[Federal Register Volume 83, Number 249 (Monday, December 31, 2018)]
[Rules and Regulations]
[Pages 67685-67694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28371]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 5f
[TD 9845]
RIN 1545-BG91
Public Approval of Tax-Exempt Private Activity Bonds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations on the public
approval requirement applicable to tax-exempt private activity bonds
issued by State and local governments. The final
[[Page 67686]]
regulations update and replace existing regulations to address
statutory changes, streamline the public approval process, and reduce
administrative burdens. The final regulations affect State and local
governments that issue tax-exempt private activity bonds.
DATES: Effective date: These regulations are effective December 31,
2018.
Applicability date: For dates of applicability, see Sec. 1.147(f)-
1(h).
FOR FURTHER INFORMATION CONTACT: Spence Hanemann, (202) 317-6980 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under OMB Control Number 1545-2185. The collection of
information in these final regulations is the requirement in Sec.
1.147(f)-1 that certain information be contained in a public notice or
public approval and, consequently, disclosed to the public. This
information is required to meet the statutory public approval
requirement provided in section 147(f) of the Internal Revenue Code.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection 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
This document contains amendments to 26 CFR part 1 under section
147(f) of the Internal Revenue Code of 1986 (Code) and 26 CFR part 5f
under section 103(k) of the Internal Revenue Code of 1954 (1954 Code).
In the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public
Law 97-248, 96 Stat. 324, Congress redesignated subsection (k) of
section 103 of the 1954 Code as subsection (l) and inserted a new
subsection (k) that imposed a public approval requirement on tax-exempt
industrial development bonds. On May 11, 1983, the Department of the
Treasury (Treasury Department) and the IRS published in the Federal
Register (48 FR 21115) temporary regulations under section 103(k) of
the 1954 Code (TD 7892) (Existing Regulations). See Sec. 5f.103-2. A
notice of proposed rulemaking (LR-221-82) by cross-reference to the
temporary regulations was published in the Federal Register (48 FR
21166) on the same day.
In the Tax Reform Act of 1986 (1986 Tax Act), Public Law 99-514,
100 Stat. 2085, Congress reorganized the tax-exempt bond provisions and
carried forward the public approval requirement of section 103(k) of
the 1954 Code in expanded form in section 147(f) of the Code. In
section 147(f), Congress extended the public approval requirement to
apply to all types of tax-exempt private activity bonds, as provided in
section 141(e). The legislative history of the 1986 Tax Act states that
``[t]he conferees intend that, to the extent not amended, all
principles of present law continue to apply under the reorganized
provisions.'' H.R. Rep. No. 99-841, at II-686 (1986) (Conf. Rep.).
Thus, the Existing Regulations in Sec. 5f.103-2 remained in effect
even after the 1986 Tax Act became law.
On September 9, 2008, the Treasury Department and the IRS published
a notice of proposed rulemaking (REG-128841-07) in the Federal Register
(73 FR 52220) that proposed regulations to amend and supplement the
Existing Regulations (2008 Proposed Regulations). The Treasury
Department and the IRS received public comments on the 2008 Proposed
Regulations and held a public hearing on January 26, 2009. On September
28, 2017, the Treasury Department and the IRS withdrew the 2008
Proposed Regulations and published a second notice of proposed
rulemaking (REG-128841-07) in the Federal Register (82 FR 45233) (2017
Proposed Regulations). The Treasury Department and the IRS received
comments on the 2017 Proposed Regulations but did not hold a public
hearing because none was requested. After consideration of all of the
comments, the 2017 Proposed Regulations are adopted as amended by this
Treasury decision (Final Regulations).
Summary of Comments and Explanation of Revisions
This section discusses the public comments received on the 2017
Proposed Regulations and explains the revisions made in the Final
Regulations in response to those comments.
1. Section 1.147(f)-1(d): Public Hearing and Reasonable Public Notice
Under the 2017 Proposed Regulations, an issue of private activity
bonds is approved by a governmental unit if a qualifying elected
representative of that governmental unit approves the issue following a
public hearing for which there was reasonable public notice. For this
purpose, a public hearing is generally defined as a forum that provides
a reasonable opportunity for interested individuals to express their
views, orally or in writing, on the proposed issue of bonds and the
location and nature of the proposed project to be financed. Reasonable
public notice generally means a published notice that is reasonably
designed to inform residents of the approving governmental unit,
including residents of the issuing unit and the host governmental unit
where a project is to be located, of the proposed issue.
A. Public Hearing
The 2017 Proposed Regulations provided that a governmental unit may
impose reasonable requirements on persons who wish to participate in a
public hearing, such as a requirement that persons desiring to speak at
the hearing make a written request to speak at least 24 hours before
the hearing. One commenter suggested that the Final Regulations allow a
governmental unit to cancel a scheduled public hearing if the
governmental unit received no timely requests to participate in the
hearing and published a supplemental public notice. However, section
147(f)(2)(B)(i) specifically requires a public hearing before an
elected official may approve the issue. Furthermore, members of the
public may not always provide timely notice of their intent to
participate in a public hearing and, in such cases, canceling the
hearing could frustrate the purpose of the public hearing requirement.
Therefore, the Treasury Department and the IRS have concluded that the
Final Regulations should not disregard the express requirement of
holding a public hearing in section 147(f)(2)(B)(i) by permitting a
governmental unit to cancel a public hearing. Accordingly, the Final
Regulations do not adopt this comment.
