Final Regs Provide Rules on Reimbursement Bonds

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations that provide guidance as to when the allocation of bond proceeds to reimburse expenditures previously made by an issuer is treated as an expenditure of the bond proceeds. When bond proceeds are "spent," they are no longer subject to arbitrage rebate, arbitrage yield limitations, and certain other limitations. Changes to the applicable law were made by the Tax Reform Act of 1984 and the Tax Reform Act of 1986. The regulations provide guidance to issuers of tax exempt bonds.

 DATES: The regulations are effective for bonds issued after March 2, 1991.

 FOR FURTHER INFORMATION CONTACT: William P. Cejudo, 202-566-3283 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)) under control number 1545-1226. The estimated average annual burden per recordkeeper is 2.4 hours. These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual recordkeepers may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington, D.C., 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503.

BACKGROUND

 On April 25, 1991, the Internal Revenue Service published a notice of proposed rulemaking to provide guidance under sections 103 and 150 of the Internal Revenue Code with respect to reimbursement bonds (56 FR 19046 (1991)). The proposed regulations reflected amendments to section 103 and the addition of sections 141 through 150 to the Code by the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2602). The notice of proposed rulemaking proposed to add to the Income Tax Regulations (26 CFR part 1) provisions for determining when the use of bond proceeds to reimburse a previously paid expenditure is treated as an expenditure of the bond proceeds for purposes of sections 103 and 141 through 150 of the Code.

 Written comments were received on the proposed regulations, and a public hearing was held on August 8, 1991. These written and oral comments requested many changes, including simplification of the regulations generally. After consideration of the comments, the proposed regulations are adopted as revised by this Treasury decision.

EXPLANATION OF PROVISIONS AND CHANGES

A. GENERAL PURPOSE OF THE REGULATIONS.

 These regulations provide rules for allocating proceeds of "reimbursement bonds." Reimbursement bonds are bonds the proceeds of which are allocated to reimburse expenditures paid prior to the date of issue of the bonds.

 Proceeds of a bond generally cease to be treated as proceeds on the date they are spent. Moneys that cease to be treated as proceeds of a bond are no longer subject to arbitrage yield limitations, the arbitrage rebate requirement, and certain other restrictions imposed by sections 103 and 141-150 of the Code. Therefore, spending bond proceeds as soon as possible may reduce the amount of arbitrage rebate an issuer would otherwise pay and may free the issuer from complying with other significant requirements of the Code.

 The early expenditure of bond proceeds as a means of avoiding or minimizing the amount of arbitrage rebate due the United States is encouraged by section 148(f)(4) of the Code, which generally treats an obligation as complying with the arbitrage rebate requirement if all gross proceeds of the obligation are spent within 6 months of the date of issue of the obligation (subject to certain exceptions) or in prescribed installments over a 2-year period (subject to certain exceptions and other requirements). Encouraging the early expenditure of bond proceeds furthers Federal tax policy by discouraging the issuance of bonds earlier than the bond proceeds are needed for governmental purposes. Deferring bond issuances reduces opportunities for earning arbitrage and lessens the burden on financial markets.

 Because the applicability of many restrictions and requirements imposed by the Code ceases when bond proceeds are spent, proper administration of sections 103 and 141-150 requires a definition of what constitutes an expenditure of bond proceeds. In particular, it is important to define to what extent the allocation of bond proceeds to reimburse prior expenditures is considered an expenditure of the proceeds.

 These regulations describe the circumstances in which an allocation of bond proceeds to reimburse a prior expenditure is treated as an expenditure of bond proceeds on the date of allocation. If reimbursements were not limited to expenditures made a reasonable period of time prior to issuance of bonds, issuers could generally avoid compliance with sections 103 and 141-150 by simply allocating bond proceeds to capital expenditures paid long before, and without reliance on, the issuance of the bonds. In addition, the intent of these regulations is to limit the treatment of reimbursement allocations as expenditures of bond proceeds to situations in which economic circumstances justify the reimbursement. These regulations are not intended to permit or condone the use of reimbursement allocations to avoid arbitrage yield limitations, arbitrage rebate, or other tax limitations or restrictions.

B. GENERAL REQUIREMENTS.

 An allocation of proceeds of governmental bonds, qualified 501(c)(3) bonds, and certain other private activity bonds to a previously paid expenditure must comply with section 1.103-18 to be an expenditure of bond proceeds. If a bond meets the requirements of these regulations, bond proceeds are deemed to be spent when they are allocated to reimburse a prior expenditure.

 In the case of a governmental bond, a qualified 501(c)(3) bond, or a private activity bond the proceeds of which are used to finance a governmentally-owned facility, three general requirements must be met in order for a reimbursement allocation of proceeds of those bonds to qualify as an expenditure of bond proceeds:

(1) On or before the date the expenditure that is being reimbursed is paid, the issuer (which, as defined, includes the borrower from a conduit issuer) must declare a reasonable official intent to reimburse the expenditure (the "official intent requirement").

 (2) The allocation of reimbursement bond proceeds to an expenditure must take place by a required time (the "reimbursement period requirement"). The allocation must generally occur on or before the later of the date 1 year after the expenditure was paid or the date 1 year after the property was placed in service. Allocation may not occur before the date on which the expenditure was paid.

 (3) The reimbursed expenditure must be a capital expenditure (the "capital expenditure requirement").

 Under the "official intent period" requirement contained in the proposed regulations, official intent had to be declared no earlier than the date 2 years prior to the date of the expenditure. This requirement was not included in these final regulations in an effort to simplify the regulations and in response to comments that the requirement was unnecessary in light of other requirements applicable to reimbursement allocations.

