[Federal Register Volume 84, Number 68 (Tuesday, April 9, 2019)]
[Rules and Regulations]
[Pages 14006-14007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06937]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9854]
RIN 1545-BO77


Arbitrage Investment Restrictions on Tax-Exempt Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding the 
arbitrage investment restrictions under section 148 of the Internal 
Revenue Code (Code) applicable to tax-exempt bonds and other tax-
advantaged bonds issued by State and local governments. The final 
regulations clarify existing regulations regarding the definition of 
``investment-type property'' by expressly providing an exception for 
investment in capital projects that are used in furtherance of the 
public purposes of the bonds. The final regulations affect State and 
local governmental issuers of these bonds and potential investors in 
capital projects financed with these bonds.

DATES: Effective Date: These final regulations are effective April 9, 
2019.
    Applicability Date: For the date of applicability, see Sec.  1.148-
11(n).

FOR FURTHER INFORMATION CONTACT: Lewis Bell at (202) 317-6980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
148 of the Code. For interest on State or local bonds to be excluded 
from the gross income of the bondholder under section 103, the bonds 
must satisfy various eligibility requirements, including a requirement 
that the bonds not be arbitrage bonds as defined in section 148. 
Section 148(a) generally defines an ``arbitrage bond'' as any bond 
issued as part of an issue any portion of the proceeds of which are 
reasonably expected to be used or are intentionally used to acquire 
``higher yielding investments'' or to replace funds so used. Section 
148(b)(1) defines the term ``higher yielding investments'' as any 
``investment property'' that produces a yield over the term of the 
issue that is materially higher than the yield on the issue. Section 
148(b)(2) defines the term ``investment property'' to include any 
security (within the meaning of section 165(g)(2)(A) or (B)), any 
obligation, any annuity contract, certain residential rental property, 
and any ``investment-type property.'' Section 1.148-1(e)(1) of the 
Income Tax Regulations defines ``investment-type property'' to include 
any property (other than securities, obligations, annuity contracts, 
and covered residential rental property for family units under section 
148(b)(2)(A), (B), (C), and (E)) ``that is held principally as a 
passive vehicle for the production of income.'' Section 1.148-1(e)(1) 
provides that, for this purpose, the production of income includes any 
benefit based on the time value of money.
    Institutional investors have suggested clarification of the scope 
of the regulatory definition of investment-type property under Sec.  
1.148-1(e)(1) to ensure that the definition does not impede greater 
investment in public infrastructure.
    The legislative history to the Tax Reform Act of 1986, Public Law 
99-514, 100 Stat. 2085, indicates that Congress intended to limit the 
scope of the arbitrage restriction on investment-type property so that 
it did not extend to investments in capital projects in furtherance of 
the public purposes of the bonds. In this regard, the House Report to 
the Tax Reform Act of 1986 included the following statement about the 
intended scope of the definition of investment-type property: ``The 
restriction would not apply, however, to real or tangible personal 
property acquired with bond proceeds for reasons

[[Page 14007]]

other than investment (e.g., courthouse facilities financed with bond 
proceeds).'' H.R. Rep. No. 99-426, at 552 (1985), 1986-3 (vol. 2) C.B. 
457; see also S. Rep. No. 99-313, at 844 (1986), 1986-3 (vol. 3) C.B. 
682 (containing a statement substantially identical to that in the 
House report); H.R. Rep. No. 99-841, at II-747 (1986) (Conf. Rep.), 
1986-3 (vol. 4) C.B. 608 (stating that the conference agreement follows 
the House bill and the Senate amendment on this restriction).
    To clarify the scope of the investment-type property definition 
consistent with Congressional intent reflected in the legislative 
history, in a notice of proposed rulemaking published in the Federal 
Register (83 FR 27302; REG-106977-18) on June 12, 2018 (the Proposed 
Regulations), the Department of the Treasury (Treasury Department) and 
the IRS proposed an exception to the definition of investment-type 
property for certain capital projects that further the public purposes 
for which the tax-exempt bonds were issued.
    The Treasury Department and the IRS solicited requests for a public 
hearing and written comments on the Proposed Regulations. No public 
hearing was held because no request for a hearing was received. The 
Treasury Department and the IRS received four public comments favoring 
finalization of the Proposed Regulations to allow greater capital 
investment in public infrastructure and did not receive any unfavorable 
public comments. Accordingly, the Treasury Department and the IRS adopt 
the Proposed Regulations, without substantive change, as final 
regulations by this Treasury Decision.

Explanation of Provisions

1. Section 1.148-1(e)(4): Exception to Investment-Type Property 
Definition for Certain Capital Projects

    Section 1.148-1(e)(4) of the Final Regulations provides that 
investment-type property does not include real property or tangible 
personal property (for example, land, buildings, and equipment) that is 
used in furtherance of the public purposes for which the tax-exempt 
bonds are issued. For example, investment-type property does not 
include a courthouse financed with governmental bonds or an eligible 
exempt facility under section 142, such as a public road, financed with 
private activity bonds.

2. Applicability Dates and Reliance

    The amendments to the definition of investment-type property in the 
final regulations apply to bonds sold on or after July 8, 2019. Issuers 
may apply the provisions of the final regulations to bonds that are 
sold before July 8, 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, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations. Because this regulation 
does 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, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business, and no comments were received.

Drafting Information

    The principal authors of these regulations are Lewis Bell and 
Spence Hanemann 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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    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 1.148-0(c) is amended by adding entries for Sec. Sec.  
1.148-1(e)(4) and 1.148-11(n) to read as follows:


Sec.  1.148-0   Scope and table of contents.

* * * * *
    (c) * * *


Sec.  1.148-1  Definitions and elections.

* * * * *
    (e)* * *
    (4) Exception for certain capital projects.
* * * * *


Sec.  1.148-11  Effective/applicability dates.

* * * * *
    (n) Investment-type property.

0
Par. 3. Section 1.148-1 is amended by:
0
1. Revising the first sentence of paragraph (e)(1).
0
2. Adding paragraph (e)(4).
    The revision and addition read as follows:


Sec.  1.148-1  Definitions and elections.

* * * * *
    (e) Investment-type property--(1) In general. Except as otherwise 
provided in this paragraph (e), investment-type property includes any 
property, other than property described in section 148(b)(2)(A), (B), 
(C), or (E), that is held principally as a passive vehicle for the 
production of income.* * *
* * * * *
    (4) Exception for certain capital projects. Investment-type 
property does not include real property or tangible personal property 
(for example, land, buildings, and equipment) that is used in 
furtherance of the public purposes for which the tax-exempt bonds are 
issued. For example, investment-type property does not include a 
courthouse financed with governmental bonds or an eligible exempt 
facility under section 142, such as a public road, financed with 
private activity bonds.
* * * * *

0
Par. 4. Section 1.148-11 is amended by adding paragraph (n) to read as 
follows:


Sec.  1.148-11   Effective/applicability dates.

* * * * *
    (n) Investment-type property. Section 1.148-1(e)(1) and (4) apply 
to bonds sold on or after July 8, 2019. An issuer may apply the 
provisions of Sec.  1.148-1(e)(1) and (4) to bonds sold before July 8, 
2019.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: November 16, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).

    Editorial Note: This document was received for publication by 
the Office of the Federal Register on April 3, 2019.

[FR Doc. 2019-06937 Filed 4-8-19; 8:45 am]
 BILLING CODE 4830-01-P