[[Page 67687]]
Other commenters suggested alternative means to satisfy the public
hearing requirement. One commenter suggested allowing a public hearing
by teleconference or webinar. The Treasury Department and the IRS have
determined that, although these technologies may be effective for other
purposes, they cannot replace a conventional public hearing conducted
in-person because they are not sufficiently reliable, publicly
available, susceptible to public response, or uniform in their features
and operation. Another commenter suggested allowing a public hearing
performed for any other federal, state, or local purpose to satisfy the
public hearing requirement under section 147(f), regardless of the
procedures by which the organizer publishes notice or conducts the
hearing. The Final Regulations defer to a certain degree to state and
local procedures for conducting a public hearing and publishing notice
of that hearing. See Sec. 1.147(f)-1(d)(3) and (d)(4)(iv) of the Final
Regulations. Furthermore, to the extent that a hearing conducted for
another governmental purpose satisfies all of the requirements of
section 147(f) and the Final Regulations, such a hearing may serve for
both purposes. The Treasury Department and the IRS have determined,
however, that state and local procedures may not supersede a specific
requirement of the Final Regulations. Accordingly, the Final
Regulations do not adopt either of these comments.
B. Reasonable Public Notice
The Existing Regulations provide that public notice is presumed
reasonable if published no fewer than 14 days before the hearing. The
2008 Proposed Regulations proposed to shorten this minimum notice
period from 14 days to seven days. The 2017 Proposed Regulations
proposed to retain the 14-day period between notice and hearing, citing
a statement in the legislative history of TEFRA referring to such a
time period. Several commenters recommended shortening this minimum
notice period to seven days before the public hearing, as proposed in
2008. These commenters noted that, although a portion of the
legislative history includes a reference to a 14-day notice period, the
statute does not require it. Commenters also reasoned that the
substantial increases in the speed at which information spreads to
individual members of the public and advances in technology since the
original enactment of this public approval requirement in 1982 should
warrant a shorter public notice period. Accordingly, the Final
Regulations adopt this comment. The Final Regulations treat notice as
presumed to be reasonably designed to inform residents of an approving
governmental unit if, among other things, the notice is given no fewer
than seven days before the public hearing.
The 2017 Proposed Regulations proposed to treat notice as presumed
to be reasonably designed to inform residents of an approving
governmental unit if, among other things, the notice was posted to the
approving governmental unit's public website. Many commenters supported
this proposed rule. Some commenters suggested modifications to this
rule. Several commenters noted that issuers that issue bonds on behalf
of a governmental unit may be unable to use this rule as proposed. The
proposed rule would permit publication on the website of the approving
governmental unit, but an on-behalf-of issuer (such as a constituted
authority that acts on behalf of a city or county) may not have the
authority to post content to the approving governmental unit's website.
Commenters suggested permitting publication of a public notice on the
website of the on-behalf-of issuer as an alternative to the website of
the approving governmental unit. The Final Regulations adopt this
comment. The Final Regulations provide that, for an issuer approval by
an issuer that acts on behalf of a governmental unit, public notice may
be posted on the public website of either the on-behalf-of issuer or
the approving governmental unit.
The 2017 Proposed Regulations required that, for public notices by
website, a governmental unit also offer a reasonable alternative notice
method for residents without access to the internet. Commenters
presented evidence that more people regularly use the internet than use
a particular newspaper, radio station, or television station. These
commenters recommended removing the requirement for an alternative
notice method in the case of publication by website. The Final
Regulations adopt this comment and eliminate the requirement for an
alternative method of obtaining the information in a website notice.
Further, to address concerns that a public notice posted on a
large, complex website may be difficult for the intended recipients of
that public notice to locate, the Final Regulations clarify that a
public notice must be posted on the governmental unit's primary public
website in an area of that website that is used to inform its residents
about events affecting the residents. In addition, issuers remain
responsible for maintaining records showing that a public notice
containing the requisite information was timely posted to an
appropriate website. See Sec. 1.6001-1.
The 2017 Proposed Regulations included a provision in Sec.
1.147(f)-1(d)(4)(iv) that presumed notice to be reasonable if, among
other things, the notice was given in a way permitted under a general
state law for providing public notice of a public hearing held by the
approving governmental unit. The 2017 Proposed Regulations also
included a provision in Sec. 1.147(f)-1(d)(3) that treated a public
hearing performed in compliance with state procedural requirements as
meeting the public hearing requirements of section 147(f) except to the
extent in conflict with a specific requirement of the proposed
regulations. One commenter expressed a concern that these two
provisions were inconsistent. The Treasury Department and the IRS have
determined that these two provisions of the 2017 Proposed Regulations
are not inconsistent. In this regard, Sec. 1.147(f)-1(d)(3) addresses
public hearings and Sec. 1.147(f)-1(d)(4) addresses public notices.
Upon consideration of this comment and in response to concerns raised
about the accessibility of notices given under state laws, the Final
Regulations clarify that notice given in a way a state permits under a
general law must still be reasonably accessible to the residents of the
approving governmental unit.
2. Section 1.147(f)-1(e): Applicable Elected Representative
The 2017 Proposed Regulations provided that an applicable elected
representative of the approving governmental unit may execute a public
approval. The 2017 Proposed Regulations provided that the applicable
elected representative of a governmental unit consists of any one of
the following: (1) The governmental unit's elected legislative body;
(2) the governmental unit's chief elected executive officer; (3) in the
case of a state, the chief elected legal officer of the state's
executive branch of government; or (4) any official elected by the
voters of the governmental unit and designated by the governmental
unit's chief elected executive officer or by state or local law to
approve issues for the governmental unit. One commenter suggested
expanding the definition of an applicable elected representative to
include the chairman of the governing board of a conduit issuer, if
that person is appointed by an elected official to execute public
approvals and empowered to approve a bond resolution to authorize an
issuance
[[Page 67688]]
of private activity bonds. The 2017 Proposed Regulations reflected the
statutory definition of an applicable elected representative in section
147(f). This statutory definition generally requires that an applicable
elected representative be either an elected official or a body
comprised of elected officials. Under section 147(f)(2)(E)(i), the
statute allows an appointee of an elected official to serve as an
applicable elected representative only in the event that the office of
an applicable elected representative is vacated and only for the
remaining term of the elected official who vacated that office. The
Treasury Department and the IRS have determined that expanding the
statutory definition of applicable elected representative to permit the
appointee of an elected official to qualify as an applicable elected
representative on a permanent basis would be inconsistent with the
purpose and content of the statute. Accordingly, the Final Regulations
adopt this provision as proposed.