 If proceeds of a private activity bond (other than a qualified 501(c)(3) bond) are allocated to reimburse a previously paid expenditure of the issuer, the allocation can qualify as an expenditure of the bond proceeds only if the bond complies with the requirements of section 1.103-8(a)(5) and does not violate the anti- abuse rules of section 1.103-18(k)(1) and (3)(ii) and (iii).

C. OFFICIAL INTENT REQUIREMENT.

 The purposes of the official intent requirement are to provide evidence that, on or prior to the date of payment, the issuer intended to reimburse the expenditure and to ensure that the reimbursement is not a device to avoid requirements imposed by the Code with respect to tax exempt bonds. In order to ensure that an issuer will consider its current financial and budgetary circumstances in connection with any declaration of official intent and that the reimbursement will be consistent with the issuer's financial and budgetary circumstances, the regulations require that the declaration of official intent (1) state that the issuer reasonably expects to reimburse the expenditure with proceeds of its debt, (2) specifically state that it is intended to be a declaration of official intent under these regulations, (3) contain a general functional description of the property to which the reimbursement relates or an identification of the fund or account from which the expenditure is to be paid and a general functional description of the purposes of the fund or account, (4) indicate the maximum principal amount of debt expected to issued for reimbursement, and (5) be reasonably available for public inspection. The issuer may designate any person to act on its behalf in declaring official intent.

 Unlike the proposed regulations, which required that the declaration of official intent state the issuer's intent to issue taxable or tax exempt debt to reimburse the prior expenditure, these regulations require only that the issuer declare its intent to issue debt to reimburse the expenditure. This change was made in response to comments expressing confusion over the language in the proposed regulations. The requirement that the declaration of official intent state that it is a declaration of official intent under these regulations was added in order to ensure appropriate evidence of intent to reimburse the expenditure. Without this evidence, expenditure authorizations by issuers or conduit borrowers (which may also be legal authorizations to incur debt) are not treated as declarations of official intent for purposes of these regulations.

 With respect to the proposed regulations, state and local financial officers commented that many larger issuers use a fund or account method to account for ongoing projects for which reimbursement financing may be used. These commentators pointed out that because of their use of fund accounting, the project-specific accounting requirements of the proposed regulations were burdensome. In response to these comments, these regulations permit declarations of official intent to describe identified funds or accounts in lieu of identified specific projects. Therefore, if a declaration of official intent both identifies the fund or account from which the expenditure to be reimbursed is paid and describes the general functional purpose of the fund or account, that declaration adequately describes the expenditure to be reimbursed for purposes of the official intent requirement.

 Commentators requested clarification regarding the provision in the proposed regulations permitting "reasonable deviations" between the property described in the declaration of official intent and the actual property acquired. In response to these comments, these regulations permit reasonable deviations between the project described and the project acquired if "the actual project financed is reasonably related in function to the project described in the declaration of official intent." The intent of this change is to simplify compliance with the official intent requirement and to allow flexibility for changes within the same project.

 In response to comments that the public availability requirement under the proposed regulations was burdensome, these regulations require only that the declaration of official intent be "reasonably available for public inspection within a reasonable period of time." Safe harbors are provided for declarations of official intent made available for public inspection in compliance with State or local law and for declarations of official intent made available within 30 days of the declaration of official intent. The intent of these changes is to simplify compliance with the public availability requirement while assuring that declarations of official intent are available for public inspection. Special rules continue to apply to public availability of declarations of official intent with respect to conduit financings such as qualified 501(c)(3) bonds and other private activity bonds.

 A declaration of official intent must be reasonable. The reasonableness requirement is intended to curb abuses that may otherwise arise when bond proceeds are allocated to reimburse expenditures primarily for the purpose of avoiding tax restrictions or requirements. The reasonableness requirement does not impose a requirement on an issuer that all other funds be exhausted. Instead, the requirement ensures that reimbursement of an expenditure is motivated by an intent to finance, on a long-term basis, an expenditure originally paid with moneys that were not available to fund the expenditure on a long-term basis.

 Commentators asked for clarification of the concept of "available moneys" in the proposed regulations. In response to this request, these regulations clarify that moneys are taken into account for purposes of determining consistency with an issuer's budgetary and financial circumstances if, at the time of the declaration of official intent, they are, or are reasonably expected to be, allocated on a long-term basis, reserved, or otherwise set aside with respect to the expenditure to be reimbursed by the issuer or by any member of the same controlled group as the issuer. The application of the controlled group concept for purposes of determining available moneys should be easier for issuers to comply with since not all members of a controlled group need to be identified if it is clear that none of them could have available moneys with respect to the expenditure to be reimbursed by the issuer. A controlled group of entities, is a group of entities controlled by the same entity or entities and is defined in new section 1.150-1(f). Because of these changes to the reasonableness requirement, the examples contained in the proposed regulations illustrating this principal were not included in these final regulations.

 The reasonableness requirement is not intended to preclude an issuer from avoiding or minimizing arbitrage rebate or arbitrage yield limitations by intentionally delaying the issuance of a bond. For example, prior to the issuance of the bond, an issuer may pay expenditures with respect to a project with moneys that are not available on a long-term basis to finance the project. By delaying the bond issue, the issuer is able to reimburse itself for the prior expenditures with bond proceeds that will be spent within the relevant 6-month or 2-year time period, thereby meeting an exception to arbitrage rebate. Delaying the issuance of obligations for this purpose furthers Federal tax policy and is encouraged.

 The reasonableness requirement will not be applied to question the soundness or appropriateness of an issuer's budget or financial practices; rather it is meant to ensure that any intent to reimburse is consistent with an issuer's established budgetary and financial practices (provided that those practices are not adopted for tax avoidance purposes). In order to ensure that an issuer's actions reasonably conform to the issuer's declarations of official intent, under the reasonableness requirement the issuer must reasonably expect to reimburse the expenditure with proceeds of a borrowing (the "reasonable expectations test"). The determination of whether an expectation to reimburse is reasonable is based on all of the relevant facts and circumstances. For purposes of this determination, one important factor is whether an issuer has failed to reimburse expenditures which it has actually paid and for which it has declared official intent. The reasonable expectations test replaces the "pattern of failing to reimburse" rules of the proposed regulations. This change was made in part in response to comments that the "pattern of failing to reimburse" rules were burdensome.

