[Federal Register Volume 69, Number 156 (Friday, August 13, 2004)]
[Rules and Regulations]
[Pages 50065-50067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18371]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9150]
RIN 1545-BC40


Remedial Actions Applicable To Tax-Exempt Bonds Issued by State 
and Local Governments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the exempt 
facility bond rules applicable to tax-exempt bonds issued by state and 
local governments. The regulations affect issuers of tax-exempt bonds 
and amend provisions in the current regulations permitting remedial 
actions for tax-exempt bonds issued by state and local governments.

DATES: Effective Date: These regulations are effective August 13, 2004.
    Applicability Date: For dates of applicability, see Sec.  1.141-
16(c) and (d) of these regulations.

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

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 under sections 141 and 142 of 
the Internal Revenue Code by amending rules pertaining to remedial 
actions (the final regulations). On July 21, 2003, the IRS published in 
the Federal Register a notice of proposed rulemaking (REG-132483-03) 
(68 FR 43059) (the proposed regulations). The proposed regulations 
would amend (1) the definition of nonqualified bonds in Sec.  1.141-12, 
(2) the rules in Sec. Sec.  1.141-12 and 1.142-2, pertaining to the 
allocation of nonqualified bonds, and (3) the effective date provisions 
under Sec. Sec.  1.141-15(e) and 1.141-16(c). A public hearing was 
scheduled for November 4, 2003. The public hearing was cancelled 
because no requests to speak were received. Written comments on the 
proposed regulations were received. After consideration of the written 
comments, the proposed regulations under Sec. Sec.  1.141-16 and 1.142-
2 are adopted as revised by this Treasury decision. The revisions are 
discussed below.

Explanation of Provisions

A. Proposed Regulations

    The proposed regulations propose two changes to the remedial action 
rules contained in Sec. Sec.  1.141-12 and 1.142-2. First, the proposed 
regulations would change the definition of nonqualified bonds under 
Sec.  1.141-12 to provide that the nonqualified bonds are a portion of 
the outstanding bonds in an amount that, if the remaining bonds were 
issued on the date on which the deliberate action occurs, the remaining 
bonds would not satisfy the private business use test or private loan 
financing test, as applicable. For this purpose, the proposed 
regulations provide that the amount of private business use is the 
greatest percentage of private business use in any one-year period 
commencing with the deliberate action.
    Second, the proposed regulations would amend the provisions of 
Sec.  1.141-12 (relating to redemption or defeasance) and Sec.  1.142-2 
relating to allocations of nonqualified bonds.

[[Page 50066]]

Under the proposed regulations, allocations of nonqualified bonds must 
be made on a pro rata basis, except that an issuer may treat any bonds 
of an issue as the nonqualified bonds so long as (i) the remaining 
weighted average maturity of the issue, determined as of the date on 
which the nonqualified bonds are redeemed or defeased (determination 
date), and excluding from the determination the nonqualified bonds 
redeemed or defeased by the issuer, is not greater than (ii) the 
remaining weighted average maturity of the issue, determined as of the 
determination date, but without regard to the redemption or defeasance 
of any bonds (including the nonqualified bonds) occurring on the 
determination date.
    The proposed regulations also would amend Sec. Sec.  1.141-15(e) 
and 1.141-16(c) to provide that for bonds issued before May 16, 1997, 
issuers may apply Sec. Sec.  1.141-12 and 1.142-2 without regard to the 
10\1/2\ year limitation on defeasances contained in those regulations.

B. Final Regulations

    Public comments were received regarding the proposed regulations. 
These comments request that the amount of nonqualified bonds be 
determined in a manner consistent with the general measurement rules 
under Sec.  1.141-3(g). Because of the interrelationship between the 
remedial action provisions of Sec.  1.141-12 and the allocation and 
accounting rules of Sec.  1.141-6 (which are currently reserved), the 
proposed regulations under Sec. Sec.  1.141-12 and 1.141-15 are not 
being finalized at this time. It is anticipated that these proposed 
regulations will be finalized in connection with the provision of the 
allocation and accounting rules.
    Commentators agreed with the proposed change that allows any bonds 
of an issue to be treated as the nonqualified bonds, provided that the 
redemption or defeasance does not have the effect of extending the 
weighted average maturity (WAM) of the issue. However, the commentators 
stated that under the bond indentures for certain fixed rate bonds, the 
redemption or defeasance of bonds with the longest maturities in an 
issue could result in an extension of the WAM of the issue. Under some 
bond indentures, optional redemptions of a portion of a term bond must 
be used first to reduce the earliest mandatory sinking fund payments on 
the bond. In this case, the redemption or defeasance of the longest 
bonds could result in an extension of the WAM. Commentators indicated 
that requiring an issuer to use the pro rata allocation method in these 
circumstances is inappropriate and recommended that the regulations be 
revised to permit the longer bonds to be treated as the nonqualified 
bonds, which is permitted under the existing regulations. The IRS and 
Treasury Department agree that additional flexibility should be 
provided for outstanding bonds with bond indentures that prevent 
compliance with the WAM rule, but believe that extensions of the WAM 
should not be permitted on a prospective basis. As a result, the final 
regulations provide that for purposes of Sec.  1.142-2(e)(2), in 
addition to the allocation methods permitted in Sec.  1.142-2(e)(2), an 
issuer may treat bonds with the longest maturities (determined on a 
bond-by-bond basis) as the nonqualified bonds, but only with respect to 
failures to properly use proceeds that occur on or after May 14, 2004 
with respect to bonds sold before August 13, 2004.
    Other comments were received that are beyond the scope of this 
project. The IRS and Treasury Department continue to consider these 
comments.