3. Section 1.147(f)-1(f): Contents of Notice and Approval
The 2017 Proposed Regulations provided that a project was within
the scope of a public approval if the requisite public notice and the
approval contained a general functional description of the project, the
maximum stated principal amount of bonds to be issued to finance the
project, the name of the initial owner or principal user of the
project, and a general description of the project's location. The 2017
Proposed Regulations further provided that a substantial deviation
between the information required to be provided in the notice and
approval and the actual use of proceeds of the issue generally would
cause that issue to fail to meet the public approval requirement.
A. Contents of Notice and Approval: Maximum Stated Principal Amount of
Bonds
The 2017 Proposed Regulations provided that the public notice and
public approval must include the maximum stated principal amount of the
issue of private activity bonds to be issued to finance the project.
The 2017 Proposed Regulations clarified that, if an issue financed
multiple projects, the notice and approval must specify separately the
maximum stated principal amount of bonds to be issued to finance each
separate project. The 2017 Proposed Regulations further provided that a
deviation between the maximum stated principal amount of bonds to be
used to finance a project that is specified in the notice and approval
and the stated principal amount of bonds actually used to finance that
project is an insubstantial deviation if that actual stated principal
amount is no more than ten percent (10%) greater than the amount in the
notice and approval or any amount less than the amount in the notice
and approval.
One commenter suggested the notice and approval should require only
the aggregate maximum stated principal amount of the bonds of the issue
to be used to finance all of the projects financed by the issue.
Another commenter similarly suggested that a deviation between the
maximum stated principal amount of the bonds to be used to finance a
project as provided in the notice and approval and the actual stated
principal amount of the bonds so used be calculated with respect to the
issue as a whole rather than individually for each project. The
Treasury Department and the IRS have determined that the relative
principal amounts within an issue to be spent on each separate project
are relevant information for this public approval process. The
approximate amount of money used to fund a particular project is
evidence of the scope of that project and the project's potential
impact on the local community. By contrast, the aggregate maximum
stated principal amount of bonds financing all projects financed by an
issue is essentially the stated principal amount of the issue and
conveys little additional information about the relative scopes of the
particular projects in multiple-project financings. Accordingly, the
Final Regulations do not adopt these comments.
One commenter suggested clarifying that the maximum stated
principal amount of bonds used to finance a project may be determined
on any reasonable basis and may take into account contingencies, such
as cost overruns or failures to receive construction approvals, without
regard to whether the occurrence of any such contingency is reasonably
expected at the time of the notice or approval. Such a rule would give
issuers the flexibility to account for uncertainties that may arise
after the bonds are issued, and the prohibition against a substantial
deviation would assure the accuracy of the public approval information
to an acceptable degree. The Final Regulations adopt this comment.
One commenter suggested changing the term ``maximum stated
principal amount'' of bonds to ``maximum stated par amount'' of bonds.
The Treasury Department and the IRS have determined that, for this
purpose, these two terms have the same meaning. The Final Regulations
do not adopt this comment and retain the term ``maximum stated
principal amount'' as proposed.
B. Contents of Notice and Approval: Initial Owner or Principal User
The 2017 Proposed Regulations provided that a project was within
the scope of a public approval if the public notice and approval
included the name of the expected initial legal owner or principal user
of the project or, alternatively, the name of the true beneficial party
of interest for such legal owner or user. One commenter suggested
clarifying that a general partner of a partnership that owns a project
may be treated as a true beneficial party of interest for this purpose.
Recognizing that limited partnership ownership structures are common
among exempt facilities under section 142, the Treasury Department and
the IRS have determined that this clarification is warranted.
Accordingly, the Final Regulations adopt this comment and include an
example clarifying that a public notice and approval may name a general
partner of an owner of a project as a true beneficial party of
interest.
C. Contents of Notice and Approval: Project Location
The Existing Regulations provide that a facility is within the
scope of a public approval if the public notice and approval contain
the prospective location of the facility by its street address or, if
none, by a general description designed to inform readers of its
specific location. The 2017 Proposed Regulations required that the
public notice and approval include a general description of the
prospective location of the project by street address, reference to
boundary streets or other geographic boundaries, or other description
of the specific geographic location that is reasonably designed to
inform readers of the location. One commenter raised a concern that the
phrase ``specific geographic location'' in the 2017 Proposed
Regulations would be more restrictive than the language in the Existing
Regulations and would be burdensome for projects located at well-known
landmarks, which may be widely recognized by their public name but may
not have a street address or identifiable geographic boundaries. The
Treasury Department and the IRS do not agree with the comment because,
as noted above, the 2017 Proposed Regulations and the Existing
Regulations both call for a general description of the specific
location. The
[[Page 67689]]
Final Regulations adopt this provision as proposed.
D. Special Rule for Pooled Financings With Qualified 501(c)(3) Bonds
For qualified 501(c)(3) bonds issued to finance pooled loan
programs that are described in section 147(b)(4)(B), the 2017 Proposed
Regulations provided a special, two-stage public approval process. At
the time that such bonds are issued, the issuer may have only limited
information about the projects to be financed. Thus, for the first
stage of public approvals occurring before the qualified 501(c)(3)
bonds are issued, the 2017 Proposed Regulations allowed the public
notice and approval to include limited general information about
projects to be financed, such as the maximum stated principal amount of
bonds expected to finance loans to section 501(c)(3) organizations or
governmental units and a general description of the types of projects
to be financed with those loans (for example, hospital facilities or
college facilities). For the second stage of public approvals for these
financings, before the issuer originates a loan to a section 501(c)(3)
organization or governmental unit, the 2017 Proposed Regulations
required a supplemental public approval satisfying the ordinary
requirements of section 147(f) for the bonds financing that loan. One
commenter recommended that no host approval be required at the time of
the limited pre-issuance public approval before the qualified 501(c)(3)
bonds are issued because the specific project information may be
unknown at that time. The Final Regulations adopt this comment. Under
the Final Regulations, for this type of financing, an issuer may either
meet the general rules on the public approval requirement or,
alternatively, at the issuer's option, may meet the special rules for a
two-stage public approval process that reflects adoption of this
comment. In particular, under this optional two-stage public approval
process, a pre-issuance issuer approval is required and a supplemental
post-issuance public approval, including issuer approval and host
approval, is required.