D. REIMBURSEMENT PERIOD REQUIREMENT.

 The purpose of the reimbursement period requirement is to provide assurance that the money originally used to pay for the expenditure that is to be reimbursed is not available with respect to the expenditure on a long-term basis. If an expenditure is not reimbursed within a relatively short period of time after its payment or after completion of the project, it is more likely that the money used to pay the expenditure is available with respect to that expenditure on a long-term basis.

 Some commentators have suggested that reimbursement allocations be permitted on an unrestricted basis with respect to all expenditures paid within a certain period of time. For example, some commentators have suggested permitting unlimited reimbursement of all expenditures paid during the 3 fiscal years preceding the date of issue of the reimbursement bonds. These commentators have argued that such a rule would be simple and that significant abuse (e.g., reimbursement of expenditures incurred many years ago) would be curbed because of the time limitation. This provision was not included in these regulations because of the potentially adverse effect that it would have on arbitrage rebate, arbitrage yield restriction, and other tax requirements and limitations applicable to tax exempt bonds. If reimbursement allocations were permitted for defined periods of time without further limitation, issuers could conceivably reimburse themselves for all expenditures paid during the defined time period whenever they issued debt regardless of their actual economic motivation for incurring the debt. Issuers could then use the proceeds of that reimbursement bond to pay for all or a portion of the project that they had not originally intended to finance with bond proceeds. By structuring the financing as a reimbursement bond rather than as a "new money" bond, the bond proceeds could be treated as "spent" and no longer subject to most tax limitations that would otherwise apply to a new money bond.

E. CAPITAL EXPENDITURE REQUIREMENT.

 The purpose of the capital expenditure requirement is to prohibit the reimbursement of day-to-day operating costs and similar "working capital" items. Comments on the proposed regulations requested clarification of the distinction between costs with a reasonably expected economic life of 1 year or more and those with a life of less than a year. In response to this request, the economic life requirement was changed to a capital expenditure requirement. For this purpose, a "capital expenditure" is defined in new section 1.150-1(h) as any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election such as an election under section 266) under general Federal income tax principles. Whether an expenditure is a capital expenditure is determined at the time the expenditure is paid with respect to the property. Future changes in law do not affect whether an expenditure is a capital expenditure.

 For purposes of applying the "general Federal income tax principles" standard referred to in section 1.150-1(h), an issuer should generally be treated as if it were a corporation subject to taxation under subchapter C of chapter 1 of the Code. For example, costs that would be deducted as trade or business expenses under section 162 of the Code are expenditures for working capital and arc not capital expenditures. On the other hand, costs incurred to acquire, construct, or improve land, buildings, and equipment generally are capital expenditures under section 263 of the Code. Costs properly allocable to the issuance of the reimbursement bond are treated as capital expenditures.

F.SPECIAL EXCEPTION FOR PRELIMINARY EXPENDITURES AND ABANDONMENT PRIOR TO COMPLETION.

 Preliminary expenditures such as architectural, engineering, survey, reimbursement bond issuance, and similar costs (not exceeding in the aggregate 20 percent of the issue price of that portion of the issue that finances the project) generally are not subject to the official intent requirement. A separate exception also recognizes that projects may be abandoned prior to completion, and generally permits reimbursement of expenditures in this event. Under the proposed regulations, preliminary expenditures were excepted only from the official intent period requirement and were limited to 10 percent of the expected cost of the project. Changes to this provision were made in response to comments that the provision was insufficient to cover all ordinary preliminary expenditures.

G. DEFINITION OF ISSUER.

 For purposes of these regulations, "issuer" means the actual issuer of an obligation. If the proceeds of a bond are loaned by the issuer to an entity (the "conduit borrower") that uses the bond proceeds to carry out the governmental purpose of the bond, "issuer" includes the conduit borrower. The actual issuer of the reimbursement bonds is not treated as the issuer with respect to proceeds loaned to a conduit borrower.

 The proposed regulations defined issuer as including all entities that were members of the same controlled group. Comments were received indicating that application of the controlled group concept in all circumstances was burdensome. In response to these comments, the controlled group concept was deleted from the definition of issuer and was applied instead generally for purposes of determining available amounts under the reasonableness requirement.

H.ANTI-ABUSE RULE AND LIMITATION ON SCOPE OF REIMBURSEMENT REGULATIONS.

 In general, a reimbursement allocation is not treated as an expenditure of bond proceeds if any action or inaction of the issuer with respect to the allocation constitutes an artifice or device. This general anti-abuse rule was not contained in the proposed regulations and is added to these regulations to prevent abuse that may otherwise occur because of certain more liberal provisions contained in these regulations (e.g., more liberal definition of issuer and a more narrow application of the reasonableness standard).

 In addition to the general anti-abuse rule, a reimbursement allocation is not treated as an expenditure of bond proceeds if, absent that application, the bond proceeds are otherwise used directly or indirectly for one of the following prohibited uses: (1) within 1 year of the allocation, to refund another issue of governmental obligations of the issuer within the meaning of section 148 of the Code, (2) within 1 year of the allocation, to create or increase the balance in a "sinking fund" (as defined in section 1.103-13(g)) with respect to any obligation of the issuer, or to replace funds that have been, are, or will be so used for sinking fund purposes, (3) within 1 year of the allocation, to create or increase the balance in a "reserve or replacement fund" (as defined in section 1.103-14(d)) with respect to any obligation of the issuer, or to replace funds that have been, are, or will be so used for reserve or replacement fund purposes, or (4) to reimburse any person (other than the issuer) for any expenditure or payment that was originally paid with proceeds of any obligation of the issuer. Any obligation that may arise when an issuer borrows from its own internal funds or from the funds of entities that are members of the same controlled group is not treated as an "obligation" as that term is used in subdivision (4) in the preceding sentence.

