,657,800       2,971,761.03
1/1/17..............................  .................          9,657,800          9,657,800       2,760,720.01
1/1/18..............................  .................          9,657,800          9,657,800       2,564,666.17
1/1/19..............................  .................          9,657,800          9,657,800       2,382,535.18
1/1/20..............................  .................          9,657,800          9,657,800       2,213,338.32
                                     --------------------
                                            $51,534,000       $144,867,000       $196,401,000               0.00
----------------------------------------------------------------------------------------------------------------

    Example 3. Refunding taxable bonds and qualified bonds. (i) In 
1999, City C issues taxable bonds to finance the construction of a 
facility for the furnishing of water. The bonds are secured by 
revenues from the facility. The facility is managed pursuant to a 
management contract with a nongovernmental person that gives rise to 
private business use. In 2007, C terminates the management contract 
and takes over the operation of the facility. In 2009, C issues 
bonds to refund the 1999 bonds. On the issue date of the 2009 bonds, 
C reasonably expects that the facility will not be used for a 
private business use during the term of the 2009 bonds. In addition, 
during the term of the 2009 bonds, the facility is not used for a 
private business use. Under paragraph (b)(2)(i) of this section, the 
2009 bonds do not satisfy the private business use test because the 
amount of private business use is based on the measurement period 
for those bonds and therefore does not take into account any private 
business use that occurred pursuant to the management contract.
    (ii) The facts are the same as in paragraph (i) of this Example 
3, except that the 1999 bonds are issued as exempt facility bonds 
under section 142(a)(4). The 2009 bonds do not satisfy the private 
business use test.
    Example 4. Multipurpose issue. In 2001, State D issues bonds to 
finance the construction of two office buildings, Building 1 and 
Building 2. D expends an equal amount of the proceeds on each 
building. D enters into arrangements that result in 8 percent of 
Building 1 and 12 percent of Building 2 being used for a private 
business use during the measurement period under Sec.  1.141-3(g). 
These arrangements result in a total of 10 percent of the proceeds 
of the 2001 bonds being used for a private business use. In 2006, D 
purports to allocate, under paragraph (d) of this section, an equal 
amount of the outstanding 2001 bonds to Building 1 and Building 2. D 
also enters into another private business use arrangement with 
respect to Building 1 that results in 10 percent of Building 1 being 
used for a private business use during the measurement period. An 
allocation is not reasonable under paragraph (d) of this section if 
it achieves more favorable results under section 141 than could be 
achieved with actual separate

[[Page 25850]]

issues. D's allocation is unreasonable because, if permitted, would 
result in more that 10 percent of the proceeds of the 2001 bonds 
being used for a private business use.

    5. Section 1.141-15 is amended by revising paragraphs (b)(1), (c), 
(d) and (h) and adding paragraph (j) to read as follows:


Sec.  1.141-15  Effective dates.