E. Timing of Hearing and Approval
The 2017 Proposed Regulations provided a safe harbor for the
minimum period of time between a notice of public hearing and the
public hearing. The 2017 Proposed Regulations also provided that the
approved bonds must be issued within a certain period of time after the
public approval. Neither the Existing Regulations nor the 2017 Proposed
Regulations restrict the period of time between a public hearing and a
public approval. One commenter suggested that the Final Regulations
impose a one-year maximum time period between a public hearing and a
valid public approval. The Treasury Department and the IRS have
determined that, although a period of one year between a public hearing
and a public approval is reasonable, a longer period may be reasonable
in some circumstances. Further, no such maximum period was proposed.
Accordingly, the Final Regulations do not adopt this comment.
4. Section 1.147(f)-1(g): Definitions
The Existing Regulations define a facility to mean a tract or
adjoining tracts of land, the improvements thereon, and any personal
property used in connection with such real property. The Existing
Regulations further provide that non-adjoining tracts of land may be
treated as one facility only if they are used in an ``integrated
operation.'' The 2017 Proposed Regulations use the term ``project''
rather than ``facility'' and generally define a project as one or more
capital projects or facilities, including land, buildings, equipment,
and other property, to be financed with an issue, that are located on
the same site, or adjacent or proximate sites used for similar
purposes. This proposed definition of project was intended to afford
flexibility for a single project to extend beyond a single tract or
adjoining tracts of land, such as the case of a college campus on
adjacent or proximate sites. Because of the potential difficulty of
determining whether facilities are used in an integrated operation, the
2017 Proposed Regulations proposed to remove the provision of the
Existing Regulations that allowed financed assets on non-adjoining
tracts of land to be treated as one facility if those assets were used
in an integrated operation.
One commenter noted that, under the 2017 Proposed Regulations, two
financed properties that are located on non-proximate sites could not
be part of a single project, whereas two such financed properties could
be part of a single facility under the Existing Regulations if the
properties were part of an integrated operation. The commenter
suggested that this aspect of the definition of project in the 2017
Proposed Regulations was more burdensome than the definition of
facility in the Existing Regulations. In general, the 2017 Proposed
Regulations would provide greater flexibility to permit a greater
physical distance between the sites included in a project than would
the Existing Regulations, as the 2017 Proposed Regulations would permit
a single project to include financed property at sites that are
proximate but not adjoining. The Final Regulations generally adopt this
more flexible definition of project from the 2017 Proposed Regulations.
In addition, to address this commenter's concern, the Final Regulations
also retain the longstanding ``integrated operations'' standard from
the Existing Regulations to allow capital projects or facilities that
are located on non-proximate sites to be treated as a one project if
those capital projects or facilities are used in an integrated
operation.
The same commenter also suggested adopting the very broad
definition of project from a different context involving mixed-use
projects under Sec. 1.141-6(a)(3), which generally includes any
facilities or capital projects financed in whole or in part with
proceeds of the issue. The commenter reasoned that the requirement in
the 2017 Proposed Regulations that the public notice and approval
include the maximum stated principal amount of the issue to be used to
finance each project would lock an issuer into a specific allocation of
bond proceeds to the project as defined in section 147(f), whereas
Sec. 1.141-6 would permit floating allocations of bond proceeds to
financed property in certain cases. These two definitions of project
serve rules with different purposes, and the different definitions
reflect those purposes. The Treasury Department and the IRS have
determined that, if the public notice and approval presented this
information as an aggregate of all property financed by the issue,
members of the public and approving officials would be unable to
extract and evaluate the portions of the aggregate relevant to their
respective roles in the public approval process. The Final Regulations
do not adopt this comment.
5. Section 1.147(f)-1(h): Applicability of the Final Regulations
The Final Regulations apply to bonds issued pursuant to a public
approval occurring on or after April 1, 2019. In addition, in response
to public comments, an issuer may apply the provisions of Sec.
1.147(f)-1(f)(6) of the Final Regulations (regarding deviations in
public approval information) in whole, but not in part, to bonds issued
pursuant to a public approval occurring before April 1, 2019.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11,
[[Page 67690]]
2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. It is hereby
certified that these regulations will not have a significant economic
impact on a substantial number of small entities. The Existing
Regulations provide guidance on the minimum informational content,
procedures, and timing for the statutorily required public notices,
public hearings, and public approvals. Although the Final Regulations
are expected to affect a significant number of small state or local
governmental units that issue tax-exempt private activity bonds, the
Final Regulations are not expected to have a significant economic
effect on those governmental units because the Final Regulations
generally would streamline and simplify the Existing Regulations in
various respects to reduce the administrative burdens of meeting the
statutory public approval requirement. For example, the Final
Regulations, unlike the Existing Regulations, would permit publication
of public notice by website to reduce costs associated with print
publication or radio or television broadcast, reduce the information
required to be contained in public notice and public approval for
certain types of bonds, liberalize the consequences of insubstantial
changes in project information, and permit curative actions to address
certain circumstances in which finished projects differ from
descriptions provided in the public notice or public approval.
Accordingly, a regulatory flexibility analysis is not required.