 The purpose of the limitations on the use of reimbursement proceeds is to prohibit issuers from using a reimbursement allocation to earn otherwise prohibited arbitrage in certain transactions involving refundings, sinking funds, reserve and replacement funds, and previously-financed expenditures. Comments on the proposed regulations stated that the anti-abuse rule under the proposed regulations did not contain any time limit for "tracing" reimbursement bond proceeds to the prohibited uses, thereby making it difficult to determine when any use of moneys for the prohibited uses would be attributed to the reimbursement allocation. One-year time limitations were added to the prohibited use provisions in response to these comments. However, reimbursement proceeds intentionally used for these prohibited uses after the 1-year period are still subject to the general anti-abuse rule.

 There are two exceptions to the limitations on uses of reimbursement proceeds. Under the first exception, the limitation does not apply if the issuer deposits the moneys from the reimbursement allocation in a bona fide debt service fund (as defined in section 1.103-13(b)(12)) or otherwise uses these moneys to pay current debt service on any obligation of the issuer (other than the reimbursement bonds). Under the second exception, the limitations with respect to refundings and expenditures originally paid with proceeds of a borrowing do not apply if the financing proceeds originally used to pay the expenditure were not reasonably expected to be used to finance that expenditure.

 Because of confusion over the application of the proposed regulations to refunding bonds and reimbursements made with taxable debt, these regulations clarify the treatment of those transactions. In the case of a tax exempt refunding of a taxable bond, if proceeds of the taxable bond were allocated to reimburse a previously paid expenditure, the proceeds of the taxable bond are not deemed to have been spent unless the reimbursement allocation complied with the Federal tax law and regulations applicable to reimbursement allocations of proceeds of tax exempt issues in effect as of the date of issue of the taxable bond. If the proceeds of the taxable bond are deemed to be unspent by application of the preceding sentence, the proceeds of the taxable bond are subject to "transfer" to the tax exempt bond issued to refund the taxable bond (directly or indirectly in a series of refundings) and therefore may become proceeds of the refunding bond. For purposes of these regulations, proceeds of the taxable bond are deemed to remain unspent until a reimbursement allocation of those proceeds is made that complies with these regulations or the taxable bond proceeds are otherwise spent. The purpose of this provision is to prevent the use of a combination of taxable and tax exempt debt to circumvent the requirements of these allocation rules.

EFFECTIVE DATE

 These regulations apply to bonds issued March 2, 1992.

SPECIAL ANALYSES

 These rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. Although this Treasury decision was preceded by a notice of proposed rulemaking that solicited public comments, the notice was not required by section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) since the regulations proposed in the that notice and adopted by this Treasury decision are interpretive. Therefore, a final Regulatory Flexibility Analysis is not required by the Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal authors of these regulations are David A. Walton, Office of Tax Legislative Counsel, Department of the Treasury, and formerly of the Office of Assistant Chief Counsel (Financial Institutions and Products), Internal Revenue Service and John J. Cross III, Office of Assistant Chief Counsel (Financial Institutions and Products), Internal Revenue Service. However, other personnel from the Service and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR 1.101-1 -- 1.133-IT

Income taxes, Reporting and recordkeeping requirements.

 26 CFR Part 602

 Reporting and recordkeeping requirements

Treasury Decision 8394

AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1 -- INCOME TAXES: TAXABLE YEARS BEGINNING AFTER DECEMBER 3l, 1953

Paragraph 1. The authority for part 1 continues to read in part:

Authority: Sec. 7805, 68A Stat. 917 (26 U.S.C. 7805) * * *

Par. 2. New section 1.103-18 is added to read as follows:

SECTION 1.103-18 PROCEEDS OF BONDS USED FOR REIMBURSEMENT.

(a) TABLE OF CONTENTS. This table of contents contains a listing of the headings of section 1.103-18(a) through (l).

 (a) Table of contents.

(c) OPERATING RULES FOR GOVERNMENTAL BONDS AND CERTAIN PRIVATE ACTIVITY BONDS --

(1) BONDS SUBJECT TO THESE OPERATING RULES. The operating rules provided in this paragraph apply only to bonds that are --

(i) Not private activity bonds described in section 141(a) (except as otherwise provided in paragraphs (c)(1)(ii) and (iii) of this section),

(ii) Qualified 501(c)(3) bonds described in section 145, or

(iii) Private activity bonds the proceeds of which are used to finance a facility that is owned by a governmental unit (within the meaning of section 142).

(2) OPERATING RULES. Except as provided in paragraph (i) of this section (relating to certain unforeseeable expenditures and certain preliminary expenditures) and in paragraph (k) (relating to anti- abuse rules) of this section, for purposes of applying sections 103 and 141-150, a reimbursement allocation is treated as an expenditure of proceeds of the reimbursement bond on the date of the reimbursement allocation if each of the following requirements is met --

(i) OFFICIAL INTENT REQUIREMENT. On or before the date the expenditure is paid by the issuer, the issuer declares a reasonable intention to reimburse the expenditure with proceeds of a borrowing.

(ii) REIMBURSEMENT PERIOD REQUIREMENT. The reimbursement allocation occurs not earlier than the date on which the expenditure is paid and not later than 1 year after the later of --

(A) The date on which the expenditure is paid, or

(B) The date on which the property is placed in service.

(iii) CAPITAL EXPENDITURE REQUIREMENT. The expenditure to be reimbursed is a capital expenditure (as defined in section 1.150- 1(h)).

