[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11103]
[[Page Unknown]]
[Federal Register: May 10, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[FI-7-94]
RIN 1545-AS49
Arbitrage Restrictions on Tax-Exempt Bonds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary
regulations.
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SUMMARY: In the Rules and Regulations portion of this issue of the
Federal Register, the IRS is issuing temporary regulations relating to
the arbitrage and related restrictions applicable to tax-exempt bonds
issued by State and local governments. The text of the temporary
regulations also serves as a portion of the text of these proposed
regulations.
DATES: Written comments and requests for a public hearing must be
received by July 11, 1994.
ADDRESSES: Send comments and requests for a public hearing to: Internal
Revenue Service, POB 7604, Ben Franklin Station, Attn: CC:DOM:CORP:T:R
(FI-7-94), room 5228, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: William P. Cejudo at 202-622-3980 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act (44 U.S.C.
3504(h)). Comments on the collection of information should be sent to
the Office of Management and Budget, Attention: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attention: IRS Reports Clearance Officer, PC:FP, Washington,
DC 20224.
The collection of information is in Sec. 1.148-4T(h)(2)(ix). This
information is required by the IRS to verify that an issuer of tax-
exempt bonds is properly complying with the arbitrage restrictions
under section 148. The recordkeepers are States and political
subdivisions that issue bonds and entities that issue bonds on behalf
of States or political subdivisions.
Estimated total annual recordkeeping burden: 6000 hours.
Estimated average annual burden per recordkeeper: 2 hours.
Estimated number of recordkeepers: 3000.
Background
Sections 1.103-8, 1.148-1T, 1.148-2T, 1.148-3T, 1.148-4T, 1.148-5T,
1.148-6T, 1.148-9T, 1.148-10T, 1.148-11T, 1.149(d)-1T, and 1.150-1T
published in the rules and regulations portion of this issue of the
Federal Register are issued to provide guidance on certain aspects of
the arbitrage and related restrictions under sections 103, 148, 149(d),
and 150 of the Internal Revenue Code. The text of those regulations
also serves as the text of these proposed regulations. The preamble to
the temporary regulations explains the regulations.
This document also proposes to amend the definition of
``investment-type property'' under the arbitrage regulations. Under
Sec. 1.148-1T, which appears elsewhere in this issue of the Federal
Register and serves as a portion of the comment document for this
notice of proposed rulemaking, the term ``investment-type property''
includes a contract that would be a hedge except that it contains a
significant investment element.
For an issuer borrowing at tax-exempt rates, paying for an interest
rate cap through an up-front payment or in annual installments presents
concerns regarding the extent to which the issuer is receiving an
arbitrage benefit similar to the benefit obtained by making a
prepayment. This arbitrage benefit arises to the extent that payments
for the interest rate cap are made earlier than the period to which the
cap relates (e.g., an up-front payment for the portion of the cap fee
that relates to later years under the cap).
The proposed regulations provide specific situations in which
interest rate caps contain a significant investment element, and,
therefore, will be treated as investment-type property. First, the
issuer may not pay for the cap more quickly than in level annual
installments. Second, the cap may not hedge a bond unless that bond is
a variable rate debt instrument within the meaning of the original
issue discount regulations. Finally, the cap rate generally cannot be
less than the on-market swap rate. These provisions would apply
prospectively to bonds sold after the adoption of final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedures Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (a signed original and eight (8) copies) to the IRS. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested by a person that timely submits
written comments. If a public hearing is scheduled, notice of the date,
time, and place will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is William P.
Cejudo, Office of Assistant Chief Counsel (Financial Institutions and
Products). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.103-8 (a)(5) is revised as follows:
Sec. 1.103-8 Interest on bonds to finance certain exempt facilities.
[The text of proposed paragraph (a)(5) is the same as the text of
Sec. 1.103-8T(a)(5) published elsewhere in this issue of the Federal
Register].
Par. 3. Section 1.148-1 is amended as follows:
1. Paragraph (b) is amended by removing the definition of
investment-type property.
2. Paragraph (e) is added to read as follows:
Sec. 1.148-1 Definitions and elections.
* * * * *
(e) Investment-type property--(1) In general. 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.
(2) Non-customary prepayments. Except as otherwise provided, a
prepayment for property or services is investment-type property if a
principal purpose for prepaying is to receive an investment return from
the time the prepayment is made until the time payment otherwise would
be made. A prepayment is not investment-type property if--
(i) The prepayment is made for a substantial business purpose other
than investment return and the issuer has no commercially reasonable
alternative to the prepayment, or
(ii) Prepayments on substantially the same terms are made by a
substantial percentage of persons who are similarly situated to the
issuer but who are not beneficiaries of tax-exempt financing.
(3) Certain hedges. Investment-type property also includes a
contract that would be a hedge (within the meaning of Sec. 1.148-4(h))
except that it contains a significant investment element. An interest
rate cap contains a significant investment element if the payments for
the cap are made more quickly than in level annual installments over
the term of the cap or the cap hedges a bond that is not a variable
rate debt instrument under Sec. 1.1275-5. In addition, a cap generally
contains a significant investment element if the cap rate is less than
the on-market swap rate on the date the cap is entered into. This
paragraph (e)(3) applies to bonds sold after [Insert the date 30 days
after the date of publication of final regulations in the Federal
Register].
Par. 4. Section 1.148-1 is further amended as follows:
Sec. 1.148-1 Definitions and elections.
[The text of the further amendments proposed for this section is
the same as the text of Sec. 1.148-1T published elsewhere in this issue
of the Federal Register].
Par. 5. Section 1.148-2 is amended as follows:
Sec. 1.148-2 General arbitrage yield restriction rules.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-2T published elsewhere in this issue of the
Federal Register].
Par. 6. Section 1.148-3 is amended as follows:
Sec. 1.148-3 General arbitrage rebate rules.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-3T published elsewhere in this issue of the
Federal Register].
Par. 7. Section 1.148-4 is amended as follows:
Sec. 1.148-4 Yield on an issue of bonds.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-4T published elsewhere in this issue of the
Federal Register].
Par. 8. Section 1.148-5 is amended as follows:
Sec. 1.148-5 Yield and valuation of investments.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-5T published elsewhere in this issue of the
Federal Register].
Par. 9. Section 1.148-6 is amended as follows:
Sec. 1.148-6 General allocation and accounting rules.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-6T published elsewhere in this issue of the
Federal Register].
Par. 10. Section 1.148-9 is amended as follows:
Sec. 1.148-9 Arbitrage rules for refunding issues.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-9T published elsewhere in this issue of the
Federal Register].
Par. 11. Section 1.148-10 is amended as follows:
Sec. 1.148-10 Anti-abuse rules and authority of Commissioner.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-10T published elsewhere in this issue of the
Federal Register].
Par. 12. Section 1.148-11 is amended as follows:
Sec. 1.148-11 Effective dates.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.148-11T published elsewhere in this issue of the
Federal Register].
Par. 13. Section 1.149(d)-1 is amended as follows:
Sec. 1.149(d)-1 Limitations on advance refundings.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.149(d)-1T published elsewhere in this issue of
the Federal Register].
Par. 14. Section 1.150-1 is amended as follows:
Sec. 1.150-1 Definitions.
[The text of the amendments proposed for this section is the same
as the text of Sec. 1.150-1T published elsewhere in this issue of the
Federal Register].
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-11103 Filed 5-5-94; 2:17 pm]
BILLING CODE 4830-01-U