Pursuant to section 7805(f) of the Code, the 2017 Proposed Regulations
preceding the Final Regulations were submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business. No comments were received.
Drafting Information
The principal authors of these regulations are Spence Hanemann of
the Office of Associate Chief Counsel (Financial Institutions and
Products) and Vicky Tsilas, formerly of the Office of Associate Chief
Counsel (Financial Institutions and Products). However, other personnel
from the Treasury Department and the IRS participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 5f
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 5f are 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 1.147(f)-1 is added to read as follows:
Sec. 1.147(f)-1 Public approval of private activity bonds.
(a) In general. Interest on a private activity bond is excludable
from gross income under section 103(a) only if the bond meets the
requirements for a qualified bond as defined in section 141(e) and
other applicable requirements provided in section 103. In order to be a
qualified bond as defined in section 141(e), among other requirements,
a private activity bond must meet the requirements of section 147(f). A
private activity bond meets the requirements of section 147(f) only if
the bond is publicly approved pursuant to paragraph (b) of this section
or the bond qualifies for the exception for refunding bonds in section
147(f)(2)(D).
(b) Public approval requirement--(1) In general. Except as
otherwise provided in this section, a bond meets the requirements of
section 147(f) if, before the issue date, the issue of which the bond
is a part receives issuer approval and host approval (each a public
approval) as defined in paragraphs (b)(2) and (3) of this section in
accordance with the method and process set forth in paragraphs (c)
through (f) of this section.
(2) Issuer approval. Except as otherwise provided in this section,
issuer approval means an approval that meets the requirements of this
paragraph (b)(2). Either the governmental unit that issues the issue or
the governmental unit on behalf of which the issue is issued must
approve the issue. For this purpose, Sec. 1.103-1 applies to the
determination of whether an issuer issues bonds on behalf of another
governmental unit. If an issuer issues bonds on behalf of more than one
governmental unit (for example, in the case of an authority that acts
for two counties), any one of those governmental units may provide the
issuer approval.
(3) Host approval. Except as otherwise provided in this section,
host approval means an approval that meets the requirements of this
paragraph (b)(3). Each governmental unit the geographic jurisdiction of
which contains the site of a project to be financed by the issue must
approve the issue. If, however, the entire site of a project to be
financed by the issue is within the geographic jurisdiction of more
than one governmental unit within a State (counting the State as a
governmental unit within such State), then any one of those
governmental units may provide host approval for the issue for that
project. For purposes of the host approval, if a project to be financed
by the issue is located within the geographic jurisdiction of two or
more governmental units but not entirely within any one of those
governmental units, each portion of the project that is located
entirely within the geographic jurisdiction of the respective
governmental units may be treated as a separate project. The issuer
approval provided pursuant to paragraph (b)(2) of this section may be
treated as a host approval if the governmental unit providing the
issuer approval is also a governmental unit eligible to provide the
host approval pursuant to this section.
(4) Special rule for host approval of airports or high-speed
intercity rail facilities. Pursuant to a special rule in section
147(f)(3), if the proceeds of an issue are to be used to finance a
project that consists of either facilities located at an airport
(within the meaning of section 142(a)(1)) or high-speed intercity rail
facilities (within the meaning of section 142(a)(11)) and the issuer of
that issue is the owner or operator of the airport or high-speed
intercity rail facilities, the issuer is the only governmental unit
that is required to provide the host approval for that project.
(5) Special rule for issuer approval of scholarship funding bond
issues and volunteer fire department bond issues. In the case of a
qualified scholarship funding bond as defined in section 150(d)(2), the
governmental unit that made a request described in section 150(d)(2)(B)
with respect to the issuer of the bond is the governmental unit on
behalf of which the bond was issued for purposes of the issuer
approval. If more than one governmental unit within a State made a
request described in section 150(d)(2)(B), the State or any such
requesting governmental unit may be treated as the governmental unit on
behalf of which the bond was issued for purposes of the issuer
approval. In the case of a bond of a volunteer fire department treated
as a bond of a political subdivision of a State under
[[Page 67691]]
section 150(e), the political subdivision described in section
150(e)(2)(B) with respect to that volunteer fire department is the
governmental unit on behalf of which the bond is issued for purposes of
the issuer approval.
(6) Special rules for host approval of mortgage revenue bonds,
student loan bonds, and certain qualified 501(c)(3) bonds. In the case
of a mortgage revenue bond (as defined in paragraph (g)(5) of this
section), a qualified student loan bond as defined in section 144(b),
and the portion of an issue of qualified 501(c)(3) bonds as defined in
section 145 that finances working capital expenditures, the issue or
portion of the issue must receive an issuer approval but no host
approval is necessary. See also paragraph (f)(5) of this section,
providing certain optional alternative special rules for certain
qualified 501(c)(3) bonds for pooled loan financings described in
section 147(b)(4)(B).
(c) Method of public approval. The method of public approval of an
issue must satisfy either paragraph (c)(1) or (2) of this section. An
approval may satisfy the requirements of this paragraph (c) without
regard to the authority under State or local law for the acts
constituting that approval.
(1) Applicable elected representative. An applicable elected
representative of the approving governmental unit approves the issue
following a public hearing for which there was reasonable public
notice.
(2) Voter referendum. A voter referendum of the approving
governmental unit approves the issue.
(d) Public hearing and reasonable public notice--(1) Public
hearing. Public hearing means a forum providing a reasonable
opportunity for interested individuals to express their views, orally
or in writing, on the proposed issue of bonds and the location and
nature of the proposed project to be financed.
(2) Location of the public hearing. The public hearing must be held
in a location that, based on the facts and circumstances, is convenient
for residents of the approving governmental unit. The location of the
public hearing is presumed convenient for residents of the unit if the
public hearing is located in the approving governmental unit's capital
or seat of government. If more than one governmental unit is required
to hold a public hearing, the hearings may be combined as long as the
combined hearing affords the residents of all of the participating
governmental units a reasonable opportunity to be heard. The location
of any combined hearing is presumed convenient for residents of each
participating governmental unit if it is no farther than 100 miles from
the seat of government of each participating governmental unit beyond
whose geographic jurisdiction the hearing is conducted.