(d) OPERATING RULES FOR CERTAIN PRIVATE ACTIVITY BONDS. In the case of a reimbursement allocation of proceeds of an exempt facility bond under section 141(e)(1)(A) or a qualified small issue bond under section 141(e)(1)(D), a reimbursement allocation is treated as an expenditure of proceeds of the reimbursement bond on the date of the reimbursement allocation for purposes of applying sections 103 and 141-150 if the property financed meets the requirements imposed under section 1.103-8(a)(5) and the reimbursement allocation does not violate the anti-abuse rules of paragraphs (k)(1) and (k)(3)(ii)- (iii) of this section.

(e) DEFINITIONS OF REIMBURSEMENT BOND AND REIMBURSEMENT ALLOCATION --

(1) DEFINITION OF REIMBURSEMENT BOND. For purposes of this section, "reimbursement bond" means the portion of an issue allocated to reimburse an expenditure that was paid prior to the date of issue. Thus, "reimbursement bond" does not include that portion of an issue allocated to reimburse an expenditure that is paid on or after the date of issue of the bond issue.

(2) DEFINITION OF REIMBURSEMENT ALLOCATION. For purposes of this section, the term "reimbursement allocation" means an allocation of proceeds of a reimbursement bond to pay an expenditure if --

(i) The allocation is evidenced by an entry on the books or records of the issuer maintained with respect to the bonds,

(ii) The allocation entry identifies either an actual prior expenditure to be reimbursed or, in the case of a reimbursement of a fund or an account, the fund or account from which the expenditure was paid, and

(iii) As a result of the allocation, the bond proceeds covered by the entry are relieved from any restrictions under the relevant legal documents and applicable state law that apply to unspent bond proceeds.

(f) PROCEDURE FOR DECLARING OFFICIAL INTENT --

(1) FORM OF OFFICIAL INTENT. For purposes of paragraph (c)(2)(i) of this section, an issuer declares an intention to reimburse an expenditure ("official intent") if --

(i) The issuer, or any person or entity designated by the issuer to declare official intent on behalf of the issuer, states that the issuer reasonably expects to reimburse the expenditure with proceeds of debt to be incurred by the issuer,

(ii) The statement of official intent specifically states that it is a declaration of official intent under this section,

(iii) The statement contains the other information required by paragraph (f)(2) of this section, and

(iv) The public availability requirements contained in paragraph (f)(3) of this section are satisfied.

(2) GENERAL DESCRIPTION OF PROPERTY TO WHICH REIMBURSEMENT RELATES AND MAXIMUM ANTICIPATED DEBT --

(i) IN GENERAL. The declaration of official intent must contain, at minimum, a general functional description of the project (as defined in paragraph (f)(2)(iii) of this section) for which the expenditure to be reimbursed is paid (e.g., "highway capital improvement program," "hospital equipment acquisition," "school building renovation," etc.) and a statement of the maximum principal amount of debt expected to be issued for such purposes.

(ii) SPECIFICITY OF DESCRIPTION. A description of a project is sufficient if it identifies the fund or account from which the expenditure to be reimbursed is paid and describes the general functional purpose of the fund or account (e.g., "parks and recreation fund -- recreational facility capital improvement program"). Reasonable deviations between a project described in a declaration of official intent and an actual project financed with a reimbursement bond do not invalidate an otherwise valid official intent if the actual project financed is reasonably related in function to the project described in the declaration of official intent. For example, reimbursement of an expenditure for hospital equipment is a reasonable deviation from a project described in a declaration of official intent as "hospital building improvements." In contrast, reimbursement of an expenditure for a rehabilitation of a city office building is not a reasonable deviation from a project described in the declaration of official intent as "highway improvements".

(iii) PROJECT. For purposes of this section, "project" means a property, project, or program.

(3) PUBLIC AVAILABILITY OF OFFICIAL INTENT --

(i) PUBLIC AVAILABILITY REQUIREMENT. The declaration of official intent must be reasonably available for public inspection within a reasonable period of time after the declaration of official intent.

(ii) SAFE HARBORS. A declaration of official intent satisfies the public availability requirement set forth in paragraph (f)(3)(i) of this section if --

(A) TIME AND LOCATION SAFE HARBOR. Within 30 days after the date of the declaration, it is made available for public inspection at the main administrative office of the issuer or at the customary location of records of the issuer that are available to the general public and it remains available for public inspection on a reasonable basis until the date of issue of the reimbursement bonds, or

(B) COMPLIANCE WITH STATE OR LOCAL LAW. The issuer complies with applicable State or local law governing the public availability of records of official acts of the actual issuer other than a law that was adopted for a purpose of avoiding or minimizing the public availability requirement of this paragraph (f)(3).

(4) SPECIAL RULE FOR CONDUIT AND "ON-BEHALF-OF" BORROWERS. If, under paragraph (j) of this section, a conduit borrower (rather than the actual issuer) is treated as the issuer of the reimbursement bonds, or if the actual issuer issues on behalf of another entity (the "on-behalf-of unit"), any of the requirements of this paragraph (f) may be met by the conduit borrower, the actual issuer, or the on- behalf-of unit. For example, a declaration of official intent made available for public inspection within 30 days after the date of the declaration either at the main administrative office of the conduit borrower or at the main administrative office or customary location of records of the governmental entity reasonably expected to issue the reimbursement bonds is reasonably available for public inspection for purposes of paragraph (f)(3)(ii)(A) of this section.

(g) REASONABLENESS REQUIREMENT FOR DECLARING OFFICIAL INTENT --

(1) GENERAL RULE. A declaration of official intent to reimburse an expenditure is reasonable only if, as of the date of the declaration --

(i) It is consistent with the budgetary and financial circumstances of the issuer, and

(ii) The issuer reasonably expects to reimburse the expenditure with proceeds of a borrowing.

