Rev. Proc. 79-5

Section 1. Purpose

The purpose of this Revenue Procedure is to provide guidance in determining whether "substantially all" (90 percent or more) of the proceeds of industrial development bonds will be considered used to provide exempt facilities under section 103(b)(4) of the Internal Revenue Code of 1954 when excess bonds proceeds remain on hand after acquisition or construction has been completed.

Sec. 2. Background

Section 103(a)(1) of the Code provides that interest on obligations of a state or political subdivision thereof is excludable from the gross incomes of the bondholders. If the obligations are industrial development bonds within the meaning of section 103(b)(2), the interest is generally not excludable. However, the interest is excludable if substantially all of the bond proceeds are used to provide exempt facilities under section 103(b)(4). Section 1.103-8(a)(1) of the Income Tax Regulations provides that substantially all of the proceeds of an issue of governmental obligations are used to provide an exempt facility if 90 percent or more of such proceeds are so used.

Sec. 3. Application

Substantially all of the proceeds of an issue of industrial development bonds will be considered used to provide exempt facilities within the meaning of section 103(b)(4) of the Code if the following circumstances are present:

.01 The face amount of the bond issue must have been based on reasonable estimates of the cost of the exempt facilities at the time the bonds were issued.

.02 At least 90 percent of the actual amount of the bond proceeds expended was used to provide the exempt facilities.

.03 No more than 10 percent of the bond proceeds actually expended was used to provide working capital or nonqualifying facilities.

.04 The remaining unexpended bond proceeds must have been used to redeem the largest portion of the outstanding bond issue, callable under the terms of the bond indenture, that did not exceed the amount of such unexpended bond proceeds. Any unexpended bond proceeds not used to redeem outstanding bonds because the amount of the callable bonds was less than the unexpended bond proceeds, must be placed in escrow for redemption of outstanding bonds at the earliest possible call date. If all of the bonds were callable at a future date, or were callable only in an amount in excess of the unexpended bond proceeds, all of the unexpended bond proceeds must have been placed in escrow until the entire bond issue is called or the maturity date of the bonds is reached. The amount placed in escrow may not be invested to produce a yield greater than the yield on the bonds.

Sec. 4. Inquiries

Inquiries about this Revenue Procedure should refer to its number and should be addressed to the Assistant Commissioner (Technical), Attention: T:I:I, Internal Revenue Service, Washington, D.C. 20224.

Sec. 5. Effect on Arbitrage Bonds

The provisions of this Revenue Procedure have no effect on a determination of whether the bonds are arbitrage bonds within the meaning of section 103(c) of the Code.