(3) Procedures for conducting the public hearing. In general, a
governmental unit may select its own procedure for a public hearing,
provided that interested individuals have a reasonable opportunity to
express their views. Thus, a governmental unit may impose reasonable
requirements on persons who wish to participate in the hearing, such as
a requirement that persons desiring to speak at the hearing make a
written request to speak at least 24 hours before the hearing or that
they limit their oral remarks to a prescribed time. For this purpose,
it is unnecessary, for example, that the applicable elected
representative of the approving governmental unit be present at the
hearing, that a report on the hearing be submitted to that applicable
elected representative, or that State administrative procedural
requirements for public hearings be observed. Except to the extent
State procedural requirements for public hearings are in conflict with
a specific requirement of this section, a public hearing performed in
compliance with State procedural requirements satisfies the
requirements for a public hearing in this paragraph (d). A public
hearing may be conducted by an individual appointed or employed to
perform such function by the governmental unit or its agencies, or by
the issuer. Thus, for example, for bonds to be issued by an authority
that acts on behalf of a county, the hearing may be conducted by the
authority, the county, or an appointee of either.
(4) Reasonable public notice. Reasonable public notice means notice
that is reasonably designed to inform residents of an approving
governmental unit, including the issuing governmental unit and the
governmental unit in whose geographic jurisdiction a project is to be
located, of the proposed issue. The notice must state the time and
place for the public hearing and contain the information required by
paragraph (f)(2) of this section. Notice is presumed to be reasonably
designed to inform residents of an approving governmental unit if it
satisfies the requirements of this paragraph (d)(4) and is given no
fewer than seven (7) calendar days before the public hearing in one or
more of the ways set forth in paragraphs (d)(4)(i) through (iv) of this
section.
(i) Newspaper publication. Public notice may be given by
publication in one or more newspapers of general circulation available
to the residents of the governmental unit.
(ii) Radio or television broadcast. Public notice may be given by
radio or television broadcast to the residents of the governmental
unit.
(iii) Governmental unit website posting. Public notice may be given
by electronic posting on the approving governmental unit's primary
public website in an area of that website used to inform its residents
about events affecting the residents (for example, notice of public
meetings of the governmental unit). In the case of an issuer approval
of an issue issued by an on-behalf-of issuer that acts on behalf of a
governmental unit, such notice may be posted on the public website of
the on-behalf-of issuer as an alternative to the public website of the
approving governmental unit.
(iv) Alternative State law public notice procedures. Public notice
may be given in a way that is permitted under a general State law for
public notices for public hearings for the approving governmental unit,
provided that the public notice is reasonably accessible.
(e) Applicable elected representative--(1) In general--(i)
Definition of applicable elected representative. The applicable elected
representative of a governmental unit means--
(A) The governmental unit's elected legislative body;
(B) The governmental unit's chief elected executive officer;
(C) In the case of a State, the chief elected legal officer of the
State's executive branch of government; or
(D) Any official elected by the voters of the governmental unit and
designated for purposes of this section by the governmental unit's
chief elected executive officer or by State or local law to approve
issues for the governmental unit.
(ii) Elected officials. For purposes of paragraphs (e)(1)(i)(B),
(C), and (D) of this section, an official is considered elected only if
that official is popularly elected at-large by the voters of the
governmental unit. If an official popularly elected at-large by the
voters of a governmental unit is appointed or selected pursuant to
State or local law to be the chief executive officer of the unit, that
official is deemed to be an elected chief executive officer for
purposes of this section but for no longer than the official's tenure
as an official popularly elected at-large.
(iii) Legislative bodies. In the case of a bicameral legislature
that is popularly elected, both chambers together constitute an
applicable elected representative. Absent designation
[[Page 67692]]
under paragraph (e)(1)(i)(D) of this section, however, neither such
chamber independently constitutes an applicable elected representative.
If multiple elected legislative bodies of a governmental unit have
independent legislative authority, the body with the more specific
authority relating to the issue is the only legislative body that is
treated as an elected legislative body under paragraph (e)(1)(i)(A) of
this section.
(2) Governmental unit with no applicable elected representative--
(i) In general. The applicable elected representatives of a
governmental unit with no applicable elected representative (but for
this paragraph (e)(2) and section 147(f)(2)(E)(ii)) are the applicable
elected representatives of the next higher governmental unit (with an
applicable elected representative) from which the governmental unit
derives its authority. Except as otherwise provided in this section,
any governmental unit from which the governmental unit with no
applicable elected representative derives its authority may be treated
as the next higher governmental unit without regard to the relative
status of such higher governmental unit under State law. A governmental
unit derives its authority from another governmental unit that--
(A) Enacts a specific law (for example, a provision in a State
constitution, charter, or statute) by or under which the governmental
unit is created;
(B) Otherwise empowers or approves the creation of the governmental
unit; or
(C) Appoints members to the governing body of the governmental
unit.
(ii) Host approval. For purposes of a host approval, a governmental
unit may be treated as the next higher governmental unit only if the
project is located within its geographic jurisdiction and eligible
residents of the unit are entitled to vote for its applicable elected
representatives.
(3) On behalf of issuers. In the case of an issuer that issues
bonds on behalf of a governmental unit, the applicable elected
representative is any applicable elected representative of the
governmental unit on behalf of which the bonds are issued.
(f) Public approval process--(1) In general. The public approval
process for an issue, including scope, content, and timing of the
public approval, must meet the requirements of this paragraph (f). A
governmental unit must timely approve either each project to be
financed with proceeds of the issue or a plan of financing for each
project to be financed with proceeds of the issue.