Effective Dates

    The final regulations apply to failures to properly use proceeds 
that occur on or after August 13, 2004 and may be applied by issuers to 
failures to properly use proceeds that occur on or after May 14, 2004, 
provided that the bonds are subject to Sec.  1.142-2. The final 
regulations that amend Sec.  1.141-16(c) apply to bonds issued before 
May 16, 1997, that are subject to Sec.  1.142-2, for purposes of 
failures to properly use proceeds that occur on or after April 21, 
2003.

Special Analyses

    It has been determined that this Treasury decision 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 
rule does not impose a collection of information on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply.

Drafting Information

    The principal authors of these regulations are Rebecca L. Harrigal 
and Vicky Tsilas, Office of Associate Chief Counsel (Tax-exempt and 
Government Entities), IRS. 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.141-0 is amended by adding an entry to the table for 
Sec.  1.141-16(d) to read as follows:


Sec.  1.141-0  Table of contents.

* * * * *


Sec.  1.141-16  Effective dates for qualified private activity bond 
provisions.

* * * * *
    (d) Certain remedial actions.
    (1) General rule.
    (2) Special rule for allocations of nonqualified bonds.


0
Par. 3. Section 1.141-16 is amended by revising paragraph (c) and 
adding paragraph (d) to read as follows:


Sec.  1.141-16  Effective dates for qualified private activity bond 
provisions.

* * * * *
    (c) Permissive application. The regulations designated in paragraph 
(a) of this section may be applied by issuers in whole, but not in 
part, to bonds outstanding on the effective date. For this purpose, 
issuers may apply Sec.  1.142-2 without regard to paragraph (c)(3) 
thereof to failures to properly use proceeds that occur on or after 
April 21, 2003.
    (d) Certain remedial actions--(1) General rule. The provisions of 
Sec.  1.142-2(e) apply to failures to properly use proceeds that occur 
on or after August 13, 2004 and may be applied by issuers to failures 
to properly use proceeds that occur on or after May 14, 2004, provided 
that the bonds are subject to Sec.  1.142-2.
    (2) Special rule for allocations of nonqualified bonds. For 
purposes of Sec.  1.142-2(e)(2), in addition to the allocation methods 
permitted in Sec.  1.142-2(e)(2), an issuer may treat bonds with the 
longest maturities (determined on a bond-by-bond basis) as the 
nonqualified bonds, but only with respect to failures to properly use 
proceeds that occur on or after May 14, 2004, with respect to bonds 
sold before August 13, 2004.

0
Par. 4. Section 1.142-0 is amended by revising the entry to the table 
for Sec.  1.142-

[[Page 50067]]

2 and adding paragraphs (e)(1) and (2) to read as follows:


Sec.  1.142-0  Table of contents.

* * * * *


Sec.  1.142-2  Remedial actions.

* * * * *
    (e) * * *
    (1) Amount of nonqualified bonds.
    (2) Allocation of nonqualified bonds.
* * * * *

0
Par. 5. Section 1.142-2 is amended by revising paragraph (e) to read as 
follows:


Sec.  1.142-2  Remedial actions.

* * * * *
    (e) Nonqualified bonds--(1) Amount of nonqualified bonds. For 
purposes of this section, the nonqualified bonds are a portion of the 
outstanding bonds in an amount that, if the remaining bonds were issued 
on the date on which the failure to properly use the proceeds occurs, 
at least 95 percent of the net proceeds of the remaining bonds would be 
used to provide an exempt facility. If no proceeds have been spent to 
provide an exempt facility, all of the outstanding bonds are 
nonqualified bonds.
    (2) Allocation of nonqualified bonds. Allocations of nonqualified 
bonds must be made on a pro rata basis, except that an issuer may treat 
any bonds of an issue as the nonqualified bonds so long as--
    (i) The remaining weighted average maturity of the issue, 
determined as of the date on which the nonqualified bonds are redeemed 
or defeased (determination date), and excluding from the determination 
the nonqualified bonds redeemed or defeased by the issuer to meet the 
requirements of paragraph (c) of this section, is not greater than
    (ii) The remaining weighted average maturity of the issue, 
determined as of the determination date, but without regard to the 
redemption or defeasance of any bonds (including the nonqualified 
bonds) occurring on the determination date.

Nancy Jardini,
Acting Deputy Commissioner of Internal Revenue.
    Approved: July 18, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-18371 Filed 8-12-04; 8:45 am]
BILLING CODE 4830-01-P