SERVICE ANNOUNCES AMENDMENTS TO ARBITRAGE REBATE REGULATIONS.

Notice 89-78 This notice informs issuers of state and local bonds that the Internal Revenue Service will make certain amendments to the temporary arbitrage rebate regulations under section 148 of the Internal Revenue Code. The Service published the rebate regulations in the Federal Register on May 15, 1989 (54 Fed. Reg. 20787), as T.D. 8252. The amendments, which relate to the definition of "guarantor" in section 1.148-3T of the temporary Income Tax Regulations, the special allocation rules for refundings in section 1.148-4T, and certain other provisions, will be effective as if originally included in the temporary regulations. In addition, the period for commenting on the proposed arbitrage rebate regulations published in the Federal Register on May 15, 1989 (54 Fed. Reg. 20861), will be extended to September 14, 1989. A. The amendment relating to the definition of "guarantor" in section 1.148-3T of the temporary regulations will be as follows: 1. Paragraph (b)(12)(ii)(C)(2) will be amended to read as follows: "(2) An entity that is not exempt from Federal income taxation and that (i) is a bank (within the meaning of section 581 or 585(a)(2)(B)), (ii) is rated in one of the two highest (e.g., "AA," "AAA," "Aa," or "Aaa") categories for unsecured debt or insurance underwriting or claims paying ability by a nationally recognized rating agency, or (iii) by issuing its policies causes obligations insured thereby to be rated in one of the two highest categories; and" B. The amendments relating to the special allocation rules for refundings in section 1.148-4T of the temporary regulations will be as follows: 1. In the last sentence of paragraph (e)(1)(iii), the word "No" will be corrected to read "Any." 2. In the first sentence of paragraph (e)(2)(ii)(C), the phrase "by more than 10 percent" will be deleted. 3. The last sentence of paragraph (e)(2)(ii)(C) will be amended to read as follows: "For purposes of this paragraph (e)(2)(ii)(C), tax-exempt investments shall not be treated as tax-exempt, and investments allocated to gross proceeds (other than proceeds) shall not be treated as nonpurpose investments. If the refunding portion of the refunding issue refunds more than one refunded issue, the portion that refunds each refunded issue shall be treated as a separate issue for purposes of applying this paragraph (e)(2)(ii)(C)." 4. Paragraph (e)(2)(ii)(D) will be amended to read as follows: "(D) NO TRANSFER IN ABUSIVE CASES. Paragraph (e)(2)(i) of this section shall not apply to proceeds allocated to investments to the extent that the principal purpose for issuing any portion of the refunding issue is to cause such investments to cease to be allocated to the refunded issue (or to become allocated to the refunding issue). For purposes of applying the preceding sentence to investments in a restricted escrow, the purpose of restructuring debt service shall not be taken into account." 5. A new paragraph (e)(3) will be added to read as follows: "(3) SEPARATE ISSUE TREATMENT FOR CONDUIT FINANCINGS -- (i) IN GENERAL. The portion of a refunded issue properly allocated to a conduit purpose investment shall be treated as a separate issue for purposes of applying paragraphs (e)(1) and (e)(2) of this section. "(ii) CONDUIT PURPOSE INVESTMENT. The term 'conduit purpose investment' means any purpose investment if -- "(A) The purpose investment is an eligible purpose investment (within the meaning of section 1.148-3T(b)(12)(viii)); and "(B) The purpose investment meets the requirements of section 1.148-3T(b)(12)(v) (or could meet such requirements if the purpose investment were guaranteed)." C. The amendments relating to other provisions in the temporary regulations will be as follows: 1. Paragraph (b)(2)(ii)(B) of section 1.148-0T of the temporary regulations will be amended to read as follows: "(B) CERTAIN RETIRED ISSUES. The provisions of sections 1.148-lT through 1.148-8T shall not apply, and the final rebate shall be considered timely paid, in the case of any bond that is part of an issue if -- " 2. Paragraph (b)(3)(ii)(C) of section 1.148-1T of the temporary regulations will be amended to read as follows: "(C) The date 60 days after the earlier of the date the issuer no longer reasonably expects section 148(f)(4)(B) (relating to temporary investment exception) to apply to the issue, and the date 12 months after the date of issue." 3. The second sentence in paragraph (e)(2)(i) of section 1.148- 2T of the temporary regulations will be amended to read as follows: "The yield on an investment that is allocated to an issue is the discount rate that produces the same present value when used in computing the present value of all the receipts received and to be received with respect to the investment, and the present value of all the payments with respect to the investment." 