(2) General rule on information required for a reasonable public
notice and public approval. Except as otherwise provided in this
section, a project to be financed with proceeds of an issue is within
the scope of a public approval under section 147(f) if the reasonable
public notice of the public hearing, if applicable, and the public
approval (together the notice and approval) include the information set
forth in paragraphs (f)(2)(i) through (iv) of this section.
(i) The project. The notice and approval must include a general
functional description of the type and use of the project to be
financed with the issue. For this purpose, a project description is
sufficient if it identifies the project by reference to a particular
category of exempt facility bond to be issued (for example, an exempt
facility bond for an airport pursuant to section 142(a)(1)) or by
reference to another general category of private activity bond together
with information on the type and use of the project to be financed with
the issue (for example, a qualified small issue bond as defined in
section 144(a) for a manufacturing facility or a qualified 501(c)(3)
bond as defined in section 145 for a hospital facility and working
capital expenditures).
(ii) The maximum stated principal amount of the issue. The notice
and approval must include the maximum stated principal amount of the
issue of private activity bonds to be issued to finance the project or
projects. If an issue finances multiple projects (for example,
facilities at different locations on non-proximate sites that are not
treated as part of the same project), the notice and approval must
specify separately the maximum stated principal amount of bonds to be
issued to finance each separate project to be financed as part of the
issue. The maximum stated principal amount of bonds to be issued to
finance a project may be determined on any reasonable basis and may
take into account contingencies, without regard to whether the
occurrence of any such contingency is reasonably expected at the time
of the notice.
(iii) The name of the initial legal owner or principal user of the
project. The notice and approval must include the name of either the
expected initial legal owner or principal user (within the meaning of
section 144(a)) of the project or, alternatively, the name of a
significant true beneficial party of interest for such legal owner or
user (for example, the name of a section 501(c)(3) organization that is
the sole member of a limited liability company that is the legal owner
or the name of a general partner of a partnership that owns the
project).
(iv) The location of the project. The notice and approval must
include a general description of the prospective location of the
project by street address, reference to boundary streets or other
geographic boundaries, or other description of the specific geographic
location that is reasonably designed to inform readers of the location.
For a project involving multiple capital projects or facilities located
on the same site, or on adjacent or reasonably proximate sites with
similar uses, a consolidated description of the location of those
capital projects or facilities provides a sufficient description of the
location of the project. For example, a project for a section 501(c)(3)
educational entity involving multiple buildings on the entity's main
urban college campus may describe the location of the project by
reference to the outside street boundaries of that campus with a
reference to any noncontiguous features of that campus.
(3) Special rule for mortgage revenue bonds. Mortgage loans
financed by mortgage revenue bonds are within the scope of a public
approval if the notice and approval state that the bonds are to be
issued to finance residential mortgages, provide the maximum stated
principal amount of mortgage revenue bonds expected to be issued, and
provide a general description of the geographic jurisdiction in which
the residences to be financed with the proceeds of the mortgage revenue
bonds are expected to be located (for example, residences located
throughout a State for an issuer with a statewide jurisdiction or
residences within a particular local geographic jurisdiction, such as
within a city or county, for a local issuer). For this purpose, in the
case of mortgage revenue bonds, no information is required on specific
names of mortgage loan borrowers or specific locations of individual
residences to be financed.
(4) Special rule for qualified student loan bonds. Qualified
student loans financed by qualified student loan bonds as defined in
section 144(b) are within the scope of a public approval if the notice
and approval state that the bonds will be issued to finance student
loans and state the maximum stated principal amount of qualified
student loan bonds expected to be issued for qualified student loans.
For this purpose, in the case of qualified student loan bonds, no
information is required with respect to names of specific student loan
borrowers.
(5) Special rule for certain qualified 501(c)(3) bonds. Qualified
501(c)(3)
[[Page 67693]]
bonds issued pursuant to section 145 for pooled loan financings that
are described in section 147(b)(4)(B) (without regard to any election
under section 147(b)(4)(A)) are within the scope of a public approval
if the public approval either meets the general requirements of
paragraph (b) of this section or, alternatively, at the issuer's
option, meets the special requirements of paragraphs (f)(5)(i) and (ii)
of this section.
(i) Pre-issuance issuer approval. Within the time period required
by paragraph (f)(7) of this section, an issuer approval is obtained
after reasonable public notice of a public hearing is provided and a
public hearing is held. For this purpose, a project is treated as
described in the notice and approval if the notice and approval provide
that the bonds will be qualified 501(c)(3) bonds to be used to finance
loans described in section 147(b)(4)(B), state the maximum stated
principal amount of bonds expected to be issued to finance loans to
section 501(c)(3) organizations or governmental units as described in
section 147(b)(4)(B), provide a general description of the type of
project to be financed with such loans (for example, loans for hospital
facilities or college facilities), and state that an additional public
approval that includes specific project information will be obtained
before any such loans are originated.
(ii) Post-issuance public approval for specific loans. Before a
loan described in section 147(b)(4)(B) is originated, a supplemental
public approval, including issuer approval and host approval, for the
bonds to be used to finance that loan is obtained that meets all the
requirements of section 147(f) and the requirements for a public
approval in paragraph (b) of this section. This post-issuance
supplemental public approval requirement applies by treating the bonds
to be used to finance such loan as if they were reissued for purposes
of section 147(f) (without regard to paragraph (f)(5) of this section).
For this purpose, proceeds to be used to finance such loan do not
include the portion of the issue used to finance a common reserve fund
or common costs of issuance.
(6) Deviations in public approval information--(i) In general.
Except as otherwise provided in this section, a substantial deviation
between the stated use or amount of proceeds of an issue included in
the information required to be provided in the notice and approval
(public approval information) and the actual use or amount of proceeds
of the issue causes that issue to fail to meet the public approval
requirement. Conversely, insubstantial deviations between the stated
use or amount of proceeds of an issue included in the public approval
information and the actual use or amount of proceeds of the issue do
not cause such a failure. In general, the determination of whether a
deviation is substantial is based on all the facts and circumstances.