(2) CONSISTENCY WITH BUDGETARY AND FINANCIAL CIRCUMSTANCES. In general, a declaration of official intent is consistent with an issuer's budgetary and financial circumstances if no funds from sources other than the reimbursement bond issue are, or are reasonably expected to be, reserved, allocated on a long-term basis, or otherwise set aside by the issuer or by any member of the same controlled group as the issuer pursuant to their budget or financial policies with respect to the expenditure to be reimbursed. See section 1.150-1(f) for a definition of controlled group.

(3) REASONABLE EXPECTATION TO REIMBURSE --

(i) FACTORS TO BE CONSIDERED --

(A) GENERAL RULE. The determination of whether, at the time of the declaration of official intent, an issuer reasonably expects to reimburse an expenditure with proceeds of a borrowing is based on all the relevant facts and circumstances, including the issuer's purposes for declaring official intent, its history of actual reimbursement of other expenditures for which official intent was declared and which were actually paid, and its actions taken toward reimbursement of the expenditures. Declarations of official intent that are made as a matter of course or are made for amounts of expenditures substantially in excess of amounts reasonably necessary for a described project (e.g., "blanket" declarations of official intent) do not meet the reasonable expectation requirement.

(B) EXAMPLES. The operation of this paragraph (g)(3)(i) is illustrated by the following examples.

EXAMPLE 1. In order to preserve the option of reimbursing expenditures, an issuer declares official intent with respect to all expenditures it pays from cash on hand. A declaration of official intent made under these circumstances does not meet the reasonable expectation requirement.

EXAMPLE 2. An issuer is planning on making certain expenditures that it expects to reimburse only if an expected grant or other source of money is not received. There is a reasonable possibility that the grant or other source of money will not be received or will be received a significant period of time after the expenditure is paid. The issuer declares an official intent to reimburse the expenditures in the event the grant is not received or is substantially delayed. Under these circumstances, the declaration of official intent meets the reasonable expectation requirement.

(ii) FAILURE TO REIMBURSE. A pattern of failing to reimburse expenditures for which official intent was declared and that were actually paid by the issuer is one factor indicating that the issuer does not reasonably expect to reimburse the expenditure for which official intent is declared. To the extent that a failure to reimburse was due to extraordinary circumstances that were beyond the control of the issuer and that could not have been foreseen, failure to reimburse is not taken into account in determining the reasonable expectations of the issuer. Examples of extraordinary circumstances include unexpected significant increases in interest rates, unexpected reductions in creditworthiness of the issuer, unexpected judicial or legislative impediments that make the financing uneconomic or impractical, unexpected or emergency borrowing for other needs that cause the issuer to reach its borrowing limits, and unexpected significant increases in tax or other revenues (or significant reductions in expected expenditures) that make the reimbursement unnecessary because of the increase in available funds.

(h) ISSUANCE COSTS TREATED AS CAPITAL EXPENDITURES. For purposes of this section, costs of issuing a reimbursement bond paid out of proceeds of the issue that are properly allocable to the reimbursement are treated as capital expenditures.

(i) SPECIAL EXCEPTIONS --

(1) EXCEPTION FOR OFFICIAL INTENT DECLARED SUBSEQUENT TO THE PAYMENT OF CERTAIN UNFORESEEABLE EXPENDITURES --

(i) EXTENSION OF TIME. If an expenditure was not reasonably foreseeable at least 30 days before its payment, the date (described in paragraph (c)(2)(i) of this section) by which official intent must be declared is extended to the date 45 days after the payment was made.

(ii) EXAMPLE. The operation of this paragraph (i)(1) is illustrated by the following example.

EXAMPLE. On June 1, 1992, fire destroyed city B's data processing system. On June 5, 1992, B purchased replacement data processing equipment with moneys on hand in its general operating fund. On June 25, 1992, B declared official intent to reimburse the cost of the equipment. Because B could not have reasonably foreseen the destruction of the equipment, for purposes of paragraph (c)(2)(i) of this section, the period for declaring official intent to reimburse the expenditure is extended to July 20, 1992, and therefore B's intent was declared during the required period.

(2) SPECIAL EXCEPTION FOR PRELIMINARY EXPENDITURES --

(i) GENERAL RULE. The official intent requirement of paragraph (c)(2)(i) of this section does not apply to preliminary expenditures (as defined in paragraph (i)(2)(ii) of this section) that are reimbursed with proceeds of a bond that finances all or a portion of the project with respect to which the preliminary expenses were incurred.

(ii) DEFINITION OF PRELIMINARY EXPENDITURES. For purposes of this paragraph, subject to the limitation in the following sentence, the term "preliminary expenditures" includes architectural, engineering, surveying, soil testing, reimbursement bond issuance, and similar costs that are incurred prior to commencement of construction, rehabilitation, or acquisition of a project, but does not include land acquisition, site preparation, and similar costs incident to commencement of construction. Preliminary expenditures include only amounts that do not exceed in the aggregate 20 percent of the issue price of that portion of the issue or issues that finance the project with respect to which the preliminary expenditures were incurred. For purposes of the preceding sentence, issue price is determined in the same manner as under section 1.148-8T(c).

(3) SPECIAL RULE FOR ABANDONMENT PRIOR TO COMPLETION. For a project abandoned prior to completion, the reimbursement period requirement of paragraph (c)(2)(ii) of this section is satisfied with respect to expenditures paid with respect to the abandoned project only if the reimbursement allocation for those expenditures is made by the later of --

(i) The date that is 1 year after the date that the project is abandoned, or

(ii) The date 2 years after the last payment of an expenditure with respect to the abandoned project that is not less than the lesser of $25,000 or 5 percent of the cost of the project.