4. In paragraph (b)(5)(i) of section 1.148-3T of the temporary regulations, the sentence reading "For purposes of computing . . . principal and interest." will be deleted. 5. Paragraph (b)(5)(iii) of section 1.148-3T of the temporary regulations will be amended to read as follows: "(iii) LOWEST YIELD. The term "lowest yield" means, with respect to a bond, the yield on the bond determined by assuming the bond is retired on the lowest yield date for the stated retirement price on such date. For purposes of computing the lowest yield, the stated retirement price on the lowest yield date shall be treated as an unconditionally payable payment of principal and interest, and the lowest yield date is the date that when used in computing the yield on the bond produces the lowest yield." 6. Paragraph (b)(8)(ii)(A) of section 1.148-3T of the temporary regulations will be amended to read as follows: "(ii) DISCOUNT RATE, ETC -- (A) IN GENERAL. For purposes of computing the present value of a bond, the yield-to-maturity on the bond shall be used as the discount rate, and the bond shall be assumed to be retired on the final maturity date for the stated retirement price on such date." 7. Paragraph (b)(10)(ii)(A) of section 1.148-3T of the temporary regulations will be amended to read as follows: "(ii) UNCONDITIONALLY PAYABLE -- (A) IN GENERAL. A payment of principal or interest on a bond is unconditionally payable if the amount of the payment and the date the amount is actually and unconditionally due are fixed and determinable as of the date of issue (determined by assuming that no payment is paid before the latest date the payment is actually and unconditionally due). A payment shall not be treated as unconditionally payable to the extent that it is not reasonably certain on the date of issue of the bond that the payment actually will be paid." 8. The first part of paragraph (b)(12)(vi) of section 1.148-3T of the temporary regulations will be amended to read as follows: "(vi) WHEN PAYMENTS COINCIDE. For purposes of paragraph (b)(12)(v)(A) of this section, payments on a purpose investment and a bond coincide if -- "(A) The payments are actually and unconditionally due during the same compounding interval used in computing the yield on the bond, determined by taking into account only payments of interest on the bond; "(B) The payments are actually and unconditionally due during the same compounding interval used in computing the yield on the bond, determined by taking into account only payments of principal of the bond; or "(C) The payments on the bond are actually and unconditionally due no later than one month after the payments on the purpose investment." 9. Paragraph (c)(2)(ii) of section 1.148-4T of the temporary regulations will be corrected to begin a new line after "mailed." 10. In paragraph (c)(1) of section 1.148-8T of the temporary regulations, the sentence reading "Such price also shall be determined . . . from that price." will be deleted. 11. Paragraph (c)(2)(ii) of section 1.148-8T of the temporary regulations will be amended as follows: "(ii) BONDS OFFERED AT A DISCOUNT. If substantially identical bonds are initially offered at one price to the general public and at a discount from that price to institutional or other investors, the issue price of each bond shall be the average offering price of all the bonds. For purposes of the preceding sentence -- "(A) The offering price of each bond sold to institutional or other investors at a discount on or before the date of issue (as defined in section 1.150-lT(c)(2)) is the discounted initial offering price at which the bond was sold, and "(B) The offering price of every other bond is determined on the basis of the initial offering price to the general public at which price a substantial amount of the bonds was sold." COMMENTS Written comments regarding either the proposed regulations or this notice should be sent to: Internal Revenue Service, Attention: CC:CORP:T:R (FI-91-86), Room 4429, Washington, DC 20224. The Service will consider all such comments that are delivered or mailed by September 14, 1989. Because the comments are open to public inspection, commentators should submit an original and seven copies of their comments. ADMINISTRATIVE PRONOUNCEMENT This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure. DRAFTING INFORMATION The principal author of this notice is George Delduke, Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this notice, please contact Mr. Delduke at (202) 566-4545 (not a toll free call).