* * * * *
    (b) Effective Dates--(1) In general. Except as otherwise provided 
in this section, Sec. Sec.  1.141-0 through 1.141-6(a), 1.141-9 through 
1.141-12, 1.141-14, 1.145-1 through 1.145-2(c), and the definition of 
bond documents contained in Sec.  1.150-1(b) (the 1997 regulations 
contained in 26 CFR Part 1, revised as of April 1, 2003) apply to bonds 
issued on or after May 16, 1997, that are subject to section 1301 of 
the Tax Reform Act of 1986 (100 Stat. 2602).
* * * * *
    (c) Refunding bonds. Except as otherwise provided in this section, 
the 1997 regulations (contained in 26 CFR Part 1, revised as of April 
1, 2003) do not apply to any bonds issued on or after May 16, 1997, to 
refund a bond to which those regulations do not apply unless--
    (1) The refunding bonds are subject to section 1301 of the Tax 
Reform Act of 1986 (100 Stat. 2602); and
    (2)(i) The weighted average maturity of the refunding bonds is 
longer than--
    (A) The weighted average maturity of the refunded bonds; or
    (B) In the case of a short-term obligation that the issuer 
reasonably expects to refund with a long-term financing (such as a bond 
anticipation note), 120 percent of the weighted average reasonably 
expected economic life of the facilities financed; or
    (ii) A principal purpose for the issuance of the refunding bonds is 
to make one or more new conduit loans.
    (d) Permissive application of regulations. Except as provided in 
paragraph (e) of this section, the 1997 regulations (contained in 26 
CFR Part 1, revised as of April 1, 2003) may be applied in whole, but 
not in part, to actions taken before February 23, 1998, with respect 
to--
    (1) Bonds that are outstanding on May 16, 1997 and subject to 
section 141; or
    (2) Refunding bonds issued on or after May 16, 1997 that are 
subject to 141.
* * * * *
    (h) Permissive retroactive application. Except as provided in 
paragraphs (d), (e) or (i) of this section, Sec. Sec.  1.141-1 through 
1.141-6(a), 1.141-7 through 1.141-14, 1.145-1 through 1.145-2, 
1.149(d)-1(g), 1.150-1(a)(3), the definition of bond documents 
contained in Sec.  1.150-1(b) and Sec.  1.150-1(c)(3)(ii) may be 
applied by issuers in whole, but not in part, to--
    (1) Outstanding bonds that are sold before the date of publication 
of final regulations in the Federal Register, and subject to section 
141; or
    (2) Refunding bonds that are sold on or after the date of 
publication of final regulations in the Federal Register, and subject 
to section 141.
* * * * *
    (j) Effective dates for certain regulations relating to refundings. 
Except as otherwise provided in this section, Sec. Sec.  1.141-13, 
1.145-2(d), 1.149(d)-1(g), 1.150-1(a)(3) and 1.150-1(c)(3)(ii) apply to 
bonds that are sold on or after the date of publication of final 
regulations in the Federal Register and that are subject to the 1997 
regulations (contained in 26 CFR Part 1, revised as of April 1, 2003).
    6. Section 1.145-0 is amended by adding an entry to the table in 
numerical order for Sec.  1.145-2(d) to read as follows:


Sec.  1.145-0  Table of contents.

* * * * *


Sec.  1.145-2  Application of private activity bond regulations.

* * * * *
    (d) Issuance costs financed by prior issue.
* * * * *
    7. In Sec.  1.145-2, paragraph (d) is added to read as follows:


Sec.  1.145-2  Application of private activity bond regulations.

* * * * *
    (d) Issuance costs financed by prior issue. Solely for purposes of 
applying the private business use test to a refunding issue under Sec.  
1.141-13, the use of proceeds of the prior issue (or any earlier issue 
in a series of refundings) to pay issuance costs of the prior issue (or 
the earlier issue) is treated as a government use.
    8. Section 1.149(d)-1 is amended by revising paragraph (g) and 
adding paragraph (h) to read as follows:


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

* * * * *
    (g) Limitation on advance refundings of private activity bonds. 
Under section 149(d)(2) and this section, interest on a bond is not 
excluded from gross income if any portion of the issue of which the 
bond is a part is issued to advance refund a private activity bond 
(other than a qualified 501(c)(3) bond). For this purpose, the term 
private activity bond--
    (1) Includes a qualified bond described in section 141(e) (other 
than a qualified 501(c)(3) bond), regardless of whether the refunding 
issue consists of private activity bonds under Sec.  1.141-13; and
    (2) Does not include a taxable bond.
    (h) Effective dates--(1) In general. Except as provided in this 
paragraph (h), this section applies to bonds issued after June 30, 
1993, to which Sec. Sec.  1.148-1 through 1.148-11 apply, including 
conduit loans that are treated as issued after June 30, 1993, under 
paragraph (b)(4) of this section. In addition, this section applies to 
any issue to which the election described in Sec.  1.148-11(b)(1) is 
made.
    (2) Special effective date for paragraph (b)(3). Paragraph (b)(3) 
of this section applies to any advance refunding issue issued after May 
28, 1991.
    (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 Sec.  1.148-11A(i) for rules relating to certain bonds sold 
before July 8, 1997.
    (4) Special effective date for paragraph (g). See Sec.  1.141-15 
for the applicability date of paragraph (g) of this section.
    9. Section 1.150-1 is amended by revising paragraphs (a)(3) and 
(c)(3)(ii) to read as follows:


Sec.  1.150-1  Definitions.

    (a) * * *
    (3) Exceptions to general effective date. See Sec.  1.141-15 for 
the applicability date of the definition of bond documents contained in 
paragraph (b) of this section and the effective date of paragraph 
(c)(3)(ii) of this section.
* * * * *
    (c) * * *
    (3) * * *
    (ii) Exceptions. This paragraph (c)(3) does not apply for purposes 
of sections 141, 144(a), 148, 149(d) and 149(g).
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 03-11926 Filed 5-9-03; 11:31 am]
BILLING CODE 4830-01-P