(j) DEFINITION OF ISSUER. For purposes of this section, "issuer" generally means the entity that actually issues the reimbursement bond (the "actual issuer"). If the proceeds of a reimbursement bond are provided to a conduit borrower (as defined in section 1.150- 1(g)), the term issuer generally means the conduit borrower and does not include the actual issuer.

(k) ANTI-ABUSE RULES --

(1) GENERAL RULE. A purported reimbursement allocation of bond proceeds is not treated as an expenditure of the bond proceeds if any action or inaction of the issuer with respect to the allocation is an artifice or device under section 1.103-13(j) or section 1.148-9T(g) to avoid, in whole or in part, arbitrage yield restrictions or arbitrage rebate requirements.

(2) REIMBURSEMENT ALLOCATIONS OF PROCEEDS OF REFUNDED BONDS --

(i) OPERATING RULE. Amounts allocable to a taxable issue of bonds are treated as unspent proceeds of the taxable bonds (and thus are subject to "transfer" to a refunding issue of tax exempt bonds) if --

(A) The proceeds of the taxable bonds are allocated by the issuer to reimburse an expenditure that was paid by or on behalf of the issuer prior to the date of issue of the taxable bonds,

(B) If the taxable bonds were an issue of tax exempt bonds, the purported reimbursement would not be treated for Federal income tax purposes as an expenditure of the bond proceeds,

(C) The taxable issue is refunded directly or indirectly in a series of refundings by the tax exempt refunding issue, and

(D) The refunding issue is issued on or after March 2, 1992.

(ii) EXAMPLE. The operation of this paragraph (k)(2) is illustrated by the following example.

EXAMPLE. In 1999, city issues its tax exempt series 1999 bonds to refund its taxable series 1997 bonds (issued in 1997). The series 1997 bonds refunded the city's taxable series 1995 "new money" bonds. The proceeds of the series 1995 bonds were used to reimburse expenditures paid by the city prior to the date of issue of the series 1995 bonds. The principles of this paragraph (k)(2) apply to the original issue the proceeds of which were used to reimburse prior expenditures (the series 1995 bonds) to the extent that the proceeds of the series 1995 bonds would be treated as proceeds of the series 1999 bonds had all the bonds in the series of refundings been tax exempt. These unspent proceeds remain unspent either until a reimbursement allocation is made that complies with the relevant requirements of this section or the bond proceeds are otherwise spent.

(3) LIMITATIONS ON USES OF REIMBURSEMENT AMOUNTS. Except as otherwise provided in this section, an allocation of bond proceeds to reimburse a previously paid expenditure is not treated as an expenditure of the bond proceeds if, but for the allocation, the bond proceeds are used directly or indirectly --

(i) Within 1 year of the date of the reimbursement allocation, to "refund" an issue of governmental obligations within the meaning of section 148,

(ii) Within 1 year of the date of the reimbursement allocation, to create or increase the balance in a "sinking fund" (within the meaning of section 1.103-13(g)) with respect to any obligation of the issuer, or to replace funds that have been, are being, or will be so used for sinking fund purposes,

(iii) Within 1 year of the date of the reimbursement allocation, to create or increase the balance in a "reserve or replacement fund" (within the meaning of section 1.103-14(d)) with respect to any obligation of the issuer, or to replace funds that have been, are being, or will be so used for reserve or replacement fund purposes, or

(iv) To reimburse any person (other than the issuer) for any expenditure or payment that was originally paid with proceeds of any obligation of the issuer (other than a borrowing by the issuer from one of its own funds or the funds of a member of the same controlled group).

(4) EXCEPTION FOR BONA FIDE DEBT SERVICE FUNDS. Paragraph (k)(3) of this section does not apply (and thus does not prevent a reimbursement allocation from being treated as an expenditure of bond proceeds) if the issuer deposits the moneys from the reimbursement allocation in a bona fide debt service fund (as defined in section 1.103-13(b)(12)) or otherwise uses these moneys to pay current debt service coming due within the next succeeding 1-year period on any obligation of the issuer (other than the reimbursement bonds).

(5) EXCEPTION FOR CERTAIN PREVIOUSLY FINANCED EXPENDITURES. Paragraphs (k)(3)(i) and (iv) of this section do not apply (and thus do not prevent a reimbursement allocation from being treated as an expenditure of bond proceeds) if, as of the date of issue of the bond originally used to pay the expenditure for which a reimbursement allocation is made (the "original financing"), the issuer did not reasonably expect to finance the expenditure with the proceeds of the original financing.

(6) EXAMPLES. The operation of this paragraph (k) is illustrated by the following examples.

EXAMPLE 1. (i) City C issues $10,000,000 principal amount of its taxable bonds on April 20, 1992 (the 1992 taxable bonds), and allocates all of the proceeds to reimburse expenditures it paid on March 1, 1988, for property that was immediately placed in service by C. The expenditures do not constitute preliminary expenditures as defined in paragraph (i) of this section. The reimbursement allocation of the 1992 taxable bond proceeds is not treated as an expenditure of the 1992 taxable bond proceeds under this section because the allocation violates the reimbursement period requirement of paragraph (c)(2)(ii) of this section.

(ii) On November 12, 1992, C issues $10,000,000 principal amount of its tax exempt refunding bonds and uses the proceeds to immediately redeem all of the outstanding 1992 taxable bonds. Because the reimbursement allocation of the 1992 taxable bond proceeds does not comply with the requirements of this section, under paragraph (k)(2) of this section, the proceeds of the 1992 taxable bonds are deemed to be unspent.