In all events, however, a change in the fundamental nature or type of a
project is a substantial deviation.
(ii) Certain insubstantial deviations in public approval
information. The following deviations from the public approval
information in the notice and approval are treated as insubstantial
deviations:
(A) Size of bond issue and use of proceeds. A deviation between the
maximum stated principal amount of a proposed issuance of bonds to
finance a project that is specified in public approval information and
the actual stated principal amount of bonds issued and used to finance
that project is an insubstantial deviation if that actual stated
principal amount is no more than ten percent (10%) greater than that
maximum stated principal amount or is any amount less than that maximum
stated principal amount. In addition, the use of proceeds to pay
working capital expenditures directly associated with any project
specified in the public approval information is an insubstantial
deviation.
(B) Initial legal owner or principal user. A deviation between the
initial legal owner or principal user of the project named in the
notice and approval and the actual initial legal owner or principal
user of the project is an insubstantial deviation if such parties are
related parties on the issue date of the issue.
(iii) Supplemental public approval to cure certain substantial
deviations in public approval information. A substantial deviation
between the stated use or amount of proceeds of an issue included in
the public approval information and the actual use or amount of the
proceeds of the issue does not cause that issue to fail to meet the
public approval requirement if all of the following requirements are
met:
(A) Original public approval and reasonable expectations. The issue
met the requirements for a public approval in paragraph (b) of this
section. In addition, on the issue date of the issue, the issuer
reasonably expected there would be no substantial deviations between
the stated use or amount of proceeds of an issue included in the public
approval information and the actual use or amount of the proceeds of
the issue.
(B) Unexpected events or unforeseen changes in circumstances. As a
result of unexpected events or unforeseen changes in circumstances that
occur after the issue date of the issue, the issuer determines to use
proceeds of the issue in a manner or amount not provided in a public
approval.
(C) Supplemental public approval. Before using proceeds of the
bonds in a manner or amount not provided in a public approval, the
issuer obtains a supplemental public approval for those bonds that
meets the public approval requirement in paragraph (b) of this section.
This supplemental public approval requirement applies by treating those
bonds as if they were reissued for purposes of section 147(f).
(7) Certain timing requirements. Public approval of an issue is
timely only if the issuer obtains the public approval within one year
before the issue date of the issue. Public approval of a plan of
financing is timely only if the issuer obtains public approval for the
plan of financing within one year before the issue date of the first
issue issued under the plan of financing and the issuer issues all
issues under the plan of financing within three years after the issue
date of such first issue.
(g) Definitions. The definitions in this paragraph (g) apply for
purposes of this section. In addition, the general definitions in Sec.
1.150-1 apply for purposes of this section.
(1) Geographic jurisdiction means the area encompassed by the
boundaries prescribed by State or local law for a governmental unit or,
if there are no such boundaries, the area in which a unit may exercise
such sovereign powers that make that unit a governmental unit for
purposes of Sec. 1.103-1 and this section.
(2) Governmental unit has the meaning of ``State or local
governmental unit'' as defined in Sec. 1.103-1. Thus, a governmental
unit is a State, territory, a possession of the United States, the
District of Columbia, or any political subdivision thereof.
(3) Host approval is defined in paragraph (b)(3) of this section.
(4) Issuer approval is defined in paragraph (b)(2) of this section.
(5) Mortgage revenue bonds mean qualified mortgage bonds as defined
in section 143(a), qualified veterans' mortgage bonds as defined in
section 143(b), or refunding bonds issued to finance mortgages of
owner-occupied residences pursuant to applicable law in effect prior to
enactment of section 143(a) or section 143(b).
(6) Proceeds means ``proceeds'' as defined in Sec. 1.141-1(b),
except that it does not include disposition proceeds.
[[Page 67694]]
(7) Project generally means one or more capital projects or
facilities, including land, buildings, equipment, and other property,
to be financed with an issue, that are located on the same site, or
adjacent or proximate sites used for similar purposes, and that are
subject to the public approval requirement of section 147(f). Capital
projects or facilities that are not located on the same site or
adjacent or proximate sites may be treated as one project if those
capital projects or facilities are used in an integrated operation. For
an issue of mortgage revenue bonds or an issue of qualified student
loan bonds as defined in section 144(b), the term project means the
mortgage loans or qualified student loans to be financed with the
proceeds of the issue. For an issue of qualified 501(c)(3) bonds as
defined in section 145, the term project means a project as defined in
the first sentence of this definition, and also is deemed to include
working capital expenditures to be financed with proceeds of the issue.
(8) Public approval information is defined in paragraph (f)(6)(i)
of this section.
(9) Public hearing is defined in paragraph (d)(1) of this section.
(10) Reasonable public notice is defined in paragraph (d)(4) of
this section.
(11) Voter referendum means a vote by the voters of the affected
governmental unit conducted in the same manner and time as voter
referenda on matters relating to governmental spending or bond
issuances by the governmental unit under applicable State and local
law.
(h) Applicability date. This section applies to bonds issued
pursuant to a public approval occurring on or after April 1, 2019. For
bonds issued pursuant to a public approval occurring before April 1,
2019, see Sec. 5f.103-2 as contained in 26 CFR part 5f, revised as of
April 1, 2018. In addition, an issuer may apply the provisions of
paragraph (f)(6) of this section in whole, but not in part, to bonds
issued pursuant to a public approval occurring before April 1, 2019.
PART 5f--TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX EQUITY AND
FISCAL RESPONSIBILITY ACT OF 1982
0
Par. 3. The authority citation for part 5f continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 5f.103-2 [Removed]
0
Par. 4. Section 5f.103-2 is removed.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: November 1, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-28371 Filed 12-28-18; 8:45 am]
BILLING CODE 4830-01-P