EXAMPLE 2. County D issues reimbursement bonds with a yield of 7 percent per annum and reimburses a previously paid expenditure. D immediately uses the proceeds of the reimbursement bond to create a sinking fund with respect to an issue of its outstanding tax exempt bonds. The outstanding tax exempt bonds have a yield of 9 percent per annum. As a sinking fund of the outstanding 9 percent bonds, the reimbursement moneys are restricted to a yield of 9 percent per annum. If D had issued bonds to advance refund the outstanding 9 percent bonds and the advance refunding bonds had a yield of 7 percent per annum, the refunding escrow created with the proceeds of the advance refunding bonds would be restricted to a yield of 7 percent per annum. Thus, D's use of the reimbursement proceeds is the equivalent of a refunding for purposes of section 148 of the Code, and the creation of a sinking fund violates section 1. 103-18(k)(3)(ii). In addition, this transaction violates the arbitrage yield limitations imposed by section 148(a).

EXAMPLE 3. On April 20, 1992, City E borrows $30,000 from a bank (tax exempt) and immediately purchases 2 police cars with the loan proceeds. On September 12, 1992, E issues general obligation bonds and proposes to use $30,000 of the bond proceeds to reimburse itself for the police cars. Because the police cars were financed with proceeds of an obligation incurred for the purpose of financing the police cars, the allocation of bond proceeds to reimburse the expenditure for the police cars is not treated as an expenditure of the bond proceeds. Even if the $30,000 bank loan were not outstanding at the time of E's issuance of the general obligation bonds on September 12, 1992, the results of this example would be the same.

EXAMPLE 4. The facts are the same as in EXAMPLE 3 except that instead of borrowing $30,000 from the bank, E finances the purchase of the police cars by using $30,000 of proceeds of its tax exempt general obligation bonds issued on February 5, 1992. On February 5, 1992, E reasonably expects to use the proceeds of the general obligation bonds to finance the renovation of city hall and not to finance police cars. The $30,000 expenditure is eligible for a reimbursement allocation if it meets the other relevant requirements of this section.

(l) EFFECTIVE DATE --

(1) IN GENERAL. The provisions of this section apply to all allocations of proceeds of reimbursement bonds issued after March 2, 1992.

(2) TRANSITIONAL RULE FOR CERTAIN EXPENDITURES. The requirement of paragraph (c)(2)(i) of this section (concerning official intent) with respect to an expenditure paid by the issuer does not apply if --

(i) The expenditure was paid by the issuer after September 8, 1989, and before March 2, 1992.

(ii) There is objective evidence that, at the time the expenditure was paid, the issuer expected to reimburse the expenditure with proceeds of a borrowing (taxable or tax exempt), and

(iii) That expectation was reasonable as defined in paragraph (g) of this section.

Par. 3. The following new section 1.150-1 is added to read as follows:

SECTION 1.150-1 DEFINITIONS AND SPECIAL RULES RELATING TO TAX EXEMPT BOND REQUIREMENTS IN GENERAL.

(a) through (e) [Reserved]

(f) CONTROLLED GROUP. A controlled group of entities is a group of entities controlled directly or indirectly by the same entity or group of entities within the meaning of paragraphs (f)(1) or (f)(2) of this section.

(1) DIRECT CONTROL. The determination of direct control is made on the basis of all the relevant facts and circumstances. However, generally one entity or group of entities (the "controlling entity") controls another entity or group of entities (the "controlled entity") for purposes of this paragraph if the controlling entity possesses simultaneously at least two of the following rights or powers and the rights or powers are discretionary and non- ministerial --

(i) The right or power to remove or cause to be removed without cause a controlling portion of the governing body of the controlled entity,

(ii) The right or power to select, approve of, or disapprove of a controlling portion of the governing body of the controlled entity,

(iii) The right or power to determine the budget of the controlled entity or to require the use of funds or assets of the controlled entity for any purpose of the controlling entity, or

(iv) The right or power to approve, disapprove, or prevent the issuance of debt obligations by the controlled entity.

(2) INDIRECT CONTROL. If a controlling entity controls a controlled entity under the test in paragraph (f)(1) of this section, then the controlling entity also controls all entities controlled, directly or indirectly, by the controlled entity or entities.

(3) EXAMPLE. The operation of this paragraph (f) is illustrated by the following example.

EXAMPLE. State law prohibits authority A from issuing bonds unless city C approves the issue. C, however, is required by state law to approve A's bond issues if the bonds meet certain objective criteria. C does not control, directly or indirectly, the establishment of the bond approval criteria. C possesses a purely ministerial or non-discretionary right or power with respect to A.

(g) CONDUIT BORROWER. The term "conduit borrower" means the obligor on a purpose investment (as defined in section 1.148-8T(e)(10). For example, if an issuer invests proceeds in a purpose investment in the form of a loan, lease, installment sale obligation, or similar obligation to another entity (the obligor on the purpose investment) and the obligor uses the proceeds to carry out the governmental purpose of the issue, the obligor is a conduit borrower.

(h) CAPITAL EXPENDITURE. The term "capital expenditure" means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election) under general Federal income tax principles. Whether an expenditure is a capital expenditure is determined at the time the expenditure is paid with respect to the property. Future changes in law do not affect whether an expenditure is a capital expenditure. For example, costs incurred to acquire, construct, or improve land, buildings, and equipment generally are capital expenditures. Capital expenditures do not include expenditures for items of current operating expense that are not properly chargeable to capital account (so called "working capital items").

(i) EFFECTIVE DATE -- (1) [Reserved]

(2) EFFECTIVE DATES FOR DEFINITIONS OF CONTROL, CONDUIT BORROWER, AND CAPITAL EXPENDITURE. The definitions contained in section 1.150-1(f),(g), and (h) apply to bonds issued after March 2, 1992.

PART 602 -- OMB CONTROL NUMBER UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read:

Authority: 26 U.S.C. 7805.

Par. 5. Section 602.101(c) is amended by adding the following entry in the table:

"Section 1.103-18. . . . 1545-1226".